As filed with the
Securities and Exchange Commission on June 23, 2004


---

|SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
|-------------------------------------------------------
|                                                       

|ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003Commission file number: 001-14477 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

---

BRASIL TELECOM PARTICIPAÇÕES S.A.(F/K/A (TELE CENTRO SUL PARTICIPAÇÕES S.A.))(Exact Name of Registrant as Specified in Its Charter)

---

|Brazil Telecom Holding Company(Translation of Registrants Name into English) | The Federative Republic of Brazil(Jurisdiction of Incorporation or Organization)
|----------------------------------------------------------------------------- | --------------------------------------------------------------------------------

---

SIA/Sul, ASP, Lote D, Bloco B - 71215-000 - Setor de Indústria, Brasília, DF, Brazil(Adress of Principal Executive Offices)

---

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

|Title of Each class                                                                                                                        | Name of Each Exchange on Which Registered
|------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------------------
|Preferred Shares, without par value represented byAmerican Depositary Shares*                                                              | New York Stock Exchange                  
|* American Depositary Shares issuable upon deposit of Preferred Shares were registered under a separate registration statement on
Form F-6

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

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:


At December 31, 2003 there were outstanding:
134,031,688,203 Common Shares, without par value
222,670,187,883 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         
         No

Indicate by check mark which financial
statement item the registrant has elected to follow:

Item 17  
         Item 18

---



TABLE OF CONTENTS

Page

|PRESENTATION OF FINANCIAL INFORMATION                       | 4                                                                         
|----------------------------------------------------------- | --------------------------------------------------------------------------
|FORWARD-LOOKING INFORMATION CONTAINED IN THIS ANNUAL REPORT | 5                                                                         
|PART I                                                      | 7                                                                         
|                                                            | ITEM 1.                                                                   
|                                                            | ITEM 2.                                                                   
|                                                            | ITEM 3.                                                                   
|                                                            | Selected Financial Data                                                   
|                                                            | Exchange Rates                                                            
|                                                            | Risk Factors                                                              
|                                                            | ITEM 4.                                                                   
|                                                            | History and Development of the Company                                    
|                                                            | Capital Expenditures                                                      
|                                                            | Business Overview                                                         
|                                                            | Regulation of the Brazilian Telecommunications Industry                   
|                                                            | Property, Plant and Equipment                                             
|                                                            | Environmental and Other Regulatory Matters                                
|                                                            | ITEM 5.                                                                   
|                                                            | Overview of Results of Operations                                         
|                                                            | U.S. GAAP Reconciliation                                                  
|                                                            | Critical Accounting Policies                                              
|                                                            | New Accounting Pronouncements                                             
|                                                            | Results of Operations for the Years Ended December 31, 2001, 2002 and 2003
|                                                            | Liquidity and Capital Resources                                           
|                                                            | ITEM 6.                                                                   
|                                                            | Board of Directors and Senior Management                                  
|                                                            | Board Practices                                                           
|                                                            | Corporate Governance Practices                                            
|                                                            | Employees                                                                 
|                                                            | Performance Bonus Plan                                                    
|                                                            | Share Ownership                                                           
|                                                            | ITEM 7.                                                                   
|                                                            | Major shareholders                                                        
|                                                            | Related Party Transactions                                                
|                                                            | ITEM 8.                                                                   
|                                                            | Consolidated Statements and Other Financial Information                   
|                                                            | Legal Proceedings                                                         
|                                                            | Dividend Policy                                                           
|                                                            | ITEM 9.                                                                   
|                                                            | Offer and Listing Details                                                 
|                                                            | Markets                                                                   
|                                                            | ITEM 10.                                                                  
|                                                            | Memorandum and Articles of Association                                    
|                                                            | Changes to the Brazilian Corporation Law                                  
|                                                            | Material Contracts                                                        
|                                                            | Exchange Controls                                                         
|                                                            | Taxation                                                                  
|                                                            | Independent Auditors                                                      
|                                                            | Documents on Display                                                      
|                                                            | ITEM 11.                                                                  
|                                                            | Quantitative Information About Market Risk                                
|                                                            | ITEM 12.                                                                  
|PART II                                                     | 135                                                                       
|                                                            | ITEM 13.                                                                  
|                                                            | ITEM 14.                                                                  
|                                                            | ITEM 15.                                                                  
|                                                            | ITEM 16A.                                                                 
|                                                            | ITEM 16B.                                                                 
|                                                            | ITEM 16C.                                                                 
|PART III                                                    |                                                                           
|                                                            | ITEM 17.                                                                  
|                                                            | ITEM 18.                                                                  
|                                                            | ITEM 19.                                                                  
|INDEX OF DEFINED TERMS                                      | 138                                                                       
|TECHNICAL GLOSSARY                                          | 140                                                                       
|SIGNATURES                                                  | 144                                                                       
|INDEX TO EXHIBITS                                           | 149                                                                       
|CONSOLIDATED FINANCIAL STATEMENTS                           |                                                                           



Table of Contents

PRESENTATION OF
FINANCIAL INFORMATION

In this Annual
Report, Brasil Telecom Participações S.A. (previously Tele Centro Sul Participações
S.A) a corporation organized under the laws of the Federative Republic of Brazil, and
its subsidiaries are referred to collectively as "our company," "we", "us" or the
"Registrant." References to our company's businesses and operations are
references to the businesses and operations of our company on a combined
consolidated basis for the years 1999 and 2000 and on a consolidated basis for the
years 2001, 2002 and 2003 as if the merger of our operating subsidiary, Brasil Telecom
S.A., with each of Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron,
Teleacre and CTMR (as defined below) had occurred as of January 1, 1996 and as if the
merger of Companhia Riograndense de Telecomunicações  CRT("CRT") with and into
Brasil Telecom, S.A. had occurred as of July 31, 2000. See Item 4 "Information on
the CompanyHistory and development of the companyHistorical Background."

References to (i) the
"real" "reais"or "R$" are to Brazilian reais(plural) and the Brazilian real(singular) and (ii) "U.S. dollars," "dollars" or "U.S.$" are to United States dollars.
All amounts in Brazilian currencies that existed prior to the adoption of the realas
the Brazilian currency on July 1, 1994 have been restated in reais.At May 31, 2004,
the Commercial Market selling rate (as defined in Item 3 "Key InformationSelected
Financial DataExchange Rates") was R$3.1287 to U.S.$1.00 as published by the
Brazilian Central Bank. The exchange rate information in this Annual Report should not
be construed as a representation that any such amounts have been, would have been or
could be converted at this or any other exchange rate.

Our audited
consolidated financial statements were prepared in conformity with generally accepted
accounting principles in Brazil ("Brazilian GAAP") which are similar to the Brazilian
Corporation Law (Law No. 6404/76, as amended by Law No. 10.330/02), except for the
effects of the recognition of inflationary effects from January 1, 1996 to December
31, 2000, and are consistent with the rules and regulations of the Brazilian
Securities and Exchange Commission (CVM  Comissão de Valores Mobiliários), and the
accounting standards issued by the Brazilian Institute of Independent Auditors
(Instituto dos Auditores Independentes do Brasilor "IBRACON"). Investors should note
that financial statements prepared in accordance with Brazilian GAAP differ from
financial statements prepared in accordance with Brazilian Corporation Law in the
methodology used for the recognition of inflation, among others. See Note 31 to our
audited consolidated financial statements for (i) a summary of the principal
differences between Brazilian GAAP and Brazilian Corporation Law as they relate to
us and (ii) a reconciliation from Brazilian Corporation Law to Brazilian GAAP of
shareholders' equity as of December 31, 2001, 2002 and 2003 and net income (loss)
for each of the years ended December 31, 2001, 2002 and 2003. Brazilian GAAP when
applied to us differs in certain important respects from generally accepted accounting
principles in the United States ("U.S. GAAP"). See Note 31 to our audited
consolidated financial statements for (i) a summary of the principal differences
between Brazilian GAAP and U.S. GAAP as they relate to us and (ii) a reconciliation to
U.S. GAAP of shareholders' equity as of December 31, 2002 and 2003 and net income
(loss) for each of the years ended December 31, 2001, 2002 and 2003. These audited
consolidated financial statements are referred to herein as the "Financial Statements."

Our audited  annual
 consolidated  financial  statements  for the year ended  December 31,  2001 prepared in
 accordance  with Brazilian GAAP and consistent  with the rules and  regulations of the
CVM and the accounting  standards  issued by IBRACON  included in this Annual Report,
 have been audited by Deloitte  Touche Tohmatsu  Auditores  Independentes,  as stated in
their report  appearing in this Annual Report.

Our audited annual
consolidated  financial  statements as of December 31,  2002 and December 31,  2003 and
for each of the two years in the period ended  December 31,  2003 prepared in accordance
with Brazilian GAAP with  reconciliation  of shareholder's  equity and income statements
to U.S. GAAP,  included in this Annual Report, have been audited by KPMG Auditores
 Independentes,  in accordance with the standards of the Public Company Accounting
Oversight Board as stated in their report appearing in this Annual Report.

The "Index of Defined
 Terms" that begins on page 138 lists the page where each defined term is defined  within
this  document. Technical terms are defined in the Technical Glossary on page 140.

Certain  figures
 included in this Annual  Report have been subject to rounding  adjustments.
 Accordingly,  figures shown as totals in certain tables may not be an arithmetic
aggregation of the figures that precede them.

Table of Contents

FORWARD-LOOKING
INFORMATION CONTAINED IN THIS ANNUAL REPORT

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

In this Annual Report,
we have made forward-looking statements with respect to, but not limited to:

- our
regional marketing strategy;

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

- our market
share;

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

- the
reduction of our labor force;

- the payment
of our debt;

- the
material adverse  financial  effect of any labor,  civil or tax claims arising out of
acts               committed by Telebrás prior to the effective date of the breakup of
Telebrás;

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

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

- our
projected capital expenditures;

- our
projected subsidies and financing; and

- our
liquidity.

Forward-looking
 statements are not guarantees of  performance.  They involve risks,  uncertainties and
assumptions  because they relate to future events and therefore depend on circumstances
 that may or may not occur in the  future.  Our future  results  and  shareholder  values
may  differ  materially  from those expressed in or  suggested  by these  forward-looking
 statements.  Many of the factors that will  determine these results and values are
beyond our ability to control or predict.

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

- the
performance of the Brazilian economy generally;

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

- the
telecommunications policy of Brazil's federal government;

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

- the
 introduction  of  competition  to the Brazilian  telecommunications  industry in general
and our               region in particular;

- the
 receipt of  additional,  and/or the  revocation  of our  existing,  governmental
 approvals  and               licenses;

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

- the
 existence  of  difficulties  in the  operation  of our  equipment  and/or the  provision
 of our               services;

- the
availability of financing;

- the
availability of qualified personnel;

- the
business abilities and judgment of our personnel;

- the
emergence of new technologies and the response of our customer base to those technologies;

- acquisition by us of other companies; and

- other
factors discussed under Item 3 "Key Information Risk Factors."

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



Table of Contents

PART I

Table of Contents

ITEM 1.
          Identity of Directors, Senior Management and Advisors

We are  filing  an
Annual  Report  under the  Securities  Exchange  Act of 1934,  as  amended  (the
"Exchange Act").  Accordingly, this item does not apply to us.

Table of Contents

ITEM 2.
          Offer Statistics and Expected Timetable

We are filing an
Annual  Report under the Exchange  Act.  Accordingly,  this item does not apply to us.

Table of Contents

ITEM 3.
          Key Information

Table of Contents

Selected Financial
Data

Background

The  selected
 financial  information  presented  herein  should  be read in  conjunction  with our
Financial  Statements  and notes,  which appear  elsewhere  in this Annual  Report.  Our
selected  financial information  is  presented  on a  combined  consolidated  basis  for
 the  years  1999  and  2000  and  on a consolidated  basis for the years  2001,  2002
and 2003 as if Brasil  Telecom  S.A.'s  merger  with  Telesc, Telegoiás,  Telebrasília,
 Telemat, Telems, Teleron,  Teleacre and CTMR (each as defined below) had occurred as of
 January 1,  1996 and the merger of CRT with and into Brasil  Telecom  S.A.  had
 occurred on July 31, 2000.

The  following
 paragraphs  discuss some  important  features of the  presentation  of the selected
financial  information  and our Financial  Statements.  These features  should be
considered when evaluating the selected financial information.

Brazilian GAAP and
U.S. GAAP

Our Financial
 Statements are prepared in accordance with Brazilian  GAAP,  which differ in certain
significant  respects  from U.S.  GAAP.  See Note 31 to our  Financial  Statements  for
(i) a summary of the principal  differences between Brazilian GAAP and U.S. GAAP as they
relate to us, and (ii) a  reconciliation to U.S.  GAAP of  shareholders'  equity as of
 December 31,  2002 and 2003 and net income (loss) for each of the years ended December 31,
2001, 2002 and 2003.

Effects of Inflation

Our financial
statements until the year 2000, and unless otherwise specified, all financial
information included in this Annual Report until the year 2000, recognize certain
effects of inflation and are restated in constant reaisof December 31, 2000, all in
accordance with Brazilian GAAP. We used the General Market Price Index, Índice Geral
de Preços de Mercado("IGP-M"), published by Fundação Getúlio Vargasfor purposes of
restating our Financial Statements. Inflationary gains or losses on monetary
assets and liabilities were allocated to their corresponding income or expense
caption in our combined statements of income until the year 2000. However, pursuant
to Brazilian GAAP, our audited financial statements as of and for the years ended
December 31, 2001, 2002 and 2003, no longer recognize the effects of inflation after
January 1, 2001 and are not restated in constant reais.

Change in
Accounting Methodology

Depreciation

During our fiscal year
1999,  we  shortened  our  depreciation  schedule  for our  automatic  switching  and
transmission  equipment  from thirteen years and ten years,  respectively,  to five years
in order to better reflect the estimated  useful life of this  equipment in light of
rapidly  changing  technology and industry practices.  See Item 4 "Information on the  CompanyProperty,  plant and equipment" and Item 5 "Operating and Financial  Review and
ProspectsOperating  ResultsResults  of  Operations  for  the  Years  Ended  December 31,  2001,  2002  and
2003Cost of ServicesDepreciation and Amortization."

Accounting
Consequences of the Breakup of Telebrás

Our financial
statements for the fiscal years prior to 2000 are not necessarily  indicative of what our
 financial  condition or results of  operations  would have been if Brasil  Telecom S.A.
had merged with Telesc, Telegoiás, Telebrasília, Telemat, Telems, Teleron, Teleacre and
CTMR before February 2000.

Difference from
Financial Statements Published in Brazil

Our  statutory
 financial  statements  prepared  in  accordance  with  the  Brazilian  Corporation  Law
(the "Statutory  Financial  Statements")  are  the  basis  for  dividend  and  tax
 determinations.  Our  audited consolidated  financial  statements for the year 2000
include the effects of inflation  through December 31, 2000, while our Statutory
 Financial  Statements  include the effects of inflation only through December 31, 1995.
 See Note 31 to our  audited  consolidated  financial  statements  for (i) a summary of
the  principal differences  between  Brazilian  GAAP  and  Brazilian  Corporation  Law as
 they  relate  to us  and  (ii) a reconciliation from Brazilian  Corporation Law to
Brazilian GAAP of shareholders'  equity as of December 31, 2001,  2002 and 2003 and net
income  (loss) for each of the years ended  December 31,  2001,  2002 and 2003. Our
Statutory  Financial  Statements also differ from our  Consolidated  Financial
 Statements in respect of certain reclassifications, presentation of comparative
information and consolidation procedures.



Selected Financial
Information

|                                                              | Year ended December 31,                    
|------------------------------------------------------------- | -------------------------------------------
|                                                              |                                            
|Income Statement Data:                                        | 1999(1)                                    
|                                                              |                                            
|                                                              | (thousands of reais, except per share data)
|Brazilian GAAP:                                               |                                            
|Net operating revenue                                         | 3,591,723                                  
|Cost of services                                              | 2,692,014                                  
|                                                              |                                            
|Gross profit                                                  | 899,709                                    
|Operating expenses:                                           |                                            
|Selling expenses                                              | 334,060                                    
|General and administrative expenses                           | 580,457                                    
|Other net operating expenses (income)                         | (22,272)                                   
|Operating income (loss) before net financial expenses         | 7,464                                      
|Net financial expenses                                        | (15,662)                                   
|                                                              |                                            
|Operating income (loss)                                       | 23,126                                     
|Net non-operating expenses (income)                           | 65,705                                     
|Employee's profit share                                       | 19,463                                     
|                                                              |                                            
|Income (loss) before taxes and minority interests             | (62,042)                                   
|                                                              |                                            
|Income and social contribution tax benefits                  
|(expenses)                                                    | 64,089                                     
|                                                              |                                            
|Income (loss) before minority interests                       | 2,047                                      
|Minority interests                                            | (31,253)                                   
|                                                              |                                            
|Net income (loss)                                             | (29,206)                                   
|                                                              |                                            
|                                                              |                                            
|Number of Common Shares (millions)(3)                         | 124,369,031                                
|Number of Preferred Shares (millions)(3)                      | 210,029,997                                
|Operating Income (loss) per thousand Common Shares (reais)(3) | 0.19                                       
|Net income (loss) per thousand Common Shares (reais)(3)       | (0.23)                                     
|Dividends per thousand Common Shares (reais)(3)               | 0.40                                       
|Dividends per thousand Common Shares (U.S. dollars)(3)(4)     | 0.22                                       
|Dividends per thousand Preferred Shares (reais)(3)            | 0.40                                       
|Dividends per thousand Preferred Shares (U.S. dollars)(3)(4)  | 0.22                                       

_____________________________________


|(1) | Presented
in constant reaisof December 31, 2000.
|--- | ------------------------------------------------

|(2) | Pursuant
to Brazilian GAAP, our audited consolidated financial statements for the years ended
December 31, 2001, 2002 and 2003 no longer recognize the effects of inflation after
January 1, 2001 and are not restated in constant reais.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Since
our present  capital  structure was not in place for the year ended  December 31,  1999,
 earnings and dividends per share were not presented for those  periods.  See Note 3r to
our  Consolidated  Financial          Statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Dividends
per thousand  shares were converted into dollars at the Commercial  Market selling rate
of R$1.955 per U.S.  dollar on  December 31,  2000, of R$2.32 per U.S.  dollar on
 December 31,  2001, of R$3.5333 per U.S. dollar on December 31, 2002 and of R$2.8892 per
U.S. dollar on December 31, 2003, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Selected Financial
Information (continued)

|                                                   | Year ended December 31,                    
|-------------------------------------------------- | -------------------------------------------
|                                                   |                                            
|Income Statement Data (continued)                  | 1999(1)                                    
|                                                   |                                            
|                                                   | (thousands of reais, except per share data)
|U.S. GAAP:                                         |                                            
|Net income (loss)                                  | (380,588)                                  
|Net income (loss) per thousand shares (reais) (5): |                                            
|Common SharesBasic                                | (1.15)                                     
|Common SharesDiluted                              | (1.15)                                     
|Preferred SharesBasic                             | (1.15)                                     
|Preferred SharesDiluted                           | (1.15)                                     
|                                                   |                                            

_____________________________________


|(5) | In
accordance with Statement of Financial  Accounting  Standards ("SFAS") No. 128 "Earnings
Per Share," basic and diluted earnings per share have been calculated,  for U.S. GAAP
purposes,  using the "two class method."  See Note 31e to our Consolidated Financial
Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                              | At December 31,     
|----------------------------------------------------------------------------- | --------------------
|                                                                              |                     
|                                                                              | 1999(1)             
|                                                                              |                     
|                                                                              | (thousands of reais)
|                                                                             
|Balance Sheet Data:                                                           |                     
|Brazilian GAAP:                                                               |                     
|Intangibles(3)                                                                | 1,160,301           
|Property, plant and equipment, net(4)                                         | 8,446,680           
|                                                                              |                     
|Total assets                                                                  | 12,351,207          
|                                                                              |                     
|Loans and financing  current portion                                         | 488,076             
|Loans and financing  non-current portion                                     | 29,386              
|                                                                              |                     
|Total liabilities (including funds for capitalization and minority interests) | 4,565,577           
|                                                                              |                     
|                                                                              |                     
|Shareholders' equity                                                          | 7,785,630           
|                                                                              |                     
|                                                                              |                     
|U.S. GAAP:                                                                    |                     
|Intangibles(5)                                                                |                     
|Property, plant and equipment, net                                            | 8,446,680           
|                                                                              |                     
|Total assets                                                                  | 11,549,335          
|                                                                              |                     
|Loans and financing  current portion                                         | 485,912             
|Loans and financing  non-current portion                                     | 29,386              
|                                                                              |                     
|Total liabilities (including funds for capitalization and minority interests) | 5,237,504           
|                                                                              |                     
|                                                                              |                     
|Shareholders' equity                                                          | 6,307,831           
|                                                                              |                     
|                                                                              |                     
|                                                                              |                     

_____________________________________


|(1) | Presented
in constant reaisof December 31, 2000.
|--- | ------------------------------------------------

|(2) | Pursuant
to Brazilian GAAP, our audited consolidated financial statements at December 31, 2001,
2002, and 2003 no longer recognize the effects of inflation after January 1, 2001 and
are not restated in constant reais.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes
the goodwill from our acquisition of a controlling stake in CRT, which was calculated
based on book value.
|--- | -------------------------------------------------------------------------------------------------------------------

|(4) | Stated
at indexed cost up to December 31, 2000, less accumulated depreciation.  See Note 3g to
our Consolidated Financial Statements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(5) | Intangibles
 under U.S. GAAP at December 31,  1999,  include the step-up goodwill paid by Solpart
 Participações  S.A.  ("Solpart") as a consequence of the exchange of shares between
 companies under our common control pursuant to our merger with Telesc,  Telegoiás,
 Telebrasília,  Telemat, Telems, Teleron,  Teleacre and CTMR. Intangibles under U.S. GAAP
at December 31,  2000, 2001, 2002 and 2003 also include the goodwill from our merger with
Telesc,  Telegoiás,  Telebrasília,  Telemat,  Telems,  Teleron,  Teleacre and CTMR and
our merger with CRT but do not include  amounts  relating to our PCS licenses.  See Note
31o to our  Consolidated Financial Statements.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Table of Contents

Exchange Rates

There are two
principal  foreign exchange  markets in Brazil:  the commercial rate exchange market (the
"Commercial  Market") and the floating rate exchange market (the "Floating  Market").
 Most foreign trade and financial  foreign  currency  exchange  transactions  are carried
out on the Commercial  Market.  Purchases of foreign  exchange in the Commercial  Market
may be carried out only through a financial  institution authorized to buy and sell
currency in that market.  The Floating  Market rate generally  applies to transactions to
which the Commercial  Market rate does not apply.  Prior to February 1,  1999, the
exchange rate in each market was  established  independently,  resulting in different
 rates during some periods.  Since  February 1,  1999, the Central Bank  authorized  the
 unification  of the exchange  positions of the Brazilian  financial institutions  in the
 Commercial  Market and Floating  Market,  which led to a  convergence  in the pricing
and liquidity of both  markets.  However,  each market  continues to have a specific
 regulation.  Most trade and financial  transactions are carried out on the Commercial
Market. The foreign  currencies may only be purchased through a Brazilian  financial
 institution  authorized to operate in these markets.  In both markets,  rates are freely
negotiated but may be strongly influenced by Central Bank intervention.

Under the RealPlan
("RealPlan"), on July 1, 1994, the realwas introduced as the official unit of
Brazilian currency, with each realhaving an exchange rate of R$l.00 to U.S.$1.00. The
issuance of reaiswas initially subject to quantitative limits backed by a corresponding
amount of U.S. dollars in reserves, but the government subsequently expanded those
quantitative limits and allowed the realto float, with parity between the real/U.S.
dollar (R$l.00 to U.S.$1.00) as a ceiling.

From its introduction
in 1994 through March 1995, the real appreciated against the U.S. dollar. On March 6,
1995, in an effort to address concerns about the overvaluation of the real relative to
the U.S. dollar, the Brazilian Central Bank introduced new exchange rate policies
that established a band within which the real/U.S. dollar exchange rate could
fluctuate. The Brazilian Central Bank initially set the exchange rate band with a
floor of R$0.86 per U.S.$1.00 and a ceiling of R$0.90 per U.S.$1.00 and provided
that, after March 10, 1995, the exchange rate band would be between R$0.88 and
R$0.93 per U.S.$1.00. Thereafter, the Brazilian Central Bank periodically adjusted
the exchange rate band to permit the gradual devaluation of the real against the U.S.
dollar. On January 13, 1999, the Brazilian Central Bank widened the exchange rate
fluctuation band in which the real was allowed to trade from between R$l.12 and R$l.22
per U.S.$1.00 to a new band of between R$1.20 and R$l.32 per U.S.$1.00. This resulted in
an immediate devaluation of the real to R$1.32 per U.S.$1.00.

Since  January 15,
 1999 the real has been allowed to float  freely.  The real  devalued to a low of R$2.165
per  U.S.$1.00 on March 3,  1999,  but  subsequently  appreciated  to R$1.789 per
U.S.$1.00 on December 31, 1999, representing a net devaluation against the U.S. dollar of
32.4% during 1999.  In 2000, the real devalued by a further 8.5% against the U.S. dollar.

Further  deterioration
in the political and economic  environment in 2001, in addition to the Brazilian energy
crisis,  resulted in the real devaluing by 15.7% against the U.S. dollar in the year. In
the final quarter of 2001, however, the real appreciated by 15.1% from R$2.671 per U.S.
$1.00 at September 30, 2001 to R$2.3204 per U.S.$1.00 at December 31, 2001.

In 2002, as a reaction
to political and economic  uncertainties,  the global economic  downturn,  the crisis in
Argentina and the Brazilian  presidential  elections,  the U.S. dollar appreciated by
34.3% against the real to R$3.5333 per U.S.$1.00 at December 31,  2002. The real
recovered in 2003,  appreciating  by 18.3% to R$2.8892 per U.S.$1.00,  at  December 31,
 2003.  During the first five months of 2004, the real has depreciated approximately 8.3%
against the U.S. dollar.  We cannot assure you that the real will not substantially
devalue again in the future.  See "Risk FactorsRisks Relating to Brazil."

As of May 31, 2004,
the Commercial Market selling rate published by the Brazilian Central Bank was R$3.1287
per U.S.$1.00.

Commercial Market
Selling Rate for U.S. Dollars

The following table
sets forth the reported high and low Commercial Market selling rates for U.S. dollars for
the months indicated.

|              | High     | Low     
|------------- | -------- | --------
|              |          |         
|              |          |         
|December 2003 | R$2.9434 | R$2.8883
|January 2004  | 2.9409   | 2.8022  
|February 2004 | 2.9878   | 2.9042  
|March 2004    | 2.8752   | 2.9400  
|April 2004    | 2.9630   | 2.8755  
|May 2004      | 3.2118   | 2.9534  

_____________________________________


|Source: | Brazilian
Central Bank
|------- | ----------------------

The following table
sets forth the reported high and low, average and period-end  Commercial Market selling
rates for U.S. dollars for the annual periods  indicated.  The average  Commercial Market
selling rates represent the average of the month-end commercial market selling rates
(R$/U.S.$) during the relevant period.

|For the Year Ended December 31, | High    | Low     | Average | Period End
|------------------------------- | ------- | ------- | ------- | ----------
|                                |         |         |         |           
|                                |         |         |         |           
|1999                            | R$2.165 | R$1.208 | R$1.816 | R$1.789   
|2000                            | 1.985   | 1.723   | 1.835   | 1.955     
|2001                            | 2.801   | 1.936   | 2.352   | 2.320     
|2002                            | 3.955   | 2.271   | 2.915   | 3.533     
|2003                            | 3.662   | 2.822   | 3.060   | 2.889     

_____________________________________


|Source: | Brazilian
Central Bank
|------- | ----------------------

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

Table of Contents

Risk Factors

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

The  information
 included in this Annual Report  concerning  Brazil and the  ownership of Telecom  Italia
 International  N.V.  ("TII"),  current name of STET  International  Netherlands  N.V.,
 Techold Participações  S.A.  ("Techold"),  and Timepart  Participações  Ltda.
 ("Timepart"),  has been included herein to the extent publicly  available.  We have
assumed such information to be correct and have not  independently verified such
information.

Risks Relating to
Our Company

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

We operate under
concessions from the Brazilian Government that authorize us to provide local fixed-line
 telecommunications services in our region and long-distance  telecommunications services
within Brazil, and require us to comply with certain obligations related to rates,
 quality of service,  network expansion and modernization,  and interconnection of our
network. Our failure to comply with the terms of the concessions may result in the
imposition of fines or other government actions, including the termination of our
concessions.  Any partial or total revocation of our concessions would have an adverse
effect on our business.

Our business,
 including the services that we provide and the rates that we charge,  is subject to
 comprehensive  regulation  under Brazilian law.  Brazil's  telecommunications
 regulatory  framework is continuously  evolving.  The  interpretation  and enforcement
of  regulations,  the assessment of compliance with  regulations  and the flexibility of
regulatory  authorities are all marked by uncertainty.  Our ability to retain our
concessions is a precondition to our success, but in light of the regulatory framework,
we cannot assure you that Anatel will not modify the terms of our concessions in an
adverse manner.

Under Brazilian law,
public regime companies, like us, must have the rates that they charge for products and
services approved by Agência Nacional de Telecomunicações ("Anatel"). On June 20,
2003, Anatel enacted Resolution 341, which provides for new types of Anatel concession
contracts, effective from January 1, 2006 until 2025. The Form of New Concession
Contract provides for changes in the way in which rates are set, for example under
the current proposals, the General Price Index - Internal Availability, Índice
Geral de Preços  Disponibilidade Interna(IGP-DI), will no longer be used to
determine the annual inflation-based adjustments to rates. Private regime companies
that compete with us, like Global Village Telecom or Intelig, do not require Anatel
approval when setting their rates and may unilaterally determine the prices that they
charge for their services. As a result, adverse changes in Brazilian telecommunications
regulations and non-approval or even delays in the approval of rate changes by Anatel,
could adversely impact our operations and competitive position.

On May 12,  2004, the
Consumer Defense  Committee of the House of  Representatives  approved a bill of law
proposing the termination of the monthly  subscription  fees charged by the Brazilian
 telephone concessionaires,  including our  subsidiary,  Brasil Telecom S.A., for fixed
line  services.  The bill is still subject to the approval of other  Committees  within
the House of  Representatives,  the Senate and President Lula's signature.  Should this
bill be approved, it will have an impact on our rate structure currently in place.  As a
result, our operations and competitive position could be adversely impacted.

We may need
additional third party financing which may not be available in the future or on terms
acceptable to us

In addition to amounts
we have already borrowed in 2004, we may require  additional third party financing for
potential  strategic  acquisitions and to commence new operations.  During 2003, our net
debt decreased from approximately  R$3,659.0 million at December 31,  2002 to
approximately  R$3,170.0 million  at December 31,  2003. During 2004,  approximately
 R$1,840.0 million of our debt will mature and we may decide to refinance other existing
debt in order to reduce costs or extend debt maturities.  We do not anticipate being able
to finance all of our funding  requirements  from cash flow from operations and will need
to rely on third party financing in the future.  We cannot assure you that such third
party financing will be available on terms acceptable to us or at all.

Certain  beneficial  shareholders  control  a large  percentage  of our  voting  shares  and  their
interests  may  conflict  with  the  interests  of  our  other  shareholders,   including  minority shareholders.

We are controlled by Solpart Participações S.A. (Solpart), the capital of which is held by Timepart,
Techold and TII. The shareholders of Solpart entered into a shareholders agreement dated July 19, 1998
and last amended as of August 27, 2002 (the "Solpart Agreement"). As our controlling shareholder Solpart
has the power to modify our business plan, modify our dividend plan and sell our material assets, among
others. At December 31, 2003, to the best of our knowledge, Timepart and Techold hold 20.9% and 47.5%
respectively of the voting capital of Solpart. We cannot assure you that any of the Solpart ́ shareholders
will not take any actions that are inconsistent with your interests.

TII is a company controlled by Telecom Italia S.p.A.  ("Telecom Italia").  Telecom Italia prevented
us from entering in the first auction of personal  communication  service  (PCS)  licenses that took place
on 2001 and acquired for itself,  through  various  subsidiaries  now  consolidated  into TIM Celular  S.A.,
(TIM),  licenses to deploy PCS in the whole  country,  including  Region II,  where we provide  fixed-line
services.  As a matter of Brazilian  law, TII and we were deemed to be  affiliates  and  therefore TIM could
not initiate to exploit the PCS  authorizations  before  January 1, 2004 unless either Telecom Italia ceased
to be affiliated  with us or we  anticipated  our 2003  universalization  targets.  In order to allow TIM to
explore  immediately  its PCS licenses TII,  Techold and Timepart  agreed to amend the Solpart  Agreement on
August 27, 2002 by means of which TII had certain rights  suspended  subject to subsequent  restoration upon
the  fulfillment  of certain  conditions  and a certain  number of common shares in the Solpart were sold by
TII to Techold and Timepart so as to reduce TII ́s indirect  ownership in Solpart and  consequently  in us to
below the affiliate  level,  subject to  corresponding  call and put rights.  Since TII ́s departure from
our control group,  the following  events have occurred (i) TIM acquired  authorizations  to render national
and  international  fixed-line  services,  in the full knowledge that we already had since 1998 an option to
provide  such  services  aiming at  transforming  ourselves  from a regional to a national  and  international
carrier;   (ii)  we,  through  a  wholly  owned  subsidiary,   14  Brasil  Telecom  Celular  S.A.,  acquired
authorization  to  render  PCS in Region  II;  and  (iii) we  exercised  our  pre-existing  right  aiming at
providing the long distance  national and international  services.  Therefore we and Telecom Italia now have
overlapping  rights to provide PCS (in Region II) and long  distance  national  and  international  services
(Regions I, II and III).  Article 68 of the General  Telecommunication  Law prevents the exploitation by the
same  juridical  person,  whether  directly  or  indirectly,  of  the  same  services  in the  same  Region.
Notwithstanding,  TII is now  requesting  to  repurchase  its voting  stock and return to our control  group
which is  against  our best  interests  as we and TIM would  then be  considered  affiliates  and  therefore
prevented from offering  the same services in the same regions.

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

We are  controlled  by Solpart.  Shareholders  of Solpart  have entered  into the Solpart  Agreement.  There
have been disputes  among the  shareholders  of Solpart  including in respect to the ownership  structure of
Solpart  and further  disputes  may arise again in the future.  Such  disputes  may arise  between and among
members of our control group with respect to the  interpretation,  application,  performance and exercise of
rights  under the Solpart  Agreement.  Any such  disputes  could  consume  significant  management  time and
resources which could have a material adverse effect on our financial condition and results of operations.

Currently,  TII is involved in a dispute with Techold and  Timepart  relating to TII's  attempt to return to
our control group.  As discussed  above,  TII is attempting to return to our control group.  On December 19,
2003,  Techold  and  Timepart  submitted  to the ICC a request  for  arbitration  to resolve the dispute for
Solpart ́s  control  aiming at avoiding  that TII  exercise  control for the benefit of Telecom  Italia in an
attempt  to  prevent  us, in our own and in the public  interest,  from  reaching  our full  potential  as a
national and international  provider of  telecommunications  services.  On January 16, 2004 Anatel consented
that during an 18 month period TII may return to our control  group so long as TII does not  participate  or
vote in any  matters  related  to the  overlapping  services.  After the 18 month  period if we and  Telecom
Italia do not reach an  agreement  Anatel  reserved  the right to impose  sanctions.  In January  2004,  TII
notified us of its  intention  to regain its voting  stock in Solpart and to restore the  suspended  control
rights  in  Solpart  as a result of our  attainment  of the  universalization  targets.  TII filed  lawsuits
against  Solpart,  Timepart,  Techold  and us to force  its  return to our  control  group.  To date,  TII ́s
requests have not been  adjudicated.  In the meantime,  ANIMEC (the  Brazilian  Association  of Investors of
Capital  Markets)  filed an  injunction  before the Conselho  Administrativo  de Defesa  Econômica  ("CADE")
(Brazil's  Antitrust  Authority) to prevent TII from returning to the control group.  On March 17, 2004, the
injunction  was granted by unanimous  decision and TII appealed from CADE ́s  decision.  This matter is still
unresolved.  We cannot  assure you that this  dispute  will not have an adverse  effect on our  management's
time and resources or our financial  condition and results of operations,  particularly  with respect to our
mobile and long distance services.

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

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

We may be liable
for labor liabilities, including those related to the companies that Brasil Telecom S.A.
 merged with, which could have an adverse effect on our results of operations

As of December 31,
 2003, we were involved in approximately  18,578 labor  proceedings,  which include
 pre-existing labor proceedings of the companies Brasil Telecom S.A. merged with. As of
December 31, 2003,  contingent  liabilities for labor proceedings in which the risk of
loss was considered  "probable" amounted to approximately  R$424.0 million and contingent
 liabilities for which the risk was considered "possible" amounted to approximately
 R$625.1 million.  The estimated total amount involved in these proceedings is
approximately  R$1,177.0 million.  In particular,  Brasil Telecom S.A. acquired CRT, the
leading fixed-line services provider in the state of Rio Grande do Sul in 2000 and, as a
result of such acquisition,  we inherited a number of labor proceedings,  as well as
other tax and civil proceedings.  As a result of recent court decisions, we now regard a
portion of our loss relating to these  proceedings as "probable" and accordingly,  in
2003, we provisioned  R$281.5 million of contingent  liabilities with respect to such
 proceedings.  See Item 8 "Financial InformationConsolidated Statements and Other
Financial InformationLegal ProceedingsLabor Legal Proceedings."

Contingencies
 classified  as having a probable risk of loss are recorded  under  liabilities.  Under
 Brazilian  labor law, a change of control,  corporate  structure or ownership  does not
affect the  enforceability  of pre-existing  employment  contracts of an entity.
 Brazilian  labor courts have taken the position that any entity that acquires the
control of a  manufacturing  or commercial  establishment  becomes  liable for the labor
liabilities of its target even when such liabilities  originated prior to the date of the
acquisition.  Although we believe that we have no other material  pre-existing  labor
 liabilities,  there can be no assurance that additional  material labor proceedings for
actions undertaken by the companies Brasil Telecom S.A. merged with prior to our merger
with them, or any other labor  liabilities,  will not be brought in the future, or if
they are, that an adverse judgment regarding the same would not have a material adverse
effect on our results of operations or financial condition.

We may be held
liable for engaging in certain activities without an environmental license,  which may
subject us to fines of up to R$10.0 million,  total or partial suspension of activities
in certain states, and/or civil and criminal sanctions.  This could have an adverse
effect on our results of operations

In Brazil,
environmental licensing is regulated mainly by Resolution No. 237 of 1997 enacted by
the Conselho Nacional do Meio Ambiente("CONAMA") (Environmental National Council).
This resolution lists the activities that require environmental licensing and provides
that any activity that has the potential to cause a significant impact on the environment
must be licensed.

In Brazil, the
federal, state and local levels of government have concurrent jurisdiction to
independently  determine whether an activity has the potential to cause a significant
impact on the environment,  and to require and grant environmental  permits for that
activity.  As part of our normal operations,  we install and maintain ducts,  wires,
cables and towers for transmission  antennae in the states in our region. The
installation and maintenance of ducts,  wires,  cables and towers for transmission
 antennae are not listed in the CONAMA Resolution No. 237 of 1997 as activities that
require compulsory  licensing.  However,  there is no guarantee that a jurisdiction  will
not view this  installation and maintenance as activities with the potential to cause a
significant  impact on the environment,  and thereby require an environmental  permit to
conduct such an activity. In any  jurisdiction,  to the extent that we are  required to
obtain an  environmental  permit and have not  obtained  such a permit,  we may be
subject to fines of up to  R$10.0 million,  total or partial  suspension  of activities,
 and/or civil and criminal sanctions.  Although we have never been charged with having
conducted our installation and maintenance  activities without a proper  environmental
 permit, there can be no assurances that some state or local authority will not
retroactively  determine that we have failed to obtain the appropriate state or local
environmental  permit, as the case may be, prior to conducting such activities.  This
could have a material adverse effect on our results of operations.

It may be difficult
to effect service of process upon, or to enforce foreign judgements upon us, our
directors and our officers

We are organized
 under the laws of Brazil,  and all of our directors and officers reside outside the
United States.  In addition,  a substantial  portion of our assets,  and most or all of
the assets of our  directors  and  officers are located in Brazil.  As a result,  it may
be difficult  for you to effect  service of process  within the United  States or other
 jurisdictions  outside of Brazil upon our company or such persons, or to enforce against
them judgments of courts in the United States, predicated upon the civil liability
provisions of the federal securities or other laws of the United States.

Risks Relating to
the Brazilian Telecommunications Industry

We face increasing
competition in the Brazilian telecommunications industry.  This may have a material
adverse effect on our market share, margins, results of operations and financial condition

The telecommunications
industry in Brazil is becoming increasingly competitive. Our public regime fixed-line
concessions are not exclusive and Anatel could grant additional private-regime
authorizations in our region. For example, in local fixed-line telecommunications
services in our region, we currently face competition from Global Village Telecom
Ltda. ("Global Village Telecom"). To date, Telecomunicações de São Paulo S.A.("Telesp"), Tele Norte Leste Participações S.A.("Telemar"), Embratel Participações
S.A., ("Embratel") and Intelig Telecomunicações Ltda.("Intelig") have been granted
permission by Anatel to provide local fixed-line telecommunications services in our
region. In intraregional long distance services in our region we currently face
competition from with Global Village Telecom, Intelig and Embratel. To date, Albra
Telecomunicações Ltda.("Albra"), Portale Rio Norte S.A.("TIM") and Global Village
Telecom have been granted permission by Anatel to provide intraregional long distance
services in our region.

In addition, the
Brazilian  telecommunications  industry is consolidating which results in larger
competitors.  The controlling interest in Embratel has been purchased by Telefonos de
Mexico S.A. de C.V. ("Telmex") subject to certain conditions  precedent.  Embratel also
provides local and broadband services in Region I and III through its subsidiaries  Vésper
S.A. and Vésper São Paulo S.A.  (together,  "Vesper").  Telmex has also acquired the
assets of AT&T do Brasil,  now Telmex do Brasil Ltda.  ("Telmex do Brasil") and owns the
mobile  operator Claro,  through its subsidiary  América  Móviles.  Telesp is majority
owned and controlled by Telefônica S.A.  ("Telefônica").  Telesp has been granted
 permission to operate in our local fixed line and long distance  markets.  We also
compete with Telesp in the data services market outside of our region.  We also expect to
compete with Telefônica in the wireless market against "Vivo", its joint venture with
Portugal Telecom S.A. ("Portugal Telecom").

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

In addition, we may
also face increased competition due to unbundling regulations. On May 13, 2004,
Anatel issued Order (Despacho) no. 172, which establishes rules for partial and full
unbundling of local telephone networks and requires us to make our networks available to
other telecommunications service providers. This legislation limits the rate we can
charge for partial unbundling to R$15.42 per line. Anatel has not yet fixed rates for
full unbundling, although we expect that these rates will be lower than the rates we
currently are permitted to charge. This legislation is expected to increase
competition in the local fixed line and broadband internet access markets by making it
easier for new telephone companies operating under either the public or private regime
to enter these markets and for existing providers to provide new services or enter new
regions, since the networks of all telecommunications service providers, including
fixed line operators such as us, will be made available at lower rates. Similarly, this
legislation makes it easier for us to provide new services and enter into new regions
in competition with other operators. These regulations are recent and we cannot
guarantee whether we can compete effectively in this environment.

The expected increases
in consolidation of telecommunications  operators in Brazil and the increase in
competition in our region due to unbundling or otherwise,  may have a material adverse
effect on our market share, margins, results of operations and financial condition.

The
telecommunications industry may not continue to grow or may grow at a slower rate

We derive most of our
revenue from our fixed-line  telecommunications  services and have recently commenced offering
wireless services.  As a result, we depend on the continuing  development and growth of
the market for  telecommunications  services in Brazil. Our ability to increase our
business depends partially on continuing  economic  development in Brazil. Any economic,
 technological or other developments  resulting in a slowdown in growth or a reduction in
demand for our  fixed-line or other  services may harm our business and revenues.  To
remain  competitive we must also diversify our services and there can be no assurance
that we will be successful in doing so.

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

In order to receive or
send calls from or to customers of other fixed-line and wireless  Brazilian  networks and
 international  networks we must  interconnect  with the networks of our competitors.
 The Brazilian General  Telecommunications Law requires all telecommunications  service
providers to interconnect their networks with those of other providers on a
non-discriminatory  basis. The rates to be paid by one network operator to the other for
the use of each other's network are currently regulated by Anatel.  However,  beginning
in July 2004,  interconnection  rates for wireless operators will be freely negotiated.
 If we are not able to negotiate favorable  interconnection  agreements in the future,
 subject to potential intervention by Anatel under its legal power to establish the terms
of agreements between  telecommunications  companies that cannot agree on interconnection
rates and terms, our operating and financial results may be adversely affected.

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

The fraudulent use of
 telecommunications  networks  imposes a significant cost upon service  providers,  who
must bear the cost of services  provided to fraudulent  users. We suffer loss of revenue
as a result of fraudulent use, and also cash costs due to our obligation to reimburse
 carriers for the cost of services provided to fraudulent  users.  During 2003, we
continued to improve our systems in order to implement an "on-line" fraud management
system.  However, we have not yet been able to implement our "on-line" fraud management
system or to implement a fraud detection system related to billing.

In addition,  we rely
on other  long-distance  carriers for  interconnection,  some of whom do not have
anti-fraud  technology in their network.  In 2001, we created a fraud  management
 department to provide  specialized customer service to customers affected by fraud.
 During the fiscal year 2002, several automated  procedures were created to detect and
control possible  abnormalities that could represent  fraudulent  activities and were
placed in various parts of our operations.  These control points have a preventive
function, and work both pro-actively and, should a fraud occur,  reactively.  In 2003, we
implemented  controlling points to capture fraud events automatically,  such as a
non-billing  mechanism for fraud-blocked  terminals,  a cut-off limit system for service
usage, and a webpage to gather any fraud claim from the community.  These actions
achieved a better level of control in mitigating  the risk of loss from frauds as
compared to previous  years.  However,  these  procedures  are still below the level of
accuracy and  effectiveness  desired and expected for fraud  control. Should we not be
able to develop and implement the technology necessary to quantify and combat fraud on
our network, our results of operations could be adversely affected.

The failure of
other  operators to effect bill  collection  may have an adverse  effect on our
 long-distance  services  revenues  generated  through other  providers,  on our
provision for doubtful  accounts,  and on the productivity ratio of our call centers.

Anatel Resolution 343,
dated July 17, 2003, requires all  telecommunications  services providers to provide
billing and collection services to other  telecommunications  services providers with
whom they have line or access sharing  agreements.  As part of our entrance into new
 long-distance  services  markets,  we entered into agreements  with several mobile
 telephone  operators and fixed-line  operators to include our long-distance  services in
their  telephone bills and provide  collection and  collection-related  services to us
and  vice-versa.  If other operators  experience  difficulties  with bill collection or
 collection-related activities,  our long-distance  services revenues generated from the
lines or accesses of other  telecommunications  operators,  our provision for doubtful
 accounts,  and the productivity ratio of our call centers may be adversely affected.

The failure to
develop and implement the  technology  necessary to extract,  analyze,  monitor and take
actions upon revenue  leakage  present in our revenue  stream could  adversely  affect
our results of operations in a competitive environment

Revenue leakage occurs
at different stages of the billing  process,  from ordering the new service to the
provider making network switch changes and establishing  accurate  billing records
 reflecting the change.  Service providers may lose a  significant  portion of their
annual  services  revenue due to services that were never billed.  Since 2002 we have
been  implementing  systems and processes  which verify the accuracy of billing and
improve our recording of traffic.  In 2003, we introduced the following new systems or
processes in order to implement our revenue leakage control which include:

- a
"conformity  certificate" from Bureau Veritas of Quality International ("BVQI"), an
international  certification  organization which validates the accurate rates for local,
 international long                            distance ("ILD") and domestic long
distance ("DLD") calls through our carrier selection code originating from public
telephones;

- the renewal
of a "conformity certificate", issued by BVQI and annually required by Anatel, for
the collection, registry, rate and billing process, including the local measured and
billed service and the public switched telephone network (Serviço
Telefônico Fixo Comutado, or STFC); and

- a procedure
for the analysis and recovery of unpaid invoices, monitoring of the installation of
telephone lines and related services, and monitoring the improper use of terminals.

Notwithstanding  our
efforts, we continue to face challenges in finding and preventing revenue leakage,
 including the gathering of data from multiple sources within our complex network/IT
 platforms and the reconciliation of such data in order to identify the root cause(s) of
leakage.  This identification,  prevention,  and correction process typically involves
multiple operational  functions throughout the organization. If we are not able to
develop and implement the technology necessary to detect, quantify, and prevent revenue
leakage in our network, our results of operations could be adversely affected.

Developments in the
global  telecommunications  industry and technology are difficult to predict and a
failure by us to respond to such  developments may have a further  material adverse
effect on our financial  condition and results of operations

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

In the event of a
natural disaster,  war,  significant  public  disturbance or for economic reasons,  the
Brazilian  government could  temporarily seize or permanently  expropriate our assets,
 which could have a material adverse effect on our financial condition and results of
operations

The Brazilian
 government has the authority to temporarily seize all assets related to
 telecommunications  concession in the event of natural disaster,  war,  significant
public disturbance,  threats to internal peace or for economic reasons, and for other
reasons related to national security. In addition, the Brazilian government has the
statutory right to permanently  expropriate any  telecommunications  concession and claim
any related  assets for reasons of public  interest.  Brazilian  law provides for
 compensation  in  connection  with losses and damages  related to temporary  seizure or
 expropriation.  However,  in the event of a temporary  seizure or  expropriation  of any
of our assets we cannot assure you that the actual  compensation  paid would be adequate
or that such payment would be timely.  This would have a material adverse effect on our
financial condition and results of operations.

Risks Relating to
Brazil

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

Substantially all of
our operations and customers are located in Brazil.  Accordingly,  our financial
condition and results of operations are substantially  dependent on Brazil's economy,
 which has been characterized by frequent and occasionally  drastic  intervention by the
Brazilian  government and volatile economic cycles in the past. In 2003 the real
appreciated in value by 22.3% in relation to the U.S. dollar,  from 3.5333 reais per U.S.
dollar at December 31,  2002 to 2.8892 reais per U.S.  dollar at December 31,  2003. In
2003, the Central Bank raised Brazil's base interest rate by a total of 10.0 percentage
 points in an effort to stabilize the currency and decrease inflationary  pressures.  In
the past, the Brazilian government has often changed monetary,  fiscal,  taxation and
other policies to influence the course of Brazil's economy. We have no control over, and
cannot predict,  what measures or policies the Brazilian government may take in response
to the current Brazilian economic situation or how Brazilian government  intervention and
government policies will affect the Brazilian economy and, both directly and indirectly,
our operations and revenues.

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

- fluctuations
in exchange rates;

- base
interest rate fluctuations;

- inflation;
and

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

On January 1, 2003,
Luiz Inácio Lula da Silva, from the Labor Party, took office as the new President
of Brazil. Until now, the economic policies of former President Cardoso have been
continued by the current administration of the Brazilian government. Although the new
government has not departed significantly from previous policies, and the Realappreciated 22.3% against the U.S. dollar during 2003, concerns remain about the
policies of the future of the Brazilian government. While the current administration's
policies have to date not been adverse to the telecommunications industry, the
uncertainty over what policies the current Brazilian government may propose or adopt
in the future may have an impact on our business and may contribute to economic
uncertainty in Brazil and to heightened volatility in the Brazilian international
securities markets and thus have an impact on our business.

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

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

Inflationary pressures
may also curtail our ability to access foreign financial markets and may lead to further
government  intervention in the economy,  including the introduction of government
policies that may adversely affect the overall performance of the Brazilian economy and
thus reduce our revenues.

Adverse changes in
Brazilian economic conditions could cause an increase in bad debt provisions for doubtful
accounts, which could materially reduce our earnings

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

- the level
of economic activity;

- devaluation
of the real;

- inflation;
or

- an increase
in domestic interest rates.

A greater portion of
our customers may not be able to pay their bills, which would increase our bad debts and
provisions for doubtful  accounts.  Losses from accounts  receivable  reached  R$298.0 million
in 2003, against R$263.5 million  in 2002,  almost flat in percentage of gross revenues
terms.  However,  should economic  conditions  worsen in Brazil and bad debts increase,
 this could materially reduce our earnings and have a material adverse effect on us.

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

The Central Bank has
periodically devalued the Brazilian currency during the last four decades. The
exchange rate between the realand the U.S. dollar has varied significantly in recent
years. For example, the real/U.S. dollar exchange rate fell from R$1.9554 per U.S.
dollar at December 31, 2000 to R$3.5333 at December 31, 2002. In 2003, the realhas
strengthened against the U.S. dollar. At December 31, 2003 the real/U.S. dollar
exchange rate was R$2.8892 per U.S. dollar.

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

The proposed
changes in Brazilian labor law may affect labor relations

In April 2003, the
Lower House reopened the discussions regarding the changes in the Brazilian Labor Law
(Consolidação das Leis do Trabalho, or CLT). According to the system currently in
force, labor relations are strongly regulated. Although still protecting fundamental
labor rights, the committee in charge of the preparation of a new bill has proposed to
include more flexibility in the rules regulating labor relations in Brazil, allowing
for employers and employees to more freely negotiate certain aspects of their employment
relations. A revision of union relations in Brazil may also be discussed. It is not
clear whether the proposed changes, if approved by the Congress, would be well accepted
by employees of Brazilian companies, including us, and their respective unions. These
changes, if implemented, may adversely impact our business in the future.

Restrictions on the
movement of capital out of Brazil may hinder your ability to receive dividends and
distributions on, and the proceeds from any sale of  the Preferred Shares

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

As a holder of ADSs
you may have fewer and less well-defined shareholders' rights than in the United States

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

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

Risks Associated
with Our Preferred Shares or American Depositary Shares

The relative
volatility and illiquidity of the Brazilian securities markets may substantially limit
your ability to sell the Preferred Shares underlying the American Depositary Shares at
the price and time you desire

Investing in
securities in emerging markets,  such as Brazil,  involves greater risk than investing in
securities from more developed countries and such investments are generally  considered
 speculative in nature.

Brazilian investments,
such as investments in our securities, are subject to economic and political risks,
involving, among others:

- changes in
the regulatory, tax, economic and political environment that may affect the ability of
investors to receive payment, in whole or in part, in respect of their investments; and

- restrictions
on foreign investment and on repatriation of capital invested.

The Brazilian
 securities  markets are  substantially  smaller,  less liquid,  more  concentrated  and
more volatile than major U.S. and European  securities  markets,  and are not as highly
regulated or supervised as these markets.  The relatively small capitalization and the
illiquidity of the Brazilian equity markets may substantially limit your ability to sell
the Preferred Shares underlying the ADSs.

Developments in
other countries, including Argentina, may affect the Brazilian economy, market price of
the Preferred Shares and your American Depositary Shares

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

Holding your
Preferred Shares in ADS form may subject you to several risks and may jeopardize certain
rights relating to voting,  dividends and distributions,  and preemptive rights, among
others, that you would otherwise enjoy as a holder of Preferred Shares

- In the
limited  circumstances  where holders of Preferred Shares are able to vote, you will be
able to exercise your voting rights with respect to the Preferred  Shares  represented by
ADSs only                            in accordance with the provisions of the deposit
agreement  relating to the ADSs. There are practical  limitations upon your ability,  as
an ADS holder, to exercise your voting rights due to the
                           additional  procedural  steps  involved  in  communicating
 with such  holders.  See Item 7 "Major  Shareholders  and  Related  Party  TransactionsMajor
 Shareholders"  and Item 10  "Additional                            InformationMemorandum
and Articles of AssociationVoting Rights."

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

- Payments of
cash dividends and  distributions,  if any, will be made in Brazilian currency to Banco
Itaú S.A., as custodian for your Preferred Shares represented by the ADSs, on behalf of
the Depositary, which will then convert such proceeds into U.S.  dollars and will cause
such U.S.  dollars to be delivered to the Depositary for  distribution  to you, as a
holder of ADSs.  Holders of ADSs could be adversely  affected by devaluations of the
Brazilian  currency that may occur due to delays in, or a refusal to grant any,  required
 government  approval for conversions of Brazilian  currency  payments and remittances
 abroad of the Preferred Shares underlying our ADSs.  See Item 10 "Additional InformationMemorandum
and Articles of AssociationDividends."

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

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

Tax reform will be
gradually implemented in the following years

In December 2003, the
Federal Senate approved part of the tax reform bill that had been under discussion for
eight months. The text approved by the Senate was consolidated in Constitutional
Amendment No. 42, enacted on December 19, 2003. Constitutional Amendment No. 42 is
already in force, and provides for an extension on the assessment of the Provisional
Contribution of Financial Transfers (Contribuição Provisória sobre Movimentação
Financeira - "CPMF"), the assessment of Programa de Integração Social("PIS"); and
Contribuição para Financiamento da Seguridade Social("COFINS") taxes on import
transactions, and the assessment of COFINS under a non-cumulative regime.

Some important issues
originally  provided for in the tax reform bill relate to:  (i) harmonization  of ICMS
tax rules, which would be governed by a single federal  legislation  applicable to all
states; (ii) equalization  of ICMS rates;  and  (iii) limitations  on granting tax
 incentives.  If approved,  such measures  shall be gradually  adopted in 2005 and 2007.
The delay in the approval and  implementation  of the tax reforms bill may negatively
affect the Brazilian economy and capital markets.

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

According to Law No.
10,833,  enacted on December 29,  2003, the disposition of assets located in Brazil by
non-residents of Brazil,  whether to other non-residents of Brazil or Brazilian residents
and whether made within or outside Brazil is subject to taxation in Brazil.  Considering
the general and unclear scope of Law No. 10,833 and the absence of judicial  guidance in
respect thereof,  we are unable to predict how the scope of Law No. 10,833 would be
interpreted in the courts of Brazil.

Table of Contents

ITEM 4.
                            Information on the Company

Table of Contents

History and
Development of the Company

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

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

Historical
Background

Prior to the
incorporation of Telebrás in 1972, there were more than 900 telecommunications
companies operating throughout Brazil. Between 1972 and 1975, Telebrás acquired
almost all the other telephone companies in Brazil and thus came to have a monopoly
over the provision of public telecommunications services in almost all areas of the
country. Beginning in 1995, the Federal Government undertook a comprehensive reform
of Brazil's telecommunications regulatory system. In July 1997, Brazil's National
Congress approved the Lei Geral de Telecomunicações(the "General Telecommunications
Law," and together with the regulations, decrees, orders and plans on
telecommunications issued by Brazil's Executive Branch, the "Telecommunications
Regulations"), which provided for the establishment of a new regulatory framework,
the introduction of competition and the privatization of Telebrás.

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

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

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

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

- to protect
and defend the users' rights;

- to prevent,
control and punish penalties of the economic order, in the telecommunications industry;

- to
establish restrictions, limits or conditions to corporate groups in obtaining or
transferring the concessions, permissions and authorizations, in order to assure the
competition; and

- to
establish the rate structure for each kind of services rendered in the public regime.

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

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

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

We are one of the
three holding companies  providing local and long-distance  services in Brazil.  See Item
7 "Major  Shareholders and Related Party  TransactionsMajor  Shareholders." In the
breakup of Telebrás,  we were allocated all the share capital held by Telebrás in Telesc,
Telegoiás,  Telebrasília,  Telemat, Telems, Teleron, Teleacre and CTMR, companies which
provided fixed-line  telecommunications service in the northern, western, central and
southern regions of Brazil. See "Business  OverviewOur  Region." In July 1998,  the
Federal  Government sold all its voting shares of these holding  companies,  including
the shares it held in Brasil Telecom Participações  S.A. to private sector buyers.  The
sale of all of the Federal  Government's  voting shares in the holding  companies to
private sector buyers is referred to herein as the  "privatization of Telebrás." As a
result of the merger of Telepar,  Telesc,  Telegoiás,  Telebrasília,  Telemat,  Telems,
 Teleron,  Teleacre,  CTMR and CRT, which  ultimately  became Brasil Telecom S.A.,  our
 subsidiary,  we became the leading local and intraregional  fixed-line
 telecommunications  service  provider in our region.  The only other relevant
 fixed-line  telecommunications  service  provider in our region is Global Village
Telecom  (Sercomtel and CTBC also operate  partially in our region but we do not service
the same  cities).  For  intraregional  long-distance  telecommunications  services,
 Intelig and  Embratel, among  others,  are providers  that are  authorized  to provide  long-distance  services in our
region.

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

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

History of Our
Company

The following bullet
points illustrate a brief history of our company:

- May 22,
1998:  The Brazilian Government transferred the ownership of Telesc, Telepar, Telegoiás,
Telebrasília, Telemat, Telems, Teleron, Teleacre and CTMR to us.

- July 29,
1998: Solpart acquired a controlling interest in our predecessor, Tele Centro Sul
Participações S.A., from the Brazilian government in the privatization process of Telebrás.

- February 28,
 2000: Our subsidiary,  Brasil Telecom S.A., was reorganized and merged with and into the
concessionaires  Telesc,  Telepar,  Telegoiás,  Telebrasília,  Telemat,  Telems,
 Teleron,                            Teleacre and CTMR.

- April 28,
2000: In accordance with our strategy of becoming a national telecommunications
company, Brasil Telecom Participações S.A. changed its corporate name from Tele
Centro Sul Participações S.A.to Brasil Telecom Participações
S.A.

- July 5,
2000: Brasil Telecom Participações S.As ADSs were listed on the New York Stock Exchange
and started trading under new symbol: "BRP".

- July 31,
2000: Brasil Telecom S.A. acquired 98.8% of the corporate capital of TBS Participações
S.A.("TBS"), a company controlled by Telefônica, which held 85.2% of the voting
capital of CRT, representing 31.6% of the total share capital of CRT, for approximately
R$1,500.0 million. CRT was the leading fixed-line telecommunications service company
in the state of Rio Grande do Sul. The acquisition of CRT was financed partly through the
use of Brasil Telecom S.A.'s cash reserves, as well as through the domestic placement of
commercial paper worth approximately R$900.0 million.

- December 28,
 2000: TBS was merged into CRT, and  immediately  afterwards CRT was merged with and into
Brasil Telecom S.A.  Pursuant to its merger with CRT,  minority  shareholders  of CRT
were given the                            right to exchange  their CRT shares for
 Preferred  Shares and Common  Shares of Brasil  Telecom S.A. The exchange of shares was
made based on the market value of Brasil  Telecom  S.A.'s  shares
                           compared to those of CRT.

- November 1,
2001: BrT Serviços de Internet S.A.("BrTSi") acquired 15.4% of the total capital stock
of iBest Holding Corporation(which controls iBest S.A.), for approximately R$10.0 million.

- November 16,
2001:  Our subsidiary, Brasil Telecom S.A., listed ADSs evidencing its Preferred Shares
on the New York Stock Exchange.

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

- May 9,
2002: Brasil Telecom Participações S.A. and Brasil Telecom S.A., joined the Special
Corporate Governance Level 1 of the São Paulo Stock Exchange("BOVESPA").

- June 3,
 2002:  Brasil  Telecom  Participações  S.A.'s shares listed on BOVESPA  started  trading
under new symbols:  "BRTP3" for Common Shares and "BRTP4" for Preferred  Shares.  Brasil
Telecom                            S.A.'s shares listed on BOVESPA started trading under
new symbols: "BRT03" for Common Shares and "BRT04" for Preferred Shares.

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

- February 18,
2003: Brasil Telecom S.A. announced the acquisition of 19.9% of the capital of MTH do
Brasil Ltda.("MTH"), a company that holds 99.99% of the capital of MetroRED Telecomunicações
Ltda.("MetroRED"), for U.S.$17.0 million together with an
option to purchase the remaining 80.1% of the capital of MTHfor U.S.$51.0 million
after certification by Anatel of compliance with the 2003
targets stipulated in our concession contracts.

- June 11,
2003: Brasil Telecom S.A. acquired, through BrTSi, the entire submarine fiber-optic
cable system of 360 Networks Americas do Brasil Ltda.("GlobeNet") for U.S.$46.8 million.
A total of U.S.$27.6 million was payable on June 11, 2003,
with the remaining U.S.$19.2 million paid within 18 months of the first installment.

- June 26,
2003:  Brasil Telecom S.A. acquired the remaining capital of iBest Holding Corporation
for U.S.$36.0 million.

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

- March 16,
 2004:  CADE,  released a provisory  decision  determining  that TII, one of our former
 controlling  shareholders  could not return to Brasil  Telecom's block of control,
 notwithstanding  the                            authorization from Anatel that  they
could do so.  The outcome is still pending.

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

- May 13,
2004:  Brasil Telecom S.A.  purchased the remaining  80.1% capital of Vant for R$15.6
million which could only be possible once we received  certification  of our compliance
with the 2003 targets                            stipulated by Anatel in our concession
contracts.

- May 2004:
 Brasil Telecom S.A.  received  acceptances of its offer to purchase  63.0% of the shares
of Internet  Group do Brasil  Ltda.'s  ("iG")  capital stock from certain  shareholders
 for U.S.$100.7                            million.  The purchase of these shares is
still subject to due diligence and execution of final purchase and sale agreements.

Organizational
structure

Brasil Telecom
 Participações S.A. is structured as a holding company and conducts  substantially all of
its operations through its only and wholly-owned  subsidiary,  Brasil Telecom S.A. Brasil
Telecom S.A. currently has four wholly-owned  subsidiaries,  BrT Serviços de Internet
S.A., 14 Brasil Telecom Celular S.A., Vant  Telecomunicações  S.A. and MTH Ventures do
Brasil Ltda. and Brasil Telecom S.A. is subdivided into eleven  operational branches,
 Tocantins,  Goiás, Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Paraná, Santa
Catarina, Rio Grande do Sul, Pelotas and the Federal District. For information on our
shareholding structure,  please see Item 7 "Major  Shareholders  and Related Party
 Transactions   Major  Shareholders."  The following  chart sets forth a summary of our
 organizational  structure,  including the  percentage of voting capital held in each of
our significant  indirect  subsidiaries  as of  December 31,  2003. All of our
 significant  indirect  subsidiaries  are organized and existing under the laws of the
 Federative  Republic of Brazil,  except for Brasil Telecom Submarine Cable System
(Bermuda) Ltd.  incorporated under the laws of Bermuda,  Brasil Telecom of America Inc.
 incorporated under the laws of the United States of America and Brasil Telecom de
Venezuela S.A. incorporated under the laws of Venezuela.

BrT Serviços de
Internet S.A.

We
formed BrTSi in October 2001. Through BrTSi, we provide broadband internet services based
on ADSL (Assymetric Digital Subscriber Line) technology through our internet service
provider (ISP) BrTurbo. BrTSi is also the parent company of the subsidiaries
that operate our submarine fiber optic cable system which we refer to as GlobeNet, and
iBest, our free internet service provider.

iBest

In
February 2002, BrTSi acquired 15.5% of iBest Holding Corporation for approximately
U.S.$10.0 million. iBest Holding Corporation controls iBest S.A. (iBest),
a free internet service provider and important brand name. On June 26, 2003, we
acquired through our wholly owned subsidiary, BrTSi, the remaining capital of iBest
Holding Corporation for U.S.$36.0 million, consolidating our 100% ownership of iBest.

GlobeNet
(Submarine Fiber-Optic Cable System)

On
June 11, 2003, we acquired, through BrTSi, the entire submarine fiber-optic cable
system of 360 Networks Americas do Brasil Ltda. which we refer to as GlobeNet, for
U.S.$46.8 million. A total of U.S.$27.6 million was paid on June 11, 2003,
with the remaining U.S.$19.2 million payable within 18 months of the first
installment. As part of this acquisition, BrTSi formed five operating subsidiaries: Brasil
Telecom Cabos Submarinos (Holding) Ltda., Brasil Telecom Cabos Submarinos Ltda., Brasil
Telecom of America, Inc., Brasil Telecom Subsea Cable System (Bermuda) Ltd. and Brasil
Telecom de Venezuela, S.A. These companies own and operate the GlobeNet fiber optic cable
system that connects the United States, Bermudas, Brazil and Venezuela. Brasil Telecom of
America, Inc. is headquartered in Boca Raton, Florida, and coordinates all GlobeNets
activities and supports the commercial activities of the group in the international
market.

14 Brasil Telecom Celular
S.A.

14
Brasil Telecom Celular S.A., is our mobile telephony services subsidiary, which we expect
to be operational during the third-quarter of 2004.  See "--Business Overview--Wireless
Services."

Vant
Telecomunicações S.A.

On
May 13, 2004, Brasil Telecom S.A. exercised its option to purchase for R$15.6 million
the remaining 80.1%, giving us 100%, of the capital of Vant. This purchase was made
possible once we received certification by Anatel of our compliance with our 2003
universalization targets. Vant offers internet protocol as well as other products to the
corporate market throughout Brazil.

MetroRED
Telecomunicações Ltda.

On
May 13, 2004, Brasil Telecom S.A. exercised its option to purchase for
U.S.$51.0 million the remaining 80.1% giving us 100% of the capital of MTH. This
purchase was made possible once we received certification by Anatel of our compliance with
our 2003 universalization targets. MetroRED is a leading local fiber optic network
provider, with 331 kilometers of local area network in São Paulo, Rio de Janeiro
and Belo Horizonte, and a 1,485 kilometer long-distance network linking these three
metropolitan areas as well as an internet solutions data center in São Paulo which
will provide internet support to our customers. As part of the acquisition, we also
acquired a management team with expertise in these markets.

Intelig

We
are engaged in on-going discussions with Inteligs shareholders, France Telecom,
Sprint Corp. and National Grid Group PLC, with respect to a possible acquisition of
Intelig. Intelig started operations in 2000, and provides national and international long
distance services nationwide and competes directly with Embratel. Intelig has built out an
extensive fixed-line telecommunications network throughout the country. The terms of any
acquisition have not been determined and accordingly, it is not possible to predict the
outcome of this process.

iG

In
May 2004, Brasil Telecom S.A. received acceptances of its offer to purchase 63.0% of the
shares of iGs capital stock from certain shareholders for U.S.$100.7 million. The
purchase of these shares is still subject to due diligence and execution of final purchase
and sale agreements. iG is a free internet services provider. This acquisition will
consolidate our already leading position in the ISP market by giving us more than 50.0% of
the dial-up minutes in the Brazilian market as well as an additional three million active
internet users.

Table of Contents

# Capital Expenditures

Before
the breakup of Telebrás, our capital expenditures were planned and allocated by
Telebrás on a system-wide basis and subject to approval by the Federal Government.
These constraints on capital expenditures prevented us from making certain investments
that otherwise would have been made to improve telecommunications service in our region.
Since the breakup of Telebrás, we are no longer subject to these restrictions. We
are now permitted to determine our own capital expenditure budget, subject to compliance
with certain obligations under our concessions. See Regulation of the
Brazilian Telecommunications IndustryObligations of Telecommunications
Companies.

The
following table sets forth our capital expenditures on plant expansion and modernization
for each of the years ended December 31, 2001, 2002 and 2003.

|                           | Year ended December 31,
|-------------------------- | -----------------------
|                           |                        
|                           | 2001                   
|                           |                        
|                           | (millions of reais)    
|Switching                  | 455.8                  
|Transmission               | 463.1                  
|Access Network             | 1,094.1                
|Data Network               | 176.3                  
|Infrastructure             | 312.5                  
|Other investments (1)      | 924.0                  
|                           |                        
|Total capital expenditures | 3,425.7                
|                           |                        

_____________________________________


|(1) | Other
investments  include the acquisition of PCS licenses,  the acquisition of GlobeNet,
 MetroRED and iBest and investments to replace plant equipment and other fixed assets
generally  without altering the capacity of the assets replaced and certain  investments
in          operational and technical support such as telecommunications management
network systems, IT investments and expansion projects.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our
capital expenditures decreased approximately 10.6% to R$1,794.0 million in the year
ended December 31, 2003, from R$2,055.9 million for the corresponding period in 2002.
Of our total capital expenditures, R$1,328.2 million related to expansion and
modernization of our fixed telephony operations, R$109.2 million to mobile telephony
operations and R$356.7 million to the acquisition of the capital stock of GlobeNet,
MetroRED and iBest. The capital expenditures on the expansion and modernization of our
fixed telephony operations consist mainly of updating technology and upgrading capacity in
relation to our transmission backbone, switching centers, data network and intelligent
network.

Expected Capital
Expenditures on Plant Expansion and Modernization

We
currently expect to invest approximately R$725.5 million in the expansion and
modernization of our network during the fiscal year 2004. For the three months ended
March 31, 2004, we had invested approximately R$147.4 million in the expansion
and modernization of our network. See Item 5 Operating and Financial Review and
ProspectsLiquidity and Capital ResourcesCapital Expenditures. We expect
to finance our remaining expected 2004 capital expenditures with internal funds generated
primarily from our operations.

Acquisition of PCS
Licenses

As
part of our strategy of providing integrated solutions to our clients, we acquired PCS
licenses for R$191.5 million, at an auction held on December 18, 2002. We paid a
premium of 3.6% over the reserve price of R$184.9 million.

On
December 18, 2002, we paid the equivalent of 10.0% of the total bid amount at
auction. The remaining 90.0% will be paid in six equal installments annually, respectively
due 36, 48, 60, 72, 84 and 96 months after the date of the signing of the term of
authorization. These installments will be adjusted by the IGP-DI index plus 1.0% interest
rate over the indexed amount calculated from the term execution date.

Table of Contents

# Business Overview

We
provide fixed-line telecommunications services in Brazil under concessions which we
assumed from each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat,
Telems, Teleron, Teleacre, CTMR and CRT for each of the states in our region. These
concessions were granted by the Brazilian government to us and to each of these companies
as a result of the privatization process. Until January 2004, these concessions
authorized us to provide local and intrastate fixed-line telecommunications services in
nine states located in the northern, western, central and southern regions of Brazil and
in the Federal District. These concession areas constitute our region. See Our
region. As a result of these original concessions, we are the leading provider of
local fixed-line telecommunications services and intraregional fixed-line
telecommunications services in our region. Local fixed-line telecommunications services
include all calls that originate and terminate within a single local area, as well as,
installation, monthly subscription, public telephones and supplemental local services.
Intrastate fixed-line telecommunications services include all calls between local areas
within a state.

Our
business, including the service we provide and the rates we charge, is subject to
comprehensive regulation by Anatel, an independent regulatory agency, under the General
Telecommunications Law and various administrative enactments thereunder. The licenses and
concessions under which we operate our fixed-line services imposed certain
universalization, expansion and modernization targets on us. On January 19, 2004, we
received certification by Anatel that we have accomplished our universalization target.
Accordingly, we are now authorized to offer local fixed and domestic and international
long-distance telephone services, originated inside or outside our region. We are also
authorized to provide mobile telephone services in our region. Our competitors in these
services are Embratel, Intelig, Global Village Telecom, Telesp, Telemar, TIM, Claro, Vivo,
Companhia de Telecomunicações do Brasil Central (CTBC Telecom)
and Sercomtel Telecomunicaçoes S.A.(Sercomtel).

Our Strategy

Our
goal is to become a leading provider of integrated telecommunications services in Brazil
and South America by maintaining our strong position in the local and intraregional long
distance markets while at the same time enhancing our existing services and developing new
services which complement our existing products and services. We intend to achieve this
goal by implementing the following key strategies:

Offer interregional and
international long-distance services

We
intend to increase our market share in our principal business of providing intraregional
long-distance service in Region II. Since January 22, 2004 we have begun
offering interregional and international long distance services and started competing
directly with other regional operators which currently provide such services. By offering
interregional and international long-distance services, we expect to be able to offer our
existing corporate and residential clients more competitive and integrated plans and
capture market share. We intend to leverage the strength of the Brasil Telecom
brand in Region II and to solidify Brasil Telecom S.A. as the carrier of choice
through advertising campaigns that promote the use of our carrier selection code
14 and the synergies across our growing portfolio of integrated services,
including wireless, data and long-distance services nationwide.

Develop our wireless
telecommunications services

As we have received Anatel's  certification that our 2003  universalization  targets have been met,
we have  recently  begun  offering  wireless  telecommunications  services  using  Global  System for Mobile
Communications  ("GSM"),  technology  through our subsidiary,  14 Brasil Telecom Celular S.A., and under the
brand name "Brasil Telecom GSM".  With the  introduction  of wireless  services,  we are the only company in
Region II  to offer both  wireline  and  wireless  services  and we expect to leverage  this to increase our
brand  awareness and overall  market share.  We are able to offer  competitive  wireless  service plans due,
among other things,  to the attractive  prices paid for our licenses and the favorable terms available to us
from our  equipment  vendors.  We also intend to realize the  synergies  between our  wireline  and wireless
operations  by marketing to our existing  client  database,  using our  existing  wireline  sales  channels,
providing  integrated  packages  and  sharing  infrastructure  and  operational  systems.  We also intend to
develop new mobile products and services for the corporate market.

