brasil telecom participaÇÕes s.a. · de telecomunicações (the “general telecommunications...

As filed with the Securities and Exchange Commission on June 30, 2000____________________________________________________________________________________________

SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

____________________

FORM 20-F____________________

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999

Commission 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 The Federative Republic of Brazil(Translation of Registrant’s Name into English) (Jurisdiction of Incorporation or Organization)

_______________________________

SAIN Via L4-Quadra 6, Lote 4,70800-200 Brasilia, DF, Brazil

(Address 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*American Depository Shares, eachrepresenting 5,000 Preferred Shares

New York Stock ExchangeNew York Exchange

___________________

* Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange.

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 ofthe close of the period covered by this Annual Report:

124,369,030,532 Common Shares, without par value210,029,997,060 Preferred Shares, without par value

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has been subject to such filing requirements forthe past 90 days.

Yes X No

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17 Item 18 X ___________________________________________________________________________________

TABLE OF CONTENTS

Page

- i -

PART I

Item 1. Description of Business....................................................................................................1

Item 2. Description of Property ..................................................................................................28

Item 3. Legal Proceedings..........................................................................................................29

Item 4. Control of Registrant......................................................................................................30

Item 5. Nature of Trading Market...............................................................................................31

Item 6. Exchange Controls and Other Limitations Affecting Security Holders...............................34

Item 7. Taxation........................................................................................................................35

Item 8. Selected Financial Data..................................................................................................40

Item 9. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.....................................................................................................................45

Item 9A. Quantitative and Qualitative Disclosures about Market Risk.............................................54

Item 10. Directors and Officers of Registrant................................................................................55

Item 11. Compensation of Directors and Officers .........................................................................59

Item 12. Options to Purchase Securities from Registrant or Subsidiaries.........................................59

Item 13. Interest of Management in Certain Transactions...............................................................59

PART II

Item 14. Description of Securities to be Registered .......................................................................59

PART III

Item 15. Defaults upon Senior Securities ......................................................................................60

Item 16. Changes in Securities, Changes in Security for Registered Securities and Use ofProceeds .......................................................................................................................60

PART IV

Item 17. Financial Statements......................................................................................................60

Item 18. Financial Statements......................................................................................................60

Item 19. Financial Statements and Exhibits...................................................................................60

INDEX OF DEFINED TERMS........................................................................................................61

TECHNICAL GLOSSARY .............................................................................................................63

- ii -

PRESENTATION OF FINANCIAL INFORMATION

In this Annual Report, Brasil Telecom Participações S.A. (previously Tele Centro SulParticipações S.A.), a corporation organized under the laws of the Federative Republic of Brazil(“Brazil“), is referred to as the Holding Company and the Holding Company and its subsidiaries (the“Subsidiaries“) are referred to collectively as the “Company.” References to the Company’s businessesand operations are references to the businesses and operations of the Subsidiaries and/or the HoldingCompany as the case may be.

References to (i) the “real,” “reais“ or “R$“ are to Brazilian reais (plural) and the Brazilian real(singular) and (ii) ”U.S. dollars,” “dollars” or “US$“ are to United States dollars. All amounts inBrazilian currencies that existed prior to the adoption of the real as the Brazilian currency on July 1, 1994have been restated in reais. At June 15, 2000, the Commercial Market Rate (as defined in Item 8 –Exchange Rates) was R$1.8079 to US$1.00.

The Company’s audited financial statements as of December 31, 1998 and 1999 and for the yearsended December 31, 1997, 1998 and 1999 (the “Consolidated Financial Statements“) contained in thisAnnual Report are presented in constant reais of December 31, 1999. See “Selected Financial Data.”

Certain terms are defined the first time they are used in this Annual Report. The “Index ofDefined Terms” that begins on page 63 lists those terms and where they are defined. Technical terms aredefined in the Technical Glossary on page 64.

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements. The Company and its representativesmay also make forward-looking statements in press releases and oral statements. Statements that are notstatements of historical fact, including statements about the beliefs and expectations of the Company’smanagement, are forward-looking statements. The words “anticipates,” “believes,” “estimates,”“expects,” “forecasts,” “intends,” “plans,” “predicts,” “projects” and “targets” and similar words areintended to identify these statements, which necessarily involve known and unknown risks anduncertainties. Known risks and uncertainties, some of which are discussed at pages 22-29 herein, includethose resulting from the short history of the Company’s operations as an independent, private-sector,entity and the introduction of competition to the Brazilian telecommunications sector, as well as thoserelating to the cost and availability of financing, the performance of the Brazilian economy generally, thelevels of exchange rates between Brazilian and foreign currencies and the telecommunications policy ofBrazil’s federal government (the “Federal Government“). Accordingly, the actual results of operations ofthe Company may be different from the Company’s current expectations, and the reader should not placeundue reliance on these forward-looking statements. Forward-looking statements speak only as of thedate they are made, and the Company does not undertake any obligation to update them in light of newinformation or future developments.

- 1 -

PART I

Item 1. Description of Business

The Holding Company is one of the companies formed as a result of the breakup ofTelecomunicações Brasileiras S.A. - Telebrás (“Telebrás”) by the Federal Government in May 1998.Each of the Subsidiaries is an operating company formerly controlled by Telebrás. In January 1998, theSubsidiaries, which had provided both fixed-line and cellular telecommunications services, spun off theircellular telecommunications operations into new companies that are now under separate control (the“Spun-off Companies“). See “Description of Business—Historical Background.”

The Company provides fixed-line telecommunications services in Brazil under concessions fromthe Federal Government (the “Concessions“). The Concessions authorize the Company to provide localand intrastate fixed-line telecommunications service in an area (the “Region“) consisting of eight stateslocated in the western, central and southern regions of Brazil, the Federal District and a small part of theState of Rio Grande do Sul. See “—The Region.” The Company is currently the sole provider of localfixed-line telecommunications services and the dominant provider of intrastate fixed-linetelecommunications services in the Region. Local fixed-line telecommunications services include allcalls that originate and terminate within a single local area in the Region, as well as, installation, monthlysubscription, public telephones and supplemental local services. Intrastate fixed-line telecommunicationsservices include all calls between local areas within a state in the Region.

Previously, the Company did not provide interstate long-distance fixed-line telecommunicationsservices between the states in the Region. However, the Company was authorized to begin to provideinterstate long-distance services between the states in the Region as of July 1999, in competition withEmbratel Participações S.A.—Embratel (“Embratel“) and Intelig Telecomunicações Ltda. (“Intelig“).See “—Competition—Intraregional Services.”

At December 31, 1999, the Company had approximately 4.7 million lines in service.

The Holding Company and its Subsidiaries

The following table sets forth the contribution made by each Subsidiary to the Company’s netoperating revenues for the year ended December 31, 1999 and the Holding Company’s shareholding ineach Subsidiary at December 31, 1999.

Contribution toconsolidated results Holding Company ownership% of net operating

revenues% of share

capital% of voting

stockSubsidiaryTelecomunicações do Paraná S.A. –

Telepar.............................................................. 31.72 65.53 81.89Telecomunicações de Santa

Catarina S.A. – Telesec .................................... 18.41 63.64 82.69Telecomunicações de Brasília S.A. –

Telebrasília ....................................................... 16.28 80.58 80.87Telecomunicações de Goiás S.A. –

Telegoiás ........................................................... 14.62 82.23 80.00Telecomunicações do Mato Grosso

S.A. – Telemat.................................................. 6.88 86.84 98.40Telecomunicações do Mato Grosso

do Sul S.A. – Telems ........................................ 6.79 95.34 98.90

- 2 -

Telecomunicações de RondôniaS.A. – Teleron................................................... 2.95 92.96 98.35

Companhia Telefônica Melhoramentoe Resistência S.A. – CTMR.............................. 1.49 74.44 81.32

Telecomunicações do Acre S.A. -Teleacre ............................................................. 0.86 88.33 89.69

Elsewhere in this Annual Report, the individual Subsidiaries are referred to by the short namesthat form part of their corporate names as set forth in the previous table.

During 1999, substantially all the Holding Company’s assets consisted of shares in theSubsidiaries. The Holding Company relies almost exclusively on dividends from the Subsidiaries to meetits needs for cash, including to pay dividends to its shareholders. See “Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

The Holding Company’s headquarters are located at SAIN Via L4 Quadra 6, Lote 4, 70800-200Brasilia, DF, Brazil, and its telephone number is 5561-415-1414.

Recent Developments

A corporate reorganization of Telecomunicações do Paraná S.A. – Telepar, one of theSubsidiaries, was implemented on February 28, 2000. Through such reorganization Telecomunicações deSanta Catarina S.A. – Telesc, Telecomunicações de Goiás S.A. – Telegoiás, Telecomunicações deBrasília S.A. – Telebrasília, Telecomunicações do Mato Grosso S.A. – Telemat, Telecomunicações doMato Grosso do Sul S.A. – Telems, Telecomunicações de Rondônia S.A. – Teleron, Telecomunicaçõesdo Acre S.A. – Teleacre and Companhia Telefônica Melhoramento e Resistência – CTMR were mergedinto Telepar. The objective of the corporate reorganization was to simplify the corporate andadministrative structure of all the Subsidiaries into a single company.

On April 28, 2000 Telepar, in accordance with its strategy of becoming a nationaltelecommunications company, changed its corporate name to Brasil Telecom S.A. (the “MergedSubsidiary”). On May 9, 2000, the Holding Company also changed its corporate name to Brasil TelecomParticipações S.A.

After the reorganization of the Subsidiaries, substantially all of the assets of the HoldingCompany consist of shares in Brasil Telecom S.A. (the Merged Subsidiary).

Historical Background

Prior to the incorporation of Telebrás in 1972, there were more than 900 telecommunicationscompanies operating throughout Brazil. Between 1972 and 1975, Telebrás and its operating subsidiaries(collectively, the “Telebrás System“) acquired almost all the other telephone companies in Brazil and thuscame to have a monopoly over the provision of public telecommunications services in almost all areas ofthe country. Beginning in 1995, the Federal Government undertook a comprehensive reform of Brazil’stelecommunications regulatory system. In July 1997, Brazil’s National Congress adopted the Lei Geralde 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 regulatoryframework, the introduction of competition and the privatization of Telebrás. The GeneralTelecommunications Law established an independent regulatory agency called Agência Nacional deTelecomunicações — ANATEL (“Anatel“).

In January 1998, in preparation for the restructuring and privatization of the Telebrás System, thecellular telecommunications operations of Telebrás’ operating subsidiaries were spun off into separatecompanies. In May 1998, Telebrás was restructured to form, in addition to Telebrás, 12 new holding

- 3 -

companies (the “New Holding Companies“) by means of a procedure under Brazilian corporate lawcalled cisão, or split-up. The New Holding Companies were allocated virtually all the assets andliabilities of Telebrás, including the shares held by Telebrás in the operating companies of the TelebrásSystem. The split-up of the Telebrás System into the New Holding Companies is referred to herein as the“Breakup“ or the “Breakup of Telebrás.”

The New Holding Companies, together with their respective subsidiaries, consist of (a) eightcellular service providers, each operating in one of the regions into which Brazil has been divided forpurposes of cellular telecommunications services in the frequency range formerly used by the companiesof the Telebrás System (each, a “Cellular Region“), (b) three regional fixed-line service providers, eachproviding local and intraregional long-distance service in one of the three regions into which Brazil hasbeen divided for purposes of fixed-line telecommunications (each, a “Fixed-Line Region“), and(c) Embratel, which provides domestic (including intraregional and interregional) long-distance telephoneservice and international telephone service throughout Brazil.

The Holding Company is one of the three New Holding Companies providing local andintraregional long-distance services in Brazil. In the Breakup, the Holding Company was allocated all theshare capital held by Telebrás in the operating subsidiaries of the Telebrás System that provided fixed-line telecommunications service in the western, central and southern regions of Brazil. See “—TheRegion.” In July 1998, the Federal Government sold all its voting shares of the New Holding Companies,including the Holding Company, to private sector buyers. The sale of all of the Federal Government’svoting shares to private sector buyers is referred to herein as the “Privatization“ or the “Privatization ofTelebrás.” The Federal Government’s shares of the Holding Company (51.79% of the votingshares) were purchased by Solpart Participações S.A. (“Solpart“), a consortium comprising of TecholdParticipações S.A., STET International Netherlands N.V. and Timepart Participações Ltda. See “Controlof Registrant.”

The Region

The Concessions authorize the Company to provide fixed-line telecommunications service ineight states of Brazil located in the western, central and southern regions of Brazil, and the FederalDistrict, as listed in the chart below, excluding small areas in the States of Goiás, Mato Grosso do Sul andParaná. In the State of Rio Grande do Sul, the Company operates only in the cities of Pelotas, Capão doLeão, Morro Redondo and Turuçu.

The states in the Region cover an area of approximately 2.6 million square kilometers,representing over 30% of the country’s total area and generating in 1997 approximately 16.8% of Brazil’sGross Domestic Product (“GDP”). At July 1, 1999, the estimated population of the Region wasapproximately 29 million, representing 17.7% of the population of Brazil. The Region has threemetropolitan areas with populations in excess of one million inhabitants, including Brasilia, the capital ofBrazil.

- 4 -

The following table sets forth certain key economic data for the state in which each Subsidiaryoperates.

State SubsidiaryPopulation(millions) (1)

Population persquare kilometer (2)

Percentage ofBrazil’s GDP for

1997 (3)

Per capitaincome

(US$) for1997 (3)

Paraná.................................. Telepar 9.4 46.95 6.07 5,138Santa Catarina ..................... Telesc 5.1 53.42 3.66 5,715Distrito Federal ................... Telebrasilia 2.0 338.34 2.28 9,412Goiás, Tocantins ................. Telegoias 6.0 9.66 2.04 2,757Mato Grosso ....................... Telemat 2.4 2.62 1.05 3,558Mato Grosso do Sul ............ Telems 2.0 5.66 1.07 4,445Rondônia............................. Teleron 1.3 5.43 0.48 2,971Rio Grande do Sul............... CTMR(4) 0.3(5) ----- ---- -----Acre ..................................... Teleacre 0.5 3.45 0.15 2,333__________________(1) Estimates made by the Instituto Brasileiro de Geografia e Estatistica — IBGE (“IBGE”) at July 1, 1999.(2) IBGE.(3) As reported by the IBGE in a 1999 Press Release in nominal reais. Per capita income was converted into dollars for presentation

purposes at the Commercial Market Rate of December 31, 1997, R$1.1164 per US$1.00.(4) CTMR serves a small area in the State of Rio Grande do Sul that includes the cities of Pelotas, Capão do Leão, Morro Redondo and

Turuçu, representing approximately 3.5% of the State’s population.(5) Persons living in the CTMR concession area.

Set forth below is a map showing the location of the Region within Brazil.

AcreRondônia

Mato Grosso

Mato Grosso do Sul

Paraná Santa Catarina

Pelotas, RS

Tocantins

Distrito Federal

Goiás

- 5 -

The Company’s business, financial condition, results of operations and prospects depend in parton the performance of the Brazilian economy and the economy of the Region, in particular. See “—Brazilian Economic Environment.”

Services

Overview

The fixed-line telecommunications services offered by the Company to its customers consist of(i) local services, including all calls that originate and terminate within a single local area in the region, aswell as, installation, monthly subscription, public telephones and supplemental local services,(ii) intrastate long-distance services, including calls between local areas within a state in the Region,(iii) interstate long-distance services, including calls between states in the Region, (iv) network services,including interconnection, leasing of facilities and fixed-to-mobile services, (v) data transmissionservices, and (vi) other services. The Company does not sell, rent or otherwise provide telephoneequipment such as handsets or switchboards. Under the terms of its Concessions, the Company is nolonger authorized to provide interregional and international long-distance services. See “—HistoricalBackground” and “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Effects of Changes in Rates and Changes in Revenue Sharing.” Beginning in 2002, theCompany may obtain authorization to provide interregional and international long-distance and othertelecommunications services, including local and intraregional fixed-line services in the other Fixed-LineRegions, provided that all of the concessionaires operating in the Region have met the year 2003universalization and expansion of service targets set forth in their respective concessions. See “—Competition” and “—Regulation of the Brazilian Telecommunications Industry—Obligations ofTelecommunications Companies.”

The following table sets forth the Company’s revenue by type of service for the indicated years.The Company’s tariffs for each category of service are discussed below under “—Rates.” Trends andevents affecting the Company’s operating revenue are discussed under “Management’s Discussion andAnalysis of Financial Condition and Results of Operations.”

Year ended December 31,1997 1998 1999

(millions of reais) (1)

Local service ................................................................... 1,838.6 2,254.5 2,500.7Intraregional (Intrastate and Interstate) long-distance

service ......................................................................... 1,438.2 920,.6 800.8Interregional and International long-distance

service (2) ...................................................................... 78.5 18.4 0.7Network services ............................................................ 194.8 654.6 734.3Data transmission............................................................ 107.8 147.2 155.6Other ............................................................................... 40.5 27.6 132.5Total................................................................................ 3,706.6 4,028.5 4,324.4Taxes and discounts ........................................................ (877.5) (900.0) (1,057.9)Net operating revenue..................................................... 2,829.1 3,128.6 3,266.6________________

(1) In constant reais of December 31, 1999.(2) Under the terms of the Concessions, the Company is no longer authorized to provide interregional and international long-distance services.

Beginning in 2002, the Company may obtain authorization to provide interregional and international long-distance and othertelecommunications services, including local and intraregional fixed-line services in the other Fixed-Line Regions, provided that it has metthe universalization and expansion service targets set forth in the Concessions.

- 6 -

Local Services

The Company is currently the sole provider of local services in the Region. Local servicesinclude all calls that originate and terminate within a single local area in the Region, as well as,installation, monthly subscription, public telephones, and supplemental local services.

The Company owns and operates public telephones throughout the Region. At December 31,1999, the Company had approximately 120,900 public telephones, of which 95% could be operated with aprepaid card. Anatel’s service targets require the Company to increase the number of public telephonesto 137,480 by year-end 2000. See “—Network and Facilities—Network Expansion” and “—Regulationof the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Network Expansion—General Plan on Universal Service.”

The Company provides a variety of other supplemental local services that include voice mail, callwaiting, call forwarding, conferencing, speed dialing and caller ID.

Intraregional (Intrastate and Interstate) Long-Distance Service

The Company is the dominant provider of intrastate fixed-line telecommunication services in theRegion and since July 1999 has been providing interstate fixed-line telecommunications services in theRegion. Calls from one local area in the Region to another local area in the Region are referred to as“intraregional long-distance” calls. Intraregional long-distance service includes intrastate long-distancecalls (calls within a given state in the Region) and interstate long-distance calls (calls between states inthe Region). Prior to the Breakup, each of the operating subsidiaries of Telebrás was the exclusiveprovider of long-distance service that originated and terminated within its concession area. Eachconcession area coincided roughly with a state, so, generally speaking, each of the operating subsidiariesof Telebrás was the exclusive provider of intrastate long-distance service in its state. Embratel was theexclusive provider of long-distance service between states.

As of July 1999, Embratel and Intelig were authorized to begin to provide intrastate long-distanceservices within the states in the Region, and the Company was authorized to begin to provide interstatelong-distance services between the states in the Region. See “—Competition.” The Company isexpanding its network to provide interstate long-distance service in the Region, and Embratel and Inteligare expanding their networks to provide intrastate long-distance service. Until the Company completesthis expansion, the Company may lease transmission facilities from other carriers to complete interstatelong-distance calls between states in the Region.

Interregional and International Service

The Company is currently not authorized to provide interregional or international long-distanceservices. Interregional long-distance service consists of calls between a point within the Region and apoint in Brazil outside the Region. International long-distance service consists of calls between a pointwithin the Region and a point outside Brazil. Beginning in 2002, at the earliest, the Company may obtainauthorization to provide interregional and international long-distance service, provided all theconcessionaires operating in the Region have met the universalization and expansion of service targets setforth in their respective concessions. See “Targets Imposed by Anatel,” “—Competition,” and “—Regulation of the Brazilian Telecommunications Industry—Obligations of TelecommunicationsCompanies.”

Network Services

Network services consist of Interconnection, Lease of Facilities and Fixed-to-Mobile Services.

Interconnection: Interconnection services consist of the use of the Company’s network by othertelecommunication providers in order to (i) receive calls that originate on the Company’s network;

- 7 -

(ii) complete calls that terminate on the Company’s network; and (iii) connect switching stations to theCompany’s network. Interconnection Services were introduced in Brazil in April 1998.

Use of the Company’s interconnection services has grown since the spin-off of the cellulartelecommunications businesses of the Telebrás operating subsidiaries, the Breakup of Telebrás and theadvent of competition in the telecommunications sector in Brazil.