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

Our
acquisition in June 2003 of GlobeNet, our submarine fiber optic cable system, and our
acquisition in May 13, 2004 of MetroRED, our local fiber-optic network, provided us with a
state-of-the-art broadband infrastructure as well as local network capacity. These
networks consist of a 22,000 kilometer submarine fiber optic system connecting us to most
of Latin America and the United States, as well as 331 kilometers of local and 1,485
kilometers of long-distance fiber-optic lines in Brasil, allowing us to expand
geographically to three principal corporate markets outside our regionSão
Paulo, Rio de Janeiro and Belo Horizonte. In addition, through MetroRED we obtained an
internet center in São Paulo that will host various internet services. We intend to
integrate these networks and this center into our existing network and business and to use
this capacity to meet the growing demands for our network and data transmission services
in order to become the market leader in both residential and corporate network and data
transmission services.

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

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

Evaluation of possible
participation in consolidation of Brazilian telecommunications industry

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

We
are engaged in on-going discussions with Inteligs shareholders, France Telecom,
Sprint Corp. and National Grid Group PLC, with respect to a possible acquisition of
Intelig. Intelig started operations in 2000, and provides national and international long
distance services on a nationwide basis and competes directly with Embratel. Intelig has
built out an extensive fixed-line telecommunications network throughout the country. The
terms of any acquisition have not been determined and accordingly, it is not possible to
predict the outcome of this process.

We
are also in discussions with respect to the acquisition of iG, a free internet services
provider. This acquisition would consolidate our already leading position in the ISP
market by giving us more than 50.0% of the dial-up minutes in the Brazilian market as well
as three million active internet users.

Our Services

The fixed-line  telecommunications  services that we offer to our customers  consist of (i) local  services,
including  all calls that  originate  and  terminate  within a single local area in the region,  as well as,
installation,  monthly subscription,  measured services,  public telephones and supplemental local services,
(ii) intraregional  long-distance  services  which include  intrastate  (calls  between local areas within a
state  in our  region)  and  interstate  (calls  between  states  in our  region),  (iii) interregional  and
international  long-distance  services,   (iv) network  services,  including  interconnection,   leasing  of
facilities and fixed-to-mobile  services,  (v) data transmission services, (vi) wireless mobile services and
(vii) other  services.  We do not sell, rent or otherwise  provide  telephone  equipment such as handsets or
switchboards.  On January 19,  2004,  Anatel  certified our compliance with  universalization  targets which
enabled us to provide  mobile  services  in our region and  interregional  and  international  long-distance
services in all regions.

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

|                                                                 | Year ended December 31,
|---------------------------------------------------------------- | -----------------------
|                                                                 |                        
|                                                                 | 2001                   
|                                                                 |                        
|                                                                 | (millions of reais)    
|Local services                                                   | 5,548                  
|Intraregional (Intrastate and Interstate)
 long-distance service | 1,341                  
|Interregional and International long-distance service(1)         | 1                      
|Network services                                                 | 994                    
|Data transmission                                                | 324                    
|Other                                                            | 250                    
|Gross operating revenues                                         | 8,458                  
|Taxes and discounts                                              | (2,300)                
|Net operating revenues                                           | 6,158                  

_____________________________________


|(1) | On
January 19, 2004, Anatel certified our compliance with universalization targets which
enabled us to provide interregional and international long-distance service.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

Local Services

Local
services include all calls that originate and terminate within a single local area in our
region, as well as, installation, monthly subscription, public telephones, and
supplemental local services. We are the leading provider of local telecommunications
services in our region with an estimated 96.5% market share. In local fixed-line services,
our sole competitor is Global Village Telecom. Global Village Telecom is an independent
service provider operating under an authorization from Anatel. As of December 31,
2003, we had approximately 9.85 million lines in service. We own and operate public
telephones throughout our region. At December 31, 2002, we had approximately 293.3
thousand public telephones. At December 31, 2003, we had approximately 296.3 thousand
public telephones and a ratio of public telephone/ 100 lines installed equal to 2.77 which
meets Anatels service targets. We also provide a variety of other supplemental local
services that include voice mail, call waiting, call forwarding, conferencing, speed
dialing and caller ID.

To
date, Telemar, Embratel, Intelig, Telesp, CTBC, Aerotech Telecomunicações
Ltda. (Aerotech), Telefree do Brasil Ltda. (Telefree), Impsat,
Easytone Telecomunicações Ltda. (Easytone) and Transit do Brasil
Ltda. (Transit) have been granted permission by Anatel to provide local fixed
telecommunications services in our region. We have also been authorized to provide local
fixed telecommunications services outside our region, however as of May 2004, we have
not done so.

Intraregional (intrastate
and interstate) long-distance service

Calls
from one local area in a region to another local area in the same region are referred to
as intraregional long-distance calls. Intraregional long-distance service
includes intrastate long-distance calls (calls within a given state in a region) and
interstate long-distance calls (calls between states in a region). Prior to merging into
us, each of Telepar, Telesc, Telegoiás, Telebrasília, Telemat, Telems,
Teleron, Teleacre, CTMR and CRT was the exclusive provider of intrastate long-distance
service in its state. As a result we became and still are the leading provider of
intrastate fixed-line telecommunications services in our region with an estimated 89.9%
intrastate market share and an estimated 75.1% interstate market share at
December 31, 2003. Until July 1999, Embratel was the exclusive provider of
interstate long-distance service.

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

As
of July 1999, Embratel and Intelig were authorized to provide intrastate
long-distance services within the states in our region, and we were authorized to begin to
provide interstate long-distance services between the states in our region. See
Competition. As a result we have been expanding our network to provide
interstate long-distance service in our region to compete against Embratel, and Embratel
and Intelig have been expanding their networks to provide intrastate long-distance service
to compete against us. Until we complete this expansion, we may lease transmission
facilities from other carriers to complete interstate long-distance calls between states
in our region. Telesp, Albra,TIM, Aerotech, CTBC Telecom, TeleNorte Leste
PCS (TNL PCS), Telmex do Brasil, Sercomtel, Telefree, Easytone, Transit,
Telenova Comunicaçoes Ltda. (Telenova), Tmais S.A.
(Tmais) and Global Village Telecomhave also been granted permission by
Anatel to provide intraregional telecommunications services in our region.

Interregional and
International Service

Historically,
under Anatel rules, regional fixed-line companies, such as us, generally were not
permitted to offer interregional or international long-distance services until
December 31, 2003 (the date designed to correspond with the certification of our
universalization targets by Anatel). As a result of Anatel having certified our compliance
with universalization targets, on January 19, 2004, we began offering interregional
long-distance and international long-distance services. Interregional long-distance
services consist of calls between locations within Brazil. International long-distance
services consist of calls between different regions within Brazil and a location outside
of Brazil. In order to provide these services, we have entered into interconnection
agreements with Telemar and Telesp and we will also make use of the cable network we
acquired through the GlobeNet acquisition (linking Brazil with the United States, Bermuda
and Venezuela) and through the MetroRED acquisition (providing network facilities in
São Paulo, Rio de Janeiro and Belo Horizonte). To date, Telesp, Albra, TIM,
Aerotech, CTBC Telecom, TNL PCS, Telmex do Brasil, Sercomtel, Telefree, Easytone, Transit,
Telenova, Tmais and Global Village Telecom have been granted permission by Anatel to
provide intraregional telecommunications services in our region.

Network Services

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

Interconnection
services

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

- receive
calls that originate on our network;

- complete
calls that terminate on our network; and

- connect
switching stations to our network.

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

- the
spin-off of the cellular telecommunications businesses of each of Telepar, Telesc,
Telegoias, Telebrasilia, Telemat, Telems, Teleron, Teleacre and CTMR;

- the breakup
of Telebras; and

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

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

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

Lease
of Facilities

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

Fixed-to-Mobile
Services

Fixed-to-mobile
services consist of calls that originate in a fixed-line telephone and terminate on a
mobile or cellular device. The use of our fixed-to-mobile services has increased
significantly in the past five years as the penetration rate of mobile services in our
region has increased.

Data Transmission Services

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

The
primary data service that we offer to both residential and corporate clients is ADSL,
which we launched in 2001. ADSL is a technology that allows normal telephone services, as
well as delivery of high speed data transmission to virtual private networks or to public
internet networks over existing copper lines. ADSL is an important service because it acts
as a primary access or last mile for other services which we offer such as, BrTurbo, our
broadband internet service provider for residential clients and corporations, and Frame
Relay, our data transmission service for corporations. We also sell ADSL accesses to
competing ISPs who offer ADSL accesses to their end users. In addition ADSL provides us
with a platform to provide new value added services that increase the average revenue per
user such as TvFone, which we launched in October of 2003. TvFone allows
point-to-point videoconferences, over ADSL technology with more than 600kbps, using
regular TV and telephone sets. We intend to continue to invest in our ADSL business in
order to better serve the expected increase in demand for this type of service
particularly in the Internet access market.

In
2003 we reached 346,233 ADSL installed ports and 281,900 accesses in service, which
represents 120,933 new ADSL accesses added in 2003. This represents a 100.4% growth from
the 140,690 accesses in service in 2002, and a growth in the ratio of active customers to
81.4% in 2003 compared to 62.5% in 2002. During 2003 we also increased the number of
cities with ADSL services from 172 to 323.

|                    | Year ended December 31,
|------------------- | -----------------------
|                    |                        
|                    | 2002                   
|                    |                        
|ADSL               
|Installed Ports     | 225,300                
|Accesses in Service | 140,690                

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

- Asynchronous
Transfer Mode (ATM) and Frame Relay  a broadband switching service and
data transmission service for corporations;

- Dedicated
Internet Protocol (Dedicated IP)  a leased line which functions as a
dedicated gate for access to internet backbone typically used by internet service
providers;

- Digital
Dedicated Line Service (SLDD)  a newly introduced leased dedicated line
service which offers wider band width than Dedicated IP;

- Dial up
internet access  a remote dial up internet access which we market under the name
DialNet. DialNet is used primarily by corporate internet service providers to
provide remote access to corporate networks; and

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

ATM,
Frame Relay, and Dedicated IP, expanded by 24.5% in 2003 compared to 2002. As of
December 31, 2003, we had installed 10,245 ATM, Frame Relay or Dedicated IP ports, in
87 cities. The DialNet service increased from 89,020 ports installed at the end of 2002,
to 150,174 ports installed in 180 cities at the end of 2003, representing an increase of
68.7%.

|                                 | Year ended December 31,
|-------------------------------- | -----------------------
|                                 |                        
|                                 | 2002                   
|                                 |                        
|DialNet                          | 89,020                 
|ATM / Frame Relay / Dedicated IP | 8,232                  

MetroRED

On
May 12, 2004, we purchased the remaining 80.1% stake giving us 100% of the capital share
of MTH, the parent company of MetroRED. MetroRED established its Brazilian branch in
August 1997, beginning its commercial operations in December 1998 by providing
private digital telecommunications network to the corporate segment.

Through
MetroRED we intend to provide our corporate data transmission services through local fiber
optic networks in the São Paulo, Rio de Janeiro and Belo Horizonte markets.
MetroRED has 339 km of metropolitan network in São Paulo, Rio de Janeiro and Belo
Horizonte, and 1,485 km of long-distance network connecting these three cities. In
addition to its private network, MetroRED also has an Internet solution center of 3,790
square meters, which offers data center services and support such as co-location and
hosting among others. As part of the acquisition, we acquired a management team with
expertise in these markets. Currently, MetroRED has almost 600 clients in Brazil.

MetroRED
plays a key role in our strategy to expand outside Region II, due to its excellent
positioning in the key data service markets (São Paulo, Rio de Janeiro and Belo
Horizonte) as well as its highly qualified executive team. With a technologically advanced
data network which complements our existing networks, MetroRED gives us direct access to
main corporate clients in Brazil to whom we can offer national as well as international
services, through GlobeNets infrastructure. MetroREDs integration with our
other services will bring many synergies, not only on sales opportunities but also in
reduction of general and administrative, information technology, and personnel costs.
According to a study we conducted in 2002, approximately 80.0% of the interregional
long-distance traffic originating in our region terminates in the three states where
MetroRED has its network. By using MetroREDs infrastructure, we expect to realize
savings as we will no longer have to use third parties infrastructure to complete
these calls.

Vant

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

GlobeNet

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

We
anticipate that the infrastructure offered by this system will assist us particularly in
the expansion of our corporate data transmission services. The acquisition of GlobeNet is
part of our strategy of becoming a complete telecommunications service company. The
GlobeNet acquisition will allow us to offer integrated services to national and
international corporate clients which includes data communications (Internet and
corporate) between Brazil and the USA. In addition, we can reduce our voice and data
interconnections costs, and offer international long-distance services without having to
use third party links. Currently we are using only a small percentage of the capacity of
GlobeNet to meet our internal needs. Telemar is also a client of GlobeNet.

Internet Services

In
October 2001, we formed BrTSi (a fully owned subsidiary) which provides internet
services through BrTurbo and iBest, and data communications services through GlobeNet.

BrTurbo

We
offer broadband Internet services in Region II through BrTurbo, our broadband Internet
service provider, based on our ADSL technology. We created BrTurbo in 2002 as a broadband
ISP through which we offer our ADSL access. Through BrTurbo, we offer competitively priced
broadband access as well as modems for purchase and internet content. BrTurbos
content includes live transmission of news, entertainment channels, video channels with
short-length feature films and documentaries and an exclusive on-line games channel. In
November 2002, BrTurbo launched TurboMeeting service, which allows two-line
video-conferences.

In
2002, we started BrTurbo Empresas, a line of services aimed at corporate clients,
particularly small and medium-sized companies and small and home offices. As part of these
services, we launched BrTData, a portal which offers space for backup and storage of
information, e-mail account, publication of Internet sites and hosting services.

iBest

We
offer free dial up internet services through iBest which we acquired in June 2003.
iBest was created in 1999 to develop commercially the Prêmio iBest brand
name, an Internet award instituted in 1995 that quickly became a national reference for
Internet awards in Brazil. In December 2001, iBest extended its activities in the
Internet market by providing free dial up Internet access. The acquisition of iBest is a
significant step in our Internet strategy. We intend to leverage iBests large
customer base by targeting sales of broadband services (ADSL) to iBests dial up
customers. In addition to ADSL, we can also offer integrated services such as voice (local
and long-distance), data and internet to iBests customers, making iBest an important
sales channel for us and allowing us to protect an important customer base from our
competition.

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

iG

We
also expect to begin offering free internet through iG. Our pending acquisition of iG will
consolidate our already leading position in the ISP market by giving us more than 50.0% of
the dial-up minutes in the Brazilian market as well as three million active internet
users.

Other Services

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

Wireless Services

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

We
expect to operate on the GSM technology platform throughout Region II and we expect
our wireless business will generate revenues in the following ways:

- usage fees
for outgoing calls made and value-added services such as access to the internet, data
transmission, short messages, call forwarding, call waiting and call blocking;

- monthly
subscription charges;

- roaming
fees;

- interconnection
fees received from other operators on incoming calls; and

- sales of
handsets.

We
have begun offering our wireless services using a relatively low amount of capital
expenditure compared to that of some of our competitors while providing our customers with
comparable level of services to that of our competitors, mainly due to lower prices we
obtained for our equipment compared to the cost obtained by our competitors. We expect our coverage to be similar to the Band A
operators in the main metropolitan areas and similar to the Band B operators in the other
areas of Region II. We have budgeted U.S.$300.0 million in capital expenditure
through the end of 2005 of which we anticipate 85.0% will be expended in 2004 principally
for building out our network infrastructure and information technology systems. We expect
to contain costs and meet our limited expense budget by:

- containing
costs via the use of our existing wireline sites and infrastructure (approximately 50.0%
of the network);

- sharing
cell sites with other companies (approximately 45.0% of the network);

- initially
running our wireless business as one of our divisions and not as a separate
business (as is the case for certain of our competitors), which will allow us to use
existing administrative and organizational or infrastructure resources such as our
billing, finance and maintenance departments;

- keeping our
subscriber acquisition costs low by using our existing client base and sales channels,
linking our marketing strategy to our existing Brasil Telecom brand rather
than creating an additional marketing brand (as has been the case for certain of our
competitors).

Our
investments in wireless network infrastructure in 2003 have already provided us with
coverage in all state capitals in our region. In addition, our wireless footprint is
forecasted to cover 82.0% of the GDP in Region II by the end of 2005.

We
intend to provide both our new and existing clients with a complete range of telephony
services, including mobile services. We will offer both pre-paid and post-paid wireless
plans and we expect that the ratio of pre-paid to post-paid will initially be 3 to 1. We
will target customers via direct channels such as our corporate stores and kiosks in major
cities, via the internet, through our call centers, through our door-to-door salesforce
and through our corporate consultants. We will also use indirect channels such as our
dealers, retail chains and other authorized dealers.

We
anticipate that we will be able to gain customers both by targeting new wireless customers
in Region II (as of December 31, 2003 market penetration for wireless services
was 31.2%) and by attracting customers from our competitors.

Our Region

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

The
states in our region cover an area of approximately 2.85 million square kilometers,
representing approximately 33.4% of the countrys total area and generating
approximately 25.0% of Brazils Gross Domestic Product (GDP) in 2003. At
December 31, 2003, the estimated population of our region was approximately
41.6 million, representing approximately 24.0% of the population of Brazil. Our
region has four metropolitan areas with populations in excess of one million
inhabitants, including Brasilia, the capital of Brazil.

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

|State              | Population (millions)(1) | Population
per square kilometer(1) | Percentage of Brazil's
GDP for 2000(2) | Per capita income (R$)
for 2000(2)
|------------------ | ------------------------ | ---------------------------------- | -------------------------------------- | ----------------------------------
|                   |                          |                                    |                                        |                                   
|Paraná             | 9.6                      | 47.96                              | 5.99                                   | 6,886                             
|Santa Catarina     | 5.4                      | 56.14                              | 3.85                                   | 7,903                             
|Distrito Federal   | 2.1                      | 352.16                             | 2.69                                   | 14,377                            
|Tocantins          | 1.2                      | 4.17                               | 0.22                                   | 2,111                             
|Mato Grosso        | 2.5                      | 2.77                               | 1.22                                   | 5,347                             
|Mato Grosso do Sul | 2.1                      | 5.81                               | 1.08                                   | 5,696                             
|Rondônia           | 1.4                      | 5.80                               | 0.51                                   | 4,066                             
|Rio Grande do Sul  | 10.2                     | 36.14                              | 7.73                                   | 8,344                             
|Acre               | 0.6                      | 3.65                               | 0.15                                   | 3,042                             
|Goiás              | 5.0                      | 14.69                              | 1.97                                   | 4,318                             

_____________________________________


|(1) | Source:
Instituto Brasileiro de Geografia e Estatistica-- IBGE("IBGE") pursuant to the 2000
national demographic census.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Source:
 IBGE.
|--- | --------------

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

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

The
following table sets forth a breakdown of our approximate revenues in each of the states
in which we operate for the year ended December 31, 2001.

|R$ millions                     | Acre | Rondônia | Mato Grosso | Mato Grosso do Sul | Brasília | Goiás | Tocantins | Santa Catarina | Paraná | Rio Grande do Sul | Total  
|------------------------------- | ---- | -------- | ----------- | ------------------ | -------- | ----- | --------- | -------------- | ------ | ----------------- | -------
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Local service                   | 44   | 110      | 290         | 282                | 690      | 574   | 57        | 680            | 1,233  | 1,587             | 5,548  
|Intraregional and interregional | 9    | 35       | 95          | 71                 | 51       | 138   | 28        | 266            | 319    | 329               | 1,341  
|International                   | 0    | 0        | 0           | 0                  | 0        | 0     | 0         | 0              | 1      | 0                 | 1      
|Network services                | 6    | 28       | 54          | 58                 | 103      | 101   | 18        | 133            | 241    | 252               | 994    
|Data transmission               | 0    | 2        | 9           | 12                 | 50       | 24    | 0         | 88             | 80     | 59                | 324    
|Other                           | 1    | 3        | 10          | 8                  | 52       | 28    | 3         | 34             | 64     | 47                | 250    
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Gross operating revenues        | 60   | 178      | 458         | 431                | 947      | 865   | 106       | 1,201          | 1,938  | 2,274             | 8,458  
|Taxes and discounts             | (12) | (46)     | (143)       | (115)              | (262)    | (243) | (26)      | (326)          | (522)  | (605)             | (2,300)
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Net operating revenues          | 48   | 132      | 315         | 316                | 685      | 622   | 80        | 875            | 1,416  | 1,669             | 6,158  
|                                |      |          |             |                    |          |       |           |                |        |                   |        

The  following  table sets forth a breakdown of our  approximate  revenues in each of the states in which we
operate for the year ended December 31, 2002.  Since 2002, our  consolidated  revenues also include  BrTSi's
revenues, which are not broken down per state.

|R$ millions                     | Acre | Rondônia | Mato Grosso | Mato Grosso do Sul | Brasília | Goiás | Tocantins | Santa Catarina | Paraná | Rio Grande do Sul | Total  
|------------------------------- | ---- | -------- | ----------- | ------------------ | -------- | ----- | --------- | -------------- | ------ | ----------------- | -------
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Local service                   | 53   | 134      | 338         | 303                | 747      | 663   | 83        | 853            | 1,406  | 1,675             | 6,255  
|Intraregional and interregional | 12   | 51       | 129         | 88                 | 62       | 175   | 39        | 329            | 398    | 465               | 1,748  
|International                   | 0    | 0        | 0           | 0                  | 0        | 0     | 0         | 0              | 1      | 0                 | 1      
|Network services                | 7    | 26       | 66          | 62                 | 114      | 101   | 29        | 131            | 239    | 246               | 1,021  
|Data transmission               | 3    | 8        | 19          | 20                 | 94       | 39    | 6         | 126            | 112    | 102               | 505    
|Other                           | 2    | 5        | 11          | 12                 | 62       | 36    | 4         | 40             | 74     | 60                | 310    
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Gross operating revenues        | 77   | 224      | 563         | 485                | 1,079    | 1,014 | 161       | 1,479          | 2,230  | 2,548             | 9,840  
|Taxes and discounts             | (21) | (71)     | (177)       | (130)              | (294)    | (294) | (34)      | (411)          | (646)  | (683)             | (2,768)
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Net operating revenues          | 56   | 153      | 386         | 355                | 785      | 720   | 127       | 1,068          | 1,584  | 1,865             | 7,072  
|                                |      |          |             |                    |          |       |           |                |        |                   |        

The
following table sets forth a breakdown of our approximate revenues in each of the states
in which we operate for the year ended December 31, 2003. Since 2002, our
consolidated revenues also include BrTSis revenues, which are not broken down per
state.

|R$ millions                     | Acre | Rondônia | Mato Grosso | Mato Grosso do Sul | Brasília | Goiás | Tocantins | Santa Catarina | Paraná | Rio Grande do Sul | Total  
|------------------------------- | ---- | -------- | ----------- | ------------------ | -------- | ----- | --------- | -------------- | ------ | ----------------- | -------
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Local service                   | 57   | 147      | 384         | 341                | 790      | 723   | 98        | 973            | 1,545  | 1,832             | 899    
|Intraregional and interregional | 11   | 48       | 157         | 88                 | 70       | 183   | 43        | 367            | 431    | 525               | 1,923  
|International                   | 0    | 0        | 0           | 0                  | 0        | 0     | 0         | 0              | 1      | 0                 | 1      
|Network services                | 8    | 31       | 72          | 67                 | 124      | 115   | 26        | 131            | 226    | 251               | 1,051  
|Data transmission               | 5    | 13       | 34          | 35                 | 125      | 61    | 9         | 177            | 172    | 160               | 764    
|Other                           | 2    | 7        | 18          | 16                 | 82       | 42    | 7         | 51             | 105    | 78                | 439    
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Gross operating revenues        | 84   | 245      | 664         | 546                | 1,191    | 1,124 | 183       | 1,699          | 2,480  | 2,847             | 11,077 
|Taxes and discounts             | (23) | (85)     | (207)       | (156)              | (326)    | (327) | (40)      | (482)          | (723)  | (772)             | (3,162)
|                                |      |          |             |                    |          |       |           |                |        |                   |        
|Net operating revenues          | 60   | 161      | 457         | 390                | 865      | 798   | 143       | 1,216          | 1,756  | 2,075             | 7,915  
|                                |      |          |             |                    |          |       |           |                |        |                   |        

Seasonality

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

Targets Established by
Anatel Applicable to Us

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

Quality Targets

We
are required, pursuant to the Telecommunications Regulations and our concession contracts,
to meet certain service quality targets relating to call completion rates, repair
requests, rate of response to repair requests, operator response periods and other aspects
of our telecommunications services. Noncompliance with these quality targets can result in
certain fines. See History and Development of the CompanyRegulation of
the Brazilian Telecommunications IndustryObligations of Telecommunications
CompaniesQuality of ServiceGeneral Plan on Quality.

The
following table summarizes our obligations relating to our quality of service from 1999 to
2005. Our quality of service targets are set by the Telecommunications Regulations and by
the concessions originally granted to each of Telepar, Teleacre, Teleron, Telemat,
Telegoiás, Telebrasília, Telems, Telesc, CRT and CTMR.

|                                                                                                     | Quality of Service Targets beginning
on December 31,
|---------------------------------------------------------------------------------------------------- | ----------------------------------------------------
|                                                                                                     |                                                     
|                                                                                                     | 1999                                                
|                                                                                                     |                                                     
|                                                                                                     | (%)                                                 
|                                                                                                    
|Call completion rate during peak periods (% of calls attempted) - Local:                             | 60                                                  
|Call completion rate during peak periods (% of calls attempted) - Long-distance:.                    | 60                                                  
|Maximum monthly repair requests (% of lines in service)                                              | 3                                                   
|Maximum monthly public telephone repair requests (% of public telephones in service)                 | 15                                                  
|Operator availability during peak periods (% response within 10 seconds)                             | 92                                                  
|Billing inaccuracy (per 1,000 bills issued) (1)                                                      | 4                                                   
|Credit issued within one billing cycle for claimed inaccuracies (% of cases)                         | 95                                                  
|Maximum number of uncompleted calls due to network congestion - Local (% of calls attempted)         | 6                                                   
|Maximum number of uncompleted calls due to network congestion - Long-distance (% of calls attempted) | 6                                                   
|Residential repair response speed (% within 24 hours)(2)                                             | 95                                                  
|Nonresidential repair response speed (% within 8 hours)(3)                                           | 95                                                  
|Public telephone repair response speed (% within 8 hours)                                            | 95                                                  
|Response rate to address change requests from residential users in up to 3 business days             | 95                                                  
|Response rate to address change requests from non-residential users in up to 24 hours                | 95                                                  

_____________________________________


|(1) | A
bill is considered inaccurate for this purpose if a customer claims it is inaccurate.
|--- | ---------------------------------------------------------------------------------------

|(2) | Must
always be within 48 hours.
|--- | -------------------------------

|(3) | Must
always be within 24 hours.
|--- | -------------------------------

The
following table indicates the individual performance of each of our concessions in
accomplishing their respective quality of service obligations as of December 31,
2003.

|                                                                                                       | Quality Performance of Services measured on December 31, 2003
|------------------------------------------------------------------------------------------------------ | -------------------------------------------------------------
|                                                                                                      
|                                                                                                       | Teleacre                                                     
|                                                                                                       |                                                              
|Rate of completed originated local calls - Morning                                                     | 72.75                                                        
|Rate of completed originated local calls - Afternoon                                                   | 74.71                                                        
|Rate of completed originated local calls - Night                                                       | 73.89                                                        
|Rate of completed originated DLD calls - Morning                                                       | 72.35                                                        
|Rate of completed originated DLD calls - Afternoon                                                     | 68.17                                                        
|Rate of completed originated DLD calls - Night                                                         | 70.39                                                        
|Rate of amount of repair requests per 100 accesses in service - Integral                               | 1.13                                                         
|Rate of amount of repair requests per 100 public telephones - Integral                                 | 6.76                                                         
|Response rate for user telephones of the STFC within 10 seconds - Morning                              | 99.51                                                        
|Response rate for user telephones of the STFC within 10 seconds - Afternoon                            | 99.85                                                        
|Response rate for user telephones of the STFC within 10 seconds - Night                                | 99.55                                                        
|Amounts of bills with complaints of errors in every 1,000 bills issued - local mode                    | 2.5                                                          
|Amounts of bills with complaints of errors in every 1,000 bills issued - DLD mode                      | 1.91                                                         
|Rate of claimed inaccurate bills with credit issued (for each 100 bills) for the local mode - Integral | 100                                                          
|Rate of originated DLD calls not completed due to traffic jam - Morning                                | 2.16                                                         
|Rate of originated DLD calls not completed due to traffic jam - Afternoon                              | 3.86                                                         
|Rate of originated DLD calls not completed due to traffic jam - Night                                  | 3.93                                                         
|Rate of originated local calls not completed due to traffic jam - Morning                              | 2.60                                                         
|Rate of originated local calls not completed due to traffic jam - Afternoon                            | 1.39                                                         
|Rate of originated local calls not completed due to traffic jam - Night                                | 3.32                                                         
|Response rate to repair requests made by residential users in up to 24 hours - Integral                | 99.77                                                        
|Response rate to repair requests made by non-residential users in up to 8 hours - Integral             | 98.94                                                        
|Response rate to repair requests made for public telephones in up to 8 hours - Integral                | 99.64                                                        
|Response rate to address change requests from residential users in up to 3 business days - Integral    | 100                                                          
|Response rate to address change requests
from non residential users in up to 24 hours - Integral       | 100                                                          

_____________________________________


|(1) | Numbers
outside the target due to the traffic jam of Vivo mobile operator route.
|--- | --------------------------------------------------------------------------------

|(2) | Numbers
outside the target due to the traffic jam of TIM mobile operator route.
|--- | -------------------------------------------------------------------------------

|(3) | Numbers
outside the target due to a failure in the interface of SGE/SAC system.
|--- | -------------------------------------------------------------------------------

Universalization 
Network Expansion

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

On
January 19, 2004, Anatel certified the accomplishment of our network expansion and
universal service targets established for 2003 in our concession contract. We thereby
received authorization to provide (i) local and intraregional long-distance services
in Regions I and III; (ii) international long-distance services in Regions I, II and
III; (iii) interregional long-distance service to anywhere within Brazil
(iv) wireless telecommunications services in our region and (v) corporate data
services throughout Brazil. In anticipation of these new services, and as part of our
strategy, we made investments in a number of fixed assets, including our wireless service
infrastructure and the acquisition of GlobeNet and iBest in 2003 and the acquisition of
the remaining shares of Vant and MetroRED in 2004.

In
addition, the authorization granted to us by Anatel to provide local services out of our
area of concession imposes certain scope commitments on us, since it requires us to
install telephone terminals in several municipalities, including the capital cities of
Regions I and II of the General Concession Plan, annually, by December 31, 2005.

The
table below indicates certain of our obligations relating to the expansion and
modernization of our network from 2000 to 2005, and our performance in accomplishing those
obligations as of December 31, 2003.

|                                                                          | Company status at 
December 31,
                2003 | Year ended December 31, (2)
|------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------
|                                                                          |                                                     
|                                                                          | 2003                                                 | 2004                       
|                                                                          |                                                      |                            
|Minimum number of installed lines (millions)                              | 10.69                                                | 8.1                        
|Fixed-line service available to all communities larger than (inhabitants) | --(3)                                                | 600                        
|Maximum waiting time for installation of a line (weeks)(1)                | 2                                                    | 2                          
|Minimum number of public telephones in service (thousands)                | 296                                                  | 216                        
|Minimum number of public telephones (per 1,000 inhabitants)               | 8.3                                                  | 7.5                        
|Minimum public telephones as a percentage of fixed lines                  | 2.7                                                  | 2.5                        
|Minimum digitalization level of network (%)                               | 99.0%                                                | 95.0%                      

_____________________________________


|(1) | Applies
only to areas where fixed-line service is fully available.
|--- | ------------------------------------------------------------------

|(2) | These
expansion and modernization requirements are inclusive of the requirements for the CRT
concession.
|--- | --------------------------------------------------------------------------------------------------------

|(3) | Obligation
met.
|--- | ---------------

Our Rates

Our
telecommunications service rates are subject to comprehensive regulation. See
Regulation of the Brazilian Telecommunications IndustryRate Regulation.
Since the relative stabilization of the Brazilian economy in mid-1994, there have been two
major changes in rates for local and long-distance services. Effective in
January 1996, rates for all services were increased, primarily to compensate for
accumulated effects of inflation. Effective in May 1997, the rate structure was
modified through a rate rebalancing that resulted in higher charges for measured service
and monthly subscription and lower charges for intraregional, interregional and
international long-distance services.

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

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

The
local basket includes activation fees (activation of the terminal), subscriptions and
local pulse, and represents the weighted average of these rates. The national
long-distance basket includes the many different values of the minute distributed by
distance and the times of application.

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

The
maximum adjustment indexes allowed for the baskets within the period of 1999 to 2003 are
as follows:

|             | 1999 | 2000  | 2001  | 2002 | 2003 
|------------ | ---- | ----- | ----- | ---- | -----
|             |      |       |       |      |      
|Local Basket | 7.9% | 14.2% | 10.4% | 8.3% | 16.0%
|DLD Basket   | 5.4% | 11.9% | 7.7%  | 4.9% | 12.5%

On
June 27, 2003, Anatel authorized an increase in rates based on the IGP-DI index, in
connection with local and long distance services and network usage, as provided for in our
concession contract. These rate increases were equal to an average of 28.8% on local
services, 24.9% on domestic long distance services and 10.5% on international long
distance services. The rate adjustments gave rise to a number of judicial claims
throughout Brazil challenging the adjustments. On July 11, 2003, the Superior Court
of Brazil (STJ) provisionally ordered that, pending its final ruling, rates
were to be adjusted based on the accumulated IPCA index (Índice de Preços
ao Consumidor Amplo) variation over the 12 months prior to May 2003 (amounting to
an average increase of approximately 17.2%). Although a final decision is still pending,
on July 12, 2003, in accordance with the provisional ruling, we readjusted our rates
downwards according to the IPCA index, effective retroactively to June 29, 2003.

On
September 11, 2003, the Second Federal Court of the Federal District issued an
injunction, stating that the rate adjustments should be based on the IPCA index and not
the IGP-DI index which is set forth in the concession contracts of the regional fixed-line
telecommunications companies. The injunction was amended on September 26, 2003 to
stipulate that the IPCA index would replace the IGP-DI index in the concession contracts.
The decision was affirmed in preliminary judgements in the 1st Region Federal Regional
Court (TRF) on October, 20, 2003, the STJ on January, 22, 2004 and the
Brazilian Supreme Court (STF) on March, 15, 2004. No final ruling has yet been
rendered in this matter.

The
following table sets forth the rate adjustments for 2003 for various services, as adjusted
by Anatel pursuant to the IGP-DI index, and as actually applied by us in accordance with
the STJ provisional order, pursuant to the IPCA index.

|                              | Anatel            | Actual Rate    
|----------------------------- | ----------------- | ---------------
|                              |                   |                
|                              | (based on IGP-DI) | (based on IPCA)
|Local services basket         | 28.75%            | 16.07%         
|Installation                  | 41.75%            | (16.67)%       
|Residential subscription      | 25.60%            | 17.24%         
|Non-residential subscription  | 41.75%            | 17.24%         
|Trunk subscription            | 41.75%            | 11.22%         
|Pulses                        | 25.60%            | 17.24%         
|Phone credits                 | 24.60%            | 17.24%         
|Change of address             | 30.05%            | 17.24%         
|Local interconnection         | 14.34%            | 3.07%          
|Domestic long distance basket | 24.85%            | 12.55%         
|Long distance interconnection | 24.85%            | 12.55%         
|                              |                   |                
|                             
|Average                       | 30.05%            | 17.24%         
|                              |                   |                

Local Rates

Our
revenue from local services consists principally of activation and installation charges,
monthly subscription charges, measured service charges and public telephone charges.

The
monthly subscription charge is the amount paid for the availability of fixed switched
telephone service, regardless of utilization. Payment of this charge includes 100 free
pulses per month for residential clients and 90 free pulses per month for non-residential
clients. Any pulses in excess of such amounts are billed to the customer as a measured
service.

Since
October 8, 2003, the date of the last rate adjustment, monthly subscription charges (net
of taxes) have been R$22.18 for residential customers and R$29.08 for commercial
customers. Since the last adjustment, the pulse charge free of tax is R$0.0894.

Users
of measured service, both residential and non-residential, pay for local calls depending
on usage, which is measured in pulses. Pulses occur system wide every four minutes for
most local calls and every sixty seconds for local calls made between certain
municipalities. These system-wide pulses are recorded independently of when the individual
calls are actually made. In addition to system-wide pulses, the system records one pulse
for every call when the call is connected. After the first pulse, only system-wide pulses
are used in determining the charge for a call. As a result, the time between the first and
the second (system-wide) pulse may vary. For example, for a call being charged using
four-minute pulse increments, the time between the first pulse and the second
(system-wide) pulse may vary between one second and four minutes.

Local
call charges for calls made on weekdays between 6:00 a.m. and 12:00 a.m. and on
Saturdays between 6:00 a.m. and 2:00 p.m., are determined by multiplying the
number of pulses by the charge per pulse. For calls being made any weekday between
midnight and 6:00 a.m., on Saturdays between 2:00 p.m. and midnight and all day
on Sundays and holidays, a caller is charged for only one pulse regardless of the duration
of the call.

The
following table sets forth selected information regarding our subscription charges and
measured service charges for local telephone services for the periods indicated.

|                                              | Year ended December 31,
|--------------------------------------------- | -----------------------
|                                              |                        
|                                              | 2001                   
|                                              |                        
|                                              | (reais)                
|Average rates for local telephone service(1): |                        
|Monthly subscription:                        
|Residential                                   | 16.58                  
|Commercial                                    | 24.59                  
|Measured service (per local pulse)            | 0.07065                

_____________________________________


|(1) | Average
rates, net of value-added taxes.
|--- | ----------------------------------------

|(2) | Average
rates for local telephone service decreased slightly in 2000 mostly due to the monetary
restatement into constant reaisof December 31, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

Since
the date of the last rate adjustment, which occurred in October 2003, we charge an
installation fee for a new line between R$8.97 and R$69.39 (depending on the state) and a
fee of R$73.04 when a subscriber changes his/her address.

Domestic Long-Distance
Rates

Domestic
long-distance calls are measured by the duration of the call and registered in the
telephone bill call by call. The value per minute is defined by the distance involved
(rate degrees from one to four), the day of the week and the time of the call. The
measurement is based on a rate unit of one tenth of a minute (six seconds) and the minimum
billable time is one minute.

The
following table sets forth selected information regarding our domestic long-distance rates
during the periods indicated.

|                                 | Year ended December 31,
|-------------------------------- | -----------------------
|                                 |                        
|                                 | 2001                   
|                                 |                        
|                                 | (reais)                
|Domestic long-distance rates(1): |                        
|0 to 50 km                       | 0.47                   
|50 to 100 km                     | 0.70                   
|100 to 300 km                    | 0.81                   
|Over 300 km                      | 1.07                   

_____________________________________


|(1) | Average
rates for a domestic long-distance call (interstate), three minutes in duration between
the hours of 9 a.m. and noon and 2 p.m. and 6 p.m. (peak hours) on weekdays, net of
value-added taxes.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Network Usage Charges

The
network usage rates, responsible for a large part of our interconnection revenue, are
applied in the following situations:

- in DLD
calls originating and terminating at our network, executed with the use of the selection
code of other providers;

- in calls
terminating at our network, originating from networks of mobile carriers; and

- in local
fixed-fixed type calls made between two local telephony carriers at the same location. In
this case, interconnection revenue must be of the local carrier that configures a volume
of traffic receipt above 55.0% of the total volume of minutes between the two networks.
The revenue will be calculated over whatever exceeds this limit.

The
Local Network Usage Rate (Tarifa de Uso de Rede Local  TU-RL) is applied when
third parties use our local network to complete their calls. When third parties use our
long-distance network the Intercity Network Usage Rate (Tarifa de Uso de Rede Interurbana
 TU-RIU) is applied.

The
following table sets forth the average per-minute rates that we charged for network
services during the indicated years.

|                                   | Year ended December 31,
|---------------------------------- | -----------------------
|                                   |                        
|                                   | 2001                   
|                                   |                        
|                                   | (reais)(1)             
|Network usage rate (local)         | 0.0501                 
|Network usage rate (long-distance) | 0.0819                 

_____________________________________


|(1) | Net
of value added taxes.  Network usage rates (local and long-distance) refer to the rates
that we charged.
|--- | ------------------------------------------------------------------------------------------------------------

As
of the date of the last rate adjustment, network usage rates for local and long-distance
services were approximately R$0.05284 and R$0.09681, respectively. The adjustment of rates
for network usage in October 2003 was 3.1% for the Local Network Usage Rate and 12.6% for
the Intercity Network Usage Rate.

Our
revenue from network services also includes payments from other telecommunications service
providers arranged on a contractual basis to use part of our network. Other
telecommunications service providers, such as providers of trunking and paging services,
may use our network to connect a central switching station to our network. Some cellular
service providers use our network to connect cellular central switching stations to the
cellular radio base stations. We also lease transmission lines, certain infrastructure and
other equipment to other providers of telecommunications services.

Fixed-Mobile Rates

Cellular
telecommunications service in Brazil, unlike in North America, is offered on a
calling party pays basis. Under the policy of calling party pays, a cellular
service subscriber generally pays cellular usage charges only for calls made by the
cellular service subscriber and not for calls received. In addition, a subscriber pays
roaming charges on calls made or received outside his or her home registration area. Calls
received by a cellular service subscriber are paid for by the party that places the call
in accordance with a rate based on cellular per-minute charges. For example, a fixed-line
service customer pays a rate based on cellular per-minute charges for calls made to a
cellular service subscriber. The cellular base rate per-minute charges are generally VC-1
(Communication Value  1) for local calls, VC-2 (Communication Value  2) for
calls outside the cellular subscribers registration area but inside the region where
the respective cellular provider provides service, and VC-3 (Communication Value  3)
for calls outside the subscribers registration area and outside the region where the
respective cellular provider provides service.

We
charge our fixed-line service customers per-minute charges based on either VC-1, VC-2, or
VC-3 rates when a fixed-line service customer calls a cellular subscriber. In turn, we pay
the cellular service provider a mobile network usage charge for such calls. For local
calls, the VC-1 is applied, and for national long-distance calls, the VC-2 and VC-3 rates
are applied.

The
criteria for measurement of these calls are defined in the Concession Contract and have
the following rules:

- Rating
unit:  six seconds (one tenth of a minute);

- Billable
Minimum: 30 seconds; and

- Billable
Calls:  only calls with a duration of over three seconds are billed.

Like
the local and DLD basket rates, the value of rates for calls involving mobile telephones
are set in the Concession Contract and are adjusted annually based on IGP-DI price index,
after approval by Anatel. The month of reference for the adjustment is February.

During
the same month, the values for mobile network use (VU-M) are also readjusted and are used
to determine the amount that the fixed carriers will have to pay per minute, after the
execution of calls of the fixed-mobile type, whether in local range or in national
long-distance range.

Since
July 6, 2003, by determination of Anatel, mobile telephone customers can choose, via
the carrier selection code, the DLD carrier they prefer to complete their calls, following
the same system adopted by the fixed telephony sector. With the introduction of this new
system, the DLD carriers began to take part in this new market.

In
February 2002, the VU-M was adjusted, on average, by 10.6% in our concession area. In
February of 2003, it was readjusted, on average, by 22.0% in our concession area and
in February 2004 it was readjusted, on average, by 9.2% in our concession area.

On
February 14, 2001, Anatel established new price caps for VC-1, VC-2 and VC-3 rates.
The VC-1 rate increased by 9.5% while the VC-2 and VC-3 rates each increased by
approximately 7.5%, all net of taxes. In February 2002, the VC-1 rate was adjusted by
9.9% and the VC-2 and VC-3 rates were adjusted by 8.8%. In February 2003, the VC-1
rate was adjusted by 23.5% and the VC-2 and VC-3 rates were adjusted by 22.0%. In
February 2004, the VC-1, VC-2 and VC-3 rates were adjusted by 6.99%.

The
following table sets forth the average per-minute rates that we charged for network
services during the indicated years.

|     | Year ended December 31,
|---- | -----------------------
|     |                        
|     | 2001(1)                
|     |                        
|     | (reais)                
|VC-1 | 0.306                  
|VC-2 | 0.626                  
|VC-3 | 0.689                  

_____________________________________


|(1) | Net
of Value Added Taxes (ICMS).  Network usage rates (local and long-distance) refer to the
rates that we charged.
|--- | -------------------------------------------------------------------------------------------------------------------

Data Transmission Rates

The
majority of revenue from data transmission services is generated by monthly line rental
charges for private leased circuits. The balance consists mainly of nominal charges for
access to the data transmission network and measured service charges based on the amount
of data transmitted. The following table sets forth selected information about our average
monthly line rental charges for private leased circuits during the indicated years.

|                                                          | Year ended December 31,
|--------------------------------------------------------- | -----------------------
|                                                          |                        
|                                                          | 2001                   
|                                                          |                        
|                                                          | (reais)                
|Average rates for monthly line rental per leased circuit: |                        
|Local circuit                                            
|4.8 Kbps                                                  | 174.50                 
|9.6 Kbps                                                  | 174.50                 
|64 Kbps                                                   | 358.75                 
|2 Mbps                                                    | 4,545.11               
|Long-distance circuit(1)                                 
|4.8 Kbps                                                  | 750.00                 
|9.6 Kbps                                                  | 750.00                 
|64 Kbps                                                   | 2,028.75               
|2 Mbps                                                    | 25,731.20              

_____________________________________


|(1) | Average
of rates, net of value-added taxes, assuming a transmission distance between 300 and 500
kilometers and a three-year contract.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

The
table below sets forth the rates that we charged for ADSL services.  These costs do not
include the fees normally paid by customers to their Internet service providers.

|Residential Plans | Downstream/Upstream Speed     | Monthly Subscription(1)
|----------------- | ----------------------------- | -----------------------
|                 
|Turbo 300         | Up to 300 Kbps/Up to 150 Kbps | 79.90                  
|Turbo 600         | Up to 600 Kbps/Up to 300 Kbps | 99.00                  
|Mega Turbo        | Up to 1.0 Mbps/Up to 300 Kbps | 199.00                 
|                 
|Corporate Plans   | Downstream/Upstream Speed     | Monthly Subscription(1)
|                 
|Rápido            | Up to 256 Kbps/Up to 128 Kbps | 119.90                 
|Super Rápido      | Up to 768 Kbps/Up to 128 Kbps | 253.12                 
|Profissional      | Up to 1.5 Mbps/Up to 256 Kbps | 593.44                 

_____________________________________


|(1) | Monthly
rates in reais, including value-added taxes.
|--- | ----------------------------------------------------

Taxes on
Telecommunications Services

The
cost of telecommunications services in Brazil includes a variety of taxes. The principal
tax is a state value-added tax, the Imposto sobre Circulação de
Mercadorias e Serviços (ICMS), which Brazilian states impose at
varying rates on telecommunications services. The current average ICMS tax rate for
telecommunications services is 25.0%. However, the ICMS tax rate varies between states. In
the State of Acre, for example, the ICMS tax rate is 25.0%, while in the State of Mato
Grosso the ICMS tax rate is 30.0%. In the State of Mato Grosso do Sul, the ICMS tax rate
is 27.0%. In the State of Goiás, the ICMS tax rate is 26.0%.

The
telecommunications tax burden also includes four other federal taxes, the Programa de
Integração Social; (PIS) and
Contribuição para Financiamento da Seguridade Social
(COFINS) which are the two social contribution taxes based on our gross
revenues and the Universal Telecommunications Service Fund(FUST) and
the Fund for Technical Development of Brazilian Telecommunications (FUNTEL).

Until
February 1, 2004, PIS was applied at a 0.7% rate and COFINS was applied at a 3.0%
rate. Since December 2002, we have been subject to a 1.7% PIS rate for
telecommunications services and may be entitled to PIS credits calculated on our costs and
expenses to offset the PIS due on our gross revenues. Since February 2004, we have
been subject to a 7.6% COFINS rate for services other than telecommunications, and may be
entitled to COFINS credits calculated on our costs and expenses to offset the COFINS due
on our gross revenue.

The
FUST and FUNTEL are imposed on certain telecommunications services at the rates of 1.0%
and 0.5%, respectively, of gross operating revenues net of certain deductions. See Item 10
Additional InformationTaxationBrazilian Tax ConsiderationsOther
Brazilian Taxes.

In
2003, taxes on telecommunications services represented approximately 27.3% of our annual
operating revenues.

Billing and Collection

We
send each customer of local services, long-distance services and other services a monthly
bill covering all the services provided during the prior period. We group our customers
into six different monthly cycles with six different payment dates. The telephone bill
itemizes long-distance calls, calls made to cellular telecommunications networks, 300, 500
and 800 services and other services such as call waiting, voice mail and call forwarding.

For
interregional and international long-distance services, customers either receive separate
monthly bills from each company they use for long-distance calls or a combined bill issued
by us. Customers make payments under agreements with various banks or other alternative
agents by direct payment to a bank or an alternative agent, or by allowing their checking
account to be debited.

Pursuant
to Brazilian law, subscribers must receive a bill at least five days before the due date.
When a payment is not made by the due date, we must send the customer, 15 days after the
due date, a notice informing the customer that they have the right to contest the debt and
if payment is not made within 30 days after the due date, all outgoing service will be
suspended, and the customer will only be able to receive incoming calls. Thirty days after
the due date we can block calls originating from such customers phone. If payment is
not made within 45 days after the due date, we send another notice informing the customer
that if payment is not made within 60 days after the due date, all services will be
suspended, the contract will be cancelled and the customers failure to pay will be
reported to a credit protection agency.

At
December 31, 2003, approximately 20.1% of our customers accounts receivable
were more than 30 days outstanding, 15.4% of our customers account receivables were
more than 60 days outstanding, and 11.5% of our customers account receivables were
more than 90 days outstanding. For the discussion of provisions for past due accounts, See
Item 5 Operating and Financial Review and ProspectsOperating Results.

Network and Facilities

General

The
network is the combination of the physical and logical infrastructure which provides
telecommunications services and which offers support to information traffic, whether it is
voice, data and/or image.

On
December 31, 2003, our plant consisted of approximately 10.7 million installed lines,
of which 9.85 million were in service. Of the lines in service at that time, approximately
72.7% were residential lines, 15.9% were commercial lines, 3.0% were public telephone
lines and 8.4% were other. Long-distance transmission is provided by a fiber-optic cable
network and by microwave lines.

The
following table sets forth combined information about our network for the periods
indicated.

|                                                             | At and for the year ended December 31,
|------------------------------------------------------------ | --------------------------------------
|                                                             |                                       
|                                                             | 2001                                  
|                                                             |                                       
|Installed lines (millions)                                   | 10.0                                  
|Lines in service (millions)                                  | 8.6                                   
|Average lines in service for year ended (millions)           | 8.5                                   
|Lines in service per 100 inhabitants                         | 21.5                                  
|Percentage of installed lines connected to digital exchanges | 97.3                                  
|Employees per 1,000 lines installed                          | 0.8                                   
|Number of public telephones (thousands)                      | 285.7                                 

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

Network Expansion

During
the 2001 fiscal year, we slowed our aggressive network expansion carried out in 2000,
increasing lines in service by approximately 16.0%, from approximately 7.4 million in
2000 to 8.6 million in 2001, thereby increasing the telephone density in our region
to 21.5 lines in service per 100 inhabitants. During the 2002 fiscal year, we
increased lines in service by approximately 10.0% from approximately 8.6 million in
2001 to 9.5 million in 2002, thereby increasing the telephone density in our region
to 23.1 lines in service per 100 inhabitants. At the end of 2003, we had 9.85 million
lines in service and the telephone density reached 23.4 lines in service per 100
inhabitants.

Network Modernization

With
respect to our network infrastructure, we apply an operating model based on operating
efficiency, continuous updates and use of cutting-edge technological resources to assure
flexibility and quality for our users. Our model is based on the following basic
objectives:

        Flexibility
to service the needs of our clients;
                Gradual evolution to preserve the investments
which have already been made;
                Investment optimization through thorough planning for
the usage of network resources;
                Open and multi-vendor environment;
                Flexibility
to maximize the introduction of new network services;
                Independence for client
access;
                Maximum operating efficiency; and
                High availability and security.

By
constantly developing our network infrastructure we work toward creating an integrated
model of services and applications, as well as a single and flexible network accessible to
all clients from any location and at any time.

During
2003, the following steps were taken to further the objectives listed above:

| | a)    
          Duplication of the IP core, with the implementation of QoS (Quality of Service)
          mechanisms and security;
| | -----------------------------------------------------------------------------------------------------------------------------------

| | b)    
          Implementation of MPLS (Multi Protocol Label Switch) which enables us to
provide           services based on VPNs IP/MPLS (Virtual Private Networks based on IP
Redes Privadas Virtuais baseadas em IP);
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c)    
          Introduction of Media Gateway and Softswitch equipment, which enables us to
          offer new services that use VoIP (Voice over IP). The services provided through
          this equipment are based on next generation network technology;
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d)    
          Introduction of Service Gateways in the broadband aggregation layer, which
          enables us to offer a new set of services to our broadband users;
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e)    
          Capillarity of the broadband accesses, which uses technology based on Digital
          Subscriber Line Access Multiplexer and Home Phoneline Networking Alliance; and
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f)    
          Implementation of hot spots for wi-fi access.
| | --------------------------------------------------------------

Competition

We
operate in the local fixed-line telecommunications, domestic long distance
telecommunications as well as in the data communications markets in our region. We compete
primarily on the basis of features, pricing and customer service. In general, the
increasingly competitive marketplace has resulted in decreasing prices for
telecommunications services, driven by increasing competition, implementation of new
technology and regulatory oversight. Accordingly, the cost of maintaining our market share
has increased and our margins have decreased due to higher subscriber acquisition costs in
the form of advertising and discounts.

As
a result of the certification by Anatel that we have met our universalization targets on
January 19, 2004, we started offering interregional and international long distance
services and we recently began offering wireless telephony services in our region in
furtherance of our business strategy to provide integrated telecommunications services
both in our region and throughout Brazil. The certification of other service
providers compliance with universalization and expansion targets, permits other
service providers to operate in our region. We may now have to compete in our region
against competitors from outside of our region that offer a more extensive array of
fixed-line, mobile, local and/or long-distance telecommunications services throughout
Brazil. As the telecommunications industry continues to consolidate, we may also face
competition from larger competitors with greater resources. In addition, we could face
increased competition if new or competing technologies are developed and launched. There
can be no assurance that increased competition will not have a material adverse effect on
our results of operations and financial condition.

Local Services

Currently,
we are the leading local fixed-line telecommunications services provider in our region,
with an estimated 96.5% market share. This estimate is based on outside consultants
statistical estimates using volume of outgoing and incoming local calls of our competitors
that interconnect through our network. Global Village Telecom is our sole competitor in
providing local fixed-line telecommunications services in our region. Our dominant
position in the local fixed-line telecommunications market is due, among other things, to
the fact that we did not face any competition in this market until the entry of Global
Village Telecom in November of 2000. Global Village Telecom is an independent service
provider operating under an authorization from Anatel. Since then, we have been able to
maintain our market share in our region due to our extensive network and the features,
prices and services we offer.

In
the short-term, we could lose market share in the provision of local fixed-line
telecommunications services as additional competitors are allowed to enter the fixed-line
market in our region. To date, Telesp, Telemar,Embratel, Intelig, CTBC Telecom,
Aerotech, Telefree, Impsat, Easytone and Transit have been granted permission by Anatel to
provide local fixed telecommunications services in our region. Our fixed-line services are
also subject to competition from wireless service providers, however such competition is
still limited by the fact that rates for wireless calls are currently much higher than
rates for calls on our fixed-line network. We also face competition from wireless service
providers in the low end of the market through the offer of prepaid plans by such wireless
providers. This could have a material adverse effect on our market share, margins, results
of operations and financial condition. See Item 3 Key Information  Risk
Factors  Risks Relating to Our Company. Since January 2004, we have the
ability to counteract losses in market share in the local fixed-line market by providing
telecommunications services in other regions.

Intraregional (intrastate
and interstate) Long-Distance Service

We
are currently the leading intraregional long-distance telecommunications services provider
in our region, with an estimated 80.0% of the intraregional market share. These estimates
are based on the volume of outgoing and incoming long-distance calls that select us to
carry such calls by imputing our carrier selection code. Pursuant to Anatel regulations,
callers are able to choose a service provider for each long distance call by selecting a
carrier selection code that identifies the carrier. Until July 6, 2003, this was
permitted only for calls made from fixed line phones. Since such date mobile callers can
also choose a service provider by selecting a carrier selection code. Our carrier
selection code is 14". Accordingly, domestic long distance carriers including
us, are now competing in the mobile-line long distance market. As our carrier selection
code 14 was widely used for calls originating from fixed telephones, we
quickly gained a significant share of the long-distance calls originating from mobile
phones. Embratel is our most significant competitor in providing intraregional
long-distance telecommunications services in our region with approximately 18.0% of the
total market share. The remaining market share is divided among Global Village Telecom,
Intelig and other operators. The licenses awarded to Embratel, Intelig and Global Village
Telecom are not subject to the same service quality and network expansion and
modernization obligations that we are subject to under our concessions.

In
the short-term, we expect to lose market share in the provision of intraregional
long-distance telecommunications services as additional competitors are allowed to enter
the market. To date, Telesp, Albra, TIM, Aerotech, CTBC Telecom, TNL PCS, Telmex do
Brasil, Sercomtel, Telefree, Easytone, Transit, Telenova, Tmais and Global Village
Telecomhave been granted permission by Anatel to provide intraregional
telecommunications services in our region. As a result of Anatel having certified our
compliance with universalization targets we expect to be able to counteract losses in
market share in the interregional long-distance services market by providing these
services in other regions.

Interregional and
International Service

Historically,
under Anatel rules, regional fixed-line companies, such as us, generally were not
permitted to offer interregional or international long-distance services until
December 31, 2003. Having received certification by Anatel of our compliance with
universalization targets on January 19, 2004, we began offering interregional and
international long-distance services. Due to our unique position in Region II
combined with marketing and promotional pricing, we were quickly able to gain
approximately 30.0% of the interregional market share and 15.0% of the international
market share in Region II. We compete primarily against Embratel which has approximately
68.0% and 85.0% of the interregional and international market share, respectively, in our
region. We expect our market share to increase as clients are no longer concerned about
selecting a carrier based on where the call ends.

To
date, Telesp, Albra, TIM, Aerotech, CTBC Telecom, TNL PCS, Telmex do Brasil, Sercomtel,
Telefree, Easytone, Transit, Telenova, Tmais and Global Village Telecom have been granted
permission by Anatel to provide interregional and international telecommunications
services in our region. This could have a material adverse effect on our ability to
increase our market share.

Data Transmission Services

Over
the past few years, the data communications sector of the telecommunications industry has
shown the highest annual growth rates and has accordingly attracted many participants. We
believe that within data transmission services, the broadband market will grow
substantially over the next few years as broadband, and in particular ADSL, can offer
users a single access point through which they can obtain voice, data and image services.
On a national level, Embratel is the largest provider of data transmission services with
approximately 50.0% of the total market share.

We
have  increased  our  market  share in the data  communications  market  primarily
 through  the development  of our  ADSL  service.  We are  the  leading  provider  of
 ADSL  accesses  in  Region II  with approximately  95.0% of the  market  share of ADSL
 accesses.  This  market  share in ADSL is based upon our market share of the local
service  market as ADSL accesses are provided  through the local  telephone  lines in our
 region.  Approximately  50.0% of the ADSL  accesses  we  provide  in  Region II  are to
our  BrTurbo customers.  The  remaining  ADSL accesses are provided to customers of third
party ISP's for which we charge an  access  fee.  Global  Village  Telecom  also
 provides  ADSL  accesses  in  our  region.  We  also  face competition from cable TV
operators who provide broadband access through cable modems.

In
the corporate data  transmissions  market,  our DialNet service has  approximately  85.0%
of the dial up  service  market in our  region.  This  estimate  is based  upon our share
of the total  volume  and duration of dial up calls that are made using our  network,
 which we can  identify as calls made to dial up services  including  our own.  We
compete in the dial up  internet  market  primarily  with  Global  Village Telecom.  We
have approximately  90.0% of the market share for Dedicated IP services in Region II,
 with the remainder  offered by Embratel.  We believe that MetroRED gives us
 approximately a 3.0% market share in its markets where it faces  competition from
Telesp,  Embratel and Telmex do Brasil.  GlobeNet  competes against the submarine cable
business of Telesp and Global Crossing.  We may face  significant  competition in all of
our data  transmission  services if we are required by Anatel to lower the rates we are
 permitted to charge other operators or ISPs to use our lines.

Internet Services

At
December 31,  2003,  BrTurbo had an approximate  47.3% market share of the monthly
broadband ISP sales in  Region II.  BrTurbo  was the  leader  in terms of number of
 active  clients  among the  providers operating  high-speed  access services based on
ADSL  technology in Region II. At December 31,  2003, it had 104,624  residential
 clients and 3,320  business  clients.  Currently,  about 50.0% of the ADSL accesses we
provide are to BrTurbo's  clients.  BrTurbo competes  primarily against the ISPs
Terra.com and Globo.com and local area ISPs who operate primarily in the rural areas.

Since
we acquired  iBest,  the company has grown mainly in  Region II,  where it is  currently
 the market leader with  approximately  54.0% of the free internet  minutes.
 iBest ended 2003 with more than 4.5 million  registered users of which  1.3 million
 were active,  generating  approximately 14 billion dial-up minutes during that year
which represents  approximately  20.0% of the national dial-up minutes.  In Region II,
iBest generates  approximately 4.4 billion dial-up minutes which represents
 approximately  28.0% of the Region II dial-up  minutes.  The "Prêmio  iBest" brand name
has become the largest  Internet Award in Brazil,  with more than  30,000  websites
 registered  in the 2003  edition.  iBest's  main  competitors  in Region II are iG and
Pop, which is owned by Global Village Telecom.

Wireless Services

We
have recently commenced offering our wireless  services.  Wireless  services are equally  competitive
and we face  competition in Region II from (i) a joint venture  between  Telefônica
and Portugal  Telecom (marketing  under the brand name  "Vivo"),  (ii) Telmex,  which
 competes  against us in our region  through América  Móviles  (marketing  under the
brand name "Claro") and  (iii) TIM.  In addition  wireless  services compete directly
against local services.

Effects of
Competition

The
deregulation  that started in 2002 and includes our recent  certification  and
authorization to provide  additional  services  inside and outside our region is
 expected  to  increase  competition  in our businesses.  Although  we  believe  we have
a unique  infrastructure  in  Region II  (having  inherited  the incumbent  network upon
 privatization  of Telebrás) and we have been  developing  strategies to effectively
protect our business,  we expect that the entry of additional  competitors  into the
market for local,  long distance and wireless  services in Region II as well as
 significant  industry  consolidation  may adversely affect our related  revenues.  We
 anticipate,  however,  that growth in the Brazilian  market will generate higher
 revenues,  especially  now that we are able to offer long distance and data services on
a nationwide basis and  wireless  services in our region.  While we expect that local
 traffic per line will  continue to decline as we expand our network to  lower-income
 customers  who, on average,  make fewer calls,  we expect that our expansion into new
business areas will provide us with new growth opportunities.

The
 impact of these  competitive  pressures  will  depend  on a variety  of  factors  that
 cannot currently  be  assessed  at this time,  some of which are beyond our  control.
 Among such  factors  are the technical and financial  resources  available to our
competitors,  the business  strategies and capabilities of our competitors,  prevailing
market  conditions,  the regulations  applicable to new entrants and us, and the
effectiveness of our efforts to prepare for increased competition and consolidation.

Customer Service

We
provide  customer  service  primarily  through  call  centers.  In addition we provide
 services through our website and in physical  locations  through  lottery  booths (which
will take payments) and will soon provide service through post offices which will take
payments as well as provide other services.

We
have  consolidated  our call center  structure,  by merging our 30 pre-existing  sites
into four sites  (Goiânia,  Campo Grande,  Florianópolis  and Curitiba)  while  improving
the level of service through outsourcing.  In  order  to  reduce  further  overlapping
 costs,  we have  closed  most of our  stores  and centralized our customer service into
the call centers.

In
an effort to improve service to our corporate customers,  we have created a call center
which is dedicated  to  such  customers.  We  have  implemented  a  customer
 relationship  management  system  which integrates  our systems  and  provides a
database of  information  for each  customer so that we can provide better  service  and
 identify  sales  opportunities  during  each  contact we have with our  customers.  In
addition,  we are targeting small and medium-sized  companies,  in order to render more
specialized customer services to them.

Sales Channels
and Marketing

We
have improved our sales channels in order to render  specialized  customer services in
different niches and sectors of our market,  but  primarily in the corporate  market.
 Our sales  channels  consist of direct  marketing,  our website,  and our customer
 service  contacts.  Our residential  sales are primarily handled  through our 800
numbers or our website.  Our corporate  sales are primarily  handled through direct sales
 contacts  with our sales  representatives.  We intend to open  shops to sell our mobile
 services  as well as other services.

We
 have  increased  our  use  of  direct  marketing  in  conjunction  with  active  and
 receptive telemarketing  as a way of targeting our market  sectors  (residential,
 commercial and  corporate).  At the same time,  we have  developed a complete  portfolio
of products and  services,  such as SLDD,  Frame Relay, ATM, IP WAN, Dedicated IP, Light
IP and DialNet, to meet the needs of our customers.

We
have also  developed  and  improved  our  website,  in an effort to deliver some of our
services online.  Currently,  customers  are able to access over 16 different  types of
services  online,  including: registration  for the purchase of a telephone line,
 issuance of a second copy of a bill,  consultation of a detailed and  summarized  bill,
 download of a bill,  verification  of receipt of payment,  and requests for repairs.

Intellectual
Property

Our
 business  is not  heavily  dependent  on  the  development  and  exploitation  of
 proprietary technology.  We conduct  research and development in the areas of
 telecommunications  services,  but do not independently develop any new
telecommunications technology.

Since
prior to the breakup of Telebrás, our company, as well as each of the other
operating subsidiaries of Telebrás, have contributed to Fundação CPqD  Centro de
Pesquisa e Desenvolvimento em Telecomunicações("the Center"), a research and
development center formerly operated by Telebrás which develops telecommunications
technology in Brazil. Pursuant to our arrangement with the Center, we have access to
telecommunications software developed by the Center and other technological services
provided by the Center, such as equipment testing and consulting and training services.
In addition to the Center, we also depend on manufacturers of telecommunications
products for the development of new hardware and new telecommunications technologies.
See Item 5 "Operating and Financial Review and ProspectsResearch and Development."
and "History and Development of the companyCapital ExpendituresResearch and
Development."

Our Trademarks
in Brazil

As
of  December 31,  2003,  we had 107  trademarks  registered  with  the  Brazilian
 Institute  of Industrial  Property  (INPI),  one of which is subject to an
 administrative  proceeding  for  invalidity of registration.

In
 Brazil,  trademark  registration  has a term of  validity  of 10 years,  after  which it
can be renewed for additional  10-year  periods.  The  application  for renewal of a
trademark must be submitted to the INPI in the last year of  validity  of the  trademark
 registration,  or  within  six  months  after the trademark  expiration  date upon
 payment of an  additional  fee.  INPI only  refuses a renewal in the event that the
renewal fees are not timely paid.  Moreover,  registrations  are subject to  forfeiture
 actions in case it is  proven  that the  trademark  was not used for five  consecutive
 years.  We  expect to apply for renewal of  registration  of all of its material
 trademarks,  so as to avoid their  expiration.  We believe that  our  significant
 trademarks  are  protected  in all  material  respects  in the  markets  in which we
currently operate.

Besides
 trademarks  duly  registered,  as of  December 31,  2003, the Company had 255 requests
for trademark  registration  filed and awaiting  registration,  out of which 20 were
 opposed by third  parties. There are also 12 trademarks in the name of third  parties
which were  transferred  to the Company but whose assignments  were  not  published  yet
at  INPI's  website.  Among  these 12  trademarks,  there  are  eight registered
  trademarks,   one  trademark  subject  to  an  administrative   proceeding  for
 invalidity  of registration,  and four requests for trademark  registration being
examined by INPI, out of which three have been opposed by third parties.

In
relation  to  trademarks  filed by third  parties,  the  Company has opposed to 52
requests  for registration.  Also in relation to third  parties'  trademarks,  the
Company has requested the invalidity of registration of four trademarks and the
cancellation for non-use of four trademark registrations.

Only
entities legally functioning in Brazil,  independent service providers and natural
persons are permitted to register  domain names.  Fees are charged for the annual
 maintenance of the registered  domain name on the Internet.

Our Domain Name
in Brazil

As
of  December 31  2003, we had 161  registered  domain names,  out of which 97 are
 registered in Brazil and 64 are registered abroad.

Table of Contents

Regulation of the
Brazilian Telecommunications Industry

General

Our
 business,  including  the  services  we  provide  and the  rates we  charge,  are
 subject  to comprehensive  regulation under the General  Telecommunications  Law and
various  administrative  enactments thereunder.  We operate in each of the states in our
region  based on the  concessions  that were granted to each of Telepar,  Telesc,  Telegoiás,
 Telebrasília,  Telemat,  Telems, Teleron,  Teleacre and CTMR. We also operate  outside
our original  concession  area based on the new  authorizations  received  from Anatel as
a result of the targets  certification.  These  concessions and  authorizations  allow us
to provide specified services and set forth certain obligations with which we need to
comply (the "List of Obligations").

Anatel
is the regulatory agency for telecommunications under the Regulamento da Agência
Nacional de Telecomunicações(the "Anatel Decree"). Anatel is administratively
independent from the Government and financially autonomous. Anatel is required to
report on its activities to the Ministry of Communications and to the Brazilian
Congress. Any proposed regulation of Anatel is subject to a period of public
comment, including public hearings, and Anatel's decisions may be challenged only in the
Brazilian courts.

Concessions and
Licenses

General

We
 operate  under  two  public  switched   telephone  network   concessions  (local  and
 domestic long-distance), which grant us the right to offer local and domestic
long-distance services in Region II.

Concessions
to provide telecommunications  services are granted under the public regime, while such
services are provided through authorizations granted under the private regime.

In
 addition to us, the  companies  that  operate in the public  regime in Brazil  ("public
 regime companies")  include Telemar,  Telesp,  Embratel and certain other local
operators.  The four primary public regime companies are the primary providers of
fixed-line  telecommunications  services in Brazil,  including local  services  and
 intraregional,  interregional  and  international  long-distance  service.  All  other
telecommunications  service  providers,  including  the other  companies  authorized  to
provide  fixed-line services in Region II, operate in the private regime ("private regime
companies").

According
 to the terms of Article 63 of the  General  Telecommunications  Law and of Article 13 of
the  Brazilian  Telecommunications  Service  Regulations,  public  regime  companies  are
subject to certain obligations  as to continuity of service,  universality  of service,
 network  expansion and  modernization. Public  regime  companies  are also  subject to
 Anatel's  supervision  in regard to the rates that they may charge.  On the other hand,
 private regime  companies are generally not subject to the  requirements  as to
universality of service or  modernization,  but they are subject to certain network
expansion and quality of service obligations set forth in their licenses.

Public
regime  companies,  such as us, also often offer certain services in the private regime,
 of which the most  significant  are data  transmission  services.  Our wireless
 services are offered under the private regime, according to a license acquired by us
on November 19, 2002.

Fixed-line Services
 Public Regime

Each
public regime  company  operates under a concession  that expires in 2005.  Each public
regime company may extend its current  concession  for an  additional  20-year  period.
 On June 20,  2003,  Anatel approved a new General Plan on Quality,  a General Plan on
Universal  Service and a new form of extension to the  concession  contracts  under which
all  fixed-line  telecommunications  incumbents  will  operate as of January 1,  2006.
See "Obligations of  Telecommunications  CompaniesNew  Telecommunications
 Regulations." The  concessions  may also be revoked  prior to  expiration.  Every
 second year during the 20-year  renewal period,  publicly-held  companies  will be
 required  to pay  biannual  renewal  fees equal to 2.0% of their annual  net  revenues
 from the  provision  of  telecommunications  services  (excluding  taxes  and  social
contributions) during the immediately preceding year.

Prior
to January 2004,  we were not permitted to offer interregional  long-distance services.
Since we achieved the expansion targets for the network and the universal  services in
advance,  we were qualified to receive a grant for such services,  following the
corresponding  amendments of the concession  contracts, which were signed on January 20,
 2004, enabling us to originate  long-distance calls in our concession area and
 terminate  them at any point in the  country.  See "  Obligations  of
 Telecommunications  Companies Public Regime Service Restrictions."

Fixed-line Services
 Private Regime

The
 Brazilian  Telecommunications  Regulations  provide for the  introduction  of
 competition  in telephone   services  in  Brazil  by  requiring  the  Brazilian
  federal   government  to  authorize   four private-regime  companiesone to provide
local services and  intraregional  long distance service in each of the three  fixed-line
 regions  and one to  provide  intraregional,  interregional  and  international  long
distance service  throughout  Brazil.  Anatel has already granted Global Village
 Telecom,  a private-regime operator,  the  licenses to operate in  Region II.  Anatel
has also  granted  licenses to two other  private regime companies to operate in each of
the other fixed-line  regions and licenses to another  private-regime company to provide
 intraregional,  interregional  and  international  long distance  service in competition
with Embratel.  Concessions  and  authorizations  have been granted in each  fixed-line
 region for regional fixed-line  companies  to  provide  local  services,  fixed-line
 companies  to provide  intraregional  long distance  service  and other  companies  to
provide  interregional  long  distance  and  international  long distance  service.
 Since 2002,  the number of  authorizations  which can be given by the Brazilian  federal
government is unlimited.

After
receiving the  certification  for the  accomplishment  of our  universalization  targets,
 we obtained  authorization  to provide  local and  domestic  long-distance  services in
our  Region,  under the private  sector regime and to regions I and III through the
General  Concession  Plan. In addition,  we were authorized to provide  international
 long-distance  services in Regions I, II and III (the entire  country) through the
General  Concession  Plan.  The other primary  public  regime  companies  have received
 similar authorizations.

Regulation of
 wireless services  PCS

In
September 2000,  Anatel promulgated regulations regarding wireless  telecommunications
 services for  PCS.  The new  rules  allow  companies  to  provide  wireless
 telecommunications  services  under  SMP authorizations.  The PCS authorizations  allow
new participants in the Brazilian  telecommunications  market to compete with  existing
 telecommunications  service  providers.  The PCS  regulations  divide Brazil into three
 separate  regions,  each  of  which  corresponds  to the  regions  applicable  to the
 public  regime fixed-line  telephone  service  providers.  PCS  services  may be
provided  within the 1800 MHz band,  which contains  Bands C, D and E.  Accordingly,  in
 addition to the  conversion  of the Band A and Band B service providers  to PCS
 authorizations,  up to three  PCS  authorizations  may be  granted  in each  PCS
 region. Anatel held auctions for PCS authorizations during 2001 and 2002.

The
PCS license  sets forth  certain  obligations  and targets  that must be met by a PCS
 company. Under these obligations, a PCS company is required:

- to cover  an
area  equivalent  to at  least  50.0%  of the  urban  area in 50.0% of the  state
              capitals and cities with more than 500,000 inhabitants by December 17, 2003;

- to cover all
state capitals and all cities with more than 500,000  inhabitants by December 17,
              2004;

- to cover an
area  equivalent  to at least  50.0% of the urban area in 50.0% of the cities with
              more than 200,000 inhabitants by December 17, 2005;

- to cover all
cities with more than 200,000 inhabitants by December 17, 2006; and

- to cover all
cities with more than 100,000 inhabitants by December 17, 2007.

A
locality is considered  "covered" when the covered area contains,  at least, 80.0% of
total urban area.  Failure to meet these  targets may result in the penalties
 established  in the  regulations  and, in extreme circumstances, in termination of the
PCS license by Anatel.

Obligations of
Telecommunications Companies

Like
other  telecommunications  service providers, we are subject to obligations concerning
quality of service and network  expansion and  modernization.  The public regime
companies are also subject to a set of  special  restrictions  regarding  the  services
 they  may  offer,  contained  in the  General  Plan  of Concessions  and  Licenses,  and
special  obligations  regarding  service  quality,  network  expansion  and modernization
contained in the General Plan on Universal Service and the General Plan on Quality.

New
telecommunications regulations

On
June 10,  2003,  the Brazilian  government  promulgated  a  presidential  decree (the
 "Decree") setting forth a number of changes in the regulation of Brazil's  fixed-line
 telecommunications  sector. The Decree  sets  forth  general  policies  regarding,
 among  others,  universal  access to  telecommunications services,  stimulation of
employment and  development  of the Brazilian  industry in the  telecommunications
sector,   competition  and  adoption  of  rate  adjustment   policies  that  take  into
 account   Brazilian socio-economic  conditions and the financial  equilibrium of the
existing concession  contracts.  The Decree also  states  that  certain  changes  should
be  reflected  in the terms of each  concession  contract to be entered into by each
public regime company as of January 1, 2006.

Pursuant
to the Decree, Anatel adopted, on June 20,  2003, a new General Plan on Universal
Service, which will  require  fixed-line  telecommunications  services  providers  to
achieve  certain  targets as of January 1,  2006. The purpose of the plan is to allow all
 Brazilians,  regardless of where they are located or their  socio-economic  status,  to
have  access  to the  public  switched  telephone  network.  The costs related  to
 meeting  the  targets  contemplated  by the  plan are to be paid for  solely  by the
 incumbent telecommunications   services  providers  pursuant  to  terms  stipulated  in
 each  provider's   concession contract.  Anatel may revise the universal service
targets,  pursuant to the concession  contracts,  as well as  propose  additional
 targets  and  accelerate  the  plan.  The  plan  applies  to  local,  domestic  and
long-distance service providers in varying degrees.

Telecommunications
services providers will be required to:

- install  the
 public  switched  telephone  network to provide  access for  individual  residential,
              non-residential  and "trunk"  classes in areas with more than 300
 inhabitants.  Priority must               be given to  requests  for  individual  access
 made by schools,  hospitals,  public  security               establishments,  public
libraries,  museums,  judiciary agencies,  federal public prosecutor's
              agencies,  and consumer protection agencies.  Special care and equipment
must also be provided               for the hearing and speech impaired;

- activate
 public  telephones  ("TUP"),  which will  allow any person to access the public
 switched               telephone network,  regardless of subscription or registration
with the carrier, ensuring that               the  density  of TUPs per  general  license
 plan  sector is equal to or over 6 TUPs per 1,000               inhabitants  from
 January 1,  2006  onwards.  This  requirement  is less  stringent  than the
              targets  established by the General Plan on Universal Service currently in
force, which is 7.5               TUPs per 1,000  inhabitants  for year-end 2003 and 8
TUPs per 1,000  inhabitants  for year-end               2005.  We believe  this will have
a lower impact on our costs and capital  expenditures.  When               activating
 TUPs,  providers  must  ensure  there  are at  least 3 TUPs  per  group  of  1,000
              inhabitants  evenly  distributed  over the service  area.  Fifty  percent
of the required TUPs               must be  installed  in areas  which are  accessible
 twenty-four  hours a day and 2.0% must be               adapted for every kind of
physical  impairment.  Local services  providers are responsible for
              meeting  the  targets in areas  located 30  kilometers  or less from any
other  service  area.               Domestic and  international  long-distance  providers
 must meet the targets in those  service               areas located thirty kilometers or
more from any other service area.

Local
 service  telecommunications  services  providers  will be required to activate  and
maintain telecommunications  services  stations ("PST") in each general license plan
sector in varying numbers.  Such numbers will be  determined by the  population  measured
 annually  from the years 2007 to 2011.  The public switched  telephone  network
 incumbent  services  providers must also activate one PST per general  license plan
 sector in  cooperative  service  stations  ("UAC") in rural  areas.  For the years 2007
and 2008,  the requirement  will vary  according to the size of the  community.  For the
year ended 2009,  all  communities must be served.

The
board of directors of Anatel also approved a public  hearing with respect to the
 regulation of special  individual  access ("AICE").  The goal of AICE is to meet the
needs of lower income  households not yet  serviced  by the  public  switched  telephone
 network,  and the  offer,  utilization,  rates,  payment conditions,  call treatment,
 network usage  remuneration and taxation of AICE will be  differentiated  than for
regular  residential  telephone  services.  AICE will be accessed via prepaid cards,
which could be used for any type of  telecommunications  services.  The installation
orders of AICE will have to be fulfilled by the  concessionaires  within 30 days after
the  registration,  according  to the General  Plan on  Universal Service, effective as
of January 1, 2006.

On
 June 20,   2003,  Anatel  also  approved  the  Form  of  New  Concession  Contract.  See
 "Risk FactorsRisks  Related to Our  Business."  In June 2003,  we notified  Anatel of
our intention to extend our current  concession.  We expect to formally enter into a new
 concession  contract with Anatel by the end of 2005.

The
Form of New Concession  Contract  contains new terms reflecting the new General Plan on
Quality and the new General Plan on Universal Service described above, which relate to:

- new
universalization targets;

- changes in
local rate measurement criteria from pulse to minute measurement;

- changes in
rate adjustment formulas,  including the creation of a telecommunications  industry
              index and a reduction in chargeable rates for local interconnection rates;
and

- a reduction in
the number of local areas.

Both
the new General Plan on Quality and the new General Plan on  Universal  Service were
 approved by Anatel on  June 28,  2003.  They will only come  into  force  upon the
 execution  of the new  concession contract.

From
our analysis to date, the major differences in the new Form of New Concession  Contract
relate to   universalization   targets   and  rate   structure.   Concessionaires   will
 be  required  to  install telecommunications  service  centers in a number of
 locations,  including  in smaller  communities  and the IGP-DI will no longer be used to
determine the annual  inflation-based  adjustments  to the rates.  The Form of New
Concession  Contract also anticipates  number  portability and resale.  This will enable
customers to change telecom service providers  without the inconvenience of having to
change their contact number,  which is especially important for corporate customers.

Public Regime  Service
Restrictions

Until
December 31,  2003,  according to the General  Concession Plan, all fixed
 telecommunications service  concessionaires,  such as our company,  were prohibited from
offering new services,  such as mobile services,  fixed  telecommunications  services in
the  interregional  or international  long-distance  mode. Embratel was also prohibited
from offering local or wireless  services.  The anticipated  accomplishment  of the
 universalization  targets  on  behalf  of the  concessionaires  enabled  them to be
 exempt  from  this restriction.  See "Network  ExpansionGeneral  Plan on Universal
 Service" and "Quality of ServiceGeneral Plan on Quality." Every publicly-held  fixed
 telecommunications  service provider was authorized,  or is in the process of being
authorized,  to offer all other  telecommunications  services,  except cable television
services, provided that they achieve their respective universalization and service
expansion targets.

Public
regime companies are subject to certain restrictions on alliances,  joint ventures,
 mergers and acquisitions, including:

- holding more
than 20% of the voting stock of any other public  regime  company for a five-year
              period  beginning  in  July 1998.  This  prohibition  is no  longer
 enforced  so  long as the               acquisition is not deemed  detrimental to
 competition,  does not put at risk the execution of               the concession
contract and is duly authorized by the necessary agencies;

- mergers
between regional  fixed-line  services  providers and wireless  services  providers (a
              prohibition that also applies to private-regime companies); and

- offering cable
television  services,  unless the company offering telephone services has won a
              public  auction to provide  cable  television  services  in the  relevant
 region and no other               bidders participated.

Network Expansion  General
Plan on Universal Service

Under
the General Plan on Universal Service,  each regional fixed-line service provider is
required to expand fixed-line  service within its region,  and Embratel is required to
expand access to long-distance service by installing  public  telephones in every
location  situated at a geodesic distance of more than 30 kilometers  from the other
region  serviced by individual  fixed  telephone  service.  No subsidies or other
supplemental  financing  are  anticipated  for  the  network  expansion  obligations  of
the  public  regime companies.  If a public regime  company fails to meet its
 obligations  in a particular  fixed-line  region, Anatel may apply the penalties
established in the terms and conditions of the concessions.

Quality of Services
 General Plan on Quality

Each
 regional  public and private  regime  company must comply with the  provisions of the
General Plan on Quality and also with the terms of their respective  concessions,
 licenses and authorizations.  All costs  related  to the  attainment  of the  goals
 established  by the  General  Plan  on  Quality  must  be exclusively  borne by the
respective  telephone service  provider.  The General Plan on Quality  establishes
minimum quality standards with regard to:

- responses to
repair requests;

- availability
of services to users;

- quality of
public telephones;

- operator
availability;

- personal
services to users;

- issuance of
bills;

- responses to
requests for address changes;

- modernization
of the network; and

- responses to
mail received from users.

These
 quality  standards  are  measured  according  to  the  definitions  and  quality
 indicators established  by  Anatel.  Companies  are  required  to  make  monthly
 reports  to  Anatel  regarding  their performance  in attaining the quality  goals.
 Additionally,  companies  are obligated to provide  Anatel an in-depth  report and
analysis  regarding  each quality  goal that is not  achieved.  Anatel may also collect
such data from companies at any time and without prior notice.

Companies
 that fail to  attain  the  Anatel  quality  goals may be  subject  to  warnings,  fines,
intervention   by  Anatel,   temporary   suspensions  of  service  or   cancellations
  of  concessions  and authorizations.  See "Fines and Penalties" below.

Fines and Penalties

Failure
to meet the network  expansion and  modernization  obligations  established  by the
General Plan  for  Universalization  Targets,  or  any  act  or  failure  to  act  that
 harms  competition  in  the telecommunications  sector may result in fines and penalties
of up to  R$50.0 million,  as well as potential revocation of concessions.

Failure
to meet the quality of service  obligations  established  by the  General  Plan for
Quality Targets  may  result in fines  and  penalties  of up to  R$40.0 million.
 Although  we were able to meet the requirements,  we may fail to meet the service
quality  obligations set forth in the Plan in the future as a result  of  certain
  factors  which  are  beyond  our  control.   See   "Business   OverviewNetwork   and
FacilitiesNetwork Expansion" and "Business OverviewServices."

Interconnection

General
 rules  regarding  interconnection  are  described  in the  General  Interconnection
 Rule, promulgated  by Anatel.  All  operating  companies  providing  public-interest
 services  are  required,  if technically  feasible,  to make their networks available
for  interconnection on a  nondiscriminatory  basis whenever  such a  request  is made by
any  other  telecommunications  provider.  Anatel  currently  sets and adjusts  the
 interconnection  rates  between two  fixed-line  networks  as well as between
 fixed-line  and wireless  networks.  Anatel has allowed  fixed-line  and  wireless
 network  operators  to freely  negotiate interconnection rates, subject to a price cap
imposed by Anatel.

Unbundling of local
networks

On
May 13, 2004,  Anatel issued Order (Despacho) no. 172, which  establishes  rules for
partial and full  unbundling  of local  telephone  networks  and  requires us to make our
 networks  available  to other telecommunications  service  providers.  This  legislation
 limits  the  rate  we  can  charge  for  partial unbundling  to R$15.42.  Anatel has not
yet fixed rates for full  unbundling,  although we expect that these rates will be lower
than the rates we are currently  permitted to charge.  This  legislation  is expected to
increase  competition in the local fixed line and broadband  internet access markets by
making it easier for new telephone  companies  operating under either the public or
private regime to enter these markets and for existing   providers  to  provide  new
  services  or  enter  new   regions,   since  the  networks  of  all telecommunications
 service providers,  including fixed line operators such as us, will be made available at
lower  rates.  Similarly,  this  legislation  makes it easier for us to provide new
 services and enter into new regions in competition with other operators.

Rate Regulation

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

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

On
the adjustment  dates for the local and DLD baskets,  the rate  adjustments  for network
use are also  approved.  These rates apply when any networks are used by other
 telecommunications  carriers.  There is a rate charged per minute of use of our local
 network by other  carriers  (TU-RL) and another for use of our intercity network
(TU-RIU).

From
the year 2000 to  December 31,  2005,  our rates and the other regional  fixed-line
 companies have been and will be adjusted downward, in real terms, as follows:

|                                                         | K-factor annual productivity adjustments
|-------------------------------------------------------- | ----------------------------------------
|                                                         |                                         
|                                                         | 2000                                    
|                                                         |                                         
|Fixed-line companieslocal (services)                    | 0.0%                                    
|Fixed-line companieslocal (network)                     | 0.0%                                    
|Fixed-line companieslong-distance and intercity network | 2.0%                                    

We
may also offer alternative  plans in addition to the basic service plan.  Alternative
plans must be submitted to Anatel for approval but are not currently subject to a price
cap.

Companies
holding SMP licenses are allowed to freely price their wireless  services,  provided they
are linked to existing service plans authorized by Anatel.  Price caps are adjusted
 annually,  based on the IGP-DI.  The  interconnection  rates are also  subject  to price
caps  fixed by Anatel  and  adjusted  on an annual basis, up to June 2004, when the
values will start to be freely negotiated between the parties.

From
the third year after the starting date of our  concession,  Anatel may submit us to the
regime of free  rating,  provided  that  there  is a  large-scale  and  effective
 competition  among  the  service providers.  Under this regime,  the  concessionaire
 can establish  its own rates.  In the event this regime is implemented,  Anatel may
reestablish  the previous  regime should  arbitrary  increases of profits by the carriers
or practices considered harmful to the competition occur.

For
 information  on  our  current  rates  and  service  plans,  see  Item  4  "Information
 on the CompanyRates".

Termination of a
Concession

There
are four possible ways that a public regime company's concession may terminate:

- non-renewal
upon the expiration of the concession;

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

- termination
 by the  company (by  agreement  with Anatel or through  legal  proceedings)  as a
              consequence of an act or omission of the Brazilian  government that makes
 rendering  services               excessively burdensome to the company;

- the occurrence
of:

a  split-up,
 spin-off,  amalgamation,  merger,  capital  reduction  or  transfer  of  the
                  company's corporate power without Anatel's authorization;the transfer
of the concession without Anatel's authorization;the
dissolution or bankruptcy of the company; oran
 extraordinary  situation where Brazilian  government  intervention,  although  legally
                  possible,  is not  undertaken  since such  intervention  would  prove
to be  inconvenient,                   unnecessary or would result in unfair benefits for
the company.
- a  split-up,
 spin-off,  amalgamation,  merger,  capital  reduction  or  transfer  of  the
                  company's corporate power without Anatel's authorization;
- the transfer
of the concession without Anatel's authorization;
- the
dissolution or bankruptcy of the company; or
- an
 extraordinary  situation where Brazilian  government  intervention,  although  legally
                  possible,  is not  undertaken  since such  intervention  would  prove
to be  inconvenient,                   unnecessary or would result in unfair benefits for
the company.

In
the event a  concession  is  terminated,  Anatel may occupy the  company's  premises and
use its employees in to continue providing services.

Table of Contents

Property, Plant and
Equipment

Our
main properties consist of transmission  equipment,  including  Synchronous Digital
Hierarchy - SDH and radio link systems,  switching  equipment,  including local,  tandem
and transit switching  centers, metallic  and  fiber-optic  cable  networks,  data
 transmission   equipment,   network  and  infrastructure management  systems,  which
include alternate  current and direct current supply equipment,  motor-generator groups,
 air conditioning,  towers,  buildings and land  surveillance.  Since we are a holding
company,  our property is owned by our subsidiary Brasil Telecom S.A.

Our
land and  buildings  consist  principally  of our  telephone  exchanges  and  other
 technical, administrative  and  commercial  properties.  Exchanges  include  local
 exchanges,  "toll"  exchanges  that connect local exchanges to long-distance
 transmission  facilities and "tandem" exchanges that connect local exchanges with each
other and with toll exchanges.

Our
properties are located in the States of Acre,  Rondônia,  Goiás,  Tocantins,  Mato
Grosso, Mato Grosso do Sul,  Paraná,  Santa  Catarina,  and Rio Grande do Sul,  as well
as in the Federal  District.  The buildings  used by our  management  are  primarily
 located  in the  capital  cities  of  these  states.  At December 31,  2003, we made use
of approximately 5,108 properties, which 3,257 were owned by our company and 1,851 were
leased from third parties.

As
of December 31,  2003, the net book value of our property, plant and equipment was
approximately R$8,632.0 million  (which includes  automatic  switching,  transmission and
other  equipment,  buildings and other fixed assets net of accumulated depreciation and
work-in-progress regarding the same).

We
have budgeted  U.S.$300.0 million for capital  expenditure  through the end of 2005, of
which we anticipate 85.0% will be expended in 2004,  principally for expanding our mobile
network  infrastructure and information technology systems.

Table of Contents

Environmental and
Other Regulatory Matters

We,
 like other  Brazilian  telephone  companies,  are  subject  to  federal,  state and
 municipal environmental  legislation and regulation.  Our failure to comply with
applicable  environmental  laws could result in administrative, civil and criminal
sanctions against us.

As
part of our  day-to-day  operations,  we regularly  install ducts for wires and cables
and erect towers for  transmission  antennae.  We may be subject to  federal,  state
 and/or  municipal  environmental licensing  requirements  due to our  installation  of
cables along  highways and  railroads,  over  bridges, rivers and marshes,  and through
farms,  conservation  units and  environmental  preservation  areas,  among other places.
 Currently,  state and municipal  environmental  agencies in the states within the region
have not  demanded  that we obtain  environmental  licenses  for the  installation  of
 transmission  towers  and antennae.  However,  there can be no  assurances  that state
and municipal  environmental  agencies will not require us to obtain  environmental
 licenses for the  installation of  transmission  towers and antennae in the future and
that such a requirement  would not have a material adverse effect on the  installation
 costs of our network or on the speed with which we can expand and modernize our network.

We
must also comply with  environmental  legislation on the  management of solid wastes.
 According to CONAMA Resolution  No. 237 of 1997,  companies  responsible for the
treatment and final disposal of solid industrial  wastes,  special wastes and solid urban
wastes are subject to  environmental  licensing.  Should the waste not be disposed of in
accordance  with standards  established by  environmental  legislation,  the company
 generating  such  waste  may be held  jointly  liable  for  any  damage  caused  with
 the  company responsible  for treatment of the waste. In the States of Santa  Catarina,
 Paraná and Mato Grosso,  we have already  implemented   management  procedures
 promoting  the  recycling  of  batteries,   transformers  and fluorescent  lamps.
 During the current year those  management  practices  will also be  implemented  in the
other states.

In
addition,  since July 1999 we have been subject,  on a provisional  basis, to the ICNIRP,
 which imposes  limits  on  the  levels  and  frequency  of  the   electromagnetic
  fields  originating  from  our telecommunications transmissions stations.

Notwithstanding
 the foregoing,  we believe that we are in compliance with ICNIRP standards as well as
with all  applicable  environmental  legislation  and  regulations.  We are currently not
involved in any administrative or judicial proceeding involving material liability for
environmental damage.

Table of Contents

ITEM 5.
          Operating and Financial Review and Prospects

The
following  discussion should be read in conjunction with our Consolidated  Financial
Statements and  notes,  which  are  included  elsewhere  in this  Annual  Report.
 Certain  important  features  of the presentation  of our  Consolidated  Financial
 Statements  are  described in the  introduction  to "Selected Financial Data."  See Item
3 "Key InformationSelected Financial Data."

Table of Contents

Overview of Results
of Operations

Our results of
operations are significantly affected by a variety of factors, including:

- rate increases
and changes in revenues from network services;

- regulatory
factors;

- political and
economic factors;

- foreign
exchange and interest rate exposure;

- general trends
of the telecommunications services industry;

- competitive
factors; and

- the attainment
by us and other operators of certification  that the  universalization  targets
              set forth by Anatel have been met.

Rates Increases
and Changes in Revenue from Network Services

Rates
for  fixed-line  telecommunications  services are subject to  comprehensive  regulation.
 Our concession  contract  establishes a price-cap  mechanism by which Anatel sets and
adjusts rates on an annual basis. The price-cap  mechanism consists of a maximum rate,
 established by Anatel,  that may be charged for a  particular  service  and a  weighted
 average  rate for a basket of basic  services.  The basket of local services  covered by
the maximum  rate  includes  all of the  services in the basic  service  plan,  such as
installation  charges,  monthly subscription fees and switched local services (traffic).
 Subject to certain limits,  the rates for  individual  services  within  the basket  may
be  increased  by up to 9.0% above the limit,  so long as the  weighted  average  rate
for the entire  basket  does not  exceed  the  limit.  Other services  covered by the
maximum rate include long distance  services,  which are  determined  based on five rate
 categories that vary with the time of day and the distance  between the caller and the
recipient,  and network usage fees.  For a further  discussion of the  application  of
 prescribed  rates to our  individual services  and  average  rates for  baskets of
 services,  see Item 4  "Information  on the  CompanyBusiness OverviewRates."

Rate Increases

Charges
for local and non-local  services changed  substantially from 2000 to 2003. In 2000,
Anatel authorized us to adjust the rates for our basket of local  services,  on average,
 by  approximately  14.0%. In 2001,  Anatel  authorized  us to adjust  the  rates for our
 basket of local  services,  on  average,  by approximately  10.0%.  In 2002,  Anatel
 again  authorized  us to adjust  the rates for our  basket of local services,  on
average,  by  approximately  8.0%. These rate changes had a positive effect on revenues
in the corresponding periods.

On
June 27,  2003,  Anatel  authorized an increase in rates based on the IGP-DI index in
connection with local and long distance  services and network  usage as provided for in
our  concession  contract.  The approved  rate  increases  were equal to an average of
28.8% on local  services  and 24.9% on domestic  long distance  services.  The rate
 adjustments  gave  rise to a number  of  judicial  claims  throughout  Brazil
challenging  the  adjustments.  On July 11,  2003,  the STJ  provisionally  ordered that,
 pending its final ruling,  rates were to be adjusted based on the  accumulated  IPCA
index  variation over the 12 months prior to May 2003  (amounting to an average  increase
of  approximately  17.2%).  Although such final  decision is still  pending,  in
 accordance  with the  provisional  ruling,  on July 12,  2003 we  readjusted  our rates
downwards according to the IPCA index, effective retroactively to June 29, 2003.

On
 September 11,  2003,  the Second  Federal  Court of the Federal  District  issued an
injunction stating  that the rate  adjustments  should be based on the IPCA index and not
the IGP-DI index as set forth in the concession  contracts of the regional  fixed-line
 telecommunications  companies.  The injunction was amended on  September 26,  2003 to
 stipulate  that the IPCA index  would  replace  the IGP-DI  index in the concession
 contracts.  The decision was  confirmed in  preliminary  judgements  in the TRF on
October,  20, 2003,  the STJ on January,  22, 2004 and the STF on March,  15, 2004.  No
final ruling has yet been rendered in this matter.

The
following  table sets forth the  adjustments in rates in 2003 for various  services as
adjusted by Anatel  pursuant  to the  IGP-DI  index,  and as  actually  applied by us in
 accordance  with the limits stipulated  in the STJ's  provisional  order,  pursuant  to
the IPCA index (the "Rate  Increase").  The Rate Increase has had a positive impact on
our revenues for 2003.

|                              | Anatel    | Actual Rate
|----------------------------- | --------- | -----------
|                              |           |            
|                              | (based on | (based on  
|                              | IGP-DI)   | IPCA)      
|                             
|Local services basket         | 28.75%    | 16.07%     
|Installation                  | 41.75%    | (16.67)%   
|Residential subscription      | 25.60%    | 17.24%     
|Non-residential subscription  | 41.75%    | 17.24%     
|Trunk subscription            | 41.75%    | 11.22%     
|Pulses                        | 25.60%    | 17.24%     
|Phone credits                 | 24.60%    | 17.24%     
|Change of address             | 30.05%    | 17.24%     
|Local interconnection         | 14.34%    | 3.07%      
|Domestic long distance basket | 24.85%    | 12.55%     
|Long distance interconnection | 24.85%    | 12.55%     
|                             
|                              |           |            
|Average                       | 30.05%    | 17.24%     
|                              |           |            

Network Services

We
provide access to our network and lease certain network  facilities to other
 telecommunications companies as part of our network service business.  This generates:

- interconnection
 fees  paid to us by mobile  service  providers  and other  telecommunications
              operators  (principally  Embratel and Intelig) for the use of our network
to complete calls to               our subscribers;

- fees from
mobile companies for the leasing of transmission facilities,  certain infrastructure
              and other equipment used in transporting mobile calls within their own
internal networks; and

- fees from the
rental of our assets,  such as points of presence,  to other  long-distance  and
              mobile companies.

Interconnection
 fees are set by Anatel. With respect to revenue,  the interconnection rate for the use
of local networks (TU-RL) increased by 8.6%, 1.7% and 3.1% in 2001, 2002 and 2003,
 respectively,  while the  interconnection  rate for the use of intercity  networks
(TU-RIU)  increased by 7.8%, 5.0% and 12.6% in 2001, 2002 and 2003, respectively.

With
respect to costs, we pay interconnection fees for using other companies' network to
complete our clients' calls. To complete a fixed-to-mobile call, we pay an
interconnection rate for the use of mobile networks (Tarifa de Uso Móvel - TU-M /
Valor de Uso Móvel - VU-M), which increased by 11.0% and 22.0% in 2002 and 2003,
respectively. To complete a fixed-to-fixed call, we also pay interconnection rate for
the use of local networks (TU-RL), and interconnection rate for the use of intercity
networks (TU-RIU).

The
growth of wireless  telecommunications  and an increase in long  distance  usage  volumes
 have resulted in substantial  growth of network  services  revenues for us and our
 competitors in 2001 and 2002. While network  services  revenues  have  continued to grow
in 2003,  the rate of such growth has  decreased. Any adverse effect on our competitors'
 systems that in turn has a negative impact on their  interconnection with our network
could have an adverse effect on our financial condition and results of operations.

Regulatory
factors

We
operate under  concessions  from the  Brazilian  Government  that  authorize us to
provide local fixed-line and specified types of long-distance  telecommunications  in our
region, and require us to comply with certain  obligations  related to rates,  quality of
service,  network expansion and modernization,  and interconnection  of our network.  Our
 business,  including  the services that we provide and the rates that we charge,  is
 subject  to  comprehensive  regulation  under  Brazilian  law.  Brazil's
 telecommunications regulatory  framework is continuously  evolving.  The  interpretation
 and  enforcement of regulations,  the assessment of compliance with  regulations  and
the flexibility of regulatory  authorities are all marked by uncertainty.

Under
 Brazilian law,  public regime  companies,  like us, must have the rates that they charge
for products and services  approved by Anatel. On June 20,  2003, Anatel enacted
 Resolution 341, which provides for new types of Anatel  concession  contracts,
 effective from January 1,  2006 until 2025. The Form of New Concession  Contract
 provides for changes in the way in which rates are set. For example  under the current
proposals,  the IGP-DI index will no longer be used to determine the annual
 inflation-based  adjustments to the rates charged by  telecommunications  companies.
 Private  regime  companies  that compete with us, like Global  Village  Telecom or
 Intelig,  do not  require  Anatel  approval  when  setting  their rates and may
unilaterally  determine  the prices that they charge for their  services.  As a result,
 adverse  changes in Brazilian  telecommunications  regulations  and  non-approval or
even delays in the approval of rate changes by Anatel, could adversely impact our
operations and competitive position.

Political and
Economic Factors

The
 following  discussion  should be read in  conjunction  with the  "Business  Overview"
 section included in Item 4  "Information  on the  Company." Our  financial  condition
and results of operations  are significantly  affected by Brazilian  telecommunications
 regulations,  including  the  regulation of rates. Our financial  condition and net
income have also been, and are expected to continue to be,  affected by the political and
economic environment in Brazil.  In particular, our financial performance is affected by:

- economic
growth and its impact on demand for telecommunications services;

- the cost and
availability of financing;

- devaluation of
the realand increase in interest rates;

- the exchange
rates between Brazilian and foreign currencies; and

- granting by
Anatel of certain authorizations, certifications and licenses.

We
are  the  leading  provider  of  local  fixed-line  telecommunications  services,  as
well as of intraregional fixed-line  telecommunications  services in our region. As of
July 1999,  Embratel and Intelig were  authorized  to and began to  provide
 intraregional  long-distance  services  in our  region,  thereby increasing  competition
 for us. In 2000,  Global  Village  Telecom  began to provide  local and  intrastate
fixed-line  telecommunications  services  in our region.  To date,  Telemar,  Embratel
 and  Intelig,  among others,  have been  granted  permission  by Anatel  to  provide
 local  telecommunications  services  in our region.  Telesp,  Albra,  TIM and Global
 Village  Telecom,  among others,  have been granted  permission by Anatel  to  provide
 intraregional,  interregional  and  international  telecommunications  services  in our
region.  See  Item 3 "Key  InformationRisk  FactorsRisks  Relating  to  the  Brazilian
 Telecommunications IndustryWe  face  increasing  competition  in the Brazilian
 telecommunications  industry  which may have a material adverse effect on our market
share, results of operations and financial condition."

In
 2002,  various  factors  had  a  negative  impact  on  the  Brazilian  economy,
 including  the uncertainties  relating to the  political  and  economic  future of
Brazil and the  political  and  economic uncertainties of other South American
 countries,  including  Argentina and Venezuela.  These factors had an influence in 2002
on the  increased  unpredictability  of the markets in Brazil,  the  decreased  ability
to obtain credit and the decreased investor confidence in the Brazilian marketplace.

During
a period of relative  economic  stability in the first half of 2002,  the Brazilian
 Central Bank  decreased the base  interest rate  ("SELIC") to a level of 18.0% as of July 17,
 2002.  However,  as a result of the  deteriorating  economic  conditions  and the
 internal  political  instability  caused by the Brazilian  presidential  elections in
the second half of 2002,  the Central Bank  increased the SELIC during the second half of
2002 to 25.0% on December 18, 2002.  During 2002, GDP increased by 1.5%.

Beginning
in 2003,  the continued  political and economic  uncertainty  in Brazil led the Brazilian
Central  Bank to raise the SELIC to 25.5% on  January 22,  2003 and further to 26.5% on
 February 19,  2003. The base  interest  fell  from a high of 26.5%  to 16.5% at the end
of 2003 due to the  improving  political situation in Brazil, the growth of the global
economy and investors' perception of the Brazilian market.

Notwithstanding
 a certain amount of economic  instability from 2000 to 2002, the economic policies
initiated by the new government  have increased  stability in the market,  leading to an
appreciation of the real in 2003 by 18.3% to R$2.8892 per U.S.$1.00 as of December 31,
2003.

The
 following  table shows the GDP growth,  the  inflation  rate,  the U.S.  dollar
 exchange rate devaluation (appreciation) and the SELIC rate for the three-year period
ended December 31, 2003.

|                                                           | Year ended December 31,
|---------------------------------------------------------- | -----------------------
|                                                           |                        
|                                                           | 2001                   
|                                                           |                        
|GDP growth(1)                                              | 1.4                    
|IGPDI Inflation rate(2)%                                  | 10.4                   
|IGP  M Inflation Rate(2)%                                 | 10.4                   
|IPCA Inflation rate(3)%                                    | 7.7                    
|U.S. dollar exchange rate devaluation / (appreciation)(4)% | 18.7                   
|SELIC(4)%                                                  | 19.0                   

______________________


|(1) | Source:
 IBGE
|--- | -------------

|(2) | Source:
 Fundação Getúlio Vargas
|--- | --------------------------------

|(3) | Source:
 Consumer Price IndexIBGE
|--- | ----------------------------------

|(4) | Source:
 Central Bank of Brazil
|--- | -------------------------------

Foreign Exchange
and Interest Rate Exposure

Our
current cost of financing is not materially exposed to exchange rate risk. At
December 31, 2003, approximately 5.3% of our indebtedness, or R$245.6 million, was
denominated in U.S. dollars. At December 31, 2003, we hedged approximately 58.4% of
our indebtedness in foreign currency. For the year ended December 31, 2003, loss on
foreign currency and monetary restatement amounted to approximately R$25.7 million,
due to the depreciation of the realagainst the U.S. dollar. We also face foreign
exchange risk because a significant portion of our equipment costs, such as costs
relating to switching centers and software used for upgrading network capacity,
are denominated in U.S. dollars. Historically, approximately 35.0% our total
capital expenditures have been U.S. dollar denominated. See Item 11 "Quantitative
and Qualitative Disclosures About Market RiskQuantitative Information About
Market RiskExchange Rate Risk."

We
are exposed to interest rate risk as a consequence of our floating rate debt. At
December 31, 2003, 99.5% of our reais-denominated interest-bearing liabilities bore
interest at floating rates. We have not entered into derivative contracts or made
other arrangements to hedge against this risk. Accordingly, although interest
rates decreased significantly in Brazil during 2003, if market interest rates
(principally the TJLP (the Brazilian federal long-term interest rate) and the CDI
(the Brazilian interbank deposit rate)) rise in the future, our financing expenses
will increase. Furthermore, at December 31, 2003, approximately 3.1% of our total
debt bore interest at floating rates based on LIBOR. At December 31, 2003, the six
month LIBOR was 1.2% per annum.

We
use swap contracts to limit the risk of increases in our liabilities (expressed in
reais) on our foreign currency debt as a result of currency fluctuations. The swap
contracts consist of currency swaps under which an obligation denominated in
foreign currency is exchanged for a real-denominated obligation bearing interest
at the CDI rate. The gain (loss) of swap transactions recorded under the
Corporation Law Method offsets the effect of exchange rate variations on our foreign
currency indebtedness.

General Trends
of the Telecommunications Services Industry

In
1998, Brazil had approximately  20.0 million fixed-line telephones and by the end of
2003, there were  49.3 million.  According  to  Anatel,  wireless  subscribers  increased
 from  7.4 million  in 1998 to 46.4 million  in 2003.  Since  mid-2003,  we have  been
 observing  a  stabilization  in the  growth  of the fixed-line  telecommunications
 services market, while the wireless  telecommunications  services segment of our
 industry  continues  to  experience  consistent  growth.  From  observing  trends in the
 growth of the wireless  intercommunications  services  industry  in the  United  States
 and  Europe,  we are aware of the necessity  to  invest  in our  wireless
 telecommunications  services  segment  in order to be able to offer integrated
fixed-line and wireless telecommunications services, as well as data transmission
services.

We
do not expect  future  material  increases in the number of installed  fixed-lines  and
revenues from basic  fixed-line  telecommunications  services;  however,  we do expect to
generate  revenues from  wireless  telecommunications  services.  By owning both
 wireless  and  fixed-line  telecommunications services  networks,  we expect to be able
to  minimize  our  interconnection  costs for  outgoing  calls and maximize
 interconnection  revenues  from  incoming  calls.  We also expect an increase in
revenues from our data transmission services due to the increased demand for our ADSL and
other data transmission services.

Competitive
Factors

We
are the  leading  provider  of  local  fixed-line  telecommunications  services  and
 intrastate fixed-line  telecommunications  services in our region.  However,  we face
 rapidly  increasing  competition from  companies that already  operate in our region,
 such as Embratel,  Intelig and Global Village  Telecom and from  companies  which have
been given  permission  to operate in our region,  such as Telemar,  Telesp, Albra, TIM,
Telmex do Brasil, TNL PCS S.A., CTBC Telecom and Sercomtel.

The
entry of new competitors in the local market,  the long distance market or the other
markets in which we compete may have an adverse impact on our business,  financial
condition,  results of operations or prospects.  The  extent  of any  adverse  effects
 on our  results  of  operations  and  market  share  from competition  will depend on a
variety of factors that cannot now be assessed with  precision,  some of which are beyond
our control.  Among these  factors are the technical  and  financial  resources
 available to our competitors,  their business  strategies and capabilities,
 consolidation of competitors,  prevailing market conditions,  the  regulations
 applicable  to us and to the new  entrants,  including  those  pertaining  to providers
 of wireless  telecommunications  services,  and the  effectiveness  of our efforts to
prepare for increased competition.

Attainment of
Certification that the Universalization Targets set forth by Anatel have been met

On
January 19,  2004,  Anatel certified the  accomplishment  of our network expansion and
universal service  targets  established in our  concession  contract.  We thereby
 received  authorization  to provide (i) local and intraregional  long-distance services
in Regions I and III;  (ii) international  long-distance services  in Regions I, II and
III;  (iii) interregional  long-distance  service to anywhere  within  Brazil (iv) wireless
 telecommunications  services in our region and (v) corporate data services throughout
Brazil. In  anticipation  of these new services,  and as part of our strategy,  we made
 investments  in a number of fixed assets,  including our wireless  service
 infrastructure  and the acquisition of GlobeNet and iBest in 2003 and the acquisition of
the remaining shares of Vant and MetroRED in 2004.

Telemar,
 Telesp and Embratel  have also received  certification  from Anatel with respect to
their network expansion and universal  service targets and accordingly,  they can provide
services on a nationwide basis in direct  competition with us. Having attained our
 certification,  we now have the  authorization to offer  telecommunications  services
outside Region II and to compete directly with Telemar, Telesp, Embratel or any other
telecommunications operator in their respective markets.

Table of Contents

U.S. GAAP
Reconciliation

We
prepare our  Consolidated  Financial  Statements in accordance with Brazilian GAAP, which
differ in certain  significant  respects from U.S.  GAAP.  The  following  table sets
forth a comparison of our net income (loss) and  shareholders'  equity in accordance with
Brazilian GAAP and U.S. GAAP as of the dates and for the periods indicated:

|                                         | At and for the year ended December 31,
|---------------------------------------- | --------------------------------------
|                                         |                                       
|                                         | 2001                                  
|                                         |                                       
|                                         | Thousands of reais                    
|Net income (loss) in accordance with:   
|Brazilian GAAP                           | (39,252)                              
|U.S. GAAP                                | (133,894)                             
|                                        
|Shareholders' equity in accordance with:
|Brazilian GAAP                           | 6,733,367                             
|U.S. GAAP                                | 6,879,650                             

See
Note 31 to our Financial  Statements  for a description  of the principal  differences
 between Brazilian  GAAP  and  U.S.  GAAP as they  relate  to us,  and a  reconciliation
 of net  income  (loss)  and shareholders' equity for the dates and periods indicated
therein.

Table of Contents

Critical Accounting
Policies

In
preparing our  consolidated  financial  statements,  we have relied on estimates and
assumptions derived from  historical  experience  and various  other  factors that we
deemed  reasonable  and  relevant. "Critical  accounting  policies" are those that are
 important to the  portrayal of our financial  condition and results and  utilize
 management's  most  difficult,  subjective  or complex  judgments,  estimates  and
assumptions.  The  application of these critical  accounting  policies often requires
 judgments made by our management  regarding  the effects of matters that are  inherently
 uncertain  on the carrying  value of our assets  and  liabilities  and the  results  of
our  operations.  Our  results  of  operation  and  financial condition  may  differ
 from  those  set  forth in our  consolidated  financial  statements,  if our  actual
experience  differs from  management's  assumptions  and  estimates.  The  following is a
discussion  of our critical  accounting  policies,  including some of the variables,
 assumptions and sensitivities  underlying the estimates relating to:

- goodwill
impairment;

- revenue
recognition;

- allowance for
doubtful accounts;

- depreciation
of property, plant and equipment;

- valuation of
property, plant and equipment;

- provisions for
contingencies;

- deferred
income taxes; and

- provision for
pensions.

Goodwill
Impairment

In
connection with SFAS No. 142's transitional goodwill impairment  evaluation,  we are
required to perform an  assessment  of whether  there was an  indication  that  goodwill
 is  impaired as of the date of adoption.  To accomplish  this, we were required to
identify our reporting  units and determine the carrying value of each reporting unit by
assigning the assets and  liabilities,  including the existing  goodwill and intangible
 assets,  to those  reporting units as of January 1, 2002. We were required to determine
the fair value of each reporting  unit and compare it to the carrying  amount of the
reporting unit within six months of January 1, 2002.  To the extent the carrying  amount
of a reporting  unit  exceeded the fair value of the reporting  unit,  we would be
required to perform the second step of the  transitional  impairment  test, as this would
be an indication  that the reporting  unit goodwill may be impaired.  Under  Brazilian
 GAAP, the amount  of  goodwill  and  other  intangible  asset  impairment,  if any,  is
 measured  based on  projected undiscounted future operating cash flows.

Under
the terms of the operating  concessions granted by the Brazilian Federal  Government,  we
are obliged to provide a certain  minimum  level of  services  over the entire  area
 covered by our  fixed-line operating  licenses.  Also, we do not possess specific
 financial  information to determine an allocation of assets and liabilities in a level
below the  consolidated  business nor do we manage  different areas of the concession as
if they were separate  businesses.  We therefore  consider the entire  fixed-line
 business to be one reporting  unit and  accordingly  we  determined  the fair value,
 under U.S.  GAAP, or the projected undiscounted future operating cash flows, under
Brasilian GAAP, of our entire fixed line business.

A
determination  of the fair value and the  undiscounted  future  operating cash flows of
our fixed line business requires  management to make certain  assumptions and estimates
with respect to projected cash inflows and outflows  related to future  revenues and
 expenditures  and  expenses.  These  assumptions  and estimates  can be  influenced  by
 different  external and internal  factors,  such as economic  tendencies, industry
trends,  interest rates,  changes in our business strategies and changes in the type of
services we offer to the  market.  The use of  different  assumptions  and  estimates
 could  significantly  change  our financial  statements.  For  example,  if we had  used
 more  conservative  assumptions  and  estimates  the expected future net cash flow may
had lead us to recognize  impairment charges on goodwill,  which would had decreased our
results of operations and  shareholders  equity In viewing all of our  fixed-line
 assets and liabilities  as one reporting  unit and  performing an initial  assessment on
this  reporting unit including the  assumptions  and  estimates  that we  considered
 appropriate,  we were not required to  recognize  any impairment loss under either, U.S.
GAAP or Brazilian GAAP.

Revenue
recognition

Under
Brazilian GAAP and U.S. GAAP, revenues from customer calls are based on time used,
 according to Brazilian law, and  recognized  when services are provided.  Considering
 their high turnover and average short life,  under  Brazilian GAAP revenues from
pre-paid  phone cards for public  telephones are recognized when the cards are sold.
 Under U.S.  GAAP,  revenues from sales of such pre-paid phone cards are recognized when
the cards are used.  Deferred  revenues are  determined  based upon estimates of sold but
unused public phone card  credits  outstanding  as of each  balance  sheet  date.  Under
 Brazilian  GAAP,  revenues  from activation and  installation  fees are recognized  upon
 activation of customer  services.  Under U.S. GAAP, revenues and related  costs from
 activation  and  installation  fees are deferred and  amortized  over five years, the
estimated average customer life.

We
consider revenue  recognition to be a critical  accounting policy,  because of the
uncertainties caused  by  different  factors  such  as  the  complex  information
 technology  required,  high  volume  of transactions,  fraud and piracy,  accounting
regulations,  managements  determination of collectibility and uncertainties  regarding
our right to receive certain  revenues  (mainly revenues for usage of our network).
Significant  changes  in  these  factors  could  cause  us to fail to  recognize
 revenues  or to  recognize revenues  that we may not be able to realize in the future,
 despite our internal  controls and  procedures. We have not identified any significant
 need to change our revenue  recognition  policy for U.S. GAAP or for Brazilian GAAP.

Allowance for
doubtful accounts

Under
 Brazilian  GAAP and U.S.  GAAP, we provide an allowance  for doubtful  accounts for
accounts receivables for which  recoverability is considered  doubtful.  Through 2000, we
calculated the allowance by applying the ratio of actual  losses  during the previous
 year  (write-offs  to gross  revenues) to amounts overdue up to 90 days.  For accounts
 over 90 days,  we determined  the  allowance  based on our  historical experience  on
such  accounts.  Effective as from 2001, we based our estimate on our  historical
 collection experience  and a review of the current  status of all trade accounts
 receivable.  This estimate  considers the ratio of historical  losses applied to the
different  categories of all outstanding  amounts  receivable from our  customers.  In
case the value of our estimated  allowance for doubtful  accounts  differs from the
amounts not actually  collected  due to a  deterioration  in the  financial  condition
 of our  customers or otherwise, additional allowance may be required.

Depreciation of
property, plant and equipment

Under
 Brazilian  GAAP and U.S.  GAAP,  depreciation  of property,  plant and equipment is
provided using  the  straight-line  method  based on the  estimated  useful  lives of the
 underlying  assets  and in accordance  with tax  rules.  The  principal  depreciation
 rates are  shown in Note 16 to the  Consolidated Financial  Statements.  Beginning  in
 1999,  we  shortened  our  depreciation  schedule  for our  automatic switching and
 transmission  equipment from thirteen years and ten years,  respectively,  to five
years,  in order  to  better  reflect  the  estimated  useful  life of this  equipment
 in light  of  rapidly  changing technology  and industry  practices.  Given the complex
 nature of our property,  plant and  equipment,  the estimates  of useful  lives  require
 considerable  judgment and are  inherently  uncertain,  due to rapidly changing
 technology and industry  practices,  which could cause early  obsolescence of our
property,  plant and equipment.  If we materially  change our assumptions of useful lives
and if external  market  conditions require us to determine the possible  obsolescence of
our property,  plant and equipment,  our  depreciation expense,  obsolescence write-off
and consequently net book value of our property,  plant and equipment could be materially
different.

Valuation of
property, plant and equipment

In
accordance with SFAS No. 144,  long-lived assets,  such as property,  plant, and
equipment,  are reviewed for impairment  whenever  events or changes in  circumstances
 indicate that the carrying amount of an asset may not be  recoverable.  Recoverability
 of assets to be held and used is measured by a comparison of the  carrying  amount  of
an asset  to the  estimated  undiscounted  future  cash  flows  expected  to be generated
by the asset.  If the carrying  amount of an asset  exceeds its  estimated  future cash
flows,  an impairment  charge is  recognized  in the amount by which the carrying  amount
of the asset exceeds the fair value of the asset.  Under Brazilian  GAAP, the
 recoverability  of assets as mentioned  above, if negative, would indicate the amount
that would be considered impaired.

A
determination of the fair value of an asset requires  management to make certain
 assumptions and estimates with respect to projected cash inflows and outflows  related
to future  revenues and  expenditures and  expenses.  These  assumption  and  estimates
 can be  influenced  by  different  external  and internal factors, such as economic
tendencies,  industry trends,  interest rates and changes in the marketplace.  The use of
different  assumptions  and  estimates  could  significantly  change our  financial
 statements,  for example if we had used more  conservative  assumptions  and estimates
the expected  future net cash flow may had lead us to  recognize  impairment  charges  on
our  property,  plant  and  equipment,  which  would  had decreased our results of
operations and  shareholders  equity.  No impairment  losses have been  recognized for
any of the periods presented.

Provisions for
contingencies

Under
Brazilian GAAP and U.S. GAAP,  provisions for contingencies are recognized for the
amounts of probable  losses  based on legal  advice from our  in-house  and  external
 legal  counsel and  management's opinion of the  outstanding  contingent  matters at the
balance  sheet date.  We  continually  evaluate  the provisions  for  contingencies
 based on  changes in  relevant  facts,  circumstances  and  events,  such as judicial
 decisions,  that may impact the  estimates,  which  could have  material  impact on our
results of operations  and  shareholders   equity.   While  management   believes  that
 the  current  provisions  for contingencies is adequate, there can be no assurance that
these factors will not change in the future.

Deferred income
taxes

We
compute and pay income taxes based on results of operations  under  Brazilian
 Corporation  Law, which are  significantly  different  from the  Brazilian  GAAP figures
that are  presented in our  financial statements  in this annual  report.  Please see
note 31 for more  detailed  description  of the  differences between  Brazilian
 Corporation  Law and Brazilian  GAAP.  Under  Brazilian GAAP and U.S. GAAP, we recognize
deferred tax assets and  liabilities  based on the  differences  between the  financial
 statement  carrying amounts  and the tax bases of assets  and  liabilities.  We
 regularly  review the  deferred  tax assets for recoverability  and  establish a
valuation  allowance  if it is more likely than not that the  deferred  tax assets will
not be realized,  based on historical  taxable income,  projected future taxable income,
and the expected timing of the reversals of existing  temporary  differences.  When
performing such reviews,  we are required to make significant  estimates and assumptions
 about future taxable income.  In order to determine future taxable  income,  we need to
estimate  future taxable  revenues and  deductible  expenses,  which are subject to
different external and internal factors, such as economic tendencies,  industry trends,
 interest rates,  changes in our business  strategies and changes in the type of services
we offer to the market.  The use of different  assumptions  and  estimates  could
 significantly  change our  financial  statements.  For example,  if we had used more
 conservative  assumptions  and estimates with respect to our expected  future taxable
 income,  we would be required  to  recognize  valuation  allowance  charges on deferred
 income tax assets,  which would decrease our results of operations and  shareholders  equity.
 If we operate at a loss or are unable to generate  sufficient  future taxable income, or
if there is a material change in the actual effective tax rates,  the time period within
which the underlying  temporary  differences  become taxable or deductible,  or any
 change in our  future  projections,  we could be  required  to  establish  a  valuation
allowance  against all or a  significant  portion of our  deferred  tax assets  resulting
 in a  substantial increase of our effective tax rate and a material adverse impact on
our operating results.

Provision for
pensions

In
relation to the  post-retirement  pension  liabilities,  we are required to make
assumptions and estimates regarding interest rates,  investment returns,  levels of
inflation for future periods,  mortality rates and projected  employment  levels.  The
accuracy of these  assumptions  and estimates  will  determine whether we have  created
 sufficient  reserves  for accrued  pension  and medical  health care costs and the
amount we are required to provide each year as our  post-retirement  pension costs.
 These  assumptions  and estimates are subject to significant  fluctuations due to
different  external and internal factors,  such as economic  trends,  social  indicators,
 our  capacity  to create  new jobs and our  ability  to  retain  our employees.  If
 these  assumptions  and  estimates  are not  accurate,  we may be  required  to  review
 our provisions for pensions,  which could  materially  reduce the results of our
 operations  and  shareholdersequity.

Table of Contents

New Accounting
Pronouncements

In
June 2001, FASB issued SFAS No. 143, Accounting for Asset Retirement  Obligations.  SFAS
No. 143 requires  the  Company to record the fair value of an asset  retirement
 obligation  as a  liability  in the period in which it incurs a legal obligation
 associated with the retirement of tangible  long-lived  assets that result from the
acquisition,  construction,  development,  and/or normal use of the assets. The Company
also  records a  corresponding  asset  that is  depreciated  over the life of the asset.
 Subsequent  to the initial measurement of the asset retirement  obligation,  the
obligation will be adjusted at the end of each period to reflect  the  passage of time
and  changes  in the  estimated  future  cash flows  underlying  the obligation.  The
Company was  required  to adopt SFAS No. 143 on January 1, 2003.  The  adoption of SFAS
No. 143 did not  have a material effect on the Company's financial statements.

At
the  September  and October 2002  meetings of the Emerging  Issues Task Force  (EITF),
 the Task Force reached a conclusion on Issue No.  00-21,  Revenue  Arrangements  with
 Multiple  Deliverables,  which outlines an approach to be used to determine when a
revenue  arrangement  for multiple  deliverables  should be divided into  separate  units
of  accounting  and, if  separation  is  appropriate,  how the  arrangement consideration
 should be allocated to the identified  accounting  units.  Specifically,  in an
 arrangements with  multiple  deliverables,  the delivered  item(s)  should be considered
a separate unit of accounting if (1) the  delivered  item(s) has value to the customer on
a  standalone  basis,  (2) there is  objective  and reliable  evidence  of the fair
 value of the  undelivered  item(s)  and (3) if the  arrangement  includes a general
right of return,  delivery or  performance  of the  undelivered  item(s) is considered
 probable and substantially  in the  control  of the  vendor.  The  arrangement
 consideration  allocable  to a  delivered item(s) that does not qualify as a separate
unit of  accounting  within the  arrangement  should be combined with the  amount
 allocable  to the  other  applicable  undelivered  item(s)  within  the  arrangement.
 The appropriate  recognition of revenue should then be determined  for those combined
 deliverables  as a single unit of  accounting.  The  adoption  of EITF  00-21  on July
1,  2003  did not  result  in a  change  in the Company's revenue recognition policies.

In
November  2002, the FASB issued  Interpretation  No. 45,  Guarantor's  Accounting and
Disclosure Requirements for Guarantees,  Including Indirect  Guarantees of Indebtedness
to Others, an interpretation of FASB  Statements  No. 5, 57 and 107 and a  rescission  of
FASB  Interpretation  No. 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.

In
December 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003),
 Consolidation of Variable  Interest  Entities,  which addresses how business  enterprise
 should evaluate whether it has a controlling  financial  interest in an entity through
means other than voting rights and accordingly  should consolidate this entity.  FIN 46R
replaces FASB  Interpretation  No. 46,  Consolidation of Variable Interest Entities,
 which was issued in January  2003.  The  Company  will be  required  to apply FIN 46R to
variable interests in VIEs created after  December 31, 2003.  For variable  interests in
VIEs created  before January 1, 2004,  the  Interpretation  will be  applied  beginning
 on  January  1, 2005.  For any VIEs that must be consolidated  under  FIN 46R that  were
 created  before  January  1,  2004,  the  assets,  liabilities  and noncontrolling
 interests  of the VIEs  initially  would be  measured  at their  carrying  amounts  with
any difference  between the net amount added to the balance sheet and any previously
 recognized  interest being recognized as the cumulative  effect of an accounting
 change.  If determining  the carrying  amounts is not practicable,  fair value at the
date FIN 46R first applies may be used to measure  assets,  liabilities  and
noncontrolling  interests of the VIE.  Management of the Company does not expect any
 significant  impact on the Company's financial statements by applying FIN 46R.

FASB
Statement No. 150, Accounting for Certain Financial  Instruments with  Characteristics of
both Liabilities  and  Equity,   was  issued  in  May  2003.  This  Statement
  establishes   standards  for  the classification  and measurement of certain financial
 instruments with  characteristics  of both liabilities and equity.  The Statement also
includes required  disclosures for financial  instruments  within its scope. For the
Company,  the Statement was effective for  instruments  entered into or modified  after
May 31, 2003 and  otherwise  will be  effective  as of January  1, 2004,  except  for
 mandatorily  redeemable  financial instruments.  For certain  mandatorily  redeemable
 financial  instruments,  the Statement will be effective for the Company on January 1,
2005.  The  effective  date has been deferred  indefinitely  for certain types of
 mandatorily  redeemable  financial  instruments.  The  Company  currently  does not
 have any  financial instruments that are within the scope of this Statement.

Emerging
 Issue Task Force No. 01-08 (EITF 01-08),  Determining  Whether an Arrangement is a
Lease, provides  guidance  in  determining  whether an  arrangement  should be
 considered  a lease  subject to the requirements  of FASB  Statement  No. 13 (FAS 13),
 Accounting  for  Leases.  EITF  01-08  defines,  amongst others,  that an arrangement
 conveys the right to use the property,  plant,  and equipment if the purchaser has (i)
the ability to operate the  property,  plant and  equipment,  (ii)  control  physical
 access to the property,  plant and  equipment,  or (iii) it is remote that one or more
other parties will take more than a minor  amount of the output and the pricing for the
output is not fixed per unit or based on current  market prices  at the date of
 delivery.  The  consensus  is  required  to be  applied  to  arrangements  agreed or
committed to, modified,  or acquired in business  combinations  initiated after the
beginning of an entity's next  reporting  period  beginning  after May 28, 2003.  We have
not entered into  significant  arrangements since this date.

Table of Contents

Results of
Operations for the Years Ended December 31, 2001, 2002 and 2003

The
 following  discussion  is  based  on and  should  be  read in  conjunction  with  our
 audited consolidated  financial  statements,  as well as  under  the  caption  "Summary
 Information."  The  data at December 31,  2001,  2002 and 2003 have been derived  from
our audited  consolidated  financial  statements, prepared in accordance with the
Brazilian GAAP.  Investors  should note that financial  statements  prepared in
accordance  with Brazilian GAAP differ from financial  statements  prepared in accordance
 with Brazilian Corporation  Law in the methodology  used for the  recognition of
inflation.  Pursuant to Brazilian GAAP our audited  financial  statements as of and for
the years ended  December 31,  2001,  2002,  and 2003 no longer recognize  the  effects
 of  inflation  after  January 1,  2001  and are not  restated  in  constant  reais.
Brazilian  GAAP when  applied to us  differs  in certain  important  respects  from U.S.
 GAAP.  We have not prepared a reconciliation to U.S. GAAP for any periods,  including
the years ended  December 31,  2001, 2002 or 2003.

The
 following  table sets forth  certain  components  of our net loss,  as well as the
 percentage change from the prior year, for 2001, 2002 and 2003.

|                                                          | Year ended December 31,                  | Percentage change
|--------------------------------------------------------- | ---------------------------------------- | -----------------
|                                                          |                                          |                  
|                                                          | 2001                                     | 2002             
|                                                          |                                          |                  
|                                                          | (thousands of reais, except percentages)
|                                                         
|Net operating revenues                                    | 6,158,408                                | 7,071,368        
|Cost of services                                          | 4,765,593                                | 5,143,358        
|                                                          |                                          |                  
|Gross profit                                              | 1,392,815                                | 1,928,010        
|Operating expenses:                                      
|Selling expensses                                         | 724,507                                  | 763,346          
|General and administrative expenses                       | 624,751                                  | 687,462          
|Other net operating expenses (income)                     | 60,875                                   | (121,181)        
|Operating income (loss) before net financial    expenses  | (17,318)                                 | 598,383          
|Net financial expense                                     | 47,051                                   | 330,460          
|                                                          |                                          |                  
|Operating income (loss)                                   | (64,369)                                 | 267,923          
|Net non-operating expenses                                | 85,167                                   | 78,312           
|Employees' profit share                                   | 52,783                                   | 42,619           
|                                                          |                                          |                  
|Income (loss) before taxes and minority interests         | (202,319)                                | 146,992          
|Income and social contribution tax benefits    (expenses) | 87,347                                   | (916)            
|                                                          |                                          |                  
|Loss before minority interests                            | (114,972)                                | 146,076          
|Minority interests                                        | 75,720                                   | 2,397            
|                                                          |                                          |                  
|Net income (loss)                                         | (39,252)                                 | 148,473          
|                                                          |                                          |                  

Net Operating
Revenues

We
generate operating revenues from:

- local
services,  including  monthly  subscription  charges,  measured service charges,  public
              telephones and additional services;

- long-distance
services;

- data
transmission;

- network
services, including interconnection and leasing high-capacity lines; and

- other
services, including toll-free, call forwarding and caller ID services.

Gross
 operating  revenues are offset by  value-added  and other  indirect  taxes and
 discounts to customers.  The  composition  of gross  operating  revenues  by  category
 of  service is  presented  in our Financial  Statements and discussed  below before
 deduction of value-added  and other indirect taxes. We do not determine net operating
 revenues for each category of revenue as we do not believe such  information to be
useful to investors.

The
following table sets forth certain  components of our consolidated net operating
 revenues,  as well as the percentage change from the prior year, for 2001, 2002 and 2003.

|                                     | Year ended December 31,                  | Percentage change
|------------------------------------ | ---------------------------------------- | -----------------
|                                     |                                          |                  
|                                     | 2001                                     | 2002             
|                                     |                                          |                  
|                                     | (thousands of reais, except percentages)
|                                    
|Local services:                      |                                          |                  
|Monthly subscription charges         | 2,218,784                                | 2,656,631        
|Measured service charges             | 2,863,073                                | 3,106,544        
|Public telephones                    | 274,218                                  | 341,766          
|Other                                | 191,679                                  | 149,643          
|                                     |                                          |                  
|Total local services                 | 5,547,754                                | 6,254,584        
|Long-distance services:             
|Intraregional                        | 1,341,288                                | 1,748,190        
|Interregional and International      | 718                                      | 594              
|                                     |                                          |                  
|Total long-distance services         | 1,342,006                                | 1,748,784        
|Data transmission                    | 324,690                                  | 504,979          
|Network services                     | 994,343                                  | 1,021,308        
|Other                                | 249,703                                  | 310,025          
|                                     |                                          |                  
|Gross operating revenues             | 8,458,496                                | 9,839,680        
|Value added and other indirect taxes | (2,200,580)                              | (2,670,871)      
|Discounts                            | (99,508)                                 | (97,441)         
|                                     |                                          |                  
|Net operating revenues               | 6,158,408                                | 7,071,368        

Net
operating  revenues  increased 11.9% to  R$7,915.2 million  in 2003 from  R$7,071.4 million
 in 2002.  This growth in net  revenues was  principally  due to:  (i) a 10.3%  increase
in revenues  from local services  resulting  from a 6.7%  increase  in the  average
 number  of lines in  service  to  approximately 9.7 million during 2003 from
approximately  9.1 million in 2002; (ii) a 51.3% increase in revenues from data
transmission  resulting from (a) a 100.4% increase in our ADSL accesses in service,  (b) a
91.7% increase in our IP accesses  (Dedicated  IP, IP Light and IP Turbo) in service,
 and (c) a 26.8%  increase in the number of our Frame Relays in service at December 31,
2002;  (iii) the 10% increase in intraregional  long distance services and (iv) the Rate
Increase.

Net
 operating  revenues  increased  by  approximately  14.8%  to  R$7,071.4 million  in 2002
 from R$6,158.4 million  in 2001. The growth in revenues in 2002 was  principally  due
to: (i) a 12.7% increase in revenues  from  local  services  resulting  from a 13.0%
 increase  in our  average  lines  in  service,  to approximately  9.1 million at the end
of 2002 from  approximately  8.0 million at December 31,  2001, higher service  charges
for the basket of local  services,  and an increase in  fixed-to-mobile  revenues;  (ii) an
increase in revenues from data  transmission  resulting  from (a) a 309.2%  increase in
our ADSL accesses in service,  (b) a  116.2%  increase  in our IP  accesses  (Dedicated
 IP, IP Light  and IP Turbo) in  service, (c) an 83.8%  increase in the number of Frame
Relays in service and (d) a  192.4%  increase in the number of DialNet accesses in
service;  and (iii) an increase in intraregional  long-distance  services resulting from
an increase in  fixed-to-mobile  revenues.  The growth in revenues was lower in 2002 than
in 2001  primarily due to a smaller  increase  of  average  lines in  service in 2002 of
9.6%,  compared  to 16.0% in 2001.  In addition,  2001 was the first full year in which
net operating  revenues  reflected our increased  telephone network from our acquisition
of CRT.

Revenues from Local
Service

Total
 revenues  from  local  services  increased  by  10.3%  to  R$6,899.8 million  in  2003
 from R$6,254.6 million  in 2002.  This increase was primarily due to the Rate Increase
as well as the  increasing penetration of  telecommunications  services in our region,
 represented by an increase in telephone density in our region of 23.4 lines in service
per 100 inhabitants at  December 31,  2003 from 23.1 lines in service per  100 inhabitants
 at  December 31,  2002. The total number of lines in service  increased to 9.9 million
at  December 31,  2003  from  9.5 million  at  December 31,  2002.  This  increase  in
 penetration  was due primarily to increased  demand  resulting from  continued  targeted
and focused  marketing  efforts aimed at increasing the number of lines in service.

Total
revenues from local services increased by approximately  12.7% to  R$6,254.6 million  in
2002 from  R$5,547.8 million  in 2001. The growth of revenues from local service in 2002
 primarily  reflects the annual  rate  increase  of the basket of local  services  by
 approximately  8.3%.  In  addition to the rate increase,  revenues from local service
 increased due to the increasing  penetration  of  telecommunications services in our
region  represented  by an increase in  telephone  density in our region of 7.5%,  from
21.5 lines in service  per 100  inhabitants  at the end of 2001 to 23.1 lines in service
per 100  inhabitants  by the end of 2002.  This increase in  penetration  was due
primarily to increased  demand  resulting  from our implementation  of  targeted  and
 focused  marketing  efforts  aimed at  increasing  the number of lines in service.

Monthly
Subscription Charges

Total
revenues from monthly  subscription  charges increased by 7.9% to  R$2,867.2 million  in
2003 from  R$2,656.6 million  in 2002.  This  revenue  growth is  primarily  due to the
 increase  in the average number  of  lines in  service  during  the  period,  as well as
to the  rate  increase  to  residential  and non-residential  clients of 17.2%.  The
increase in monthly  subscription  charges was  partially  offset by our continued
 offering of discounted  basic monthly plans to clients who requested  line
 cancellations  in areas where we have idle  capacity.  These  discounted  monthly  plans
were  implemented  for the purpose of retaining clients in these areas.

Total
revenues from monthly  subscription  charges increased by 19.7% to  R$2,656.6 million in
2002 from  R$2,218.8 million  in 2001.  This growth was  primarily  due to the increase
in the average  number of lines in  service  during  the  period,  as well as to the
annual  price  adjustment  of the basket of local services of 14.0% for  residential
 customers  and of 0.6% for  nonresidential  customers.  The increase was due to our
 implementation  of discounted  plans to clients who requested line  cancellations in
areas where we have idle  capacity.  These  discounted  monthly  plans were  implemented
 for the  purpose of  retaining clients in these areas.

Measured
Service Charges

Total
revenues from measured  service  charges,  which include charges for pulses used in
excess of the fixed monthly  allowance  and charges for local  fixed-line  to mobile
 handsets,  increased by 12.3% to R$3,490.0 million  in 2003 from  R$3,106.5 million  in
2002.  This  increase  was  primarily  due to a 15.1% increase in revenues from calls
made from a fixed-line  to mobile  handsets  inside the mobile  subscriber's home area
 ("VC-1"),  resulting  from an  increase  in 2003 in the  number of mobile  lines in our
region of 36.5%,  according to Anatel estimates,  as well as increased  telephone density
in our region.  The increase in VC-1 revenues was partly offset by a decrease in total
billed pulses.

Total
 billed  pulses,  which  include the number of pulses that exceed the fixed amount of
monthly free pulses in 2003 decreased by 8.1% to  approximately  12.0 billion.  A pulse
represents an average of 2.5 minutes of call time.  Despite the increase in telephone
 density,  the number of billed  pulses per average lines in service per month  decreased
 to 103.2 in the year ended  December 31,  2003,  compared to 119.9 in the  corresponding
 period in 2002,  reflecting our  increasing  penetration  into lower income  households.
This decrease in billed pulses also reflects  lower overall  economic  growth during
2003, and is consistent with the industry-wide  trend of wireless  substitution for
fixed-line service and increased use of our ADSL service  instead of our  dial-up
 connections.  By not  automatically  disconnecting  delinquent  clients at switch
 centers  with idle  capacity,  we were able to continue to realize  revenues by blocking
 only their outgoing  calls,  enabling such clients to continue to generate fees for
network service usage on calls they were permitted to receive on their blocked lines.

Total
revenues from measured service charges increased  approximately 8.5% to  R$3,106.5 million
in 2002 from  R$2,863.1 million  in 2001.  This  increase  was due to the 15.7%  increase
of VC-1 calls in 2002 resulting  from the 24.9%  increase  in the  number  of  mobile
 lines in our  region,  according  to Anatel estimates,  as well as  increased  telephone
 density in our  region.  The  increase  in VC-1  revenues  was partially offset by a
decrease in total billed pulses.

Total
billed pulses  decreased by 3.3% to  approximately  13 billion in 2002.  Despite the
increase in  telephone  density,  the number of billed  pulses per average  lines in
service per month  decreased  to 119.9 in 2002,  compared  to  139.5  in 2001,
 reflecting  our  increasing  penetration  into  lower  income households.  This decrease
in billed pulses also reflects  lower overall  economic  growth during 2002,  and is
consistent with the  industry-wide  trend of wireless  substitution for fixed-line
 service and increased use of our ADSL service instead of our dial-up connections.

Public
Telephones

Total
 revenues  from  public  telephones  increased  by  15.4%  to  R$394.5 million  in 2003
 from R$341.8 million  in 2002,  primarily  due to the rate  increase of 17.2%,  as well
as a 1.9% increase in the number of public phone credits,  which is the total call time
 purchased by clients on phone cards,  to 5.97 billion  credits in 2003 from 5.86
 billion  credits in 2002.  Our revenues  from public  phone  credits are generated  from
local and  long-distance  calls made from public  payphones  in our region using our
prepaid telephone  cards by using us to carry the call.  This  increase in our revenue
from public phone credits was partially  driven by an increase in public  phone usage by
prepaid  mobile  phone  subscribers,  because the rates  charged for  outgoing  calls on
 fixed-line  public  telephones  are lower than the rates  charged on outgoing  calls
from prepaid  mobile  phones.  The increase in public  telephone  revenues was also due
to a 1.0%  increase in the number of public  telephones in service to 296,270 at  December 31,
 2003 from 293,282 at December 31, 2002.

Total
revenues from public  telephones  increased by  approximately  24.6%, to  R$341.8 million
 in 2002,  from  R$274.2 million  in 2001.  The increase was due to the 8.4% rate
increase in 2002, as well as a 14.2%  increase in the number of public  phone  credits to
5.86  billion  credits in 2002 from 5.13  billion credits in 2001.  This  increase  in
our revenue  from  public  phone  credits  was  partially  driven by an increase in
public phone usage by prepaid mobile phone  subscribers,  because the rates charged for
outgoing calls on  fixed-line  public  telephones  are lower than the rates  charged on
outgoing  calls from  prepaid mobile  phones.  In 2002,  the number of public  telephones
in service  increased by 2.5% to 293,282 in 2002 from  285,725 in 2001.  The rate of
growth of public  telephones  in service  decreased to 2.5% in 2002 from 30.2% in 2001.
 This  difference was primarily due to the  fulfillment of the  universalization  targets
for 2001 that  required  maintaining  all  localities  with over 600  inhabitants  that
are not  served by fixed telephony,  with at  least  one  public  telephone  accessible
 24 hours a day and  capable  of  making  and receiving local,  domestic  long-distance
 and  international  long-distance  calls; and at least one public telephone available
every 500 meters at all localities served by fixed telephony.

Other
Local Services

Total
 revenues from other local  services which consist  primarily of  installation  fees and
line rentals  decreased by 1.1% to  R$148.0 million  in 2003 from  R$149.6 million  in
2002, due to a decrease in line rental  revenues  offset by an increase in installation
 revenues.  Line rental  revenues  decreased to R$2.2 million  in 2003 from  R$5.2 million
in 2002 as a result of the movement of some customers from rented lines to regular
 services in connection with our new promotional  plans.  Installation  revenues
 increased to  R$35.5 million in 2003 from  R$32.6 million in 2002,  principally due to a
reduction in the discounts we offered with respect to installation fees as part of our
periodic promotional plans.

Total
revenue from other local services  decreased  approximately  21.9% to R$149.6 million in
2002 from  R$191.7 million  in 2001 primarily as a result of a decrease in line rental
 revenues  combined with a decrease in installation  revenues.  Installation  fees in
2002 decreased by 53.7% to R$32.6 million in 2002 from  R$26.7  million  in 2001,
 principally  due to the  sale of  promotional  plans  with  the  waiver  of installation
 fees for lines  installed.  We did not offer  promotional  plans in 2001. Line rental
revenues decreased  approximately  38.8% to  R$5.2 million  in 2002 from  R$8.5 million
 in 2001,  as a result of the movement of some  customers  from rented lines to regular
 services in connection  with our new  promotional plans.

Revenues from
Long-Distance Services

At
 December 31,   2003,  our  revenues  from  long-distance   services   consisted
  primarily  of intraregional (intrastate and interstate) long-distance calls (both
fixed-fixed and fixed-mobile).

Intraregional
Long-distance

Our
revenues from intraregional  long-distance  services increased by 10.0% to R$1,923.1 million
in 2003 from  R$1,748.2 million  in 2002.  This increase is due to: (i) a 6.7%  increase
in the average  number of lines in  service,  with a 14.4%  decrease  in traffic  per
line in 2003;  (ii) a  5.8%  decrease in VC-2 minutes  and a 21.9%  increase  in VC-3
 minutes,  which was  fueled by the  growth in the  number of mobile subscribers  in our
region and resulting in a combined  increase in VC-2 and VC-3  fixed-mobile  revenues to
R$473.1 million in 2003 from  R$385.1 million in the corresponding  period in 2002; (iii) the
12.55% average rate increase in the  long-distance  services basket in 2003; and (iv) the
increase in our estimated average market  share to 89.9%  from 86.5% in the  intrastate
 segment,  and to 75.2%  from 73.0% in the  interstate segment,  due to our  targeted and
focused  television,  radio and  newspaper  advertising  campaigns.  VC-2 minutes are
 fixed-mobile  minutes for calls made from a fixed-line to a mobile  handset  outside the
mobile subscriber's home area but inside the region where the respective  mobile operator
 provides  service.  VC-3 minutes are  fixed-mobile  minutes for calls made from a
fixed-line to a mobile  handset  outside the mobile subscriber's home area and outside
the region where the respective cellular provider provides service.

Total
revenues from  intraregional  long-distance  services increased by 30.3% to R$1,748.2
million in 2002,  from  R$1,341.3  million in 2001.  This increase was due to: (i) a
12.6% increase in the number of average  lines  in  service  in 2002;  (ii) a  34.5%  and
 30.6%  increase  in the  number  of VC-2 and VC-3 fixed-mobile  minutes  respectively
 fueled by the growth in the number of mobile subscribers in our region, which  resulted
 in  a  combined  increase  in  VC-2  and  VC-3   fixed-mobile   revenues  to
 approximately R$385.1 million  in 2002 from  approximately  R$256.9 million  in 2001;
 (iii) an average rate adjustment of 5.0% in the basket of long-distance  services,
 implemented on June 28,  2002; and (iv) the  increase in our average  market  share
 from  82.2% to  86.5%  in the  intrastate  segment,  and from  67.0% to 73.0% in the
interstate segment due to our targeted and focused television, radio and newspaper
advertising campaigns.

Interregional
and International Long-distance

Revenues
 from   interregional   and  international   long-distance   calls  consist  primarily
 of long-distance  calls  to  bordering  cities  adjacent  to  our  region.   Revenues
 from  interregional  and international   long-distance  services  decreased  by  5.3%
 to  approximately   R$562,000  in  2003,  from approximately  R$594,000  in  2002.  The
 decrease  in 2003  was  primarily  due to the  30.3%  decrease  in borderline  traffic.
 Revenues from  interregional and international  long-distance  calls decreased in 2003
because  the  services  rendered  in this  segment  were  limited to  interregional
 long-distance  calls to bordering cities adjacent to our region.

Revenues
 from  interregional  and  international  long-distance  services  decreased  by  17.3%
to approximately  R$594,000 in 2002, from  approximately  R$718,000 in 2001. The decrease
in 2002 was primarily due to the 15.6% decrease in borderline traffic.

Revenues from Data
Transmission

Total
 revenues  from data  transmission,  which  include  revenues  from  ADSL,  ATM (a
 broadband switching  technology),  DialNet (a remote access service for corporations and
internet service  providers), Frame Relay (a data  transmission  service) and  Dedicated
IP (an internet  hosting  service),  increased by 51.3% to  R$764.1 million  in 2003 from
 R$505.0 million in 2002. This growth was due to the 100.4% increase in the number of
ADSL  accesses  in service to  approximately  281,900  at  December 31,  2003 from
 140,690 accesses in service at  December 31,  2002,  which  generated  average  revenues
 per line of  approximately R$90.1  during  2003,  an  increase  of 31.0% from
 approximately  R$68.8 in 2002.  In  addition,  the 91.7% increase  in the number of IP
access  (Dedicated  IP, IP Light and IP Turbo) in service to 5,057 at December 31, 2003
from 3,638 at December  31,  2002 and the 26.8%  increase in the number of Frame Relay
 accesses in service to 13,080 at  December  31, 2003 from 10,319 at  December  31, 2002
also  contributed  to the higher revenues from data  transmission  over the period.  The
increase in ADSL subscribers was driven by increased residential  demand  while the
 increase  in IP and Frame  Relay  accesses  was due to  increased  corporate demand.
 Overall growth in all data  transmission  services was due to the expansion of our
corporate client base and our  ability  to provide  integrated  solutions  to our
 customers  through  targeted  and  focused marketing campaigns.

Revenues
from data  transmission,  which include revenues from ADSL, ATM, DialNet,  Frame Relay
and Dedicated IP increased by 55.5% to  R$505.0 million  in 2002, from  approximately
 R$324.7 million  in 2001. This  growth  was  due to the  309.2%  increase  in  number
 of ADSL  accesses  in  service  to  140,690  at December 31,  2002 from 34,378 at
December 2001 as a result of the continued roll out of ADSL services which were
originally  introduced in April 2001.  The increase was also due to the 116.2%  expansion
in the number of IP accesses  (Dedicated  IP, IP Light and IP Turbo)  lines in service to
2,638 at December  31, 2002 from 1,220 at December 31, 2001,  the 83.8%  increase in the
number of Frame Relay  accesses in service to 10,319 at  December  31,  2002 from  5,615
at  December  31,  2001,  the 192.4%  increase  in the number of DialNet accesses in
service to 59,258 at December  31, 2002 from 20,265 at December  31, 2001 and the 8.7%
 increase in the number of SLDD accesses in service.  The increase in Dedicated  IP,
Frame Relay and DialNet  accesses was due to increased  corporate  demand.  Overall
 growth in all data  transmission  services was due to the expansion of our corporate
 client base and our ability to provide new products and integrated  solutions to our
customers through targeted and focused marketing campaigns.