Telecommunications service providers are required to provide interconnection services on anondiscriminatory basis. Subject to certain requirements, they are free to negotiate the terms of theirinterconnection agreements but if the parties fail to reach an agreement, Anatel will arbitrate thecontroversy and establish the terms and conditions of interconnection. See “—Regulation of the BrazilianTelecommunications Industry—Obligations of Telecommunications Companies—Interconnection” and“—Regulation of the Brazilian Telecommunications Industry—Rate Regulation.” The terms of theCompany’s interconnection services, particularly the pricing and technical requirements of these services,may affect the Company’s results of operations, its competitive environment and its capital expenditurerequirements.

The Company provides interconnection services to long distance providers (Embratel andIntelig), and certain operators of trunking services. The Company also provides interconnection servicesto the nine cellular service providers that were spun off from the Telebrás operating subsidiaries as wellas all Band B cellular service providers in the Region.

Specifically in relation to Embratel, effective April 1998, the Company entered into aninterconnection agreement with Embratel, regulated by Anatel, under which Embratel pays the Companyfees on a per-minute basis for long-distance calls carried by Embratel that are originated or completedusing the Company’s local network.

The Company receives from Embratel a supplemental per-minute fee called the ParcelaAdicional de Transição (“PAT”). The PAT was also implemented in April 1998 in order to reduce theimpact of the discontinuation of the revenue-sharing arrangement between the Company and Embratel.See “— Historical Background” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations — Effects of Changes in Rates and Changes in Revenue Sharing.” The PATwill be gradually phased out by June 30, 2001.

Lease of Facilities: Other telecommunications service providers, particularly cellular serviceproviders, lease trunk lines from the Company for use within their stand-alone networks, and largecorporate customers lease lines from the Company for use in private networks connecting differentcorporate sites.

The Company also leases its telecommunications facilities to Embratel and Intelig in order toprovide access to its network.

Fixed-to-Mobile Services: Fixed-to-Mobile Services consist of calls that originate in a fixed-lineterminal and terminate in a cellular terminal. The use of the Company’s Fixed-to-Mobile Services hasgrown since the spin-off of the cellular telecommunications businesses of Telebrás’ operatingsubsidiaries. For a more detailed description of the types of Fixed-to-Mobile Services, see “Rates—Network Usage Charges.”

Data Transmission Services

The Subsidiaries provide low- and high-speed data transmission services through private leasedcircuits. Beginning in 1989, the Company invested in data transmission capacity in response to thegrowing demand in Brazil for services that require high-speed dedicated and switched digital circuits,such as data, image and text transmission, corporate networking, Internet access and video conferencing.

- 8 -

The Company offers various data transmission services such as leased lines, packet switching(X-25), frame relay and Internet Protocol. The Company also offers data transmission services over theCompany’s own network and provides access to Embratel’s data transmission Internet Protocol. AtDecember 31, 1999, the Company had a total of 36,334 access gates in service.

In 1999, the Company acquired a data network to be used in supplying data communicationservices such as ATM, frame relay and Internet (dedicated and dial-up). The Company intends to keep oninvesting in data networks in order to better serve the boost of demand expected for these kinds ofservices.

Other Services

The Company provides telecommunications services beyond basic telephone service includingvalue added services (900, follow-me, voice mail, call waiting), Internet related services (InternetProtocol access, e-mail access), Yellow Page advertising and advertising on public telephone cards.However, in accordance with its concessions, the Company is prohibited from providing cable televisionservices but may lease its network to other providers of such services. The Company expects thatincreased competition between the suppliers of such services will result in greater demand for its network.

Targets Imposed by Anatel

The Company is required to achieve certain targets imposed by Anatel and the Concessions inconnection with quality and universalization of its services.

Quality Targets

The Company is required under the Telecommunications Regulations to meet certain servicequality targets relating to call completion rates, repair requests, rate of response to repair request, operatorresponse periods and other aspects of telecommunications services. Noncompliance with these qualitytargets can result in certain fines. See “—Regulation of the Brazilian Telecommunications Industry—Obligations of Telecommunications Companies—Quality of Service—General Plan on Quality.” TheCompany has never been fined for any failure to meet these quality targets.

The following table summarizes the obligations of each of the Subsidiaries relating to quality ofservice from 1999 to 2005. Quality of service targets for the Subsidiaries are set by each of theirrespective concessions and the Telecommunications Regulations.

Quality of Service Targets beginningon December 31,

1999 2000 2001 2002 2003 2004 2005(%) (%) (%) (%) (%) (%) (%)

Dial tone within 3 seconds (% of cases): ..... 98 98 99 99 99.5 99.5 99.5Call completion rate during peak periods (%of calls attempted) – Local:...................... 60 60 65 65 70 70 70

Call completion rate during peak periods (%of calls attempted) – Long Distance:....... 60 60 65 65 70 70 70

Maximum monthly repair requests (% oflines in service)......................................... 3 3 2.5 2.5 2 2 1.5

Maximum monthly public telephone repairrequests (% of public telephones in service)...................................................................... 15 15 12 12 10 10 8

Operator availability during peak periods (%response within 10 seconds)..................... 92 92 93 93 94 94 95

Billing inaccuracy (% of inaccurate bills) (1)

............................................................. 4 4 3 3 2 2 2

- 9 -

Quality of Service Targets beginningon December 31,

1999 2000 2001 2002 2003 2004 2005(%) (%) (%) (%) (%) (%) (%)

Credit issued within one billing cycle forclaimed inaccuracies (% of cases)............ 95 95 96 96 97 97 98

Maximum number of uncompleted calls dueto network congestion – Local (% of callsattempted) ................................................. 6 6 5 5 4 4 4

Maximum number of uncompleted calls dueto network congestion – Long Distance (%of calls attempted)..................................... 6 6 5 5 4 4 4

Residential repair response speed (% within24 hours)(2) ................................................ 95 96 96 96 97 97 98

Nonresidential repair response speed (%within 8 hours)(3)....................................... 95 96 96 96 97 97 98

Public telephone repair response speed (%within 8 hours) .......................................... 95 96 96 96 97 97 98

__________________

(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 the Subsidiaries inaccomplishing their respective quality of service obligations as of December 31, 1999.

Quality of Service Performance measured as ofDecember 31, 1999

Teleacre Teleron Telemat TelegoiasTele-

brasília Telems Telepar Telesc CTMR(%) (%) (%) (%) (%) (%) (%) (%) (%)

Dial tone within 3 seconds (%of cases):

Morning............................ 100 100 100 100 100 100 99 100 100Afternoon ......................... 100 99 100 100 100 100 99 100 100Night................................. 100 100 100 100 100 100 100 100 100

Call completion rate duringpeak periods (% of callsattempted) – Local:

Morning............................ 62 54 59 63 60 63 66 65 62Afternoon ......................... 62 59 60 65 59 62 65 65 64Night................................. 61 56 56 60 58 60 63 56 62

Call completion rate duringpeak periods (% of callsattempted) – Long Distance:

Morning ............................ 58 56 52 59 56 61 61 64 60Afternoon .......................... 57 59 56 60 57 60 62 64 61Night ................................. 56 52 49 50 49 51 54 56 59

Maximum monthly repairrequests (% of lines inservice).................................. 4 7 5 3 2 4 3 3 2

Maximum monthly publictelephone repair requests (%of public telephones inservice).................................. 11 22 29 11 9 14 13 12 11

Operator availability duringpeak periods (% responsewithin 10 seconds)

Morning ............................ 96 38 95 93 92 83 97 95 100

- 10 -

Quality of Service Performance measured as ofDecember 31, 1999

Teleacre Teleron Telemat TelegoiasTele-

brasília Telems Telepar Telesc CTMRAfternoon .......................... 95 54 99 95 98 95 96 94 98

Billing inaccuracy (% ofinaccurate bills)(1).................. 10 4 4 6 16 4 9 5 21

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

Universalization – Network Expansion

The Company is also required under the Telecommunications Regulations to meet certain targetsrelating to network expansion and modernization. See “—Regulation of the BrazilianTelecommunications Industry—Obligations of Telecommunications Companies—Network Expansion—General Plan on Universal Service.”

For the year ended 1999, the Company met all of the expansion and modernization requirementsof its Concessions. The table below indicates certain obligations of the Company relating to theexpansion and modernization of its network from 1999 to 2005, and the performance of the Company inaccomplishing those obligations at December 31, 1999.

Company statusat December 31, By December 31,

1999 1999 2000 2001 2002 2003 2004 2005Minimum number of installed lines(millions)............................................... 5.2 4.7 5.3 5.9 5.9 5.9 5.9 5.9

Fixed-line service available to allcommunities larger than (thousands ofinhabitants) ........................................... - – – 1,000 1,000 600 600 300

Maximum waiting time for installationof a line (weeks)(1) ................................ - – – 4 3 2 1 1

Minimum number of public telephonesin service (thousands) ........................... 121 117 137 163 163 163 163 163

Minimum number of public telephones(per 1,000 inhabitants).......................... 4.3 4.3 4.3 4.3 4.3 7.5 7.5 8.0

Minimum public telephones as apercentage of fixed lines ....................... 2.3 2.3 2.3 2.3 2.3 2.5 2.5 3.0

Minimum digitalization level of network(%) ........................................................ 85% 75% 75% 85% 85% 95% 95% 100%

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

The targets the Company expects to require the most effort to meet are those relating to averagewaiting period for the installation of a line and installation of public telephones. The Company isobligated to reduce the maximum waiting time for installation of a line to four weeks by year-end 2001.If the Company fulfills this obligation prior to year-end 2001, it will not be required to comply with theminimum number of installed lines obligations. The Company’s management believes that prior to theBreakup, the Company would not have been able to comply with these targets. However, following theBreakup, the Company believes that these targets will be more readily met as competitors enter themarket and the Company expands its own network without government-imposed restrictions oninvestments. See “—Competition” and “—Capital Expenditures.” The Company is obligated to have137,480 public telephones in service by year-end 2000, 50% with local and domestic long-distance direct-dial capability and 25% with international long-distance direct-dial capability. Currently, the Companyhas approximately 121,000 public telephones in service.

- 11 -

Rates

Rates for telecommunications services provided by the Company are subject to comprehensiveregulation. See “—Regulation of the Brazilian Telecommunications Industry—Rate Regulation.” Sincethe relative stabilization of the Brazilian economy in mid-1994, there have been two major changes inrates 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 structurewas modified through a tariff rebalancing that resulted in higher charges for measured service andmonthly subscription and lower charges for intraregional, interregional and international long-distanceservices.

The Concessions establish a price-cap mechanism for annual rate adjustments, which places anupper limit on a weighted average of the rates for a basket of local and long-distance and forinterconnection. The basket includes activation and subscription fees and measured usage fees for local,long-distance and public telephone service. Subject to certain limits, the rates for individual serviceswithin the basket may be increased by up to 9% above the limit, as long as the weighted average rate forthe entire basket does not exceed the limit. The Concessions provide for the price cap to be adjustedperiodically to take account of inflation, as measured by the Indice Geral de Preços—DisponibilidadeInterna (“IGP-DI“).

Local Rates

The Company’s revenue from local service consists principally of activation and installationcharges, monthly subscription charges, measured service charges and public telephone charges. Users ofmeasured service, both residential and nonresidential, pay for local calls depending on usage. Usage ismeasured in pulses. Pulses occur system-wide every four minutes for most local calls and every sixtyseconds for local calls made between certain municipalities. These system-wide pulses are recordedindependently of when individual calls are actually made. In addition to system-wide pulses, the systemrecords one pulse for every call when the call is connected. After the first pulse, only system-wide pulsesare used in determining the charge for a call. As a result, the time between the first pulse 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 andfour minutes.

Local call charges for normal weekday calls are determined by multiplying the number of pulsesby the charge per pulse. For calls being made any day between midnight and 6:00 a.m., on Saturdaysbetween 2:00 p.m. and midnight and all day on Sundays and holidays, a caller is charged for only onepulse regardless of the duration of a call. Measured service charges are the same for all customers.Additionally, the local service customer pays a fixed monthly subscription charge for the use of theservices. Monthly subscription services include, among other things, up to 90 or 100 free pulses permonth as the case may be. Any pulses in excess of 90 or 100 pulses per month as the case may be, arebilled to the customer as a measured service.

Since 1999, the monthly subscription charge (net of taxes) has been R$11.77 for residentialcustomers, R$17.65 for commercial customers and the price of one pulse (net of taxes) has beenR$0.6826. The following table sets forth selected information on the Company’s subscription chargesand measured service charges for local telephone service for the periods indicated.

- 12 -

Year ended December 31,1997 1998 1999 (3)

Average rates for local telephone service (2): (reais) (1)

Monthly subscription:Residential .................................................................. 9.34 12.0 11.77Commercial................................................................. 16.21 18.0 17.65

Measured service (per local pulse) ..................................... 0.065 0.070 0.683__________________(1) In constant reais of December 31, 1999.(2) Monthly average rates, net of value-added taxes.(3) Average rates for local telephone service decreased slightly in 1999 as compared to 1998, mostly due to the monetary restatement into

constant reais of December 31, 1999

As of June 23, 2000, the average monthly rate for residential and commercial subscriptions wasR$14.11 and R$21.97, respectively. Average monthly rates for measured service (per local pulse) wereR$0.078. As of June 23, 2000, monthly subscriptions for residential services include a monthlyallowance of 100 free pulses, while monthly subscriptions for commercial services contain a monthlyallowance of 90 free pulses.

The Company charges an installation fee ranging from R$8.40 to R$86.33 (depending on thestate) for the installation of a new line and a fee of R$67.30 when a customer changes addresses. As ofJune 23, 2000, installation fees ranged from R$10.45 to R$77.93.

Intraregional Long-Distance Rates

Rates for intraregional long-distance calls are computed on the basis of the time of day, and dayof the week, duration and distance of the call and also vary depending on whether special services, suchas operator assistance, are used. The following table sets forth selected information on the Company’sdomestic long-distance rates during the periods indicated.


Domestic long-distance rates (2): (reais)(1)

0 to 50 km ........................................................................... 0.38 0.38 0.4650 to 100 km ....................................................................... 0.65 0.65 0.76100 to 300 km ..................................................................... 0.97 0.97 1.15over 300 km ........................................................................ 1.30 1.30 1.53

__________________(1) In constant reais of December 31, 1999.(2) Rates for a domestic long-distance call, 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 Company’s revenue from network services consists primarily of two basic categories:payments from other telecommunications service providers on a per-minute basis to complete calls usingthe Company’s network and fixed payments from other telecommunications service providers on acontractual basis to use part of the Company’s network. The network usage charge varies depending onwhether the telecommunications service provider uses the Company’s local or long-distance network.Similarly, the Company pays other fixed-line and cellular service providers a network usage charge tocomplete calls on their networks. The terms and conditions of interconnection are freely negotiatedbetween the parties, subject to approval by Anatel. The Company is required to make its networkavailable for interconnection whenever demanded by any other telecommunication provider, if technicallypossible, on equal and non-discriminatory basis.

Cellular telecommunications service in Brazil, unlike in North America, is offered on a “callingparty pays” basis. Under the policy of calling party pays, a cellular service subscriber generally pays

- 13 -

cellular usage charges only for calls made by the cellular service subscriber and not for calls received. Inaddition, a subscriber pays roaming charges on calls made or received outside his or her home registrationarea. Calls received by a cellular service subscriber are paid for by the party that places the call inaccordance with a rate based on cellular per-minute charges. For example, a fixed-line service customerpays a rate based on cellular per-minute charges for calls made to a cellular service subscriber. Thecellular base rate per-minute charges are generally VC1, for local calls, VC2, for calls outside the cellularsubscriber’s registration area but inside the region where the respective cellular provider provides service,and VC3, for calls outside the subscriber’s registration area and outside the region where the respectivecellular provider provides service. The Company charges its fixed-line service customers per-minutecharges based on either VC1, VC2, or VC3 rates when a fixed-line service customer calls a cellularsubscriber. In turn, the Company pays the cellular service provider the mobile network usage charge.

The Company’s revenue from network services also includes payments from othertelecommunications service providers arranged on a contractual basis to use part of the Company’snetwork. Other telecommunications service providers, such as providers of trunking and paging services,may use the Company’s network to connect a central switching station to the Company’s network. Somecellular service providers use the Company’s network to connect cellular central switching stations to thecellular radio base stations. The Company also leases transmission lines, certain infrastructure and otherequipment to other providers of telecommunications services.

The following table sets forth the average per-minute rates charged by the Company for networkservices during the indicated years.


(reais)(1)

Network usage rate (local).................................... 0.046 0.047 0.039Network usage rate (long-distance ) ..................... 0.077 0.076 0.069Per minute charges for calls made to the cellular network:

VC1 ............................................................... 0.32 0.32 0.27VC2 ............................................................... 0.70 0.70 0.56VC3 ............................................................... 0.79 0.79 0.64

_______________________(1) In constant reais of December 31, 1999. Net of Value added taxes. Network usage rates (local and long-distance) refer to the rates charged

by Telepar (the Merged Subsidiary).(2) Average rates decreased slightly in 1999 as compared to 1998, mostly due to the monetary restatement into constant reais of December 31,

1999.

As of June 23, 2000, network usage rates for local and long-distance increased to approximatelyR$0.044 and R$0.078, respectively.

Data Transmission Rates

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


Average rates for monthly line rental per leased circuit: (reais)(1)

Local circuit4.8 Kbps............................................................................ 240.27 209.56 174.499.6 Kbps............................................................................ 268.80 209.56 174.4964Kbps.............................................................................. 569.79 430.86 358.752Mbps ............................................................................... 6,346.67 5,458.68 4,545.11

- 14 -

Long-distance circuit (2)

4.8 Kbps............................................................................ 1,156.00 900.75 750.009.6 Kbps............................................................................ 1,335.56 900.75 750.0064Kbps.............................................................................. 2,804.34 2,436.54 2,028.762Mbps ............................................................................... 34,935.20 21,424.81 25,731.20

_______________(1) In constant reais of December 31, 1999.(2) Average of monthly average rates, net of value-added taxes, assuming a transmission distance between 300 and 500 kilometers and a three-

year contract.(3) Average rates decreased slightly in 1999 as compared to 1998, mostly due to the monetary restatement into constant reais of December 31,

1999.

Taxes on Telecommunications Services

The cost of telecommunications services to the customer includes a variety of taxes. The averagerate of all such taxes, as a percentage of the Company’s gross operating revenues, was 24.5% in 1999.The principal tax is a state value-added tax, the Imposto sobre Circulação de Mercadorias e Serviços(“ICMS“), which the Brazilian states impose at varying rates on revenues from the provision oftelecommunications services. The average rate in the states that comprise the Region is 25% fortelecommunications services, except basic telephony and data transmission services. In the State of Acre,the rate is 17%, and in the State of Mato Grosso, the rate is 30%. In the State of Paraná, the ICMS rate is25%, with the exception of data transmission services, for which the rate is 17%.

Other taxes on gross operating revenues include two federal social contribution taxes, thePrograma de Integração Social (“PIS“) and the Contribuição para Financiamento da Seguridade Social(“COFINS“), which were imposed on certain telecommunications services at a combined rate of grossoperating revenues in 1999 (PIS = 0.65% and COFINS = 3.0%).

Public Compromise for Tariffs Reduction

On June 1, 1999, the Company implemented a public compromise for tariffs reduction(“Compromise”) that assures the lowest tariff available in the Company’s area of service to customersmaking a long distance call who choose the Company’s access code (“14”).

Through such Compromise, the Company undertook to set the tariffs of the Subsidiaries at aminimum 0.5% lower than the tariffs of its competitors for the same services rendered.

In case the Company charges its customers a tariff superior to those of competitors, the differenceowed by the Company to the customer arising from the Compromise is deducted from the following billof the consumer, after a request of the customer is presented to and accepted by the Company.

The Compromise original final term was December 31, 1999, and it provides for an automaticrenewal for an undetermined term in which the Company may cancel the Compromise at any time after a15-day notice of its decision. Such decision has not been taken until the moment.

Billing and Collection

The Company sends each customer of Local Services, Intraregional Long-Distance Services andother Services a monthly bill covering all the services provided during the prior period. In 1999, theCompany began the implementation of a new billing, collection and customer service system in order toallow for better billing management. Since September 30, 1999, the Company has grouped its customersinto 14 different billing cycles. The telephone bill separately itemizes long-distance calls, calls made on acellular telecommunications network, 800 and 900 services and other services such as call waiting, voicemail and call forwarding.