Revenues from
Network Services

Revenues
from network  services are generated  primarily  from  interconnection  fees paid to us
by other  telecommunications  operators  for use of our network  and, to a lesser
 extent,  from  leasing  fees generated from mobile service providers for the leasing of
our transmission  facilities,  infrastructure and other  equipment,  and  fees  from  the
 rental  of our  assets,  such  as  points  of  presence,  to  other long-distance and
mobile operators.

Total
 revenues  from  network  services  increased  by 2.9% to  R$1,050.8 million  in  2003,
 from R$1,021.3 million  in 2002,  due to the increase in revenues  generated  from
 interconnection  fees,  which represent the majority of revenues from network  services
 (R$835.3 million  in 2003).  Total  revenues from interconnection  fees consisted of
R$607.1 million  from  fixed-to-fixed  traffic and  R$228.2 million  from mobile-to-fixed
 traffic.  This  increase in total  revenue from  interconnection  fees was due primarily
to the growth in the number of mobile  accesses in our region and,  consequently,  higher
mobile traffic on our network combined with the Rate Increase.

Total
 revenues  from  network  services  increased  by 2.7% to  R$1,021.3 million  in  2002,
 from R$994.3 million  in 2001  due to the  increase  in  revenues  generated  from
 interconnection  fees,  which represent the majority of revenues from network  services
 (R$785.8 million  in 2002).  Total  revenues from interconnection  fees consisted of
R$607.1 million  from  fixed-to-fixed  traffic and  R$178.7 million  from mobile-to-fixed
 traffic.  This  increase in total  revenue from  interconnection  fees was due primarily
to the growth in the number of mobile  lines in our region  and,  consequently,  higher
 mobile  traffic on our network,  as well as growth in fixed-line  traffic,  combined
with the rate increase in 2002. Total revenues from network  services  grew at a slower
pace in 2002 compared to 2001 as a result of the expansion of other operators' networks
which reduced such operators' need to rely upon our networks.

Revenues from Other
Services

Other
services consist primarily of supplementary and value-added services such as toll-free,
 call forwarding  and caller ID. Total  revenues  from other  services  increased by
41.6% to  R$439.0 million  in 2003 from  R$310.0 million in 2002. Revenues from
supplementary and value-added  services increased by 24.9% to  R$348.2 million  in
December 31,  2003 from  R$278.8 million in 2002. This increase was due to increased
advertising  campaigns  promoting  value-added  services as part of our strategy to
increase average revenue per line.

Total
revenues from other services increased 24.2% to R$310.0 million in 2002 from  R$249.7 million
in 2001.  Revenues from  supplementary and value-added  services  increased by 28.8% to
 R$278.8 million  in 2002 from  R$216.5 million  in 2001.  This  increase was due to
increased  advertising  campaigns  promoting value-added services as part of our strategy
to increase average revenue per line.

Charges Against
Gross Operating Revenues

Value-added
and Other Indirect Taxes

The
principal taxes deducted from gross operating  revenues are state value added taxes
"ICMS", the federal social  contribution  taxes,  PIS and COFINS,  and the
 telecommunications  contributions,  FUST and FUNTTEL.  We collect  these taxes from our
 customers  and  transfer  them to the  appropriate  governmental entities.  The current
 average  rate of ICMS is 25.0%.  However,  the ICMS tax rate varies in some  states. In
the state of Rondônia,  for example,  the ICMS tax rate is 35.0%,  while in the state of
Mato Grosso, the ICMS tax  rate is 27.0%  and in the  state of  Goias,  the  ICMS  tax
 rate is  26.0%.  PIS and  COFINS  are currently  imposed at a combined rate of 9.3% of
gross  operating  revenues.  FUST and FUNTTEL are currently imposed at a combined rate of
1.5% of gross operating revenues, net of certain deductions.

The
total amount of value-added  and other taxes  increased by 13.9% to  R$3,042.5 million
 in 2003 from  R$2,670.9 million  in 2002.  The rate of growth in  value-added  and other
taxes  reflects the rate of growth in our gross  operating  revenue  during the period
and the change in revenue  mix,  as there is less tax applicable to certain services,
such as interconnection services.

The
total amount of value-added  and other taxes  increased by 21.4% to  R$2,670.9 million
 in 2002 from  R$2,200.6 in 2001.  The rate of growth in  value-added  and other taxes
reflects the rate of growth in our gross  operating  revenue  during  the  period  and
the  change  in  revenue  mix,  as there is less tax applicable to certain services, such
as interconnection services.

Discounts

Discounts
are generally  divided into rebates on:  (i) pre-paid  telephone cards (typically  having
commissions   of   approximately   10.0%  over  the  face   amount   sold),   (ii) local
  wireline   calls, (iii) long-distance  calls,  and  (iv) intelligent  network services
(such as caller ID, call forwarding and conference  calling).  Discounts  increased 22.8%
to  R$119.7 million  in 2003 from  R$97.4 million in 2002, primarily due to an increase
in the promotions we offered to maintain our customer base.

Discounts
 decreased  2.1% to  R$97.4 million  in 2002  from  R$99.5  in 2001,  primarily  due to a
decrease in the promotions we offered to our customer base.

Cost of Services

Total
cost of services  increased by 6.1% to  R$5,455.0 million  in 2003 from R$5,143.4  million
in 2002.  Our cost of  services  increased  primarily  as a result  of an  increase  in
 interconnection  costs payable to other  operators for completing  calls  originating on
our network.  However,  as a percentage of net operating  revenues,  cost of services
 decreased to 68.9% in 2003 from 72.7% in 2002,  primarily due to reductions in personnel
costs and relatively stable materials costs.

Total
cost of services increased by 7.9% to  R$5,143.4 million  in 2002 from R$4,765.6 in 2001.
Our cost of services increased  primarily as a result of an increase in  interconnection
 costs payable to other operators  for  completing  calls  originating  on our network.
 However,  as a percentage  of net operating revenues,  cost of services  decreased to
72.7% in 2002 from 77.4% in 2001,  primarily  due to reductions in personnel costs and
relatively stable materials costs.

The
 following  table  sets  forth  certain  components  of our  cost of  services,  as well
as the percentage change from the prior year, for 2001, 2002 and 2003.

|                              | Year ended December 31,                  | Percentage change
|----------------------------- | ---------------------------------------- | -----------------
|                              |                                          |                  
|                              | 2001                                     | 2002             
|                              |                                          |                  
|                              | (thousands of reais, except percentages)
|                             
|Cost of Services:             |                                          |                  
|Depreciation and amortization | 2,597,160                                | 2,614,511        
|Personnel                     | 185,843                                  | 144,581          
|Materials                     | 91,746                                   | 78,760           
|Services                      | 1,689,287                                | 2,057,839        
|Other                         | 201,557                                  | 247,667          
|Total cost of services        | 4,765,593                                | 5,143,358        

Depreciation and
Amortization

Total
 depreciation and  amortization  costs decreased by 3.7% to  R$2,517.9 million  in 2003
from R$2,614.5 in 2002, due to a decrease in depreciation  costs  associated with CRT
assets resulting from the disposal of such assets which occurred at the end of the year
which was partially offset by an increase in depreciation  costs associated with the
expansion of our network in 2003,  through an increase in lines installed to 10.7 million
at December 31, 2003 from 10.6 million at December 31, 2002.

Total
depreciation and amortization costs increased by 0.7% to R$2,614.5 million,  from
 R$2,597.2 million in 2001, due to the increase in lines  installed in 2002.
 Depreciation  and  amortization  costs grew at a slower pace in 2002 due to the slower
growth in the number of lines in service during this period.

Personnel

Total
 personnel  costs  decreased  by  10.5% in 2003 to  R$129.4 million  from  R$144.6 million
 in 2002.  This  decrease  in personnel  costs was primarily due to the  outsourcing  of
maintenance  services for our network,  which resulted in a net reduction in our  labor
 force  by  approximately  305  employees  during  the  period,  partially  offset  by
the  reclassification,  in  2003,  of R$12.5 million  of employees'  profit share to
personnel  expenses as a result of a CVM rule that requires that employees' profit share
be classified as a personnel  expense when a net loss is realized.  At  December 31,
 2003, we had  approximately  5,265  employees,  a decrease from 5,571 employees at
December 31, 2002.

Total
 personnel  costs  decreased by  approximately  22.2% to  R$144.6 million  in 2002,  from
 R$185.8 million  in 2001. The decrease in personnel costs in 2002 was primarily due to
the outsourcing of technical and operational  services for our network,  which resulted
 in a  reduction  in our labor  force by 2,319  employees  during  2002 to 5,571
 employees  at  December 31,  2002 from 7,890 employees at December 31, 2001.

Materials

Total
costs  related to  materials,  such as plastic  phone cards and  materials  for  network
 maintenance  (such as cables), increased by 7.0% to R$84.3  million in 2003 from  R$78.8 million
 in 2002.  This  increase in material  costs was primarily due to the growth in usage of
prepaid  phone cards,  partially  offset by the transfer of costs  resulting  from our
 outsourcing  of  maintenance services for our network to third parties.

Total
costs related to materials  decreased by approximately  14.2% to  R$78.8 million  in 2002
from  R$91.7 million  in 2001. The decrease in material costs was primarily due to the
outsourcing of technical and operational services for our network.

Services

The
 cost  of  third  party  services,   which  include  interconnection  costs  and  the
 cost  of  maintaining  our  network infrastructure,  increased  by 15.2%  to  R$2,370.5 million
 in 2003  from  R$2,057.8 million  in 2002.  This  increase  was due to the consolidation
 of expenses  relating to our  acquisition of GlobeNet which included the  maintenance of
the sub-marine  cables acquired thereby and, to a lesser extent, by the increased
outsourcing of maintenance services for our network to third parties.

Interconnection
 costs increased to approximately 16.1% of gross revenues,  or  R$1,772.1 million,  in
2003 from approximately 15.5% of gross revenues,  or  R$1,526.5 million,  in the
 corresponding  period in 2002.  This increase was due to the  fixed-to-mobile Rate
Increase,  mostly in VC-1 as well as directly  related to the use of our carrier
 selection code on calls  originating from mobile phones,  as we must pay a fee to the
originating  mobile phone operator to complete these calls.  The increase was partially
 offset by a decrease in  fixed-to-mobile  telephone traffic of approximately 6.8% to
approximately 4.1 billion minutes in 2003 from approximately 4.4 billion  minutes in
2002.  The  increase in costs of third party  services  was also due to  subcontractor
 costs  associated  with maintaining our network  infrastructure.  Subcontracted  costs
increased by 12.6% to  R$598.3 million  in 2003 from  R$531.4 million in 2002 due to our
increased  outsourcing of maintenance and fee adjustments  resulting from inflation
indexing provisions in the existing maintenance contracts.

In
2002, the total cost of third party  services  increased by 21.8% to  R$2,057.8 million,
 from  R$1,689.3 million  in 2001. The  increase  in 2002 was  primarily  due to an
 increase in  interconnection  costs,  and to a lesser  extent by the  outsourcing  of
technical  and  operational  services  for our network.  In 2002,  interconnection  costs
 increased  to  approximately  15.5% of gross revenues in 2002 from  approximately  14.9%
of gross  revenues in 2001.  This increase was due to the rate increase in 2002 and also
to an increase in  fixed-to-mobile  interconnection  costs mostly in VC-1 which  resulted
 from an increase in  fixed-to-mobile  telephone traffic.  Fixed-to-mobile  telephone
 traffic  grew by  approximately  10.1%  to  approximately  4.4  billion  minutes  in
 2002,  from approximately  3.9 billion  minutes in 2001. The increase in
 fixed-to-mobile  telephone  traffic was due to the increase in the amount of pre-paid
mobile phones which allow mobile  customer to receive calls from fixed-line  telephones
free of charge in return for a flat monthly  fee.  The number of mobile  phones in our
region is estimated by Anatel to have grown by 24.9% to 9.5 million in 2002 from 7.7
million in 2001. The increase in costs of third party services was also due to
 subcontracted  costs  associated  with  maintaining our network  infrastructure.
 Subcontracted  costs increased by 23.6% to  R$531.4 million in 2002 from R$429.2 in 2001
due to our increased outsourcing of maintenance and technical and operational services.

Other

Other
costs of service, which primarily include fees paid for the rental of equipment and
infrastructure, insurance and a fee imposed by Anatel on providers of
telecommunications services for the inspection of switching stations and wireless
terminals, referred to as Taxa de Fiscalização de Telecomunicações, or FISTEL,
increased by 42.5% to R$353.0 million in 2003 from R$247.7 million in 2002. This
increase was primarily due to the consolidation of iBest and GlobeNet in the third
quarter of 2003.

Other
costs of service,  increased  by 22.9% to  R$247.7 million  in 2002 from  R$201.6 million
 in 2001.  This  increase  was primarily due to the increase in internet connection fees
associated with the increase in ASDL revenues.

Gross Profit

Our
gross profit increased in 2003 by 27.6% to  R$2,460.2 million  from  R$1,928.0 million in
2002, as a result of an increase in our net operating  revenues in 2003. As a percentage
of net operating  revenues,  gross profit increased to 31.1% in 2003 from 27.3% in 2002.

Our
gross profit increased in 2002 by 38.4% to  R$1,928.0 million  from R$1,392.8   million
in 2001 as a result of an increase in net  operating  revenues in 2002 and a smaller
 increase in cost of services in 2002.  As a percentage  of net  operating  revenues,
gross profit increased to 27.3% in 2002 from 22.6% in 2001.

Operating
expenses

Total
 operating  expenses,  which  include  selling  expenses,  general and  administrative
 expenses and other net operating expenses,  increased by 42.7% to  R$1,898.0 million  in
2003 from  R$1,329.6  million in 2002.  This increase was primarily a result of the
increase in general and administrative expenses in the period, as discussed below.

Total
operating  expenses decreased by 5.7% to  R$1,329.6 million  in 2002 from  R$1,410.1 million
 in 2001. This decrease was primarily a result of the increase in other net operating
expenses (income), as discussed below.

The
following table sets forth certain components of our operating  expenses,  as well as the
percentage change from the prior year, for 2001, 2002 and 2003.

|                                      | Year ended December 31,                  | Percentage change
|------------------------------------- | ---------------------------------------- | -----------------
|                                      |                                          |                  
|                                      | 2001                                     | 2002             
|                                      |                                          |                  
|                                      | (thousands of reais, except percentages)
|                                     
|Operating expenses:                  
|Selling expenses                      | 724,507                                  | 763,346          
|General and administrative expenses   | 624,751                                  | 687,462          
|Other net operating expenses (income) | 60,875                                   | (121,181)        
|                                      |                                          |                  
|Total operating expenses              | 1,410,133                                | 1,329,627        
|                                      |                                          |                  

Selling Expenses

Total
 selling  expenses  increased  7.6% to  R$821.7 million  in 2003 from  R$763.3 million
 in 2002.  This  increase was due primarily to (i) a 27.3%  increase in expenses for
salaries and bonuses  relating to our sales  personnel,  primarily in the  corporate
segment in connection  with our retention  programs for corporate  personnel;  (ii) a
13.1%  increase of bad debts and  provisions  for doubtful accounts  (connected with the
correspondent  increase in revenues);  and (iii) the  reclassification in 2003 of R$11.7 million
of  employees'  profit share to the  personnel  expense  component  of selling  expenses
as a result of a CVM rule that  requires  that employees'  profit share be classified as
personnel  expense when a net loss is realized.  These  increases were partially  offset
by a 27.3% decrease in advertising and marketing expenses.

Bad
debts and provisions for doubtful accounts  increased 13.1% in 2003 due to our increase
in gross revenues.  However,  as a percentage of gross  revenues,  bad debts and
provisions for doubtful  accounts  remained  stable at 2.7% of gross revenues for 2003 in
comparison to 2002.  This stability in bad debts and provisions  for doubtful  accounts
as a percentage of gross revenues  reflects our continued focus on measures to control
bad debt, such as the introduction of prepaid phone cards to mitigate credit risk.

In
2002, total selling expenses  increased by 5.4% to  R$763.3 million,  from  R$724.5 million
in 2001, due to higher expenses of services  primarily due to the outsourcing of call
center  services,  offset by a reduction in bad debts and provisions for doubtful
accounts.  In 2002, bad debts and provisions for doubtful  accounts  decreased
 approximately  18.6%. As a percentage of gross revenue, bad debts and  provisions  for
 doubtful  accounts  decreased  from 3.8% of gross  revenues in 2001 to 2.7% of gross
 revenues in 2002. During 2002, we implemented  certain successful  strategies in order
to reduce bad debt levels,  including (i) the teleaviso service in February 2002,  which
 involves  sending a warning  message to  previously  delinquent  clients  before their
payment date, in order to ensure  that they  will pay  their  bills on time and  (ii) sending
 a  collection  agreement  letter to warn of final  disconnections, offering the
customers the option to pay their past-due bills in installments before their lines are
cut off.

General and
Administrative Expenses

Total
general and  administrative  expenses  increased 25.8% to  R$865.1 million  in 2003 from
 R$687.5 million  in 2002. This increase was primarily due to an increase in  (i) expenses
 from  information  technology  equipment  depreciation;  (ii) expenses  for regular
office services,  such as security,  cleaning and maintenance and (iii) the
 reclassification,  in 2003, of  R$21.5 million  of employees'  profit share to the
personnel  expense  component of the general and  administrative  expenses.  Employees'
profit share is required by the CVM to be classified  as a personnel  expense when a net
loss is realized.  As a percentage of net operating  revenues, general and administrative
expenses rose to 10.9% in 2003 from 9.7% in 2002.

In
2002, total general and administrative  expenses increased by approximately 10.0% to
R$687.5 million,  from  R$624.8 million in 2001, primarily due to an increase in expenses
from IT equipment  depreciation and in expenses for regular office services,  such as
security,  cleaning and maintenance.  As a percentage of net operating revenues,  general
and administrative expenses decreased to 9.7% in 2002 from 10.1% in 2001.

Other Net Operating
Expenses (Income)

Total
 other  net  operating  expenses  (income)  decreased  from an  income  of  R$121.2 million
 in 2002  to an  expense  of R$211.3 million  in 2003. This increase in expenses resulted
 primarily from an increase of R$359.7 million in provision for contingent liabilities
 relating  mainly to the  operations of the Rio Grande do Sul branch,  formerly CRT. This
increase in provision is a result of court  decisions in the fourth quarter of 2003,
 which now require us to regard our loss relating to a portion of these  proceedings as
"probable".  The contingent  liabilities relate to CRT's pre-existing  labor, civil and
tax proceedings,  primarily regarding salary issues  (following  reallocation of CRT
staff) and entitlement to bonuses in connection with dangerous  working  conditions.  We
do not expect any material losses in excess of these amounts.  See Item 8 "Financial
Information  Legal Proceedings".

In
2002,  total  other net  operating  expenses  (income)  decreased,  to an income of
 R$121.2 million,  from an  expense  of R$60.9 million  in 2001.  This  increase was due
to the  reduction in the  provision  for the  retirement  incentive  plan (in 2002, we
accounted  lay-off  expenses  only until  March 2002)  and the  reduction  in the
 write-off  of  interconnection  accounts  receivable (recognized in 2001 as other
operating expenses and no longer recognized in 2002).

Operating Income
(Loss) Before Net Financial Expenses

Our
total operating income before net financial  expenses  decreased by 6.0% to an income of
 R$562.2 million  in 2003 from an income of  R$598.4 million  in 2002.  As a percentage
 of net  operating  revenues,  operating  income  before net  financial  expenses
decreased to 7.1% in 2003 from 8.5% in 2002.

Our
total operating  income before net financial  expenses  increased to an income of  R$598.4 million
 in 2002 from a loss of R$17.3 million  in 2001  primarily as a result of an increase in
gross  profits  combined with a decrease in operating  expenses.  As a percentage of net
operating revenues, operating income before net financial expenses increased to 8.5% in
2002.

Net Financial
Expenses

Total
net financial  expenses  represent the net effect of interest  income,  interest  expense
and exchange rate and monetary restatement gain and loss. Our total net financial
 expenses  increased 84.6 to  R$610.2 million  in 2003 from  R$330.5 million in 2002
primarily as a result of:

- a 55.3%
increase in our interest expense, to R$841.1 million in 2003 from R$541.9 million in
2002 as a result of higher interest rates in Brazil in 2003 compared to
2002, which increased the cost of our realdenominated indebtedness, as the
average CDI in 2003 was 23.3% as compared to 19.1% in 2002.


the increase
in interest  expenses was offset by a 49.3% increase in our interest income to  R$341.2 million
 in 2003                   from  R$228.6 million in 2002, primarily as a result of the
increase in average cash balances to R$1,776.4 million in                   2003 from
R$1,030.8 million in 2002.
- the increase
in interest  expenses was offset by a 49.3% increase in our interest income to  R$341.2 million
 in 2003                   from  R$228.6 million in 2002, primarily as a result of the
increase in average cash balances to R$1,776.4 million in                   2003 from
R$1,030.8 million in 2002.

In
2002, our net financial expenses increased by more than 601.7% to  R$330.5 million,  from
approximately  R$47.1 million in 2001, primarily as a result of:

- a 120.2%
increase in our interest expenses, to R$541.9 million in 2002 from R$246.1 million in
2001 as a result of:


a 32.7%
increase in our  indebtedness,  to R$4,176.2  million at the end of 2002 from R$3,148.2
million at the end of                   2001;an increase in
our interest expense from our U.S. dollar denominated indebtedness, due to a
depreciation of the realduring 2002; andan increase in
our interest expense from our realdenominated indebtedness, due to an increase in
Brazilian interest rates as the average CDI in 2002 was 19.1% as
compared to 17.5% in 2001.
- a 32.7%
increase in our  indebtedness,  to R$4,176.2  million at the end of 2002 from R$3,148.2
million at the end of                   2001;
- an increase in
our interest expense from our U.S. dollar denominated indebtedness, due to a
depreciation of the realduring 2002; and
- an increase in
our interest expense from our realdenominated indebtedness, due to an increase in
Brazilian interest rates as the average CDI in 2002 was 19.1% as
compared to 17.5% in 2001.

Operating Income
(Loss)

Our
 total  operating  income  decreased  to a loss of  R$48.0 million  in 2003 from an
 income  of  R$267.9 million  in 2002, primarily as a result of the 42.7% and 84.6%
increase in operating expenses and net financial  expenses,  respectively.  Operating
loss was 0.6% of net operating revenues in 2003.  Operating income was 3.8% of net
operating revenues in 2002.

In
2002, our total  operating  income  increased to  approximately  R$267.9 million,  from a
loss of  R$64.4 million  in 2001, primarily  as a result of the increase in operating
 income  before net  financial  expenses,  partially  offset by the increase in net
financial  expenses.  Operating income was 3.8% of net operating  revenues in 2002.
 Operating loss was 1.0% of net operating  revenues in 2001.

Net
Non-Operating Expenses

Net
non-operating expenses consist principally of equipment disposal in connection with the
modernization of our network.

Total
net  non-operating  expenses  increased  to  R$550.0 million  in 2003 from  R$78.3 million
 in 2002.  Net  non-operating expenses are comprised mainly of the  amortization of
goodwill we acquired as a result of the merger of our subsidiary,  Brasil Telecom S.A.,
with CRT in December 2000.  Goodwill amortization for CRT totaled  R$96.1 million for the
year ended December 31,  2003 (See note 8 to our audited consolidated  financial
 statements).  Besides the amortization of goodwill, in 2003 we wrote-off property,
 plant and equipment  related  to CRT in the  amount  of  R$302.7 million,  as a result
 of the  physical  inventory  performed  for  transmission equipment,  tools and
instruments and multi-pair  cables,  among others.  In addition,  we wrote off  R$20.0 million
of other property, plant and equipment for a total of R$322.7 million.

Total
net  non-operating  expenses  decreased by 8.0% to R$78.3 million in 2002,  from  R$85.2 million
 in 2001.  This was due primarily as a result of an increase in gains on disposal of
permanent assets.

Employees'
Profit Share

According
 to Law  No. 10,101/2000,  all  Brazilian  companies  may  compensate  employees,  in
addition  to their  salary and benefits,  with profit sharing.  The amount of such profit
sharing is generally  determined by negotiations between our company and the labor unions
that represent our employees.

Our
employees' profit share decreased 91.8% to R$3.5 million in 2003 from  R$42.6 million in
2002 due to the  reclassification of  R$46.3 million  as personnel  expenses  because we
realized  losses under Brazilian  Corporation  Law.  Employees'  profit share is required
by the CVM to be classified as a personnel expense when a net loss is realized.

In
2002, our employees' profit share decreased by 19.3% to  R$42.6 million,  from
 approximately  R$52.8 million in 2001. This was due to the decrease in the number of our
employees by approximately 29.4% in 2002.  At December 31, 2002, we had 5,571 employees.

Income (Loss)
Before Taxes and Minority Interests

Our
 income  before  taxes  and  minority  interests  decreased  to a loss of  R$601.5 million
 in  2003  from  an  income  of R$147.0 million in 2002 primarily as a result of the
increase in operating loss and net non-operating  expense.  As a percentage of net
operating revenues, loss before taxes and minority interests increased to 7.6% in 2003
from 2.1% in 2002.

Our
 loss  before  taxes  and  minority  interests  decreased  to an  income  of  R$147.0 million
 in  2002  from  a  loss  of R$202.3 million  in 2001 primarily as a result of the
increase in operating  income before net financial  expense and a decrease in net
non-operating  expense. As a percentage of net operating  revenues,  loss before taxes
and minority interests decreased to 2.1% in 2002 from 3.3% in 2001.

Income and
Social Contribution Tax benefits (expenses)

Income
and social  contribution tax benefits increased to a credit of R$261.4 million in 2003
from an expense of R$916,000 in 2002.  This increase was due to an increase in loss
before taxes and minority  interests to a loss of  R$601.5 million  in 2003 from an
income of R$147.0 million in 2002.

In
2002,  income and social  contribution tax benefits decreased to an expense of approximately
 R$916,000,  from a credit of approximately R$87.4 million  in 2001.  This decrease in
income and social  contribution  tax benefits was primarily due to a decrease in loss
before taxes and minority interests to an income of R$147.0 million in 2002 from a loss
of R$202.3 million in 2001.

Minority
Interests

In
2003, we allocated  R$171.5  million of loss to minority  shareholders  relating to their
 participation  in Brasil Telecom S.A.'s losses in 2003.

In
2002, we allocated a loss of approximately  R$2.4 million to the minority  shareholders
of Brasil Telecom S.A.  relating to their participation in Brasil Telecom S.A.'s losses
in 2002.

Net Income (Loss)

Our
net income decreased to a loss of  R$168.6 million  in 2003 from an income of  R$148.5 million
in 2002, as a result of the increase in operating  loss and net  non-operating  expense.
 Net loss was 2.1% of net operating  revenues in 2003. Net income was 2.1% of net
operating revenues in 2002.

In
2002,  our net loss  decreased  to an income of R$148.5  million from a loss of  R$39.3 million
 in 2001 as a result of the increase  in our  operating  income  before net  financial
 expense  combined  with the  decrease  in our net  non-operating  expenses, employees'
 profit share and the reduction of the deferred tax credits  accrued in 2002. Net income
was 2.1% of net operating  revenues in 2002.  Net loss was 0.6% of net operating revenues
in 2001.

Table of Contents

Liquidity and
Capital Resources

Cash Flow

The
 following  table sets forth  certain  components  of our source of funds or cash flows
for the years ending  December 31, 2001, 2002 and 2003.

|                                                 | Years ended December 31,
|------------------------------------------------ | ------------------------
|                                                 |                         
|                                                 | 2001                    
|                                                 |                         
|                                                 | (millions of reais)     
|                                                
|Cash flows provided by (used in):               
|Operating activities                             | 2,270.7                 
|Investing activities                             | (3,170.5)               
|Financing activities                             | (653.5)                 
|                                                 |                         
|                                                
|Increase (decrease) in cash and cash equivalents | (1,553.4)               
|                                                 |                         

We
use the net cash generated from our operations  and from external  financing to fund
capital  expenditures  for our network expansion and modernization, to pay dividends, to
meet our anticipated debt-service, and to invest in new businesses.

We
believe  that we have  sufficient  sources of  liquidity  and  capital  to meet these
 requirements  for the next few years although we cannot assure you in this regard.

Cash Flows Provided
by Operating Activities

Our
 primary  source of funds  continues  to be cash  generated  from  operations.  Our cash
flow  from  operating  activities increased 9.7% to  R$2,707.3 million  in 2003 from
 R$2,467.4 million  in 2002. This increase is primarily due to the 11.9% increase in net
operating revenues and the resulting 27.6% increase in gross profit in 2003 compared to
2002.

Cash Flows Used in
Investing Activities

Acquisitions
of property,  plant and equipment  continue to be our primary use of cash flow and other
capital  resources.  Our cash flow used in investing  activities  decreased  11.6% to
 R$1,636.9 million  in 2003 from  R$1,852.3 million  in 2002.  In 2003, we invested
 R$1,794.0 million  to expand and modernize our network to facilitate the  introduction
of new products and services,  enhance responsiveness  to  competitive  challenges,
 increase the operating  efficiency and  productivity  of our network and meet our
network expansion and modernization  goals.  During the  corresponding  period in 2002,
we invested  R$2,005.9 million  to expand and modernize our network.

As
part of our strategy to acquire high  technology  network  infrastructure,  we invested a
total of  R$356.7 million  during 2003 on our  acquisitions  of the capital  stock of
GlobeNet,  MetroRED and iBest.  This amount is part of the total  R$1,794.0 million
mentioned above.

Cash Flows Provided
by Financing Activities

We
realized a cash outflow from financing  activities of  R$710.0 million in 2003, as
compared to an inflow of R$515.5 million in 2002.  The change from inflow to outflow from
 financing  activities  during 2003 was  primarily  due to  (i) R$84.6 million  in new
loans incurred in 2003, compared to R$1,249.9 million in new loans incurred in 2002, (ii) a
 R$128.7 million  increase in loans repaid, for a total of R$557.4 million  in loans
repaid in 2003,  compared to R$428.7 million in loans repaid in 2002, and (iii) an
increase in interest on shareholders' equity paid by R$83.0 million to R$198.3 million in
2003, from R$281.3 million in 2002.

Currently,
 we are  negotiating  with BNDES a new credit  facility  of  approximately  R$1.0
 billion  for the  expansion  and modernization of our network.

Increase (Decrease)
in Cash and Cash Equivalents

In
2003, our cash and cash equivalents  increased by  R$360.5 million  to  R$1,956.7 million,
 compared to an increase in cash and cash equivalents by  R$1,130.6 million  to  R$1,596.2 million
 in 2002. The increase in our cash and cash equivalents was primarily due to the higher
cash inflow from operating activities and the decrease in cash flow used for investing
 activities,  partially offset by the outflow for financing activities in 2003.

Indebtedness

At
December 31,  2003, we had  R$3,790.0 million  of indebtedness,  a decrease of 9.2% from
R$4.176.2  million at December 31, 2002. In the twelve months of 2003, our interest
 expense  (including  accrued  interest)  increased by 22.1% to  R$603.8 million  from
R$494.6  million in 2002,  as a result of higher  interest  rates in Brazil in 2003
 compared to 2002 and the  following  increases  in indebtedness:

- On December 1,
 2002,  Brasil Telecom S.A. issued  R$400.0 million  of public  non-convertible
 debentures  guaranteed by               Brasil  Telecom  Participações  S.A. The
maturity date is December 1,  2004.  Interest on the debentures is equivalent to
              109.0% of the CDI rate and is payable on a semi-annual  basis, on June 1
and December 1 of each year,  until the maturity               of the debentures.

- During the
year ended December 31, 2002, Brasil Telecom S.A. drew down an additional R$325.3 million
from its long-term credit facilities with BNDES. Approximately R$71.5 million
was drawn from a BNDES credit facility bearing interest at the variable
TJLP rate plus 6.5% per annum. The TJLP rate as of December 31, 2003 was 11.0% per
annum. Approximately R$253.8 million was drawn from a BNDES credit
facility bearing interest at a rate equal to the rate of appreciation of
the U.S. dollar versus the Brazilian realon an annual basis plus the
average annual currency basket rate published by BNDES (Cesta de
Moeda) plus 3.85% per annum. See Item 10 "Additional InformationMemorandum and
Articles of AssociationMaterial ContractsBNDES Loan Agreements".

At
December 31,  2003,  approximately  4.1%, or  R$156.5 million,  of our total
 indebtedness was denominated in U.S. dollars, compared to 5.2%, or R$215.5 million,  at
December 31,  2002. Of our indebtedness affected by exchange variation at December 31,
 2003, approximately  66.7% was hedged against  significant  variations in exchange
 rates  (R$/U.S.$).  See Note 31 to our audited  financial statements and " Quantitative
and Qualitative Disclosure about Market Risk" below.

The
following table sets forth the repayment schedule of our indebtedness:

|                   | At December 31, 2003
|------------------ | --------------------
|                   |                     
|                   | (thousands of reais)
|2004               | 1,696,958           
|2005               | 755,434             
|2006               | 777,391             
|2007               | 520,628             
|2008 and after     | 39,591              
|                   |                     
|Total Indebtedness | 3,790,002           
|                   |                     

Although
our indebtedness  decreased to R$3,790.0 million in 2003, and our interest expenses
(including  capitalized interest) increased to  R$603.8 million  for the twelve  months
of 2003,  we expect to be able to repay  substantially  all of the  principal and
interest on our indebtedness  with internally  generated funds. Net cash flow from our
operating  activities was  R$2,707.3 million  in 2003,  compared to  R$2,467.4 million
 in 2002. However,  there can be no assurances that net cash flow from operating
 activities will continue to be  sufficient to cover these  obligations  or that we will
not need  additional  financing in order to repay all principal and interest on our
indebtedness as it comes due.

In
February of 2004, Brasil Telecom S.A. issued  U.S.$200.0 million  9.375% Notes due 2014
in the  international  market.  The notes will mature on  February 18,  2014 unless
 extended for a period of up to eighteen  months from the expected  maturity  date. The
notes have the benefit of an irrevocable  standby letter of credit,  as well as an
insurance  policy  provided by the Overseas  Private Investment Corporation.  The net
proceeds from the notes will be used to finance our 2004 and 2005 investment program.

On
March 24,  2004 Brasil  Telecom S.A.  entered into a Japanese Yen 21.6 billion loan
 facility  arranged by Sumitomo  Mitsui Banking Corporation  ("SMBC"),  guaranteed by the
Japan Bank for International  Cooperation ("JBIC") and granted by a syndicate of five
commercial  banks  (including  SMBC).  The loan is not secured and bears  interest at a
rate equal to Yen (LIBOR) plus 1.92% per annum. Interest  payments are due on September 24
 and March 24 of each year.  Brasil Telecom S.A.  borrowed the entire amount available
under this facility on March 28,  2004 in the form of a single term loan, which was
exchanged into  approximately  R$576.0 million  and which we used to partially finance
our 2003 capital expenditures.

Capital
Expenditures

Our
capital expenditures  decreased  approximately 9.3% to  R$1,794.0 million in 2003, from
 R$2,005.9 million in 2002. Of our capital  expenditures in 2003,  R$1,328.2 million
 related to expansion and modernization of our fixed operations,  R$109.2 million  to
mobile  operations  and  R$356.7 million  to the  acquisition  of the  capital  stock of
 GlobeNet,  MetroRED  and iBest.  The  capital expenditures on the expansion and
modernization of our fixed telephony  operations consist mainly of updating  technology
and upgrading capacity in relation to our  transmission  backbone,  switching  centers,
 data  network and  intelligent  network.  Such  expenditures decreased  approximately
 34.2%  compared  with 2002  (R$1,783.6 million  in 2002).  This  decrease was due to
lower  requirements  for investment  in  equipment  and  networks due to better
 management  as well as the general  slowdown of the  Brazilian  economy,  which resulted
in lower equipment and network usage than projected.

We
currently expect to invest  approximately  R$2,000.0 million  in the expansion and
 modernization of our network during the fiscal year 2004, which includes  investments of
approximately  R$850.0 million in our mobile telephone network.  At December 31,  2003 we
had expected  capital  expenditure  commitments  amounting to  approximately  R$117.7 million
 for 2004.  For the three months ended March 31,  2004, we invested  approximately
 R$217.0 million  in the expansion and modernization of our network.  See Item 5
"Operating and  Financial  Review  and  ProspectsLiquidity  and  Capital  ResourcesCapital
 Expenditures."  We expect to finance  our  remaining expected 2004 capital  expenditures
with internally  generated funds from operations.  Net cash flow from our operating
 activities was approximately R$2,700.0 million, R$2,500.0 million and R$2,300.0 million
in 2003, 2002 and 2001, respectively.

Research and
Development

We
conduct research and development in the areas of telecommunications  services,  but we do
not independently develop any new telecommunications  technology.  We have a group of
 professionals  focused on the search of new technology,  aiming at the application of
this  technology to the development of new services and, also, at adding value to the
existing  services.  This work is performed in cooperation  with suppliers of equipment
and systems.  As a result of this work, we are the first Brazilian  carrier to launch
services that use next generation network architecture.

Since
 prior to the  breakup  of  Telebrás,  we,  and each of the  other  former  operating
 subsidiaries  of  Telebrás,  have contributed to the Center,  which is a research and
development  center formerly operated by Telebrás that develops  telecommunications
technology for application in Brazil. On August 3,  2001 we entered into two service
 agreements with the Center,  one in the amount of R$7.0 million  per year for a
 three-year  period in order to  maintain  our access to  telecommunications  software
 developed  by the Center,  and the  other in the  amount  of  R$10.0 million  per year
for a 2-year  period in order to  receive  technological  services provided by the
Center,  such as equipment testing and consulting and training  services.  In addition to
the Center, we also depend on manufacturers of telecommunications products for the
development of new hardware and new telecommunications technologies.

Our
 aggregate  expenditures  on research and  development,  including  our  contribution  to
the Center,  were  approximately R$8.0 million, R$3.8 million and R$ 2.6 million in 2001,
2002 and 2003, respectively.

Trend Information

The
evolution of the communications  needs of our customers has been redefining the role of
 telecommunications  in Brazil. We believe  that the mass use of  computers  and the
 internet,  the  evolution  of  wireless  and data  compression  technology,  and the
deregulation of and increased  competition in telecommunications  services will continue
to increase the demand for  telecommunications services in Brazil.

Due
to these developments,  the value of access and long-distance  networks has decreased and
the value of  telecommunications applications  and services has  increased.  As a result,
 telecommunications  companies  have been seeking to integrate  vertically and expand
 geographically  in order to obtain  economies of scale and leverage  revenue growth.
 This is expected to favor those companies with sufficient  access to financing.
 Although we believe that our company is well  positioned to take advantage of this
trend,  there can be no assurances that we will have access to sufficient financing in
the future or on terms acceptable to us.

As
an  immediate  effect of the  geographic  expansion  and  vertical  integration,  the
 degree  of  difference  between  the traditional  players has diminished and the
boundaries  between the  communications  companies  (i.e.,  voice/data via fixed
 accesses, voice/data via mobile accesses,  Internet and cable modem) have become
 increasingly  narrow. In order to differentiate  ourselves from our competitors, we have
sought to bundle our products and services, brand our services and introduce value-added
services.

The
deregulation and technological  evolution of the telecommunications  industry in Brazil
has intensified the competition in the voice  sector as well as in the data sector.  This
may have a material  adverse  effect on our market  share,  margins,  results of
operations  and  financial  condition."  In terms of mobile  telephony,  the auction of
licenses for PCS in Brazil has further  boosted competition.

We
believe that our main strength lies in the regional  awareness of our brand name,  the
 technologically  advanced  level of our network, our success in the recruitment of top
quality employees and our strong internal cash flow generation.

Our
key strategies for the period between 2004-2006 are to:

- Offer complete
and innovative solutions in telecommunications services;

- Seek excellent
relations with our customers;

- Minimize our
operational costs while expanding our network and services;

- Attract,
develop and retain qualified personnel; and

- Participate in
the consolidation of the Brazilian telecommunications sector.

"Off-Balance Sheet" Arrangements

We do not have any off-balance sheet arrangements.

Trading Activities

Our
company does not engage in any material trading activities  involving  commodity
 contracts that are accounted for at fair value.  The only  risk  management  activities
 that we  engage  in is the  hedging  of some of our  U.S.  dollar  and Yen  denominated
indebtedness.  See  Item 11  "Quantitative  and  Qualitative  Disclosures  About  Market
 RiskQuantitative  information  about  market riskExchange Rate Risk."

Contractual
Obligations

The
following  tables set forth our obligations to make future payments under  contracts,
 such as debt and lease  agreements, and under contingent commitments, such as debt
guarantees.

|                                   | Payments due by period at December 31, 2003
|---------------------------------- | -------------------------------------------
|                                   |                                            
|Contractual Obligations            | Less than1 year                            
|                                   |                                            
|                                   | (thousands of reais)                       
|Indebtedness                       | 1,696,958                                  
|Capital lease obligations          | 5,894                                      
|Operating leases                   | 14,374                                     
|Unconditional purchase obligations | 117,694                                    
|Other long-term obligations        |                                           
|                                   |                                            
|Total contractual cash obligations | 1,834,920                                  

Dividends

We
are required to distribute to our shareholders,  either as dividends or as tax deductible
 interest on shareholder  equity, 25.0% of our adjusted net income  determined in
accordance  with Brazilian  accounting  principles  and as adjusted in accordance  with
Brazilian  Corporation  Law including any  realization of the net income reserve.  We
were required to pay a  non-cumulative  preferred dividend on our Preferred  Shares in an
amount equal to 6.0% of the share capital  attributable to our Preferred Shares under
Brazilian Corporation  Law. Law  No. 10,303,  dated  October 31,  2001,  which  amended
the  Brazilian  Corporation  Law  requires  that we pay a non-cumulative  preferred
dividend on our Preferred Shares of at least 3.0% per year of the book value of
Shareholders'  equity divided by our total  number  of  shares.  On  December 19,  2002
we  amended  our  Bylaws to comply  with  these new  requirements.  Preferred
Shareholders are now entitled to receive a minimum  non-cumulative  dividend of Preferred
Dividend equal to the greater of (i) 6.0% per year of the value of our total  share
 capital  divided by our total  number of shares or  (ii) 3.0%  per year of the book
value of our shareholders'  equity  divided  by the  total  number  of our  shares.  In
 2001,  2002  and 2003 we paid  dividends  of  approximately R$183.6 million, R$281.3 million
and R$198.3 million, respectively.

Pension Plans

We
 participate in a  multi-employer  defined  benefit plan, the "Sistel Plan," that covers
our inactive or retired  employees who were former employees of Telebrás.  Under this
plan, we are contingently  liable,  together with the other companies that comprised the
Telebrás system,  for our proportionate  share of unfunded  obligations of the plan
attributable to our participating  employees as well as  post-retirement  health care
benefits for active and inactive  employees that were in this  condition  until January
31, 2000. Contributions  to this  plan may be  required  in case of an  accumulated
 deficit.  As of  December  31,  2003 the plan was  running a surplus.  The retirement
 health  benefits are covered by a  defined-benefit  assistance  plan,  maintained in
 conjunction  with other sponsors  from the former  Telebrás  system who provide
 telecommunications  services.  This  benefit  assistance  plan is provided for
participants  who were being assisted on January 31, 2000, and for those assisted under
the  defined-benefit  plans (PBSs)  segregated from all the other  Sistel  sponsors.
 The  contributions  are funded by the  company and  represent  1.5% of the  paychecks
 of active participants  who are  associated  with the PBS-TCS  group  (incorporated  to
the TCSPrev plan in December  31,  2001).  The  companys responsibility for this
assistance plan is exclusively  limited to future  contributions.  In 2003, the
contributions of the company to this  assistance plan were R$125,000.  During the year
2000, we withdrew a portion of our funds from the  multi-employer  plan in order to
establish a separate plan for our current  employees who were also former  employees of
Telebrás.  On February 28,  2000, we founded our own private pension entity  implementing
a defined  contribution,  variable benefit plan,  TCSPrev  ("TCSPrev")  (Brasil
 Telecom's Pension Fund).  This plan covers  employees who signed terms of membership
from February 28, 2000 onwards.  Approximately  74.0% of our employees are covered under
TCSPrev.  Under TCSPrev the sponsoring  companies are no longer jointly  liable.
 Instead,  each sponsor is liable only for  contributions  with respect to its own
 employees.  Joint  liability  among the plan sponsors  continues to exist only with
respect to retired  employees,  who will  necessarily  continue under the Sistel Plan, or
with respect to the active employees who did not sign the term of  membership to join
 TCSPrev.  The company has another  health  assistance  defined-benefit  plan under
Sistel which provides  health  assistance to retirees and pensioners  associated with the
PBT-BrT group  (incorporated  by TCSPrev in December 31, 2001). The  contributions for
this plan were fully paid in July 1998 through a single payment.  New  contributions
 will be limited to the future need to cover expenses, if any occur.  See Note 22 to our
Financial Statements.

Prior
to our acquisition of CRT, CRT created a pension program to provide retirement benefits
to its employees (Fundação dos Empregados da Companhia Riograndense de Telecomunicações"FCRT"). Unfortunately the FCRT was not fully funded by CRT. When we purchased CRT
we assumed our proportionate share of the unfounded obligations of the FCRT
attributable to those CRT employees that were assumed by our company (the FCRT covers
approximately 25.0% of our current employees (approximately 1.174 employees as of
December 31, 2003)).

We
estimate that, at December 31, 2003, our  proportionate  share of the unfunded
 obligations of the FCRT attributable to our participating  employees was  approximately
R$ 3,375.0 million.  In an effort to eliminate the existing deficit over a period of
twenty years,  as of January  2002,  we have been making  additional  monthly
 contributions  to the FCRT in an amount equal to 57.285% of the combined  salary of
members of the FCRT who are employees of our company (48.92% is used for  contributions
 which amortize the deficit and 8.365% is used for normal  contributions).  Since
February 2003, we have been making additional  monthly  contributions to the FCRT in
fixed  amounts  to  amortize  the  deficit,  which in 2003 was  approximately  R$90,460.0
 million.  In  2003,  the  normal  monthly contribution represented approximately 6.72%
of the combined salary of the members of the FCRT.

For
the year ended  December 31, 2003,  the total cost of the FCRT to our company was
 approximately  R$93,835.0  million.  We have contributed approximately R$90,460.0
million to amortize the deficit, and R$3,375.0 million for normal contribution.

As
a result of our potential  unfunded  obligations  under the FCRT, in 2003 we decreased
the current portion of our provision for pensions  from R$92.1  million at December  31,
2002 to  approximately  R$28.0  million at December 31,  2003,  and  increased  the
non-current  portion of our provision for pensions from  approximately  R$409.7 million
at December 31, 2002 to  approximately  R$476.4 million at December 31, 2003. See Note 22
to our Financial  Statements.  The TCSPrev  defined-benefit  plan was created on February
28, 2000 and is  subscribed  to by  approximately  80.0% of the  companys  employees.
 In  December  31,  2001,  all  pension  plans  were incorporated  under  Sistel,  which
in turn created  groups with defined  contributions,  liquidated-benefits  (benefício-saldado)
 and defined-benefits.  The plans that joined TCSPrev,  PBS-TCS,  PBT-BrT,  Convênio de
 Administração-BrT  and Termo de Relação Contratual Atípica,  maintained  the
 conditions  established  by their  respective  original  plans.  As of March 2003,  this
plan was no longer accepting new participants.

This
plan kept the same  bases as the  original  plans for  contributions  by  groups of
 participants,  which are  determined through  actuarial studies prepared by independent
 actuaries in accordance with the rules currently  effective in Brazil and complying with
the capitalization  regime for cost  determination.  Currently,  participants and
sponsors only contribute to the internal groups, PBS-TCS  (defined-benefit)  and TCSPrev
 (defined-contribution).  In the TCSPrev group, both the participant and the sponsor
contribute equally  to the  participants  individual  account,  with the  contribution
 varying  from 3.0% to 8.0% of the  participants  salary, depending on the age of the
 participant.  The participant may elect to make further  contributions  to the plan,
 although the sponsor is not required to match such  contributions.  In the PBS-TCS
group, the sponsors  contribution is equal to 12.0% of the participants monthly salary,
 whereas the  participants  contribution  varies according to the age,  seniority and
salary of the  participant.  The participant also has the option of making additional
 payments into the plan and the size of this contribution  depends on the age when the
 participant  entered into the plan.  The sponsors are  responsible  for all
 administrative  costs and risks of the plan. In 2003, the  contributions  of the company
to TCSPrev  was, on average,  7.31% of the total value of the payroll of the
 participants  who were members of the plan, totaling R$15.3 million.

As
a result of our  potential  obligations  to the  PAMEC-BrT  assistance  plan,  in 2003
the company  constituted a long term provision for R$ 1.7 million.  In 2002, there was no
such provision.

Table of Contents

ITEM 6.
          Directors, Senior Management and Employees

Table of Contents

Board of Directors
and Senior Management

Board of
Directors

With
the  reduction of the stake held by TI in the voting  capital of Solpart,  directors  Mr.
 Carmelo  Furci and Mr.  Wilson Quintella,  and their respective  alternates,  resigned
on September 11, 2002.  During the General  Shareholders  Meeting held on April 23, 2003
our shareholders elected Mr. Lênin Florentino de Faria and Mr. Carlos Torres Rodenburg.

The
following are the current members of our board of directors and their respective
positions.

|Name (Age)                                | Position | Date Elected  
|----------------------------------------- | -------- | --------------
|                                          |          |               
|                                         
|Luis Octavio Carvalho da Motta Veiga (52) | Chairman | April 19, 2004
|Veronica Valente Dantas (47)              | Director | April 19, 2004
|Arthur Joaquim de Carvalho (46)           | Director | April 19, 2004
|Fabio de Oliveira Moser (36)              | Director | April 19, 2004
|Lenin Florentino de Faria (43)            | Director | April 19, 2004
|Carlos Bernardo Torres Rodenburg (47)     | Director | April 19, 2004

Luis
Octavio Carvalho da Motta Veiga, has served as a member of our Board of Directors since April
30, 2001. Mr. Motta Veiga is currently a partner with the law firm of Carvalhosa,
Eizirik e Motta Veiga Advogados. Previously, Mr. Motta Veiga was president of
Pretrobrás Petróleo Brasileiro S.A., Chief Executive Officer of Anglo
American Corporation do Brasil Ltda., Rayner Coffee International (London) and Jornal
do Brasil S.A.and director of Banco da Bahia de Investimentos and other companies of
BBM Group. Mr. Motta Veiga has also been a member of the National Monetary Counsel and
president of the Brazilian Securities and Exchange Commission (CVM - Comissão de Valores
Mobiliários). Mr. Motta Veiga holds a degree in Law from the Federal University
of Rio de Janeiro and a post graduate degree in Public Management from Institut
International dAdministration Publicin Paris, France.

Verônica
Valente Dantas,has served as a member of our Board of Directors since April 30, 2001.
Ms. Dantas is a partner and managing director of Opportunity Asset Management Ltda.
Prior to joining the Opportunity Group, Ms. Dantas was managing director of Icatu
Empreendimentos e Participações Ltda., an investment company in
Brazil. Ms. Dantas holds a degree in Business Administration from the Federal University of Bahia.

Arthur
Joaquim de Carvalho, has served as a member of our Board of Directors since April
2001. In August 1998, he was also elected to the board of directors of Tele Norte
Celular Participações S.A. and Telemig Celular
Participações S.A. Mr. Carvalho currently serves as a Principal of
CVC/Opportunity Equity Partners Ltda., a Cayman Island privately-owned investment company.
Mr. Carvalho has served as a Senior Investment Officer for private equity at the
Opportunity Group. Prior to joining the Opportunity Group, he served as a Managing
Director of Manuel Joaquim de Carvalho Ltda., an export-oriented agribusiness
company. Mr. Carvalho holds a degree in Business Administration from the Federal
University of Bahia.

Fabio
de Oliveira Moser, has served as a member of our Board of Directors since April 2004.
Mr. Moser is currently manager of the Equity Management Division 
Telecommunications, Energy and Petrochemical of PREVI. Mr. Moser held several management
positions at Banco de Brasil S.A. from 1982 to 1999. He also served as Chairman of the
Board of Directors and as Administrative and Market Relations Officer of Fiago
Participações S.A., and as a member of the board of directors of Kepler
Weber S.A. Mr. Moser holds a Business Administration degree from Faculdade Cândido
Mendes, an MBA in Finance from Instituto Brasileiro de Mercado de Capitais  IBMEC,
and a Masters degree in Business Administration from IBMEC.

Lênin
Florentino de Faria, has served as a member of our Board of Directors since April
2003. Mr. Faria is currently manager in the Corporate Governance Management
Department of PREVI. He was also manager in the Equity Management Division of
PREVIfrom September 2001 to December 2002. He held the position of division
manager in the Administrative Unit Control from September 2000 to September 2001, and he
also held the position of Division Manager of Compliance in the Internal Control Unit from
February to August 2000 in PREVI. Since 1980, he has held other positions in
several departments of PREVI. Mr. Faria holds a Business Administration degree from
CEUB  Brasilia, Brazil and an MBA in Corporate Governance from IBMEC. He has also
obtained a professional qualification in Labor Economy from UNICAMP.

Carlos
Bernardo Torres Rodenburg, has served as a member of our Board of Directors since
April  2003. Mr. Rodenburg is currently a Director of CVC/Opportunity Equity
Partners Adm. Recursos Ltda. Previously, he held the position of Director at Opportunity
Asset Management Ltda. He was also a Director of Banco Icatuand a Director of
Atlantica Corretora. Mr. Rodenburg holds a Business Administration Degree from
UNIFACS.

Senior Management

Our
senior management  consists of a Chief Executive  Officer, a Financial  Executive Officer
and a Human Resources  Executive Officer,  and a Technical  Executive  Officer,  each
elected by the board of directors for a term of three years. An executive  officer may be
removed from office at any time by our board of directors.

The
following are our current executive officers and their respective positions.

|Name (Age)                              | Position                          | Date elected   
|--------------------------------------- | --------------------------------- | ---------------
|                                        |                                   |                
|                                       
|Humberto José Rocha Braz (38)           | Chief Executive Officer           | August 29, 2003
|Paulo Pedrão Rio Branco (51)            | Financial Executive Officer       | August 28, 2003
|Carlos Geraldo Campos Magalhães (49)    | Human Resources Executive Officer | August 28, 2003
|Francisco Aurélio Sampaio Santiago (49) | Technical Executive Officer       | August 28, 2003

Humberto
José Rocha Braz, has served as our Chief Executive Officer since August 2003.
Mr. Braz also served as our Institutional Relations Director from 2002 until 2003. From
1979 to 2002, Mr. Braz held various management positions, including Commercial Director,
at the Andrade Gutierrez construction company. Mr. Braz holds a degree in Social
Communication from Faculdade de Filosofia, Ciências e Letras de Belo Horizonte and
an MBA in Business Management from Fundação Instituto de
Administração  FIA.

Paulo
Pedrão Rio Branco, has served as our Chief Financial Officer since
April 2000. Mr. Rio Branco joined Coelba (Companhia de Eletricidade do Estado da
Bahia) in 1975, working as General Coordinator of the Presidency. In 1987, he worked
as Coordinator of Energy of the Bahia State Secretariat of Mines and Energy. In
April 1988, he joined CHESF (Companhia Hidrelétrica do São
Francisco) as advisor to the President. In June 1989, Mr. Rio Branco became
Special Coordinator of Bahia State Secretariat, becoming Secretariat of Mines and Energy
of the State of Bahia in January 1990. In May 1990, Mr. Rio Branco became the
Chief Financial Officer of CHESF. In 1995, he became Manager of the New Business
Department at Coelba. Prior to joining Brasil Telecom Participações S.A., he
worked as Development Director at Iberdrola Energia do Brasil Ltda.Mr. Rio Branco
holds a degree in Business Administration and Economics from Universidade
Católica de Salvadorand a post graduate degree in corporate finance from
Fundação Getúlio Vargas.

Carlos
Geraldo Campos Magalhães, has served as our Human Resources Executive Officer
since December 13, 2001. Prior to coming to the Company, Mr. Magalhães has
served as a financial director for OAS Group, sub-secretary of finance of the State of
Bahia, General Supervisor of LIGHT  Serviços de Eletricidade S.A., and
Finance Director and President of Companhia de Eletricidade do Estado da Bahia 
COELBA. Mr. Magalhães holds a degree in business from the Business
Administration School of the State of Bahia and a degree in engineering from the Federal
University of Bahia.

Francisco
Aurélio Sampaio Santiago,has served as our Technical Executive Officer since
August 2003. Mr. Santiago has also served as Brasil Telecom S.A.s Network Executive
Officer since October 2002. He occupied the posts of Assistant Director for the
Fulfillment of Targets and Assistant Network Director from December 2000 to September
2002, and has been responsible for the Area of Operations since June 2001. He also served
as Network Director of the Central Region (Brasília, Goiás and Tocantins)
from May 1999 to December 1999 and of the Southern Region (Paraná, Santa Catarina
and MTMR in Rio Grande do Sul) from December 1999 to December 2000. He has been in this
industry for 23 years, having served as Engineering Director, Director of Human Resources
and Director of the Mobile Department of Telebrasília. Mr. Santiago has a degere in
electrical engineering from the University of Brasilia (UnB), and attended a postgraduate
course in telecommunications at the École National Superièure de
Telecomunication (ENST) in Paris, France in 1984 and a course on Tele-computing at UnB in
1987.

Solpart
Shareholders' Agreement

Under
the Solpart  shareholders'  agreement dated July 19, 1998, among Techold,  TII, Timepart,
 Solpart and others,  which we refer to as the Solpart Agreement,  Solpart has agreed to
vote its shares in Brasil Telecom  Participações S.A. to cause the nomination and
 election by Techold and TII of Brasil  Telecom  Participações  S.A.'s and Brasil
 Telecom  S.A.'s  board of  directors  and senior management.

Compensation

For the year
ended December 31, 2003, the aggregate amount of compensation that Brasil Telecom
Participações S.A. paid to all of its directors and executive officers was
approximately R$13.1 million and the aggregate amount of bonuses paid to all of its
directors and executive officers was approximately R$6.1 million.

For the year ended December 31, 2003, the aggregate  amount for pension,  retirement or similar benefits for
Brasil  Telecom  Participações  S.A.  directors  and  executive  officers  together  with the  directors and
executive  officers of Brasil  Telecom  S.A.  was  approximately  R$240,588.  We have not  entered  into any
employment or service  agreement  with any of our  directors or executive  officers.  As a result,  the only
benefits  accruing  to any of our  directors  or  executive  officers  upon their  termination  are  medical
benefits and those provided under applicable Brazilian laws.

Stock Option Plan

At
Brasil Telecom  Participações  S.A.'s  Extraordinary  General  Shareholders  Meeting held
on April 28,  2000,  shareholders approved the general  plan to grant stock  purchase
 options to our officers and our  employees  (the  "Plan").  The Plan  authorizes a
maximum limit of 10.0% of the shares of each class of company  stock.  To date,  the
general terms of the Plan have not been  submitted to Brasil Telecom Participações S.A.'s
board of directors.

At
Brasil Telecom S.A.'s  Extraordinary  General  Shareholders  Meeting held on April 28,
2000,  shareholders  also approved a general plan to grant stock  purchase  options to
its officers and its  employees and the  employees of its  subsidiaries  (the "Brasil
Telecom S.A.  Plan").  The Brasil  Telecom S.A. Plan  authorizes a maximum limit of 10.0%
of the shares of each class of company stock. Shares  received  from the  exercise of
options  guarantee  the  beneficiaries  the same rights  granted to other  Brasil
 Telecom S.A. shareholders.  The general terms of this plan have been submitted to Brasil
 Telecom  S.A.s board of directors and the  administration of this plan was entrusted to
a management  committee  appointed by Brasil  Telecom  S.A.s board of directors,  which
decided to grant only preferred stock options.

The
Brasil Telecom S.A. Plan is divided into two separate programs:

Program
(A)

This
program is granted as an extension of the  performance of Brasil Telecom  S.A.'s
 objectives  established by its board of directors for a five-year period.  At December 31,
2003, no stock had been granted.

Program
(B)

The
strike price of the option is  established by the management  committee  using as
reference the arithmetic  average of the market  price of the shares for the last 20
trading  sessions  prior to the date of granting the option.  The price will be
 monetarily restated by the IGP-M between the date of signing the contracts and the
payment date.

The
first grant of stock  options  under  Program B occurred on December  17, 2002 with
 622,364  options  issued.  The second grant of options  occurred on December  19,  2003
with  308,033  options.  22,298 of the  options  granted on December  17, 2002 lapsed
during 2003.

The
right to exercise  the options  applies to: (a) 33.0% on the 24th month after the date
the option was  granted;  (b) 33.0% on the 36th month after the date the option was
 granted;  and (c) 34.0% on the 48th month after the date the option was  granted.  The
periods  of  acquisition  can be  anticipated  in view of the  occurrence  of  events or
 special  conditions  set forth in the  option contract.  Options that are not exercised
after seven years from the date of execution of the options agreements will expire without compensation.

The
information related with the general plan to grant stock options is summarized below:

|                         | 2003                             
|------------------------ | ---------------------------------
|                         |                                  
|                         | Preferred SharesOption (thousand)
|                         |                                  
|Balance as of 12/31/2002 | 622,364                          
|Granted                  | 308,033                          
|Expired                  | (22,928)                         
|Balance as of 12/31/2003 | 907,469                          

Table of Contents

Board Practices

We
are administered by a board of directors (Conselho de Administração) and our senior
management (Diretoria), and overseen by a fiscal council (Conselho Fiscal).

Board of
Directors

The
board of directors,  whose  functions  resemble  those of a U.S.  board of directors,
 must be comprised of at least three individual  shareholders resident in Brazil or
non-resident,  provided that the latter is represented in Brazil by an attorney-in fact.
The board of directors is mandated to direct the company's  business;  elect,  remove and
establish the duties and  responsibilities of the company's  executive  officers;
 inspect the activities of the executive officers and the company records and documents,
 including those with third parties;  call general  shareholders  meetings as deemed
 appropriate or required;  comment on reports of the officers and their accountants;
 provide prior commentary on company acts or contracts, as provided for in the by-laws;
 approve share issues or dividends;  decide on the disposal of assets,  encumbrances,
 guarantees and obligations assumed on behalf of third parties, unless the by-laws
 provide  otherwise,  and select and dismiss  independent  auditors.  Financial
 statements,  including  annual  balance sheet, accumulated  profit and loss  statement,
 income  statement and source and  application  of funds  statement must be prepared
under the direction of the board of directors, audited and approved by shareholders.

In
addition to the duties  prescribed by law, our by-laws  provides that our board of
directors is also responsible for, among others:

(i)
approving our annual budget, including the objectives and business strategy for the
period of that budget;

(ii)
authorizing the acquisition of our issued shares whether for the purpose of cancellation
or otherwise;

(iii)
approving our participation in or any sale of our participation in the capital of other
companies;

(iv)
authorizing the acquisition of fixed assets whose individual value is above 1.0% of our
net equity;

(v)
within the limit of our authorized  capital,  approving the grant of any option to
purchase  stock to our  administrators, employees and to individuals that render services
to us;

(vi)
authorizing the giving of real or personal guarantees by us in favor of third parties;

(vii)
 authorizing   certain  benefits  given  to  our  employees  or  to  the  community  in
 furtherance  of  our  corporate responsibilities;

(viii)
approving  loans,  financing,  leasing and issues of commercial  papers whose individual
value is above 1.0% of our net equity;

(ix)
authorizing investments in new businesses or the creation of any subsidiary;

(x)
approving the complementary social security policy of the company and the collective
bargaining agreements;

(xi)
approving the internal rules of the board of directors;

(xii)
approving any proposal of the senior management relating to our organizational
 structure,  including the competence and duties of our senior management;

(xiii)
electing and dismissing,  at any moment,  our senior  management,  including the Chief
Executive  Officer and assigning duties to them, in accordance with the provisions of the
by-laws; and

(xiv)
dividing the global  remuneration  amount,  set by the annual general  shareholders
 meeting,  between our Directors and Executive Officers and assigning their individual
remuneration.

Currently,
 our board of directors  consists of six directors;  all of which are elected by holders
of our Common Shares.  Our directors  are replaced  during any absence,  impediment or
vacancy,  by their  respective  alternate.  In the case of a vacancy in the position of
an effective director,  the remaining  directors will appoint among them an alternate,
 who will take on the role until the time of the first meeting.  Anyone who occupies
positions in companies with which we compete,  in particular,  on advisory  committees,
board of  directors or fiscal  councils;  or anyone who has  interests  which  conflict
 with ours shall not be elected to the board of directors.

The
board of directors will meet ordinarily once every two months and holds special  meetings
 whenever called by the Chairman or by two members of the board of directors.  Voting
takes place by majority of those present.

In
order to comply with the rules established for companies qualified under Level 1 of
Bovespa Special Corporate Governance, when a director or executive officer is elected,
his investiture is conditioned upon the execution and delivery of a Statement of
Consent from the senior management (Termo de Anuência dos Administradores), by means of
which he personally undertakes to comply with the Differentiated Corporate Governance
Practice Rules established by Bovespa for Level 1 companies. Our directors and
executive officers must also report to BOVESPA the volume and characteristics of any
securities directly or indirectly held by them, including derivatives.

Fiscal Council

Brazilian
 Corporation  Law requires us to provide in our by-laws for the  existence of a board of
auditors  which we refer to as our fiscal  council,  but does not require us to have one
on a permanent  basis.  We have adopted by-laws which require us to have a permanent
 fiscal council that consists of four members and their  respective  alternates  three of
which are elected by holders of our common  shares and one which is elected by holders of
our  preferred  shares.  The  members of our fiscal  council  are  elected at the annual
general  shareholders  meeting and are not part of our board of directors.  The fiscal
council operates  independently  from our management and from our external auditors and
has the following legal authorities:

(i)
to supervise the acts of our senior management and ensure that they comply with their
legal and statutory duties;

(ii)
to give an opinion on the annual report of the management,  including the supplementary
 information  deemed necessary or useful for deliberation at a general meeting;

(iii)
to give opinions on any proposal of the senior  management and board of directors to be
submitted to a general  meeting, regarding an alteration in the capital, the issue of
debentures or subscription  bonuses,  investment plans, capital budgets,  dividend
distribution, transformation, merger, consolidation or division;

(iv)
to report any error,  fraud or criminal acts it may discover to the senior  management
 and board of  directors,  and, if these fail to take the necessary  steps to protect our
 interests,  to a general  meeting of  shareholders,  suggesting an  appropriate course
of action;

(v) to
call the annual  general  meeting should the senior  management and board of directors
 delay doing so for more than one month,  and an  extraordinary  general  meeting
 whenever  serious or urgent matters occur,  including such matters on the agenda as it
deems necessary;

(vi)
to examine,  at least every three months, the trial balance sheet and other financial
 statements  periodically  prepared by us;

(vii)
to examine the accounts and financial statements for the fiscal year and to provide an
opinion on them;

(viii)
to exercise such  responsibilities  during a  liquidation,  taking into account the
special  provisions  which regulate liquidations.

In
order to comply with the rules established for companies qualified under the Special
Corporate Governance Level 1 of BOVESPA, when one of the members of our fiscal
council is elected, his investiture is conditional upon the execution and delivery of a
statement of consent from our board of directors and our fiscal council (Termo de Anuência
dos Administradores), by means of which he personally undertakes to comply with the
differentiated corporate governance practice rules established by Bovespa for Level
1 companies. Our fiscal council members and board of directors must also report to
BOVESPA the volume and characteristics of our securities directly or indirectly held
by them, including derivatives.

The
following are the current members of our fiscal council:

|Name                             | Date Elected  
|-------------------------------- | --------------
|                                 |               
|Luiz Otavio Nunes West           | April 19, 2004
|Gilberto Braga                   | April 19, 2004
|Luiz Fernando Cavalcanti Trocoli | April 19, 2004
|Egon Handel                      | April 19, 2004

Table of Contents

Corporate
Governance Practices

The significant
differences between our corporate governance practices and the New York Stock Exchange
standards can be found on our website, www.brasiltelecom.com.br/ir/. The information
found at this website is not incorporated by reference into this document.

Table of Contents

Employees

In
2003, we decreased the number of our employees by  approximately  5.5%, from 5,571
employees at December 31,  2002 to 5,265 employees at December 31, 2003.  All of our
employees are employed on a full-time basis.

Approximately
 31.8% of our employees  work in the area of  operations,  25.5% of our employees  work
in the area of marketing and other  commercial  activities,  10.7% of our  employees
 work in the area of finance,  10.6% of our  employees  work in the area of information
 technology,  10.2% of our employees work in the area of support services,  4.4% of our
employees work in the area of human resources and 7.0% of our employees work in the area
of senior management.

Approximately
32.0% of our employees are affiliated employees of the unions, legal representatives of
the category, that are affiliated to the following federations: FENATTEL - Federação
Nacional dos Trabalhadores em Telecomunicações(National Federation of
Telecommunications Workers), or FITTEL - Federação Interestadual dos Trabalhadores em
Telecomunicações(Interstate Federation of Telecommunications Workers). The base
date of the category is December, time in which the salary losses for the
period are negotiated, with basis on the accrued INPC index from December to November of
the immediately preceding year.

The
economic clauses are negotiated annually, while the social clauses are negotiated every 2
years.

The
following table sets forth the breakdown of our employees by geographic region:

|                                         | 2001  | 2002  | 2003 
|---------------------------------------- | ----- | ----- | -----
|                                         |       |       |      
|                                         | (%)   | (%)   | (%)  
|Offices                                 
|Distrito Federal                         | 20.2  | 32.9  | 36.0 
|Rio Grande do Sul                        | 27.0  | 17.9  | 14.2 
|Paraná                                   | 21.5  | 20.1  | 19.0 
|Santa Catarina                           | 11.2  | 10.4  | 9.9  
|Goiás/Tocantins                          | 11.0  | 7.9   | 7.1  
|Mato Grosso do Sul                       | 4.6   | 4.3   | 3.9  
|Mato Grosso                              | 2.5   | 3.9   | 4.1  
|Rondônia                                 | 1.5   | 2.1   | 2.2  
|Acre                                     | 0.5   | 0.5   | 0.5  
|São Paulo (1)                            | 0.0   | 0.0   | 0.6  
|Rio de Janeiro (1)                       | 0.0   | 0.0   | 2.1  
|U.S., Venezuela and Bermudas Islands (1) | 0.0   | 0.0   | 0.4  
|                                         |       |       |      
|                                        
|Total                                    | 100.0 | 100.0 | 100.0
|                                         |       |       |      

______________________________


|(1) | In
2003,  there were  employees in three new locations,  due mainly to the operation of the São
Paulo and Rio de Janeiro  offices,      acquisition of iBest and GlobeNet.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Table of Contents

Performance Bonus
Plan

We
renewed the  collective  labor  agreement  with  several  labor  unions in the context of
which we would pay a bonus to the employees who reached their  operational  targets,
 according to the terms and  conditions set forth in the norms of the bonus plan for
performance.

For
the year ended December 31,  2003, we paid, in 2004, approximately  R$30.6 million in
performance bonuses to our officers, executives and employees.

For
the year ended December 31,  2002, we paid, in 2003, approximately  R$38.8 million in
performance bonuses to our officers, executives and employees.

Table of Contents

Share Ownership

According
to the Brazilian  Corporation  Law, all members of the board of directors of a Brazilian
 publicly held company must also be shareholders of that company.  As a result, all
members of our board of directors own at least one of our shares.

The
following table indicates the amount of shares owned by each member of our board of
directors and senior management.

|Name of Director (1)                 | Number ofPreferred Shares | Number ofCommon
|------------------------------------ | ------------------------- | ---------------
|                                     |                           |                
|                                    
|Luis Octavio Carvalho da Motta Veiga | 50,040                    | 16,016         
|Veronica Valente Dantas              |                          | 1              
|Arthur Joaquim de Carvalho           |                          | 1              
|Fabio de Oliveira Moser              |                          | 1              
|Lenin Florentino de Faria            | 1,832                     | 17,750         
|Carlos Bernardo Torres Rodenburg     | 464                       | 462            

|Name of Senior Manager(1)          | Number ofPreferred Shares | Number ofCommon
|---------------------------------- | ------------------------- | ---------------
|                                   |                           |                
|                                  
|Humberto José Rocha Braz           |                          |               
|Paulo Pedrão Rio Branco            | 4,674                     | 4,672          
|Carlos Geraldo Campos Magalhães    |                          | 381            
|Francisco Aurélio Sampaio Santiago | 2,025,989                 | 460            

_________________


|(1) | None
of the  persons  indicated  in the table  beneficially  owns more than one  percent of
any class of our        capital stock.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

Table of Contents

ITEM 7.
          Major Shareholders and Related Party Transactions

Table of Contents

Major shareholders

References to
"Preferred  Shares and "Common  Shares" in this Annual Report are to our preferred
 shares and common  shares,  respectively.  References  to  "American  Depositary
 Shares" or "ADSs" are  references  to American   Depositary  Shares  each  representing
 3,000  Preferred  Shares,  and  references  to  "American Depositary  Receipts" or
"ADRs" are references to the American  Depositary  Receipts,  the certificates that
evidence the ADSs.

Brasil Telecom
 Participações  S.A.'s capital stock is comprised of Preferred Shares and Common Shares,
 all without par value.  At December  31, 2003,  there were  222,670,187,883  Preferred
 Shares  outstanding  and 134,031,688,203  Common  Shares  outstanding.  Of the two
 classes of Brasil  Telecom  Participações  S.A.'s capital stock  outstanding,  only the
Common Shares have full voting rights.  Brasil  Telecom  Participações S.A.'s Preferred
Shares have voting rights under the following limited circumstances:

- in any
decision by the General  Shareholders'  Meeting  related to any management  service
         agreement,  including any technical  assistance  agreement,  to be entered into
by our company with          any foreign entity affiliated to any of Techold, TII or
Timepart; and

- in any
 decision  by the General  Shareholders'  Meeting,  related to any  matter,  if our
         company shall have omitted to pay preferred dividends for three or more
consecutive years.

The following table
sets forth information  concerning the ownership of Brasil Telecom  Participações S.A.'s
Preferred  Shares and  Common  Shares  (i) by  Solpart  and  (ii) by  Brasil  Telecom
 Participações  S.A.'s directors  and senior  management as a group,  at April 30, 2003.
We are not aware of any other  shareholder of record owning more than 5.0% of Brasil
Telecom Participações S.A.'s Common Shares.

|Name of Owner                                        | Number of
    Preferred Shares 
    Owned | % of
    Outstanding
    Preferred
    Shares | Number of
    Common Shares 
    Owned | % of
    Outstanding
    Common
    Shares
|---------------------------------------------------- | ----------------------------------------- | --------------------------------------------- | -------------------------------------- | ------------------------------------------
|Solpart                                              | 161,687,175                               | 0.07                                          | 71,830,503,826                         | 53.59                                     
|All directors and executives officers
    as a group | 2,082,999                                 | 0.00                                          | 39,744                                 | 0.00                                      

At  December  31, 2003
Brasil  Telecom  Participações  S.A.'s  Preferred  Shares were held by  approximately
1,563,976  registered  holders, of whom approximately  1,563,760  registered holders were
located in Brazil. At December  31,  2003,  Brasil  Telecom  Participações  S.A.'s
 Common  Shares  were held by  approximately 1,838,187 registered holders, of whom
approximately 1,838,053 registered holders were located in Brazil.

At December 31, 2003,
 Solpart  owned  approximately  53.6% of Brasil  Telecom  Participações  S.A.'s common
stock.  Accordingly,  Solpart has the ability to control the  election of the board of
 directors  of Brasil Telecom  Participações  S.A. At December 31, 2003, to the best of
our knowledge,  Techold,  TII and Timepart owned approximately 47.5%, 31.6% and 20.9%,
 respectively,  of the capital stock of Solpart and 19.0%, 19.0% and 62.0% of the voting
 capital of Solpart.  On April 26, 2004,  Solpart  reduced its own capital  stock by
distributing  3,474,342,842  of Brasil  Telecom  Participações  S.A.'s  common shares and
 3,491,253,373  of Brasil Telecom  Participações  S.A.'s preferred  shares to its
 shareholders.  As a result,  Solpart reduced its  interest in Brasil  Telecom  Participações
 S.A.  and  Timepart,  Techold  and TII also  became  direct minority shareholders.