Until the end of 1999, long distance calls originating in the networks of fixed-line serviceproviders were directly billed to customers by fixed-line service providers. Fixed-line service providers

- 15 -

were responsible for collecting fees for such long-distance services from customers and transferring suchfees to long-distance providers after deducting their interconnection fees for the use of their fixed-linenetwork. With the advent of competition in long distance services, customers now receive monthly billsfrom each company they choose to carry their long-distance call. Accordingly, the issuance of bills forthese services is made separately by each long-distance carrier. Customer payments are effected underagreements with various banks, either by debiting the customer’s checking account or by direct paymentto a bank.

Pursuant to Brazilian law, subscribers must receive a bill at least five days before the due date,and the Company must allow customers 30 days from the due date before suspending outgoing service,including a notice of termination sent to the customer after 15 days. If the bill is not contested, outgoingservice may be suspended, and the Company may terminate incoming service if a subscriber’s payment is60 days past due.

At December 31, 1999, approximately 8.6% of all receivables were outstanding for more than30 days and less than 90 days and 6.0% of all receivables were outstanding for more than 90 days. For adiscussion of provisions for past due accounts, see “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Results of Operations for the Years Ended December 31, 1997,1998 and 1999—Operating Expenses—Selling Expense.”

Network and Facilities

General

The Company’s network includes installed lines and exchanges, a network of access linesconnecting customers to exchanges, trunk lines connecting exchanges and long-distance transmissionequipment. At December 31, 1999, the Company’s regional telephone network included approximately5.2 million installed lines, of which 4.7 million were lines in service. Of the access lines in service at thattime, 70.3% were residential lines, 20.3% were commercial lines and 2.4% were public telephone lines.Intraregional long-distance transmission is provided by a microwave network and by fiber-optic cable.The Company’s management believes that the unmet demand for fixed-line telecommunications servicesin the Region is substantial. The customer waiting period for the installation of a new line variessignificantly depending on the capacity of the switching center that serves the locality.

The following table sets forth selected information about the Company’s network at the dates andfor the years indicated.

At and for the year ended December 31,1995 1996 1997 1998 1999

Installed access lines (millions).......................................... 2.8 3.1 3.6 4.2 5.2Access lines in service (millions) ....................................... 2.5 2.8 3.2 3.8 4.7Average access lines in service for year ended (millions).. 2.3 2.6 2.9 3.5 4.2Lines in service per 100 inhabitants ................................... 9.3 10.2 11.3 13.4 16.6Percentage of installed access lines connected to digitalexchanges .......................................................................... 55.2 63.6 74.2 75.5 84.7

Employees per 1,000 access lines installed ........................ 5.2 4.6 3.3 3.1 1.9Number of public telephones (thousands).......................... 58.9 72.9 86.8 97.9 120.9Local call pulses for year ended (billions).......................... 9.3 9.5 9.9 11.5 13.2Domestic long-distance call minutes for year ended(billions)............................................................................ 4.4 5.2 5.6 6.1 6.9

International call minutes for year ended (millions)........... 37.4 45.0 54.9 63.5 78.9

The Company is required under the Telecommunications Regulations to meet certain targetsrelating to network expansion and modernization. See “—Regulation of the BrazilianTelecommunications Industry—Obligations of Telecommunications Companies—Network Expansion—General Plan on Universal Service.”

- 16 -

Network Expansion

In 1999, the Company embarked on an aggressive network expansion program. In 1999, theCompany expanded its plant and lines-in-service by 25% from 4,183 thousand installed lines to 5,243thousand installed lines and from 3,777 thousand lines-in-service to 4,718 thousand lines-in-service;thereby increasing telephone density in the Region by 24% from 13.4 lines-in-service per 100 inhabitantsto 16.6 lines-in-service per 100 inhabitants.

Network Modernization

As part of its network modernization program, the Company has continued to install digitalexchanges throughout its network. Compared to the older analog technology, digital systems improve thequality and efficiency of the network, accommodate higher traffic levels, require less maintenance andpermit the Company to offer a broad range of value added services, such as voice, text and dataapplications. At December 31, 1999, 84.7% of all installed lines were connected to digital exchanges.Under the Telecommunications Regulations, the Company’s local network must be 99% digital by year-end 2005.

As part of its network modernization program, the Company has continued to install fiber-opticcable for its network, completing the construction of its 8,600 kilometer fiber-optic backbone network, orSuper Via Digital on December 16, 1999. The backbone, which started its operations on January 7, 2000,is based on Synchronous Digital Hierarchy (“SDH”) (digital communication through fiber optics) andinterconnects five Brazilian states of the areas of service of the Company (Santa Catarina, Paraná, MatoGrosso, Mato Grosso do Sul and Goiás), besides Brasília and the Federal District. The backbone isavailable for the transmission of voice, data, Internet, high definition pictures at a speed of 2.5 Gbps, andsupports about 540,000 simultaneous transmissions. The SDH has a back up and redundancy in thetransmissions. In case of interruptions in a certain sector, the calls are automatically diverted to analternate route. The Company plans a further extension of 1,300 kilometers to the backbone so that itmay reach the remaining states of the Company’s Region. At December 31, 1999, a total of 22,927kilometers of fiber-optic cable had been installed for use in the Company’s network.

Competition

The Company operates in the local, intrastate and interstate fixed-line telecommunicationsmarkets in the Region. The Company is not authorized to operate in the interregional or internationallong-distance markets.

During 1999, the Company estimates that 52% of the domestic long-distance calls in the Regionwere intrastate calls, 17% were interstate calls and 31% were interregional calls.

Local Services

Currently, the Company is the only supplier of local fixed-line telecommunications services in theRegion. A license to provide local fixed-line telecommunications services in the Region was awarded toGlobal Village Telecom on August 27, 1999, however, Global Village Telecom has not yet begun localservice operations in the Region.

Intraregional Services

Currently, the Company is the dominant provider of intrastate fixed-line telecommunicationservices in the Region and since July 1999 has also been providing interstate fixed-linetelecommunication services in the Region. A license to provide intrastate and interstate fixed-linetelecommunications services in the Region was awarded to Global Village Telecom on August 27, 1999.

- 17 -

As provided in their concession, as of July 1999, Embratel, the former long-distance serviceprovider of the Telebrás System, was authorized to begin to provide intrastate long-distance services incompetition with the Company. Embratel is controlled by MCI Worldcom, a global telecommunicationscompany with annual revenues of more than $30 billion and established operations in over 65 countries.Embratel has a limited intrastate network and will pay network usage fees to the Company for allintrastate long-distance calls carried by Embratel that use the Company’s local network either to completeor initiate a call.

In January 1999, Intelig was awarded licenses to provide long-distance service throughout Brazilin competition with Embratel. As provided in their concession, as of July 1999, Intelig was alsoauthorized to begin to provide intrastate long-distance service in the Region in competition with theCompany. Intelig began its operations in January 2000. The partners that comprise Intelig include:(i) National Grid, the owner and operator of the electricity transmission network in the United Kingdomwith a quoted market value of over US$10 billion, (ii) France Telecom, one of the world’s leadingtelecommunications carriers with 1998 consolidated operating revenues of US$24.6 billion and(iii) Sprint, a global communications company with US$17 billion in annual revenues. Although SprintCorp. still has a shareholding in Intelig, according to Act n. 6030, enacted by Anatel on January 17, 2000,Sprint Corp. has been forbidden from practicing any acts of control, such as participating in themanagement and operations of Intelig, exercising voting or veto rights, etc. Sprint Corp. has beenrequired to sell its shareholdings in Intelig.

The new licensees awarded to Embratel, Intelig and Global Village Telecom are not subject to thesame service quality and network expansion and modernization obligations that the Company is subject tounder its Concessions. Beginning in 2002, the Company may face an unlimited number of competitors inlocal and intraregional long-distance, and it may itself seek a license to provide interregional andinternational long-distance telecommunications services provided that it has met certain obligationscontained in the Concessions. See “Regulation of the Brazilian Telecommunications Industry—Concessions and Licenses.”

In December 1998, Anatel approved a resolution outlining a numbering plan for fixed-line serviceproviders in Brazil. The numbering plan created the so-called carrier selection code, whereby the caller isable to choose a service provider for each long-distance call with numbers that identify the carrier. TheCompany’s carrier selection code is “14.”

There can be no assurance that the entry of new competitors will not have a material adverseeffect on the Company’s business, financial condition, results of operations or prospects. Embratel, theformer long-distance carrier of the Telebrás System, has an extensive transmission network, experienceand financial resources. Any adverse effects on the Company’s results and market share fromcompetitive pressures will depend on a variety of factors that cannot now be assessed with precision andthat are beyond the Company’s control. Among such factors are the technical and financial resourcesavailable to the Company’s competitors, the business strategies and capabilities of the competitors,prevailing market conditions, the regulations applicable to new entrants and the Company and theeffectiveness of the Company’s efforts to prepare for increased competition.

Employees

At December 31, 1999, the Company had approximately 10,016 employees, all employed on afull-time basis. The employees work in regional administration and marketing (1%), plant modernizationand expansion (11%), plant maintenance and operation (42%), client services (35%), human resources(1%), budgeting and finance (2%), materials (2%), information technology (3%), and generaladministration (3%).

At December 31, 1999, approximately 60% of all employees were members of state labor unionsassociated either with the Federação Nacional dos Trabalhadores em Telecomunicações (“Fenattel“) or

- 18 -

with the Federação Interestadual dos Trabalhadores em Telecomunicações (“Fittel“). Some employeesin particular job categories are affiliated with other unions specific to such categories. Each Subsidiarynegotiates a new collective labor agreement every year with the local union. These negotiations arecarried out with the supervision and guidance of the Company, on one side, and Fenattel or Fittel, on theother. The collective agreements currently in force expire on November 30, 2000. The Company’smanagement considers the relations of the Company with its work force to be satisfactory. The Companyhas not experienced any work stoppage that had a material effect on its operations.

Retirement and Termination Incentive Program (“Projeto Amanhã” – Project Tomorrow)

At the end of 1998, the Company offered its employees a retirement and termination incentiveplan, called “Projeto Amanhã” (Project Tomorrow). Those who wished to participate in the plan wererequired to sign up in the period from January 4 to January 15, 1999 and terminations under the plan weredetermined on January 29, 1999.

The Company undertook to pay to the employees who participated in the program a financialincentive to retire or terminate the employee relationship, based on each employee’s service with theCompany, in addition to the mandatory severance payments under applicable Brazilian legislation.

Approximately 1,230 employees of the Company agreed to participate in the plan, whichrepresented a total cost of approximately R$63,000,000. Of that, approximately R$32,400,000represented mandatory severance payments under applicable Brazilian legislation and R$30,600,000represented the payment of retirement incentives to employees under the Projeto Amanhã.

Organizational Restructuring Process

In May 1999, the Company implemented a restructuring program that resulted in the dismissal of1,843 employees. The employees affected by the restructuring were entitled to receive, in addition to themandatory severance payments under applicable Brazilian legislation, additional amounts based on theirlength of service to the Company and their age. In addition, the employees affected by the restructuringwere provided with continued coverage under the Medical Plan of the Company for a period of fourmonths after the date of the dismissal without charge to the employee.

The restructuring was concluded on July 2, 1999 and resulted in approximately R$65,000,000 ofrestructuring costs to the Company, approximately R$29,000,000 of which was paid out asindemnification under the program.

“Apoio Daqui” Employment Transition Program

The “Apoio Daqui” employment transition program is similar to the organizational restructuringprogram mentioned above. However, unlike that process, the employment transition program is a long-term program without a fixed termination date.

The “Apoio Daqui” employment transition program was initiated in the second half of 1999 andis structured around two “baskets” of benefits: (i) guarantees to employees, upon termination of theiremployment, of the benefits under the incentive plan; and (ii) a “support action basket”, involving supportby the Company in order to give them greater security and confidence in the transition process, as well asoffering them internal and outside re-employment opportunities.

As of April 2000, approximately 2,780 employees of the Company were dismissed under thisprogram. The Company estimates the cost of this program to be approximately R$66,000,000.

Supplementary Retirement Benefits

The Company participates in a pension fund administered by the Fundação de Seguridade Social(“Sistel”). Sistel, a private not-for-profit private pension foundation was created by Telebrás in 1977 toprovide pension benefits to supplement government-provided retirement benefits. The sponsors

- 19 -

contribute to the cost of a benefit plan, which is also funded in part by employee contributions made bysalary deductions.

The Sistel Plan is a defined benefit plan funded by variable contributions by participants. TheCompany makes monthly contributions to Sistel in an amount equal to 13.5% of the salary of eachemployee who participates in Sistel. Each employee participant also makes a monthly contribution toSistel that is based on the employee’s age and salary.

On February 28, 2000, the Company founded its own private pension, Tele Centro Sulprev –Previdência Privada da Telecentrosul Participações S.A. (“TCSprev”), which is administered by Sistel.The TCSprev private pension plan, unlike the Sistel plan, is a defined contribution variable benefit planand is offered only to active employees of the Company who sign its Terms of Membership (Termo deConvênio de Adesão) on or before April 28, 2000. Employees of the Company who do not elect to joinTCSprev will remain members under the Sistel Plan. As of April 2000, the majority of the employees ofthe Company had joined TCSprev. The Company believes that the assets of TCSprev are sufficient tofund the accrued benefits that will be transferred to employees who migrate to the new definedcontribution plan.

The companies that sponsor Sistel are jointly and severally liable for contributions in respect ofall employees who participate in the Sistel plan. However, under the TCSprev, sponsoring companies arenot jointly liable for the obligations of the TCSprev plan. Instead, each TCSprev plan sponsor is liableonly for contributions in respect of its own employees. Joint liability among the plan sponsors continuesto exist only with respect to inactive employees, who will necessarily continue to be covered under theSistel plan and the post-retirement health care plan.

In addition to the Sistel plan, Telepar granted a supplementary retirement benefit to its employeespursuant to a collective agreement executed in 1970 with the union representing the economic category towhich its employees belonged. In 1982, it was agreed by collective agreement that the supplementaryretirement benefits granted to former Telepar employees would apply only to employees hired on orbefore December 31, 1982. In 1990, the supplementary retirement benefits became subject to a specificagreement governing the contractual relationship created by the grant of the supplementary retirementbenefits (“Terms of Contractual Relationship”). The application of the Terms of ContractualRelationship was also limited to employees hired on or before December 31, 1982.

In 1998, Telepar submitted proposals to employees included within the scope of the Terms ofContractual Relationship, under which the supplementary retirement benefits would be extinguished inreturn for indemnification (an alternative private pension plan). A total of 2,007 employees accepted theproposed settlement, while 240 elected to remain covered by the provisions of the Terms of ContractualRelationship.

At present, about 650 retired employees and 80 active employees benefit from the supplementaryretirement benefits provided for under the Terms of Contractual Relationship.

Research and Development

Until the Breakup of Telebrás, the Company and the other companies of the Telebrás Systemeach contributed to the Fundação Centro de Pesquisa e Desenvolvimento (the “Center“), a research anddevelopment center formerly operated by Telebrás. Since the Privatization, the Center has continued todevelop telecommunications technology as a private, independently administered non-profit foundationfinanced with resources from the public and private sector. Pursuant to a three-year contract signed inMay 1998 between Telebrás and each Subsidiary, the Company is obligated to contribute a maximum ofR$63.3 million to the Center during the three years ending May 2001. The Company’s aggregateexpenditures on research and development, including its contribution to the Center and expendituresrelating to its own independent research and development activities, were approximately R$16.1 million,R$21.0 million and R$21.9 million for 1997, 1998 and 1999, respectively.

- 20 -

During the effectiveness of its agreement with the Center, the Company has access totelecommunications software developed by the Center and other technological services provided by theCenter such as equipment testing and consulting and training services. The Center may also provideservices to third parties on a fee-for-service basis. The Company receives technological support from theCenter as contemplated in the agreement. The Company also conducts independent research anddevelopment in areas of telecommunication services but does not independently develop newtelecommunications hardware. The Company primarily depends on manufacturers oftelecommunications products for the development of new hardware.

Capital Expenditures

Before the Breakup, the Company’s capital expenditures were planned and allocated on a system-wide basis and subject to approval by the Federal Government. These constraints on capital expendituresprevented the Company from making certain investments that otherwise would have been made toimprove telecommunications service in the Region. Since the Breakup of Telebrás, these restrictions nolonger apply. The Company is now permitted to determine its own capital expenditure budget, subject tocompliance with certain obligations under the Concessions. See “—Regulation of the BrazilianTelecommunications Industry—Obligations of Telecommunications Companies.”

The following table sets forth the Company’s capital expenditures for each of the years endedDecember 31, 1999 and 1998.

Year ended December 31,1998 1999

(millions of reais)(1)

238 275Transmission..................................................................................................... 250 110Access Network................................................................................................ 275 279Backbone network ............................................................................................ 0 82Data Network.................................................................................................... 30 49Other investments (2)........................................................................................... 497 170Total capital expenditures ................................................................................. 1,289 964__________ (1) In constant reais of December 31, 1999.(2) Other investments include investments to replace plant equipment and other fixed assets generally without altering the capacity of the asset

replaced and certain investments in operational and technical support such as telecommunications management network systems.

The Company expects to spend approximately R$2,000 million on capital expenditures in 2000.The Company’s management expects that up to 60% of its year 2000 capital expenditures will be fundedthrough third-party financing.

Regulation of the Brazilian Telecommunications Industry

General

The Company’s business, including the services it provides and the rates it charges, is subject tocomprehensive regulation under the General Telecommunications Law and various administrativeenactments thereunder. Each of the Subsidiaries operates under a Concession that authorizes it to providespecified services and sets forth certain obligations (the “List of Obligations”).

Anatel is the regulatory agency for telecommunications under the General TelecommunicationsLaw and the October 1997 Regulamento da Agência Nacional de Telecomunicações (the “AnatelDecree“). 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 BrazilianCongress. In addition, any proposed regulation of Anatel is subject to a period of public comment,including public hearings, and Anatel’s decisions may be challenged in the Brazilian courts.

- 21 -

Concessions and Licenses

The concessions and authorizations for supplying telecommunications services in Brazil aregranted under the public and private regimes. Services under the public regime are supplied throughconcessions while services under the private regime are supplied through authorizations grantedby Anatel.

Under article 13 of the Telecommunication Service Regulation, the Brazilian Governmentundertakes the responsibility to assure the existence, universalization and continuity oftelecommunication services exploited under the public regime. The companies under the private regimeare not subject to the same restrictions in relation to universalization and continuity, and the rendering ofservices is not assured by the Brazilian Government.

The companies under the public regime are subject to certain special obligations regarding tariffsestablished by Anatel which is also responsible for supervising the tariffs charged by such companies. Onthe other hand, the prices charged by the companies under the private regime are freely set, and onlysubject to general policies and legislation which aim at protecting competition from any harm, as well asfrom the abuse of economic power.

The obligations in respect to the quality of services, interconnection and payment for the use ofnetworks are applicable to companies that render telecommunications services under both the public andprivate regimes.

Until December 31, 2003, public regime companies that render fixed-line telephone services (likethe Company) are prohibited from offering interregional and international long distance services whileEmbratel is prohibited from offering local services, unless all of the concessionaires operating in theirrespective region have met the year 2003 universalization and expansion of service obligations byDecember 31, 2001. Such obligations include universalization and expansion of service targets set bysuch fixed-line telephone service providers’ respective concession contracts and the General Plans ofAnatel.

Until December 31, 2002, private regime companies rendering fixed-line phone services areprohibited from offering interregional and international long-distance services, while Intelig is prohibitedfrom offering local services, unless private regime companies otherwise fulfill certain obligations on anaccelerated basis by December 31, 2001. Such obligations include extension and attendance targets setunder the respective authorizations of each private regime company.

Also, after December 31, 2001, Anatel may grant an unlimited number of additionalauthorizations to providers of local, intraregional, interregional and international long-distance services.

Fixed-line Services—Public Regime. Each public regime company operates under concessionsthat expire in 2005 but, subject to meeting certain obligations, are renewable for an additional 20-yearperiod. The concessions may be revoked prior to expiration. See “—Obligations of TelecommunicationsCompanies—Public Regime—Service Restrictions.” Every second year during the 20-year renewalperiod, public regime companies will be required to pay renewal fees equal to 2% of the annual netrevenues from the provision of telecommunications services (excluding taxes and socialcontributions) during the immediately preceding year, beginning April 30, 2006.

The Company, like the other regional fixed-line companies, is generally not permitted to offerinterregional, international long-distance service or other specified telecommunications services untilDecember 31, 2003. However, if all the operating concessionaires providing fixed-line services in theRegion meet their network expansion and universal service targets on an accelerated basis by December31, 2001, the Company would qualify to receive authorization to offer any sort of telecommunicationsservices beginning in 2002, in the Region and elsewhere, including interregional and international long-

- 22 -

distance services. See “—Obligations of Telecommunications Companies—Public Regime—ServiceRestrictions.”

Fixed-line Services—Private Regime. The Telecommunications Regulations provide for theintroduction of competition in telecommunications services in Brazil by requiring the FederalGovernment to authorize four private regime companies: one to provide local and intraregional long-distance services in each of the three Fixed-line Regions and one to provide intraregional, interregionaland international long-distance services throughout Brazil. The auctions for the licenses to provide localand intraregional fixed-line telecommunications services in the Region in competition with the Companyas well as in each of the other Fixed-line Regions have already occurred. Beginning 2002, Anatel mayauthorize additional private regime companies to provide intraregional, interregional and internationaltelephone long-distance services. See “—Competition.”

Obligations of Telecommunications Companies

The Company, like other telecommunications service providers, is subject to obligationsconcerning quality of service and network expansion and modernization. The four public regimecompanies are also subject to a set of special restrictions regarding the services they may offer containedin the Plano Geral de Outorgas (“General Plan of Concessions and Licenses“) and special obligationsregarding network expansion, modernization and service quality contained in the Plano Geral de Metasde Universalização (“General Plan on Universal Service“) and the Plano Geral de Metas de Qualidade(“General Plan on Quality“).

Public Regime—Service Restrictions. The General Plan of Concessions and Licenses prohibitsthe regional fixed-line service providers from offering cellular, interregional long-distance or internationallong-distance services and prohibits Embratel from offering local or cellular services until December 31,2003. Such service restrictions may be suspended after December 31, 2001 subject to certain conditions.

Anatel will monitor the progress of Embratel and the regional fixed-line service providerstowards meeting their respective Lists of Obligations. See “—Network Expansion—General Plan onUniversal Service” and “—Quality of Service—General Plan on Quality.” Each regional fixed-lineprovider will be authorized to provide all other telecommunication services (except for fixed-line servicesin the private regime within the Region and cable TV services) either (i) beginning 2004; or (ii) beginning2002, provided that all of the concessionaires operating in their respective region have met theirrespective universalization and expansion of service targets.

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

• a public regime company is prohibited from holding more than 20 percent of the voting stock inany other public regime company for a five year period beginning July 1998 (following eachperiod the prohibition is suspended provided that the acquisition is not deemed detrimental to theimplementation of the General Plan of Concessions and Licenses);

• mergers between regional fixed-line service providers and cellular service providers areprohibited; and

• companies offering telephony services are prohibited from offering cable television (unless apublic auction to provide such services in the relevant region is held and no one appears).

Network Expansion—General Plan on Universal Service. Under the General Plan on UniversalService, each regional fixed-line service provider is required to expand fixed-line service within its FixedRegion in accordance with the List of Obligations, and Embratel is required to expand access to long-distance service by installing public telephones in remote regions. No subsidies or other supplementalfinancings are anticipated to finance the network expansion obligations of the public regime companies.

- 23 -

Any Subsidiary that meets its December 31, 2001 target of four weeks maximum waiting time forinstallation of a line in advance of the deadline will no longer be subject to the network expansionrequirements. If a public regime company fails to meet its obligations in a particular Fixed-line Region,Anatel may apply the penalties established in the Concessions.

The universalization targets that cannot be met by the Company with efficient rendering ofservices can be funded with resources from a fund which has been specially created for this purpose (the“FUST”), which fund collects resources for the Union, the Federal States, the Federal District and allcities within the Union universalization. The Federal Government is not allowed to grant any kind offinancing to companies to assist them in accomplishing their universalization goals.

The General Plan on Universal Service allows Anatel to consider companies to have met theuniversalization network expansion goals if such company has successfully reached the goals of amaximum wait of 4 weeks for the installation of a phone line.

Quality of Services – General Plan on Quality

The providers of fixed-line services, either in the private or in the public regime, shall complywith the provisions of the General Plan on Quality and with the terms of their respective concessioncontracts, licenses and authorizations, as the case may be. All costs related to the fulfillment of thequality goals established by the General Plan on Quality shall be exclusively held by the respectivetelephone service provider.

The General Plan on Quality establishes the minimum quality standards for the services in regardto (i) quality of phone calls; (ii) attendance to repair requests; (iii) phone services to the user; (iv) qualityof public phones; (v) supply of access code to users; (vi) personal services to users; (vii) issuance of bills;(viii) attendance to requests of address changes; and (ix) modernization of the network. The providers offixed-line services are obliged to supply Anatel with specific data containing their achievement of theminimum quality set forth in the General Plan on Quality on a monthly basis. However, Anatel maycollect such data itself at any time and without any previous warning.

The provider of fixed-line telephone service who does not achieve, in due time, the quality targetsestablished, may be subject to general punitive measures inflicted by Anatel. Such measures are:warning, fine, temporary suspension, issuance of a bad repute statement, and termination of contract.Fines applicable due to an act or omission contrary to the terms of the respective concession, permissionor authorization and which causes damages to the quality of the fixed-line telephone services may amountup to R$40 million. Such fines shall be imposed pursuant to the terms of Law 9,472/97 and the respectiveconcession, permission or authorization.

Fines and Penalties. Failure to meet the network expansion and modernization obligations in theList of Obligations may result in fines and penalties of up to R$50 million as well as potential revocationof the Concessions. Failure to meet the quality of services obligations in the List of Obligations mayresult in fines and penalties of up to R$40 million. While there can be no assurances, the Company’smanagement believes that it will be able to meet these requirements; however, the Company’s ability tomeet the quality of service obligations in the List of Obligations will depend upon certain factors outsideits control. See “—Network and Facilities—Network Expansion” and “—Services—Quality of Service.”

Interconnection. All public regime companies are required to provide interconnection uponrequest to any provider of public telecommunications services when technically possible. The terms andconditions of interconnection are freely negotiated between parties, subject to Anatel’s approval. If theparties do not reach agreement on the terms of their interconnection, Anatel may act as their arbitrator. Ifa company offers any party a tariff below the price cap, it must offer that tariff to any other requestingparty on a nondiscriminatory basis. Fixed-line service providers are required to meet certain targets forthe number of interconnection points available.

- 24 -

Rate Regulation

The Concessions provide for a price-cap mechanism to set and adjust rates on an annual basis.The price-cap mechanism consists of an upper limit placed on a weighted average rate for two baskets ofservices, one local and one long-distance. The local basket includes installation charges, monthlysubscription fees and measured usage fees. The long-distance basket includes four rates for calls ofvarying distances. The caps for local and long-distance interconnection services are equal to the caps forthe respective baskets.

The initial price caps in the Concessions are based on the previously existing tariffs, which weredeveloped based on the Company’s fully allocated costs. The price caps are adjusted on an annual basisunder a formula set forth in the Concessions, which provides for two types of adjustments. Oneadjustment reflects the rate of deflation or inflation during the relevant period, as measured by the IGP-D1, an index published by the Fundação Getúlio Vargas, a private Brazilian economic researchorganization. The other adjustment is a reduction in the price-level adjustment determined in accordancewith a table of deemed productivity gains that are phased in during 1998-2005 for some caps and 2001-2005 for others.

Subject to certain limits, the tariffs for individual services within each basket may be increasedwithout pre-defined limits, as long as the weighted average tariff for the entire basket does not exceed theprice cap. Subject to approval by Anatel, the Company may also offer alternative plans that are notsubject to the price cap. For instance, customers might be permitted to select a plan that allows unlimitedcalling for a set fee rather than paying the per-minute fee under the Company’s basic service plan.

Other telecommunications companies wishing to interconnect with and use the Company’snetwork must pay certain fees, primarily a flat network usage fee charged per minute of use, whichrepresents an average charge for a basket of network elements and services. The flat network usage fee issubject to a price cap that varies from company to company based on the underlying cost characteristicsof that company’s network. For a breakdown of the Company’s past network usage charges, see “—Rates—Network Usage Charges.”

Three years from the date of the Concession, Anatel may permit the Company to set its owntariffs, provided there is effective competition. Excessive increases in earnings or anti-competitivepractices may cause Anatel to reinstitute the price-cap mechanism.

For information on the Company’s current tariffs and service plans, see “—Rates.”

Concession’s Termination

Under the terms of the Concession, the Concession can be terminated under any of the followingcircumstances: (i) upon expiration of the Concession; (ii) by the Federal Government under extraordinarycircumstances in which the public interest is jeopardized and the Federal Government decides to operatethe services of the Company, being understood that such termination by the Federal Government shallonly be valid as long as a law declaring the existence of such situation is enacted and the relevantindemnification is paid to the Company; (iii) by amicable or judicial termination by the Company as aconsequence of an act or omission of the Federal Government if the rendering of the services by theCompany becomes an excessive burden to the Company; (iv) annulment, which shall only occur if theCompany is guilty of an irreversible and serious irregularity, which shall be determined as such byAnatel; (v) should the Company enter into a split-up, spin-off, amalgamation or merger process, capitalreduction or a transfer of the Company’s corporate power without Anatel’s authorization; (vi) by thetransfer of the Concession without Anatel’s authorization and (viii) in the event the intervention by Anatelin the Company is necessary but such intervention would cause unfair benefits to the Company. In theevent the Concession is terminated, Anatel may, without prejudice, preemptively occupy all the

- 25 -

Company’s properties and use its employees in order to continue rendering services, on the terms andconditions previously established.

Brazilian Political Environment

The Brazilian political environment was marked by high levels of uncertainty after the countryreturned to civilian rule in 1985, ending 20 years of military government. The death of a President-electin 1985 and the resignation of another President in the midst of impeachment proceedings in 1992, aswell as rapid turnover in the Federal Government at and immediately below the cabinet level, adverselyaffected the implementation of consistent economic and monetary policies.

Fernando Henrique Cardoso, who was Finance Minister at the time of implementation of Brazil’slatest economic stabilization plan (the “Real Plan“), was elected President of Brazil in October 1994 and,in October 1998, was reelected for an additional four-year term, which began in January 1999. PresidentCardoso is the leader of a coalition of six political parties that represents a majority in the federalCongress. His party, the Brazilian Social Democratic Party, holds the second largest number of seats inthe coalition.

From 1999 to date has been marked by difficult relations between the Federal Government andcertain state governments. In the 1998 elections for state governors, candidates from parties allied withthe President’s coalition prevailed in 21 of 27 states, including the State of São Paulo. Oppositioncandidates won in six states, including the States of Rio de Janeiro and Rio Grande do Sul. In January1999, the new Governor of the State of Minas Gerais announced that his state would suspend paymentson its debt to the Federal Government for 90 days. The Governor of the State of Rio Grande do Sulsubsequently obtained a court order permitting his state to make its debt payments into an escrowaccount, pending resolution of a request of seven states to renegotiate refinancing agreements they hadreached with the Federal Government in 1997. The Federal Government has responded by seeking towithhold constitutionally-mandated transfers to the State of Minas Gerais. The Federal Government hasnotified certain international financial institutions that it will no longer guarantee those states’ obligationsto those institutions, leading the World Bank to suspend loans to the States of Minas Gerais and RioGrande do Sul.

In February 1999, certain state governors pressed for a renegotiation of their states’ refinancingagreements with the Federal Government. The President offered instead to make loans to the states tocover the costs of layoffs and pension reform and promised to review a law exempting exports from statetaxes. The Federal Government has initiated negotiations with the World Bank to secure funding for suchloans. The Federal Government is also proposing to refinance certain debt of Brazil’s municipalities for aperiod of 30 years at a rate equivalent to 9% above the rate of inflation, in return for which themunicipalities are to be required to cut costs sharply and adopt strict fiscal guidelines.

Brazilian Economic Environment

The Company’s business, prospects, financial condition and results of operations are dependenton general economic conditions in the Region and in Brazil, and in particular on (i) economic growth andits impact on demand for telecommunications services, (ii) the cost and availability of financing and(iii) exchange rates between Brazilian and foreign currencies.

For many years before the introduction of the Real Plan in late 1993, the Brazilian economy wasextremely volatile. The Federal Government implemented a succession of programs intended to stabilizethe economy and provide a basis for sustainable, non-inflationary growth. Changes in monetary, credit,tariff and other policies were frequent and occasionally drastic. In particular, actions to control inflation,interest rates or consumption included freezing bank accounts, imposing capital controls, introducing hightariffs and other strong measures. Changes in policy, social instability and other political and economicdevelopments, and the Brazilian government’s responses to such developments, not infrequently had a

- 26 -

material adverse effect on the business, operations, financial condition and results of operations ofTelebrás and its operating subsidiaries.

The Federal Government introduced the Real Plan in December 1993. The Real Plan is aneconomic stabilization program intended to reduce the rate of inflation by reducing certain publicexpenditures, collecting liabilities owed to the Federal Government, increasing tax revenues, continuingto privatize government-owned entities and introducing a new currency. The real was introduced asBrazil’s currency on July 1, 1994, initially with an exchange rate of R$1.00 to US$1.00. The realappreciated through January 1995 and thereafter gradually declined in value against the dollar, reachingR$1.2087 to US$1.00 at December 31, 1998. Notwithstanding the success of the Real Plan in loweringinflation and stabilizing the Brazilian economy, the Real Plan has also led to economic slowdown, and arise in unemployment in most regions and sectors of the economy.

The Asian financial crisis in 1998 and the ripple effects of that crisis presented a seriouschallenge for Brazil. After reaching a historical high of US$74.7 billion at April 30, 1998, Brazil’sinternational reserves declined to US$41.2 billion at November 30, 1998.

In November 1998, in response to continuing pressure on the real and the rapid decline in thecountry’s dollar reserves, Brazil negotiated a US$41.5 billion loan package arranged by the InternationalMonetary Fund (“IMF”). Acceptance of the IMF package committed Brazil to implementing acombination of spending cuts and tax increases. Brazil’s level of international reserves stabilizedfollowing the announcement of the support package, reaching US$44.6 billion at December 31, 1998.

After some initial progress in implementing a Fiscal Stabilization Program announced in late1998, the Federal Government encountered difficulties in implementing the program in Congress. See“—Brazilian Political Environment.” The Central Bank attempted a controlled devaluation of the real bywidening the band within which the real was permitted to trade, but subsequent Central Bank interventionfailed to keep the rate within the new band. On January 15, 1999, the Central Bank announced that thereal would be permitted to float, with Central Bank intervention to take place only in times of extremevolatility. Since then both the level of international reserves and the value of the real have declined. AtDecember 31, 1999 Brazil’s international reserves stood at US$36.3 billion and the Commercial MarketRate stood at R$l.7890 to US$1.00. At December 31, 1999 the Rate was R$1.7890 to US$1.00.

In the first quarter of 1999, the Federal Government had a series of legislative successes with itsefforts to implement the expense reduction and revenue enhancement measures under its FiscalStabilization Program. Brazil also began negotiations with the IMF on adjustments to the previouslyagreed 1999-2001 economic program, and agreement was reached in March 1999 on new economictargets. In 1999, Brazil received US$8.6 billion in disbursements from the IMF. Since then Brazil hasturned down disbursements from the IMF loan and has begun repayment of its IMF loans. Nonetheless,there can be no assurance that Brazil will be able to meet the primary surplus targets under its agreementwith the IMF and accordingly, that the full amount of the IMF-led support package will be available toBrazil if Brazil desired additional disbursements. Furthermore, there can be no assurance that Brazil willbe able to negotiate additional loan packages from the IMF or any other financial institution in case of afuture decline in Brazil’s level of international reserves.

As a result of the Asian financial crisis, GDP dropped 0.1% during 1998, reflecting a decline of1.3%, in the industrial sector and a slight rise of 0.8% in the services sector. In 1999, GDP rose slightlyby 0.8%, reflecting an increase of 9.0% and 1.1% in the agricultural and services sectors, respectively,and a small decline in the industrial sector of 1.7%.

As of June 15, 2000, the reserves totaled US$28.8 billion and the Commercial Market Rate stoodat R$1.8079 to US$1.00.

- 27 -

Developments in Other Emerging Market Countries

The Brazilian securities markets can be influenced by economic and market conditions in otheremerging market countries. Although economic conditions are different in each country, investors’reactions to developments in one country can have an effect on the securities of issuers in other countries,including Brazil. Since 1999 the international financial markets have experienced significant volatility;for example, the financial market index of the São Paulo Stock Exchange increased 152% for the twelvemonths ended December 31, 1999 and decreased 12.49% for the five months ended May 31, 2000.

There can be no assurance that the Brazilian securities markets will not continue to be affectednegatively by events elsewhere, especially in emerging markets, or that such events will not adverselyaffect the prices of the Company’s securities.

Inflation and Devaluation

Brazil experienced extremely high and generally unpredictable rates of inflation and ofdevaluation of Brazilian currency for many years until the implementation of the Real Plan. Inflationitself, as well as certain governmental measures to combat inflation and public speculation about possiblefuture actions have also historically contributed to economic uncertainty in Brazil and to heightenedvolatility in the Brazilian securities markets. See “—Brazilian Economic Environment.”

During 1999, Brazil experienced a sharp currency devaluation. See “—Brazilian EconomicEnvironment.” The following table sets forth the rate of Brazilian inflation, as measured by the IndiceGeral de Preços — Mercado (the General Price Index — Market or “IGP-M“), and the devaluation of theBrazilian currency against the U.S. dollar during the periods indicated.


(percentages)Inflation (IGP-M) (1) ............................................................................ 7.7 1.8 20.1Devaluation (Commercial Market Rate vs. US$)(1) ............................ 7.4 8.3 48.0_______________(1) Source: Central Bank of Brazil, May 2000 Bulletin.

During the first quarter of 2000, inflation, as measured by the IGP-M, amounted to 1.75%(13.74% on an annualized basis) and the appreciation of the real against the U.S. dollar was 2.3%.

Inflation and devaluation have potentially adverse consequences for the Company’s business,prospects, financial condition and results of operations. These factors introduce distortions into theCompany’s financial statements and make period-to-period comparisons difficult and unreliable.Differences between the relative rate of Brazilian inflation as compared to the rates of Brazil’s tradingpartners, on the one hand, and the rate of currency devaluation, on the other, can have an adverse effecton the Company’s results of operations. Inflation places pressure on the Company’s rates and invitesFederal Government efforts to control inflation by holding down the rates that Brazilian public utilitiesare permitted to charge.

There can be no assurance that Brazilian inflation will remain at modest rates or, if there is anincrease in inflation, that the Company’s business, prospects, financial condition and results of operationswill not be adversely affected.

Item 2. Description of Property

The principal properties of the Company consist of transmission equipment (including outsideplant and trunk lines), exchange equipment and switching equipment. The Company’s land and buildingsconsist principally of its telephone exchanges and other technical, administrative and commercial

- 28 -

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 andwith toll exchanges.

The Company’s properties are located in the States of Acre, Rondônia, Goiás, Tocantins, MatoGrosso, Mato Grosso do Sul, Paraná, and Santa Catarina, as well as in the Federal District and in a smallarea of the State of Rio Grande do Sul. The buildings used by the Company’s management are primarilylocated in the capital cities of these states. At December 31, 1999, the Company had approximately 3,308material properties, all of which are owned by the Company.

At December 31, 1999, the net book value of the Company’s property, plant and equipment wasapproximately R$7,744 million in constant reais of December 1999 (which includes automatic switching,transmission and other equipment, buildings and other fixed assets net of accumulated depreciation andwork-in-progress regarding the same).

Item 3. Legal Proceedings

Breakup of Telebrás

The legality of the Breakup and Privatization of Telebrás was challenged in numerous legalproceedings, the great majority of which have now been dismissed. A few, however, are still pending.The Company’s management believes that the ultimate resolution of those proceedings will not have amaterial adverse effect on the Company’s business or financial condition.

The Company is a party to certain legal proceedings arising in the normal course of business,including civil, administrative, tax, social security and labor proceedings. The Company has provided foror deposited in court amounts to cover its estimated losses due to adverse legal judgments. In the opinionof the management of the Company, such actions, if decided adversely to the Company, would not have amaterial adverse effect on the Company’s business or financial condition.

Telebrás is the legal predecessor of the Holding Company and is a defendant in a number of legalproceedings and subject to certain other claims and contingencies. Under the terms of the Breakup,liability for any claims arising out of acts committed by Telebrás prior to the effective date of the Breakupremains with Telebrás, except for labor and tax claims (for which Telebrás and the New HoldingCompanies are jointly and severally liable by operation of law) and any liability for which specificaccounting provisions have been assigned to the Holding Company or to one of the other New HoldingCompanies. The Company’s management believes that the chances of any such claims materializing andhaving a material adverse financial effect on the Company are remote.