The following is a
brief description of our controlling shareholders:

- We are
ultimately  indirectly  controlled by  Cvc/Opportunity  Equity Partners Ltd. and
Opportunity               Asset Management Inc.  respectively as general partner and
manager of  CVC/Opportunity  Equity               Partners L.P. and Opportunity Fund.

- CVC/Opportunity
 Equity Partners L.P.,  Investidores  Institucionais  FIA, PRIV FIA and Opportunity
              Fund hold 42.10%,  45.45%,  2.39% and 9.75%  respectively of the voting
capital of Opportunity               Zain S.A., which in turn is the controlling
shareholder of Invitel S.A.

- Invitel is the
holding  company of Techold  Participações  S.A.,  which together with Timepart hold
              47.5% and 20.9% respectively of the voting capital of  Solpart.

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

Telecom
Holding S.A.is, to the best of our knowledge, controlled by Woog Family LP.Privtel
Investimentos S.A.is owned by Eduardo Cintra Santos, who serves on Brasil Telecom S.A.'s board of
directors.Teleunion S.A.is owned by the estate of Luiz Raymundo Tourinho Dantas..
- Telecom
Holding S.A.is, to the best of our knowledge, controlled by Woog Family LP.
- Privtel
Investimentos S.A.is owned by Eduardo Cintra Santos, who serves on Brasil Telecom S.A.'s board of
directors.
- Teleunion S.A.is owned by the estate of Luiz Raymundo Tourinho Dantas..

- Solpart is the
controlling shareholder of Brasil Telecom Participações S.A.

For a description of
Solpart's Shareholders Agreement, see "Major ShareholdersShareholders' agreement."

The following chart
sets forth our controlling shareholders as of April 26, 2004.

Shareholders'
Agreement

Solpart,
 Brasil Telecom  Participações  S.A. ́s controlling  entity has a shareholders'
 agreement. On July 19, 1998,  Timepart,  Techold,  TII,  Solpart and others,  entered
 into an  Amendment  and Restated Shareholders  Agreement of Solpart,  to set forth their
 respective  rights and obligations  with respect to their interest in Solpart and in its
then  controlled  companies and provides,  among other things,  for the following:

- the rules for
the nomination of the majority of our directors and executive officers;

- a right of
first offer, rights of first refusal and tag-along rights for TII; and

- rights of
first refusal for Techold with respect to the sale of TII's shares in Solpart.

Under the Solpart
Shareholders' Agreement, upon the fulfillment of certain conditions,  Techold and TII may
be entitled to nominate and elect  members of our Board of Directors  and of our Senior
 Management. In addition,  under the Solpart  Shareholders'  Agreement,  the parties
 thereto  have  agreed,  among other things, that the:

- modification
of our business plan, dividend policy and Bylaws;

- sale of any of
our material assets;

- issuance by
our company of additional securities;

- increase or
reduction of our capital;

- incurrence by
our company of additional indebtedness; and

- merger of our
company with another company,

require (i) the prior
 approval of an absolute  majority of the voting  capital of Solpart and (ii) the
affirmative  vote of TII in the matters defined therein as  Supermajority  Matters.
 However,  according to the August 27, 2002 amendment to the  shareholder's  agreement,
 certain  provisions were amended,  TII's approval  rights  were  suspended  subject  to
 subsequent  restoration  upon  the  fulfillment  of  certain conditions  and a certain
 number of common  shares in  Solpart  were sold by TII to  Techold  and  Timepart
subject to call and put  rights.  There are disputes  pending  regarding  TII ́s
effort to restore  these approval rights and exercise its call rights.  See Item 3 "Key
 InformationRisk  factorsRisks  relating to our company  Certain  beneficial
 shareholders  control a large  percentage  of our voting shares and their interests may
conflict with the interests of our other  shareholders,  including minority
 shareholders" and "Disputes among our controlling shareholders have had and could in the future have a material adverse
effect on our management and operations."

On  September  16,
 2003,  Solpart  Participações  S.A.,  Opportunity  Logica  II  FIA,  OPP I FIA,
Opportunity I FIA,  Opportunity  Fund and  CVC/Opportunity  Equity  Partners LP entered
into a  shareholders agreement  called  "Acordo de Voto da Brasil Telecom  Participações
 S.A."  (hereinafter  referred to as the "Voting Agreement").  The Voting Agreement
 establishes that the above mentioned  shareholders shall vote as a block,  in order to
 reinforce  the  exercise  of the control  Brasil  Telecom  Participações  S.A. by its
current controlling shareholders.

On October 30, 1998, Opportunity Zain S.A., Opportunity Fund, CVC/Opportunity Equity Partners FIA, PRIV
FIA, Tele FIA, Fundação Petrobras de Seguridade Social, Fundação Sistel de Seguridade Social, Caixa de
Previdência dos Funcionários do Banco do Brasil and Fundação Embratel de Seguridade Social entered into
the Shareholders ́ Agreement of Invitel (hereinafter referred to as the Invitel Shareholders ́
Agreement). The Invitel Shareholders ́ Agreement provides for rules regarding (i) appointment of
Officers and Directors on the level of Invitel, Techold, Solpart and Brasil Telecom Participações S.A.;
(ii) the exercise of voting rights by the Parties and the board members appointed by Invitel; and (iii)
the right of first refusal on the transfer of shares issued by Invitel.

Table of Contents

Related Party
Transactions

None
of the members of our board of directors or senior management,  or any close member of
their respective families,  has or has had, since the period beginning  January 1,  2001,
any direct interest in any transaction effected with our company which is or was unusual
in its nature or conditions, or significant to our business.

As
of December 31,  2003, no outstanding  loans or guarantees have been made to the members
of our board of directors,  senior management, or any close member of their respective
families.

Transactions
with Brasil Telecom S.A.

From
time to time, our subsidiary,  Brasil Telecom S.A., provides us with certain logistic and
other  administrative  services on an arm's  length  basis.  For the year 2003,  we
received  approximately  R$2.3 million  of services  from  Brasil  Telecom  S.A. At
December 31, 2003, Brasil Telecom S.A. owed us approximately R$157,000.

On
May 22, 1998, Brasil Telecom Participações S.A. entered into a loan agreement with
Brasil Telecom S.A., under which it agreed to loan a total of approximately R$50.6 million,
with a variable interest rate equal to the rate of appreciation of the U.S. dollar
versus the Brazilian realon an annual basis + 1.75% per annum, payable at the end
of each semester. The loan matures on July 1, 2014. As of December 31, 2003,
Brasil Telecom Participações S.A. is owed approximately R$89.6 million in principal
and accrued interest on this loan. See Note 26 to our consolidated audited Financial
Statements.

On
September 29,  2000,  Brasil Telecom  Participações  S.A. granted  approximately  R$87.0 million
 to Brasil Telecom S.A. in advance  of the  issuance  of  certain  debentures.  During
the year  ended  2001,  Brasil  Telecom  S.A.  issued,  and Brasil  Telecom Participações
S.A. purchased in a private placement,  approximately R$1.3 billion in debentures, with a
variable interest rate equal to the CDI rate.  The debentures are payable in three
 installments  on July 27,  2004 (30.0%),  July 27,  2005 (30.0%) and July 27,  2006
(40.0%),  respectively.  As of  December 31,  2003,  Brasil Telecom S.A. owed Brasil
Telecom  Participações  S.A.  approximately  R$1.4 billion in principal and accrued
interest on these debentures.

At
December 31,  2003 Brasil Telecom S.A. owes Brasil Telecom  Participações S.A. a total of
approximately  R$1.4 billion from all loans and debentures.  For the year ended December 31,
 2003 Brasil Telecom S.A. paid Brasil Telecom  Participações S.A. a total of
approximately R$285.8 million in interest from such loans and debentures.  See Note 26 to
our Audited Financial Statements.

Table of Contents

ITEM 8.
          Financial Information

Table of Contents

Consolidated
Statements and Other Financial Information

See
Item 18 "Financial Statements."

Table of Contents

Legal Proceedings

Breakup of Telebrás

The
legality of the breakup of Telebrás and  privatization  of Telebrás was  challenged  in
numerous  legal  proceedings,  the great  majority of which have now been  dismissed.  A
few,  however,  are still  pending.  We believe that the ultimate  resolution  of those
proceedings will not have a material adverse effect on our business or financial
condition.

We
are a party to certain legal proceedings arising in the normal course of business,
 including civil,  administrative,  tax, social  security  and labor  proceedings.  We
have  provided for or deposited  in court  amounts to cover our  estimated  losses due to
adverse  legal  judgments.  We believe  that such  actions,  if decided  adversely  to
our  company,  are not likely to have a material adverse effect on our business or
financial condition.

Telebrás,
 our legal  predecessor,  is a defendant in a number of legal proceedings and is subject
to certain other claims and contingencies.  Under the terms of the breakup of Telebrás,
 liability for any claims  arising out of acts  committed by Telebrás prior to the
effective  date of the breakup of Telebrás  remains with  Telebrás,  except for labor and
tax claims (for which Telebrás and the 12 new holding  companies  into which it was
 broken-up  are jointly and  severally  liable by operation of law) and any  liability
for which  specific  accounting  provisions  have been  assigned  to us.  Our  management
 believes  that the  chances  of any such  claims materializing and having a material
adverse financial effect on our company are remote.

Administrative
Claim Before Anatel

Embratel
has filed an  administrative  claim against our company  before  Anatel  challenging  the
legality of an  association entered into by our company and other  regional  fixed-line
 companies for the  rendering of 800 national  services.  Embratel  alleges that such an
association  violates  applicable  telecommunications  legislation.  We are currently
 awaiting  Anatel's decision in this matter.  Should Anatel rule against the association,
 this may have a material adverse effect on our operations,  since we consider 800
services as strategic to our business development.

Antitrust
Proceedings

Embratel
and other companies filed  administrative  complaints  before Anatel,  the Secretariat of
Economic Law of the Ministry of Justice and CADE charging us with carrying out
 cartel-like  practices with Telemar and  Telefônica.  We were only  allowed to start
 operating  outside of our  concession  area after January 19, 2004,  following  Anatel's
 certification  that we anticipated our 2003  universalization  targets.  We believe these
antitrust complaints are groundless and baseless.

Labor Legal
Proceedings

At
December 31,  2003, contingent  liabilities for labor legal proceedings in which the risk
of loss was considered "probable" amounted to  approximately  R$424.0 million.  At
December 31,  2003,  contingent  liabilities for labor legal  proceedings in which the
risk of loss was  considered  "possible"  amounted to  approximately  R$625.1 million.
 As of  December 31,  2003,  we were involved in approximately  18,578 labor legal
 proceedings,  6,897 of which were brought  against CRT. The estimated total amount
involved in these proceedings is approximately R$1,177.0 million.

In
2003,  there was an increase in labor  contingent  liabilities in the amount of  R$107.7 million.
 This increase was mainly due to monetary  adjustments,  in the order of R$42.4 million
and re-evaluation of the legal  proceedings,  specially in the Rio Grande do Sul branch
(former CRT),  particularly  relating to risk premium and wage adjustments  arising from
collective  agreement,  totaling R$71.0 million.

- performance
bonus plan;

- employee
promotions;

- dangerous work
conditions;

- overtime;

- subsidiary
liability;

- productivity;

- recognition of
employment relationship;

- reinstatement;
and

- voluntary
severance plans.

As
the successor of Telepar, we were the defendant in a civil public action brought
by the Attorney General for Labor Matters of Curitiba (Ministério Público do Trabalho
 Curitiba) based on our dismissal of a large number of employees aged 40 years or over
(with an average of more than 20 years' of seniority) under our restructuring program.
During 2001, a preliminary judgment was entered in this matter ordering the
reinstatement of the dismissed employees and dismissing all claims for
indemnification. We have appealed this judgment and the judicial order was revoked.
The civil public action was dismissed and the Attorney General for Labor Matters of
Curitiba filed an appeal with the Tribunal Regional do Trabalho("Regional Labor
Court"). The appeal court ordered the rehiring of the dismissed employees. Both
parties filed a review appeal to the Tribunal Superior do Trabalho("Superior Labor
Court") and are still awaiting a decision of this matter. Considering that the
rehiring of such employees, as opposed to their reinstatement, will have effects only
as of effective rehiring, we do not expect any costs related to this action.

Brasil
 Telecom S.A. is the  defendant in a labor claim filed by 1,478  employees,  in 1984,
 requesting  the payment of salary differences  due to the failure in complying with the
"Company  Internal  Rules,"  which  established  different  criteria  depending on an
employee's  seniority.  In 1988, a judgment was entered in this matter  ordering the
payment of such  differences.  Since the judgment, the parties have been  discussing the
values  involved in the action.  In order to settle the values  involved,  a specific
 appeal was filed to the Regional Labor Court which ordered the exclusion of the
employees who were hired after  October 1976  (which represent 600 claimants).  The
Regional  Labor Court ruled that only 814 employees  are entitled to the claim,
 excluding  624 other  claimants.  The courts  appointed  expert  found that our  exposure
 was equal to R$144  million,  and the  company  is  challenging  this  calculation.
Subsequently,  the  parties  agreed to settle  the matter  individually,  and as of June
2004 we had  settled  with 565  employees  for approximately  R$50 million.  We estimate
that we may still incur  approximately  R$15 million in liability as not all employees are
 interested in amicable settlements.

Brasil
Telecom S.A. is the defendant in a labor claim filed by the Labor Union of Santa
Catarina (SINTEL), in 1997, as the legal substitute of all employees, requesting
the payment of differences due to the profit sharing paid by Telesc in 1996,
considering a difference of criteria regarding the procedures adopted to calculate
the values paid. The Labor Judge ordered the payment of such differences. However, we
filed an appeal to the Regional Labor Court, which dismissed the labor claim. SINTELfiled a recurso de revista ("review appeal") to the Superior Labor Court and the
decision issued by the Regional Labor Court was confirmed. In December 2003, the
Labor Unions motion was denied, and the case was remanded to the lower court for
dismissal.

In
1984, 1,480 employees filed a labor claim requesting the payment of differences due
to the profit sharing bonus. The Labor Judge dismissed the labor claim in 1985. An
appeal filed to the Regional Labor Court modified the decision, ordering the
payment of the profit sharing. Telesc filed a review appeal (recurso de revista) to
the Superior Labor Court and also to the Supremo Tribunal Federal("Superior Federal
Court"), but the decision was confirmed. In 1990, an agreement was settled with the
employees in order to pay the profit sharing. In 1995, a Governmental Resolution N. 10
was issued and as a result, Telesc did not pay the profit sharing as agreed but instead
began to pay as established in the Resolution. In 1997, SINTELand part of the
employees requested the reopening of the labor claim to execute the differences of the
profit sharing payments. The Labor Judge did not accept the request. However, the
Regional Labor Court admitted the employees' request. In 1998, Telesc filed a review
appeal, which was not accepted by the Superior Labor Court. In 2003, Telesc filed a
recurso extraordinário("extraordinary appeal") to the Superior Federal Court, which
was not accepted. Telesc filed an agravo de instrumento("interlocutory appeal")
before the Brazilian Supreme Court in April 2003, which was not accepted. The labor
claim was returned to the lower Labor Judge for the executory phase. We estimate that we
would incur a cost of approximately R$20.6 million, based on our evaluation that 703
employees are eligible for indemnification. Based on a court decision dated June 15, 2004, we understand that the
executory phase will determine that 1,098 employees must be indemnified,
which would increase the company's exposure. The company is currently in
negotiations to settle the entire case.

Legal Tax
Proceedings

Application of ICMS
on Cellular Activation and Other Fees

In
June 1998, the governments of certain Brazilian States approved an Agreement (Convênio
No.69/98) to interpret existing Brazilian tax law to broaden the application of the
ICMS effective July 1, 1998, to certain services, including cellular activation and
installation services, to which the ICMS had not previously been applied.

The
 administrative  tax  authorities in the Federal  District and in the States of Santa
 Catarina,  Tocantins,  Acre and Rio Grande do Sul have  assessed  our company on this
issue  regarding  the period of five years  preceding  June 30,  1998.  However,  our
company obtained  favorable  judicial  decisions  confirming that ICMS cannot be applied
 retroactively to services rendered during the period prior to the Convênio No. 69/98
(June 30, 1998).

We
believe that any such  attempt by these States  governments  to extend the scope of the
ICMS to apply it  retroactively  to services that are supplementary to basic
telecommunications services is illegal and unconstitutional because:

(a)
 Their interpretation would subject certain services which are not telecommunications
services to taxation; and

(b)
 Taxes may not be applied retroactively.

Additionally,
 the statute of limitation for the ICMS tax is of five years,  which means that the State
 governments  can only charge taxes within a  five-year-period  starting from the tax
triggering event.  Because of that, the tax authorities could not charge the company for
the services  rendered during the five years preceding  June 30,  1998, since the term of
the statute of limitation has expired.

Recently,
 the STJ decided in the Special  Appeal No.  402.047-MG  that no ICMS should be levied on
the cellular  installation and activation  services  established in Convênio No. 69/98.
 However, we have knowledge of other judicial decision  unfavorable to the taxpayer.
 Even though,  the STJ has not granted a final and uniform  decision on this issue,  we
estimate a probable  possibility of a favorable  decision to the taxpayer,  which means a
low likelihood of disbursement in our  proceedings.  With regard to the payments of ICMS
tax on such  cellular  activation  and  installation  services as of July 1,  1998,  we
have filed  judicial  claims  (declaratory actions)  in the  States  of our  region  to
 avoid  such  collections.  As of  December 2003,  we  deposited  in  court
 approximately R$166.0 million  in order to guarantee the judicial  discussion  without
the  application of interest and fees. In case the legality of Convênio  No. 69/98  is
 confirmed by Superior  Courts,  the  deposited  amount will be  converted  into revenue
to the state  treasury department  without new disbursements by the company.  However,
 if Superior Courts  consolidate the opinion that the terms of Convênio No. 69/98 are
illegal, the deposited amount will be returned to us.

Services Tax
Applying on Complementary Telecommunications services

Several
 municipal  governments  assessed  our  company in order to collect  the  Services  Tax
 ("ISS") on the  complementary telecommunications  services.  These  assessments
 constitute a relevant  contingency  for our company.  The company  understands  that
these complementary  telecommunications  services,  which are considered  accessory
services in the  telecommunications  services,  are subject to ICMS instead of the ISS.
 Consequently,  our company is not paying the ISS on these  services.  Our company's
 legal counsel estimates as reasonable the likelihood of  disbursement  considering  the
absence of judicial  precedent in superior  judicial  courts. The amount of this tax
contingency that  corresponds to a possible  contingency is  approximately  R$236.1 million.
 This amount is not provisioned in our company's balance sheet.

State Value-Added
Tax Credits

Several
 States  Treasury  Department  assessed our company in order to discuss the use of the
ICMS tax  credits.  Our company presented  administrative  and judicial  defenses
 against the assessments.  In some  administrative  proceedings,  the decision at the
first  administrative  level was  unfavorable  to the company.  According to the State
tax  authorities,  the procedure  adopted by our company  for  registering  the ICMS
 credits  is not in  accordance  with the law.  On the other  hand,  our  company's
 legal  counsel understands  that the  likelihood of  disbursement  is low in the
judicial level since ICMS tax credits are guaranteed by the Brazilian Constitution.  The
amount  involved in the discussion  that  corresponds to a possible  contingency  is
 approximately  R$70.7 million. This amount is not provisioned in our company's balance
sheet.

State Value-Added
Tax Applying on International Telecommunications services

Several
States Treasury  Departments  assessed our company in order to collect the ICMS tax on
international  telephone calls. The tax authorities  understand that  international
 telephone calls are services  rendered in Brazil and subject to ICMS tax since the
request  and the  payment  for the  services  are  executed  in Brazil.  Our  company
 presented  administrative  defenses  against the assessments.  The amount  involved in
the  administrative  proceedings  that  corresponds to a possible  contingency  is
 approximately R$83.3 million.  This amount is not provisioned in the company's
 balance sheet.  Our company's legal counsel  understands the ICMS tax is not applicable
to the international telephone call services and estimates the likelihood of disbursement
as low.

Social Security
Contribution Applying on Several Issues

The
National Welfare Agency filed  administrative and judicial  proceedings against our
company in order to collect the Social Welfare  Contribution  ("INSS"),  which is levied
 on  payments  of  salaries,  on  several  types of  payments  made to our  company's
employees.  Our company  presented  defenses against all these  proceedings.  The amount
involved in those proceedings that corresponds to a possible  contingency is
 approximately  R$329.4 million  not  provisioned in the company's  balance  sheet.  Our
company's  legal counsel  understands  that the possibility of success is reasonable in
the judicial  level,  which means the likelihood of disbursement as low.

State Value-Added
Tax Applying on Sale of Pre-paid Telephone Cards

The
State Treasury  Department of the States of Mato Grosso and Tocantins  assessed our
company to collect the ICMS on sale of pre-paid  telephone cards used in public
 telephones.  Our company  presented  administrative  defenses against all these
 assessments. The amount involved in the administrative  proceedings that correspond to a
possible  contingency is approximately  R$24.9 million. This amount is not
provisioned in the company's  balance sheet.  Our company's legal counsel  understands
the possibility of success is reasonable in the judicial level, which means the
likelihood of disbursement as low.

Costs of the Social
Contribution on Gross Revenue Transferred to the Users of the Telecommunications services

The
civil class action was filed by a federal prosecutor and ANDEC ("Associação
Nacional de Defesa dos Consumidores de Cartão de Crédito") in order to suspend the
transfer of the cost of the PIS/COFINS to the users of the telecommunications
services. Our company presented defenses against the assessments. The amount
involved in these judicial proceedings that correspond to a possible contingency is
approximately R$207.1 million. This amount is not provisioned in the company's
balance sheet. Our company's legal counsel understands the possibility of success
is reasonable in the judicial level, which means the likelihood of disbursement as low.

REFIS

The
REFIS (the "REFIS") is a program  created by the Federal  government in order to provide
the opportunity to legal entities to pay their debts related to taxes managed by the
Federal Revenue Service and the National Welfare Agency ("INSS").

On
 November 16,  2000,  the company  filed the request to include in the REFIS program its
debts related to the taxes managed by the INSS.  As of  December 2003,  the total  amount
 of the debt  included  in the  REFIS is  approximately  R$76.0 million.  In the
calculation  of the total  amount  included in the REFIS,  (allowed by law) the company
used both (i) a 40% of reduction of the penalty fee applied issued in the  assessments
and (ii) its own and third parties net operating  losses,  to offset with the tax debts
included in the REFIS.

PAES

The
PAES is a program  created by the Federal  government in order to provide the
 opportunity to taxpayers to pay their debts (related  to taxes  managed  by the  INSS)
 in 120  installments.  In 2003,  the  company  filed  the  request  to pay in
 installments R$43.9 million of federal tax debts, and as of December 2003, there are 116
outstanding installments.

Civil Legal
Proceedings

At
 December 31,  2003, we had  provisions of  approximately  R$208.1 million  of contingent
 liabilities  for civil  lawsuits classified  as  "probable"  risks.  The  increase  in
 "probable"   contingent   liabilities  was  primarily  due  to  an  increase  of R$157.0 million
 in the civil lawsuits proposed against CRT, as a result of the Rio Grande do Sul courts'
 understandings  that CRT has misapplied certain rules provided by the  Communications
 Ministry.  At December 31,  2003,  contingent  liabilities for civil lawsuits classified
as "possible"  risks  amounted to  approximately  R$740.5 million.  The increase in
"possible"  contingent  liabilities  was primarily due to an increase of  R$398.8 million
 in the lawsuits  arising from the  capitalization  process,  where a higher number of
shares and amount of dividends is requested.

Most
of the civil  suits  filed  against us would not,  if  determined  in a manner  adverse
to our  company,  have a material adverse effect on our results of operations or
financial condition.  The most significant civil suits against us are the following:

CRT
is a defendant in certain  lawsuits in connection with certain  illegalities  that are
alleged to have occurred during the privatization  and sale of CRT.  Although we believe
that we will prevail in this  dispute,  there can be no assurance  that the courts will
rule in our favor.  If the  plaintiffs in these lawsuits are  successful,  the courts
could void the  privatization  of CRT, which would  result in our loss of control of CRT.
 Although we would be entitled to recover the  purchase  price paid for CRT from the
State of Rio Grande do Sul, such an adverse ruling could have a material adverse effect
on our operations.

As
the successor of CRT, Brasil Telecom S.A. is the defendant in a Civil Public Action
brought by the Federal Attorney General (Ministério Público) for Rio Grande do Sul
against CRT claiming indemnification of amounts paid by customers as a result of
allegedly abusive commercial practices in connection with 0900/900 telephone
services. An adverse judgment has been issued against us in this action. Although
the court did not award any damages in this action, it enjoined us from offering
0900/900 telephone services and from disconnecting service to customers for the
non-payment of any 0900/900 services incurred prior to the date of the judgment. Both
parties have filed appeals against the decision at first instance and the
appeals have not yet been decided. Customers seeking to recover damages in this
matter will have to bring their own separate actions. Our ultimate liability will
depend on how many of Brasil Telecom S.A.s customers initiate and succeed in any such
proceedings.

Splice
do Brasil  Telecomunicações e Eletrodomésticos Ltda. has filed a lawsuit against
Brasil Telecom S.A. to collect amounts owed under equipment supply agreements. The
court's decision was favorable to the plaintiff and the lawsuit is currently in the
execution phase. The expert has already presented its appraisal report, which sets
the amount of the claim at R$25,472,276.87. The ratification of the appraisal by the
court is still pending. We have already provisioned for this probable contingency in
our balance-sheet.

Brasil
Telecom Participações S.A. is the defendant in a lawsuit brought by Tele Centro
Oeste Celular Participações S.A. ("TCO") in May 1999. TCO claims that certain
debts owed to TCO by third parties were wrongly allocated to Brasil Telecom
Participações S.A. in connection with the breakup of Telebrás. TCO sought a
declaration that these debts, which are owed by Telebrasília Celular S.A.and
Telegoiás Celular S.A.and which amount to approximately R$142.5 million, are owed to
TCO and not to Brasil Telecom Participações S.A. In October 1999, we filed suit
against Telebrasília Celular S.A.and Telegoiás Celular S.A.to collect unpaid and
overdue amounts under these debts. In early 2002, the court ruled that (i) the debts
are owed to Brasil Telecom Participações S.A. and not to TCO, (ii) Telebrasília
Celular S.A.and Telegoiás Celular S.A.must repay the debts to Brasil Telecom Participações
S.A., and (iii) the debts will be adjusted according to the exchange rate only up
until the date that the breakup of Telebrás took place, and thereafter shall only be
adjusted according to the rate of inflation (IGP-DI). Each of the parties appealed
this ruling on different grounds. The judgment on appeal decided (i) to overturn
the decision at first instance in the lawsuit brought by TCO against Brasil Telecom
Participações S.A. and dismiss the action without judgment on the merits because of
TCO's lack of standing to bring action and (ii) to overturn in part the decision at
first instance in the suits brought by Brasil Telecom Participações S.A. against
Telebrasília Celular S.A.and Telegoiás Celular S.A.determining that the debts will be
adjusted according to the exchange rate, as established in the agreements.

Actions by us
against TII and certain shareholders

We have instituted
 lawsuits to recover  damages  suffered as a result of actions taken by TII and the board
members  nominated by TII to our board of directors.  These actions include acts and/or
omissions of these persons and a number of Brazilian  pension funds related,  among other
things,  to the negotiation process for the acquisition of CRT and certain other
 acquisition,  concession and financing  opportunities which  we  assert  were
 improperly  interfered  with by TII due to its  interests  in our  competitors  or
potential  competitors.  We also understand that there are legal proceedings pending
relating to efforts by TII to  resume a  controlling  position  in our  company.  See
Item 3 Key  Information   Risk  Factors   Certain  beneficial  shareholders  control a
large  percentage of our voting shares and their interests may conflict with the
interests of our other shareholders,  including minority  shareholders. In addition,  we
have suffered damages from the diversion of management  attention and other  turbulence
 caused as a result of past actions of TII, its affiliates  and its agents and are
 continuing to suffer  similar  damages from the  uncertainty  caused to our business by
these efforts to retake  control.  The recovery of such damages will be subject to
further lawsuits.

Table of Contents

Dividend Policy

Pursuant
to our by-laws,  we are required to distribute as dividends in respect of each fiscal
year ending on December 31,  to the extent  amounts are  available  for  distribution,
 an  aggregate  amount  equal to at least 25% of Adjusted Net Income (as defined below)
on such date (the  "Mandatory  Dividend").  The annual  dividend  distributed  to holders
of  Preferred  Shares (the  "Preferred Dividend")  has priority in the  allocation of
Adjusted Net Income.  Remaining  amounts to be  distributed  are allocated  first to the
payment of a dividend to holders of Common Shares in an amount equal to the Preferred
 Dividend,  and subsequently  distributed equally among  holders of  Preferred  Shares
and Common  Shares.  Under the  Brazilian  Corporation  Law, a company is permitted to
suspend the Mandatory  Dividend  in respect of common  shares and  preferred  shares not
 entitled  to a fixed or minimum  dividend if its board of directors and fiscal  council
 report to the  shareholders'  meeting that the  distribution  would be  incompatible
 with the financial circumstances of such company and the shareholders  ratify this
conclusion at the shareholders'  meeting.  In this case,  (i) the board of  directors
 must  forward  to the CVM within  five days of the  shareholders'  meeting an
 explanation  justifying  the  information transmitted  at the meeting and (ii) the
 profits which were not  distributed  for such reason are to be recorded as a special
 reserve and, if not absorbed by losses in  subsequent  fiscal  years,  are to be paid as
dividends as soon as the  financial  situation of such company permits.  Our Preferred
 Shares are entitled to a minimum  dividend and thus the Mandatory  Dividend may be
suspended only with respect to the Common Shares.  See "Priority and Amount of Preferred
Dividends."

Under
our by-laws,  we may pay dividends out of retained  earnings or  accumulated  profits in
any given fiscal year.  For the purposes of the Brazilian  Corporation Law,  accumulated
 profits are defined as net income after income and social  contribution taxes for such
fiscal year,  net of any  accumulated  losses from prior fiscal years and any amounts
 allocated to founders'  shares,  income bonds,  employees'  and  management's
 participation  in a company's  profits.  Retained  earnings are defined as the amount of
our net income in prior years that was not paid out as  dividends  in the year in which
it was earned,  but rather was  retained in  accordance with a proposal of the board of
directors duly approved by a shareholders meeting.

At
each annual  shareholders'  meeting,  our board of  directors is required to  recommend
 how net profits for the  preceding fiscal year are to be allocated.  Under the Brazilian
 Corporation  Law, we are required to maintain a statutory  reserve,  to which we must
 allocate  5.0% of net profits for each fiscal year until the amount of such  reserve
 equals 20.0% of our paid-up  share  capital (the "Statutory  Reserve").  This reserve
can only be used to increase capital or offset  accumulated  losses.  Net losses, if any,
may be charged against the statutory reserve.

The
Brazilian Corporation Law also provides for two additional discretionary allocations
of net profits that are subject to approval by shareholders at the annual shareholders'
meeting. First, a percentage of net profits may be allocated to the contingency reserve
for anticipated losses that are deemed probable in future years (the "Contingency
Reserve"). Any amount so allocated in a prior year must be either (i) reversed in the
fiscal year in which the loss was anticipated if such loss does not in fact occur or
(ii) reversed in the event that the anticipated loss occurs. Second, if the amount of
Unrealized Revenue (as defined below) exceeds the sum of (i) the statutory reserve
(Reserva Legal), (ii) the Contingency Reserve and (iii) retained earnings, such
excess may be allocated to the reserve (the "Unrealized Revenue Reserve"). Such
allocations may not hinder the payment of minimum dividends on our Preferred Shares.
"Unrealized Revenue" is defined under the Brazilian Corporation Law as the sum of (i) the
share of equity earnings of affiliated companies which is not paid as cash dividends and
(ii) profits from installment sales to be received after the end of the next
succeeding fiscal year.

For
the purposes of the  Brazilian  Corporation  Law, and in accordance  with our by-laws,
 "Adjusted Net Income" is an amount equal to our net profit adjusted to reflect
allocations to and reversion from (i) the Reserva Legal;  (ii) the  Contingency Reserve
and (iii) the Unrealized Revenue Reserve.

The
amounts  available for  distribution are determined on the basis of our financial
 statements  prepared in accordance with the Brazilian  Corporation Law, which differ
from financial  statements,  such as our Financial  Statements  included herein,  that
are prepared using the constant currency method according to Brazilian GAAP.

In
order to allow the  payment of  dividends  after the  breakup of  Telebrás,  the
 shareholders  of  Telebrás  approved  the allocation  and  transfer  of a  proportional
 part of the  retained  earnings  and  reserves  of  Telebrás  to our company as retained
earnings.  These  earnings and reserves  (which amount to  approximately  R$1,300 million)
 are available to be used by our company for payment of future dividends, if so approved
by our shareholders, although we are not legally obligated to do so.

Priority and
Amount of Preferred Dividends

Our
by-laws provide for a minimum  non-cumulative  dividend of Preferred Dividend equal to
the greater of (i) 6.0% per year of the  value of our  total  share  capital  divided  by
the  total  number  of  shares  or  (ii) 3.0%  per year of the book  value of our
shareholders'  equity  divided by our total  number of our  shares.  As a result of such
 provision,  holders of  Preferred  Shares are entitled to receive,  in any year,
 distributions of cash dividends prior to the holders of Common Shares receiving any
distribution of cash dividends in such year.  In addition, distributions of cash
dividends in any year are made:

- first, to the
holders of Preferred  Shares,  up to the amount of the Preferred  Dividend of our
Preferred Shares for such               year;

- then,  to the
holders of Common  Shares,  until the amount  distributed  in respect of each Common
 Share is equal to the               amount distributed in respect of each Preferred
Share; and

- thereafter, to
the Common Shares and Preferred Shares on a pro rata basis.

If
the  Mandatory  Dividend in any year is less than or equal to the  Preferred  Dividend
 payable to the holders of Preferred Shares in such year,  the holders of Common  Shares
will not be entitled to receive any cash  dividends  distributed  by our company in such
year,  unless the  holders  of Common  Shares  approve  dividends  in excess of the
 Mandatory  Dividend.  In such  circumstances, however,  holders of Preferred  Shares
will be entitled to the amount  available  for payment of  dividends  up to an aggregate
 amount equal to the  Preferred  Dividend  plus,  in the event the  Preferred  Dividend
 is higher  than the amount  available  for  payment of dividends  for such year,  any
retained  earnings  from  previous  years may be used to make up for such  shortfall.  If
the  Preferred Dividend is not paid for a period of three years,  holders of Preferred
 Shares shall be entitled to full voting rights until such time as the minimum dividend
is paid in full for any year.

Payment of
Dividends

We
are  required by Brazilian  law (Law 6,404,  article 132) and our by-laws to hold an
annual  shareholders'  meeting  within four months  after the end of each fiscal year at
which,  among other  things,  an annual  dividend  may be declared by decision of the
shareholders on the  recommendation of our executive  officers and our board of
directors.  The payment of annual dividends is based on our  financial  statements
 prepared for each fiscal year ended  December 31  in  accordance  with  Brazilian
 Corporation  Law.  Under Brazilian  Corporation Law,  dividends are required to be paid
within 60 days following the date the dividend  distribution is declared to shareholders
 of record,  unless a shareholders'  meeting  resolution sets forth another date of
payment,  which must occur prior to the end of the fiscal year in which such dividend
 distribution was declared.  A shareholder has a three-year  period from the dividend
payment  date to claim  dividends  in respect of its shares,  after which our company has
no liability  for such  payment.  Because our shares are issued in  book-entry  form,
 dividends  with respect to any share are  automatically  credited to the account
 holding such share and no action is  required  on the part of the  shareholder.  We are
not  required  to adjust the amount of paid-in  capital  for inflation.  Annual
 dividends may be paid to  shareholders  of newly issued  shares on a pro rata basis
 according to the date when the subscription price for such newly issued shares was paid
to us.

Shareholders
who are not residents of Brazil must register with the Brazilian Central Bank in
order for dividends, sales proceeds or other amounts with respect to their shares
to be eligible to be remitted outside of Brazil. The Preferred Shares underlying
the ADSs are held in Brazil by Banco Itaú S.A., as agent for the Depositary, which
has registered with the Brazilian Central Bank as the registered owner of our shares.

Payments
of cash  dividends and  distributions,  if any,  will be made in Brazilian  currency to
Banco Itaú S.A., as custodian for our Preferred  Shares  represented by the ADSs, on
behalf of the  Depositary.  Banco Itaú S.A. will then convert such proceeds into U.S.
 dollars and will cause such U.S.  dollars to be delivered to the  Depositary  for
 distribution  to holders of ADSs. In the event that the custodian is unable to
 immediately  convert the Brazilian  currency  received as dividends into U.S.  dollars,
 the amount of U.S.  dollars payable to holders of ADSs may be adversely  affected by
 devaluations  of the Brazilian  currency that occur before such dividends  are converted
and remitted.  Dividends in respect of our Preferred  Shares paid to resident and
 non-resident  shareholders, including   holders   of   ADSs,   are  not   currently
  subject   to   Brazilian   withholding   tax.   See   Item   10   "Additional
InformationTaxationBrazilian Tax Considerations."

Table of Contents

ITEM 9.
          The Offer and Listing

Table of Contents

Offer and Listing
Details

Our
Preferred  Shares  commenced  trading  separately on the Brazilian  stock  exchanges on
September 21, 1998.  The following table sets forth the  reported  high and low closing
 sale prices for our  Preferred  Shares on the São Paulo  Stock  Exchange  and the
approximate average daily trading volume for the annual periods indicated.

|              | Nominal reaisper 1,000 Preferred Shares | Average Daily Trading Volume
|------------- | --------------------------------------- | ----------------------------
|              |                                        
|              | High                                    | Low                         
|              |                                         |                             
|              |                                         |                             
|Year-end 1999 | 30.89                                   | 7.21                        
|Year-end 2000 | 33.24                                   | 15.90                       
|Year-end 2001 | 24.84                                   | 10.30                       
|Year-end 2002 | 19.57                                   | 12.73                       
|Year-end 2003 | 23.85                                   | 15.40                       

_____________________________________


Source:  São Paulo
Stock Exchange


The
following  table sets forth the reported high and low closing sale prices for our
Preferred  Shares on the São Paulo Stock Exchange and the approximate average daily
trading volume for the quarterly periods indicated.

|                    | Nominal reaisper 1,000 Preferred Shares | Average DailyTrading Volume
|------------------- | --------------------------------------- | ---------------------------
|                    |                                        
|                    | High                                    | Low                        
|                    |                                         |                            
|                    |                                         |                            
|First quarter 2002  | 19.57                                   | 15.38                      
|Second quarter 2002 | 18.34                                   | 13.01                      
|Third quarter 2002  | 17.65                                   | 12.73                      
|Fourth quarter 2002 | 19.33                                   | 15.82                      
|First quarter 2003  | 19.60                                   | 15.40                      
|Second quarter 2003 | 23.05                                   | 19.10                      
|Third quarter 2003  | 23.85                                   | 18.40                      
|Fourth quarter 2003 | 23.35                                   | 20.58                      
|First quarter 2004  | 26.30                                   | 19.82                      

---

Source:  São Paulo Stock
Exchange


The
following  table sets forth the reported high and low closing sale prices for our
Preferred  Shares on the São Paulo Stock Exchange and the approximate average daily
trading volume for the monthly periods indicated.

|              | Nominal reaisper 1,000 Preferred Shares | Average DailyTrading Volume
|------------- | --------------------------------------- | ---------------------------
|              |                                        
|              | High                                    | Low                        
|              |                                         |                            
|              |                                         |                            
|December 2003 | 23.20                                   | 22.10                      
|January 2004  | 26.30                                   | 21.61                      
|February 2004 | 24.45                                   | 21.60                      
|March 2004    | 22.45                                   | 19.82                      
|April 2004    | 21.04                                   | 18.10                      
|May 2004      | 17.96                                   | 16.06                      

---

Source:  São Paulo Stock
Exchange


Our
ADSs, each  representing  5,000 Preferred Shares,  commenced trading on the New York
Stock Exchange on November 16,  1998. The  following  table sets forth the  reported
 high and low closing  sale prices for our ADSs on the New York Stock  Exchange  and the
approximate average daily trading volume for the annual periods indicated.

|                                | Nominal U.S. dollars per ADS | Average DailyTrading Volume
|------------------------------- | ---------------------------- | ---------------------------
|                                |                             
|                                | High                         | Low                        
|                                |                              |                            
|                                |                              |                            
|November 16  December 31, 2001 | 41.80                        | 34.72                      
|Year-end 2002                   | 44.90                        | 21.70                      
|Year-end 2003                   | 41.05                        | 22.67                      

---

Source:  New York Stock
Exchange


The
following  table sets forth the reported high and low closing sale prices for our ADSs on
the New York Stock  Exchange and the approximate average daily trading volume for the
quarterly periods indicated.

|                    | Nominal U.S. dollars per ADS | Average DailyTrading Volume
|------------------- | ---------------------------- | ---------------------------
|                    |                             
|                    | High                         | Low                        
|                    |                              |                            
|                    |                              |                            
|First quarter 2002  | 44.90                        | 33.41                      
|Second quarter 2002 | 42.40                        | 24.40                      
|Third quarter 2002  | 30.40                        | 21.70                      
|Fourth quarter 2002 | 28.55                        | 22.25                      
|First quarter 2003  | 30.72                        | 22.67                      
|Second quarter 2003 | 39.80                        | 29.22                      
|Third quarter 2003  | 41.05                        | 29.85                      
|Fourth quarter 2003 | 41.05                        | 34.88                      
|First quarter 2004  | 45.53                        | 34.13                      

---

Source:  New York Stock
Exchange


The
following  table sets forth the reported high and low closing sale prices for our ADSs on
the New York Stock  Exchange and the approximate average daily trading volume for the
monthly periods indicated.

|              | Nominal U.S. dollars per ADS | Average DailyTrading Volume
|------------- | ---------------------------- | ---------------------------
|              |                             
|              | High                         | Low                        
|              |                              |                            
|              |                              |                            
|December 2003 | 39.50                        | 36.38                      
|January 2004  | 45.53                        | 38.29                      
|February 2004 | 41.86                        | 37.21                      
|March 2004    | 39.01                        | 34.13                      
|April 2004    | 36.61                        | 31.00                      
|May 2004      | 30.99                        | 25.70                      

---

Source:  New York Stock
Exchange


There
are no  restrictions  on ownership of our Preferred  Shares or Common Shares by
individuals or legal entities  domiciled outside Brazil.

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 regulations which generally require, among other things, that the
relevant investments have been registered with the Brazilian Central Bank. Banco Itaú S.A.,
as custodian for our Preferred Shares represented by the ADSs, has registered with the
Brazilian Central Bank on behalf of the Depositary the Preferred Shares that it will
hold. This enables holders of ADSs to convert dividends, distributions or the
proceeds from any sale of such Preferred Shares, as the case may be, into U.S. dollars
and to remit such U.S. dollars abroad. However, holders of ADSs could be adversely
affected by delays in, or a refusal to grant any, required government approval for
conversions of Brazilian currency payments and remittances abroad of the Preferred
Shares underlying our ADSs.

In
Brazil,  there are a number of mechanisms  available to foreign  investors  interested in
trading directly on the Brazilian stock exchanges or on organized over-the-counter
markets.

Under
the  regulations  issued by the National  Monetary  Council,  on  January 26,  2000
 ("Resolution  No. 2,689"),  foreign investors seeking to trade directly on a Brazilian
stock exchange or on an organized  over-the-counter  market, must meet the following
requirements:

- Investments must be
registered with a custody, clearing or depositary system authorized by CVM or the
Brazilian Central Bank;

- Trades of securities
are restricted to transactions performed on the stock exchanges or organized
over-the-counter markets authorized by the CVM;

- You must establish a
representative in Brazil;

- You must complete a form
annexed to the Resolution No. 2,689; and

- You must register with
the CVM and register the inflow of funds with the Brazilian Central Bank.

If
these  requirements  are met,  foreign  investors will be eligible to trade directly on
the Brazilian stock exchanges or on organized  over-the-counter  markets.  These rules
extend favorable tax treatment to all foreign investors  investing pursuant to these
rules.  See Item 10 "Additional  InformationTaxation."  These  regulations  contain
certain  restrictions on the offshore  transfer of the title of the securities, except in
the case of corporate reorganizations effected abroad by a foreign investor.

A
certificate of foreign capital registration has been issued in the name of the
Depositary with respect to the ADSs and is maintained by Banco Itaú S.A., as custodian
for our Preferred Shares represented by the ADSs, on behalf of the Depositary.
Pursuant to such certificate of foreign capital registration, we expect that
Depositary will be able to convert dividends and other distributions with respect to
the Preferred Shares represented by ADSs into foreign currency and remit the proceeds
outside of Brazil.

In
the event that a holder of ADSs  exchanges  such ADSs for  Preferred  Shares,  such
 holder will be entitled to continue to rely on the Depositary's  certificate of foreign
capital registration for five business days after such exchange,  following which such
holder must seek to obtain its own  certificate  of foreign  capital  registration  with
the Brazilian  Central Bank.  Thereafter,  any holder of  Preferred  Shares  may not be
able to  convert  into  foreign  currency  and remit  outside  Brazil  the  proceeds
 from the disposition of, or distributions  with respect to, such Preferred  Shares,
 unless such holder qualifies under Resolution  No. 2,689 or obtains its own  certificate
 of foreign  capital  registration.  A holder that obtains a certificate of foreign
 capital  registration will  be   subject   to   less   favorable   Brazilian   tax
  treatment   than  a   holder   of   ADSs.   See   Item  10   "Additional InformationTaxationBrazilian
Tax Considerations."

Under
current  Brazilian  legislation,  the Federal  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 Federal  Government  froze
all  dividend and capital  repatriations  held by the Brazilian  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 Federal
 Government  directives.  There can be no assurance  that the Federal Government will not
impose similar restrictions on foreign repatriations in the future.

Table of Contents

Markets

Our
Preferred Shares are traded on the Bolsa de Valores de São Paulo(the São Paulo
Stock Exchange) under the symbol "BRTP4." At December 31, 2003, we had approximately
1,855,500 shareholders.

Our
Preferred Shares are also listed on the New York Stock Exchange in the form of ADSs
under the symbol "BRP," with each ADS representing 5,000 Preferred Shares, issued by
the Depositary pursuant to the deposit agreement, dated November 16, 1998, among our
company, the Depositary and the registered holders and beneficial owners from time to
time of ADSs. Preferred Shares represented by ADSs are held in custody in Brazil by
Banco Itaú S.A., as custodian for our Preferred Shares represented by the ADSs.

Our
Common Shares are also traded on the São Paulo Stock Exchange under the symbol "BRTP3."

Trading
on the São Paulo Stock Exchange

The
São Paulo Stock  Exchange is a  non-profit  entity  owned by its member  brokerage
 firms.  Trading on the São Paulo Stock Exchange is limited to member  brokerage  firms
and a limited number of authorized  non-members.  The São Paulo Stock Exchange has open
outcry  trading  sessions and an automated  system on which  trading can be  conducted
 during the trading day. In 1999,  the São Paulo Stock  Exchange  began  operating  an
 "after-market"  which  allows  for  limited  after-hours  trading  to take  place.
 There are no specialists  or market  makers for our shares on the São Paulo  Stock
 Exchange.  Trading in  securities  listed on the São Paulo Stock Exchange 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 without adjustment
of the purchase price for inflation. Payment for shares or delivery of shares are made
through the facilities of separate clearinghouses for each exchange, which maintain
accounts for member brokerage firms. The clearinghouse for the São Paulo Stock
Exchange is Companhia Brasileira de Liquidação e Custodia S.A.  CBLC.

In
order to better control  volatility,  the São Paulo Stock Exchange has adopted a "circuit
breaker" system pursuant to which trading  sessions may be suspended  for a period of 30
minutes or one hour  whenever the indices of this stock  exchange fall below the limit of
10.0% in relation to the index registered in the previous trading session.

At
December 31,  2003, the aggregate market  capitalization of all of the companies listed
on the São Paulo Stock Exchange was approximately  R$677.0  billion.  Although  all the
 outstanding  shares of an  exchange-listed  company may trade on a São Paulo Stock
Exchange,  in most cases less than half of the listed  shares are actually  available for
trading by the public,  the  remainder  being held by small  groups of  controlling
 persons  that  rarely  trade their  shares.  For this  reason,  data  showing  the total
 market capitalization of São Paulo Stock Exchange tends to overstate the liquidity of
the Brazilian equity securities market.

The
Brazilian  equity market is relatively  small and illiquid as compared to major world
markets.  In 2003, the daily trading volume  on the São  Paulo  Stock  Exchange  averaged
 approximately  R$818.3 million.  In 2003,  the ten most  actively  traded  issues
represented approximately 53.5% of the total trading in the cash market (standard lot) on
the São Paulo Stock Exchange.

Trading
on the São Paulo Stock Exchange by nonresidents of Brazil is subject to certain
 limitations  under Brazilian  foreign investment  legislation,  which generally
 require,  among other things,  that the relevant  investments  have been registered with
the Brazilian Central Bank, according to Resolution No. 2,689.  See "Offer and Listing
Details."

The
Special Corporate Governance Levels of the São Paulo Stock Exchange

On
December 11,  2000, the São Paulo Stock Exchange or, BOVESPA,  launched three new listing
segments designed for the trading of shares issued by publicly held companies:  the
Special Corporate  Governance Level 1,  the Special Corporate  Governance Level 2 and the
"Novo Mercado" of BOVESPA.

Such
new listing segments were designed for the trading of shares issued by companies that
 voluntarily  undertake to abide by more stringent corporate governance practices and
disclosure requirements than those currently requested by the Brazilian legislation.

The
 inclusion  of a company  in any of the new  segments  implies  the  adhesion  of such
 company  to a series of  corporate governance  rules known  generally as "good
 corporate  governance  practices."  These  rules,  which are  consolidated  in the
listing regulations  of the  exchange,  are meant to enhance the  quality of  information
 provided  by  Brazilian  corporations  and  increase shareholder's rights, depending on
the considered level.

On
March 27,  2002, our board of directors approved our adhesion to the Special Corporate
 Governance Level 1 of BOVESPA.  Our shares joined the Special Corporate Governance Level
1 of BOVESPA on May 9, 2002.

In
order to join the  Special  Corporate  Governance  Level 1, we agreed  to  undertake  the
 following  corporate  governance practices:

|1) | the maintenance of a free-float of at least 25.0% of our capital stock;
|-- | -----------------------------------------------------------------------

|2) | holding of public offerings for share placements  through  mechanisms that favor
capital dispersion to a broader spectrum               of shareholders;
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | disclosing  improved quarterly  information,  including  consolidated  figures and
special audit revisions on a quarterly               basis;
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------

|4) | complying with the enhanced disclosure rules of the exchange for transactions
 involving assets,  including  transactions               with our controlling
shareholders and our management;
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5) | disclosing shareholder agreements and stock option programs; and
|-- | ----------------------------------------------------------------

|6) | the publication of an annual calendar of corporate events.
|-- | ----------------------------------------------------------

Regulation
of Brazilian Securities Markets

The
 Brazilian  securities  markets are  regulated by the CVM,  which has authority  over
stock  exchanges and the  securities markets  generally,  and by the Brazilian  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 governed by Law 6,385 as amended (the "Brazilian Securities Law")
and the Brazilian Corporation Law.

Under
the Brazilian Corporation Law, a company is either publicly-held, a companhia
aberta, such as our company (whose shares are publicly traded on the São Paulo
Brazilian stock exchanges) or privately-held, a companhia fechada. All
publicly-held companies are registered with the CVM and are subject to reporting
requirements. A company that is registered with the CVM may have its securities
traded either on the Brazilian stock exchanges or on the Brazilian over-the-counter
market. The shares of a public company may also be traded privately, subject to
certain limitations. To be listed on the Brazilian stock exchanges, a company must
apply for registration with the CVM and the stock exchange where the head office of the
company is located. Once this stock exchange has admitted a company to listing and the
CVM has accepted its registration as a publicly-held company, its securities may be
traded on the São Paulo Stock Exchange.

Trading
in  securities  on the São Paulo Stock  Exchange  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 São Paulo Stock  Exchange or the CVM,  among other reasons,
 based on or due to a belief that the company has provided inadequate  information
 regarding a material event or has provided inadequate responses to inquiries by the CVM
or the relevant stock exchange.

The
Brazilian Securities Law provides for, among other things,  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 U.S. securities markets or markets in certain other jurisdictions.

Table of Contents

ITEM
10.    Additional Information

Table of Contents

Memorandum
and Articles of Association

The
summary of the  material  provisions  concerning  our  Preferred  Shares and Common
 Shares,  our by-laws,  and  Brazilian Corporation  Law contained in Item 10 "Additional
 InformationMemorandum  and Articles of  Association"  under  Amendment No. 1 to our
Registration  Statement on Form 20-F (File No. 1-15256),  filed with the U.S.  Securities
and Exchange Commission on October 31,  2001, as amended (the  "Registration  Statement")
 is  incorporated  herein by  reference.  Such  description  contained in the
 Registration Statement  is qualified  to the extent  applicable  by this  section,  as
well as by  reference  to our by-laws,  which have been filed (together with an English
 translation) as an exhibit to this Annual Report,  and to Brazilian  Corporation  Law. A
copy of our by-laws (together with an English translation) is available for inspection at
the principal office of the Depositary.

Our
Capital Stock is comprised of Preferred  Shares and Common Shares,  all without par
value.  At  December 31,  2003,  there were 222,670,187,883  Preferred Shares outstanding
and 134,031,688,203 Common Shares outstanding.

Table of Contents

Changes
to the Brazilian Corporation Law

On
October 31,  2001,  Law  No. 10,303  amended the Brazilian  Corporation  Law,
 establishing,  among other  provisions,  the following applicable to companies such as
ours:

- disputes among our
shareholders will be subject to arbitration if provided for in our by-laws;

- a tender offer at a
purchase price equal to fair value for all outstanding shares will be required upon a
de-listing or a substantial reduction in liquidity of our shares as a
result of purchases by any controlling shareholder;

- noncontrolling
shareholders representing at least 15.0% of our Common Shares will have the right to
elect one member of our board of directors by separate vote;

- non-voting
noncontrolling shareholders representing at least 10.0% of our outstanding capital
stock will have the right to elect one member of our board of directors by
separate vote;

- any sale of control will
require the purchaser to offer to purchase the minority shareholders' common
shares at a purchase price at least equal to 80.0% of the price per share
paid to a controlling shareholder;

- insiders (i.e.,
controlling shareholders, the shareholders that elect members to our board of
directors and fiscal council, the members of our board of directors and
fiscal council and our executive officers) will be required to
disclose any purchase or sale of our shares to the CVM and the São Paulo
Stock Exchange;

- the chairman of any
shareholders', board of directors' or executive officers' meeting will be entitled to
enforce the voting provisions of any shareholders' agreement which has been
duly filed with our company; and

- the first and second
calls for shareholders' meetings will have to be made fifteen and eight days,
respectively, before such meeting, except that the CVM can also require
the first call 30 days before a shareholders' meeting.

Table of Contents

Material
Contracts

The
following summaries are not intended to be complete and reference is made to the
agreements themselves, which are included as exhibits to this Form 20-F or other filings
with the SEC as indicated below.

Our
Concessions for Local Fixed-Line Switched Telecommunications services

As
successor in interest to each of Telesc, Telegoiás, Telebrasília, Telemat, Telems,
Teleron, Teleacre, CTMR and CRT, we have assumed their public regime concessions to
provide fixed-line local switched telecommunications services, for calls originating in
the following geographic areas: Paraná, Santa Catarina, Distrito Federal, Goiás,
Tocantins, Mato Grosso, Mato Grosso do Sul, Rondônia, Acre and Rio Grande do Sul.

Switched
fixed-line local telecommunications services are services that, through the transmission
of voice and other signals, allow for communications between fixed predetermined points
within a local calling area.

The
term of our respective concessions, which were originally granted free of charge, ends on
December 31, 2005. Notwithstanding the foregoing, we have the right to a one-time
extension of twenty years for each concession provided that we meet certain conditions
set forth in each such concession. See Item 4 "Information on the CompanyHistory and
Development of the CompanyRegulation of the Brazilian Telecommunications Industry."

Our
Concessions for Intraregional Fixed-Line Switched National Long-distance
Telecommunications services

As
successor in interest to each of Telesc, Telegoiás, Telebrasília, Telemat, Telems,
Teleron, Teleacre, CTMR and CRT, we have assumed their public regime concessions to
provide fixed-line switched telecommunications services for calls originating in the
following geographic areas: Paraná, Santa Catarina, Distrito Federal, Goiás, Tocantins,
Mato Grosso, Mato Grosso do Sul, Rondônia, Acre and Rio Grande do Sul.

The
terms of our respective concessions, which were originally granted free of charge, end on
December 31, 2005. Notwithstanding the foregoing, we have the right to a one-time
extension of twenty years for each concession, provided that we meet certain conditions
set forth by each such concession. See Item 4 "Information on the CompanyHistory and
Development of the CompanyRegulation of the Brazilian Telecommunications Industry."

BNDES
Loan Agreements

Brasil
Telecom S.A. has entered into loan agreements with the BNDES. BNDES is our principal
creditor. At December 31, 2003, Brasil Telecom S.A. had outstanding loans to BNDES in the
aggregate principal amount of approximately R$1.98 billion. The interest payable by our
company on such Real-denominated debt is based either on the TJLP rate + 3.85% per annum
or on a rate equal to the rate of appreciation of the U.S. dollar versus the Brazilian
realon an annual basis + the average annual currency basket rate published by BNDES
(Cesta de Moeda) + 3.85% per annum. The TJLP rate in Brazil as of December 31, 2003 was
11.0% per annum. The currency basket devalued 15.7% against Brazilian Realthroughout
2003.

The
proceeds from the BNDES loans were used to finance the expansion and modernization of our
network from June 1998 to December 2003, in order to meet the service requirements under
our concessions.

Indenture

Brasil
Telecom S.A. issued U.S.$200.0 million 9.375% Notes due 2014 under an indenture dated
February 17, 2004, among Brasil Telecom S.A., The Bank of New York, as indenture trustee,
registrar, New York paying agent and transfer agent, and The Bank of Tokyo-Mitsubishi
Ltd., as principal paying agent. Pursuant to the indenture, the notes will be payable in
full in a single payment upon maturity unless redeemed earlier or extended pursuant to
the terms of the indenture. The notes will bear interest at a fixed rate of 9.375% per
annum from the date of issuance until all required amounts due in respect thereof have
been paid. Interest on the notes will be paid semiannually in arrears on February 17 and
August 17 of each year, commencing on August 17, 2004, to the noteholders registered as
such as of the close of business on a record date being the tenth business day preceding
such payment date. Interest for the first interest period will accrue from February 17,
2004. Interest on the notes will be computed on the basis of a 360-day year of twelve
30-day months.

The
indenture describes covenants with which we must comply, including:

- compliance with all
applicable laws;

- maintenance our
properties and corporate existence;

- observations of certain
interest coverage and leverage ratios;

- restrictions with respect
to certain mergers, consolidations or similar transactions;

- restrictions with respect
to creation of certain liens on our assets; and

- restrictions with respect
to certain sale and lease-back transactions.

These
covenants are subject to a number of important qualifications and exceptions as described
in the indenture.

The
indenture will contain certain events of default, consisting of, among others, the
following:

- failure to pay principal
when due;

- failure to pay interest
and other amounts (i) within 30 calendar days of the due date therefor in the case of
payments made in respect of any interest payment dates occurring prior to the expected
maturity date, and (ii) when due, in the case of any interest payment date occurring on
or after the expected maturity date; and

- breach by us of any
covenant or agreement in the indenture or any of the other relevant transaction documents.

Registration
Rights Agreement

In
connection with Brasil Telecom S.A.s issuance of U.S.$200.0 million 9.375% Notes due
2014, Brasil Telecom S.A. entered into a registration rights agreement among us and
Citigroup Global Markets Inc. as initial purchaser dated February 17, 2004. Pursuant to
the registration rights agreement we agreed to conduct a registered exchange offer for
the notes under the Securities Act on or before February 17, 2005. If the exchange offer
is not completed or, if required, the shelf registration statement is not declared
effective on or before February 17, 2005, the annual interest rate applicable to the
notes will be increased by 0.50% per annum. This increase in the interest rate will end
and the rate of interest due on the notes shall be reduced to the initial interest rate
applicable to the notes upon the earlier of (i) completion of the exchange offer, (ii) the
effectiveness of a shelf registration, and (iii) the notes becoming freely tradable under
the Securities Act.

Company
Support Agreement

In
connection with Brasil Telecom S.A.s issuance of U.S.$200.0 million 9.375% Notes due
2014, Brasil Telecom S.A. entered into a company support agreement between us and the
Overseas Private Investment Corporation ("OPIC") dated February 17, 2004. Under the
company support agreement we agree to, among other things, make certain representations
and warranties and covenants with respect to our compliance with environmental, workers'
rights, foreign corrupt practices and other matters. A breach by us of any of our
representations and warranties or covenants in the company support agreement which
results in an Event of Termination (as defined therein) would entitle OPIC to terminate
the insurance policy relating to the U.S.$200.0 million 9.375% Notes due 2014 or to
withhold any amount otherwise payable by OPIC under such insurance policy. If the
insurance policy is terminated or otherwise ceases to be in full force and effect, or
OPIC withholds any amount otherwise payable by OPIC under the insurance policy, in each
case for any reason attributable to acts or omissions of Brasil Telecom S.A., an event of
default under the indenture will have occurred.

Insurance
Trust Agreement

In
connection with Brasil Telecom S.A.s issuance of U.S.$200.0 million 9.375% Notes due
2014, Brasil Telecom S.A. entered into an insurance trust agreement dated February 17,
2004, between us and The Bank of New York, as insurance trustee. The insurance trust
agreement establishes a grantor trust (the "Insurance Trust") under New York law for the
benefit of the noteholders. Pursuant to an insurance trust agreement the Insurance
Trustee will hold the insurance as credit enhancement and support for the notes to the
extent of the coverage set forth in the insurance policy.

JBIC-Guaranteed
Loan

On
March 24, 2004 Brasil Telecom S.A. entered into a Japanese Yen 21.6 billion loan facility
arranged by SMBC, guaranteed by JBIC and granted by a syndicate of five commercial banks
(including SMBC). The loan is not secured and bears interest at a rate equal to Yen
(LIBOR) plus 1.92% per annum. Interest payments are due on September 24 and March 24 of
each year. Brasil Telecom S.A. borrowed the entire amount available under this facility
on March 28, 2004 in the form of a single term loan, which was exchanged into
approximately R$576.0 million and which we used to partially bear our 2003 capital
expenditures.

Overdue
amounts bear interest at a rate equal to Yen (LIBOR) plus 1.92% per annum. The interest
payments and arrangement fee and agency fee on this loan are subject to withholding in
Brazil at a rate of 12.5%, and we are required to gross-up such interest payments to
ensure the lenders receive the amounts they would have received in the absence of this
withholding. The principal amount of this loan is repayable in Japanese Yen in ten equal
installments due on the interest payment dates referred to above. We may prepay all or a
portion of this loan on any payment date subject to certain conditions.

JBIC,
pursuant to its untied guarantee program, has guaranteed the repayment of 97.5% of the
principal amount of and interest due on this loan. For this guarantee JBIC receives a fee
in the amount of 1.25 per annum of 97.5% of the aggregate principal amount of the loan
outstanding from time to time. In order to induce JBIC to guarantee the Japanese Yen 21.6
billion loan facility, on March 18, 2004 we entered into a loan facility in Yen in an
aggregate amount of approximately R$3.0 million with JBIC and the participating financial
institutions. The proceeds from such loan were used for the acquisition of Japanese goods.

The
loan agreements impose certain restrictions on Brasil Telecom S.A., including limitations
on liens (subject to customary exceptions), limitations on assets sales and limitations
on mergers and similar transactions. Under the loan agreements Brasil Telecom S.A. is
also subject to financial covenants including an interest coverage ratio, debt coverage
ratio and leverage ratio. If Brasil Telecom S.A. fails to comply with these financial
covenants, in addition to the other remedies available to the lenders, Brasil Telecom
S.A. may be required to provide to the lenders and JBIC collateral security for the loan,
including a guarantee from a bank or parent company. The loan agreements include
customary events of default, subject to certain grace periods and customary exceptions.

Table of Contents

Exchange
Controls

There
are no restrictions on ownership of the ADSs or the Preferred Shares by individuals or
legal entities domiciled outside Brazil.

The
right to convert dividend payments and proceeds from the sale of shares into foreign
currency and to remit such amounts outside Brazil may be subject to restrictions under
foreign investment legislation which generally requires, among other things, that the
relevant investments be registered with the Brazilian Central Bank. If any restrictions
are imposed on the remittance of foreign capital abroad, they could hinder or prevent
Banco Itaú S.A., as custodian for our Preferred Shares represented by the ADSs, or
registered holders who have exchanged ADSs for Preferred Shares, from converting
dividends, distributions or the proceeds from any sale of such Preferred Shares, as the
case may be, into U.S. dollars and remitting the U.S. dollars abroad.

Foreign
investors may register their investment under Law 4,131/62 or Resolution No. 2,689.
Registration under Resolution No. 2,689 affords favorable tax treatment to foreign
investors who are not resident in a tax haven, as defined by Brazilian tax laws. See "TaxationBrazilian
Tax Considerations."

Under
Resolution No. 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 requirements are fulfilled. In accordance with Resolution
No. 2,689, the definition of foreign investor includes individuals, legal entities,
mutual funds and other collective investment entities, domiciled or headquartered abroad.

Under
Resolution No. 2,689, a foreign investor must:

- appoint at least one
representative in Brazil, with powers to perform actions relating to its investment;

- appoint an authorized
custodian in Brazil for its investments;

- register as a foreign
investor with the CVM; and

- register its foreign
investment with Brazilian Central Bank.

Under
Resolution No. 2,689, securities and other financial assets held by a foreign investor
must be registered or maintained in deposit accounts or under the custody of an entity
duly licensed by the Brazilian Central Bank or the CVM. In addition, any transfer of
securities held under Resolution No. 2,689 must be carried out in the stock exchanges or
through 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 or as a consequence of the de-listing of the relevant shares
from a Brazilian stock exchange and the cancellation of the registration of the relevant
company from the CVM.

Holders
of ADSs who have not registered their investment with the Brazilian Central Bank could be
adversely affected by delays in, or refusals to grant, any required government approval
for conversions of payments made in reaisand remittances abroad of these converted
amounts.

Resolution
No. 1,927 of the National Monetary Council, which restated and amended Annex V to
Resolution No. 1,289, provides for the issuance of depositary receipts in foreign markets
in respect of shares of Brazilian issuers. We have obtained approval for the American
Depositary Shares under Annex V to Resolution No. 1,289, in order to (i) allow the
proceeds from the sale by holders of ADSs outside Brazil to be free of Brazilian foreign
investment controls, and (ii) allow holders of ADSs who are not resident in a tax haven
to be entitled to favorable tax treatment in Brazil. See "TaxationBrazilian Tax
Considerations."

A
certificate of foreign capital registration has been issued in the name of the Depositary
with respect to the ADSs and is maintained by Banco Itaú S.A., as custodian for our
Preferred Shares represented by the ADSs, on behalf of the Depositary. Pursuant to such
certificate of foreign capital registration, we expect that the Depositary will be able
to convert dividends and other distributions with respect to the Preferred Shares
represented by ADSs into foreign currency and remit the proceeds outside of Brazil. See
Item 9 "Offer and listingOffer and listing details" and Item 9 "Offer and ListingMarketsTrading
on the São Paulo Stock Exchange."

In
the event that a holder of ADSs exchanges the ADSs for Preferred Shares, such holder will
be entitled to continue to rely on the Depositary's certificate of foreign capital
registration for only five business days after such exchange, following which such holder
must seek to obtain its own certificate of foreign capital registration with the
Brazilian Central Bank. Thereafter, any holder of Preferred Shares may not be able to
convert into foreign currency and remit outside Brazil the proceeds from the disposition
of, or distributions with respect to, such Preferred Shares, unless such holder qualifies
under Resolution No. 2,689 or obtains its own certificate of foreign capital
registration. A holder of Preferred Shares that obtains a certificate of foreign capital
registration will be subject to less favorable Brazilian tax treatment than a holder of
ADSs. See "TaxationBrazilian Tax Considerations."

Table of Contents

Taxation

The
following summary contains a description of the principal Brazilian and U.S. federal
income tax considerations of the acquisition, ownership and disposition of Preferred
Shares or ADSs, 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 or ADSs.
The summary is based upon the tax laws of Brazil and regulations thereunder and on the
tax laws of the U.S. and regulations thereunder as in effect on the date hereof, all of
which authorities are subject to change or differing interpretations, possibly with
retroactive effect. Each holder should consult their own tax advisors as to the tax
consequences of the acquisition, ownership and disposition of Preferred Shares or ADSs.

Although
there is at present no income tax treaty in force between Brazil and the U.S., 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 or ADSs.
Prospective holders of Preferred Shares or ADSs should consult their own tax advisors as
to the tax consequences of the acquisition, ownership and disposition of Preferred Shares
or ADSs in their particular circumstances.

Brazilian
Tax Considerations

The
following discussion summarizes the principal Brazilian tax consequences of the
acquisition, ownership and disposition of Preferred Shares or ADSs 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 his
or her own tax advisor about the Brazilian tax consequences of investing in Preferred
Shares or ADSs.

Individuals
domiciled in Brazil and Brazilian companies are taxed in Brazil on the basis of their
worldwide income which includes earnings of Brazilian companies' foreign subsidiaries,
branches and affiliates. The earnings of branches of foreign companies and non-Brazilian
residents ("Nonresidents") in general are taxed in Brazil only on income derived from
Brazilian sources.

Taxation
of Dividends

Dividends
paid by our company in cash or in kind from profits of periods beginning on or after
January 1, 1996 (i) to the Depositary in respect of Preferred Shares underlying ADSs or
(ii) to a non-Brazilian holder in respect of Preferred Shares will not be subject to
Brazilian withholding tax. Dividends paid from profits generated before January 1, 1996
may be subject to Brazilian withholding tax at varying rates, except that stock dividends
are not subject to Brazilian tax unless we subsequently redeem the stock, or the
non-Brazilian holder sells the stock in Brazil, within five years after the distribution.

The
only Brazilian tax treaty now in effect that would (if certain conditions are met) reduce
the rate of the withholding tax on dividends paid from profits generated before January 1,
1996 is the treaty with Japan, which would reduce the rate to 12.5% under the
circumstances set forth in the treaty.

Taxation
of Gains

Brazilian
law distinguishes between, on the one hand, direct foreign investments in Brazilian
companies and, on the other hand, foreign investments in securities issued by Brazilian
companies through the Brazilian capital markets. Under Resolution No. 2,689, which became
effective on March 31, 2000, superseding previous regulations (Annex IV) which restrict
such foreign investment portfolios to institutional investors, foreign investors may
invest directly in Brazilian financial markets, as long as they meet certain
requirements. See "Exchange Controls" above.

Until
recently, gains realized outside Brazil by a non-Brazilian holder on the disposition of
ADSs to another non-Brazilian holder were not subject to Brazilian tax. However, Law No. 10,833,
published on December 29, 2003, established that the disposition of assets located in
Brazil by Nonresidents, whether to other Nonresidents or Brazilian residents and whether
made within or outside Brazil, is subject to taxation in Brazil at a rate of 15.0%, or
25.0%, if the Nonresident is domiciled in a country that does not tax income or that
taxes it at a maximum rate of 20.0%.

As
a result, the disposition of ADSs, the deposit of Preferred Shares in exchange for ADSs
or the withdrawal of Preferred Shares upon cancellation of ADSs may be characterized as
assets located in Brazil and could be subject to the income tax according to Law No. 10,833/03,
if there is gain in the transaction, at a 15.0% rate or 25.0% rate, if the beneficiary of
the gain is domiciled in a country that does not tax income or that taxes it at a maximum
rate of 20.0%.

Gains
realized by non-Brazilian holders on dispositions of Preferred Shares in Brazil or in
transactions with Brazilian residents, if they observe the requirements of Resolution No. 2,689,
are exempted from withholding income tax, unless the foreign investor is located in a
jurisdiction which does not impose income tax or which has an income tax rate lower than
20.0%, in which case it will be subject to the same general taxation rules applicable to
Brazilian residents.

Gains
on the disposition of Preferred Shares obtained upon cancellation of ADSs are not taxed
in Brazil if such disposition is made, and the proceeds are remitted abroad, within five
business days after cancellation.

Any
gains realized by a non-Brazilian resident upon the redemption of Preferred Shares will
be treated as gains from the disposition of such Preferred Shares to a Brazilian resident
occurring off of a stock exchange and will accordingly be subject to tax at a rate of
20.0%, except for gains realized by a non-Brazilian resident located in a jurisdiction
which does not impose income taxes or which has an income tax rate lower than 20.0%, in
which case such gain will be subject to tax at a rate of 25.0%.

Gain
is 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 Brazilian Central Bank is calculated on the basis of the
foreign currency amount registered with the Brazilian Central Bank.

There
can be no assurance that the current preferential treatment for holders of ADSs and
non-Brazilian holders of Preferred Shares will be maintained.

Any
exercise of preemptive rights relating to our Preferred Shares or ADSs will not be
subject to Brazilian taxation. Gains on the sale or assignment of preemptive rights
relating to our Preferred Shares will be treated differently for Brazilian tax purposes
depending on (i) whether the sale or assignment is made by the Depositary or by you, and
(ii) whether the transaction takes place on a Brazilian stock exchange. Gains on sales or
assignments made by the Depositary on a Brazilian stock exchange are not taxed in Brazil,
but gains on other sales or assignments may be subject to tax at rates up to 20.0%.

Distributions
of Interest on Capital

Brazilian
corporations may make payments to shareholders characterized as interest on our capital
as an alternative form of making dividend distributions. The rate of interest may not be
higher than the TJLP rate as determined by the Brazilian Central Bank from time to time
(11.0% per annum for the three month period beginning October 1, 2003). The total amount
distributed as interest on capital may not exceed the greater of (i) 50.0% of net income
(before taking such distribution and any deductions for income taxes into account) for
the year in respect of which the payment is made or (ii) 50.0% of retained earnings for
the year prior to the year in respect of which the payment is made. Payments of interest
on capital are decided by the shareholders on the basis of recommendations of our board
of directors.

We
may deduct distributions of interest on capital paid to Brazilian and non-Brazilian
holders of Preferred Shares, including payments to the Depositary in respect of Preferred
Shares underlying ADSs, for Brazilian corporate income tax purposes. Such payments are
subject to Brazilian withholding tax at the rate of 15.0%, except for payments to persons
who are exempt from tax in Brazil, which are free of Brazilian tax, and except for
payments to persons situated in jurisdictions deemed to be tax havens (i.e., countries
that either have no income tax or in which the income tax rate is less than 20.0%), which
will be subject to tax at a 25.0% rate.

No
assurance can be given that our board of directors will not recommend that future
distributions of profits should be made by means of interest on capital instead of by
means of dividends.

Amounts
paid as interest on capital (net of applicable withholding tax) may be treated as
payments in respect of the dividends that we are obligated to distribute to its
shareholders in accordance with its Charter and the Brazilian Corporation Law.
Distributions of interest on capital in respect of our Preferred Shares, including
distributions to the Depositary in respect of Preferred Shares indemnifying ADSs, may be
converted into U.S. dollars and remitted outside of Brazil, subject to applicable
exchange controls.

Other
Brazilian Taxes

There
are no Brazilian inheritance, gift or succession taxes applicable to the ownership,
transfer or disposition of Preferred Shares or ADSs 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 or ADSs.

A
financial transaction tax (the "IOF tax") may be imposed on the conversion of Brazilian
currency into foreign currency (e.g., for purposes of paying dividends and interest). The
rate of the IOF tax on such conversions is currently 0%, but the Minister of Finance has
the legal power to increase the rate to a maximum of 25.0%. Any such increase will be
applicable only prospectively.

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 our distributions in respect of ADSs at the time such distributions are converted into
U.S. dollars and remitted abroad by Banco Bradesco S.A., as custodian for our Preferred
Shares represented by the ADSs. Currently, the CPMF tax rate is 0.38%.

FUST
 Universal Telecommunications Service Fund

The
Universal Telecommunications Service Fund, introduced by Law 9,998/00, Oficio CircularNo. 58/04,
and DespachoNo. 29/03 (Anatel), was created to raise funds to meet the cost of the
universalization of the telecommunications services, which are not recoverable through
the efficient exploration of the service. According to the law, one of FUST's forms of
income is the contribution by both public and private telecommunications providers, of
1.0% of the gross operating revenue from the rendering of telecommunications services.
The value will be calculated after certain tax deductions and will exclude
interconnection costs. The funds are supposed to be paid to Anatel and will be invested
according to the policies laid out by the Ministry of Communication.