Liability for any claims arising out of acts committed by the Subsidiaries prior to the effectivedate of the spin-off of the Subsidiaries’ cellular assets and liabilities to the newly formed cellularcompanies remains with the Subsidiaries, except for labor and tax claims (for which the Subsidiaries andthe newly formed cellular companies are jointly and severally liable by operation of law) and thoseliabilities for which specific accounting provisions have been assigned to the newly formed cellularcompanies. However, under the shareholders’ resolution pursuant to which the spin-off was effected, thenewly formed cellular companies have contribution rights against the Subsidiaries with respect to theentire amount of any payments made by the newly formed cellular companies in connection with anylabor or tax claims brought against the newly formed cellular companies and relating to acts committedby the Subsidiaries prior to the effective date of the spin-off.

Retroactive Application of Certain Taxes to Cellular Activation and Other Fees

In June 1998, the governments of certain Brazilian states outside of the Company’s Regionapproved an agreement to interpret existing Brazilian tax law to apply the ICMS (state value-added tax)

- 29 -

effective July 1, 1998, to certain services, including installation services, to which the ICMS had notpreviously been applied. There is a risk that those state governments could seek to apply thisinterpretation retroactively to services rendered during the five years preceding June 30, 1998. TheCompany’s management believes that any such attempt by these state governments to extend the scope ofthe ICMS to apply it retroactively to services that are supplementary to basic telecommunications servicesis unlawful because (i) the state governments would be acting beyond the scope of their authority,(ii) their interpretation would subject certain services which are not telecommunications services totaxation and (iii) new taxes may not be applied retroactively.

The Company’s management believes that it is unlikely that any state government in theCompany’s Region will attempt to apply the ICMS to activation fees retroactively. The Company’smanagement believes that any such attempt would be unlawful.

There can be no assurance that the Company will prevail in its position that the new interpretationby the state governments is unlawful. If the ICMS were to be applied retroactively for the last five yearsit would have a material adverse impact on the financial condition and results of operations of theCompany. If the ICMS were to be applied retroactively to activation fees earned by the discontinuedcellular operations, during the last five years, it would give rise to a liability estimated at R$207 million.

Administrative Claim Before Anatel

Embratel has filed an administrative claim against the Company before Anatel challenging thelegality of an association entered into by the Company and other regional fixed-line companies for therendering of 0800 national services. Embratel alleges that such an association violates applicabletelecommunication legislation. The Company is currently awaiting Anatel’s decision in this matter.Should Anatel rule against the association, this may have a material adverse effect on the operations ofthe Company, as the Company considers 0800 services as strategic to the Company’s businessdevelopment.

Labor Legal Proceedings

As of May, 2000, the Company was involved in approximately 4,297 labor legal proceedings.The estimated total amount involved in those proceedings is R$176.5 million. The majority of theseproceedings are related to (i) profit sharing; (ii) employee promotions; (iii) dangerous work conditions;(iv) overtime; (v) subsidiary liability; (vi) productivity; and (vii) reinstatement.

Of the total labor liability indicated above, the Company considers that (i) R$71.9 million isattributable to labor proceedings where the risk of the Company of losing the case is evaluated as“probable”; (ii) R$77.4 million is attributable to labor proceedings where the risk is evaluated as“possible”; and (iii) R$27.2 million is attributable to labor proceedings where the risk is evaluated as“remote”.

The Company has made provisions for labor liabilities classified as “probable” in the amount ofR$71.9 million.

Item 4. Control of Registrant

References in this Annual Report to “Preferred Shares“ and “Common Shares“ are to thepreferred shares and common shares, respectively, of the Holding Company. References to “AmericanDepositary Shares“ or “ADSs“ are to American Depositary Shares, each representing 5,000 PreferredShares. The ADSs are evidenced by American Depositary Receipts (“ADRs“).

Of the Holding Company’s two classes of capital stock outstanding, only the Common Shareshave full voting rights. The Preferred Shares have voting rights under limited circumstances. At June 1,

- 30 -

2000, Solpart owned 51.79% of the Common Shares. Accordingly, Solpart has the ability to control theelection of the Company’s Board of Directors and the direction and future operations of the Company.

The following table sets forth information concerning the ownership of Common Stock bySolpart and by the Company’s officers and directors as a group at June 1, 2000. The Company is notaware of any other shareholder owning more than 10.0% of the Common Shares.

Name of OwnerNumber of Common

Shares OwnedPercentage of Outstanding

Common SharesSolpart....................................................................................................... 64,405,151,125 51.79%All directors and executives officers as a group (4 persons) .................... 4,672 0.00

At December 31, 1999, Techold Participações S.A., STET International Netherlands N.V. andTimepart Participações Ltda. owned approximately 34%, 38% and 28% of the capital stock of Solpart,respectively. The following is a brief description of the shareholders of Solpart.

Techold Participações S.A. is a subsidiary of Invitee S.A., a company owned by (i) the followingBrazilian pension funds: SISTEL — Fundação Sistel Seguridade Social; TELOS — Fundação Embratelde Seguridade Social; FUNCEF — Fundação dos Economiários Federais; PETROS — FundaçãoPetrobrás de Seguridade Social; and PREVI — Caixa de Previdência dos Funcionários do Banco doBrasil and (ii) Opportunity Zain S.A., whose shareholders are investment funds and the companiescontrolled by the Opportunity Group. The Opportunity Group is an investment and management group,whose activities include money management and private equity in Brazil.

STET International Netherlands N.V. is part of a group headed by Telecom Italia (BC) S.P.A.(“Telecom Italia“). Telecom Italia is one of the world’s largest fixed-line telecommunications operators,with approximately 25.7 million installed fixed lines. It also provides, through its subsidiary TIM(Telecom Italia Mobile), mobile telecommunications services worldwide to more than 10.9 millionsubscribers. Telecom Italia also provides leased lines, data communication services, satellitecommunications services and IT software services, develops and manufactures telecommunicationsequipment and installs telecommunications networks. Telecom Italia has made investments in fixed andmobile service providers in Argentina, Chile, Bolivia, Brazil, Cuba, Spain, France, Greece, Austria, theCzech Republic, Serbia, China and India. Telecom Italia is also a participant in the consortia thatacquired control of two other New Holding Companies, Tele Celular Sul Participações S.A. and TeleNordeste Participações S.A.

Timepart Participações Ltda. is a holding company owned by Telecom Holding S.A., PrivtelInvestimentos S.A. and Teleunion S.A. Approximately 100% of the share capital of Telecom HoldingS.A. is owned by CSH LLC and CSH Units. Approximately 100% of the share capital of PrivtelInvestimentos S.A. is owned by Eduardo Cintra Santos. Approximately 100% of the share capital ofTeleunion S.A. is owned by Luiz Raymundo Tourinho Dantas. The sole purpose of the entities that ownTimepart is to invest in shares of other companies.

Shareholders’ Agreement

On July 19, 1998, Techold Participações S.A. (“Techold“), STET International Netherlands N.V.(“STET“) and Timepart Participações Ltda. (“Timepart“) entered into a Shareholders’ Agreement (the“Agreement“), which governs their respective rights and obligations with respect to their shareholdings inthe Holding Company. The Agreement provides for the formation of a new company, Solpart, for thepurposes of holding the investment in and supervising the activities of the Holding Company. TheAgreement provides for (i) rules for the management of the Holding Company by Solpart; (ii) a right offirst offer, rights of first refusal and tag-along rights for STET; (iii) rights of first refusal for Techold withrespect to the sale of STET’s shares; and (iv) the implementation of an Initial Business Plan of theHolding Company.

- 31 -

The Agreement provides that if Techold and/or Timepart (the “Selling Parties“) seek to sell amajority of Solpart’s common shares and preferred shares, STET may exercise a right of first offer withrespect to all the shares held by the Selling Parties. In addition, STET has rights of first refusal withrespect to a third party offer from (i) a telecommunications competitor at a price equal to or belowSTET’s offer price plus 15% thereof (“premium price“) or (ii) a non-telecommunications competitor.STET’s tag along rights may be exercised if (i) the third party purchase price for the Holding Company isgreater than the premium price and the third party purchaser is a telecommunications competitor or (ii) inthe event that the proposed sale of shares to a telecommunications competitor when added to all otherprevious transfers of shares by the Selling Parties would equal 10% or more of either the common sharesor preferred shares, or both, being transferred.

Item 5. Nature of Trading Market

The principal trading market for the Preferred Shares is the Bolsa de Valores de São Paulo (the“São Paulo Stock Exchange“). The Preferred shares are also traded on seven other Brazilian stockexchanges. The Preferred Shares used to be traded on the Bolsa de Valores do Rio de Janeiro (the “Riode Janeiro Stock Exchange“) . They are no longer traded on the Rio de Janeiro Stock Exchange becausethe exchange now only trades Brazilian federal, state and municipal debt or carries out privatizationauctions. At December 31, 1999, the Holding Company had approximately 2.8 million shareholders.

The Preferred Shares commenced trading separately on the Brazilian stock exchanges onSeptember 21, 1998. The following table sets forth the reported high and low closing sale prices forPreferred Shares of the Holding Company on the São Paulo Stock Exchange for the periods indicated.

Nominal reais per 1,000 Preferred SharesHigh Low

Third quarter 1998 (beginning September 21, 1998) ....................................... 13.20 6.00Fourth quarter 1998 .......................................................................................... 15.00 9.80First quarter 1999.............................................................................................. 18.19 7.70Second quarter 1999 ......................................................................................... 22.01 16.00Third quarter 1999............................................................................................ 22.30 17.90Fourth quarter 1999 .......................................................................................... 32.90 20.55_______________Source: São Paulo Stock Exchange

In the United States, the Preferred Shares trade in the form of ADSs, each representing 5,000Preferred Shares, issued by The Bank of New York, as depositary (the “Depositary“) pursuant to aDeposit Agreement (the “Deposit Agreement“) among the Holding Company, the Depositary and theregistered holders and beneficial owners from time to time of ADRs. Preferred Shares represented by theADSs are held in custody in Brazil by Banco Itaú S.A. The ADSs commenced trading separately on theNYSE on November 16, 1998 under the symbol TCS (which the Holding Company expects to change toBRP as part of its name change from Tele Centro Sul Participações, S.A. to Brasil Telecom Participações,S.A.). At December 31, 1999, there were approximately 191 registered owners of ADSs.

The following table sets forth the reported high and low closing sales prices for ADSs on theNYSE for the period indicated.

US dollars per ADSHigh Low

Fourth quarter 1998 (beginning November 16, 1998)...................................... 61.31 41.50First quarter 1999.............................................................................................. 49.00 29.50Second quarter 1999 ......................................................................................... 66.56 46.69Third quarter 1999............................................................................................ 59.25 47.63Fourth quarter 1999 .......................................................................................... 90.75 53.31_______________Source: Bank of New York

- 32 -

The common shares and preferred shares of Brasil Telecom (the Merged Subsidiary) are alsotraded on the São Paulo Stock Exchange, the Rio de Janeiro Stock Exchange and seven other Brazilianstock exchanges.

Trading on the Brazilian Stock Exchanges

Of Brazil’s nine stock exchanges, the São Paulo Stock Exchange is the most significant. During1999, the São Paulo Stock Exchange accounted for over 90% of the trading value of equity securities onall Brazilian stock exchanges.

Each Brazilian stock exchange is a non-profit entity owned by its member brokerage firms.Trading on each 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 onwhich trading can be conducted during the trading day. In 1999, the São Paulo Stock Exchange beganoperating an “after-market” which allows for limited after-hours trading to take place. There are nospecialists or market makers for the Holding Company’s shares on the São Paulo Stock Exchange.Trading in securities listed on the Brazilian stock exchanges may be effected off the exchanges in certaincircumstances, although such trading is very limited.

Settlement of transactions is effected three business days after the trade date without adjustmentof the purchase price for inflation. Payment for shares is made through the facilities of separateclearinghouses for each exchange, which maintain accounts for member brokerage firms. The seller isordinarily required to deliver the shares to the exchange on the second business day following the tradedate. The clearinghouse for the São Paulo Stock Exchange is Companhia Brasileira de Liquidacão eCustodia S.A. — CBLC, which is controlled mainly by the exchange’s member brokerage firms andcertain banks that are not members of that exchange.

At December 31, 1999, the aggregate market capitalization of all of the companies listed on theSão Paulo Stock Exchange was approximately R$408.9 billion. Although all the outstanding shares of anexchange-listed company may trade on a Brazilian stock exchange, in most cases less than half of thelisted shares are actually available for trading by the public, the remainder being held by small groups ofcontrolling persons that rarely trade their shares. For this reason, data showing the total marketcapitalization of Brazilian stock exchanges tends to overstate the liquidity of the Brazilian equitysecurities market.

The Brazilian equity market is relatively small and illiquid compared to major world markets. In1999, the combined daily trading volumes on the São Paulo Stock Exchange and the Rio de Janeiro StockExchange averaged approximately R$626.3 million. In 1999, the five most actively traded issuesrepresented approximately 58.5% of the total trading in the cash market on the São Paulo StockExchange.

Trading on Brazilian stock exchanges by nonresidents of Brazil is subject to certain limitationsunder Brazilian foreign investment legislation.

Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the Comissão de Valores Mobiliários (theBrazilian Securities Commission or “CVM“), which has authority over stock exchanges and the securitiesmarkets generally, and by the Central Bank, which has, among other powers, licensing authority overbrokerage firms and regulates foreign investment and foreign exchange transactions. The Braziliansecurities market is governed by Law No. 6,385, as amended (the “Brazilian Securities Law“) and LawNo. 6,404, as amended (the “Brazilian Corporation Law“).

- 33 -

Under the Brazilian Corporation Law, a company is either public, a companhia aberta , such asthe Holding Company or the Merged Subsidiary (both of which are publicly traded on the Brazilian stockexchanges) or private, a companhia fechada. All public companies are registered with the CVM and aresubject to reporting requirements. A company registered with the CVM may have its securities tradedeither on the Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares of apublic company may also be traded privately, subject to certain limitations. To be listed on the Brazilianstock exchanges, a company must apply for registration with the CVM and the stock exchange where thehead office of the company is located. Once this stock exchange has admitted a company to listing andthe CVM has accepted its registration as a public company, its securities may be traded on all otherBrazilian stock exchanges.

Trading in securities on the Brazilian stock exchanges may be suspended at the request of acompany in anticipation of a material announcement. Trading may also be suspended on the initiative ofa Brazilian stock exchange or the CVM, among other reasons, based on or due to a belief that thecompany has provided inadequate information regarding a material event or has provided inadequateresponses 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 United States securitiesmarkets or markets in certain other jurisdictions.

Item 6. Exchange Controls and Other Limitations Affecting Security Holders

There are no restrictions on ownership of Preferred Shares or Common Shares of the HoldingCompany by individuals or legal entities domiciled outside Brazil.

The right to convert dividend payments and proceeds from the sale of shares into foreigncurrency and to remit such amounts outside Brazil is subject to restrictions under foreign investmentregulations which generally require, among other things, that the relevant investments have beenregistered with the Central Bank. Such restrictions on the remittance of foreign capital abroad may hinderor prevent Banco Itaú S.A. (the “Custodian“), as custodian for the Preferred Shares represented by ADSs,or holders who have exchanged ADRs for Preferred Shares from converting dividends, distributions orthe proceeds from any sale of such Preferred Shares, as the case may be, into U.S. dollars and remittingsuch U.S. dollars abroad. Holders of ADSs could be adversely affected by delays in, or refusal to grantany, required government approval for conversions of Brazilian currency payments and remittancesabroad of the Preferred Shares underlying the ADSs.

In Brazil, there are a number of mechanisms available to foreign investors interested in tradingdirectly on the Brazilian stock exchanges or on organized over-the-counter markets. Because of itssimplicity, an investment mechanism known as “Annex IV” has been the traditional vehicle for foreigninstitutional investors to carry out such investments. Under Annex IV to Resolution No. 1,289 of theNational Monetary Council (the “Annex IV Regulations”), qualified investors (which principally includeforeign financial institutions, insurance companies, pension and investment funds, charitable foreigninstitutions and other institutions that meet certain minimum capital and other requirements) registeredwith the CVM and acting through authorized custody accounts managed by local agents may buy and sellshares on Brazil stock exchanges without obtaining a separate Certificates of Registration for eachtransaction.

On January 26, 2000, the National Monetary Council issued Resolution No. 2,689, whichreplaced, as of March 31, 2000, the current Annex IV Regulations, with a phase-out period lasting untilJune 30, 2000. On January 27, 2000 the CVM issued Instruction No. 325, which provides additionalregulation with respect to the new system. Under the new rules, foreign investors seeking to trade

- 34 -

directly on the Brazilian stock exchange or on organized over-the-counter markets, must meet thefollowing requirements:

• Investments must be registered with a custody, clearing or depositary system authorized by CVMor Central Bank;

• Trade of securities is restricted to transactions performed on the stock exchanges or organizedover-the-counter markets authorized by the CVM;

• Investors must establish a representative in Brazil;

• Investors must complete a form annexed to the Resolution No. 2,689/00; and

• Investors must register with the CVM and register the inflow of funds with the Central Bank.

If these requirements are met, foreign investors will be eligible to trade directly on the Brazilianstock exchanges or on organized over-the-counter markets. The new rules will also extend the favorabletax treatment currently applicable to Annex IV qualified institutional investors to all foreign investorsinvesting pursuant to these new rules. See “Taxation.” The new regulations maintain Annex IV’srestrictions on the offshore transfer of the title of the securities, except in the case of corporatereorganizations effected abroad by a foreign investor.

A Certificate of Registration has been issued in the name of the Depositary with respect to theADSs and is maintained by the Custodian on behalf of the Depositary. Pursuant to the Certificate ofRegistration, the Custodian and the Depositary are able to convert dividends and other distributions withrespect to the Preferred Shares represented by ADSs into foreign currency and remit the proceeds outsideBrazil. In the event that a holder of ADSs exchanges such ADSs for Preferred Shares, such holder will beentitled to continue to rely on the Depositary’s Certificate of Registration for five business days after suchexchange, following which such holder must seek to obtain its own Certificate of Registration with theCentral Bank. Thereafter, any holder of Preferred Shares may not be able to convert into foreign currencyand remit outside Brazil the proceeds from the disposition of, or distributions with respect to, suchPreferred Shares, unless such holder qualifies under Resolution 2,689 or obtains its own Certificate ofRegistration. A holder that obtains a Certificate of Registration will be subject to less favorable Braziliantax treatment than a holder of ADSs. See “Taxation—Brazilian Tax Considerations.”

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

Item 7. Taxation

The following summary contains a description of the principal Brazilian and U.S. federal incometax consequences of the acquisition, ownership and disposition of Preferred Shares or ADSs, but it doesnot purport to be a comprehensive description of all the tax considerations that may be relevant to adecision to purchase Preferred Shares or ADSs. The summary is based upon the tax laws of Brazil andregulations thereunder and on the tax laws of the United States and regulations thereunder as in effect onthe date hereof, which are subject to change. Each holder should consult their own tax advisors as tothe 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 United States,the tax authorities of the two countries have had discussions that may culminate in such a treaty. No

- 35 -

assurance can be given, however, as to whether or when a treaty will enter into force or how it will affectthe U.S. holders of Preferred Shares or ADSs. Prospective holders of Preferred Shares or ADSs shouldconsult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition ofPreferred 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 Brazilfor Brazilian tax purposes (a “non-Brazilian holder“). This discussion does not address all the Braziliantax considerations that may be applicable to any particular non-Brazilian holder, and each non-Brazilianholder should consult his or her own tax advisor about the Brazilian tax consequences of investing inPreferred Shares or ADSs.

Taxation of Dividends

Dividends paid by the Holding Company in cash or in kind from profits of periods beginning onor after January 1, 1996 (i) to the Depositary in respect of Preferred Shares underlying ADSs or (ii) to anon-Brazilian holder in respect of Preferred Shares will generally not be subject to Brazilian withholdingtax. Dividends paid from profits generated before January 1, 1996 may be subject to Brazilianwithholding tax at varying rates, except that stock dividends are not subject to Brazilian tax unless thestock is subsequently redeemed by the Holding Company, or the non-Brazilian holder sells the stock inBrazil, within five years after the distribution.

The only Brazilian tax treaty now in effect that would (if certain conditions are met) reduce therate of the withholding tax on dividends paid from profits generated before January 1, 1996 is the treatywith 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 Braziliancompanies and, on the other hand, foreign investments in securities issued by Brazilian companiesthrough 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 toinstitutional investors, foreign investors may invest directly in Brazilian financial markets, as long as theymeet certain requirements. See “Exchange Controls and Other Limitations Affecting Security Holders”above.

Gains realized outside Brazil by a non-Brazilian holder on the disposition of ADSs to anothernon-Brazilian holder are not subject to Brazilian tax. Neither the deposit of Preferred Shares in exchangefor ADSs nor the withdrawal of Preferred Shares upon cancellation of ADSs is subject to Brazilian tax.

Non-Brazilian holders are not subject to tax in Brazil on gains realized on dispositions ofPreferred Shares outside Brazil to other non-Brazilian holders.

Gains realized by non-Brazilian holders on dispositions of Preferred Shares in Brazil or intransactions with Brazilian residents, if observed the requirements of Resolution No. 2,689, are exemptedfrom withholding income tax, unless the foreign investor is located in a jurisdiction which does notimpose income tax or which has an income tax rate lower than 20%, in which case it will be subject to thesame general taxation rules applicable to Brazilian residents.

Currently, Brazilian residents are subject to withholding income tax on capital gains resultingfrom sale of securities in a stock exchange or over-the-counter market organized by an entity authorizedby CVM at a rate of 10% for the year 2000 and 2001, and 20% for the year 2002 and thereafter. Othertransactions with variable income securities in commodities exchanges, future and derivative markets and

- 36 -

in non-organized over-the-counter markets are subject to a capital gains tax of 15% in the year 2000 and20% for the year 2001 and thereafter.

Gains on the disposition of Preferred Shares obtained upon cancellation of ADSs are not taxed inBrazil if such disposition is made, and the proceeds are remitted abroad, within five business days aftercancellation.

Any gains realized by a non-Brazilian resident upon the redemption of Preferred Shares will betreated as gains from the disposition of such Preferred Shares to a Brazilian resident occurring off of astock exchange and will accordingly be subject to tax at a rate of 15%.

Gain is measured by the difference between the amount in Brazilian currency realized on the saleor exchange and the acquisition cost of the shares sold, measured in Brazilian currency without anycorrection for inflation; the acquisition cost of shares registered as an investment with the Central Bank iscalculated on the basis of the foreign currency amount registered with the 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 the Preferred Shares or ADSs will not be subject toBrazilian taxation. Gains on the sale or assignment of preemptive rights relating to the Preferred Shareswill be treated differently for Brazilian tax purposes depending on (i) whether the sale or assignment ismade by the Depositary or the investor, and (ii) whether the transaction takes place on a Brazilian stockexchange. Gains on sales or assignments made by the Depositary on a Brazilian stock exchange are nottaxed in Brazil, but gains on other sales or assignments may be subject to tax at rates up to 15%.

Distributions of Interest on Capital

Brazilian corporations may make payments to shareholders characterized as interest on the capitalof the Holding Company as an alternative form of making dividend distributions. The rate of interest maynot be higher than the Federal Government’s long-term interest rate (the “TJLP“) as determined by theCentral Bank from time to time (13.48% per annum for the three month period starting April 1999). Thetotal amount distributed as interest on capital may not exceed the greater of (i) 50% of net income (beforetaking such distribution and any deductions for income taxes into account) for the year in respect ofwhich the payment is made or (ii) 50% of retained earnings for the year prior to the year in respect ofwhich the payment is made. Payments of interest on capital are decided by the shareholders on the basisof recommendations of the company’s board of directors.

Distributions of interest on capital paid to Brazilian and non-Brazilian holders of PreferredShares, including payments to the Depositary in respect of Preferred Shares underlying ADSs, aredeductible by the Holding Company for Brazilian corporate income tax purposes. Such payments aresubject to Brazilian withholding tax at the rate of 15%, except for payments to persons who are exemptfrom tax in Brazil, which are free of Brazilian tax, and except for payments to persons situated injurisdictions deemed to be tax havens (i.e., countries that either have no income tax or in which theincome tax rate is less than 20%), which will be subject to tax at a 25% rate.

No assurance can be given that the Board of Directors of the Holding Company will notrecommend that future distributions of profits should be made by means of interest on capital instead ofby means of dividends.

Amounts paid as interest on capital (net of applicable withholding tax) may be treated aspayments in respect of the dividends the Holding Company is obligated to distribute to its shareholders inaccordance with its Charter and the Brazilian Corporation Law. Distributions of interest on capital inrespect of the Preferred Shares, including distributions to the Depositary in respect of Preferred Shares

- 37 -

indemnifying ADSs, may be converted into U.S. dollars and remitted outside of Brazil, subject toapplicable exchange controls.

Other Brazilian Taxes

There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transferor disposition of Preferred Shares or ADSs by a non-Brazilian holder except for gift and inheritance taxeslevied by some states in Brazil on gifts made or inheritances bestowed by individuals or entities notresident or domiciled in Brazil or in the relevant State to individuals or entities that are resident ordomiciled within such State in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes orduties payable by holders of Preferred Shares or ADSs.

A financial transaction tax (the “IOF tax“) may be imposed on the conversion of Braziliancurrency into foreign currency (e.g., for purposes of paying dividends and interest). The rate of the IOFtax on such conversions is currently 0%, but the Minister of Finance has the legal power to increase therate to a maximum of 25%. 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 fromaccounts at banks and other financial institutions (the “CPMF tax“) will be imposed on distributions bythe Holding Company in respect of ADSs at the time such distributions are converted into U.S. dollarsand remitted abroad by the Custodian. The CPMF tax will be in effect until June 2002, unless its term isextended, and such tax will be imposed at a rate of 0.38% from June 1999 until June 2000 and at a rate of0.30% from June 2000 until June 2002.

Registered Capital

Amounts invested in Preferred Shares by a non-Brazilian holder who qualifies under theResolution 2,689 and obtains registration with the CVM, or by the Depositary representing an ADSholder, are eligible for registration with the Central Bank. Such registration (the amount so registered isreferred to as “Registered Capital“) allows the remittance outside Brazil of foreign currency, converted atthe Commercial Market Rate, acquired with the proceeds of distributions on, and amounts realizedthrough dispositions of such Preferred Shares. The Registered Capital per Preferred Share purchased inthe 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 Sharewithdrawn upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the average price of aPreferred Share on the Brazilian stock exchange on which the most Preferred Shares were traded on theday of withdrawal or, (ii) if no Preferred Shares were traded on that day, the average price on theBrazilian stock exchange on which the most Preferred Shares were traded in the fifteen trading sessionsimmediately preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis ofthe average Commercial Market Rates quoted by the Central Bank on such date or dates.

A non-Brazilian holder of Preferred Shares may experience delays in effecting Central Bankregistration, 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. tax law set forth below are based on U.S. law as in force on thedate of this Annual Report, and changes to such law subsequent to the date of this Annual Report mayaffect the tax consequences described herein. This summary describes the principal tax consequences ofthe ownership and disposition of Preferred Shares or ADSs, but it does not purport to be a comprehensivedescription of all of the tax consequences that may be relevant to a decision to hold or dispose ofPreferred Shares or ADSs. This summary applies only to purchasers of Preferred Shares or ADSs whowill hold the Preferred Shares or ADSs as capital assets and does not apply to special classes of holders

- 38 -

such as dealers in securities or currencies, holders whose functional currency is not the U.S. dollar,holders of 10% or more of the shares of the Holding Company (taking into account shares held directlythrough depositary arrangements), tax-exempt organizations, financial institutions, holders liable for thealternative minimum tax, securities traders who elect to account for their investment in Preferred Sharesor ADSs on a mark-to-market basis, and persons holding Preferred Shares or ADSs in a hedgingtransaction or as part of a straddle or conversion transaction.

Each holder should consult such holder’s own tax advisor concerning the overall taxconsequences to it, including the consequences under laws other than U.S. federal income tax laws,of an investment in Preferred Shares or ADSs.

In this discussion, references to “ADSs” also refer to Preferred Shares, references to a “U.S.holder“ are to a holder of an ADS (i) that is a citizen or resident of the United States of America, (ii) thatis a corporation organized under the laws of the United States of America or any state thereof, or (iii) thatis otherwise subject to U.S. federal income taxation on a net basis with respect to the ADS.

For purposes of the U.S. Internal Revenue Code of 1986, as amended (the “Code“), holders ofADRs will be treated as owners of the ADSs represented by such ADRs.

Taxation of Dividends

Subject to the “Passive Foreign Investment Company” discussion below, a U.S. holder willrecognize ordinary dividend income for U.S. federal income tax purposes in an amount equal to theamount of any cash and the value of any property distributed by the Holding Company as a dividend tothe extent that such distribution is paid out of the Holding Company’s current or accumulated earningsand profits (“e&p“), as determined for U.S. federal income tax purposes, when such distribution isreceived by the Custodian or by the U.S. holder, in the case of a holder of Preferred Shares. To the extentthat such a distribution exceeds the Holding Company’s e&p, it will be treated as a nontaxable return ofcapital, 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 taxwithheld on the amount distributed and the amount of a distribution paid in reais will be measured byreference to the exchange rate for converting reais into U.S. dollars in effect on the date the distribution isreceived by the Custodian, or by a U.S. holder, in the case of a holder of Preferred Shares. If theCustodian or U.S. holder, in the case of a holder of Preferred Shares, does not convert such reais into U.S.dollars on the date it receives them, it is possible that the U.S. holder will recognize foreign currency lossor gain, which would be ordinary loss or gain, when the reais are converted into U.S. dollars. Dividendspaid by the Holding Company will not be eligible for the dividends received deduction allowed tocorporations under the Code.

Distributions out of e&p with respect to the ADSs generally will be treated as dividend incomefrom sources outside of the United States and generally will be treated separately along with other itemsof “passive” (or, in the case of certain U.S. holders, “financial services”) income for purposes ofdetermining 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 beclaimed as a credit against the U.S. federal income tax liability of a U.S. holder if such U.S. holder electsfor that year to credit all foreign income taxes, or such Brazilian withholding tax may be taken as adeduction. Foreign tax credits will not be allowed for withholding taxes imposed in respect of certainshort-term or hedged positions in securities or in respect of arrangements in which a U.S. holder’sexpected economic profit, after non-U.S. taxes, is insubstantial. U.S. holders should consult their own taxadvisors concerning the implications of these rules in light of their particular circumstances.

- 39 -

Distributions of additional shares to holders with respect to their ADSs that are made as part of apro rata distribution to all shareholders of the Holding Company generally will not be subject to U.S.federal income tax.

A holder of an ADS that is a foreign corporation or nonresident alien individual (a “non-U.S.holder“) generally will not be subject to U.S. federal income tax or withholding tax on distributions withrespect to ADSs that are treated as dividend income for U.S. federal income tax purposes, and generallywill not be subject to U.S. federal income tax or withholding tax on distributions with respect to ADSsthat are treated as capital gain for U.S. federal income tax purposes unless such holder would be subject toU.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 saleor other disposition of an ADS, a U.S. holder will recognize gain or loss for U.S. federal income taxpurposes in an amount equal to the difference between the amount realized in consideration for thedisposition of the ADS (excluding the amount of any distribution paid to the Custodian but not distributedby the Custodian prior to the disposition) and the U.S. holder’s tax basis in the ADS. Such gain or lossgenerally will be subject to U.S. federal income tax and will be treated as capital gain or loss. Long-termcapital gains recognized by an individual holder generally are subject to a maximum rate of 20 percent inrespect of property held for more than one year. The deductibility of capital losses is subject to certainlimitations. Gain realized by a U.S. holder on a sale or disposition of ADSs generally will be treated asU.S. source income. Consequently, if Brazilian tax is imposed on such gain, the U.S. holder will not beable to use the corresponding foreign tax credit, unless the holder has other foreign source income of theappropriate 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 gainrealized on the sale or other disposition of an ADS unless (i) such gain is effectively connected with theconduct by the holder of a trade or business in the United States, or (ii) such holder is an individual whois present in the United States of America for 183 days or more in the taxable year of the sale and certainother conditions are met.

Passive Foreign Investment Company

The Company believes that it is not a passive foreign investment company (“PFIC”) for U.S.federal income tax purposes in the current taxable year and does not expect to become a PFIC in futuretaxable years. However, because the determination of whether the offered shares constitute shares of aPFIC will be based upon the composition of the Company’s income and assets on an annual basis, there isno assurance the Company will not be considered a PFIC for any subsequent year. If the offered shareswere shares of a PFIC for any fiscal year, a U.S. holder of 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 theoffered shares and certain distributions received with respect to the offered shares. The Company doesnot intend to provide information to investors necessary for the “qualified electing fund” election in thecase that the Company were a PFIC.

U.S. Backup Withholding and Information Reporting

Distributions made in respect of offered shares, and proceeds from the sale or other disposition ofoffered shares, payable to a U.S. holder by a U.S. paying agent or other U.S. intermediary will be subjectto information reporting requirements. If information reporting requirements apply, distributions made tothe U.S. holder will be reported to the IRS and to the U.S. holder as may be required under applicableTreasury regulations. Backup withholding at a rate of 31% will also apply to any payments made to aU.S. holder if such U.S. holder fails to provide an accurate taxpayer identification number or certificationof exempt status or is notified by the IRS that it has failed to report all dividends or interest required to be

- 40 -

shown on its U.S. federal income tax return. In addition, certain penalties may be imposed by the IRS ona 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 topayments 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 non-U.S. holders file a timelyand properly completed IRS Form W-8 or W-8BEN with the U.S. paying agent or intermediary. Anyamount withheld under the backup withholding rulings will be allowed as a refund or credit against aholder’s U.S. federal income tax liability provided the required information is furnished to the IRS.

The IRS has issued final regulations (the “Final Regulations”) which, among other things, affectthe procedures to be followed by a non-U.S. holder in establishing such non-U.S. holder’s exemption forthe purpose of the backup withholding rules discussed above. The Final Regulations generally will beeffective for payments made after December 31, 2000. Each holder should consult their own taxadvisors concerning the effect of the Final Regulations on their ownership and disposition ofPreferred Shares or ADSs.

Item 8. Selected Financial Data

Background

The selected financial information presented below should be read in conjunction with theConsolidated Financial Statements and the notes thereto which appear elsewhere in this Annual Report.The Consolidated Financial Statements have been audited by Arthur Andersen S/C for 1999, DeloitteTouche Tohmatsu Auditores Independentes for 1998 and KPMG Auditores Independentes for 1997, andtheir reports on the Consolidated Financial Statements appear elsewhere in this Annual Report.

The following paragraphs discuss some important features of the presentation of the selectedfinancial information and the Consolidated Financial Statements. These features should be kept in mindin evaluating the selected financial information and in reading “Management’s Discussion and Analysisof Financial Condition and Results of Operations.”

Brazilian GAAP and U.S. GAAP

The Consolidated Financial Statements are prepared in accordance with Brazilian GAAP, whichdiffers in certain material respects from generally accepted accounting principles in the United States(“U.S. GAAP“). See Note 31 to the Consolidated Financial Statements for a summary of the differencesbetween Brazilian GAAP and U.S. GAAP and a reconciliation to U.S. GAAP of shareholders’ equity asof December 31, 1998 and 1999 and net income for the years ended December 31, 1997, 1998 and 1999.

Effects of Inflation

The Consolidated Financial Statements and, unless otherwise specified, all financial informationincluded in this Annual Report recognize certain effects of inflation and are restated in constant reais ofDecember 31, 1999, all in accordance with Brazilian GAAP. The Company used the IGP-M inflationindex for purposes of preparing the Consolidated Financial Statements. See “Management’s Discussionand Analysis of Financial Condition and Results of Operations—Effects of Changes in Presentation ofFinancial Statements in 1999.” Inflationary gains or losses on monetary assets and liabilities wereallocated to their corresponding income or expense caption in the Consolidated Statements of Income.

Change in Accounting Methodology

In 1999, the Company reclassified part of its short-term loan asset balances to long-term assetsbecause they have been challenged in court. See “Legal Proceedings — Breakup of Telebrás” and

- 41 -

“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Effects ofChanges in Presentation of Financial Statements in 1999.”

In 1999, the Company reclassified certain tax incentives from previous years from long-termassets to investments because the funds had been used to acquire shares in certain telecommunicationscompanies. See “Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Effects of Changes in Presentation of Financial Statements in 1999.”

As of 1999, the Company shortened its depreciation schedule for both its automatic switching andtransmission equipment from thirteen years and ten years, respectively, to five years in order to betterreflect the estimated useful life of this equipment in light of rapidly changing technology and industrypractices. See “Results of Operations for the Years ended December 31, 1997, 1998 and 1999 — Cost ofServices — Depreciation and Amortization” and “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Effects of Changes in Presentation of Financial Statements in1999.”

Accounting Consequences of the Breakup of Telebrás

The formation of the Holding Company and the transfer of assets and liabilities from theSubsidiaries to the Spun-off Companies have been accounted for as a reorganization of entities undercommon control in a manner similar to a pooling of interests. As of December 31, 1997 and for the yearended December 31, 1997, the fixed-line telecommunications businesses of the Subsidiaries are presentedas continuing operations and the cellular telecommunications businesses are presented as discontinuedoperations.

The assets and liabilities of the cellular telecommunications businesses are presented as net assetsof discontinued operations and were transferred to the Spun-off Companies at their indexed historicalcost. The revenues and expenses associated with such assets and liabilities were also allocated to incomefrom discontinued operations. For revenues and cost of services, separate records were maintainedhistorically for the cellular telecommunications businesses of the Subsidiaries, so actual amounts wereallocated to discontinued operations. Costs other than cost of services were allocated between continuingoperations and discontinued operations using methodologies described in Note 2b to the ConsolidatedFinancial Statements.

The Consolidated Financial Statements for the fiscal years prior to 1999 are not necessarilyindicative of what the financial condition or results of operations of the Company would have been if theSpun-off Companies had been separate legal entities before 1998.

At the May 22, 1998, Telebrás shareholders’ meeting, the shareholders established theshareholders’ equity of each New Holding Company, and allocated to each a portion of the retainedearnings of Telebrás. Telebrás retained sufficient retained earnings from which to pay certain dividendsand other amounts. The balance of Telebrás’ retained earnings was allocated to each New HoldingCompany in proportion to the total net assets allocated to each such company. The retained earnings soallocated do not represent the historical retained earnings of the New Holding Companies. The retainedearnings allocated to the Company resulted in an increase of R$322.0 million in relation to the historicalretained earnings of the Subsidiaries. See Note 2a to the Consolidated Financial Statements. The amountof distributable retained earnings of the Holding Company includes retained earnings allocated to theHolding Company in the Breakup of Telebrás.

For 1997, “minority interests” in the Consolidated Financial Statements reflects the interest ofshareholders other than Telebrás in the Subsidiaries. For 1998, “minority interests” reflects the interest ofshareholders other than the Holding Company in the Subsidiaries.

- 42 -

Difference from Financial Statements Published in Brazil

The Company’s statutory financial statements prepared in accordance with the BrazilianCorporation Law (the “Statutory Financial Statements“) are the basis for dividend and tax determinations.The Consolidated Financial Statements include the effects of inflation through December 31, 1999, whilethe Statutory Financial Statements include the effects of inflation only through December 31, 1995. TheStatutory Financial Statements also differ from the Consolidated Financial Statements in respect ofcertain reclassifications and presentation of comparative information. See Note 2f to the ConsolidatedFinancial Statements.

- 43 -

SELECTED FINANCIAL INFORMATION

Year ended December 31,1995 1996 1997 1998 1999

(thousands of reais (1), except per share data)Income Statement Data:Brazilian GAAPNet operating revenue......................... 1,914,035 2,498,050 2,829,090 3,128,551 3,266,568Cost of services ................................... (1,198,156) (1,334,426) (1,488,028) (1,755,365) (2,448,309)Gross profit ......................................... 715,879 1,163,624 1,341,062 1,373,186 818,259Operating expenses ............................. (453,816) (474,048) (554,868) (761,864) (811,471)Operating income from continuing

operations before interestincome/expense............................. 262,063 689,576 786,194 611,322 6,788

Allocated interest expense(2) ............... (21,254) (12,160) (41,872) — —Net financial income........................... — — — 113,993 14,244Operating income (3) ........................... 240,809 677,416 744,322 725,315 21,032Net non-operating expense ................. (1,619) (19,736) (30,138) (83,848) (59,757)Employee’s profit share ...................... (10,179) (20,499) (31,855) (22,641) (17,700)Income from continuing operations(4). 229,011 637,181 682,329 — —Income from discontinued cellular

operations (4) .................................. 179,111 357,026 410,305 — —Unallocated interest income (5) ........... 48,542 72,795 74,357 — —Unallocated interest expense (5) .......... (4,417) (1,787) (3,447) — —Income before taxes and minority

interests ......................................... 452,247 1,065,215 1,163,544 618,826 (56,425)Income and social contribution taxes . (197,587) (278,287) (320,606) (186,729) 58,287Income before minority interests ........ 254,660 786,928 842,938 432,097 1,862Minority interest ................................. (32,319) (111,603) (166,457) (102,759) (28,424)

Net income/(loss)................................ 222,341 675,325 676,481 329,338 (26,562)

Earnings/(loss) per thousand shares(reais) ............................................ — — — 0.98 (0.08)

Dividends per thousand shares (reais)— — — 0.42 0.40

Dividends per thousand shares(U.S. dollars)(6) ............................. — — — 0.35 0.22

U.S. GAAP:Income (loss) from continuing operations(4) 724,988 789,595 455,955 (346,244)Income from discontinued operations(4) 373,602 435,465 — —Net income (loss)................................ 743,777 809,164 455,955 (346,244)Net income (loss) per thousand shares (reais):.............................................................Common Shares–Basic ....................... 2.32 2.52 1.12 (1.04)Common Shares–Diluted.................... 2.10 2.38 1.09 (1.04)Preferred Shares–Basic ....................... 2.32 2.52 1.54 (1.04)Preferred Shares–Diluted.................... 2.10 2.38 1.51 (1.04)

______________________

(1) Presented in constant reais of December 31, 1999.(2) For 1995, 1996 and 1997, interest expense allocable to continuing operations.(3) For years prior to 1998, operating income from continuing operations before unallocated interest income/expense.(4) Before unallocated interest income/expense, taxes and minority interests for 1996 and 1997.(5) Unallocated interest income and expense represent interest income and expense that could not be allocated between continuing and

discontinued operations.(6) For 1998 only the preferred shares of the Company paid any dividends.