FUNTEL
 Fund for the Technological Development of the Telecommunications

Law
10,052/00 established the Fund for the Technological Development of Telecommunications.
Pursuant to this regulation, the fund was created to foster technological development,
encourage human intellectual capital, encourage employment, promote capital access to
small and medium sized business, all in order to enlarge the competitiveness of the
Brazilian Telecommunications' Industry. This fund received a contribution of 0.5% of the
gross operating income, after tax deduction, earned through the exploration of
telecommunications services by both public and private companies. A directive board
composed of governmental representatives will manage the fund and determine how the funds
will be invested.

Registered
Capital

Amounts
invested in Preferred Shares by a non-Brazilian holder who qualifies under the Resolution
No. 2,689 and obtains registration with the CVM, or by the Depositary representing an ADS
holder, are eligible for registration with the Brazilian 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 purchased in the form of an
ADS, or purchased in Brazil and deposited with the Depositary in exchange for an ADS,
will be equal to its purchase price (stated in U.S. dollars). The Registered Capital per
Preferred Share withdrawn upon cancellation of an ADS will be the U.S. dollar equivalent
of (i) the average price of a Preferred Share on the Brazilian stock exchange on which
the most Preferred Shares were traded on the day of withdrawal or, (ii) if no Preferred
Shares were traded on that day, the average price on the Brazilian stock exchange on
which the most Preferred Shares were traded in the fifteen trading sessions immediately
preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis of
the average Commercial Market rates quoted by the Brazilian Central Bank on such date or
dates.

A
non-Brazilian holder of Preferred Shares may experience delays in effecting Brazilian
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.

U.S.
Federal Income Tax Considerations

The
statements regarding U.S. federal income tax law set forth below are based on the
Internal Revenue Code of 1986, as amended (the "Code"), its legislative history, existing
and proposed Treasury regulations thereunder, published rulings and court decisions, 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, possibly
with retroactive effect. This summary describes the principal tax consequences of the
ownership and disposition of Preferred Shares or ADSs, but it does not purport to be a
comprehensive description of all of the federal income tax consequences that may be
relevant to a decision to own or dispose of Preferred Shares or ADSs. This summary
applies only to purchasers of Preferred Shares or ADSs who will hold the Preferred Shares
or ADSs as "capital assets" within the meaning of Section 1221 of the Code (i.e.,
generally, property held for investment) and does not apply to special classes of holders
such as dealers or brokers in securities or currencies, holders whose functional currency
is not the U.S. dollar, holders of 10.0% or more of our shares (by vote or by value, and
directly or by attribution, taking into account shares held directly through depositary
arrangements), tax-exempt organizations, financial institutions, insurance companies,
regulated investment companies, holders liable for the alternative minimum tax,
securities traders who elect to account for their investment in Preferred Shares or ADSs
on a mark-to-market basis, and persons holding Preferred Shares or ADSs in a hedging
transaction or as part of a straddle, conversion or constructive ownership transaction.

Each
holder should consult such holder's own tax advisor concerning the overall tax
consequences to it, including the consequences under tax laws other than U.S. federal
income tax laws, of an investment in the Preferred Shares or ADSs.

As
used in this summary, references to "ADSs" also refer to "Preferred Shares." As used in
this summary, the term "U.S. holder" means a beneficial owner of ADSs that is for U.S.
federal income tax purposes, (i) a citizen or resident of the United States, (ii) a
corporation or other entity (treated as a corporation for U.S. federal income tax
purposes) organized in or under the laws of the United States or its political
subdivisions, (iii) a trust subject to the control of a U.S. person (as defined in the
Code) and the primary supervision of a U.S. court or (iv) an estate, the income of which
is subject to U.S. federal income taxation regardless of its source. As used in this
summary, the term "non-U.S. holder" means a beneficial owner of ADSs that is not a U.S.
holder. In the case of a holder of the common shares that is, or is treated as, a
partnership for U.S. federal income tax purposes, the tax treatment of a partner will
generally depend upon the status of the partner and the activities of the partnership.
Therefore, partners of a partnership holding our common shares should consult their tax
advisor.

For
purposes of the U.S. federal income tax laws, holders of ADSs will be treated as owners
of the ADSs represented by such ADSs.

Taxation
of Dividends

Subject
to the "Passive Foreign Investment Company" discussion below, a U.S. holder will
recognize ordinary dividend income for U.S. federal income tax purposes in an amount
equal to the amount of any cash and the value of any property that we distribute as a
dividend, to the extent that such distribution is paid out of our current or accumulated
earnings and profits ("e&p"), as determined for U.S. federal income tax purposes, in
accordance with the U.S. holder's regular method of accounting for U.S. federal income
tax purposes. To the extent that such a distribution exceeds our e&p, it will be treated
as a nontaxable return of capital, to the extent of the U.S. holder's tax basis in the
ADS (or Preferred Shares, as the case may be), and thereafter as capital gain. The amount
of any distribution will include the amount of Brazilian tax withheld on the amount
distributed and the amount of a distribution paid in reaiswill be measured by reference
to the exchange rate for converting reaisinto U.S. dollars in effect on the date the
distribution is received by Banco Bradesco S.A., as custodian for our Preferred Shares
represented by the ADSs, or by a U.S. holder, in the case of a holder of Preferred
Shares. If the custodian or U.S. holder, in the case of a holder of Preferred Shares,
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. Dividends that
we have paid will generally not be eligible for the dividends received deduction allowed
to corporations under the Code.

Distributions
out of e&p with respect to the ADSs generally will be treated as dividend income from
sources outside of the U.S. and generally will be treated separately along with other
items of "passive" (or, in the case of certain U.S. holders, "financial services") income
for purposes of determining the credit for foreign income taxes allowed under the Code.
Subject to certain limitations, Brazilian income tax withheld in connection with any
distribution with respect to the ADSs may be claimed as a credit against the U.S. federal
income tax liability of a U.S. holder if such U.S. holder elects for that year to credit
all foreign income taxes. Such Brazilian withholding tax may be taken as a deduction at
the U.S. Holder's election, only if the U.S. Holder does not claim a credit for any
Brazilian or other foreign taxes paid or accrued in that year. Foreign tax credits will
not be allowed for withholding taxes imposed in respect of certain short-term or hedged
positions in securities or in respect of arrangements in which a U.S. holder's expected
economic profit, after non-U.S. taxes, is insubstantial. U.S. holders should consult
their own tax advisors concerning the implications of these rules in light of their
particular circumstances.

Distributions
of additional shares to holders with respect to their ADSs that are made as part of a pro
rata distribution to all of our shareholders generally will not be subject to U.S.
federal income tax.

A
non-U.S. holder generally will not be subject to U.S. federal income tax or withholding
tax on distributions with respect to ADSs that are treated as dividend income for U.S.
federal income tax purposes, and generally will not be subject to U.S. federal income tax
or withholding tax on distributions with respect to ADSs that are treated as capital gain
for U.S. federal income tax purposes unless such holder would be subject to U.S. federal
income tax on gain realized on the sale or other disposition of ADSs, as discussed below.

Taxation
of Capital Gains

Subject
to the "Passive Foreign Investment Company" discussion below, in general, upon the sale
or other taxable disposition of an ADS, a U.S. holder will recognize gain or loss for
U.S. federal income tax purposes in an amount equal to the difference between the amount
realized in consideration for the disposition of the ADS (excluding the amount of any
distribution paid to the custodian but not distributed by the custodian prior to the
disposition) and the U.S. holder's tax basis in the ADS. Such gain or loss generally will
be subject to U.S. federal income tax and will be treated as capital gain or loss if the
shares were held as a capital asset and will be long-term capital gain or loss if the
shares have been held for more than one year on the date of such sale or disposition.
Under U.S. legislation enacted in 2003, long term capital gains realized upon a sale or
other disposition of ADSs after May 5, 2003 and before the end of a taxable year which
begins before January 1, 2009 generally will be subject to a maximum federal income tax
rate of 15%. The deductibility of capital losses is subject to certain limitations. Gain
or loss realized by a U.S. holder on a sale or disposition of ADSs generally will be
treated as U.S. source gain or loss. Consequently, if Brazilian tax is imposed on such
gain, the U.S. holder will not be able to use the corresponding foreign tax credit,
unless the holder has other foreign source income of the appropriate type in respect of
which the credit may be used.

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 an ADS unless (i) such gain is effectively
connected with the conduct by the holder of a trade or business in the U.S., (ii) such
holder is a former citizen or long-term resident of the United States, a "controlled
foreign corporation", a "foreign personal holding company", a corporation which
accumulates earnings to avoid U.S. federal income tax, or is of a certain type of foreign
charitable organization, each within the meaning of the Code, or (iii) such holder is an
individual who is present in the U.S. for 183 days or more in the taxable year of the
sale and certain other conditions are met.

Passive
Foreign Investment Company

We
believe that we are not a passive foreign investment company ("PFIC") for U.S. federal
income tax purposes in the current taxable year and do not expect to become a PFIC in
future taxable years. However, because the determination of whether the offered shares
constitute shares of a PFIC will be based upon the composition of our income and assets
on an annual basis, there is no assurance that we will not be considered a PFIC for any
subsequent year. If the offered shares were shares of a PFIC for any fiscal year, a U.S.
holder of the offered shares could be subject to adverse U.S. federal income tax
consequences with respect to any gains realized on the sale or other disposition of the
offered shares and certain distributions received with respect to the offered shares. We
do not intend to provide you with information necessary for the "qualified electing fund"
election in the case that we are deemed a PFIC. Holders and prospective purchasers of the
ADSs should consult their own tax advisers regarding the PFIC rules and their effect on
holding or purchasing the shares.

U.S.
Backup Withholding and Information Reporting

Distributions
made in respect of offered shares, and proceeds from the sale or other disposition of
offered shares, payable to a U.S. holder by a U.S. paying agent or other U.S.
intermediary will be subject to information reporting requirements. If information
reporting requirements apply, distributions made to the U.S. holder will be reported to
the Internal Revenue Service ("IRS") and to the U.S. holder as may be required under
applicable Treasury regulations. Backup withholding will also apply to any payments made
to a U.S. holder if such U.S. holder fails to provide an accurate taxpayer identification
number (social security number, individual taxpayer identification number or employer
identification number) or certification of exempt status or is notified by the IRS that
it has failed to report all dividends or interest required to be shown on its U.S.
federal income tax return. In addition, certain penalties may be imposed by the IRS on a
U.S. holder that is required to supply such information but that does not do so.

Information
reporting and backup withholding are generally not required with respect to payments made
by a U.S. paying agent or other U.S. intermediary to certain exempt U.S. holders (e.g., corporations
and tax-exempt organizations) and non-U.S. holders, provided that, in the case of
non-U.S. holders, such non-U.S. holders file a timely and properly completed IRS Form W-8
or W-8BEN with the U.S. paying agent or intermediary. Any amount withheld under the
backup withholding rulings will be allowed as a refund or credit against a holder's U.S.
federal income tax liability provided the required information is furnished to the IRS in
a timely manner. Each holder should consult its own tax advisor concerning the effect of
the New Regulations on its ownership and disposition of Preferred Shares or ADSs.

Table of Contents

Independent
Auditors

Our
audited consolidated financial statements as of December 31, 2001 and for the year ended
December 31, 2001 have been audited by Deloitte Touche Tohmatsu, independent auditors.
The offices of Deloitte Touche Tohmatsu are located at Rua Alexandre Dumas 1981,
04717-906, São Paulo, SP, Brazil.

Our
audited consolidated financial statements as of December 31, 2002 and 2003 and for the
years ended December 31, 2002 and 2003 prepared in conformity with Brazilian GAAP with
reconciliation of shareholders' equity and statements of operations to U.S. GAAP,
included in this annual report, have been audited by KPMG Auditores Independentes, in
accordance with the standards of the Public Company Accounting Oversight Board as stated
in their report which is included herein. The offices of KPMG Auditores Independentes are
located at Avenida Almirante Barroso 52, 17o andar, Rio de Janeiro, RJ  20031-000,
Brazil.

Table of Contents

Documents
on Display

Statements
contained in this Annual Report regarding the contents of any contract or other document
are complete in all material respects, however, where the contract or other document is
an exhibit to this Annual Report, each of these statements is qualified in all respects
by the provisions of the actual contract or other documents.

This
Annual Report may be reviewed without charge at the Public Reference Section of the U.S.
Securities and Exchange Commission, 450 Fifth Street, N.W., Room 1300, Washington, D.C.
20549.

Copies
of all or any portion of this Annual Report can be obtained from the Public Reference
Section of the U.S. Securities and Exchange Commission, 450 Fifth Street, N.W., Room
1300, Washington, D.C. 20549, upon payment of fees prescribed by the U.S. Securities and
Exchange Commission. For further information on the public reference rooms, call the U.S.
Securities and Exchange Commission at 1-800-SEC-0330.

We
are subject to the information requirements of the Exchange Act applicable to a foreign
private issuer, and accordingly, we must file or furnish reports, including annual
reports on Form 20-F, reports on Form 6-K, and other information, with the U.S.
Securities and Exchange Commission. These reports and other information can be inspected
at, and subject to the payment of any required fees, copies may be obtained from, the
public reference facilities maintained by the U.S. Securities and Exchange Commission as
described above. These reports and other information may also be inspected and copied at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005. As
a foreign private issuer, however, we will be exempt from the proxy requirements of
Section 14 of the Exchange Act and from the short-swing profit recovery rules of Section 16
of the Exchange Act, although the rules of the New York Stock Exchange may require that
we solicit proxies from our shareholders under some circumstances.

Our
website is located at http://www.brasiltelecom.com.br. The information on our website is
not part of this Annual Report.

Table of Contents

ITEM
11.     Quantitative and Qualitative Disclosures About Market Risk

Table of Contents

Quantitative
Information About Market Risk

We
are exposed to market risk from changes in both foreign currency exchange rates and
interest rates. We are exposed to foreign exchange rate risk because certain of our costs
are denominated in currencies (primarily the U.S. dollar) other than those in which we
earn revenues (primarily the real). Similarly, we are subject to market risk deriving
from changes in interest rates that may affect the cost of our financing.

The
principal market for our products and services is Brazil and substantially all of our
revenues are denominated in reais. We have described under Item 4 "Information on the
CompanyHistory and Development of the Company" the manner in which the Brazilian
government has controlled, and continues to control, the prices we charge.

Prior
to Brasil Telecom S.A.s merger with CRT, we did not use derivative instruments to hedge
against currency risks. However, after Brasil Telecom S.A.s merger with CRT, we became
responsible for, among other things, CRT's U.S. dollar-denominated liabilities. Due to
these circumstances and the increasing volatility of U.S. dollar rates, we decided to
hedge some of our U.S. dollar-denominated indebtedness. We do not hold or issue
derivative or other financial instruments for trading purposes.

Exchange
Rate Risk

We
also face foreign exchange risk because a significant portion of our equipment costs,
such as costs relating to switching centers and software used for upgrading network
capacity, are primarily denominated in U.S. dollars. Since 2001, approximately 35.0% of
our total capital expenditures have been U.S. dollar denominated. Our cost of financing,
however, is not materially exposed to exchange rate risk. At December 31, 2003,
approximately 4.1%, or R$156.4 million, of our indebtedness was denominated in foreign
currency with substantially all of such amount denominated in U.S. dollars. At December 31,
2003, we hedged approximately 52.49% of our foreign currency indebtedness, including the
majority of our U.S. dollar denominated debt maturing through the end of 2005 against
significant variations in exchange rates (R$/U.S.$) by using foreign currency swap
contracts. The aggregate notional principal amount of the swap contracts is approximately
U.S.$82.8 million, of which approximately U.S.$35.5 million matures within one year and
approximately U.S.$38.4 million matures in one to three years. At December 31, 2003, the
fair value of the swap contracts amounted to approximately R$8.1 million. See Notes 29b and 29c to
our audited financial statements for additional information regarding the swap contracts.

In
2003, losses on foreign currency and monetary restatement amounted to approximately
R$83.2 million, due to the appreciation of the realagainst the U.S. dollar. At December 31,
2003, the potential immediate loss in earnings that we could sustain from a hypothetical
10.0% change in foreign currency exchange rates would be approximately R$12.7 million.

Interest
Rate Risk

At
December 31, 2003, we had approximately R$3,790.0 million in loans and financing
outstanding, of which R$4,523.5 million bore interest at floating rates and R$112.3 million
bore interest at fixed rates. We invest our excess liquidity (approximately R$1,956.7 million
in 2003) mainly in short-term instruments. The potential loss in earnings to us over one
year that would have resulted from a hypothetical, instantaneous and unfavorable change
of 1.0% in the interest rates applicable to our financial assets and liabilities in 2003
would be approximately R$7.1 million. The above sensitivity analysis is based on the
assumption of an unfavorable 1.0% movement of the interest rates applicable to each
homogeneous category of financial assets and liabilities and sustained over a period of
one year. A homogeneous category is defined according to the currency in which financial
assets and liabilities are denominated and assumes the same interest rate movement within
each homogeneous category (e.g., reais). As a result, our interest rate risk sensitivity
model may overstate the impact of interest rate fluctuation for such financial
instruments as consistently unfavorable movements of all interest rates are unlikely.

The
table below provides summary information regarding our exposure to interest rate and
exchange rate risk in our total debt portfolio as of December 31, 2003:

|                             | Total Debt Portfolio
|---------------------------- | --------------------
|                             |                     
|                             | R$ million          
|                             |                     
|Floating rate debt:         
|Realdenominated              | 3,613.1             
|Foreign currency denominated | 154.2               
|                            
|Fixed rate debt:            
|Realdenominated              | 20.4                
|Foreign currency denominated | 2.2                 
|                             |                     
|Total                        | 3,790.0             
|                             |                     

As
of December 31, 2003, approximately 51.0% of our total debt portfolio was tied to the
CDI rate. As of December 31, 2003, the CDI rate accumulated for the year was 23.2% per
annum.

The
table below provides information about our debt obligations as of December 31, 2003,
which are sensitive to changes in interest rates and exchange rates. This table presents,
by expected maturity dates and currency, the principal cash flows and related average
interest rates of these obligations. Variable interest rates are based on the applicable
reference rate (LIBOR, CDI or TJLP) as of December 31, 2003:

|Debt Obligation           | TotalShort-Term Debt 2004 | 2005    | 2006    | 2007    | 2008   | After 2008 | TotalLong Term Debt | Fair ValueLong Term Debt
|------------------------- | -------------------------- | ------- | ------- | ------- | ------ | ---------- | -------------------- | -------------------------
|                          |                            |         |         |         |        |            |                      |                          
|                         
|Debt in U.S. Dollars:     |                            |         |         |         |        |            |                      |                          
|Fixed rate debt           | 233                        | 213     | 213     | 213     | 213    | 1,169      | 2,021                | 2,021                    
|Average interest rate     | 1.8%                       | 1.8%    | 1.8%    | 1.8%    | 1.8%   | 1.8%       |                     |                         
|Variable rate debt        | 43,151                     | 40,119  | 19,855  | 13,283  | 12,903 | 24,890     | 111,050              | 111,050                  
|Average interest rate     | 3.5%                       | 3.5%    | 2.9%    | 1.8%    | 1.7%   | 1.7%       |                     |                         
|                          |                            |         |         |         |        |            |                      |                          
|                         
|Debt in Brazilian reais: 
|Fixed rate debt           | 5,023                      | 5,000   | 5,000   | 5000    | 417    | 0,0        | 15,417               | 15,417                   
|Average interest rate     | 14%                        | 14%     | 14%     | 14%     | 14%    |           |                     |                         
|Variable rate debt(1)     | 1,648,551                  | 710,102 | 752,323 | 502,132 | 0,0    | 0,0        | 1,964,558            | 1,964,558                
|Average interest rate     | 16.7%                      | 15.8%   | 15.8%   | 15.6%   |       |           |                     |                         
|                          |                            |         |         |         |        |            |                      |                          
|                         
|Total debt obligations(1) | 1,696,958                  | 755,434 | 777,391 | 520,628 | 13,533 | 26,059     | 2,093,046            | 2,093,046                
|                          |                            |         |         |         |        |            |                      |                          

Hedging
Policy

We
constantly evaluate and consider alternatives with respect to hedging foreign exchange
risk in connection with our foreign currency indebtedness and have currently entered into
hedging contracts with respect to short-term payments of our foreign currency debt.

Table of Contents

ITEM
12.     Description of Securities Other than Equity Securities

We
are filing an Annual Report under the Exchange Act. Accordingly, this item does not apply
to us.

Table of Contents

PART II

Table of Contents

ITEM 13.
         Defaults, Dividend Arrearages and Delinquencies

Not
applicable.

Table of Contents

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

We
were required to pay a  non-cumulative  preferred  dividend on our Preferred Shares in an
amount equal to 6.0% of the share capital  attributable to our Preferred Shares under
Brazilian  Corporation Law. Law No. 10,303,  dated October 31,  2001, which amended the
Brazilian  Corporation Law requirement  that we pay a  non-cumulative  preferred
 dividend on our Preferred Shares of at least 3.0% per year of the book value of
Shareholders'  equity divided by our total number of shares.  On December 19,  2002 we
amended our Bylaws to comply  with these new  requirements.  Preferred  Shareholders  are
now  entitled  to receive a minimum  non-cumulative  dividend of Preferred  Dividend
 equal to the greater of (i) 6.0% per year of the value of our total share  capital
 divided by our total number of shares or (ii) 3.0% per year of the book value of our
shareholders' equity divided by the total number of our shares.

Table of Contents

ITEM 15.
         Controls and Procedures

Evaluation
of disclosure controls and procedures. Our Chief Executive Officer, Humberto José Rocha
Braz and our Financial Executive Officer, Paulo Pedrão Rio Branco, after evaluating
the effectiveness of our disclosure controls and procedures (as defined in U.S.
Exchange Act Rules 13a-15(e)) as of the end of the period covered by this Form 20-F,
have concluded that, as of such date, our disclosure controls and procedures were
effective.

Changes
in internal controls. There have been no significant changes in our internal control
over financial reporting that occurred during the year ended December 31, 2003 that
have materially affected, or are reasonably likely to materially affect our internal
control over financial reporting.

Table of Contents

ITEM 16A.
        Audit Committee Financial Expert

Because
we have not  established  an audit  committee,  our entire  board of  directors  is
deemed our audit  committee  under section  3(a)(58)  of the  Exchange  Act.  Our board
of  directors  has not yet  determined  whether any of the members of the board of
directors  is an audit  committee  financial  expert as such term is defined for the
purposes of this Item 16A. We believe that none of the members of our board of directors
 qualify as such an audit  committee  financial  expert.  We do not have such an audit
 committee financial expert because we are not required to do so under Brazilian law.

Table of Contents

ITEM 16B.
        Code of Ethics

We
have  adopted a code of ethics that applies to all  officers  and  employees.  A copy of
the code of ethics may be obtained free of charge by contacting  our investor  relations
 department at (+55) 61 415-1256.  No waivers,  either  explicit or implicit,  of
provisions of the code of ethics were granted in 2003.

Table of Contents

ITEM 16C.
        Principal Accountant Fees and Services

KPMG
Auditores  Independentes  served as our independent  registered  public  accounting firm
for the year ended  December 31, 2002 and 2003 appearing in this annual report on Form 20-F.

The
following  table  presents the aggregate  fees for  professional  services and other
 services  rendered by KPMG Auditores Independentes to us in 2002 and 2003 in thousands
of reais.

|                   | 2003    | 2002 
|------------------ | ------- | -----
|Audit Fees         | R$1,593 | R$793
|Audit-related Fees |        | 10   
|Tax Fees           | 47      | 40   
|All Other Fees     |        |     
|Total              | R$1,640 | R$843

Audit
fees are fees agreed upon with KPMG  Auditores  Independentes  for the fiscal  years 2002
and 2003,  (including  related expenses) for the audit of our annual  consolidated
 financial  statements  and for the reviews of our quarterly  financial  statements
submitted  on Form 6-K,  including  the  reviews of our annual  report on Form 20-F.
 They also  include  fees  billed for other  audit services such as the provision of
comfort letters.

Audit-related
 Fees  consist of fees billed by KPMG  Auditores  Independentes  for  assurance  and
related  services  that are reasonably  related  to the  performance  of the  audit or
review  of the  company's  financial  statements  or that are  traditionally performed by
the external  auditor,  and include  consultations  concerning  financial  accounting
 and reporting  standards,  internal control reviews, review of security controls and
operational effectiveness of systems and due diligence related to acquisitions.

Tax
Fees  include fees billed for tax  compliance  services,  including  the review of the
 original,  as well as seminars and training regarding changes in, Brazilian tax
legislation.

Audit committee
pre-approval policies and procedures

Our
board of directors  requires  management to obtain the boards  approval before engaging
 independent  outside auditors to provide  any audit or  permitted  non-audit  services
 to us, or our  subsidiaries.  Pursuant to this  policy,  our board of  directors
pre-approves  all audit and  non-audit  services  provided by KPMG  Auditores
 Independentes,  our principal  auditor.  Pursuant to the boards pre-approval  process,
each year, KPMG prepares a detailed list of services that it proposes to perform during
the coming year. These  proposed  services are  presented to the board of  directors,
 which  considers  and approves the  services.  Management  is not permitted to engage
our outside auditors for any audit or non-audit  service that is not on the list of
services  approved by the board of directors without first returning the board of
directors for approval of such additional services.



Table of Contents

PART
III

Table of Contents

ITEM 17.
         Financial Statements

We
have responded to Item 18 in lieu of responding to this Item.

Table of Contents

ITEM 18.
         Financial Statements

Reference
is made to pages F-1 through F-68 for our Financial Statements.

Table of Contents

ITEM 19.
         Exhibits

The
following is a list of all exhibits filed as a part of this Annual Report on Form 20-F:

|Exhibit
          
      Number | Exhibit                                                                                                                                                                                                                                                           
|------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1                             | Amended and Restated Charter of the Registrant.
    (1)                                                                                                                                                                                                           
|1.2                             | Amended and Restated Charter of the Registrant
    (English translation). (1)                                                                                                                                                                                     
|2.1                             | Form of Deposit Agreement to be executed
          among the Registrant, Citibank N.A., as Depositary, and the Holders and
          Beneficial Owners of American Depositary Shares evidenced by American
    Depositary Receipts issued thereunder. (2)         
|2.2                             | Indenture
          dated February 17, 2004, among
          Brasil Telecom S.A., The Bank of New York, as indenture trustee, registrar,
          New York paying agent and transfer agent, and The Bank of Tokyo-Mitsubishi
    Ltd., as principal paying agent.
|3.1                             | Amendment to the Amended and Restated Shareholders'
    Agreement (3)                                                                                                                                                                                             
|4.1                             | Standard Concession Agreement for Local,
    Switched, Fixed-Line Telephone Service. (2)                                                                                                                                                                          
|4.2                             | Standard Concession Agreement for Local,
          Switched, Fixed-Line Telephone Service and Schedule of Omitted Concession
    contracts (English translation). (2)(4)                                                                                          
|4.3                             | Standard Concession Agreement for Domestic
    Long-Distance, Switched, Fixed-Line Telephone Service. (2)                                                                                                                                                         
|4.4                             | Standard Concession Agreement for Domestic
          Long-Distance, Switched, Fixed-Line Telephone Service and Schedule of
    Omitted Concession Agreements (English translation). (2)(4)                                                                        
|4.5                             | Registration
          Rights Agreement dated February 17,
          2004 between Brasil Telecom S.A. and Citigroup Global Markets Inc.
    as initial purchaser.                                                                                                 
|4.6                             | Company
          Support Agreement dated February 17,
          2004 between Brasil Telecom S.A. and the Overseas Private Investment
    Corporation.                                                                                                            
|4.7                             | Insurance
          Trust Agreement dated February 17,
          2004, between Brasil Telecom S.A. and The Bank of New York, as insurance
    trustee.                                                                                                            
|4.8                             | Loan
          Agreement dated March 24, 2004
          among Brasil Telecom S.A. and Sumitomo Mitsui Banking Corporation,
    and the lenders named therein.                                                                                                     
|4.9                             | Indemnity Agreement dated March 24, 2004
          among Brasil Telecom S.A., Japan Bank for International Corporation and
    Sumitomo Mitsui Banking Corporation.                                                                                               
|8.1                             | List of subsidiaries of the Registrant, their
    jurisdiction of incorporation and names under which they do business.                                                                                                                                           
|12.1                            | Certification
          of Humberto José Rocha
          Braz , Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                                                           
|12.2                            | Certification
          of Paulo Pedrão Rio
          Branco , Financial Executive Officer, pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002.                                                                                                        
|13.                             | Certification
          pursuant to 18 U.S.C. Section 1350,
          as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
    2002.                                                                                                                   

---

|(1) |  | Filed
  as an Exhibit to the Company's Annual Report on Form 20-F, filed on July 15,
  2002.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | Filed
  as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form 20-F,
  filed on October 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(3) |  | Filed with the Company's
Report on Form 6-K, filed on October 9, 2002.
|--- |  | ----------------------------------------------------------------------

|(4) |  | Pursuant
  to Rule 12b-31 under the Exchange Act the  Registrant is not filing a copy of each
   concession  agreement for each region      because such agreements are  substantially
   identical in all material  respects  except as enumerated in the schedule  attached to
     each standard concession agreement.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Table of Contents

INDEX OF DEFINED TERMS

|Adjusted Net Income            | 114     
|------------------------------ | --------
|ADRs                           | 104     
|ADSs                           | 104, 129
|American Depositary Shares     | 104     
|Anatel                         | 32      
|Anatel Decree                  | 59      
|ATM                            | 37      
|BOVESPA                        | 101     
|Brazilian Securities Law       | 120     
|BrTSi                          | 28      
|BrTurbo                        | 36      
|BVQI                           | 19      
|CADE                           | 15      
|Center                         | 93      
|Code                           | 128     
|COFINS                         | 24, 52  
|Commercial Market              | 12      
|Common Shares                  | 104     
|CONAMA                         | 16      
|Conformity Certificate         | 19      
|Contingency Reserve            | 114     
|CPMF                           | 24      
|CPMF tax                       | 128     
|CRT                            | 4       
|CTMR                           | 24      
|CVM                            | 4       
|Dedicated IP                   | 37      
|Depositary                     | 23      
|DialNet                        | 37      
|DLD basket                     | 47, 65  
|e&p                            | 129     
|Embratel                       | 27      
|Exchange Act                   | 7       
|FCRT                           | 95      
|FENATTEL                       | 102     
|FISTEL                         | 86      
|FITTEL                         | 102     
|Floating Market                | 12      
|FUNTTEL                        | 83      
|FUST                           | 83      
|GDP                            | 41      
|General Telecommunications Law | 25      
|Global Crossing                | 57      
|Global Village Telecom         | 35      
|GlobeNet                       | 28      
|GSM                            | 39      
|iBest                          | 30      
|IBGE                           | 41, 71  
|ICMS                           | 52      
|ICNIRP                         | 5       
|iG                             | 33      
|IGP-DI                         | 14      
|IGP-M                          | 7       
|INPI                           | 59      
|Intelig                        | 34      
|IOF tax                        | 128     
|IPCA index                     | 48      
|IRS                            | 131     
|ISP                            | 36      
|Light IP                       | 141     
|List of Obligations            | 59      
|local basket                   | 47, 65  
|Mandatory Dividend             | 113     
|MetroRED                       | 28      
|MTH                            | 28      
|non-Brazilian holder           | 126     
|non-U.S. holder                | 129     
|PCS                            | 28      
|PFIC                           | 130     
|PIS                            | 52      
|Preferred Dividend             | 113     
|Real Plan                      | 12      
|Registered Capital             | 128     
|Registrant                     | 4       
|Registration Statement         | 120     
|Resolution No. 2,689           | 117     
|Securities Act                 | 23      
|SFAS                           | 10      
|Sistel Plan                    | 95      
|SLDD                           | 37      
|Statutory Reserve              | 113     
|STF                            | 48      
|STJ                            | 48      
|TBS                            | 27      
|TCSPrev                        | 95      
|Teleacre                       | 24      
|Telebrás                       | 24      
|Telebrasília                   | 24      
|Telecommunications Regulations | 25      
|Telefônica                     | 17      
|Telegoiás                      | 24      
|Telemar                        | 27      
|Telemat                        | 24      
|Telems                         | 24      
|Telepar                        | 24      
|Teleron                        | 24      
|Telesc                         | 24      
|TII                            | 13      
|TJLP                           | 71      
|TU-M                           | 69      
|TU-RIU                         | 69      
|TU-RL                          | 69      
|U.S. GAAP                      | 4       
|Unrealized Revenue             | 114     
|Unrealized Revenue Reserve     | 114     
|Vant                           | 30      
|VC-1                           | 80      
|VC-2                           | 82      
|VC-3                           | 82      
|Vetor                          | 37      
|VU-M                           | 51, 69  



Table of Contents

TECHNICAL GLOSSARY

The
following explanations are not intended as technical  definitions,  but to assist the
general reader to understand certain terms as used in this Annual Report.

Access
charge:Amount per minute charged by network operators for the use of their network
by other network operators. Also known as an "interconnection charge" or "network usage
charge."

Access
gates:The points of interface between the network equipment (either dedicated or
switched) and the transmission media that connect network equipment to the end user.

Analog:A mode of transmission or switching which is not digital and therefore not
represented in discrete terms such as voltage on/off or light pulse on/off.

Analog
network:A network using analog technology with circuit switching, capable of
connecting one user with all users, but with limited transmission capacity.

ATM
(Asynchronous Transfer Mode):A broadband switching technology that permits the use
of one network for different kinds of information, such as voice, data and video.

Band
A Service Provider:A former Telebrás operating subsidiary that has been granted a
concession to provide cellular telecommunications services in a particular area within
a radio spectrum frequency range referred to by Anatel as "Band A."

Band
B Service Provider:A cellular service provider that has been granted a
concession to provide cellular telecommunications services in a particular area
within a radio spectrum frequency range referred to by Anatel as "Band B."

Base
station:A radio transmitter/receiver that maintains communications with the cellular
telephones within a given cell. Each base station in turn is interconnected with other
base stations and with the public switched telephone network.

Broadband
services:Services characterized by a transmission speed of 2 Mbit/second or more.
According to international standards, these services are divided into two categories:
(i) Interactive Services, including video-telephone/video-conferencing (both
point-to-point and multipoint), video-monitoring, interconnection of local networks,
file transfer, high-speed fax, e-mail for moving images or mixed documents, broadband
videotext, video on demand, retrieval of sound programs or fixed and moving images,
and (ii) Broadcast Services, such as sound programs, television programs (including
high-definition TV and pay TV) and selective document acquisition.

CATV
(Cable Television):Cable or fiber-based distribution of TV programs.

Cell:The geographic area covered by a single base station in a cellular telecommunications
system.

Cellular
service:A mobile telecommunications service provided by means of a network of
interconnected low-powered base stations, each of which covers one small geographic
cell within the total cellular telecommunications system service area.

CGI
(Common Gateway Interface)-bins:A directory on a web server in which CGI programs
are stored. CGIs are programs or scripts, usually executed on the web server, that
perform actions (like searching or running applications) when the user clicks on
certain buttons or parts of the web screen.

Dedicated
IP:A service for Internet hosting that does not use the virtual shared hosting
system. The virtual shared hosting system is a system in which an IP number is
assigned to multiple dominion names. Dedicated IP hosting accounts allow users to
have their own log files, true CGI-bins, telnet accounts, and many other unique
configuration files. The service provides a foundation for other IP applications,
such as e-mail, web hosting, eCommerce, and home banking and enables business
productivity through the use of web access, file transfer, multimedia presentation,
video-conferencing, collaborative applications and new readers.

DialNet:A service that offers remote access through a switched telephone network to Internet
providers or corporations.

Digital:A mode of representing a physical variable, such as speech, using digits 0 and 1.
The digits are transmitted in binary form as a series of pulses. Digital networks
allow for higher capacity and higher flexibility through the use of
computer-related technology for the transmission and manipulation of telephone calls.
Digital systems offer lower noise interference and can incorporate encryption as a
protection from external interference.

Digital
penetration:The substitution of analog transmission equipment for equipment
capable of transmitting digital signals.

Digital
Subscriber Line Access Multiplexer:a network device, usually at a telephone company
central office, that receives signals from multiple customer Digital Subscriber Line
(DSL) connections and puts the signals on a high-speed backbone line using
multiplexing techniques. Depending on the product, DSLAM multiplexers connect DSL
lines with some combination of asynchronous transfer mode (ATM), frame relay, or
Internet Protocol networks. DSLAM enables a phone company to offer business or homes
users the fastest phone line technology (DSL) with the fastest backbone network
technology (ATM).

Exchange:See Switch.

Frame
Relay:A data transmission service using protocols based on direct use of transmission
lines.

Home
Phoneline Networking Alliance:a home networking standard developed by the Home
Phoneline Networking Alliance is an industry standard, high-speed, reliable
networking (LAN) technology that uses the existing phone wires in your home to share a
single Internet connection with several PCs in your home. Using HomePNA, multiple
computer users in a home can share a single Internet connection, open or copy files
from different computers, share printers, and play multiuser computer games.
HomePNA can be used without interrupting normal voice or fax services.

Internet:A collection of interconnected networks spanning the entire world, including
university, corporate, government and research networks from around the globe. These
networks all use the IP communications protocol.

IP
WAN:A service that allows for the interconnection of corporate networks located
in several distant locations for applications that do not need band guarantee. This
service also provides for the formation of data communications networks without
protocol conversion.

ISDN
(Integrated Services Digital Network):A system in which several services
(e.g., speech and data) may be simultaneously transmitted end-to-end in digital
form.

IP
(Internet Protocol):The language of the Internet; a set of rules that specify how
information is divided into jackets and addressed for delivery between computer systems.

IT
(Information Technology):The equipment, processes, procedures and systems used
to provide and support information systems (computerized and manual) within an
organization and those reaching out to customers and suppliers.

Kbps:Kilobytes per second.

Leased
high-speed data communication:The digital exchange of information at speeds
exceeding 64 Kbps transmitted through mediums that are leased to users for their
exclusive use.

Light
IP:A service for Internet hosting that uses the virtual shared hosting system. The
virtual shared hosting system is a system in which an IP number is assigned to multiple
dominion names.

Local
loop:The system used to connect a subscriber to the nearest switch. It
generally consists of a pair of copper wires, but may also employ fiber-optic circuits,
microwave links or other technologies.

Log
files:Files that track access activity for a host resource. For instance, a log
file might contain information relative to those who access a web site.

Mbps:Megabytes per second.

Mux:A multilever that slices up individual traffic streams and combines individual
time slots to create a high-speed transmission stream of information.

Network:An interconnected collection of elements. In a telephone network, these consist of
switches connected to each other and to customer equipment. The transmission
equipment may be based on fiber-optic or metallic cable or point-to-point radio
connections.

Network
usage charge:See Access charge

Optical
fiber:A transmission medium which permits extremely high capacities of data
transmission. It consists of a thin strand of glass that provides a pathway along which
waves of light can travel for telecommunications purposes.

Packet-switched
data communications services:Data services that are based on parceling or
breaking data stream into packets and switching the individual packets. Information
that is transmitted is segmented into cells of a standardized length, which are
then transmitted independently of one another, allowing maximization of
available capacity and usage of a single transmission path for multiple
communications. The cells are then reassembled upon reaching their destination.

Packet
switching:A method of data transmission in which small blocks of data are
transmitted rapidly over a channel dedicated to the connection only for the duration
of the packet's transmission.

PBX
(Private Branch Exchange):Telephone switchboard for private use, but linked to a
national telephone network.

Penetration:The measurement of the take-up of services. Penetration is calculated by dividing
the number of subscribers at any given time by the population to whom the service is
available and multiplying the quotient by 100.

Private
leased circuits:Voice, data or image transmission mediums leased to users for their
exclusive use.

Repeater:A device that amplifies an input signal for re-transmission.

Satellite
services:Used for links with countries that cannot be reached by cable, or as an
alternative to cable, and to form closed user networks.

SDH
(Synchronous Digital Hierarchy):A hierarchical set of digital transport structures,
standardized for the transport of suitably adapted payloads over physical transmission
networks.

Sectorization:The process of dividing cells into sectors by using directional antennae at the base
station. Sectorization reduces co-channel interference which permits smaller cells and
increases network capacity.

Services
control points (SCP):A database that is able to screen the full ten digits of an
800 number and route calls to the appropriate, customer-designated long-distance carrier.

Signaling
network:A network used for signaling by one or more users and consisting of
signaling points and connecting signal links.

SLDD:A digital dedicated line service with speed options varying between 1.2Kbps and 2Mbps,
that allows data transfer with practically null delay and transparency to protocols.
SLDD makes it possible to form point to point or multi-point networks by means of
dedicated circuits.

SLS
(Specialized Limited Service):Limited telephonic, telegraphic,
data-communications service or any other type of telecommunications service for one
person or a group of persons for the accomplishment of specific activity.

STFC:The public switched telephone network that delivers basic telephone service and,
in certain circumstances, more advanced services.

Switch:Used to set up and route telephone calls either to the number called or to the next
switch along the path. They may also record information for billing and control
purposes. Also known as an "exchange."

TDMA
(Time Division Multiple Access):A standard of digital cellular telecommunications
technology.

Telnet:A program that allows the user to connect to other computers on the Internet. The
process by which a person using one computer can sign on to a computer in another city,
state or country.

Universal
service:The obligation to supply basic service to all users throughout the
national territory at reasonable prices.

Value
Added Services:Services that provide additional functionality to the basic
transmission services offered by a telecommunications network.

VC-1:Rate for local calls made from fixed-line to cellular.

VC-2:Rate for calls made from fixed-line to cellular, outside the cellular subscriber's
registration area but inside the region where the respective cellular provider provides
service.

VC-3:Rate for calls made from fixed-line to cellular, outside the cellular subscriber's
registration area and outside the region where the respective cellular provider
provides service.

VSAT
(Satellite Network Technology):A telecommunications system based on wireless
satellite technology. The term "VSAT" stands for Very Small Aperture Terminal.
VSAT technology is comprised of a small satellite earth station and an antenna
of approximately 1.8 meters in diameter.



Table of Contents

SIGNATURES

The
 registrant  hereby  certifies that it meets all of the  requirements  for filing on Form
20-F and that it has duly caused and authorized the undersigned to sign this Annual
Report on its behalf.

| |                          | BRASIL TELECOM
    PARTICIPAÇÕES S.A.                                  
| | ------------------------ | -----------------------------------------------------------------------
| |                          |                                                                        
| |                          | By: /s/ Humberto José Rocha Braz                                       
| |                          | Name: Humberto José Rocha Braz
       Title: Chief Executive Officer   
| |                          |                                                                        
| |                          |                                                                        
| |                          | By: /s/ Paulo Pedrão Rio Branco                                        
| |                          | Name: Paulo Pedrão Rio Branco
       Title: Financial Executive Officer
| |                          |                                                                        
| | Dated: June 23,
    2004



Table of Contents

INDEX TO EXHIBITS

|ExhibitNumber | Exhibit                                                                                                                                                                                                                                                          | Sequential 
    Numbering
|------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------
|              |                                                                                                                                                                                                                                                                  |                          
|1.1           | Amended and Restated Charter
    of the Registrant (1)                                                                                                                                                                                                           |                         
|1.2           | Amended and Restated Charter
    of the Registrant (English translation) (1)                                                                                                                                                                                     |                         
|2.1           | Form of Deposit Agreement
        to be executed among the Registrant, Citibank N.A., as Depositary, and
        the Holders and Beneficial Owners of American Depositary Shares evidenced
    by American Depositary Receipts issued thereunder (2)             |                         
|2.2           | Indenture
          dated February 17,
          2004, among Brasil Telecom S.A., The Bank of New York, as indenture
        trustee, registrar, New York paying agent and transfer agent, and The
    Bank of Tokyo-Mitsubishi Ltd., as principal paying agent. |                          
|3.1           | Amendment to the Amended
    and Restated Shareholders' Agreement (3)                                                                                                                                                                                            |                          
|4.1           | Standard Concession Agreement
    for Local, Switched, Fixed-Line Telephone Service (2)                                                                                                                                                                          |                         
|4.2           | Standard
          Concession Agreement for Local, Switched, Fixed-Line Telephone Service
          and Schedule of Omitted Concession Agreement (English
    translation) (2)(4)                                                                                |                         
|4.3           | Standard Concession Agreement
        for Domestic Long-Distance, Switched, Fixed-Line Telephone Service (2)                                                                                                                                                     |                         
|4.4           | Standard Concession Agreement
        for Domestic Long-Distance, Switched, Fixed-Line Telephone Service and
        Schedule of Omitted Concession Agreements (English translation) (2)(4)                                                                      |                         
|4.5           | Registration
          Rights Agreement dated February 17, 2004 between Brasil Telecom
    S.A. and Citigroup Global Markets Inc. as initial purchaser.                                                                                                          |                         
|4.6           | Company
          Support Agreement dated February 17, 2004 between Brasil Telecom
    S.A. and the Overseas Private Investment Corporation.                                                                                                                     |                         
|4.7           | Insurance
          Trust Agreement dated February 17, 2004, between Brasil Telecom
    S.A. and The Bank of New York, as insurance trustee                                                                                                                      |                         
|4.8           | Loan
          Agreement dated March 24,
          2004 among Brasil Telecom S.A. and Sumitomo Mitsui Banking Corporation
    and the lenders named therein.                                                                                                     |                         
|4.9           | Indemnity Agreement dated March 24, 2004
        among Brasil Telecom S.A., Japan Bank for International Corporation and
    Sumitomo Mitsui Banking Corporation.                                                                                                |                         
|8.1           | List of subsidiaries of the
        Registrant, their jurisdiction of incorporation and names under which
    they do business                                                                                                                                   |                         
|12.1          | Certification
          of Humberto José Rocha
          Braz , Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002.                                                                                                          |                         
|12.2          | Certification
          of Paulo Pedrão
        Rio Branco , Financial Executive Officer, pursuant to Section 302 of
    the Sarbanes-Oxley Act of 2002.                                                                                                         |                         
|13.           | Certification
          pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
    of the Sarbanes-Oxley Act of 2002.                                                                                                                            |                         

---

|(1) |  | Filed
  as an Exhibit to the Company's Annual Report on Form 20-F, filed on July 15,
  2002.
|--- |  | --------------------------------------------------------------------------------------------

|(2) |  | Filed
  as an Exhibit to Amendment No. 1 to the Company's Registration Statement on Form 20-F,
  filed on October 31, 2001.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------

|(3) |  | Filed with the Company's
Report on Form 6-K, filed on October 9, 2002.
|--- |  | ----------------------------------------------------------------------

|(4) |  | Pursuant
  to Rule 12b-31 under the Exchange Act the Registrant is not filing a copy of each
  concession Agreement for each region because such agreements are substantially identical
  in all material respects except as enumerated in the schedule attached to each standard
  concession Agreement.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



BRASIL TELECOM PARTICIPAÇÕES
S.A.

CONSOLIDATED FINANCIAL
STATEMENTS

AS OF DECEMBER 31, 2002
AND 2003 AND FOR EACH OF THE YEARS IN THE THREEYEAR PERIOD ENDED DECEMBER 31, 2003





BRASIL TELECOM PARTICIPAÇÕES
S.A.

CONSOLIDATED FINANCIAL
STATEMENTS

As of December 31, 2002
and 2003 and for each of theyears in the three year period ended December 31, 2003

CONTENTS

|Reports of Independent Public Accounting Firms             | F-3 and F-4      
|---------------------------------------------------------- | -----------------
|Consolidated Balance Sheets                                | F-5              
|Consolidated Statements of Operations                      | F-6              
|Consolidated Statements of Changes in Shareholders Equity | F-7              
|Consolidated Statements of Cash Flows                      | F-8              
|Notes to the Consolidated Financial Statements             | F-9 through F- 76





Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Shareholders of

Brasil Telecom Participações S.A.:

We have audited the  accompanying  consolidated  statements of  operations,  changes in  shareholders  equity and cash flows of Brasil
Telecom  Participações  S.A. (a  Brazilian  Corporation)  and  subsidiaries  (the  Company) for the year ended  December 31, 2001,  all
adjusted for price level changes through December 31, 2000.  These  consolidated  financial  statements are the  responsibility  of the
Companys management.  Our responsibility is to express an opinion on these consolidated 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  consolidated  financial
statements  are free of material  misstatement.  An audit  includes  examining,  on a test basis,  evidence  supporting the amounts and
disclosures  in the  consolidated  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
audit provides a reasonable basis for our opinion.

In our opinion,  the consolidated  financial  statements  referred to above present fairly,  in all material
respects,  the consolidated results of their operations and cash flows of Brasil Telecom  Participações S.A.
and  subsidiaries for the year ended December 31, 2001, in conformity with accounting  practices  adopted in
Brazil.
Accounting  practices  adopted in Brazil  vary in certain  respects  from  accounting  principles  generally
accepted in the United  States of America  (U.S.  GAAP).  Application  of U.S.  GAAP would have affected the
results of  operations  for the year ended  December 31, 2001,  to the extent  summarized  in Note 31 to the
consolidated financial statements.

/s/ Deloitte Touche Tohmatsu Auditores Independentes

June 10, 2002, except for Notes 31
and 32 as towhich the date is June 26, 2002



REPORT OF
INDEPENDENT PUBLIC ACCOUNTING FIRM

The Board of Directors
and ShareholdersBrasil Telecom Participações S.A.Brasília, DF

We have audited the
 accompanying  consolidated  balance sheets of Brasil Telecom  Participações  S.A. as of
December 31, 2002 and 2003,  and the related  consolidated  statements of operations,
 cash flows and changes in  shareholders  equity for the year then ended.  These
consolidated financial statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated 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 consolidated  financial statements are free of
material misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated 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, the
consolidated  financial statements referred to above present fairly, in all material
respects,  the consolidated  financial position of Brasil Telecom Participações S.A. as
of December 31, 2002 and 2003, and its results of operations and its cash flows for the
year then ended in conformity with Brazilian generally accepted accounting principles
(Brazilian GAAP), including recognition of the effects of changes in the purchasing power
of the Brazilian currency through December 31, 2000, as discussed in Note 2.a and 2.b.

Accounting  principles
 generally  accepted 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 31 to the
consolidated financial statements.

/s/ KPMG Auditores Independentes

March 18, 2004, except as to Note
30.b and 30.e, which is as of May 18, 2004.Brasília, DF



BRASIL TELECOM
PARTICIPAÇÕES S.A.

Table of Contents

CONSOLIDATED BALANCE
SHEETS

As of December 31,
2002 and 2003(In thousands of Brazilian reais)

|                                           |         |            |           
|------------------------------------------ | ------- | ---------- | ----------
|                                           |         | 2002       | 2003      
|                                           |         |            |           
|Current assets:                            |         |            |           
|Cash and cash equivalents                  | Note 11 | 1,596,163  | 1,956,655 
|Trade accounts receivable, net             | Note 12 | 1,542,851  | 1,859,713 
|Deferred and recoverable taxes             | Note 13 | 416,015    | 701,027   
|Other assets                               | Note 14 | 194,297    | 163,711   
|                                           |         |            |           
|Total current assets                       |         | 3,749,326  | 4,681,106 
|                                           |         |            |           
|Non-current assets:                        |         |            |           
|Deferred and recoverable taxes             | Note 13 | 893,460    | 867,674   
|Other assets                               | Note 14 | 603,863    | 755,915   
|                                           |         |            |           
|Total non-current assets                   |         | 1,497,323  | 1,623,589 
|                                           |         |            |           
|                                           |         |            |           
|Permanent assets:                          |         |            |           
|Investments                                | Note 15 | 171,537    | 220,471   
|Property, plant and equipment, net         | Note 16 | 11,265,991 | 9,579,821 
|Intangibles                                | Note 17 | 470,544    | 531,556   
|                                           |         |            |           
|Total permanent assets                     |         | 11,908,072 | 10,331,848
|                                           |         |            |           
|Total assets                               |         | 17,154,721 | 16,636,543
|                                           |         |            |           
|                                           |         |            |           
|Current liabilities:                       |         |            |           
|Payroll and related accruals               | Note 18 | 44,352     | 61,907    
|Accounts payable and accrued expenses      |         | 998,236    | 978,458   
|Taxes other than income taxes              | Note 19 | 356,720    | 443,348   
|Dividends and employees' profit sharing    | Note 20 | 290,166    | 374,120   
|Income taxes                               | Note 9  | 64,958     | 74,401    
|Loans and financing                        | Note 21 | 591,874    | 1,696,958 
|Provisions for contingencies               | Note 22 | 3,232      | 48,509    
|Provision for pensions                     | Note 23 | 92,144     | 28,022    
|Other liabilities                          |         | 87,306     | 83,280    
|                                           |         |            |           
|Total current liabilities                  |         | 2,528,988  | 3,789,003 
|                                           |         |            |           
|                                           |         |            |           
|Non-Current liabilities:                   |         |            |           
|Income taxes                               | Note 9  | 417,741    | 173,922   
|Taxes other than income taxes              | Note 19 | 344,452    | 583,194   
|Loans and financing                        | Note 21 | 3,584,293  | 2,093,044 
|Provision for pensions                     | Note 23 | 409,696    | 478,068   
|Provisions for contingencies               | Note 22 | 385,992    | 650,469   
|Other liabilities                          |         | 237,479    | 298,367   
|                                           |         |            |           
|Total non-current liabilities              |         | 5,379,653  | 4,277,064 
|                                           |         |            |           
|                                           |         |            |           
|Minority Interest                          |         | 2,582,648  | 2,309,045 
|                                           |         |            |           
|                                           |         |            |           
|Shareholders' equity:                      |         |            |           
|Share capital                              |         | 2,453,191  | 2,740,012 
|Capital reserves                           |         | 864,544    | 835,811   
|Income reserves                            |         | 1,530,617  | 910,072   
|Retained earnings                          |         | 1,815,080  | 1,775,536 
|                                           |         |            |           
|Total shareholders' equity                 | Note 24 | 6,663,432  | 6,261,431 
|                                           |         |            |           
|                                           |         |            |           
|Total liabilities and shareholders' equity |         | 17,154,721 | 16,636,543
|                                           |         |            |           

See the accompanying
notes to the financial statements





BRASIL TELECOM
PARTICIPAÇÕES S.A.

Table of Contents

CONSOLIDATED
STATEMENTS OF OPERATIONS

Years ended December
31, 2001, 2002 and 2003(In thousands of Brazilian reais, except earnings (losses) per
lot of one thousand shares)

|                                                                                       |        |             |             |            
|-------------------------------------------------------------------------------------- | ------ | ----------- | ----------- | -----------
|                                                                                       |        | 2001        | 2002        | 2003       
|                                                                                       |        |             |             |            
|Net operating revenue                                                                  | Note 4 | 6,158,408   | 7,071,368   | 7,915,194  
|                                                                                      
|Cost of services                                                                       | Note 5 | 4,765,593   | 5,143,358   | 5,455,019  
|                                                                                       |        |             |             |            
|Gross profit                                                                           |        | 1,392,815   | 1,928,010   | 2,460,175  
|                                                                                      
|Operating expenses:                                                                   
|Selling expenses                                                                       |        | 724,507     | 763,346     | 821,627    
|General and administrative expenses                                                    |        | 624,751     | 687,462     | 865,052    
|Other net operating expenses (income)                                                  | Note 6 | 60,875      | (121,181)   | 211,308    
|                                                                                       |        |             |             |            
|Operating income (loss) before net financial expenses                                  |        | (17,318)    | 598,383     | 562,188    
|Net financial expenses                                                                 | Note 7 | 47,051      | 330,460     | 610,159    
|                                                                                       |        |             |             |            
|Operating income (loss)                                                                |        | (64,369)    | 267,923     | (47,971)   
|                                                                                      
|Net non-operating expenses                                                             | Note 8 | 85,167      | 78,312      | 550,022    
|Employees' profit share                                                                |        | 52,783      | 42,619      | 3,510      
|                                                                                       |        |             |             |            
|Income (loss) before taxes and minority interests                                      |        | (202,319)   | 146,992     | (601,503)  
|Income and social contribution taxes benefit (expenses)                                | Note 9 | 87,347      | (916)       | 261,390    
|                                                                                       |        |             |             |            
|Income (loss) before minority interests                                                |        | (114,972)   | 146,076     | (340,113)  
|Minority interests                                                                     |        | 75,720      | 2,397       | 171,466    
|                                                                                       |        |             |             |            
|Net income (loss)                                                                      |        | (39,252)    | 148,473     | (168,647)  
|                                                                                       |        |             |             |            
|                                                                                      
|Shares outstanding at the balance sheet date                                           |        | 348,323,389 | 351,527,027 | 355,221,076
|                                                                                       |        |             |             |            
|                                                                                      
|Earnings (losses) per lot of one thousand shares outstanding at the balance sheet date |        | (0.10)      | 0.42        | (0.47)     
|                                                                                       |        |             |             |            

See the accompanying
notes to the financial statements





BRASIL TELECOM
PARTICIPAÇÕES S.A.

Table of Contents

CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December
31, 2001, 2002 and 2003 (In thousands of Brazilian reais)

|                                                  |                 |              | Income Reserves         |                |                  |          
|------------------------------------------------- | --------------- | ------------ | ----------------------- | -------------- | ---------------- | ---------
|                                                  |                 |              |                         |                |                 
|ShareCapital                                      | CapitalReserves | LegalReserve | UnrealizedProfitReserve | TreasuryShares | RetainedEarnings | Total    
|                                                  |                 |              |                         |                |                  |          
|Balances at December 31, 2000                     | 2,189,189       | 1,051,643    | 192,703                 | 1,928,967      | -                | 1,782,592
|                                                  |                 |              |                         |                |                  |          
|Prior year adjustments                            |                 |              |                         |                |                  |          
|Provision for pensions                            | -               | -            | -                       | -              | -                | (215,943)
|Capital increase                                  |                 |              |                         |                |                  |          
|Subscription bonus                                | 138,460         | (138,460)    | -                       | -              | -                | -        
|Transfer from reserves                            | 76,880          | -            | -                       | -              | -                | (76,880) 
|Fiscal benefits on amortization of goodwill       | 23,692          | (23,692)     | -                       | -              | -                | -        
|Consolidation adjustments                         | -               | -            | -                       | -              | -                | (3,462)  
|Fiscal incentives                                 | -               | 23           | -                       | -              | -                | -        
|Decrease in income tax, due to change in tax rate | -               | (4,221)      | -                       | -              | -                | -        
|Net loss                                          | -               | -            | -                       | -              | -                | (39,252) 
|Realization of unrealized profit                  | -               | -            | -                       | (272,280)      | -                | 272,280  
|Transfer to/from reserves                         | -               | -            | 12,714                  | -              | -                | (12,714) 
|Dividends                                         | -               | -            | -                       | -              | -                | (148,872)
|                                                  |                 |              |                         |                |                  |          
|Balances at December 31, 2001                     | 2,428,221       | 885,293      | 205,417                 | 1,656,687      | -                | 1,557,749
|                                                  |                 |              |                         |                |                  |          
|Capital increase                                  |                 |              |                         |                |                  |          
|Fiscal benefits on amortization of goodwill       | 24,970          | (24,970)     | -                       | -              | -                | -        
|Consolidation adjustments                         | -               | -            | -                       | -              | -                | 4,173    
|Increase in income tax, due to change in tax rate | -               | 4,221        | -                       | -              | -                | -        
|Net income                                        | -               | -            | -                       | -              | -                | 148,473  
|Realization of unrealized profit                  | -               | -            | -                       | (353,659)      | -                | 353,659  
|Acquisition of treasury stock                     | -               | -            | -                       | -              | (9,175)          | -        
|Transfer to/from reserves                         | -               | -            | 22,172                  | -              | -                | (22,172) 
|Dividends                                         | -               | -            | -                       | -              | -                | (217,627)
|                                                  |                 |              |                         |                |                  |          
|Balances at December 31, 2002                     | 2,453,191       | 864,544      | 227,589                 | 1,303,028      | (9,175)          | 1,824,255
|                                                  |                 |              |                         |                |                  |          
|Capital increase                                  |                 |              |                         |                |                  |          
|Fiscal benefits on amortization of goodwill       | 286,821         | (28,733)     | -                       | -              | -                | (258,088)
|Consolidation adjustments                         | -               | -            | -                       | -              | -                | 2,525    
|Net loss                                          | -               | -            | -                       | -              | -                | (168,647)
|Realization of unrealized profit                  | -               | -            | -                       | (627,753)      | -                | 627,753  
|Acquisition of treasury stock                     | -               | -            | -                       | -              | (11,671)         | -        
|Transfer to/from reserves                         | -               | -            | 7,208                   | -              | -                | (7,208)  
|Dividends                                         | -               | -            | -                       | -              | -                | (224,208)
|                                                  |                 |              |                         |                |                  |          
|Balances at December 31, 2003                     | 2,740,012       | 835,811      | 234,797                 | 675,275        | (20,846)         | 1,796,382
|                                                  |                 |              |                         |                |                  |          

See the accompanying
notes to the financial statements





BRASIL TELECOM
PARTICIPAÇÕES S.A.

Table of Contents

CONSOLIDATED
STATEMENTS OF CASH FLOWS

Years ended December
31, 2001, 2002 and 2003(In thousands of Brazilian reais)

|                                                                     |             |             |            
|-------------------------------------------------------------------- | ----------- | ----------- | -----------
|                                                                     | 2001        | 2002        | 2003       
|                                                                     |             |             |            
|Operating Activities                                                 |             |             |            
|Net income (loss)                                                    | (39,252)    | 148,473     | (168,647)  
|                                                                     |             |             |            
|Adjustments to reconcile net income (loss) to net
cash provided by   |             |             |            
|operating activities:                                                |             |             |            
|Depreciation and amortization                                        | 2,747,250   | 2,834,604   | 2,842,609  
|Minority share of net income (loss)                                  | (75,720)    | (2,397)     | (171,466)  
|Foreign exchange losses                                              | 66,886      | 60,209      | 52,921     
|Gain (loss) on permanent asset disposals                             | 5,084       | (5,502)     | 470,710    
|Other provisions                                                     | 20,317      | (3,502)     | 16,019     
|Increase (decrease) in provisions for contingencies                  | (12,396)    | 10,746      | 309,683    
|Increase (decrease) in provision for pensions                        | (9,920)     | 11,096      | 4,250      
|Increase in allowance for doubtful accounts                          | 88,280      | 10,203      | 29,223     
|Net (increase) decrease in income tax, due to change
in rate         | (7,685)     | 4,221       | -          
|Increase in trade accounts receivable, gross                         | (121,003)   | (322,117)   | (336,773)  
|(Increase) decrease in other current assets                          | (24,573)    | 27,175      | 58,454     
|Increase in other non-current assets                                 | (236,735)   | (217,272)   | (97,868)   
|Increase (decrease) in payroll and related accruals                  | 26,825      | (48,150)    | 16,035     
|Increase (decrease) in accounts payable and accrued
expenses         | 389,838     | (296,708)   | (73,772)   
|Increase in taxes other than income taxes                            | 43,950      | 79,629      | 86,192     
|Increase (decrease) in other current liabilities                     | 12,068      | (19,594)    | (19,638)   
|Increase (decrease) in accrued interest                              | (257,665)   | 18,698      | (14,643)   
|Decrease deferred in income taxes                                    | (278,987)   | (14,313)    | (298,072)  
|Increase (decrease) in other non-current liabilities                 | (65,905)    | 191,899     | 2,102      
|                                                                     |             |             |            
|Net cash provided by operating activities                            | 2,270,657   | 2,467,396   | 2,707,319  
|                                                                     |             |             |            
|Investing activities:                                                |             |             |            
|Additions to investments                                             | (9,795)     | (38,559)    | (55,557)   
|Cash paid for the acquisition of new companies, net
of cash and cash |             |             |            
|equivalents acquired of R$33,463                                     | -           | -           | (144,516)  
|Additions to property, plant & equipment                             | (3,178,923) | (1,646,630) | (1,332,400)
|Additions to intangible assets                                       | -           | (191,495)   | (123,541)  
|Proceeds from asset disposals                                        | 18,227      | 24,416      | 19,147     
|                                                                     |             |             |            
|Net cash used in investing activities                                | (3,170,491) | (1,852,268) | (1,636,867)
|                                                                     |             |             |            
|Financing activities:                                                |             |             |            
|Loans repaid                                                         | (1,095,170) | (428,741)   | (564,650)  
|New loans obtained                                                   | 625,241     | 1,249,898   | 84,565     
|Expansion plan and other contributions paid back                     | (38)        | (1,297)     | (185)      
|Subscription bonus                                                   | -           | 8,020       | 13,332     
|Acquisition of treasury shares                                       | -           | (31,027)    | (44,689)   
|Dividends paid                                                       | (183,560)   | (281,348)   | (198,333)  
|                                                                     |             |             |            
|Net cash provided (used) by financing activities                     | (653,527)   | 515,505     | (709,960)  
|                                                                     |             |             |            
|Increase (decrease) in cash and cash equivalents                     | (1,553,362) | 1,130,633   | 360,492    
|                                                                     |             |             |            
|Cash and cash equivalents at beginning of the period                 | 2,018,892   | 465,530     | 1,596,163  
|                                                                     |             |             |            
|Cash and cash equivalents at end of the period                       | 465,530     | 1,596,163   | 1,956,655  
|                                                                     |             |             |            

See the accompanying
notes to the financial statements





BRASIL TELECOM
PARTICIPAÇÕES S.A.

Table of Contents

NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS

(In thousands of
Brazilian reais)

1.    a) Operations and
background

Brasil Telecom
 Participações  S.A. (the Company or the Holding  Company") and its subsidiaries
 (collectively  the Companys) are the principal  providers of Switched Fixed Telephone
 Service (STFC) in the states of Rio Grande do Sul, Santa Catarina, Paraná,  Goiás,
 Tocantins,  Mato Grosso do Sul, Mato Grosso,  Rondônia,  Acre,  and the Federal
 District under the terms of concessions  granted by the Federal  Government  which will
expire on December 31, 2005 and may be renewed for a further term of 20 years. The
Company presented to Agência Nacional de Telecomunicações  (ANATEL) the regulatory
authority for the Brazilian  telecommunications  industry, its formal manifestation of
express and unequivocal interest in the extension of the periods of the concessions of
STFC of which it is holder, for an additional contractual period of 20 years, as from
January 1, 2006, and it is waiting the signing of the juridical instruments concerning
the contractual terms of extension.

The Company's
business, including the services it may provide and the rates charged, is regulated by
ANATEL, pursuant to Law Nr. 9,472 of July 16, 1997 and the related regulations, decrees,
orders and plans.

On February 28, 2000,
Brasil Telecom  Participações S.A. reorganized its investments in fixed-line
 telecommunication  companies,  by exchanging its shares in its eight smaller operating
 subsidiaries for newly issued shares of its main operating subsidiary, Telecomunicações
do Paraná S.A.  TELEPAR. The minority shareholders of the smaller operating companies
also exchanged their shares for newly issued shares of TELEPAR.  These companies were
then merged into TELEPAR.  After the merger, the name of TELEPAR was changed to Brasil
Telecom S.A..

On July 31, 2000, the
Company acquired a controlling interest in TBS Participações S.A. (TBS), the holding
company of Companhia Riograndense de Telecomunicações  (CRT). Effective December 1, 2000,
the Company acquired the minority interest of CRT through the exchange of its outstanding
shares for new shares issued by the Company.

b)    Subsidiaries

Brasil Telecom Celular
S.A. (BrT Celular) is a wholly owned subsidiary  formed in December 2002 to operate the
Mobile Personal Service (SMP),  holding a license to serve the same coverage area where
the Company operates STFC, over the following 15 years. At the balance sheet date, BrT
Celular was in the pre-operating phase.  The beginning of its activities is forecasted
for the second semester of 2004.

        BrT Serviços de Internet S.A.  (BrTI)
is a wholly owned subsidiary  formed in October 2001,  engaged in the provision of
internet  services and related  activities.  It started its activities in 2002.  During
the second quarter of 2003, BrTI invested,  as shareholder or quotaholder, and started to
have control of the following companies:

|(i)  | Group BrT Cabos Submarinos (formerly known as GlobeNet Group)
     This group of companies provides data transmission  services through a system of submarine fiber optics cables,  with points of connection in the United States,  Bermuda Islands,  Venezuela and Brazil,  Group BrT Cabos Submarinos offers its services
     through packages of integrated services, offered to local and international corporate customers.  The following
     companies acquired as part of the purchasing program of the GlobeNet Group, comprise it:

Brasil Telecom Cabos Submarinos do Brasil (Holding) Ltda. (BrT CSH): company acquired on June 11, 2003, as part of the purchasing program of the GlobeNet Group.Brasil Telecom Cabos Submarinos do Brasil Ltda. (BrT CS Ltda.): company acquired on June 11, 2003, in which BrTI has direct control and the full control jointly with BrT CSH, being also part of the purchasing program of the GlobeNet Group.Brasil Telecom Subsea Cable Systems  (Bermuda) Ltd. (BrT SCS Bermuda):  company  incorporated  under the laws of the Bermudas,  for which the transfer of resources by BrTI for payment of subscribed  capital  occurred on May 30, 2003. It is also part of the purchasing program of the GlobeNet Group.  BrT SCS Bermuda holds the total shares of Brazil Telecom of America Inc. and of Brasil Telecom de Venezuela S.A.No-significant goodwill was generated as a result of this acquisition.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | Group iBest

                           BrTI has held since February 2002, a minority interest in the iBest Holding  Corporation  (IHC), a company  incorporated in the Caiman Islands.  In June 2003, as a result of several statutory acts in IHC and in its subsidiaries,  BrTI acquired the
                           control of the Group iBest, which the main companies are: (i) iBest Holding Corporation; (ii) iBest S.A.; (iii) Febraio S.A.; and (iv) Freelance S.A. The acquisition of iBest generated a goodwill as mentioned in Note 17.

                           iBest was  incorporated  in January 1999,  with the objective of organizing the iBest Prize,  trading  advertising  space for the event.  In December 2001 it extended its  activities,  when it started to offer and to concentrate  its operations on
                           providing dialed access to the Internet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

2. Presentation of the
consolidated financial statements

a.
Indexation of the consolidated financial statements

Partially as a result
of past high levels of inflation in Brazil, two methods of inflation  accounting
 evolved:  the Brazilian GAAP and the Brazilian  Corporation Law methods.  Financial
 statements  prepared under Corporation Law are required for virtually all Brazilian
entities,  and are the basis for determination of taxable income and dividends payable,
 while the financial statements prepared under Brazilian GAAP used to be required for
information purposes by the Brazilian Securities and Exchange Commission (CVM) until
1996, after which their disclosure became optional.

The most important
 difference between these methods,  which has an effect on the financial  statements of
subsequent periods, is the date of cessation of the recognition of inflationary
 adjustments in the carrying values of permanent assets. This was December 31, 2000 under
Brazilian GAAP and December 31, 1995 under Brazilian Corporation Law.

The consolidated
 financial  statements of the Company were prepared on a fully indexed basis to recognize
the effects of changes in the purchasing  power of the Brazilian  currency until December
31, 2000, under the methodology  known Generally  Accepted  Accounting Principles in
Brazil (Brazilian GAAP).

b. Previously
published financial information

The presentation of
the consolidated  financial  statements  under Brazilian GAAP is consistent with the
 presentation of the published  financial  statements  under Brazilian  Corporation Law
of the Companies,  from which the accompanying  financial  information was extracted,
except for certain adjustments mainly related to effects of indexation applied on
shareholders' equity and net income, detailed in the tables below, and certain
reclassifications within the balance sheets and the statements of operations.

The tables below
present a reconciliation of net income (loss) for the years ended December 31, 2001, 2002
and 2003 and shareholders' equity at those dates in accordance with Brazilian Corporation
Law to net income and shareholders' equity reported herein:

|                                                                                                                    | 2001      | 2002      | 2003     
|------------------------------------------------------------------------------------------------------------------- | --------- | --------- | ---------
|Net income (loss):                                                                                                  |           |           |          
|Net income in accordance with Brazilian Corporation
Law                                                             | 261,002   | 442,981   | 145,139  
|Effect of the indexation of non-monetary assets through
December 31, 2000 (mainly an increased depreciation charge) | (763,229) | (668,370) | (736,930)
|Effect on deferred taxation of the above adjustments                                                                | 290,957   | 220,769   | 260,032  
|Minority interest in the above adjustments                                                                          | 172,018   | 153,093   | 163,112  
|                                                                                                                    |           |           |          
|Net income (loss) as reported herein                                                                                | (39,252)  | 148,473   | (168,647)
|                                                                                                                    |           |           |          
|                                                                                                                    |           |           |          
|                                                                                                                    |           |           |          
|                                                                                                                    | 2001      | 2002      | 2003     
|Shareholders' equity                                                                                                |           |           |          
|Shareholders' equity in accordance with Brazilian
Corporation Law                                                   | 6,000,974 | 6,225,547 | 6,137,327
|Effect of the indexation of non-monetary assets through
December 31, 2002                                           | 1,720,663 | 1,052,293 | 315,366  
|Effect on deferred taxation on the above adjustment                                                                 | (607,554) | (386,786) | (126,754)
|Minority interest in the above adjustments                                                                          | (380,716) | (227,622) | (64,508) 
|                                                                                                                    |           |           |          
|Shareholders' equity as reported herein                                                                             | 6,733,367 | 6,663,432 | 6,261,431
|                                                                                                                    |           |           |          

c. Principles of
consolidation

These consolidated
financial statements include the accounts of the Holding Company and of the Companies
mentioned in Note 1 to these financial statements. All material intercompany balances and
transactions have been eliminated.

Certain prior year
amounts were reclassified to conform to the current years presentation.

d. Consolidated
statements of cash flows

These consolidated
 financial  statements include the consolidated  statements of cash flows which better
reflect the source and use of funds in order to provide more significant  information,
 instead of the statements of sources and uses of funds, which are usually disclosed in
accordance with Brazilian GAAP.

3. Summary of
principal accounting practices

a. Cash
and cash equivalents

Cash equivalents are
considered to be all highly liquid temporary cash investments with original maturity
dates of three months or less. They are recorded at original cost plus income earned to
the balance sheet date and do not exceed market value.

b. Trade accounts receivable

Accounts  receivable
from telephone  subscribers are calculated at the tariff rate on the date the service was
rendered.  Customer  accounts  receivable also include services  provided to customers to
the balance sheet date but not yet billed and the related taxes are accounted for on the
accrual basis. Interest on overdue accounts receivable from customers is recorded when
received.

c. Allowance for
doubtful accounts

An allowance for
doubtful accounts is recorded for accounts receivable for which recoverability is
considered doubtful.  Effective as from 2001, the computation basis became the historical
collection experience and a review of the current status of all trade accounts
 receivable.  Current loss provision is estimated  considering the ratio of historical
losses applied to the different  categories of all outstanding amounts receivable from
customers.  Customers Accounts Receivable over 180 days due, are written-off from the
balance sheet.

d. Foreign currency
transactions

Transactions in
foreign currency are recorded at the exchange rate at the time of the related
 transactions.  Foreign currency  denominated assets and liabilities are translated using
the exchange rate at the balance sheet date.  Exchange rate variations are recognized in
the statements of operations as they occur.

e. Inventories

Inventories are stated
at the lower of cost or net realizable value. Cost of inventories is determined on a
weighted average cost basis.  Inventories are separated into network expansion and
maintenance  inventories.  Inventories for use in network expansion are classified as
"Construction-in-progress" under "Property, plant and equipment". Maintenance inventories
are classified as other current assets.

f. Investments

Consist principally of
investments with less than a 20% ownership stake, including fiscal incentive investments,
recorded at indexed cost through December 31, 2000, less a reserve for losses when
considered necessary.

g. Property, plant and
equipment

Property, plant and
equipment is stated at indexed cost through December 31, 2000, less accumulated
depreciation.

Up to December 31,
1998,  interest  attributable to  construction-in-progress  was calculated,  at the rate
of 12% per annum of the  construction-in-progress  balance and the part related to third
party loans was credited to interest  expense based on actual interest costs with the
balance relating to self-funding being credited to capital reserves,  within shareholders  equity.
 Starting 1999, the Company has been recording  capitalization of interest on loans
specifically  related to financing of construction in progress,  and interest on
self-financing is no longer recorded.

Improvements to
existing property are capitalized while maintenance and repair costs are charged to
expense as incurred. Materials allocated to specific projects are added to
construction-in-progress.

Depreciation is
provided using the straight-line method based on the estimated useful lives of the
underlying assets and in accordance with tax rules. The principal depreciation rates are
shown in Note 16.c.