- 44 -

Year ended December 31,1995 1996 1997 1998 1999

(thousands of reais (1), except per share data)

Balance Sheet Data:Brazilian GAAPIntangibles—Goodwill on Bluetel Merger(2) — — — — 1,055,260Property, plant and equipment, net ................. 6,487,639 7,161,720 7,739,867 8,411,003 7,744,244Total assets ..................................................... 7,686,393 9,043,707 10,185,628 10,093,603 11,233,066Loans and financing—current portion............ 76,123 125,133 132,607 12,208 443,891Loans and financing—non-current portion .... 151,321 170,967 220,977 22,657 26,726Shareholders’ equity ....................................... 5,222,582 5,967,353 6,498,402 6,552,197 7,080,806

U.S. GAAP:Intangibles—Goodwill on Bluetel Merger(2) — — — 358,789Property, plant and equipment, net ...................... 6,749,809 7,267,169 7,873,484 7,323,224Total assets .......................................................... 8,861,500 9,968,642 9,901,719 10,503,768Loans and financing—current portion ................ 109,293 202,559 11,460 441,923Loans and financing—non-current portion ......... 170,967 132,171 22,657 26,726Shareholders’ equity............................................ 6,037,497 6,390,101 6,082,420 5,740,410

______________________(1) Presented in constant reais of December 31, 1999.(2) See Note 29 to Consolidated Financial Statements.

Exchange Rates

The Holding Company will pay any cash dividends and make any other cash distributions withrespect to Preferred Shares in Brazilian currency. Accordingly, exchange rate fluctuations will affect theU.S. dollar amounts received by the holders of ADSs on conversion by the Depositary of dividends anddistributions in Brazilian currency on the Preferred Shares represented by the ADSs. Fluctuations in theexchange rate between the Brazilian currency and the U.S. dollar will also affect the U.S. dollarequivalent of the price of the Preferred Shares on the Brazilian stock exchanges. Although only 9.0% ofthe Company’s indebtedness is denominated in U.S. dollars (the rest being denominated in reais) andmost of the Company’s revenues are denominated in reais, exchange rate fluctuations may affect theCompany’s results of operations. See “Management’s Discussion and Analysis of Financial Conditionand Results of Operations—Effects of Inflation.” The Company does not hedge its obligations under itsforeign currency-denominated indebtedness.

There are two legal exchange markets in Brazil—the commercial rate exchange market (the“Commercial Market”) and the floating rate exchange market (the “Floating Market“). The CommercialMarket is reserved primarily for foreign trade transactions and transactions that generally require priorapproval from Brazilian monetary authorities, such as the purchase and sale of registered investments byforeign persons and related remittances of funds abroad. Purchases and sales of foreign exchange in theCommercial Market may be carried out only through a financial institution in Brazil authorized to buyand sell currency in that market. As used herein, the “Commercial Market Rate” is the prevailing sellingrate for Brazilian currency into U.S. dollars, as reported by the Central Bank, which applies totransactions carried out on the Commercial Market. The “Floating Market Rate” is the prevailing sellingrate for Brazilian currency into U.S. dollars which, as reported by the Central Bank, applies totransactions to which the Commercial Market Rate does not apply. Prior to the implementation of theReal Plan, the Commercial Market Rate and the Floating Market Rate differed significantly at times.Since the introduction of the real, the two rates have not differed significantly. On January 25, 1999, theBrazilian federal government announced the unification of the exchange position of Brazilian financialinstitutions in the Commercial Market and the Floating Market which has led to an additionalconvergence in the pricing and liquidity of both markets. Both the Commercial Market Rate and theFloating Market Rate are freely negotiated but may be influenced by the Central Bank.

- 45 -

Between March 1995 and January 1999, the Central Bank maintained a band within which theexchange rate between the real and the U.S. dollar fluctuated, and the Central Bank intervened in theforeign exchange market from time to time. In early January 1999, the Central Bank attempted acontrolled devaluation of the real by widening the band within which the real was permitted to trade, butsubsequent Central Bank intervention failed to keep the rate within the new band. On January 15, theCentral Bank announced that the real would be permitted to float, with Central Bank intervention to takeplace only in times of extreme volatility. Since then, the real devalued to a high of R$2.200 per US$1.00on March 3, 1999, and appreciated 21.7% to R$1.8079 per US$1.00 as of June 15, 2000. See“Description of Business—Brazilian Economic Environment.”

The following table sets forth the period-end, average, high and low exchange rate for reais asreported by the Federal Reserve Bank of New York as its noon buying rate for reais per U.S. dollar (the“Noon Buying Rate”), for the periods indicated.

Period Period-endAverage for

Period(1) High Low1995......................................................... 0.9706 0.9162 0.9706 0.83201996......................................................... 1.0393 1.0051 1.0413 0.97121997......................................................... 1.1165 1.0779 1.1165 1.03941998......................................................... 1.2085 1.1605 1.2085 1.11601999......................................................... 1.8090 1.8207 2.2000 1.20742000 (through May 31, 2000)................. 1.8210 1.7844 1.8560 1.7230________________

Source: Federal Reserve Bank of New York.(1) Average of the Noon Buying Rates on the last day of each month in the period.

Item 9. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Formation of the Holding Company and Presentation of Financial Information

On May 22, 1998, in preparation for the privatization of the Telebrás System, the TelebrásSystem was restructured to form, in addition to Telebrás, the Holding Company and the eleven other NewHolding Companies. The restructuring of the Telebrás System was accomplished by means of aprocedure under Brazilian law called cisão or split-up. Virtually all the assets and liabilities of Telebráswere allocated to the New Holding Companies which, together with their respective subsidiaries,comprise (a) three fixed-line service providers, (b) eight cellular service providers and (c) one domesticand international long-distance service provider. In the Breakup, certain assets and liabilities of Telebrás,including the share capital of the Subsidiaries owned by Telebrás, were transferred to the HoldingCompany. See Note 1 to the Consolidated Financial Statements.

The following discussion should be read in conjunction with the Consolidated FinancialStatements of the Company and the notes thereto, which are included elsewhere in this Annual Report.Certain important features of the presentation of the Consolidated Financial Statements are described inthe introduction to “Selected Financial Data.”

Spin-off of Cellular Telecommunications Business

Effective January 1, 1998, the cellular telecommunications businesses of the Subsidiaries werespun off into separate companies. For 1997, the Consolidated Financial Statements present the fixed-linetelecommunications businesses of the Subsidiaries as continuing operations and the cellulartelecommunications businesses as discontinued operations. See “Selected Financial Information—Background—Accounting Consequences of the Breakup of Telebrás.” Income from the cellularoperations (before unallocated interest expense, taxes and minority interest) accounted for approximately38% of the Company’s income before taxes and minority interest in 1997.

- 46 -

Effects of Changes in Rates and Changes in Revenue Sharing

In addition to the spin-off of the cellular businesses of the Subsidiaries, there were three majorchanges in the structure of telecommunications rates that affected the Company’s results in 1998 and1999.

Rate Rebalancing.Charges for local and non-local services changed substantially as part of a rate rebalancing

process designed to eliminate cross-subsidies from long-distance services to local services. Effective inApril and May 1997, rates for measured service and monthly subscription charges increased, and rates forlong-distance services decreased. Monthly subscription charges, for example, increased by 270% forresidential customers and 59% for commercial customers. These rate changes had a positive effect onrevenues from local service and an adverse effect on revenues from non-local services, which affected theCompany’s results in 1998.

Elimination of Embratel Revenue-sharing.Until July 1998, the Company received a fixed percentage of revenue from interregional and

international long-distance calls carried by Embratel that originated in the Company’s Region. Thisrevenue-sharing arrangement ended effective July 13, 1998. Since then, the Company receivesinterconnection fees from Embratel on a per-minute basis for interregional and international calls carriedby Embratel that are initiated or completed on the Company’s fixed-line network. The Company alsoreceives from Embratel a supplemental per-minute charge called the Parcela Adicional de Transição (the“PAT”) in order to reduce the impact of the discontinuation of the revenue-sharing arrangement. FromApril 1998 through December 1998, the fixed PAT amount was R$0.025 per minute, including PIS (afederal social contribution tax) and COFINS (a federal social contribution tax). The PAT will begradually phased out by June 30, 2001. See “Description of Business—Services—Interregional andInternational Service.” These changes had a substantial adverse impact on revenues in 1998 and 1999.

Interconnection Fees.The Company receives interconnection fees from cellular operators and, since July 1998, from

Embratel. The growth in cellular telecommunications and the discontinuation of the Embratel revenue-sharing arrangement have resulted in substantial growth in interconnection revenues in 1998 and 1999.

Effects of Changes in Presentation of Financial Statements in 1999

There are significant differences in presentation between the Consolidated Financial Statementsof the Company for 1999 and for earlier years. Each of these differences should be taken into account incomparing financial condition and results of operations for 1999 and for prior years.

Creation of the Holding Company.The Holding Company was created effective February 28, 1998 in the Breakup of Telebrás. For

1998 and 1999, the Consolidated Financial Statements reflect the consolidated financial condition andresults of operations of the Holding Company and the Subsidiaries. For earlier dates and periods, theConsolidated Financial Statements reflect only the combined financial condition and results of operationsof the Subsidiaries, except that the portion of equity and net income attributable to shareholders other thanTelebrás is presented as “minority interests.”

Indexation for Inflation.The Consolidated Financial Statements were prepared on a fully indexed basis to recognize the

effects of inflation, and are presented in constant reais of December 31, 1999. For 1998, theConsolidated Financial Statements were not monetarily restated because of the low rate of inflation inBrazil that year. See Note 2c to the Consolidated Financial Statements.

- 47 -

Reclassification of Short-Term Loan Asset Balances.In 1999, the Company reclassified part of the short-term loans previously made to Telebrás’

cellular service providers in the amount of R$23,235 as long-term assets because they had beenchallenged in court. See “Legal Proceedings—Breakup of Telebrás.”

Reclassification of Long-Term Assets to Investments. In 1999, the Company reclassified certain tax incentives from previous years from long-term

assets to investments because the funds from the tax incentives had been used to acquire shares in certaintelecommunication companies.

Reduction of Depreciation Schedules for Telecommunication Equipment.As of 1999 the Company shortened its depreciation schedule for its automatic switching and

transmission equipment from thirteen years and ten years, respectively, to five years in order to betterreflect the estimated useful life of this equipment in light of rapidly changing technology and industrypractices. See “—Results of Operations for the Years ended December 31, 1997, 1998 and 1999—Costof Services—Depreciation and Amortization.”

Political, Economic, Regulatory and Competitive Factors

The following discussion should be read in conjunction with the “Description of Business”section included elsewhere in this Annual Report. As set forth in greater detail below, the Company’sfinancial condition and operations were significantly affected by Brazilian telecommunicationsregulations, including the regulation of tariffs. See “Description of Business—Regulation of the BrazilianTelecommunications Industry.” The Company’s financial condition and net income also have been, andare expected to continue to be, affected by the political and economic environment in Brazil. See“Description of Business—Brazilian Political Environment” and “—Brazilian Economic Environment.”In particular, the Company’s financial performance will be affected by (i) economic growth in the Regionand its impact on demand for telecommunications services, (ii) the cost and availability of financing and(iii) the exchange rates between Brazilian and foreign currencies.

The Company is currently the sole provider of local fixed-line telecommunications services andthe dominant provider of intrastate fixed-line telecommunications services in the Region. A license toprovide local and intrastate fixed-line telecommunications services in the Region in competition with theCompany was awarded to Global Village Telecom on August 27, 1999. In addition, as provided in theirrespective concessions, as of July 1999, Embratel and Intelig were authorized to begin to provideintrastate long-distance services in the states in the Region in competition with the Company. See“Description of Business—Competition.” In August 1999, Anatel required the Company and its fixed-line competitors to implement a numbering plan to promote competition between providers of fixed-linelong-distance services by allowing callers to choose a service provider for each long-distance call byprefacing the call with numbers that identify the carrier.

Foreign Exchange and Interest Rate Exposure

The Company faces foreign exchange risk as a result of its foreign currency liabilities because itsequipment costs are primarily denominated in U.S. dollars. The Company’s current cost of financing,however, is not materially exposed to exchange rate risk, at December 31, 1999, approximately 9.0% ofthe Company’s indebtedness, or R$42.5 million, was denominated in U.S. dollars. The Company’sforeign-currency indebtedness consists primarily of supplier credits, and the Company’s managementexpects that the amount of supplier credits will increase in order to finance the expansion of its network.Devaluation of the real could result in exchange losses on foreign-currency indebtedness. Currently, theCompany is not engaged in any hedging activities. The Company is, however, analyzing its exposure to

- 48 -

currency risks and developing a plan to use hedging activities to offset currency risks as it deemsappropriate. For the year ended December 31, 1999, losses on foreign currency financing were R$10.4million, which was offset in part by a gain on foreign-currency denominated assets of R$11.5 million.See “Quantitative and Qualitative Disclosures about Market Risk—Exchange Rate Risk.”

The Company is exposed to interest rate risk as a consequence of its floating rate debt. AtDecember 31, 1999, 100% of the Company’s reais denominated interest-bearing liabilities bore interest atfloating rates. The Company has not entered into derivative contracts or made other arrangements tohedge against this risk. Accordingly, if market interest rates (principally the TJLP) rise, the Company’sfinancing expenses will increase.

Results of Operations for the Years Ended December 31, 1997, 1998 and 1999

The following table sets forth certain components of the Company’s net income, as well as thepercentage change from the prior year, for 1997, 1998 and 1999.

Year ended December 31, Percentage change1997 1998 1999 1997-1998 1998-1999

(thousands of reais, except percentages)(1)

Net operating revenues ........................................... 2,829,090 3,128,551 3,266,568 10.6 4.4Cost of services ....................................................... 1,488,028 1,755,365 2,448,309 18.0 39.5Gross profit ............................................................. 1,341,062 1,373,186 818,259 2.4 (40.4)Operating expenses:Selling expenses ..................................................... (275,696) (268,072) (303,818) (2.8) 13.3General and administrative expenses ..................... (457,312) (487,231) (527,909) 6.5 8.3Other net operating income (expenses) .................. 178,140 (6,561) 20,256 — —Operating income from continuing operations

before interest income (expense)...................... 786,194 611,322 6,788 (22.2) (98.9)Allocated interest expense(2) ................................... (41,872) — — — —Net financial income............................................... — 113,993 14,244 — (87.5)

Operating income (3) ................................................ 744,322 725,315 21,032 (2.6) (97.1)Net non-operating income (expense)...................... (30,138) (83,848) (59,757) 178.2 (28.7)Employees’ profit share .......................................... (31,855) (22,641) (17,700) (28.9) (21.8)Income from continuing operations(4)..................... 682,329 — — — —Income from discontinued cellular operations(4) .... 410,305 — — — —Unallocated interest income(5) ................................ 74,357 — — — —Unallocated interest expense(5) ............................... (3,447) — — — —Income before taxes and minority interests ............ 1,163,544 618,826 (56,425) (46.8) —Income and social contribution taxes ..................... (320,606) (186,729) 58,287 (41.8) —Income before minority interests ............................ 842,938 432,097 1,862 (48.7) (99.6)Minority interests .................................................... (166,457) (102,759) (28,424) (38.3) (72.3)

Net income (loss).................................................... 676,481 329,338 (26,562) (51.3) —______________(1) Presented in constant reais of December 31, 1999. Columns may not add due to rounding.(2) For 1997, interest expense allocable to continuing operations.(3) For 1997, operating income from continuing operations before unallocated interest income (expense).(4) Before unallocated interest income (expense), taxes and minority interests.(5) Unallocated interest income and expense represent interest income and expense that could not be allocated between continuing and

discontinued operations.

Net Operating Revenues

The Company generates operating revenues from (i) local services, including monthly charges,measured service, public telephones and additional services, (ii) intrastate long-distance services,(iii) interstate long-distance services, (iv) data transmission, (v) network services, includinginterconnection and leasing high-capacity lines, and (vi) other services. Gross operating revenues are

- 49 -

offset by value-added and other indirect taxes and discounts to customers. The composition of operatingrevenues by category of service is presented in the Consolidated Financial Statements and discussedbelow before deduction of value-added and other indirect taxes. The Company does not determine netoperating revenues for each category of revenue. The following table sets forth certain components of theCompany’s operating revenues, as well as the percentage change from the prior year, for 1997, 1998 and1999.


(thousands of reais, except percentages) (1)

Local services:Monthly charges .............................................. 540,069 784,004 915,042 45.2 16.7Measured service charges ............................... 947,822 1,106,013 1,264,019 16.7 14.3Public telephones ............................................. 146,460 157,428 158,495 7.5 0.7Other................................................................ 204,278 207,017 163,044 1.3 (21.2)

Total........................................................... 1,838,629 2,254,462 2,500,672 22.6 10.9

Non-local services:Intrastate and interstate.................................... 1,438,214 920,616 800,780 (36.0) (13.0)International .................................................... 78,496 18,416 671 (76.5) (96.4)

Total........................................................... 1,516,710 939,032 801,451 (38.1) (14.7)Data transmission ............................................ 107,820 147,208 155,643 36.5 5.7Network services ............................................. 194,841 654,630 734,300 236.0 12.2Other................................................................ 48,591 33,178 132,425 (31.7) 299.1

Gross operating revenues ......................................... 3,706,591 4,028,510 4,324,491 (8.7) 7.3Value added and other indirect taxes .............. (867,660) (888,996) (1,029,180) 2.5 15.8Discounts ......................................................... (9,841) (10,963) (28,743) 11.4 162.2

Net operating revenue.............................................. 2,829,090 3,128,551 3,266,568 10.6 4.4______________(1) Presented in constant reais of December 31, 1999.

Net operating revenues increased by 4.4% in 1999 and 10.6% in 1998. The growth in revenues inthe three-year period was principally due to an increase in the average number of lines, increases inservice charges for local services and increased interconnection with the Company’s network by cellularcompanies. Average lines in service increased by approximately 20% to 4.2 million in 1999 from 3.5million in 1998, which in turn represented a 17.3% increase from 2.9 million in 1997. These factors wereoffset in part by lower revenue from non-local services. The deceleration in the rate of growth inrevenues in the three-year period was principally due to the Company’s servicing of an increasing numberof lower income households pursuant to the universal service requirements under the Concessions, as wellas to a change in the rate of growth of certain tariffs below the rate of inflation because of certainregulatory limitations on the rates at which certain tariffs can be increased.

Local Service

Revenues from local services increased by 10.9% in 1999 and 22.6% in 1998. The increase overthe three-year period primarily reflects increased monthly subscription revenues, resulting from anincrease in the number of lines in service and tariff increases which were partly offset by a decrease inaverage local call volume per line in service.

Monthly Subscription Charges. Revenues from monthly subscription charges increased 16.7% in1999 and 45.2% in 1998. The increase over the three-year period reflected an increase in the averagenumber of lines in service as well as an increase in the monthly subscription charge for all customers.Effective June 1999, in accordance with the Concessions, Anatel authorized a 17.7% nominal increase inmonthly subscription charges.