The Companys  management reviews property,  plant and equipment for possible  impairment  whenever
events or changes in  circumstances  indicate that the carrying value of an asset or group of assets may not
be recoverable  on the basis of  undiscounted  future cash flows.  These reviews have not indicated the need
to recognize any impairment  losses during the years ended December 31, 2001,  2002 and 2003.  Write-down of
property,  plant and  equipment  assets is recorded  when and if  necessary.  In 2003 a write-off of certain
plant and  equipment  that will no longer be used in  operations  was  recorded  based upon an  obsolescence
study as mentioned in Note 8.

h. Vacation pay accrual

Employees cumulative
vacation pay is accrued as earned.

i. Income and social
contribution taxes

Income and social
contribution taxes are accounted for under the asset and liability method.  Deferred tax
assets and liabilities are recognized for the future tax consequences  attributable to
(a) differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and (b) tax loss carryforwards.  Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and  liabilities  of a change in tax rates is
 recognized in income in the period that includes the enactment  date in relation to all
 temporary  differences,  except for the future  benefit arising out of the goodwill
amortization, where the effect of a change in rates is recognized in capital reserves
within shareholders equity.

j. Loans and financing

Loans and financing
include accrued interest and monetary or exchange variations to the balance sheet date.

k. Reserve for
contingencies

Reserves for
contingencies are recognized for the estimated amounts of probable losses based on legal
advice and management's opinion of the outstanding matters at the balance sheet date. The
basis and nature of the provisions are described in Note 22.

l. Revenue recognition

Revenues are generally
recognized on accrual basis.  Revenues from customer calls are based on time used,
 according to Brazilian law, and are recognized when services are provided.  Services
provided and not billed at the end of each month are estimated and recorded on accrual
basis.  Considering their high turnover and short average life,  revenues from phone
cards for public telephones are recorded as the cards are sold. Revenues from activation
and installation fees are recognized upon the activation of customer services. For the
fixed terminals activated on a pre-paid basis, the amounts received are recorded as
advances from customers and revenue is recorded according to the provision of the
services.

m. Interest income and
expenses

Interest income
represents interest earned and gains and losses on temporary cash investments.

Interest expense
represents interest incurred and charges on loans and financing and exchange gains and
losses on foreign currency loans and financing.

n. Research and
development

Research and
development costs are charged to expense as incurred. Total research and development
costs were R$8,000, R$3,761 and R$2,566 for the years ended December 31, 2001, 2002 and
2003, respectively.

o. Pensions and other
post-retirement benefits

Private pension plans
and other  retirement  benefits  sponsored by the Company for their employees are managed
by SISTEL and Fundação CRT.  Contributions  are determined on an actuarial basis,  when
 applicable,  and accounted for on an accrual basis. As of December 31, 2001, to comply
with CVM Instruction Nr. 371/00,  Brasil Telecom S.A. recorded the actuarial deficit on
the balance sheet date against  shareholders  equity,  excluding the  corresponding tax
effects.  As from the beginning of 2002,  adjustments to the actuarial deficit provision
are being recognized as a period expense.

p. Employees profit
sharing

The Company has made a
provision for granting employees the right to a share of its profits. The amount,
determined to be paid in the year following the recorded provision, is in accordance with
the agreement with the union, the Company's bylaws and the labor agreement.

q. Advertising costs

Advertising costs are
expensed as incurred and amounted to R$120,145, R$117,558 and R$85,712 during the years
ended December 31, 2001, 2002 and 2003, respectively.

r. Earnings (loss) per
share

Earnings (loss) per
thousand shares have been calculated based on the number of outstanding shares at the
balance sheet date, net of treasury stock.

s. Derivatives

The Company has
entered into derivative transactions to manage partially its exposure in foreign currency
exchange rates, basically through currency swap contracts.  Gains and losses from swap
contracts are recognized monthly on an accrual basis by comparing contractual exchange
rates to month end exchange rates, regardless of the contracted settlement terms.

Management of the
Company does not operate with derivatives for trading purposes.

t. Segment information

The Company currently
has operating activities substantially in one segment for local and regional fixed-line
 telecommunications.  All revenues are generated in relation to services provided in the
states of Rio Grande do Sul, Santa Catarina,  Paraná, Goiás, Tocantins,  Mato Grosso do
Sul, Mato Grosso, Rondônia, Acre and in the Federal District.

u. Use of estimates

The preparation of the
consolidated  financial  statements  requires  management of the Company to make a number
of estimates and assumptions  relating to the reported amount of assets and liabilities
and the disclosure of contingent  assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the period.
 Significant items subject to such estimates and assumptions include the carrying amount
and recoverability of property,  plant and equipment, and intangibles (including the
estimates of the level of future revenues and expenses by the reporting units where the
goodwill has been allocated  subject to impairment  analysis under SFAS Nr. 142);
 valuation  allowances for  receivables,  inventories,  deferred income tax assets and
also provisions for contingencies.  Actual results could differ from those estimates.

4. Net operating
revenue

|                                     | 2001        | 2002        | 2003       
|------------------------------------ | ----------- | ----------- | -----------
|Local services:                      |             |             |            
|Monthly charges                      | 2,218,784   | 2,656,631   | 2,867,244  
|Measured service charges             | 2,863,073   | 3,106,544   | 3,490,010  
|Public telephones                    | 274,218     | 341,766     | 394,525    
|Other                                | 191,679     | 149,643     | 148,035    
|                                     |             |             |            
|Total                                | 5,547,754   | 6,254,584   | 6,899,814  
|Non-local services:                  |             |             |            
|Intrastate and interstate            | 1,341,288   | 1,748,190   | 1,923,094  
|International                        | 718         | 594         | 562        
|                                     |             |             |            
|Total                                | 1,342,006   | 1,748,784   | 1,923,656  
|                                     |             |             |            
|Data transmission                    | 324,690     | 504,979     | 764,059    
|Network services                     | 994,343     | 1,021,308   | 1,050,821  
|Other                                | 249,703     | 310,025     | 439,031    
|                                     |             |             |            
|Gross operating revenues             | 8,458,496   | 9,839,680   | 11,077,381 
|Value added and other indirect taxes | (2,200,580) | (2,670,871) | (3,042,487)
|Discounts                            | (99,508)    | (97,441)    | (119,700)  
|                                     |             |             |            
|Net operating revenue                | 6,158,408   | 7,071,368   | 7,915,194  
|                                     |             |             |            

There are no customers
who individually account for more than 5% of gross operating revenues.

5. Cost of services

The costs incurred in
the generation of services rendered are as follows:

|                              | Year ended December 31,
|----------------------------- | -----------------------
|                              |                        
|                              | 2001                   
|                              |                        
|Depreciation and amortization | 2,597,160              
|Personnel                     | 185,843                
|Materials                     | 91,746                 
|Services                      | 1,689,287              
|Other                         | 201,557                
|                              |                        
|                              | 4,765,593              
|                              |                        

6. Other net operating
expenses (income)

Following are
presented the remaining income and expenses attributed to operational activities:

|                                                        | 2001     | 2002      | 2003     
|------------------------------------------------------- | -------- | --------- | ---------
|                                                        |          |           |          
|Taxes other than income taxes                           | 22,141   | 23,190    | 32,461   
|Provision for retirement incentive plan and layoffs     | 98,173   | 3,295     | 8,434    
|Technical and administrative services                   | (27,268) | (35,564)  | (40,805) 
|Provisions for contingencies, net of reversal (note
22) | 8,015    | 29,159    | 359,947  
|Fines and expenses recovered                            | (82,524) | (95,706)  | (114,583)
|Write-off - interconnection accounts receivable         | 74,963   | -         | -        
|Write-off of collection in process of classification    | (26,768) | (24,255)  | (17,936) 
|Write-off of advances and other credits                 | 25,802   | 6,727     | 3,293    
|Infra-structure rentals                                 | (27,006) | (36,146)  | (44,033) 
|Donations and sponsoring                                | 17,523   | 26,707    | 21,198   
|Unclaimed dividends                                     | (19,162) | (9,562)   | (18,139) 
|Reversal of other provisions                            | (14,218) | (10,780)  | 2,970    
|Other                                                   | 11,204   | 1,754     | 18,501   
|                                                        |          |           |          
|                                                        | 60,875   | (121,181) | 211,308  
|                                                        |          |           |          

In 2001, the Company
created an  interconnection  function to support and coordinate all matters  concerning
 relations with other  telecommunications  companys,  with the objective of reevaluating
 outstanding  contracts and renegotiating the balances from previous years. As a result,
provisions for write-off totaling R$74,963 were recognized as other operating expenses in
2001, on the basis of the expectation of realization of the related accounts receivable.

The retirement
incentive plan and layoff expenses relate to the following termination plans:

|                       |                   | Incurred           
|---------------------- | ----------------- | -------------------
|                       |                   |                    
|Plans                  | Period covered    | Number of employees
|                       |                   |                    
|Projeto Amanhã         | Dec. 98  Feb. 99 | 1,230              
|Lay-Off                | May 99  July 99  | 1,843              
|Apoio Daqui            | Oct 99- Mar. 02   | 6,151              
|Projeto Novos Caminhos | Sep  Dec. 2000   | 324                

The plans included
termination benefits as part of the Company's overall restructuring plan. The costs at
each year-end were provided considering the projected employees for each branch,
department and job position.

Fines and expenses
recovered primarily represent penalties collected on past due accounts receivable and
recovery of sales taxes of prior periods.  The amount of penalties collected on past due
accounts receivable amounted to R$55,372,  R$67,889 and R$80,383 in 2001, 2002 and 2003,
respectively.

7. Net financial
expenses

|                                            | 2001      | 2002      | 2003     
|------------------------------------------- | --------- | --------- | ---------
|Financial income:                           |           |           |          
|Interest income                             | (253,055) | (228,571) | (341,162)
|Gain on foreign currency denominated assets | (57,265)  | (85,181)  | (54,622) 
|Financial expenses:                         |           |           |          
|Interest expense                            | 246,147   | 541,895   | 841,108  
|Losses on foreign currency financing        | 111,224   | 102,317   | 164,835  
|                                            |           |           |          
|                                            | 47,051    | 330,460   | 610,159  
|                                            |           |           |          

8. Net
non-operating expenses (income)

|                                                   | 2001     | 2002    | 2003    
|-------------------------------------------------- | -------- | ------- | --------
|                                                   |          |         |         
|Gain (losses) on disposal of fixed assets          | 5,084    | (5,502) | 74,417  
|Writen-off on permanent assets CRT                 | -        | -       | 386,977 
|Amortization of goodwill on merger of CRT          | 96,133   | 96,133  | 96,133  
|Gain (losses) on disposal of other permanent asset | (18,960) | (3,642) | 2,737   
|Other                                              | 2,910    | (8,677) | (10,242)
|                                                   |          |         |         
|                                                   | 85,167   | 78,312  | 550,022 
|                                                   |          |         |         

The write-off of permanent  assets  results from the  identification  in 2003 of certain plant and equipment
that  will  no  longer  be  used  in  operations  due to  its  obsolescence  and/or  replacement  with  more
technologically advanced  telecommunications  equipment based upon the Companys current capital expenditure
and  modernization  program.  The specific plant and equipment written off was identified in an obsolescence
study performed by the Company with the support of a specialized third party firm.

9. Income and
social contribution taxes benefit (expenses)

Brazilian income taxes
comprise federal income and social contribution taxes. In 2001, 2002 and 2003, the rate
for income tax was 25% and 9% for social contribution tax producing a combined statutory
rate of 34%.

Deferred taxes are
provided on temporary differences, which include the effects of indexation adjustments
that will not give rise to deductions when the related assets are subsequently
depreciated, amortized or disposed of.

Income and social
contribution taxes are booked on an accrual basis, with the temporary differences being
deferred.  The provisions for income and social contribution taxes recognized in the
statements of operations are as follows:

|                        | Year ended December 31,
|----------------------- | -----------------------
|                        |                        
|                        | 2001                   
|                        |                        
|Social contribution tax | (29,200)               
|Income tax              | (89,751)               
|Deferred taxes          | 206,298                
|                        |                        
|Total                   | 87,347                 
|                        |                        

The following is a
reconciliation of the amount calculated by applying the combined statutory tax rates to
the reported income before taxes and the reported income tax expense:

|                                                                                                             | Year ended December 31,
|------------------------------------------------------------------------------------------------------------ | -----------------------
|                                                                                                             |                        
|                                                                                                             | 2001                   
|                                                                                                             |                        
|Income (losses) before taxes as reported
in the consolidated financial statements                            | (202,319)              
|Combined statutory rate                                                                                      | 34%                    
|                                                                                                             |                        
|Tax benefit (expenses) at the combined statutory
rate                                                        | 68,789                 
|Permanent additions:                                                                                         |                        
|Goodwill amortization on CRT merger                                                                          | (32,685)               
|Other non-deductible expenses                                                                                | (8,701)                
|Permanent exclusions:                                                                                        |                        
|Payments of interest on shareholders'
equity                                                                 | 26,974                 
|Non-taxable  income                                                                                          | 21,263                 
|Other items:                                                                                                 |                        
|Unrecognized tax loss BrTI                                                                                   | -                      
|Effect of rate changes                                                                                       | 12,601                 
|Other, net                                                                                                   | (894)                  
|                                                                                                             |                        
|Income and social contribution tax benefit
as reported in the accompanying consolidated financial statements | 87,347                 
|                                                                                                             |                        

In 2001, 2002 and
2003, part of dividends  proposed by the companys for payment at the end of the year was
 characterized as interest on  shareholders  equity.  As a result,  under Brazilian tax
law, this part of the dividend was treated as a deduction for income tax purposes.

The composition of
deferred tax assets and liabilities, based on temporary differences, is as follows:

|                                            | December 31,
|------------------------------------------- | ------------
|                                            |             
|                                            | 2002        
|Deferred tax assets:                        |             
|Future benefit from                         |             
|Goodwill pushed down from Bluetel           | 143,515     
|Goodwill on acquisition of CRT              | 187,749     
|Provisions for contingencies                | 132,097     
|Unrealized revenue                          | 7,497       
|Allowance for doubtful accounts             | 52,281      
|Provision for actuarial deficiency FCRT    | 170,626     
|Other                                       | 71,896      
|                                            |             
|Total (see Note 13)                         | 765,661     
|                                            |             
|Deferred tax liabilities:                   |             
|Additional indexation expense from pre-1990 | 16,772      
|Effect of full indexation                   | 386,786     
|Other                                       | 54,319      
|                                            |             
|Total                                       | 457,877     
|                                            |             

Deferred tax
liabilities on the effects of full indexation relate to the difference between the tax
basis of permanent assets,  which were not indexed for inflation  subsequent to December
31, 1995, and the reporting basis, which includes  indexation through December 31, 2000.

Other deferred tax
liabilities refer to unrealized revenue from interest accruing on loans to certain mobile
telephone operators resulting from the Telebrás spin-off in 1998, which are being
contested by the creditors (Note 14).

The composition of tax
liabilities is as follows:

|                           | December 31,
|-------------------------- | ------------
|                           |             
|                           | 2002        
|                           |             
|Federal income tax payable | 24,822      
|Deferred tax liabilities   | 457,877     
|                           |             
|Total                      | 482,699     
|                           |             
|Current                    | 64,958      
|Non-current                | 417,741     

The  Company has not  provided a  valuation  allowance  against  the net  deferred  tax asset as of
December  31, 2003  arising out of  temporary  differences  based upon  managements  belief that it is more
likely  than not that such  deferred  tax asset will be  realized  in the  future  through  reversal  of the
differences  and the  generation  of  taxable  income by the  Company.  The  taxable  income,  basis for the
registration of the deferred tax assets is calculated  under Brazilian  Corporation  Law, which was positive
in the last three years as  demonstrated  on the Note 2.b,  which result in taxes expenses  demonstrated  in
Note 9.

The periods during
which the deferred tax assets are expected to be realized are given below.  The
 realization  periods are based on a technical study using forecast future taxable
 income,  generated in financial years when the temporary  differences  will become
deductible expenses for tax purposes. This asset is maintained according to the
requirements of CVM Instruction 371/02, the technical study having been approved by the
executive and Board of Directors and examined by the fiscal council.

|2004        | 273,309
|----------- | -------
|2005        | 133,625
|2006        | 72,533 
|2007        | 63,348 
|2008        | 63,346 
|2009 a 2011 | 72,737 
|2012 a 2013 | 28,684 
|After 2013  | 66,932 
|TOTAL       | 774,514
|Current     | 270,167
|Non current | 504,347

The  recoverable
 amount  foreseen  after the year 2013 relates to a provision to cover the actuarial
 deficit of the FCRT pension plan (see Note 23), the liability for which is being paid
over 18 years,  the maximum  period  established by the Supplementary Pensions Department
(SPC).  Despite the time limit stipulated by the SPC, based on estimated future taxable
income, the Company would be able to recover the deferred tax balance entirely by the
year 2007 if it decided to prepay the FCRT liability that year.

10. Cash flow
information

|                                        | Year ended December 31,
|--------------------------------------- | -----------------------
|                                        |                        
|                                        | 2001                   
|                                        |                        
|Income and social contribution tax paid | 133,543                
|Interest paid                           | 453,120                

11. Cash and cash
equivalents

|                           | December 31,
|-------------------------- | ------------
|                           |             
|                           | 2002        
|                           |             
|Cash and bank accounts     | 62,846      
|Temporary cash investments | 1,533,317   
|                           | 1,596,163   
|                           |             

Temporary cash
investments  represent amounts invested in portfolios managed by financial  institutions
and refer to federal bonds with an average yield equivalent to interbank deposit rates
(DI CETIP - CDI), contracts in the Futures and Commodities Exchange - BM&F, linked to
foreign exchange variation and interest of around 2% per year and in an investment fund,
bearing exchange variation plus six-month LIBOR rate tax plus interest of 1.5% per annum.

12. Trade accounts
receivable, net

|                                | December 31,
|------------------------------- | ------------
|                                |             
|                                | 2002        
|                                |             
|Unbilled amounts                | 572,453     
|Billed amounts                  | 1,124,166   
|Allowance for doubtful accounts | (153,768)   
|                                |             
|                                | 1,542,851   
|                                |             

The changes in the
allowance for doubtful accounts were as follows:

|                                     | Year ended December 31,
|------------------------------------ | -----------------------
|                                     |                        
|                                     | 2001                   
|                                     |                        
|Beginning balance                    | 55,287                 
|Transfer from new acquisitions       | -                      
|Provision charged to selling expense | 375,526                
|Write-offs                           | (287,248)              
|                                     |                        
|Ending balance                       | 143,565                
|                                     |                        

13. Deferred and
recoverable taxes

|                                    | December 31,
|----------------------------------- | ------------
|                                    |             
|                                    | 2002        
|                                    |             
|Tax withheld at source              | 9,985       
|Recoverable social contribution tax | 11,190      
|Recoverable income tax              | 180,897     
|Deferred tax assets (see Note 9)    | 765,661     
|Sales and other taxes               | 341,742     
|                                    |             
|                                    | 1,309,475   
|                                    |             
|Current                             | 416,015     
|Non-current                         | 893,460     

14. Other assets

|                                                            | December 31,
|----------------------------------------------------------- | ------------
|                                                            |             
|                                                            | 2002        
|                                                            |             
|Amounts receivable from loans to mobile telephone
operators | 164,329     
|Maintenance inventories                                     | 63,171      
|Prepayments .                                               | 58,370      
|Accounts receivable from assets disposals and others        | 7,032       
|Recoverable advances                                        | 78,407      
|Court deposits                                              | 332,090     
|Escrow agreements                                           | 15,787      
|Assets available for sale                                   | 2,412       
|Tax incentives                                              | 14,473      
|Advance for future paid-in capital                          | 1,809       
|Other                                                       | 60,280      
|                                                            |             
|                                                            | 798,160     
|                                                            |             
|Current                                                     | 194,297     
|Non-current                                                 | 603,863     

Loans
to mobile  telephone  operators of R$162,207 as of December 31, 2002  (R$100,346 in 2001)
arose from loans allocated to the Company on the spin-off of Telebrás.  The loans are to
 Telebrasília  Celular S.A. and  Telegoiás  Celular S.A. and were used by them in their
plant  expansions.  They are indexed to the U.S. dollar and bear interest that varies
between LIBOR plus 1% per semester and 11.55% per annum.

The
legality of these  obligations is being  contested by the parent Company of  Telebrasília
 Celular S.A. and Telegoiás  Celular S.A. and thus they are not being paid. Based on the
opinion of the Company legal advisors,  no provision for losses regarding these balances
has been made. The Company is providing for deferred tax on the financial income
generated from such loans. The corresponding deferred tax is recognized as a long-term
liability.

The
majority of the court deposits relates to the labor and tax cases,  with the most
significant  individual item being the ICMS (State VAT) as mentioned in Note 19.

15. Investments

|                                       | December 31,
|-------------------------------------- | ------------
|                                       |             
|                                       | 2002        
|                                       |             
|Fiscal incentive and other investments | 171,537     
|                                       |             
|                                       | 171,537     
|                                       |             

The
 investments  are stated at cost and refer mainly to equity  interests  obtained by
 converting  into shares or capital  quotas the tax  incentive investments in regional
funds,  information technology companys and audiovisual projects. Most are shares of
other  telecommunication  companys located in the regions covered by such regional
incentives.

16. Property, plant
and equipment, net

a.
         Composition:

|                                   | December 31,
|---------------------------------- | ------------
|                                   |             
|                                   | 2002        
|                                   |             
|Construction-in-progress           | 1,209,507   
|Automatic switching equipment      | 7,662,067   
|Transmission and other equipment   | 15,651,358  
|Buildings                          | 5,440,501   
|Other assets                       | 2,056,816   
|                                   |             
|Total cost                         | 32,020,249  
|Accumulated depreciation           | (20,754,258)
|                                   |             
|Property, plant and equipment, net | 11,265,991  
|                                   |             

Transmission
and other equipment  includes:  transmission  equipment,  aerial,  underground and
building  cables,  teleprinters,  private  automatic exchanges, generating equipment and
furniture.

Other
assets include:  underground cables,  computer  equipment,  vehicles,  land and other
assets.  Within Other assets the book value of land is R$112,089 at December 31, 2002
and R$114,515 at December 31, 2003.

According
to the STFC concession  contracts,  the Company assets that are indispensable for
providing the service and qualified as reversible assetsat the time of expiration of
the concession will automatically  revert to ANATEL,  and the Company will be entitled to
the right of compensation  stipulated in the legislation and the corresponding contracts.

Changes
in property, plant and equipment for the year ended December 31, 2002 and 2003 are:

|                               | Year ended December 31,
|------------------------------ | -----------------------
|                               |                        
|                               | 2002                   
|                               |                        
|Beginning balance              | 12,036,873             
|Additions                      | 1,975,618              
|Disposals                      | (8,034)                
|Transfer from new acquisitions | -                      
|                               |                        
|Depreciation                   | (2,738,466)            
|                               |                        
|Ending balance                 | 11,265,991             
|                               |                        

b.
         Capitalized interest

As
 required   of   companys   in  the   telecommunications   industry  at  that  time,
  the  Company   capitalized   interest   attributable   to construction-in-progress,  up
to December 31, 1998, at the rate of 12% per annum of the balance of
 construction-in-progress.  Starting in 1999, the Company capitalizes  interest on loans
specifically  related to financing of construction in progress,  and interest on internal
financing is no longer capitalized. The amounts of R$247,380,  R$127,979 and R$61,330,
were capitalized in 2001, 2002 and 2003, respectively.  Capitalized interest is
depreciated over the same period as the associated assets.

c.
         Depreciation rates

The
annual depreciation rates applied to property, plant and equipment are as follows:

|                                           | %    
|------------------------------------------ | -----
|                                           |      
|Automatic switching equipment              | 20.00
|Transmission and other equipment           | 20.00
|Buildings                                  | 4.00 
|Other assets (excluding land) average rate | 10.47

d.          Rentals

The
Company rents  equipment and premises  through a number of operating  agreements that
expire at different  dates.  Total annual rent expense under these agreements which are
operating and capital leases, was as follows:

|             | Year ended December 31,
|------------ | -----------------------
|             |                        
|             | 2001                   
|             |                        
|Rent expense | 165,027                

Rental
commitments  relating to these contracts where the future minimum rental payments under
leases with remaining terms in excess of one year that are non-cancelable without payment
of a penalty are:

|Year ending December 31, 2003 |       
|----------------------------- | ------
|                              |       
|2004                          | 21,841
|2005                          | 5,475 
|2006                          | 5,036 
|2007                          | 4,868 
|2008                          | 4,701 
|2009                          | 4,532 
|2010 and after                | 8,175 
|                              |       
|Total                         | 54,628
|                              |       

17. Intangibles

|                                                | December 31,
|----------------------------------------------- | ------------
|                                                |             
|                                                | 2002        
|                                                |             
|Goodwill on merger of CRT (a)                   | 276,404     
|Goodwill on acquisition of iBest (b)            | -           
|Mobile personal services licenses (c)           | 194,140     
|Goodwill on acquisition of GlobeNet (note 1b.i) | -           
|                                                |             
|                                                | 470,544     
|                                                |             

(a)
On December 28,  2000, a corporate  reorganization  resulted in the merger of CRT into
the Company  with effect from  December 1, 2000.  The restructuring  process  included a
down-stream  merger  performed in accordance with the  requirements  of  Instructions
 319/99 and 320/99 of the Brazilian Securities Commission (CVM) with the objective of
achieving the deductibility for income tax purposes of amortization of the goodwill.  As
a consequence,  a special goodwill reserve was recorded at the CRT level in shareholders'
equity with the related tax benefit of the future goodwill  amortization recorded as a
deferred tax asset in the amount of R$321,856 (the remaining  balance of this tax benefit
is shown in the  consolidated  balance sheet as part of deferred and recoverable  taxes
as of December 31, 2002 and 2003 in the amounts of R$187,749 and R$123,378  respectively
- see Note 9). As a result of this corporate reorganization,  in the Brasil Telecom books
goodwill was recomputed  reducing its amount to R$480,691,  net of the tax benefit,
 including the  unamortized balance of goodwill recognized in previous acquisitions. The
remaining unamortized balance of goodwill is presented in this account.

(b)
In June 2003, as a result of several statutory acts in iBest Holding  Corporation - IHC
and in its  subsidiaries,  BrTI acquired the control of the Group iBest.  The
 acquisition of iBest  generated a goodwill of R$117,216,  which will be amortized over
the upcoming  years  proportionally  to the profits generated by Group iBest.

(c)
Relates to three Mobile Personal Service (SMP) license contracts signed with ANATEL in
2002 by the wholly-owned  subsidiary Brasil Telecom Celular S.A. The cost of these
 licenses,  which  guarantee the operation of SMP over the next 15 years in the same
operating area where the Company has its fixed  telephone  concession,  amounted to R$
191,495,  of which 10% was paid upon  signing the  contract.  The balance of R$ 172,345
 corresponding  to the remaining 90%, was recognized as a liability of the subsidiary and
is payable in six equal and successive annual  installments  falling due between 2005 and
2010. The outstanding  balance is subject to price-level  restatement  based on the
variation of the IGP-DI index plus interest of 1% per month. On December 31, 2003, the
restated liability was R$ 211,847 (R$ 174,990 in 2002) and is presented under the caption
other liabilities, in non current liabilities.

18. Payroll and
related accruals

|                                | December 31,
|------------------------------- | ------------
|                                |             
|                                | 2002        
|                                |             
|Salaries and wages              | 3,149       
|Accrued social security charges | 37,985      
|Accrued benefits                | 3,218       
|                                |             
|                                | 44,352      
|                                |             

19. Taxes other
than income taxes

|                                           | December 31,
|------------------------------------------ | ------------
|                                           |             
|                                           | 2002        
|                                           |             
|ICMS (Value-added tax)                     | 607,361     
|Other indirect taxes on operating revenues | 93,811      
|                                           |             
|                                           | 701,172     
|                                           |             
|Current                                    | 356,720     
|Non-current                                | 344,452     

The
non-current  portion refers to ICMS (State VAT),  related to income from other services
not directly related to  telecommunications  as from 1998, which the Company is
 challenging  in court and for which escrow  deposits  are being made.  It also  includes
 the  deferred  ICMS arising on account of an incentive scheme offered by the government
of the State of Paraná, which grants four years postponement without interest charges.

20. Dividends and
employees profit sharing

|                          | December 31,
|------------------------- | ------------
|                          |             
|                          | 2002        
|                          |             
|Controlling shareholder   | 19,141      
|Minority shareholders     | 230,635     
|Employees profit sharing | 40,390      
|                          |             
|                          | 290,166     
|                          |             

(a) Includes  R$37,972
in 2002 and  R$34,345 in 2003 of unclaimed  dividends  from prior years,  which will be
reversed to retained  earnings if not claimed within three years.

21. Loans and
financing

|                           | December 31,
|-------------------------- | ------------
|                           |             
|                           | 2002        
|                           |             
|Financial institutions (a) | 2,424,901   
|Debentures (b)             | 1,445,310   
|Other financing (c)        | 18,488      
|Hedge (g)                  | (19,337)    
|Accrued interest           | 306,805     
|                           |             
|                           | 4,176,167   
|                           |             
|Current                    | 591,874     
|Non-current                | 3,584,293   

a.
         Financial institutions

Financing
from financial  institutions  denominated in local  currency,  as of December 31, 2003,
bore fixed interest of 14% per annum and       variable interest based on one of the
following  reference rates: TJLP (Brazilian  long-term interest rates, which was 11.0%
per annum at December 31,       2003) plus 3.85% to 6.5% per annum, UMBNDES (National
Bank for Economic and Social Development  currency,  which was -15.69% per annum at
December 31,       2003) plus 3.85% to 6.5% per annum, 100% and 109% of CDI (Interbank
 Deposit rate, which was 23.25% per annum at December 31, 2003) and IGP-M (General
      Market Price Index, which was 8.71% per annum at December 31, 2003) plus 12% per
annum.  In 2003 this resulted in an average rate of 16.3% per annum.

Financing
 denominated  in foreign  currency  bears fixed  interest rate of 1.75% to 15.50% per
annum  resulting in an average rate of 4.85% per      annum,  and a variable  interest
rate of LIBOR plus 0.5% to 4.00% per annum,  resulting in an average rate of 3.24% per
annum. The LIBOR rate was 1.22%      per annum on December 31, 2003 for semi-annual
payments.

b.
         Debentures

In
2000, the Company issued  debentures  convertible into preferred shares,  for the purpose
of financing part of the investment  program of the       Subsidiary.  Total funding was
R$ 817,600, and subscription  bonuses were fully paid-up, in the amount of R$ 285,702.
 Debentures yield interest of 4%       per annum, above the Brazilian long-term interest
rate (TJLP) of 10% per annum as of December 31, 2001 and 2002,  respectively,  payable
semiannually.       The portion of interest attributable to a TJLP rate in excess of 6%
per annum will be added to the debenture balance.

In
2002, the Subsidiary made 2 new public issues of debentures:

First
public issue: 50,000 non-convertible debentures without renegotiation clause, with a
unit value of R$ 10, totaling R$ 500,000, issued on May 1, 2002. The maturity
period is two years, and remuneration corresponds to an interest rate of 109% of the
CDI, payable half-yearly on November 1 and May 1 as from the date of initial
distribution to maturity.

Second
Public Issue: 40,000 non-convertible debentures without renegotiation clause, with a
unit value of R$ 10, totaling R$ 400,000, issued on December 1, 2002. The maturity
period is two years, and remuneration corresponds to an interest rate of 109% of the
CDI, payable half-yearly on June 1 and December 1, as from the date of initial
distribution to maturity.

As
of December 31, 2003, no debentures issued by the Company had been repurchased.

c.          Other
financing

Relates
 substantially to loans from suppliers of telecommunication  equipment  denominated in
U.S. dollars that bear interest at either a fixed       rate of 1.75% per annum or a
variable rate of LIBOR plus 0.5% to 2.95% per annum.

d.
         Repayment schedule

Non-current
debt is schedule to be paid as follows:

|     | 2003     
|---- | ---------
|     |          
|2005 | 755,434  
|2006 | 777,391  
|2007 | 520,628  
|2008 | 13,532   
|2009 | 12,688   
|2010 | 13,371   
|     | 2,093,044
|     |          

e.
         Interest Rate and Currency analysis

|                    | Exchange rate atDecember 31, 2002 and 2003(Units of one Brazilian real) | December 31,
|------------------- | ----------------------------------------------------------------------- | ------------
|                    |                                                                        
|                    | 2002                                                                    | 2003        
|                    |                                                                         |             
|Floating Rate Debt: |                                                                         |             
|Brazilian reais     |                                                                         | 3,960,688   
|U.S. dollars        | 3.5333 and 2.8892, respectively                                         | 176,620     
|                    |                                                                         |             
|                    |                                                                         | 4,137,307   
|                    |                                                                         |             
|Fixed Rate Debt:   
|Brazilian reais     |                                                                         | 29          
|U.S. dollars        | 3.5333 and 2.8892, respectively                                         | 38,831      
|                    |                                                                         |             
|                    |                                                                         | 38,860      
|                    |                                                                         |             
|                   
|                    |                                                                         |             
|                    |                                                                         | 4,176,167   
|                    |                                                                         |             

f. Covenants and
guarantees

The loans from
financial  institutions require the Company to maintain certain financial ratios,  which,
if they are not met, present the creditors with the right to anticipate the maturity and
require additional  charges.  During 2003, the Company amended its loan agreement with
BNDES,  modifying some covenants, in order to adjust them according to the actual market
conditions. As of December 31, 2003, the Company was in compliance with all of its loan
covenants.

The
loans and financing are guaranteed by the credits derived from the provision of telephone
services.

g.          Swap
contracts

As
of December 31, 2003 the Company had R$201,350 (R$ 224,626 as of December 31, 2002) of
debt denominated in U.S. dollars.

The
Company entered into several swap  transactions  in order to limit losses from
 fluctuations of the Brazilian real. The market risk on these swap  contracts  results
from changes in the Brazilian  deposit  certificate  rates (CDI) versus  changes in the
exchange rate. The main terms of these swap transactions are as follows:

|(a) | The
interbank deposit certificate rate is that quoted by CETIP (Central de Custódia e de
Liquidação).
|--- | -----------------------------------------------------------------------------------------------------

|(b) | The
change in the exchange rate is that quoted by the  Brazilian  Central  Bank,  plus an
annual fixed  interest rate of from 5.86% to 30.3% per       annum.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

The
details of the notional values and maturity periods are as follows:

|                                | 2003  
|------------------------------- | ------
|                                |       
|Number of contracts             | 48    
|Original value (U.S.$ thousand) | 82,758
|                               
|Maturity periods:              
|Up to 1 year                    | 35,545
|1 to 3 years                    | 38,431

The
Company  accounts for the swap  transactions  by calculating  the unrealized gain or loss
at each balance sheet date based on what would have been the result of settlement of the
outstanding contracts at that date. The gain or loss for a period is recorded in
financial income or expense of such period.

The
swap  operations  resulted in a loss of R$2,358,  gain of R$28,874 and loss of R$83,188
 during the years ended December 31, 2001,  2002 and 2003, respectively, which were
recorded in financial expense and financial income, in that order.

22. Provisions for
contingencies

The Company and its
subsidiaries  periodically perform an assessment for contingencies risks, and also review
lawsuits taking into consideration the legal, economic,  taxes and accounting  aspects.
 The assessment of these risks aims at classifying them according to the chances of an
unfavorable outcome between the alternatives of probable, possible or remote, taking into
account, according to the circumstances, the opinion of its legal counselors.

Provisions are
recognized for those contingencies where the risks are classified as probable.
 Contingencies  classified as possible or remote are discussed in this Note. In certain
 situations,  due to legal  requirements or precautionary  measures,  judicial deposits
are made to guarantee the continuity of the cases in litigation.  These lawsuits are in
progress in various courts, including administrative, lower, and higher courts.

Labor Claims

The provision for
labor claims includes an estimate by the Companys  management,  supported by the opinion
of its legal  counselors,  of the probable       losses related to lawsuits filed by
former employees of the Company and of service providers.

Tax Suits

The provision for tax
 contingencies  refers mainly to matters related to tax collections due to differences in
 interpretation of the tax legislation       by the Companys legal counsel and the tax
authorities.

Civil Suits

The provision for
civil  contingencies  refers to cases related to contractual  adjustments  arising from
Federal Government  economic plans and other       cases related to community telephony
plans.

Classification by
Risk Level

Contingencies with
Probable Risk

Contingencies
classified as having a probable risk of loss, for which provisions are recorded under
liabilities, have the following balances:

|           | Year ended December 31,
|---------- | -----------------------
|           |                        
|           | 2002                   
|           |                        
|Labor      | 316,334                
|Tax        | 11,905                 
|Civil      | 60,985                 
|           |                        
|TOTAL      | 389,224                
|           |                        
|Current    | 3,232                  
|           |                        
|Noncurrent | 385,992                
|           |                        

Changes in the
provision for the years ended December 31, 2001, 2002 and 2003, were as follows:

|                                  | Year ended December 31,
|--------------------------------- | -----------------------
|                                  |                        
|                                  | 2001                   
|                                  |                        
|Beginning balances                | 390,874                
|Contingencies paid during the yea | (20,411)               
|Additional provisions             | 50,558                 
|Reversal of provisions            | (42,543)               
|                                  |                        
|Ending balances                   | 378,478                
|                                  |                        

Labor

There was a increase
in labor contingences in 2003 of R$107,763.  The composition of this increase arises,
 mainly, from monetary restatement in             the amount of R$42,424 and from the
revaluation of the cases,  especially in the Rio Grande do Sul Branch (former CRT), whose
main objects refer             to additional  remuneration  for hazardous  activities and
salary  readjustments  resulting  from  collective  agreements,  in a total amount of
            R$71,000.  Moreover, there were reversals of provisions, favorable to the
Company, in the amount of R$13,116.

The main objects that
affect the provisions for labor claims are the following:

|(i) | Additional
Remuneration for Hazardous Activities - related to the claim for payment of additional
 remuneration for hazardous activities,  based                         on Law 7,369/85,
regulated by Decree 93,412/86, due to the supposed risk of contact by the employee with
the electric power system;
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | Salary
Differences and Consequences - related,  mainly, to requests for salary increases due to
supposedly unfulfilled union negotiations.  They                         are related to
the  repercussion  of the salary  increase  supposedly  due on the others  sums
 calculated  based on the  employees                        salaries;
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iii) | Career
plan - related to the request for  application  of the career and salaries  plan for
 employees of the Santa  Catarina  Branch  (formerly                         Telesc),
with promotions for seniority and merit, supposedly not granted by the former Telesc; and
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iv) | Joint
 Responsibility  - related to the  request to ascribe  responsibility  to the  Company,
 made by  outsourced  personnel,  due to  supposed                         nonobservance
of their labor rights by their real employers;
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Tax

During 2003 there was
an increase of R$54,065 due, mainly, to notifications  related to the collection of the
education allowance,  differential             in rate of ICMS in interstate
 acquisitions,  incorrect  compensation  of tax losses,  non-collection  of social
security and CPMF taxes, in the             amount of R$42,019.  Also the provision for
lawyers success fees and monetary updating  contributed for the increase recorded in
2003, in total             amount of R$15,533.  Due to revaluations of the cases during
the year a total of R$15,701 was reversed from the provision.

The main lawsuits
provided for are as follows:

|(i) | Social
security - Related to the non-collection of social security education allowance;
|--- | ---------------------------------------------------------------------------------------

|(ii) | Federal
Revenue Department - Incorrect compensation of tax losses;
|---- | ------------------------------------------------------------------

|(iii) | State
Revenue Department - Non-collection of differential in rate of ICMS; and
|----- | ------------------------------------------------------------------------------

|(iv) | CPMF
- Non-collection of the contribution on financial activities.
|---- | ------------------------------------------------------------------

Civil

The increase in 2003
in the amount of R$147,926 for consolidated is represented,  mainly, by the increase of
R$157,000 related to civil lawsuits             of the former CRT, merged by the Company,
 monetary restatement in the amount of R$11,583 and reductions of R$24,282,  related to
write-offs due             to revaluations.

The lawsuits provided
are the following:

|(i) | Review
of contractual conditions - Lawsuit where a company which supplies equipment filed legal
action against the Company,  asking for a review                         of contractual
conditions due to economic stabilization plans;
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | Contracts
of Financial  Participation  - The  position  related to the  incorrect  procedure
 previously  adopted by the former CRT in processes                         related to
the  application  of a rule enacted by the Ministry of the  Communications  has been
agreed to in the Court of Appeals of                         Rio Grande do Sul. Such
cases are in various phases: First instance, Court of Appeals and Higher Court of
Appeals; and
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iii) | Other
 lawsuits - related to various  ongoing  lawsuits  such as  indemnification  for pain and
 suffering  and material  damages to  consumers,                         indemnification
 for contractual  rescission,  indemnification  for accidents,  as well as lawsuits that
are in Special Civil Courts                         whose claims, separately, do not
exceed forty minimum salaries.
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contingencies with
Possible Risk

The position of
contingencies with levels of risk considered to be possible, and therefore not recorded
in the accounts, is the following:

|      | Year ended December 31,
|----- | -----------------------
|      |                        
|      | 2002                   
|      |                        
|Labor | 440,798                
|Tax   | 570,460                
|Civil | 253,771                
|      |                        
|TOTAL | 1,265,029              
|      |                        

Labor

The increase in labor
contingencies in 2003, of R$184,468 is attributed,  mainly, to monetary restatements in
the amount of R$86,941 and for the             filing of new lawsuits in the amount of
R$158,787, and pointing out that there were revaluations which had resulted in a
reduction of R$75.039.

The main  objects
 that  comprise  the  possible  losses of a labor nature are related to  additional
 remuneration  for  hazardous  activities,             promotions and joint
 responsibility,  the evaluation of which  processes by the legal  assessors  resulted in
a level of risk of loss evaluated             only as possible. As well as the cited
objects, the following demands also contribute to the aforementioned amount:

|(i) | Petition
for remunerative consideration for hours of works supposedly exceeding the normal working
hours agreed upon between the parties; and
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | Petition
for application of a regulation that stipulated the payment of a percentage on the Companys
profits,  attributed to the Santa Catarina                         Branch.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Tax

The increase
 occurring in 2003 of R$293,507  refers,  mainly,  to the following  amounts and
respective  objects:  R$209,445 related to ISS not             collected and/or
 under-collected,  R$107,666 related to an interstate  differential  rate of ICMS (State
VAT),  R$45,364 related to ICMS on the             international  calls,  R$19,265
 related to immunity from COFINS,  R$9,851 related to social  security  contribution  and
workers  compensation             insurance,  R$9,618 related to income tax at source on
hedge and swap operations, and also taking into consideration R$18,721 related to success
            fees. It should be mentioned that the monetary  restatement  totaled
R$107,841 and there were reductions for revaluation or reversion  favorable
            to the Company in the amount of R$249,066.

The main lawsuits
considered as possible loss are presented as follows:

|(i) | ICMS
(State VAT) - On international calls;
|--- | ------------------------------------------

|(ii) | ICMS
(State VAT) - Differential of rate in interstate acquisitions;
|---- | -------------------------------------------------------------------

|(iii) | ICMS
(State VAT) - Exploitation of credits related to the acquisition of fixed assets for use
and consumption;
|----- | --------------------------------------------------------------------------------------------------------------

|(iv) | ISS
(Service Tax) - Not collected and/or under-collected;
|---- | ---------------------------------------------------------

|(v) | IRPJ
and CSLL (Income and Social Contribution Taxes) - Monetary variation on credits overpaid
in 1997 and 1998;
|--- | ---------------------------------------------------------------------------------------------------------------

|(vi) | INSS
(Social Security) - Related to the Bresser and Summer Plans, as well as others social
security and SAT payments;
|---- | ---------------------------------------------------------------------------------------------------------------------

|(vii) | COFINS
- REPASS; and
|----- | --------------------

|(viii) | Withholding
tax (IRRF) - Operations related to hedge for covering debts.
|------ | ------------------------------------------------------------------------

Civil

The  increase for
 consolidated  occurring in 2003 was  R$486,869  and is  represented,  mainly,  by an
increase of R$398,830  related to shares             originating  in a  capitalization
 process where a larger  number of shares in the capital is demanded in relation to that
which was issued,  as             well as corresponding dividends claimed. The increase
also is composed of monetary restatements in the amount of R$59,851.

The main lawsuits are
presented as follows:

|(i) | Repayments
 resulting from Community Telephony Program lawsuits (PCT) - the plaintiffs intend to pay
the compensations  related to the contracts                         resulting from the
Community  Telephony  Program.  Such  proceedings  are encountered in various  phases:
 First instance,  Court of                         Appeals and Higher Court of Appeals;
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(ii) | Lawsuits
of a consumer nature;
|---- | ------------------------------

|(iii) | Contractual
- Lawsuits related to the claim for a percentage  resulting from the Real Plan, to be
applied in a contract for rendering  services,                         review of
conversion of installments in URV and later in reais, related to the supply of equipment
and rendering of services; and
|----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(iv) | Attendance
for customers points - Public civil lawsuits arising from the closing of customer
attendance points.
|---- | ---------------------------------------------------------------------------------------------------------------

Contingencies with
Remote Risk

In
addition to the claims mentioned above, there are also contingencies  considered to be of
remote risk in the amount of R$1,294,159 (R$717,097 in 2002).

Management  does not  believe  that the  ultimate  outcome  of any  litigation  described  above will have a
material adverse effect on the Companys  financial  position,  or results of operations after consideration
of the provisions described above.

Letters of Guarantee

The Subsidiary Brasil
Telecom S.A. has contracts for letters of guarantees signed with financial institutions,
 as a complementary guarantee for lawsuits in provisory  execution,  in the amount of
R$124,947.  Most of these  contracts,  representing  84%, have a stated period for
 termination  during 2004 and the remainder is for an indeterminated period of time. The
remuneration for these contracts varies between 0.74% p.a. and 2.00% p.a..

The judicial deposits
related to the contested contingencies and tributes (suspended liability) are presented
in Note 22.

23. Provision for
pensions and other benefits

a.          Pension
and other post employment benefit plans

Brasil Telecom
 sponsors  various private pension plans designed to provide  retirement  benefits and
medical  assistance to employees and their dependents.  These plans are managed by Fundação
de Seguridade Social (SISTEL),  which managed plans for pension and other post retirement
benefits for most companies of the former Telebrás System, and Fundação dos Empregados da
Companhia  Riograndense de Telecomunicações  (FCRT),  which administered the benefit
plans of CRT, acquired in 2000.

The status of each
plan is  reviewed  annually by  independent  actuaries  at the balance  sheet  date.  In
the case of defined  benefit  plans, immediate  recognition is given to actuarial gains
and losses and as from 2001 the Company has established a liability in the balance sheet
for the deficits of those plans showing  deficits,  following the  requirements  of CVM
 Instruction  Nr.  371/00.  In the case of plans that show  surpluses,  no assets are
recognized due to the legal impossibility of distributing the surpluses.

Details of the pension
plans are as follows:

a.1         SISTEL

a.1.1
Description of the plans

PBS-A - Defined
benefit pension plan and PAMA - Retirees health care plan

The Company,  together
with other  companies,  sponsors a defined  benefit private  pension plan and a
 post-retirement  benefit health care plan managed by Fundação SISTEL de Seguridade
 Social  ("SISTEL"),  the PBS-A and PAMA plans.  Until December 1999, all sponsors of the
plans managed by SISTEL were jointly and  severally  liable as to these plans.  On
December 28, 1999,  the sponsors  negotiated  conditions  to create plans  individualized
 by sponsor with the maintenance  of joint and several  liability  only for the
 participants  already  receiving  benefits.  This  restructuring  of SISTEL was
 approved by the government regulator, the Supplementary Pensions Secretariat (SPC), on
January 13, 2000.

The PAMA plan was
subsequently  expanded to cover all the  beneficiaries of the PBS-TCS Group,
 incorporated into TCSPREV (see below) on December 31, 2001, except for those in the
PBT-BrT plan.  According to legal and actuarial opinions,  the sponsor's liability for
contributions to the PAMA plan is exclusively limited to 1.5% of the payroll of active
participants.

TCSPREV  - Defined
contribution plans

This defined
 contribution  plan and settled benefits plan was introduced on February 28, 2000, with
the adherence of around 80% of employees at that time.  On December 31, 2001, all the
other pension plans  sponsored by the Company and managed by SISTEL were  transformed
 into defined  contribution  plans with  settled benefits and were merged into TCSPREV.
 The reorganization  was subsequently  approved by the SPC. The plans that were merged
into TCSPREV were the  PBS-TCS,  PBT-BrT,  the BrT Management  Agreement plan and the
Supplementary  Plan for the Paraná branch employees.  TCSPREV currently serves around 74%
of  active employees.

PAMEC-BrT -
Health-care plan

This health care plan
covers retirees in the PBT-BrT pension plan, which was incorporated into the TCSPREV plan
on December 31, 2001.

a.1.2
Contributions

PBS-A - Defined
benefit pension plan and PAMA - Retirees health care plan

Contributions to the
PBS-A plan are only required in case of an actuarial deficit.  As of December 31, 2003,
the PBS-A plan was in surplus.

The PAMA plan is
maintained  with  contributions  of 1.5% of the payroll of active  participants  linked
to the PBS plans,  segregated  and sponsored by the several SISTEL sponsors.

TCSPREV - Defined
contribution plan

Contributions  to this
 plan were  maintained  on the same  basis as the  original  plans  incorporated  in 2001
for each  group of  participants,  and were established based on actuarial studies
prepared by independent  actuaries  according to regulations in force in Brazil,  using
the capitalization  system to determine costs. In the case of the PBS-TCS defined benefit
plan group, the Companys  contribution was 12% of the payroll of the  participants,
 whilst the employees'  contribution varied according to the age, service time and
salary. In the remaining TCSPREV defined  contribution plan groups, the contributions are
made equally by the employee and the Company and are credited into individual  accounts
of each  participant.  The basic  contribution  percentages vary between 3% and 8% of the
participant's  salary,  according to age. In addition,  participants have the option to
contribute  voluntarily and sporadically to the plan above the basic contribution,  but
without equal payments from the Company.  The Company is responsible for the
administrative cost of the plan and disbursement  of the  benefits.  In 2003
 contributions  by the  Company  to the  TCSPREV  group  represented  on average  7.31%
of the  payroll of the plan participants whilst the average employee contribution of plan
participants was 6.58% (2002, 7.14% and 6.75% respectively).

PAMEC-BrT -
Health-care plan

Contributions for this
plan were fully paid in July 1998.

a.2         FCRT

a.2.1
Description of the plans

BrTPREV plan

The BrTPREV plan was
 introduced on October 21, 2002 as a defined  contribution  and settled  benefits  plan
to provide  supplementary  pension  benefits to employees of the former CRT. In March
2003 this plan was also opened to the new employees of the Company and its  subsidiaries
 who wished to participate in the sponsored complementary social security plans. BrTPREV
currently covers approximately  25% of employees.

Brasil Telecom
Founder and Alternative plans

The Brasil Telecom
Founder and Alternative plans are defined contribution and settled benefit plans, now
closed to the entry of new participants.

a.2.2
Contributions

BrTPREV plan

Contributions  are
made equally by the employee  and the Company and are credited  into  individual
 accounts of each  participant.  The basic  contribution percentages vary between 3% and
8% of the participant's salary,  according to age. In addition,  participants have the
option to contribute  voluntarily and sporadically to the plan above the basic
contribution,  but without equal payments from the Company.  The Company is responsible
for the administrative cost of the plan and the  disbursement  of the  benefits.  In 2003
 contributions  by the  Company  represented  on  average  6.79%  of the  payroll  of the
plan participants, whilst the average employee contribution was 5.87% (2002 1.32% and
1.34% respectively).

Brasil Telecom
Founder and Alternative plans

The regular Company
 contributions  in 2003 to the Founder plan were an average of 5.43% of the  participants  payroll.
 Employees  contributed at variable rates  according  to age,  service  time and salary,
 at an average  rate in 2003 of 5.18% (2002  7.87%).  In the  Alternative  Brazil
 Telecom  plan,  the participants also pay an entrance fee, depending on age when joining
the plan.

The technical deficit
corresponding to the current value of the Company's supplementary  contribution,  due to
the actuarial deficiency of the plans managed by FCRT,  must be amortized  within the
maximum  established  period of 20 years as from January 2000, in accordance  with the
 requirements of the Pensions regulator.  Of the maximum period established, 18 years
still remain for complete settlement.

a.2.3
Resolution CVM 371/2000

In accordance with CVM
resolution 371/2000, Brasil Telecom S.A. recognized the entire actuarial deficit of
R$490,744 of the FCRT plan at December 31, 2001 directly in shareholders' equity, net of
the corresponding taxes. The net amount recorded in shareholders equity was R$ 490,744
together with the corresponding tax benefit of R$ 162,362.

As a result of a new
actuarial  valuation of these plans at December 31, 2003 the deficit  increased to R$
504,404  (R$501,840 in 2002) and consequently the liability was increased to the same
amount, the difference was charged to expenses.

a.3 Status
of the SISTEL and FCRT plans

The status of the
SISTEL and FCRT plans at December 31, 2002 and 2003 is presented below, in accordance
with CVM Resolution 371/2000:

|                                                                                          
|------------------------------------------------------------------------------------------
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|CONCILIATION OF ASSETS AND LIABILITIES                                                    
|                                                                                          
|Actuarial liabilities with benefits granted                                               
|Actuarial liabilities with benefits to be granted                                         
|(-) Payments of defined contributions                                                     
|(=) Total present value of actuarial liabilities                                          
|Fair value of plan assets                                                                 
|(-) Payments of defined contributions                                                     
|Fair value of plan assets                                                                 
|                                                                                          
|(=) Net Actuarial Liability/(Asset)                                                       
|                                                                                          
|                                                                                          
|                                                                                          
|                                                                                          
|CHANGES IN NET ACTUARIAL LIABILITY/ (ASSETS)                                              
|                                                                                          
|Present value of actuarial liability - beginning of period(1)                             
|Cost of interest(1)                                                                       
|Current service cost                                                                      
|Current service cost of the sponsor(1)                                                    
|Current service cost of the participants                                                  
|Net benefits paid(1)                                                                      
|Administrative cost of the plan                                                           
|Actuarial (gain) or loss on actuarial liability                                           
|Value of the liability at the end of the year in respect of defined contributions received
|                                                                                          
|Present value of actuarial liability  end of period                                      
|                                                                                          
|Fair value of plan assets at the beginning of the period(1)                               
|Expected income from plan assets                                                          
|Regular contributions received by the plan                                                
|Sponsor(1)                                                                                
|Participants(1)                                                                           
|Amortization contributions received from the sponsor                                      
|Other funds collected                                                                     
|Payment of benefits(1)                                                                    
|Administrative expenses of the plan                                                       
|Actuarial gains on plan assets                                                            
|Value of the Obligations at the end of the exercise (payment of defined contributions)    
|                                                                                          
|Fair value of plan assets at the end of the period                                        
|                                                                                          
|(=) Value of the Net Actuarial Liabilities/(Assets) (2)                                   
|                                                                                          

|(1) | TCSPREV
Plan: This includes contributions to both the defined benefit and defined contribution
plans.
|--- | -----------------------------------------------------------------------------------------------------

|(2) | The
Company does not recognize an asset when the plan is in surplus.
|--- | --------------------------------------------------------------------

|                                                  
|--------------------------------------------------
|EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS
|                                                  
|Current service cost                              
|Contributions from participants                   
|Cost of interest                                  
|Income from plan assets                           
|Actuarial losses recognized                       
|                                                  
|Total expense recognized                          
|                                                  

|                                      
|--------------------------------------
|PRINCIPAL ACTUARIAL ASSUMPTIONS USED  
|                                      
|Discount rate for actuarial liability 
|                                      
|Total income expected from plan assets
|                                      
|Estimated index for salary increase   
|                                      
|Mortality table                       
|                                      
|Disability table                      
|                                      
|Mortality rate of disabled            
|                                      
|Turnover                              
|                                      
|Retirement age                        
|                                      
|Inflation rate                        
|                                      

N/A:
Not Applicable


---

Supplementary
information - 2003


---

|a) | The
plan assets are the position on November 30, 2003.  With reference to BrTPREV the assets
were projected to December 31, 2003.
|-- | ---------------------------------------------------------------------------------------------------------------------------------

|b) | The
data used is from September 30, 2003 and October 31, 2003 for TCSPREV and BrTPREV,
respectively.  Such data was projected to December 31, 2003,      for both the plans.
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|                                                           
|-----------------------------------------------------------
|                                                           
|                                                           
|                                                           
|                                                           
|                                                           
|RECONCILIATION OF ASSETS AND LIABILITIES                   
|                                                           
|Actuarial liabilities with granted benefits                
|Actuarial liabilities with benefits to grant               
|(=) Present value of actuarial liabilities                 
|Fair value of plan assets                                  
|                                                           
|(=) Net actuarial liability/(asset)                        
|                                                           
|                                                           
|                                                           
|                                                           
|CHANGES IN NET ACTUARIAL LIABILITY/(ASSET)                 
|                                                           
|Present value of actuarial liability - beginning of period 
|Cost of interest                                           
|Current service cost                                       
|Current service cost of sponsor                            
|Net benefits paid                                          
|Administrative cost of plan                                
|Actuarial (gain) or loss on actuarial liability            
|                                                           
|Present value of actuarial liability  end of period       
|                                                           
|Fair value of plan assets at the beginning of the period(1)
|Income from plan assets                                    
|Payment of benefits                                        
|Administrative expenses of the plan                        
|Actuarial gains (losses) on plan assets                    
|                                                           
|Fair value of plan assets at the end of the period         
|                                                           
|                                                           
|                                                           
|(=) Value of the Net Actuarial Liabilities/(Assets) (2)    
|                                                           

|(2) | The Company does not recognize an asset when the plan is in surplus.
|--- | --------------------------------------------------------------------

|                                                  
|--------------------------------------------------
|EXPENSE RECOGNIZED IN THE STATEMENTS OF OPERATIONS
|                                                  
|Constitution of the actuarial liabilities         
|                                                  
|Total expense recognized                          
|                                                  

|                                        
|----------------------------------------
|PRINCIPAL ACTUARIAL ASSUMPTIONS USED    
|                                        
|Discount rate for actuarial liability   
|                                        
|Total income expected from plan assets  
|                                        
|Estimated index for increase in benefits
|                                        
|Mortality table                         
|                                        
|Disability table                        
|                                        
|Mortality rate of disabled              
|                                        
|Starting age for benefits               
|                                        
|Inflation rate                          
|                                        

N/A: Not Applicable


---

Supplementary
information - 2003


---

|a) | The
assets of the plans are the position for November 30, 2003.
|-- | ---------------------------------------------------------------

|b) | The
data used is for September 30, 2003, projected to December 31, 2003.
|-- | ------------------------------------------------------------------------

---

b.          Stock
option plans

On April 28, 2000 the
shareholders  approved a stock option plan for officers and employees.  A maximum of 10%
of each kind of Company stock may be used for the plan. Shares derived from exercising
options guarantee the beneficiaries the same rights granted to other Company
 shareholders.  Administration of this plan was entrusted to a management  committee
 appointed by the Board of Directors,  which decided to grant options using only
preferred  stock. The plan is divided into two separate programs:

b.1      Program A:

This program is
granted as an extension of managements  performance  objectives for the Company
established by the Board of Directors for a five-year  period.  Up to December 31, 2003,
no stock had been granted under this program.

b.2      Program B:

The exercise price of
the option is established by the management  committee  having as reference the market
price of 1000  shares in the date of  granting  the  option,  and will be  monetarily
 restated by the IGP-M between the date of signing the contracts and the payment date.

The first  grant of
stock  options  under  Program B occurred  on December  17,  2002 with  622,364  options
issued.  The second grant of options  occurred on December 19, 2003 with  308,033
 options.  22, 298 options of the first grant lapsed during the year.

The right to exercise
the option is given within the following periods as follows:

|     | First Grant   | Second Grant
|---- | ------------- | ------------
|From | End of period | From        
|33%  | 01/01/04      | 12/31/08    
|33%  | 01/01/05      | 12/31/08    
|34%  | 01/01/06      | 12/31/08    

Vesting can be
 anticipated  as a result of the  occurrence of events or special  conditions
 established in the option contract.

The information
related to the general plan to grant stock options is summarized below:

|                                  | 2002                     | 2003                             
|--------------------------------- | ------------------------ | ---------------------------------
|Preferred stockoptions (thousand) | Average exerciseprice R$ | Preferred stockoptions (thousand)
|Opening balance                   | -                        | -                                
|Granted                           | 622,364                  | 11.34                            
|Lapsed options                    | -                        | -                                
|Closing balance                   | 622,364                  | 11.34                            

None
of the options  granted  had been  exercised  as of the balance  sheet date and the
balance of the options represents 0.17% the total outstanding stocks at that date (0.12%
in 2002).

Considering
the hypothesis that the options will be fully  exercised,  the opportunity  cost of the
premiums of the respective options,  calculated by the Black-Scholes  method, for the
Company would be R$829 (R$35 in 2002).

c.       Other
employee benefits

Other
benefits granted to employees  include private health and dental care plans, meal
allowances, group life insurance, occupational accident insurance, sickness allowance and
transportation subsidies.

24. Shareholders equity

a.       Share
capital

Authorized
 capital  stock as of December 31, 2002 was 700 billion  shares.  The  Companys  issued
and paid up capital stock is comprised of preferred  shares and common shares,  all
without par value,  as shown in the table below:

|                                         | In thousands of shares
|---------------------------------------- | ----------------------
|                                         |                       
|                                         | Common                
|                                         |                       
|Number of shares as of December 31, 1999 | 124,369,031           
|Issuance of shares                       | -                     
|                                         |                       
|Number of shares as of December 31, 2000 | 124,369,031           
|Issuance of shares                       | 4,090,848             
|                                         |                       
|Number of shares as of December 31, 2001 | 128,459,879           
|Issuance of shares                       | 3,203,638             
|                                         |                       
|Number of shares as of December 31, 2002 | 131,663,517           
|                                         |                       
|Issuance of shares                       | 2,368,171             
|                                         |                       
|Number of shares as of December 31, 2003 | 134,031,688           
|                                         |                       

The
capital may be increased only by a decision  taken at a  shareholders  meeting in
connection  with the  capitalization  of profits or reserves  previously  allocated to
capital increases at the shareholdersmeeting.

The
preferred shares are non-voting  except under limited  circumstances  and are entitled to
a minimum preferential  non-cumulative  dividend of 6% of the capital  value per share
or, as from 2002, 3% of the net book value per share,  whichever is greater.  Also the
preferred shares have priority over the common shares in the case of  liquidation  of the
Company.  Under  Brazilian  Corporation  Law,  the number of  non-voting shares or shares
with limited  voting rights,  such as the preferred  shares,  may not exceed  two-thirds
of the total number of shares.

b.       Treasury
Stock

On
December 31, 2003,  788,800  thousand  common shares were held in treasury  (692,000 at
December 31, 2002). These treasury shares are derived from the stock repurchase program.

On
October 1, 2002 the Company's  Board of Directors  approved a proposal to  repurchase
 preferred and common stock under the following terms and conditions:  (i) the retained
 earnings  account  represented the origin of the funds  invested in purchasing  the
stock;  (ii) the  authorized  limit for the  repurchase was 6,161,061  thousand common
shares and 21,986,351  preferred  shares,  corresponding to 10% of the common and
preferred shares  outstanding;  and (iii) the period determined for the acquisition was
three months as from October 2, 2002.

The
quantity purchased was 1,480,800 thousand common shares, the weighted average,  minimum
and maximum costs were R$ 14.08,  R$ 12.40 and R$ 17.00 per thousand shares
 respectively.  The total amount paid was R$ 11,671.

None
of the common shares acquired were sold during the 2002 financial year.

On
December 31, 2003,  the  Company's  common stock was quoted on the BOVESPA  exchange at
R$ 18.25 per thousand  shares.  The common stock held in treasury  represented  R$
27,025,  quoted at the market value on that date.

c.       Capital
Reserves

Reserve
for Share Subscription Premium

This
reserve arose from the  difference  between the amount paid on  subscription  and the
value of the corresponding capital.

Special
Goodwill Reserve

This
The Special  Goodwill  Reserve  arose out of the corporate  restructuring  described in
Note 1 and represents  the  value  of the tax  benefits  which it  management  believe,
 will be  generated  by  future amortization  of the goodwill.  Each year an amount of
the reserve,  corresponding  to the realized  benefit may be capitalized,  to the benefit
of the  controlling  shareholder,  by the issue of new shares.  Minority shareholders
 are ensured the right to preference,  in proportion to their  respective  holdings in
type and class of shares,  and the  consideration  for such  acquisitions as they choose
to make, will be paid to the controlling  shareholder in accordance with the terms of CVM
instruction 319/99,  320/99 and 349/01. In 2001 and  2002  shareholders  meetings
 approved  capital  increases  of  R$23,692  and  R$24,970,  respectively, corresponding
to the 2000 and 2001 realized portion of such tax benefits.

Other
Capital Reserves

These
reserves arose out of the funds invested in income tax incentives.

d.       Income
reserves

Legal
Reserve

A
Brazilian  company is required to  appropriate  5% of annual net income to a legal
reserve until that reserve  equals 20% of  paid-up  share  capital  or 30% of paid-up
 share  capital  plus  capital  reserves; thereafter,  appropriations  to this  reserve
 are not  compulsory.  The legal  reserve  can only be used to increase capital or to
offset accumulated losses.

Unrealized
profit reserve

This
reserve  represents  income  recognized  but not yet received  relating to net gains on
indexation through  December 31, 1995 and to adjustments to investments  valued on the
equity basis. The realization of this  reserve  will  occur when fixed  assets are
 depreciated  or  disposed  of and as  dividends  or other distributions  are received
from the  subsidiary  companys.  Realization  of this reserve is transferred to retained
earnings.

In 2003,  the Company
 reversed  R$627,753  (R$353,659 in 2002),  according to its current policy for common
and preferred shareholders remuneration.

e.   Dividends and
interest on Shareholders Equity

Pursuant
 to its by-laws and  Brazilian  Corporation  Law,  the  Company is required to
 distribute  as dividends  in respect of each fiscal year  ending  December  31, to the
extent  amounts  are  available  for distribution,  an  aggregate  amount  equal to at
least  25% of  Adjusted  Net  Income on such  date.  Under Brazilian  Corporation  Law,
 the  definition  of Adjusted  Net Income is as follows:  statutory  net income reduced
by amounts allocated to legal reserve,  unrealized profits reserve (if any) and
contingency  reserve (if any), and increased by the realized  portion of the unrealized
 profits  reserve and by any reversals of the  reserve  for  contingencies.  The annual
 dividend  distributed  to holders of  preferred  shares  (the ''Preferred  Dividend'')
 has priority in the  allocation of adjusted net income as mentioned in Note 23.aabove.
 Remaining  amounts to be distributed  are allocated first to the payment of a dividend
to holders of common shares in an amount equal to the preferred  dividend and the
remainder is  distributed  equally among holders of preferred shares and common shares.

Brazilian
corporations may make payments to shareholders  characterized as interest on on
shareholdersequity  (the  JSCP).  The rate of  interest  may not be higher  than the
 Federal  Governments  long-term interest  rate (the  TJLP) as  determined  by the
Central Bank from time to time.  The Company  elected to characterize  dividends  for
2002 and 2003 as JSCP.  This is a deductible  expense for income tax  purposes, but is
treated as dividends  for  accounting  purposes and is deducted  from  compulsory
 dividends,  net of withholding income tax.

The
 calculation of Adjusted Net Income and the  determination  of the mandatory  minimum
 dividends in accordance with Brazilian Corporation Law and the Companys by-laws are
shown in the table below:

|                                                                                      | 2002     | 2003     
|------------------------------------------------------------------------------------- | -------- | ---------
|Net income (loss) of the year                                                         | 148,473  | (168,647)
|Adjustments necessary to reach net income (loss) on a Brazilian Corporation Law basis | 294,968  | 853,316  
|Realization of unrealized profit reserve                                              | 353,659  | 87,250   
|Transfer to legal reserve                                                             | (22,172) | (7,208)  
|Adjusted net income                                                                   | 774,928  | 764,711  
|Minimum dividends - 25%                                                               | 193,732  | 191,178  

Dividends attributable
to preferred and common shareholders in identical conditions were:

|          | 2002                       | 2003                      
|--------- | -------------------------- | --------------------------
|          | 3% OF SHAREHOLDERS EQUITY | 3% OF SHAREHOLDERS EQUITY
|COMMON    | 72,562                     | 71,338                    
|PREFERRED | 121,170                    | 119,840                   
|TOTAL     | 193,732                    | 191,178                   

Interest
on shareholders equity   JSCP

The
Company  credited  Interest on  Shareholders  Equity to its  shareholders  according  to
the stock position on the date of each  credit made during the  financial  year.  The
JSCP  Interest on  ShareholdersEquity was allocated to dividends,  net of withholding
 tax, on the closing date of the financial year, as a proposal for the  allocation  of
income to be submitted for approval by the general  shareholders'  meeting. In 2001 the
Company did not credit interest on capital to its shareholders.

|                                                                 | 2002     | 2003    
|---------------------------------------------------------------- | -------- | --------
|INTEREST ON SHAREHOLDERS EQUITY (JSCP) CREDITED TO SHAREHOLDERS |          |         
|COMMON STOCK                                                     | 59,884   | 82,270  
|PREFERRED STOCK                                                  | 99,416   | 137,930 
|                                                                 | 159,300  | 220,200 
|WITHHOLDING TAX (IRRF)                                           | (23,895) | (33,030)
|JSCP, NET                                                        | 135,405  | 187,170 

Allocation of interest
on shareholders equity to the compulsory dividend was:

|                                                          | 2002      | 2003     
|--------------------------------------------------------- | --------- | ---------
|MINIMUM COMPULSORY DIVIDENDS                              | 193,732   | 191,178  
|LESS                                                      |           |          
|INTEREST ON CAPITAL, NET OF IRRF                          | (135,405) | (187,170)
|SUPPLEMENTARY DIVIDEND IN ADDITION TO INTEREST ON CAPITAL | 58,327    | 4,008    

|TOTAL DIVIDENDS PER THOUSAND SHARES (IN REAIS) | 2002     | 2003    
|---------------------------------------------- | -------- | --------
|COMMON                                         | 0.551115 | 0.538194
|PREFERRED                                      | 0.551115 | 0.538194

25. Expansion plan
contributions

Expansion
plan  contributions  were the means by which Brazilian  telecommunication  companies
financed the growth of their  telecommunications  network up to July 1997.  Contributions
 were made by  companys or individuals  wishing to be  connected to the national
 telephone  network.  The  Companys'  expansion  plan contribution  program was
terminated,  with no new contracts being signed after June 30, 1997. The remaining
balance  as of  December  31,  2002 and 2003,  R$8,159  and  R$7,974  presented  within  other
 non-current liabilities  in the  consolidated  balance  sheet,  arose  from  plans
 realized  before  termination,  the corresponding  net assets of which are  already
 included  in the  Subsidiarys  fixed  assets  through  the Community  Expansion Plan.
The Subsidiary  must await final court  decisions  arising from lawsuits filed by
interested parties before the corresponding shares can be issued.

26. Transactions
with related parties

Transactions
 with related parties refer to operations with the parent company,  Solpart  Participações
S.A. and the  subsidiaries  Nova Tarrafa  Participações  Ltda.  and Brasil  Telecom
 S.A.,  as well as their subsidiaries.

Transactions
 between  related  parties and the Company are carried out on an  arms-length  basis.
 The principal transactions are:

a.    Solpart
Participações S.A.

Dividends
and interest on Shareholders Equity

R$
38,989 (R$ 25,820 in 2001) of the dividends credited in 2002 were allocated to the parent
company.

b. Brasil
Telecom S.A.(balances and transactions have been eliminated in the consolidated
financial statements)

Dividends/Interest
on Capital

The
Subsidiary  credited  interest on capital to the Company in the amount of R$ 162,425 (R$
213,367 in 2002).  The balance of this asset as of December 31, 2002, net of withholding
 income tax, is R$ 138,062 (R$ 181,362 as of December 31, 2002).

Loans
to Subsidiary

The
 receivable  that arose at the time of the  Telebrás  spin-off  is indexed to the US
dollar,  bears interest at 1.75% per year,  and  amounted to R$ 89.653 at December  31,
 2003 (in 2002,  R$  120,081).  The charge to financial loss amounted to R$ 18,965 in
2003 (R$ 44,591 in financial income in 2002).

Debentures

On
January 27, 2001, the Subsidiary issued 1,300 private  nonconvertible  debentures at a
unit price of R$ 1,000,  in the total amount of R$ 1,300,000,  for the purpose of funding
part of its investment  program. The entire  issue of  debentures  was acquired by the
Company.  The face value of these  debentures  will be amortized in three  installments
 equivalent to 30%, 30% and 40%,  with maturity on July 27, 2004,  July 27, 2005 and July
27, 2006,  respectively.  The  remuneration  of the  debentures  is equivalent to 100% of
CDI, paid  semiannually.  As of December 31, 2003,  the asset is R$ 1,408,190
 (R$1,405,228  in 2002) and charges recognized in expenses for 2003 represent R$ 286,911
(R$ 236,356 in 2002 and R$26,686 in 2000).

Accounts Receivable
and Accounts Payable

Arising from
 transactions  related to the use of  installations  and logistic  support.  As of
December 31, 2003,  the balance  receivable is R$157 (R$663  payable at December 31,
2002) and the amounts booked against the  profit  and  loss  accounts  in 2003
 represents  R$2,301  (R$2,352  in 2002  and R$  2,466 in 2001) of Operating Expenses and
R$256 in 2002 R$ 4,182 in 2001 of Operating revenue.

Other related
parties

Advance for Future
Capital Increase

Funds for future
capital increase in equity accounted investments or investments stated at cost as of
December 31 were as follows:

PARENT COMPANY
CONSOLIDATED


|INVESTOR            | AFAC INVESTEE              | 2002  | 2003 
|------------------- | -------------------------- | ----- | -----
|                    | MINORITY INVESTMENTS       |       |      
|Brasil Telecom S.A. | Vant Telecomunicações S.A. | 1,809 | 6,965
|TOTAL               | 1,809                      | 6,965

27. Commitments

a.       Capital
expenditure

At December 31,  2003,
 the Company had capital  expenditure  commitments  in the amount of  R$117,694,
     which is expected to be invested  during  2004.  These  commitments  are in relation
to the  continuing      expansion  and  modernization  of the  Companys  plant,
 including  transmission  equipment  and  data      transmission equipment.

b.       Services
rendered due to acquisition of assets

BrT SCS  Bermuda
 acquired  fixed  assets  from a third  party  company.  Concurrently  with the assets
     acquired,  basically  underwater  cables, it assumed the obligation of providing
data traffic services,      initially  contracted  with the company that sold the assets,
 which was a beneficiary of the financial      resources of the respective advances.  The
time remaining for the supplying of such assumed services is      around twenty years.

28. Insurance (not
audited)

The
 Company has  insurance  covering  operational  risks,  loss of profit,  guarantee  on
 contractual commitments,  comprehensive  general liability (including officers  liability),
 national and international cargo,  vehicle and life. At December 31, 2003, in the
opinion of management,  all significant and high-risk assets and obligations were insured.

29.   Fair value of
financial instruments and risk analysis

The
following  methods and assumptions  were used to estimate the fair value of each class of
financial instrument.  The  fair  value  estimates  are made at a  discrete  point in
time  based on  relevant  market information  and  information  about the  financial
 instrument.  Because no market exists for a significant portion of the  Company's
 financial  instruments,  fair value  estimates  are based on judgments  regarding future
expected loss experience,  current economic  conditions,  risk  characteristics  of
various financial instruments  and other  factors.  These  estimates are  subjective in
nature and involve  uncertainties  and matters if significant  judgment and therefore
 cannot be determined with precision.  Changes in assumptions could significantly affect
the estimates.

a.       Fair Value
of current assets and liabilities

The
carrying  amount of cash and cash  equivalents,  trade accounts  receivable,  accounts
 payable and short-term financing approximates fair value due to the short maturity of
these instruments.

b.       Foreign
currency loans and financing (primarily exchange rate risk)

The
Company and the  Subsidiary  have loans and  financing  contracted  in foreign  currency
 with risk related to the  possibility  of  fluctuations  in  exchange  rates which may
 increase  the balance of these liabilities.  Loans  subject to this risk  represent
 3.9% of total loans and financing  (5.4% in 2002).  To protect it from foreign  currency
 risk, the Company and the  Subsidiary  enters into foreign  currency swap contracts with
financial  institutions.  Of its debts in foreign currency,  30% are covered by swap
contract agreements.  Unrealized  positive or negative  effects of these  operations  are
 recorded in the profit and loss accounts as gain or loss. In 2003,  consolidated  net
losses totaled R$83,188 (net gains of R$28,874 in 2002).

The
book and market values of the foreign  currency  loans and financing and the swap
 contracts as of December 31, 2002 and 2003 was as follows:

|                    | 2002         | 2003      
|------------------- | ------------ | ----------
|Book value          | Market value | Book value
|Liabilities         |              |           
|Loans and financing | 243,964      | 228,768   
|Swap contracts      | (28,514)     | (27,980)  
|TOTAL               | 215,450      | 200,788   
|Current             | 46,472       | 41,443    
|Non-current         | 168,978      | 159,345   

The
 method  used for  calculation  of market  value  (fair  value) of loans and  financing
 in foreign currency was the discounted cash flow, at the market rates prevailing on the
balance sheet date.

The
fair value of the swap contracts was estimated  using  specific data available for these
 financial instruments,  including  using prices  currently  charged to enter into
similar  agreements,  or discounting projected cash flows at market  discount rates that
reflect the credit,  interest and foreign  currency risk associated with these financial
instruments.

c.       Local
currency loans and financing (primarily interest rate risk)

The
Subsidiary has loans and financing  contracted in local currency,  subject to interest
rates linked to various  reference rates (TJLP,  UMBNDES,  CDI, etc) with the risk of
 fluctuations  in these rates.  The Subsidiary  has contracted  derivative  contracts to
hedge 79% (75% in 2002) of its  liabilities  subject to the UMBNDES  rate,  using
 exchange  rate swap  contracts,  considering  the  influence of the dollar on the basket
of  currencies,  which  determine  the UMBNDES  interest  rate.  However the other
 market  rates are continually  monitored  to  evaluate  the  need to  contract
 derivatives  to  protect  against  the risk of volatility of these rates.

The
book and market  values of the loans and  financing  in local  currency as of December
31, 2002 and 2003 is as follows:

|                                            | 2002       | 2003        
|------------------------------------------- | ---------- | ------------
|                                            | Book value | Market value
|Liabilities                                 |            |             
|Loans linked to TJLP (including debentures) | 2,693,835  | 2,693,835   
|Loans linked to UMBNDES                     | 307,413    | 307,413     
|CDI                                         | 924,617    | 924,617     
|Loans linked to IGPM                        | 25,647     | 25,647      
|Other loans                                 | 29         | 29          
|Swap contracts                              | 9,176      | (858)       
|TOTAL                                       | 3,960,717  | 3,950,683   
|Current                                     | 545,402    | 535,368     
|Non current                                 | 3,415,315  | 3,415,315   

Book
and market values are  equivalent  because the current  contractual  conditions for these
types of financial instruments are similar to those when they were contracted.  A
hypothetical  unfavorable variation of 1% in the aforementioned rates, would result in a
negative impact on income of approximately R$ 5,770.

The
fair value of the swap contracts was estimated  using  specific data available for these
 financial instruments,  including  using prices  currently  charged to enter into
similar  agreements,  or discounting projected  cash flows at market  discount  rates
that  reflect the credit,  interest  associated  with these financial instruments.

30. Subsequent
events

a.       Execution
of obligations of universalization (unaudited)

Under
 terms of the  legislation,  by which the  Federal  Government  granted  concessions  for
the operation  of fixed line  telephony  in Brazil,  the country was divided  into 3
regions and the Company had until 2003, the concession to operate only in Region II.

On
January 19, 2004,  through an announcement in the Official  Gazette,  ANATEL recognized
that the Company had achieved compliance with the minimum coverage  requirements
 established for its concession area in the Brazilian  governments  General Plan for
Universal Goals - (PGMU), prior to the deadline of December 31,  2003.  Consequently,
  the  restriction  that  would  have  prohibited  the  Company,  its  controlling
corporations,  subsidiaries  and associated  companies from providing  telecommunications
 services in other areas,  without new  authorizations  from the  regulator,  ceases to
have effect.  In the same  publication, ANATEL issued  authorizations to the Company to
offer STFC services in the following service  modalities and areas:  (i) Local and
National Long Distance  calls in Regions I and III and Sectors 20, 22 and 25 of Region II
of the General Plan of Grants (PGO);  and (ii)  International Long Distance calls, in
Regions I, II and III of the PGO.

b.
      Acquisition of interests in MTH do Brasil Ltda. and Vant Telecomunicações S.A.

On
January 20, 2004,  BrT gave notice to (i) MetroRED  Telecommunications  Group Ltd.  (MetroRED)
and FTT  Ventures  Limited  (FTT)  of its  intention  to  exercise  its  option to
 purchase  80.1% of the corporate  capital of MTH do Brasil Ltda.  (MTH),  which holds
99.9% of the corporate  capital of MetroRED Telecomunicações  Ltda.  (MetroRED  Brasil),
 under  the terms of the  Option  Agreement  entered  into on February  17,  2003,  and
(ii)  Aescom Sul Ltda.  (Aescom)  of its  intention  to  exercise  the option to
purchase  80.1% of the  corporate  capital of Vant  Telecomunicações  S.A.  (Vant)
 under the terms of the Option Agreement entered into on December 5, 2001.

The
 transfer of control of MetroRED  and Vant to BrT was  approved at the Meetings of the
Board of Directors  of the  National  Telecommunications  Agency  Anatel  held on April
 28,  2004 and May 5,  2004, respectively.

Accordingly,
 on May 13, 2004 MetroRED and FTT have executed  instruments  that  transferred to BrT
quotas  representing  80.1% of the  corporate  capital  of MTH and 1 (one)  quota of
 MetroRED  Brasil,  and receive in exchange a price of US$51  million.  Likewise,  Aescom
has on May 13, 2004  executed  instruments that  transferred  to BrT shares  representing
 80.1% of the  corporate  capital of Vant,  and  receives  in exchange a price of
R$15,575,284.80  (fifteen million, five hundred and seventy-five  thousand,  two hundred
and eight-four  Brazilian  reais and eighty cents).  Upon conclusion of these
 transactions,  BrT became the direct and indirect holder of the entire corporate
 capital of MTH and consequently of MetroRED Brasil,  and of the entire corporate capital
of Vant.

MetroRED
Brasil is a provider of private  telecommunications  network services through
 fiber-optic digital  networks,  and has 339 km of local  networks in São Paulo,  Rio de
Janeiro,  and Belo Horizonte and 1,485 km of long distance network  connecting these
three major  metropolitan  commercial  centers.  It also owns an Internet Solutions
Center with an area of 3,500 m2 in São Paulo, which offers  co-location,  hosting and
added-value services.

Vant
is a service provider company for corporate networks,  founded in October 1999. Initially
with focus on TCP/IP networks,  Vant began in Brazil with a network 100% based in this
technology.  Vant operates throughout  Brazil,  and is present in the main Brazilian
 capitals and offers a wide portfolio of voice and data products.

The
acquisition of MetroRED and Vant has a fundamental  role in BrTs strategy for expansion
beyond Region II, in light of their position in the corporate  market,  their focus on
data  transmission  services and the fact that their networks complement BrTs.

c.       Credit of
Interest on Shareholders Equity - JSCP

The
Management of the Company  decided on January 30, 2004, by delegation of the Board of
Directors in a meeting held on December 12, 2003,  to pay  Interest on  Shareholders  Equity
 (JSCP) in the amount of R$75,000  (R$63,750 net of withholding tax - IRRF).  The date
 determined for the accounting  recognition of the JSCP is January  30,  2004.  The JSCP
can be imputed to the  dividends  for 2004 that will be subject to the  approval  of the
 shareholders  general  meeting  to be held in 2005,  which  will  decide the date of
payment.

d.       Funding of
Resources with Issuance of Bonds

The
Company  began on offer on February 9, 2004 for the  placement of bonds,  in the total
value of US$200 million,  with maturity in 2014,  remunerated at the rate of 9.375% per
year payable each six months. The payment of the  principal  will  always  fall on the
dates of August 17 (of 2004 for the first  payment) and  February 17 (of 2014 for the
last  payment).  The  placement  was  private,  destined to  institutional investors and
the  leadership of the operation fell to Citigroup.  The closing of the operation
 occurred on February 17, 2004,  when the legal  instruments  related to the operation
 were signed,  with the consequent financial  settlement.  The funds will be use for the
Companys capital investment program,  related to 2004 and 2005.

e.
      Acquisition of interests in Internet Group Limited (iG)

In
response to the binding offers sent by Brasil Telecom S.A., in compliance with the
 deliberation wich  occurred in the Board of  Directors  meeting held on December 18,
2003,  for the  acquisition  of the shares of  Internet  Group  Limited  (iG),
 acceptance  confirmations  were  received  from the  following shareholders on May 18,
2004: GP Holdings Inc.;  Global Internet  Investments;  Digital Network  Investments
Ltd.; Andrade Gutierrez Contractors;  Infinity Trading Ltd.; NG9 Internet Investments;
 Blue Star I, LLC; TH Lee Putnam  Parallel  Ventures,  LP; TH Lee Putnam  Ventures,  LP;
THLi  Coinvestments  Partners,  LLC;  UBS Capital  Americas III, LP; UBS Capital
 Americas  Nominees  B.V.;  Ideas & Solutions;  Al Nahda  Investment, Dunial Khazal
Company, and company management.

The
transactions  represent the acquisition of different classes of shares, with and without
voting rights,  equivalent  to 63% of iGs  corporate  capital in the amount of US$100.7
 million,  with an implied value of US$137.7  million for 100% of iG shares,  and
consider that iG has a cash position of approximately US$16  million.  Including  the
stake of 9.45%  already  held by Brasil  Telecom  Participações  S.A.,  both Companies
together will control 72.45% of iGs corporate capital.

The
acquisitions  are subject to the fulfillment of certain usual terms concerning
 transactions of this nature,  including due diligence  and the  negotiation  of final
 contract  agreements,  as well as the necessary approval by the ruling authorities.

With
these  acquisitions,  Brasil Telecom positions itself as the leader in the Brazilian
 Internet market and consolidates its strategy to offer integrated and convergent
telecommunications services.

31. Summary of the
differences between Brazilian GAAP and U.S. GAAP

The
 consolidated  financial  statements have been prepared in accordance with Brazilian
 generally accepted  accounting  principles  (Brazilian  GAAP),  which differ in
certain  significant  respects  from accounting principles generally accepted in the
United States of America (U.S. GAAP).

The
following is a summary of the  significant  policies and  adjustments  to net income
(loss) and shareholders  equity  required  when  reconciling  such  amounts  recorded
 in the  consolidated  financial statements  to the  corresponding  amounts  in
 accordance  with  U.S.  GAAP,  considering  the  significant differences between
Brazilian GAAP and U.S. GAAP:

a.       Different
criteria for capitalizing and amortizing capitalized interest

Until
 December 31, 1993,  capitalized  interest was not added to the  individual  assets in
property, plant and equipment;  instead,  it was  capitalized  separately  and amortized
over a time period  different from the estimated  useful lives of the related assets.
 Under U.S. GAAP,  capitalized  interest is added to the individual assets and is
amortized over their estimated useful lives.

Also,
 under  Brazilian  GAAP, as applied to companies in the  telecommunications  industry,
 interest attributable to  construction-in-progress  was  calculated,  up to December 31,
1998, at the rate of 12% per annum of the  balance of  construction-in-progress  and that
part which  related to  interest on third party loans was  credited  to  interest
 expense  based on actual  interest  costs with the  balance  relating  to self-funding
being credited to capital reserves.  Starting 1999,  Brazilian GAAP required
 capitalization of interest  on loans  specifically  related  to  financing  of
 construction  in  progress,  and  interest  on self-financing is no longer allowed.

Under
U.S.  GAAP, in accordance  with the  provisions of Statements of Financial  Accounting
 Standards (SFAS) Nr. 34,  Capitalization  of Interest Cost, interest  incurred on
borrowings is capitalized to the extent that  borrowings  do not exceed the balances of
 construction-in-progress.  The credit is a reduction of interest  expense.  Under U.S.
 GAAP,  the amount of interest  capitalized  excludes  the  monetary  gain associated
with the borrowings and the foreign exchange gains and losses on foreign currency
borrowings.

The
effects of these different  criteria for  capitalizing and amortizing  capitalized
 interest are as follows:

|                                                                  | Year ended December 31
|----------------------------------------------------------------- | ----------------------
|                                                                  |                       
|                                                                  | 2001                  
|                                                                  |                       
|Capitalized interest difference                                  
|U.S. GAAP capitalized interest:                                  
|Interest which would have been capitalized and credited to income
|under U.S. GAAP (Interest accrued on loans , except in years     
|when total loans exceeded total construction-in-progress, when   
|capitalized interest was reduced proportionately)                 | 229,234               
|                                                                 
|Accumulated capitalized interest on disposals                     | (9,967)               
|                                                                  |                       
|                                                                  | 219,267               
|                                                                  |                       
|                                                                 
|Less Brazilian GAAP capitalized interest:                        
|Interest capitalized and credited to income under Brazilian GAAP 
|(Up to the limit of interest incurred on loans obtained for      
|financing capital investments)                                    | (247,380)             
|Accumulated capitalized interest on disposals                     | 22,001                
|                                                                  |                       
|Total capitalized interest under Brazilian GAAP                   | (225,379)             
|                                                                  |                       
|U.S. GAAP difference                                              | (6,112)               
|                                                                  |                       
|                                                                 
|                                                                  | 2001                  
|                                                                 
|Amortization of capitalized interest difference                  
|Amortization under Brazilian GAAP                                 | 223,769               
|Less: Amortization under U.S. GAAP                                | (106,913)             
|Difference in accumulated amortization on disposals               | (13,712)              
|                                                                  |                       
|U.S. GAAP difference                                              | 103,144               
|                                                                  |                       

b.  Dividends and
interest on shareholders equity

Although
 under  Brazilian  Corporation  Law proposed  dividends  require  approval at a
 shareholdersmeeting,  under Brazilian  Corporation Law they are accrued for in the
consolidated  financial statements in anticipation of their approval by the  shareholders  meeting.
 Distributions  characterized  as interest on shareholders  equity as well as minimum
 compulsory  dividends are accrued for under both  Brazilian and US GAAP.  Any excess of
 proposed  dividends  over  either the minimum  compulsory  dividend  or  distributions
characterized as interest on  shareholders  equity would not be accrued for under US
GAAP, if such proposed dividends  is subject to approval  at the annual  Shareholders  Meeting.
 There was no such excess in 2001, 2002 or 2003.

c.       Pensions
and other post-retirement benefits

Refer to Note 32.a for
a discussion of  differences  between  Brazilian GAAP and U.S. GAAP as they relate to
pensions and other post-retirement benefits.

For purposes of the
U.S. GAAP  reconciliation,  the  provisions of SFAS Nr. 87,  Employers'  Accounting for
Pensions  (SFAS 87) and SFAS Nr. 106,  Employers'  Accounting  for  Post-retirement
 Benefits Other than Pensions  (SFAS 106) have been applied.  The  provisions of SFAS
87 were applied with effect from January 1, 1992 because it was not feasible to apply
them from the effective  date  specified in the standard.  As a result,  R$292,131 of the
 transition  liability was  transferred  directly to  shareholders'  equity at the
implementation date.

Under Brazilian GAAP,
the Company adopted CVM  Deliberation  371 during the year ended December 31, 2001 and
recorded an adjustment to opening  shareholders  equity  amounting to R$ 328,381,  net
of R$162,362,  which was recorded as deferred  income tax on provision for pension.  This
 adjustment  was reversed for U.S. GAAP purposes,  since all effects of pensions and
other  post-retirement  benefits  have already been  recognized after applying SFAS 87
and SFAS 106.

d.       Items
recorded directly in shareholders equity accounts

Under Brazilian GAAP,
some items are recorded directly in shareholders' equity, which under U.S. GAAP would be
recorded in the statements of operations, such as fiscal incentives in regional funds
converted into shares or capital quotas of telecommunication companies, detailed in item
(l) and tax incentives that are granted to the Company and became effective immediately.

e.       Earnings
(losses) per share

Under
Brazilian GAAP, net income (loss) per share is calculated on the number of shares
 outstanding at the balance sheet date. In these  consolidated  financial  statements,
 information  is disclosed per lot of one  thousand  shares,  because  generally  this is
the  minimum  number of shares that can be traded on the Brazilian stock exchanges. Each
American Depositary Share (ADS) is equivalent to five thousand shares.

As
determined by SFAS Nr. 128,  "Earnings Per Share",  since the preferred and common
 stockholders have different  dividend,  voting and  liquidation  rights,  basic and
diluted  earnings per share have been calculated  using the "two-class"  method.  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.

Basic
earnings per common share is computed by dividing net income available to common
 shareholders by the  weighted  average  number of common  shares  outstanding  during
the period.  Net income  available  to preferred  shareholders is the sum of the
preferred  stock  dividends (a minimum of 6% of preferred  capital or, as from 2002, 3%
per annum calculated on the amount  resulting from dividing the net book  shareholders'
equity by the total number of Company  shares,  whichever is greater,  as defined in the
Companys  by-laws) and the preferred  shareholders  portion of undistributed net
income.  Undistributed net income is computed by deducting  total  dividends (the sum of
preferred and common stock  dividends)  from adjusted net income. Undistributed  net
income is shared  equally by the preferred and common  shareholders  on a pro rata basis.
Total  dividends  are  calculated  as  described  in note 24.e.  Diluted  earnings  per
share is computed by reducing net income for an increase in net earnings  allocated to
minority  shareholders  and dividing  such net income available to common and preferred
shareholders by the monthly  weighted-average  number of common and preferred shares
outstanding during the period.

The  weighted-average  (thousand) shares outstanding for diluted earnings per share is not greater than
such shares used in the basic earnings per share  calculation  since the dilutive share issue is that of the
Holding  Companys  subsidiaries,  as indicated below. The  weighted-average  number of common and preferred
shares used in computing  basic  earnings per share for 2003 was  133,636,993,000  (130,862,607,000  in 2002
and  127,437,166,000  in 2001) and  220,853,075,000  in 2003  (219,344,544  in 2002 and  219,863,511,000  in
2001),  respectively.  The Companys have received  certain  contributions  from customers or customers have
independently  paid  suppliers of  telecommunication  equipment and services for the  installation  of fixed
line  services.  These  amounts  are  reflected  as funds  for  capitalization  within  other  non-current
liabilities in the accompanying  consolidated  balance sheets. Once the installation is essentially complete
and the  contributions  have been  received,  the funds will be  converted  into  equity (see Note 25 to the
consolidated  financial  statements).  The shares are treated as  outstanding  and included in the basic EPS
calculation  only when such funds are converted to equity and the shares  issued.  The shares are treated as
outstanding  for diluted EPS purposes  when  expansion  plan  contributions  are received or when  Community
Expansion Plan agreements  have been approved.  The 907,469  thousand  preferred stock options granted under
the stock option  program for  officers and  employees  mentioned  in Note 23.b were not  considered  in the
calculation  of the diluted  earnings per share,  as the program  only  contemplates  stock  options for the
Subsidiary Brasil Telecom S.A.

If
the  Company  is  able  to  pay  dividends  in  excess  of the  minimum  requirement  for
 preferred shareholders  and the remainder of the net income is  sufficient  to provide
equal  dividends to both common and  preferred  shareholders,  then the basic and the
diluted  earnings  per share will be the same for both common and preferred shareholders.

The
 Company's  preferred  shares are  nonvoting  except under certain  limited
 circumstances  and are entitled to a preferential,  non-cumulative  dividend and to
priority over the common shares in the event of liquidation  of the  Company.  In 2000,
 2001 and  2002,  the  amount  of  dividends  paid to the  preferred shareholders
 exceeded the minimum guaranteed  dividends,  and was equal to the amount per share paid
to the common shareholders.

f.       Disclosure
requirements

U.S.
GAAP  disclosure  requirements  differ from those required by Brazilian  GAAP.  However,
 in these consolidated financial statements, the level of disclosure has been expanded to
comply with U.S. GAAP.

g.       Income
taxes

The
Company  fully  accrues for  deferred  income taxes on  temporary  differences  between
tax and reporting  records.  The existing policies for accounting for deferred taxes are
substantially in accordance with SFAS Nr. 109, "Accounting for Income Taxes" (SFAS 109).

Under
SFAS 109, the  provisional  measures,  which are  temporary  measures  used by the
 Government to determine  changes in tax rates,  are not considered to be enacted law.
 Therefore,  the deferred tax effect calculated  using the  social  contribution  rate of
9% as  described  in Note 9, would be changed to 8% for U.S. GAAP purposes in 2001.

h.       Interest
expense, interest income and accrued interest

Brazilian
GAAP requires  interest  expense and income to be shown as part of operating income
(expense) and accrued interest as a part of loans and financing within liability
 balance.  Under U.S. GAAP,  interest expense and income would be shown after  operating
 income  (expense)  within  statements of operations  and accrued interest would be
included in accounts payable within the balance sheet.

i.       Employees profit
sharing

Brazilian
GAAP requires  employees'  profit sharing to be shown as an  appropriation  of net income
for the year.  Under U.S.  GAAP,  employee  profit  sharing is included  as an expense in
arriving at  operating income (expense).

j.       Permanent
assets

Brazilian
GAAP has a class of assets called permanent  assets.  This is the collective name for all
assets on which  indexation  adjustments  were  calculated  in the  corporate  and
 fiscal law  accounts  of Brazilian  companies.  Under U.S. GAAP, the assets in this
 classification  would be non-current  assets and property,  plant and equipment.  Gains
and losses on the disposal of permanent  assets are presented in Note 8. Such gains and
losses are classified as  non-operating  expense for Brazilian GAAP. Under U.S. GAAP,
such gains and losses would affect operating income (expense).

k.
      Price-level  adjustments  and U.S.  GAAP  presentation  in respect of  accounting
 periods  through      December 31, 2000

The
effects of  price-level  adjustments  have not been  eliminated in the  reconciliation
 to U.S. GAAP,  because the  application of inflation  restatement  as measured by the
IGP-M,  applied until December 31, 2000 under Brazilian GAAP,  represents a comprehensive
 measure of the effects of price level changes in the  Brazilian  economy and, as such,
is considered a meaningful  presentation  for both  Brazilian and U.S. accounting
purposes.

See
the  reconciliation  of net income (loss) for the years ended December 31, 2001,  2002
and 2003 and shareholders  equity  as at that  date  in  accordance  with  Brazilian
 Corporation  Law to net  loss  and shareholders  equity  in  accordance  with
 Brazilian  GAAP  reported  herein  in Note  2.b  and a  summary explanation of these 2
sets of Brazilian accounting principles in Note 2.a.

l.       Funds for
capitalization

i. Resources for
capital increase and expansion plan contributions

Under
Brazilian GAAP,  resources for capital  increases and expansion plan  contributions
 received are included in the balance sheet as non-current  liability until the
subscribers  have paid for their telephone connection in full and a general meeting of
shareholders approves the capital increases.

Effective
 January 1, 1996,  indexation of the expansion plan  contributions was no longer applied
and, for  contracts  signed as from that date,  Telebrás  (the former  controlling
 shareholder)  was allowed the option of using a value per share  equal to the market
 value,  when this was higher  than book  value.  For U.S. GAAP purposes,  a portion of
the resources for capital increase and expansion plan contributions  would be allocated
to  shareholders'  equity based on the market value of the shares to be issued to
 subscribers. The remainder of the resources for capital  increase and expansion  plan
 contributions  would be classified as  a  deferred   credit  and  amortized  to  reduce
  depreciation   expense  from  the  time  the  related construction-in-progress is
completed.

ii. Donations and
subsidies for investments

Under
Brazilian GAAP,  those amounts which comprise  principally the excess of the value of
property,  plant and equipment  incorporated  into the Company's assets over the
corresponding  credits for expansion plan  contributions  received are recorded as a
credit to other capital reserves. For U.S. GAAP purposes, the credit to capital reserves
would be classified as a deferred credit and amortized to reduce depreciation expense.

m.          Valuation of long-lived Assets

SFAS
 Nr. 144  provides a single  accounting  model for  long-lived  assets to be disposed
 of. SFAS  Nr. 144  also  changes the  criteria for classifying  an asset as held for
sale;  and  broadens  the scope of  businesses  to be  disposed  of that  qualify for
 reporting  as  discontinued operations and changes the timing of recognizing  losses on
such  operations.  The Company adopted SFAS Nr. 144 on January 1,  2002. The adoption of
SFAS Nr. 144 did not affect the Companys financial statements.

In
 accordance  with SFAS  Nr. 144,  long-lived  assets,  such as  property,  plant,  and
 equipment,  and  purchased  intangibles  subject to amortization,  are reviewed for
impairment  whenever  events or changes in  circumstances  indicate that the carrying
 amount of an asset may not be recoverable.  Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated  undiscounted
future cash flows expected to be generated by the asset. If the carrying  amount of an
asset exceeds its estimated  future cash flows, an impairment charge is  recognized by
the amount by which the carrying  amount of the asset  exceeds the fair value of the
asset.  Assets to be disposed of would be separately  presented in the balance sheet and
reported at the lower of the carrying  amount or fair value less costs to sell,  and are
no longer depreciated.  The assets and  liabilities of a disposed group  classified as
held for sale would be presented  separately in the  appropriate  asset and liability
sections of the balance sheet.

Goodwill
and intangible  assets not subject to amortization are tested annually for impairment,
 and are tested for impairment more frequently if events and  circumstances  indicate
 that the asset might be impaired.  An impairment  loss is recognized to the extent that
the carrying  amount exceeds the assets fair value.

Prior
to the  adoption of SFAS  Nr. 144,  the Company  accounted  for  long-lived  assets in
 accordance  with SFAS  Nr. 121, Accounting  for Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of.

Brazilian
GAAP does not require the 2 steps approach to determine  potential asset  impairment,
 but requires  measurement of recoverability for  long-lived  assets on a recurring
 basis or when events or changes in  circumstances  indicate that the carrying  value of
an asset or group of assets may not be recoverable. For all periods presented, no
impairment losses were recognized under Brazilian GAAP and U.S. GAAP.

Under
Brazilian GAAP,  impairment losses would be recorded as non-operating  expenses.  Under
U.S. GAAP,  impairment losses are recorded as operating expenses.  Additionally,  under
Brazilian GAAP the gains (losses) on disposal of permanent assets and write-off of
permanent assets due to obsolescence (as presented in Note 8) are considered a
non-operating item, while under U.S. GAAP they are all considered operating expenses.

n.          Stock
options

Under
U.S. GAAP, the Company  accounts for stock options in accordance with SFAS Nr. 123,
 "Accounting  for  Stock-Based  Compensation," which  establishes a fair-value  method of
accounting  for employee  stock options or similar equity  instruments.  For US GAAP,
 the  Black-Scholes option-pricing  model was used to estimate the grant date fair value
of its options  granted.  Under  Brazilian  GAAP,  there is no  requirement  to account
for stock options at fair value.  The  adjustment to reflect the  difference in valuation
 basis between U.S. GAAP and Brazilian  GAAP is as follows:

|                                            | First Gant | Second Grant
|------------------------------------------- | ---------- | ------------
|                                            |            |             
|                                            |            |             
|Number of options granted (in thousands)    | 622,364    | 308,033     
|                                            |            |             
|Fair value of option at date of grant*      | $0.00409   | $0.00556    
|                                            |            |             
|Fair value of options granted at grant date | $2,544     | $1,713      
|                                           

The fair value of
options is  recognized  over the expected  vesting  term of the option for US GAAP
 purposes,  which is three years.  An amount of R$829 was  recognized  for U.S.  GAAP
 purposes as stock  option  compensation  expense  (2002:  R$35).  No stock  option
 compensation  expense was recognized for Brazilian GAAP purposes.

* The assumptions
underlying the calculation of the fair value of the option are detailed in note 32.e.

o. Goodwill & other
      intangible assets and business combination

Goodwill & other
intangible assets

Under
Brazilian GAAP goodwill  represents the difference between historical book value of the
assets acquired and liabilities  assumed and the purchase  price,  and it is  amortized
 over the  estimated  period  over which the Company  expects to benefit  from the
 goodwill.  This period is determined  based on the reasons  attributed  by  management
 for the payment of  goodwill.  Impairment,  if any, is measured to the extent that the
unarmotized balance of goodwill exceeds the expected future profits of the business.

Under
US GAAP,  goodwill  represents the excess of costs over fair value of assets of
businesses  acquired.  The Company and its  subsidiaries adopted the provisions of SFAS
Nr. 142, Goodwill and Other Intangible Assets, as of January 1,  2002.  Goodwill
and intangible assets acquired in a purchase  business  combination  and  determined to
have an indefinite  useful life are not  amortized,  but instead  tested for impairment
at least annually in accordance  with the  provisions of SFAS Nr. 142.  SFAS Nr. 142
 also requires that  intangible  assets with  estimable  useful lives be amortized over
their  respective  estimated  useful lives to their estimated  residual  values,  and
reviewed for impairment in accordance with SFAS Nr. 144,Accounting for Impairment or
Disposal of Long-Lived Assets.

In
connection with SFAS Nr. 142s  transitional  goodwill  impairment  evaluation,  the
Statement required the Company and its subsidiaries to perform an assessment of whether
there was an indication that goodwill is impaired as of the date of adoption.  To
accomplish  this, the Company and its  subsidiaries  were required to identify its
reporting units and determine the carrying value of each reporting unit by assigning the
assets and liabilities,  including  the  existing  goodwill  and  intangible  assets,  to
those  reporting  units as of  January 1,  2002.  The Company and its subsidiaries  were
required to determine the fair value of each  reporting  unit and compare it to the
carrying  amount of the reporting unit within six months of January 1,  2002. To the
extent the carrying  amount of a reporting  unit exceeded the fair value of the reporting
 unit,  the Company and its  subsidiaries  would be required to perform the second step
of the  transitional  impairment  test, as this would be an indication  that the
reporting unit goodwill may be impaired.

Under
the terms of the operating  concessions granted by the Federal Government,  the Company
is obliged to provide a certain minimum level of services over the entire area covered by
its operating  licenses.  Also,  the Company does not possess  discrete  financial
 information  that could allow a  determination  of assets and  liabilities  (and
 goodwill)  allocation  in a level below the entire  business  and  neither  does it
manage different  areas of the concession as if they were separate  businesses and has
thus  considered  the entire  business to be one reporting  unit. In viewing all the
assets and  liabilities  of the Company as one reporting  unit and  performing an initial
 assessment on this  reporting  unit as to whether there was an indication that goodwill
is impaired  (based on a valuation  performed by an independent  third party),  the
second step of the transitional impairment test was not required. Consequently, the
Company and its subsidiaries were not required to recognize an impairment loss.

Prior
to the adoption of SFAS Nr. 142,  for US GAAP purposes  goodwill was amortized on a
straight-line  basis over the expected periods to be benefited,  and assessed for
 recoverability  by  determining  whether the  amortization  of the goodwill  balance
over its remaining  life could be recovered  through  undiscounted  future  operating
 cash  flows of the  acquired  operation.  All  other  intangible  assets  were
 amortized  on a straight-line  basis.  The amount of goodwill and other  intangible
 asset  impairment,  if any, was measured based on projected  discounted  future
operating cash flows using a discount rate  reflecting  the Company and its  subsidiaries  average
cost of funds.  The amount of goodwill and other intangible asset  impairment,  if any,
was measured based on projected  discounted  future operating cash flows using a discount
rate reflecting the Companys average cost of funds.

Under
Brazilian GAAP, goodwill amortization is classified in non-operating expenses. Under U.S.
GAAP, goodwill amortization was classified in operating expenses until December 31, 2001.



Business
combinations

i) Purchase of
minority interests in the eight operating companies formerly held directly by Brasil
Telecom Participações S.A.

On
February 28, 2000, in connection  with the combination of the eight  operating  companies
under common control with Telepar,  the Company made an offer to exchange  Telepar shares
for the shares held by minority  shareholders  in each of the operating  companies.  The
exchange was made based on the book value of the shares of Telepar compared to the book
value of the shares of the operating  companies.  The Book value of the shares was
calculated by dividing  stockholders  equity by the number of shares  outstanding.  In
the exchange offer,  Telepar acquired almost 100% of the minority shares.

Under
U.S.  GAAP,  the purchase  price of these shares must be calculated  based on the traded
market value of Telepar shares at the time of the exchange.  The purchase price is then
compared to the fair value of the assets and  liabilities of each of the operating
 companies to determine goodwill.  These  differences,  which were being  amortized,  on
the  straight-line  basis over five years for U.S.  GAAP,  but ceased in 2001,  are
summarized as follows:

|Market value of the TELEPAR shares exchanged for minority interests            | 1,188,388  
|------------------------------------------------------------------------------ | -----------
|Fair value of the minority interests exchanged (which approximates book value) | (1,161,690)
|                                                                               |            
|Goodwill as of January 31, 2000                                                | 26,698     
|Amortization of goodwill in 2000                                               | (4,895)    
|                                                                               |            
|                                                                               |            
|Goodwill, net as of December 31, 2000                                          | 21,803     
|Amortization of goodwill in 2001                                               | (5,339)    
|                                                                               |            
|Goodwill, net as of December 31, 2001                                          | 16,464     
|                                                                               |            

ii) Purchase of
controlling interest in CRT

On
July 31, 2000, the Company and The Subsidiary  purchased the controlling  interest in CRT
for R$1,517,574 in cash, of which R$1,499,760 was paid by The Subsidiary , and R$17,814
by the Company.  The goodwill  under U.S. GAAP for this purchase must be adjusted for the
 difference  between the fair value of the net assets purchased and the purchase price.

Under
Brazilian GAAP,  goodwill for the purchase is calculated at the difference  between
 historical book value of the assets and liabilities assumed and the purchase  price.
 Also, as mentioned in Note 9 and 17.a, goodwill  under  Brazilian  GAAP was accounted for
partially as a deferred tax asset which, for U.S. GAAP purposes, should be included as
part of intangibles.

The
 adjustments  under U.S. GAAP to reflect the difference in  depreciation  and
 amortization  resulting from the purchase price  allocation differences explained above
are as follows:

|Net assets purchased under U.S. GAAP                                                  | 533,026  
|------------------------------------------------------------------------------------- | ---------
|Adjustment to state fixed assets at fair value                                        | (53,128) 
|                                                                                      |          
|Fair value of net assets purchased from CRT                                           | 479,898  
|Purchase price                                                                        | 1,517,574
|                                                                                      |          
|Goodwill under U.S. GAAP                                                              | 1,037,676
|Goodwill under Brazilian GAAP                                                         | 767,993  
|                                                                                      |          
|Difference in goodwill as of July 31, 2000                                            | 269,683  
|                                                                                      |          
|                                                                                      |          
|Subsidiarys interest                                                                 | 244,363  
|Companys interest                                                                    | 25,320   
|                                                                                      |          
|Amortization of the difference of goodwill:                                           |          
|For the five months ended Dec. 31, 2000                                               | (22,474) 
|For 2001                                                                              | (53,936) 
|                                                                                      |          
|Effect of depreciation related to the adjustment to state fixed assets at fair value: |          
|For the five months ended Dec. 31, 2000                                               | 2,878    
|For 2001                                                                              | 6,906    
|For 2002                                                                              | 4,707    
|For 2003                                                                              | 3,669    

For
U.S. GAAP, the difference in goodwill was amortized, until 2001, on the straight-line
basis over five years.

The
 depreciation  related to the adjustment to state fixed assets at fair value is being
 calculated at a rate per annum  compatible with the fixed assets realization.

Additionally,
 the amortization of the recomputed  goodwill  recognized by the Subsidiary in 2002 under
BR GAAP in the amount of R$96,133,  as mentioned in Note 17, has been reversed under US
GAAP in connection with the adoption of SFAS 142.

iii) Purchase of
minority interest in CRT

On
December 28, 2000, the  Subsidiary  exchanged its shares for the remaining  outstanding
 shares of CRT. The exchange ratio was based on the market value of CRT shares and the
market value of the Company's  shares at December 1, 2000. The purchase was recorded
 under  Brazilian GAAP based on the book value of the CRT shares as of December 1, 2000,
so no goodwill arose for Brazilian GAAP purposes.

Under
U.S. GAAP, the purchase price of the minority  interest in CRT was determined based on
the traded market value of The Subsidiary  shares as of December 1, 2000.  U.S. GAAP also
requires that this  acquisition of the minority  interest in CRT be recorded as of the
 transaction  closing date,  December 28, 2000. As discussed in (ii) above,  there are
also  differences  between U.S. GAAP and  Brazilian  GAAP in the  allocation of the
purchase price to the assets and liabilities acquired which result in a difference in
depreciation and amortization expense.

The
adjustments to reflect the differences between U.S. GAAP and Brazilian GAAP discussed
above are as follows:

|Book value of net assets purchased under U.S. GAAP                                    | 841,908  
|------------------------------------------------------------------------------------- | ---------
|Adjustment to fixed assets to reach fair value                                        | (108,174)
|                                                                                      |          
|Fair value of net assets purchased from CRT                                           | 733,734  
|Market value of The Subsidiary shares issued in exchange                              | 903,146  
|                                                                                      |          
|Goodwill under U.S. GAAP                                                              | 169,412  
|                                                                                      |          
|                                                                                      |          
|Net effect of recording transaction on December 28, 2000 rather than December 1, 2000 | (6,129)  
|                                                                                      |          
|Amortization of goodwill for 2001                                                     | (33,881) 
|Reversal of depreciation for 2001                                                     | 14,063   
|                                                                                      |          
|Reversal of depreciation for 2002                                                     | 9,585    
|                                                                                      |          
|Reversal of depreciation for 2003                                                     | 7,464    

For
U.S. GAAP, the goodwill was amortized, until 2001, on the straight-line basis over five
years.

The
 depreciation  related to the adjustment to state fixed assets at fair value is being
 calculated at a rate per annum  compatible with the fixed assets realization.

Under
 Brazilian  GAAP,  the Company  recognized a gain of R$ 185,262 in 2000 due to the change
in its  percentage  ownership  interest in The Subsidiary  attributable  to the issuance
of the  Subsidiarys  shares in exchange for CRT shares.  The basis per share in the
 Subsidiary was lower than the amount  received in exchange for the CRT shares;
 therefore,  the increase in basis resulted in a gain.  Under U.S. GAAP, the fair value
of the CRT shares received in exchange for The Subsidiary  shares was lower than under
Brazilian GAAP.  Therefore,  the gain recognized under Brazilian GAAP has been reversed
in the  reconciliation  to U.S. GAAP net income.  For purposes of U.S. GAAP, the Company
 recognizes gains and losses arising from issuance of subsidiaries stock in shareholders equity.

iv) Step-up of basis
of companies under common control

Under
U.S. GAAP,  Emerging  Issues Task Force Nr. 90-5,  "Exchanges of Ownership  Interests
 between  Entities under Common  Control," when an exchange of shares between  companies
 under common control takes place,  the parent  companys  basis in the  subsidiaries
 should be reflected (or pushed down) as the basis in the financial  statements of the
surviving entity. The parent company,  which originally  acquired the nine operating
companies in the privatization  auction (Solpart) in August 1998,  recorded  significant
 goodwill in that purchase.  This goodwill,  along with the step up in the basis of the
fixed assets to fair value at the time of the purchase,  results in an increase in the
consolidated  assets,  as well as in shareholders equity of the Company of R$982,054
(R$589,609 of goodwill and R$392,445 of fixed assets).

Due
to the purchase of minority interest of eight operating companies  subsequently merged,
in 2000, the Company recognized,  under U.S. GAAP, the amount of R$345,801  related to
the difference  between the unamortized  goodwill of R$740,869  (R$982,054  less
 accumulated  amortization  and depreciation of R$241,185) and the amount of R$395,068
recorded as a tax credit under Brazilian GAAP.

The
 amortization,  which ceased in 2001, and  depreciation  under U.S. GAAP for these
assets,  calculated on the  straight-line  basis,  were R$78,102 in 2000 and 2001 and
R$14,216 in 2002.

For
U.S. GAAP, goodwill was amortized,  until 2001, on the straight-line basis over five
years. The depreciation  related to the adjustment to state fixed assets at fair value is
being calculated at a rate per annum compatible with the fixed assets realization.

v) Purchase of
controlling interest in iBest

On
June 26, 2003, the Company  purchased the remaining  capital of 50,5% of iBest S/A and
became owner of 100% of its capital share. The results of iBest operations have been
included in the consolidated financial statements as from such date.

The
Company  obtained third party  valuation  appraisal for the  intangibles,  as due to the
nature of iBest business  (free internet  access),  the greater part of its value is
associated  with  intangibles.  Below is the summary of the estimated  fair values of
assets  acquired and  liabilities assumed at the acquisition date:

|Net assets purchased under U.S. GAAP                                              | June 26, 2003
|--------------------------------------------------------------------------------- | -------------
|Current assets                                                                    | 40,103       
|                                                                                  |              
|Non-curent assets                                                                 | 7,323        
|                                                                                  |              
|Investments                                                                       | 61           
|Property, plant and equipment                                                     | 2,948        
|Customer List                                                                     | 11,572       
|Trademark                                                                         | 67,043       
|                                                                                  |              
|                                                                                  |              
|Total assets acquired                                                             | 129,050      
|                                                                                  |              
|                                                                                  |              
|Current liabilities                                                               | 10,315       
|Non-current liabilities                                                           | 283          
|Deferred taxes on intangible assets                                               | 26,729       
|                                                                                  |              
|Total liabilities assumed                                                         | 37,327       
|                                                                                  |              
|Total purchase price (including R$10,000 for minority interests owned previously) | 157,045      
|                                                                                  |              
|Goodwill under US GAAP                                                            | 65,322       
|                                                                                  |              
|Customer List Amortization:                                                       |              
|2003                                                                              | 9,708        
|                                                                                  |              
|Reversal of Deferred Taxes Liabilities                                            |              
|2003                                                                              | 3,301        

The Brazilian  GAAP goodwill  amounted to R$117,216 and has not been  amortized  until December 31,
2003.  Intangible  assets consist of the customer list and trademark value. The amortization  related to the
customer list is being  calculated at the  estimated  churn rate and the future free cash flow  generated by
the customer list existing at the acquisition  date. The purchase price  allocation is temporary and subject
to change as to the purchase  price that will  ultimately be assigned to the  trademark.  To the extent that
the trademark  valuation is changed upon the finalization of the purchase price  allocation,  goodwill would
be adjusted.  Trademark and goodwill acquired in a purchase  business  combination and determined to have an
indefinite  useful  life  are not  amortized,  but  instead  tested  for  impairment  at least  annually  in
accordance  with the  provisions of SFAS Nr. 142. The amount of goodwill and intangible  assets  impairment,
if any, was  measured  based on  projected  discounted  future  operating  cash flows using a discount  rate
reflecting  the  Companys  average  cost of funds.  Under  Brazilian  GAAP,  goodwill  for the  purchase is
calculated at the difference  between  historical book value of the assets and  liabilities  assumed and the
purchase price.

vi) Goodwill Group BrT Cabos Submarinos (GlobeNet)

During the second quarter of 2003, BrTI invested,  as shareholder or quotaholder,  of the Group
BrT Cabos  Submarinos  (formerly known as GlobeNet). This acquisition  generated an
insignificant  goodwill,  which is being amortized under Brazilian GAAP in five years,
and has been reversed under US GAAP in connection with the adoption of SFAS 142.

p.          Revenue
recognition

i)          Activation
and installation fees

Under  Brazilian  GAAP,  revenues  from  activation  and  installation  fees  are  recognized  upon
activation  of  customer  services.  Under  U.S.  GAAP,  revenues  and  related  taxes from  activation  and
installation  fees are deferred and amortized  over five years,  the estimated  average  customer  life. For
U.S.  GAAP  purposes,   the  Company  has  adopted  this  revenue  recognition  policy  for  activation  and
installation  fees  effective  January 1, 2000  pursuant  to Staff  Accounting  Bulletin  (SAB)  Nr.  101,
Revenue  Recognition in Financial  Statements  (SAB 101).  The  application of this revenue  recognition
policy  subsequent to January 1, 2000 resulted in a (decrease)  increase in income of R$(29,399),  R$ 13,332
and  R$11,448,  for the years ended  December 31,  2001,  2002 and 2003,  respectively.  The adoption by the
Company of Staff  Accounting  Bulletin  Nr. 104 and  Emerging  Issues Task Force  Issue Nr.  00-21  Revenue
Arrangements with Multiple Deliverables  in 2003 did not have any effect.

ii) Sales of public
telephone cards

Under
 Brazilian GAAP revenues from public  telephone  phone cards are  recognized  when the
cards are sold.  Under U.S. GAAP,  revenues generated  from sales of public  telephone
 phone cards are  recognized as such  services are provided.  For U.S.  GAAP,  deferred
 revenues at each consolidated  balance  sheet date are  determined  based upon
 estimates  of sold but  unused  public  phone  card  credits  outstanding  as of each
consolidated balance sheet date.

q.  Provision for
retirement incentive plan

Under
 Brazilian  GAAP,  the Company  recorded a provision for a retirement  incentive  plan
during the year ended  December 31, 2001 in connection with the intended  rationalization
 of certain business  activities of CRT (under the Apoio Daqui plan).  Under U.S. GAAP,
such costs may only be accrued if they are part of a formal  restructuring plan approved
by management that specifically  identifies the significant  actions to be taken to
complete the plan, the number and job  classifications  of employees to be terminated,
 and other strict  criteria.  As all of the criteria for accrual  have not been met,  the
 provision  was  reversed for U.S.  GAAP  purposes on December  31,  2001.  There was no
such  provision in the liabilities as of December 31, 2002 and 2003, as the retirement
incentive plan was carried out and settled during 2002.

r. Derivative
financial instruments

Under
 Brazilian  GAAP,  swap  contracts are recorded on the balance sheet based on the net
amount to be received or paid. For U.S. GAAP purposes,  the  Company  adopted  SFAS Nr.
 133,  Derivative  Instruments  and  Hedging  Activities,  as  amended by SFAS Nr. 137
and SFAS Nr. 138 (collectively,  SFAS 133) on January 1, 2000.  Under SFAS 133, the
swap  contracts are recorded on the balance  sheet at fair value,  with changes in fair
value recognized in earnings unless specific hedge criteria are met. The Company did not
account for any transaction as hedging activity.

s. Unclaimed
dividends and dividends in excess of retained earnings (deficit)

Under
Brazilian GAAP, dividends unclaimed by shareholders after three years are reversed
against income.  Under US GAAP, such unclaimed dividends are reversed against retained
earnings.

Under Brazilian GAAP,
dividends in excess of accumulated balance of retained earnings (deficit) are presented
in these financial statements under retained earnings (deficit), within shareholders equity.
Under Brazilian Corporate Law this situation would not be possible, as dividends cannot
be paid if there is negative balance in retained earnings, but any excess distributed
would be presented as an advance to shareholders as an asset balance. Under US GAAP,
dividends in excess of accumulated balance of retained earnings would be presented as a
reduction of paid-in-capital.

t. Capital lease

Brazilian
GAAP does not require  capitalization  of assets acquired  through capital lease
 arrangements.  Virtually all lease contracts are considered as operating  lease,  with
charges being recorded in statements of operations  throughout  the period of the lease
 arrangement.  The residual value,  often reached at a bargain  purchase  option,  after
the period of the lease  arrangement is capitalized  and depreciated  over the estimated
useful remaining life.

US
GAAP  requires  capital  lease  arrangements  defined  under SFAS Nr. 13 to be
 capitalized  as  property,  plant and  equipment  and depreciated over the estimated
useful life of the asset.

u. Pre-operating
costs

According to Brazilian
GAAP all expenses  registered during the  pre-operating  stage of the subsidiary BrT
Celular is deferred until the subsidiary starts its  operations,  when the deferred
 expenses are  amortized  over the future  period of which the  subsidiary  expects to
benefit from these expenses.

Under
US GAAP, expenses registered during the star-up stage and organizations of a development
stage entity are expensed as incurred.

v. Issue of
treasury stock

Brazilian
 GAAP  requires  issue of  treasury  stock to be added to  retained  earnings  (deficit),
 while  under US GAAP this  would be considered an addition to paid-in-capital.

Net income
      (loss) reconciliation of the differences between Brazilian GAAP and U.
      S. GAAP
  Years ended December 31, 2001, 2002
and 2003

|                                                                                                                                                             |           |           |           |          
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------- | --------- | --------- | ---------
|                                                                                                                                                             |           | 2001      | 2002      | 2003     
|                                                                                                                                                             |           |           |           |          
|                                                                                                                                                             |           |           |           |          
|Net income (loss) as reported under Brazilian GAAP                                                                                                           |           | (39,252)  | 148,473   | (168,647)
|                                                                                                                                                             |           |           |           |          
|Add/(deduct):                                                                                                                                                | Note 31   |           |           |          
|Different criteria for:                                                                                                                                      |           |           |           |          
|Capitalized interest                                                                                                                                         | (a)       | (6,112)   | 154,440   | 157,676  
|Amortization of capitalized interest                                                                                                                         | (a)       | 103,144   | 78,550    | (53,863) 
|Pensions and other post-retirement benefits                                                                                                                  |           |           |           |          
|SISTEL                                                                                                                                                       |           |           |           |          
|U.S. GAAP prepaid (accrued) pension (cost) benefit                                                                                                           | (c)       | (9,493)   | 27,981    | 13,247   
|FCRT                                                                                                                                                         |           |           |           |          
|U.S. GAAP prepaid pension cost                                                                                                                               | (c)       | 403,949   | 5,736     | 20,799   
|Reversal of Brazilian GAAP provision for pensions charged to equity                                                                                          | (c)       | (215,943) | -         | -        
|Items posted directly to shareholder's equity:                                                                                                               |           |           |           |          
|Fiscal incentive received                                                                                                                                    | (d)       | 23        | -         | -        
|Other consolidation adjustments                                                                                                                              | (d)       | (3,462)   | 4,173     | 2,527    
|Social contribution rate change not enacted                                                                                                                  | (g)       | (14,791)  | 6,903     | -        
|Amortization of deferred credit on contributions plan expansion                                                                                              | (l)       | 119,897   | 65,077    | 71,380   
|Compensation cost of stock options                                                                                                                           | (n)       | -         | (35)      | (829)    
|Amortization of goodwill attributable to purchase of minority interests in eight operating companies                                                         | (o) (i)   | (5,339)   | -         | -        
|Amortization of goodwill until 2001 attributable to purchase of controlling interest in CRT, net of reduction in depreciation due to step-down in fair value | (o) (ii)  | (47,030)  | 4,706     | 3,404    
|Reversal of amortization of goodwill recomputed                                                                                                              | (o) (ii)  | -         | 96,133    | 96,133   
|Purchase of minority interest in CRT:                                                                                                                       
|Amortization of goodwill until 2001,  net of  reduction  in  depreciation  due to              step-down in fair value                                       | (o) (iii) | (19,818)  | 9,585     | 7,464    
|Amortization until 2001 and depreciation of step-up in basis of companies under common control                                                               | (o) (iv)  | (78,102)  | (14,216)  | 23,495   
|Amortization customer list of iBest                                                                                                                          | (o) (v)   | -         | -         | (9,708)  
|Reversal of amortization of goodwill GlobeNet                                                                                                                | (o) (vi)  | -         | -         | 649      
|Deferred revenue, net of related costs - activation and installation fees                                                                                    | (p)       | (13,385)  | 13,332    | 11,449   
|Deferred revenue - public telephone cards                                                                                                                    | (p)       | 409       | 2,981     | (1,835)  
|Reversal of provision for retirement incentive plan                                                                                                          | (q)       | 33,000    | (33,000)  | -        
|Change in fair value of derivative financial instruments                                                                                                     | (r)       | 3,548     | 3,976     | 37,045   
|Reversal of gain attributable to unclaimed dividends                                                                                                         | (s)       | (19,162)  | (9,563)   | (18,139) 
|Capital leases                                                                                                                                               | (t)       | -         | -         | 116      
|Preoperating costs of móbile operations                                                                                                                      |           | -         | -         | (22,256) 
|Minority interest in U.S. GAAP adjustments                                                                                                                   |           | (174,292) | (137,557) | (90,766) 
|Deferred tax effect of above adjustments                                                                                                                     |           | (151,683) | (147,776) | (87,950) 
|                                                                                                                                                             |          
|                                                                                                                                                             |           |           |           |          
|U.S. GAAP net income (loss)                                                                                                                                  |           | (133,894) | 279,899   | (8,347)  
|                                                                                                                                                             |           |           |           |          

|                                                                                |             |             |            
|------------------------------------------------------------------------------- | ----------- | ----------- | -----------
|                                                                                | 2001        | 2002        | 2003       
|                                                                                |             |             |            
|                                                                                |             |             |            
|Net income (loss) per thousand shares in accordance with U.S. GAAP:             |             |             |            
|                                                                                |             |             |            
|U.S. GAAP net income (loss) - allocated to common shares  basic and diluted    | (49,167)    | 104,591     | (3,147)    
|U.S. GAAP net income (loss) - allocated to preferred shares  basic and diluted | (84,727)    | 175,308     | (5,201)    
|                                                                                |             |             |            
|Weighted average shares outstanding (in thousands)                              |             |             |            
|Common shares  basic                                                           | 127,437,166 | 130,862,608 | 133,636,993
|Common shares  diluted                                                         | 127,437,166 | 130,862,608 | 133,636,993
|Preferred shares  basic                                                        | 219,863,511 | 219,344544  | 220,853,075
|Preferred shares  diluted                                                      | 219,345,030 | 219,344,959 | 220,854,507
|                                                                                |             |             |            
|U.S. GAAP net income (loss), per thousand shares                                |             |             |            
|Common shares  basic                                                           | (0.39)      | 0.80        | (0.02)     
|Common shares  diluted                                                         | (0.39)      | 0.80        | (0.02)     
|Preferred shares  basic                                                        | (0.39)      | 0.80        | (0.02)     
|Preferred shares  diluted                                                      | (0.39)      | 0.80        | (0.02)     

Shareholders equity
reconciliation of the differences between Brazilian GAAP and U.S. GAAP                                      As
of December 31, 2002 and 2003

|                                                                                                                                                             |           | 2002      | 2003     
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------- | --------- | ---------
|                                                                                                                                                             |           |           |          
|                                                                                                                                                             |           |           |          
|                                                                                                                                                             |           |           |          
|Total shareholders' equity as reported under Brazilian GAAP                                                                                                  |           | 6,663,432 | 6,261,431
|                                                                                                                                                             |           |           |          
|Add/(deduct):                                                                                                                                                | Note 31   |           |          
|Different criteria for:                                                                                                                                      |           |           |          
|Capitalized interest                                                                                                                                         | (a)       | (726,427) | (568,751)
|Amortization of capitalized interest                                                                                                                         | (a)       | 812,786   | 758,923  
|Pension and other post-retirement benefits                                                                                                                   |           |           |          
|SISTEL                                                                                                                                                       |           |           |          
|U.S. GAAP gain on plan curtailment and settlement                                                                                                            | (c)       | 176,607   | 176,607  
|U.S. GAAP accrued pension cost                                                                                                                               | (c)       | (253,094) | (239,847)
|FCRT                                                                                                                                                         |           |           |          
|U.S. GAAP prepaid accrued pension cost                                                                                                                       | (c)       | 405,434   | 426,233  
|Contributions to plant expansion:                                                                                                                            |           |           |          
|Amortization of deferred credit                                                                                                                              | (l)       | 560,204   | 631,582  
|Subscribed capital stock                                                                                                                                     | (l)       | (640,688) | (640,688)
|Donations and subscriptions for investment                                                                                                                   | (l)       | (182,862) | (182,862)
|Goodwill attributable to purchase of minority interests in eight operating companies                                                                         | (o) (i)   | 16,464    | 16,464   
|Amortization of goodwill attributable to purchase of controlling interest in CRT until 2001, net of reduction in depreciation due to step-down in fair value | (o) (ii)  | (61,918)  | (58,250) 
|Reversal of amortization of goodwill recomputed                                                                                                              | (o) (ii)  | 96,133    | 192,266  
|Purchase of minority interest in CRT:                                                                                                                        |           |           |          
|Net effect of recording purchase on transaction closing date                                                                                                 | (o) (iii) | (6,129)   | (6,129)  
|Amortization of goodwill (until 2001), net of reduction in depreciation due to step-down in fair value                                                       | (o) (iii) | (10,233)  | (2,767)  
|Reversal of Brazilian GAAP gain attributable to issuance of shares by subsidiary                                                                             | (o) (iii) | (185,262) | (185,262)
|U.S. GAAP gain attributable to issuance of shares by subsidiary                                                                                              | (o) (iii) | 61,238    | 61,238   
|Exchange of shares between companies under common control                                                                                                    |           |           |          
|Step-up in basis                                                                                                                                             | (o) (iv)  | 345,802   | 345,802  
|Amortization until 2001 and depreciation of step-up in basis                                                                                                 | (o) (iv)  | (170,421) | (146,926)
|Amortization customer list of iBest                                                                                                                          | o (v)     | -         | (9,708)  
|Reversal of amortization of goodwill GlobeNet                                                                                                                | o (vi)    | -         | 649      
|Deferred revenue, net of related costs - activation and installation fees                                                                                    |           |           |          
|(including cumulative effect of change in accounting principle in 2000)                                                                                      | (p)       | (41,903)  | (30,454) 
|Deferred revenue  public telephone cards                                                                                                                    | (p)       | (8,280)   | (10,115) 
|Change in fair value of derivative financial instruments                                                                                                     | (r)       | 9,500     | 46,545   
|Capital leases                                                                                                                                               | (t)       | -         | 116      
|Preoperating costs of mobile operations                                                                                                                      | (u)       | -         | (22,256) 
|Minority interest in U.S. GAAP adjustments                                                                                                                   |           | (120,336) | (211,931)
|Deferred tax effect of above adjustments                                                                                                                     |           | 68,305    | (19,646) 
|                                                                                                                                                             |           |           |          
|                                                                                                                                                             |           |           |          
|U.S. GAAP shareholders equity                                                                                                                               |           | 6,808,351 | 6,582,264
|                                                                                                                                                             |           |           |          




Statements of
changes in shareholders equity in accordance with U.S. GAAP                                                                                              As
of December 31, 2002 and 2003

|                                  | Note   | Total    
|--------------------------------- | ------ | ---------
|                                  |        |          
|Balance, December 31,2000         |        | 7,126,919
|                                  |        |          
|Forfeiture of unclaimed dividends | 31 (s) | 19,162   
|Declaration of dividends          | 23 (e) | (132,537)
|Net loss for the year             |        | (133,894)
|                                  |        |          
|                                  |        |          
|Balance, December 31, 2001        |        | 6,879,650
|                                  |        |          
|Forfeiture of unclaimed dividends | 31 (s) | 9,563    
|Purchase of treasury shares       | 23 (b) | (9,176)  
|Declaration of dividends          | 23 (e) | (351,585)
|Net income for the year           |        | 279,899  
|                                  |        |          
|                                  |        |          
|Balance, December 31, 2002        |        | 6,808,351
|                                  |        |          
|                                  |        |          
|Forfeiture of unclaimed dividends | 31 (s) | 18,139   
|Purchase of treasury shares       | 23 (b) | (11,671) 
|Declaration of dividends          | 23 (e) | (224,208)
|Net loss for the year             |        | (8,347)  
|                                  |        |          
|                                  |        |          
|Balance, December 31, 2003        |        | 6,582,264
|                                  |        |          

32. Additional
disclosures required by U.S. GAAP

a.
               Pension and other post-retirement benefits:

i. Plans
administered by SISTEL

The Company,  together
with other former  companies in the Telebrás group,  sponsored  multi-employer  defined
 benefit  pension and other  post-retirement  benefit plans,  through the end of 1999,
 which are operated and administered by SISTEL.  In December 1999, the Company and the
other companies that participate in the SISTEL plan reached an agreement to withdraw the
active  participants to the pension plan and establish a new plan for each of the New
Holding Companies.  The parties agreed to allocate the plan assets based on the
liabilities in accordance with Brazilian GAAP. The allocation of the initial transition
 obligation and unamortized gains and losses was based on the projected benefit
 obligation (PBO) of each individual  sponsor divided by the total PBO of SISTEL at
December 31, 1999. The inactive employees of all of the New Holding Companies that
participated in the SISTEL defined benefit pension plan will remain as part of the
multiemployer plan in SISTEL. The post-retirement  benefit plans will also remain as a
multiemployer  plan;  however,  SISTEL no longer subsidizes life insurance premiums for
inactive (retired) employees after December 31, 1999.

The Company remains
jointly and severally liable for the multiemployer portion of the plan, therefore, no
amounts were recorded under those plans.

A summary of the
liability as of December 31, 2002 and 2003 for the Companys active employees defined
benefit pension plan was as follows:

|                                         | 2002      | 2003     
|---------------------------------------- | --------- | ---------
|                                         |           |          
|Funded status:                           |           |          
|Accumulated benefit obligation:          |           |          
|Vested                                   | 377,510   | 288,888  
|Non-vested                               | 3,344     | 33,181   
|                                         |           |          
|Total                                    | 380,854   | 322,069  
|                                         |           |          
|Projected benefit obligation             | 384,564   | 418,935  
|Allocated assets                         | 492,384   | 573,834  
|                                         |           |          
|Projected obligation in excess of assets | (107,820) | (154,899)
|Unrecognized gains                       | 68,284    | 106,451  
|Unrecognized prior service cost          | 125,057   | 119,421  
|Unrecognized net transition obligation   | (9,034)   | (7,733)  
|                                         |           |          
|Accrued pension cost                     | 76,487    | 63,240   
|                                         |           |          

A summary of the
SISTEL pension plan as of December 31, 2002 and 2003 for the multiemployer portion
(inactive employees pension plan) is as follows:

|                                                        | December 31
|------------------------------------------------------- | -----------
|                                                        |            
|                                                        | 2002       
|                                                        |            
|Projected benefit obligation (100% vested)              | 2,922,542  
|Fair value of plan assets                               | (3,684,883)
|                                                        |            
|Excess (deficiency) of assets over projected obligation | (762,341)  
|                                                        |            

In March 2000, the
Company offered a new defined  contribution  plan, and  approximately  80% of the active
employees  migrated to the new plan. The accumulated  benefit of each employee who
migrated was transferred to an individual  account for each employee,  with 100% vesting
in this amount.  The effect of settlement and curtailment of this portion of the defined
benefit plan under SFAS Nr. 88 Employers'  Accounting and Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits  was a gain of R$176,607,
which is reflected in the reconciliation to U.S. GAAP net income.

The net periodic
pension cost for 2002 and 2003 for the SISTEL administered plans was as follows:

|                                    | 2002     | 2003*   
|----------------------------------- | -------- | --------
|Service cost                        | 15,911   | 30,752  
|Interest cost                       | 15,849   | 15,779  
|Expected return on assets           | (36,219) | (23,808)
|Amortization of gains               | (7,536)  | (7,417) 
|Expected Participants Contributions | -        | (14,504)
|                                    |         
|Net periodic pension cost (income)  | (11,995) | 802     
|                                    |         

*Values as from
January 1, 2003 include both Defined Benefit and Defined Contribution portions of the
plan.

The changes in the
accrued pension cost for the SISTEL administered plans for the year ended December 31,
2002 and 2003 is as follows:

|Accrued pension cost as of December 31, 2001 | 104,468 
|-------------------------------------------- | --------
|Net periodic cost for 2002                   | (11,995)
|Company contributions during 2002            | (15,986)
|                                             |         
|Accrued pension cost as of December 31, 2002 | 76,487  
|Net periodic cost for 2003                   | (12,043)
|Company contributions during 2003            | (1,204) 
|                                             |         
|Accrued pension cost as of December 31, 2003 | 63,240  
|                                             |         

The net pension cost
for 2003 in the accrued  reconciliation  includes the expected company contributions of
R$12,845 (different from actual to reconcile with opening balances as actuaries last
year had slightly different figures) at December 31, 2002 for purposes of
comparability.

The actuarial
assumptions used in 2001, 2002 and 2003 were as follows:

|                                                            | 2001  | 2002  | 2003
|----------------------------------------------------------- | ----- | ----- | ----
|                                                            |       |       |     
|Discount rate for determining projected benefit obligations | 6.00% | 6.00% | 6,0%
|Rate of increase in compensation levels                     | 3.00% | 1.00% | 2,0%
|Expected long-term rate of return on plan assets            | 9.00% | 9.00% | 6,5%

The rates are real
rates and exclude inflation.

The Company maintains
jointly with other companies a post-retirement benefit plan (PAMA) for the participants
already covered who were in such position on January 31, 2000.  Based on legal and
actuarial opinions, the Companys liability is exclusively limited to 1.5% of the payroll
of the active participants.

The funded status of
the pension and post retirement  plans under Brazilian GAAP and U.S. GAAP differ.
 Benefit  obligations  differ because they have been prepared using different  actuarial
 assumptions  permitted under Brazilian and U.S. GAAP.

The
net assets of the plans differ under Brazilian GAAP and U.S. GAAP principally due to the
accrual of income tax contingencies of the pension fund for U.S. GAAP purposes in the
amount of R$426,032  (R$364,644 in 2002),  respectively.  The contingency  arises out of
uncertainty as to the income tax status of Brazilian  pension funds in general because
the tax law is unclear as to whether these funds are exempt from tax on their investment
gains.  Under Brazilian GAAP, two methods of accounting for the income tax contingency
are currently  permitted.  The tax is either deducted from plan assets for the purposes
of determining the funded status of the plan or it is not deducted,  but is disclosed in
a note as being a contingency.  Management of the pension fund has determined that the
Brazilian GAAP financial statements of the fund be prepared on the basis that the legal
arguments against assessment of the tax on the investment gains are sufficiently strong
as to avoid the need for the potential liability to be recognized.  However, for U.S.
GAAP purposes,  management of the Company believes that the assessment of this potential
income tax liability is probable.  Accordingly,  in determining the funded status for
U.S. GAAP purposes,  the potential  income tax liability  (calculated in accordance with
SFAS 109) has been deducted from the fair value of the plan assets.

ii. Plan
administered by Fundação CRT (FCRT)

On July 31, 2001, the
subsidiary Brasil Telecom S.A. acquired the controlling  interest in CRT, and in December
2001,  acquired the minority  interest.  At the acquisition dates, the liability for
defined benefit          plans of CRT were recorded under U.S. GAAP as part of the fair
value. The net pension cost for 2002 and 2003 under U.S. GAAP is reflected from the dates
of acquisition until December 31, 2003.

In October 2002, the
Company offered employees the option to transfer to a new defined  contribution  settled
benefits plan,  BrTPREV.  The benefit  obligation  relating to each employee that opted
to migrate was          transferred to an individual account at 100% of the obligation
under the previous plan in the amount of R$362,469. The employees that did not opt to
migrate to BrTPREV remained in their previous plans.

A summary of
             the liability as of December 31, 2002 and 2003 (Alternative, Founder
             and BrTPREV are presented consolidated) for the CRT employees benefit
           plans was as follows:

|Funded status:                           | 2002      | 2003     
|---------------------------------------- | --------- | ---------
|                                         |           |          
|Accumulated benefit obligation:          |           |          
|Vested                                   | 909,528   | 891,269  
|Non-vested                               | 10,649    | 83,739   
|                                         |           |          
|Total                                    | 920,177   | 975,008  
|                                         |           |          
|Projected benefit obligation             | 922,150   | 990,752  
|Allocated assets                         | 420,311   | 486,348  
|                                         |           |          
|Projected obligation in excess of assets | 501,839   | 504,404  
|Unrecognized gains                       | 324,970   | 280,978  
|Unrecognized prior service cost          | (25,541)  | (23,989) 
|Unrecognized net transition obligation   | (362,468) | (343,392)
|                                         |           |          
|Accrued pension cost                     | 438,800   | 418,001  
|                                         |           |          

The net periodic
pension cost for CRT for the year ended December 31, 2002 and 2003 (Alternative, Founder
and BrTPREV are presented consolidated) was as follows:

|                               | 2002     | 2003     
|------------------------------ | -------- | ---------
|                               |          |          
|Service cost                   | 11,853   | 6,502    
|Interest cost                  | 55,607   | 154,784  
|Expected return on assets      | (26,689) | (113,926)
|Amortization of (gains) losses | (17,416) | 22,450   
|                               |          |          
|Net periodic pension cost      | 23,355   | 69,810   
|                               |          |          

The changes in the
accrued pension cost for the plans administered by FCRT for the year ended December 31,
2002 and 2003 (Alternative, Founder and BrTPREV are presented consolidated) were as
follows:

|                                                  | 2002      | 2003    
|------------------------------------------------- | --------- | --------
|                                                  |           |         
|Accrued pension cost at the beginning of the year | 795,910   | 438,800 
|Net periodic cost for the year                    | 23,355    | 69,810  
|Company contributions during the year             | (17,997)  | (90,609)
|Unrecognized net transition obligation            | (362,468) | -       
|                                                  |          
|Accrued pension cost at the end of the year       | 438,800   | 418,001 
|                                                  |          

The actuarial
assumptions used in 2002 and 2003 were follows:

|                                                            | 2002  | 2003 
|----------------------------------------------------------- | ----- | -----
|                                                            |       |      
|Discount rate for determining projected benefit obligations | 6.00% | 6.00%
|Rate of increase in compensation levels                     | 0.00% | 2,00%
|Expected long-term rate of return on plan assets            | 6.00% | 6.00%

The above are real
rates and exclude inflation.

b.
               Stock options

On December 17, 2002,
the Company  granted  622,364  thousand stock options under Stock Option Program B (refer
to Note 23.b for the conditions of the program).  The per share weighted  average fair
value of stock options granted during 2002 on the date of grant using the Black-Scholes
 option-pricing model was R$4.09 with the following weighted average  assumptions:  2002  expected
dividend yield 5.1%, risk-free interest rate of 23% p.a. (which equals the SELIC interest
rate), and an expected vesting term of 3 years.

On
December 19, 2003 , the Company granted 308,033  thousand stock options under Stock
Option Program B (refer to Note 23.b for the conditions of the program).  The per share
weighted  average fair value of stock options granted during 2003 on the date of grant
using the Black-Scholes  option-pricing  model was R$5.56 with the following weighted
average  assumptions:  2002  expected dividend yield 3.2%, risk-free interest rate of
8.6% p.a. (which equals the National Treasury Notes interest rate), and an expected
vesting term of 3 years.

c.
               Transitional disclosures due to cessation of goodwill amortization

As
the Company  adopted  SFAS 142 on January 1, 2002 the  amortization  of goodwill
 mentioned  in Note 30.o was ceased for US GAAP  purposes on that date.  If adoption of
SFAS had  occurred on December 31, 1999, reported US GAAP net income and related basic
and diluted earnings per share would have been the following in 2000 and 2001, exclusive
amortization expense (net of income tax):

|                                | 2001     
|------------------------------- | ---------
|                                |          
|Reported net income (loss)      | (133,894)
|Add back: goodwill amortization | 127,053  
|                                |          
|Adjusted net income (loss)      | (6,841)  
|                                |          

|Adjusted net income (loss) allocated to common shares  basic      | (2,510)    
|------------------------------------------------------------------ | -----------
|Adjusted net income (loss) allocated to common shares  diluted    | (2,510)    
|Adjusted net income (loss) allocated to preferred shares  basic   | (4,331)    
|Adjusted net income (loss) allocated to preferred shares  diluted | (4,331)    
|                                                                   |            
|Weighted average shares outstanding (in thousands)                 |            
|Common shares  basic                                              | 127,437,166
|Common shares  diluted                                            | 127,437,166
|Preferred shares  basic                                           | 219,863,511
|Preferred shares  diluted                                         | 219,864,030
|                                                                   |            
|U.S. GAAP net income (loss), per thousand shares                   |            
|Common shares  basic                                              | (0.02)     
|Common shares  diluted                                            | (0.02)     
|Preferred shares  basic                                           | (0.02)     
|Preferred shares  diluted                                         | (0.02)     

d.
               New accounting pronouncements

In
June 2001,  FASB issued SFAS Nr. 143,  Accounting for Asset Retirement  Obligations.
 SFAS Nr. 143 requires the Company to record the fair value of an asset retirement
obligation as a liability in the period in which it incurs a legal obligation  associated
with the retirement of tangible  long-lived assets that result from the acquisition,
 construction,  development,  and/or normal use of the assets. The Company also records a
 corresponding  asset that is depreciated  over the life of the asset.  Subsequent to the
initial  measurement of the asset  retirement  obligation,  the obligation  will be
adjusted at the end of each period to reflect the passage of time and changes in the
 estimated  future cash flows  underlying  the  obligation.  The Company was required to
adopt SFAS Nr. 143 on  January 1,  2003.  The adoption of SFAS Nr. 143 did not have a
material effect on the Companys financial statements.

At
the September and October 2002 meetings of the Emerging  Issues Task Force (EITF),  the
Task Force reached a conclusion  on Issue Nr. 00-21,  Revenue  Arrangements  with
Multiple  Deliverables,  which outlines an approach to be used to determine when a
revenue arrangement for multiple  deliverables should be divided into separate units of
accounting and, if separation is appropriate,  how the arrangement  consideration should
be allocated to the identified accounting units.  Specifically,  in an arrangements with
multiple deliverables,  the delivered item(s) should be considered a separate unit of
accounting if (1) the delivered item(s) has value to the customer on a standalone  basis,
 (2) there is objective and reliable  evidence of the fair value of the  undelivered
 item(s) and (3) if the  arrangement  includes a general right of return,  delivery or
performance of the undelivered  item(s) is considered  probable and substantially in the
control of the vendor.  The arrangement  consideration  allocable to a delivered item(s)
that does not qualify as a separate unit of accounting  within the arrangement  should be
combined with the amount allocable to the other applicable  undelivered  item(s) within
the arrangement.  The appropriate  recognition of revenue should then be determined for
those combined deliverables as a single unit of accounting. The adoption of EITF 00-21 on
July 1, 2003 did not result in a change in the Companys revenue recognition policies.

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.

In
December 2003, the FASB issued Interpretation Nr. 46 (revised December 2003), Consolidation
of Variable Interest Entities,  which addresses how business enterprise should
evaluate whether it has a controlling  financial  interest in an entity through means
other than voting rights and accordingly  should  consolidate this entity.  FIN 46R
replaces FASB  Interpretation  Nr. 46, Consolidation of Variable  Interest Entities,
 which was issued in January 2003. The Company will be required to apply FIN 46R to
variable  interests in VIEs created after December 31, 2003. For variable interests in
VIEs created before January 1, 2004, the Interpretation  will be applied  beginning on
January 1, 2005. For any VIEs that must be consolidated  under FIN 46R that were created
before January 1, 2004, the assets,  liabilities and  noncontrolling  interests of the
VIEs initially would be measured at their carrying  amounts with any difference  between
the net amount added to the balance sheet and any previously  recognized  interest being
 recognized as the cumulative  effect of an accounting change. If determining the
carrying amounts is not practicable,  fair value at the date FIN 46R first applies may be
used to measure assets,  liabilities and noncontrolling  interests of the VIE.
 Management of the Company does not expect any significant impact on the Companys
financial statements by applying FIN 46R.

FASB
Statement Nr. 150, Accounting for Certain  Financial  Instruments  with
 Characteristics  of both  Liabilities  and Equity,  was issued in May 2003.  This
 Statement  establishes  standards for the classification and measurement of certain
financial  instruments with  characteristics of both liabilities and equity. The
Statement also includes required  disclosures for financial  instruments within its
scope. For the Company,  the Statement was effective for  instruments  entered into or
modified after May 31, 2003 and otherwise will be effective as of January 1, 2004,
 except for  mandatorily  redeemable  financial  instruments.  For certain mandatorily
 redeemable  financial  instruments,  the Statement will be effective for the Company on
January 1, 2005. The effective date has been deferred  indefinitely for certain types of
mandatorily  redeemable financial instruments. The Company currently does not have any
financial instruments that are within the scope of this Statement.

Emerging
Issue Task Force Nr. 01-08 (EITF 01-08),  Determining  Whether an  Arrangement is a
Lease,  provides  guidance in determining  whether an arrangement  should be considered a
lease subject to the requirements of FASB Statement Nr. 13 (FAS 13),  Accounting for
Leases.  EITF 01-08 defines,  amongst others,  that an arrangement  conveys the right to
use the property,  plant, and equipment if the purchaser has (i) the ability to operate
the property,  plant and equipment,  (ii) control  physical  access to the property,
 plant and equipment,  or (iii) it is remote that one or more other parties will take
more than a minor amount of the output and the pricing for the output is not fixed per
unit or based on current  market  prices at the date of  delivery.  The  consensus is
required to be applied to  arrangements  agreed or committed  to,  modified,  or acquired
in business combinations initiated after the beginning of an entitys next reporting
period beginning after May 28, 2003. We have not entered into significant arrangements
since this date.