- 50 -

Measured Service Charges. Revenues from measured service charges increased by 14.3% in1999 and 16.7% in 1998. The increase over the three-year period was principally due to tariff increases.The price per pulse increased by 17.7% (in nominal terms) effective in July 1999. Although the averagenumber of lines also increased over the three-year period for residential and nonresidential customers,there was a decrease in the average call volume per line in service due to the tariff increases, so overalllocal call volume did not increase at the same rate as growth in the average number of lines in service.Total pulses increased to 15% to 13.2 billion in 1999 from 11.5 billion in 1998, which in turn representedan increase from 9.8 billion total pulses in 1997.

Public Telephones. Revenues from public telephones increased 0.7% in 1999 and 7.5% in 1998.The increase over the three-year period was principally due to: (i) a 3.4% and 12.7% increase in thenumber of public telephones in 1999 and 1998, respectively; (ii) an increase in the usage of pre-paidtelephone cards; and (iii) a modest increase in the usage of token operated public telephones. Thesefactors were offset in part by increases in cellular telephone usage and fixed-line penetration.

Other Local Services. Gross revenue from other local services decreased 21.2% in 1999 andincreased 1.3% in 1998. The decrease in 1999 as compared to 1998 was principally due to the monetaryrestatement into constant reais of December 31, 1999. In 1999 there was no material decrease in thevolume of other services provided, nor a material increase in the rates charged for these services.

Non-local Services

Non-local services consisted, until the privatization, of intrastate and interstate long-distance aswell as international long-distance service. Prior to the discontinuation of the Embratel revenue-sharingarrangement the Company received 100% of the call revenue for intrastate long-distance calls. Forinterstate and international calls, the Company billed the customer for the full retail price of the call andpaid a fixed percentage of the call revenue to Embratel. For accounting purposes, the Companyrecognized only its percentage of the revenue for such calls.

Revenue from non-local services (i.e., intrastate and interstate long-distance services) decreasedby 13.0% in 1999 and 36.0% in 1998. The decreases in 1999 and 1998, respectively, resulted from thediscontinuation of the revenue sharing arrangement between the Company and Embratel and the fact thatthe Company only began providing interstate services in July 1999. In both years, these effects wereoffset in part by an increase in revenues from network services billed to Embratel after the discontinuationof the revenue sharing arrangement and an increase in the volume of intrastate and interstate andinternational long-distance calls to 5,644 million minutes, 6,183 million minutes and 6,916 millionminutes in 1997, 1998 and 1999, respectively.

International Long-distance. Revenues from international long-distance service decreased by96.4% in 1999 and 76.5% in 1998. The decrease in 1999 and in 1998 resulted from the discontinuation ofthe revenue-sharing arrangement between the Company and Embratel and the fact that the Company isnot currently permitted to offer international long-distance services.

Data Transmission

Revenues from data transmission increased by 5.7% in 1999 and 36.5% in 1998. The smallerincrease in 1999 was due to a decrease in the rate of growth of revenues from dedicated transmission linesand a more competitive pricing strategy. The increase in 1998 was due to a 62% increase in revenuesfrom dedicated transmission services.

Network Services

The Company provides access to its network to other telecommunications companies and leasescertain network facilities to other telecommunications companies as part of its network services business.

- 51 -

This includes primarily interconnection fees from Embratel and cellular service providers for the use ofthe Company’s network and fees from cellular companies for the leasing of transmission facilities, certaininfrastructure and other equipment for use in transporting cellular calls within their own internalnetworks. Gross revenues from network services increased by 12.2% in 1999 and 236.0% in 1998.Network services have grown due to growth of cellular companies and consequently increased demandsby cellular companies for interconnection with the Company’s network and demands by cellularcompanies to rent equipment. The slower growth in 1999 was due primarily to discounts in the rental ofnetwork facilities to cellular providers. The extraordinary growth in 1998 was due primarily to thecommencement of interconnection fees from Embratel. The Company’s management expects continuedgrowth in revenues from network services as cellular service providers grow.

Value-added and Other Indirect Taxes

The principal taxes deducted from gross operating revenue are state value-added taxes (theICMS) on operating revenues from the provision of telecommunications services and federal socialcontribution taxes, including PIS (PASEP prior to July 1998) and COFINS. The Company collects thesetaxes from its customers and transfers them to the appropriate governmental entity. The current rate ofICMS is 25.0%, except in the State of Acre, where the rate is 17%, and in the State of Mato Grosso,where, as of January 1999, the ICMS rate was raised to 30%. PIS (PASEP prior to July 1998) andCOFINS are currently imposed at a combined rate of 3.65% of gross operating revenues. Prior toFebruary 1999, the combined rate was 2.65%. Value-added and other taxes increased by 15.8% in 1999and 2.5% in 1998. The increases reflect increases in the Company’s gross operating revenue during theperiod. However, the percentage increase in taxes in 1998 was not commensurate with the increase ingross operating revenues because network services which are not subject to ICMS were not the primarycontributors to the increase in gross operating revenue.

Cost of Services

Cost of services increased by 39.5% in 1999 and 18.0% in 1998. The following table sets forthcertain components of the Company’s cost of services, as well as the percentage change from the prioryear, for 1997, 1998 and 1999.


(thousands of reais, except percentages) (1)

Cost of Services:Depreciation and amortization ................... 804,645 891,476 1,623,361 10.8 82.1Personnel ..................................................... 266,584 223,841 165,996 (16.0) (25.8)Materials ...................................................... 35,949 36,000 12,151 0.1 (66.2)Services ....................................................... 357,630 558,518 598,592 56.2 7.2Other............................................................ 23,220 45,530 48,209 96.1 5.9

Total cost of services ........................................... 1,488,028 1,755,365 2,448,309 18.0 39.5_____________(1) Presented in constant reais of December 31, 1999.

Depreciation and amortization. Depreciation and amortization expenses increased by 82.1% in1999 and by 10.8% in 1998. The increase in depreciation and amortization expenses resulted from theexpansion of the Company’s network and the Company’s shortening of its depreciation schedules forautomatic switching and transmission equipment from thirteen years and ten years, respectively, tofive years in order to better reflect the estimated useful life of the equipment in light of rapidly changingtechnology and industry practices.

Personnel. Personnel expenses decreased by 25.8% in 1999 and by 16.0% in 1998. The decreasein 1999 was due to a 22% reduction in the number of employees, by approximately 3,500 employees.The decrease in 1998 was due to a reduction in the number of employees, in part because of voluntary

- 52 -

retirements and in part because the number of employees that remained with the Company following theBreakup was less than the number of employees allocated to continuing operations in the preparation ofthe Company’s 1997 financial statements.

Materials. Expenses related to materials decreased by 66.2% in 1999 after having remainedstable in 1998. In 1999, the decrease was principally due to improved economies of scale and improvedbargaining positions with suppliers.

Services. Expenses related to services provided by third parties increased by 7.2% in 1999 and56.2% in 1998. The increase over the three-year period was primarily due to increases in interconnectionpayments to cellular companies for calls originating on the Company’s network and terminating oncellular networks and interconnection payments made to Embratel following the elimination of therevenue-sharing arrangement. In 1999, interconnection costs increased approximately 28% from R$295million to R$376 million.

Other. Other costs of service, which primarily include fees paid to rent equipment andinfrastructure for use in the network, increased by 5.9% in 1999 and by 96.1% in 1998. The increase in1998 was due to an increase in rent and insurance costs and the introduction of an inspection fee levied byAnatel.

Operating Expenses

Operating expenses increased by 6.5% in 1999 and by 37.3% in 1998. The increase over thethree-year period was principally due to increased selling expenses, general administrative expenses andother net operating income.

Selling Expenses. Selling expenses increased by 13.3% in 1999, having remained relativelystable in 1998. The increase in 1999 was primarily due to an increase in advertising and marketingexpenses from approximately R$2 million in 1998 to R$37 million in 1999. Advertising and marketingexpenses increased due to the beginning of intrastate and interstate long-distance competition in thesecond half of 1999.

General and Administrative Expenses. General and administrative expenses increased by 8.3% in1999 and 6.5% in 1998. The increase over the three-year period was principally due to an increase infringe benefits, expenses related to third-party services including corporate training and management andtechnology consultant fees. The increase in 1999 and 1998 also reflected the additional general andadministrative expenses associated with the operations of the Holding Company.

Other Net Operating Income. Other net operating income (expenses) was a net credit of R$20.3million in 1999 and a net charge of R$6.6 million in 1998. The increase in 1999 was due to the reversalof provisions for contingencies in the amount of R$117 million, offset in part by the Company’s reductionof its staff by approximately 3,500 employees and the resultant increase in its expenses on dismissal ofpersonnel from approximately R$63 million in 1998 to R$131 million in 1999. The significant decreasein 1998 was primarily due to a provision for a retirement incentive plan of approximately R$63 million inDecember 1998, as well as a R$58 million increase in the provision for contingencies which was offset byan increase in revenues from technical and administrative services and fines recovered.

Interest Income

The Company recognized net financial income of R$14.2 million in 1999, representing the neteffect of interest income, interest expense and exchange gain and loss. See Note 7 to the ConsolidatedFinancial Statements. The Company had interest income of R$57.6 million due to interest on cash andcash equivalents. The primary cause for the drop in interest income in 1999 was the decrease in domesticinterest rates from 1998 to 1999. See “—Liquidity and Capital Resources.” The Company incurred

- 53 -

approximately R$428 million in new indebtedness in 1999, primarily to finance the expansion of itsnetwork.

Employees’ Profit Share

All Brazilian companies may compensate employees, in addition to their salary and benefits, withprofit sharing. The amount of such profit sharing is determined by negotiation between the Company andthe labor unions representing the employees. At present, such profit sharing payments are limited to 25%of total proposed dividends. In addition to the 25% limit imposed, the Company has establishedadditional limits. The Company must limit employees’ share of profits to the lower of (i) the aggregate ofthe employees’ December compensation and (ii) 50% of the Company’s net income adjusted fordividends. The Company’s employees’ profit share was R$31.9 million, R$22.6 million and R$17.7million in 1997, 1998 and 1999, respectively.

Minority Interests

Minority interests in the net income of the Subsidiaries was R$166.5 million, R$102.8 millionand R$28.4 million in 1997, 1998 and 1999, respectively. The drop in minority interest in nominal termsin 1999 can be attributed to the 1999 loss posted by the Company. Minority interests as a percentage ofincome before such interests reflects expansion plan contributions made by Planta Comunitária deTelecomunicações — PCT and individuals. Such contributions are paid directly to the Company ininstallments and upon receipt the Company issues preferred shares to the new subscribers under a systemcalled “auto-financing.” As of June 30, 1997 the Company discontinued the auto-financing program, butcontributions are still received by the Company as installment payments were spread out over a certainperiod.

Liquidity and Capital Resources

The Company had R$470.6 million of total indebtedness at December 31, 1999 up from R$34.9million at December 31, 1998 primarily because of the bridge loan from Banco Nacional deDesenvolvimento Econômico e Social — BNDES. The BNDES loan was incurred to finance theCompany’s network expansion and modernization. See Note 20 to the Consolidated FinancialStatements, and “Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk.”

The Company expects to spend approximately R$2,000 million on capital expenditures in 2000.The Company’s management expects that up to 60% of its year 2000 capital expenditures will be fundedthrough third party financing.

The Holding Company is required to distribute to its shareholders, either as dividends or as taxdeductible interest on net worth, 25% of its adjusted net income determined in accordance with Brazilianaccounting principles and as adjusted in accordance with Brazilian corporate law including anyrealization of the net income reserve. The Holding Company is required to pay a non-cumulativepreferred dividend on its preferred shares in an amount equal to 6% of the share capital attributable to thepreferred shares under Brazilian corporate law. The Subsidiaries are also subject to mandatorydistribution requirements and are accordingly required to pay dividends to the minority shareholders aswell as to the Holding Company.

The Holding Company’s principal assets are the shares of the Merged Subsidiary. The HoldingCompany relies almost exclusively on dividends from the Merged Subsidiary to meet its needs for cash,including for the payment of dividends to its shareholders. The Holding Company controls the paymentof dividends by the Merged Subsidiary, subject to limitations under Brazilian law.

The Company participates in a multi-employer defined benefit plan that covers inactive or retiredemployees of the Company who were former employees of Telebrás. The Company is contingently liable

- 54 -

for its proportionate share of unfunded obligations of the plan attributable to its participating employeesas well as post-retirement health care benefits for active and inactive employees. During 1999, theCompany withdrew a portion of the Company’s funds from the multi-employer plan in order to establisha separate plan for current employees of the Company who were also former employees of Telebras. SeeNote 22 to the Consolidated Financial Statements.

The Company made capital expenditures of approximately R$1,289 million and R$964 million in1998 and 1999, respectively. The principal expenditures related primarily to the expansion andmodernization of the Company’s network. See “Description of Business—Capital Expenditures.” Inaddition, the Company paid dividends of R$36.7 million and R$120.4 million in 1998 and 1999,respectively.

The Company’s primary source of funds is cash flow generated from its operations, net of taxes.In 1999 the Company posted a 8.7% increase in earnings before interest, tax, depreciation andamortization, from R$1,558 million in 1998 to R$1,694 million in 1999.

U.S. GAAP Reconciliation

The Company prepares its consolidated financial statements in accordance with Brazilian GAAP,which differs in significant respects from U.S. GAAP. The differences are described in Note 31 to theConsolidated Financial Statements. Net loss for 1999 is R$346.2 million under U.S. GAAP, compared toR$26.6 million under Brazilian GAAP. Shareholders’ equity at December 31, 1999 is R$5,740.4 millionunder U.S. GAAP compared to R$7,080.8 million under Brazilian GAAP.

The differences between Brazilian GAAP and U.S. GAAP that have the most significant effectson net income and shareholders’ equity are the treatment of capitalized interest, the accounting for auto-financing contributions, unfunded status of pensions and other retirement benefits, deferred tax onindexation and goodwill transferred from the Bluetel merger. See Note 29 to Consolidated FinancialStatements.

Item 9A. Quantitative and Qualitative Disclosures about Market Risk

The Company is exposed to market risk from changes in both foreign currency exchange ratesand interest rates. The Company is exposed to foreign exchange rate risk because certain of its costs aredenominated in currencies (primarily the U.S. dollar) other than those in which it earns revenues(primarily the real). Similarly, the Company is subject to market risk deriving from changes in interestrates which may affect the cost of its financing.

The Company does not use derivative instruments, such as foreign exchange forward contracts,foreign currency options, interest rate swaps and forward rate agreements, to manage these market risks,nor does it hold or issue derivative or other financial instruments for trading purposes.

Exchange Rate Risk

The Company has exchange rate exposure with respect to the U.S. dollar because the Company’sequipment costs are primarily denominated in U.S. dollars. The Company’s cost of financing, however,is not materially exposed to exchange rate risk, at December 31, 1999, approximately 9.0% or R$42.5million of the indebtedness of the Company was denominated in U.S. dollars. The potential immediateloss to the Company that would result from a hypothetical 10% change in foreign currency exchange rateswould be approximately R$4.3 million. See “Management’s Discussion and Analysis of FinancialCondition and Results of Operations—Foreign Exchange and Interest Rate Exposure.

- 55 -

Interest Rate Risk

At December 31, 1999, the Company had approximately R$470.6 million in loans and financingoutstanding, all of which bore interest at floating rates. The Company invests its excess liquidity(R$1,043.4 million at December 31, 1999) mainly in short-term instruments. The potential loss to theCompany over one year that would have resulted from a hypothetical, instantaneous and unfavorablechange of 100 basis points in the interest rates applicable to financial assets and liabilities onDecember 31, 1999 would be approximately R$4.7 thousand. The above sensit ivity analyses are based onthe assumption of an unfavorable 100 basis point movement of the interest rates applicable to eachhomogeneous category of financial assets and liabilities and sustained over a period of one year. Ahomogeneous category is defined according to the currency in which financial assets and liabilities aredenominated and assumes the same interest rate movement within each homogeneous category (e.g., U.S.dollars). As a result, the Company’s interest rate risk sensitivity model may overstate the impact ofinterest rate fluctuation for such financial instruments as consistently unfavorable movements of allinterest rates are unlikely. See Note 20d to the Consolidated Financial Statements and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations—Foreign Exchange andInterest Rate Exposure.”

Item 10. Directors and Officers of Registrant

Board of Directors

The Holding Company is administered by a Board of Directors (Conselho de Administração) anda Board of Executive Officers (Diretoria ), and overseen by an Audit Committee (Conselho Fiscal). TheBoard of Directors is comprised of eleven members serving for a term of three years. The Board ofDirectors holds a regular meeting once every two months and holds special meetings when called by theChairman or by two members of the Board of Directors.

The following are the current members of the Board of Directors and their respective positions.

Name (Age) Position Date ElectedModesto Souza Barros Carvalhosa (69) .... Chairman August 10, 1998Jorge de Moraes Jardim Filho (52) ........... Director August 10, 1998Arthur Joaquim de Carvalho (43) ............. Director September 1, 1998Carlos Augusto Coelho Salles (62)........... Director September 1, 1998Luiz Raymundo Tourinho Dantas (74) ..... Director September 1, 1998Cassio Casseb Lima (45) ......................... Director January 27, 1999Carmelo Furci (47).................................. Director September 1, 1998Wilson Quintella (74).............................. Director January 27, 1999Ronnie Vaz Moreira (42) ........................ Director December 2, 1999Altamiro Boscali (60).............................. Director January 28, 2000Henrique Pizzolato (48)........................... Director October 4, 1999

Set forth below are brief biographical descriptions of the Directors.

Modesto Souza Barros Carvalhosa, has served as Chairman of the Board of Directors of theCompany since August 1998. He served as a consultant for legal matters to the São Paulo StockExchange, Chairman of the Court of Ethics of the Brazilian Bar Association—São Paulo Chapter andProfessor of Commercial Law at the School of Law of the University of São Paulo. He served as amember of the International Faculty for Corporate and Capital Market Law and Securities Regulation inPhiladelphia, from 1975 to 1995. Mr. Souza Barros Carvalhosa holds a law degree and a doctorate degree

- 56 -

in law from the University of São Paulo, as well as a post-graduate degree in the economics of law fromthe University of Camerino (Italy).

Jorge de Moraes Jardim Filho, has served as a member of the Board of Directors of the Companysince August 1998. Mr. de Moraes Jardim Filho has served as a member of the Boards of Directors ofACESITA S.A. and of Companhia Paulista de Força e Luz S.A., Telegoiás S.A., Telepisa S.A. and TelespCelular Participações S.A., as President of Telecomunicações Brasileiras S.A. — Telebrás (1995) and ofTelebrasilia (1991-1993), as interim Minister of State for Communications (1992-1995) and as Chairmanof the Board of Directors of Telebrás (1992-1995) and Telebrasilia (1993). He also served as theSecretary to the Ministry of Communications from 1992 to 1995. He currently serves as theSuperintendent Director of Fundacão de Seguridade Social — SISTEL, Chairman of the Board ofDirectors of GTD S.A., Vice-President of the Boards of Directors of Americel S.A., Telet S.A.,Paranapanema S.A. and World Trade Center of São Paulo. He holds a degree in Engineering and a post-graduate degree in statistics and economic engineering from the University of Brasilia.

Arthur Joaquim de Carvalho, has served as a member of the Board of Directors of the Companysince September 1998. In August 1998, he was also elected to the Board of Directors of Tele NorteCelular Participações S.A. and Telemig Celular Participações S.A. Mr. Carvalho serves as a Principal ofCVC/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 tojoining 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 fromthe Federal University of Bahia.

Carlos Augusto Coelho Salles, has served as a member of the Board of Directors of the Companysince September 1998. From 1989 to 1998 he served as Superintendent Executive Officer of Xerox doBrasil. He currently serves as the President of Xerox do Brasil, Astor Administração de Bens eParticipações Ltda. and Centro de Desenvolvimento de Sistemas de Vitória, and on the AdministrativeBoard of São Rafael Sociedade de Previdéncia Privada. He holds a law degree from the Law School ofthe University of the State of Rio de Janeiro and a degree in Business Administration from the GetúlioVargas Foundation of Rio de Janeiro.

Luiz Raymundo Tourinho Dantas, has served as a member of the Board of Directors of theCompany since September 1998. He served as Executive Officer and founder of Brasquip (a drillingdevices manufacturer), of CASAFORTE — Crédito Imobiliário e Credito Financiamento and ofCompanhia de Bebidas da Bahia — CIBEB (Carlsberg) and as President of Companhia ValençaIndustrial — Fábrica de Tecidos. He also served as vice-president of the Commercial Association ofBahia, of the Industry Federation of the State of Bahia and as Royal Consul of Denmark. Mr. TourinhoDantas holds a law degree from the Federal University of Bahia.

Cassio Casseb Lima, has served as a member of the Board of Directors of the Company sinceJanuary 1999. He served as Head of Country Treasury and Head of Northwest Regional Sales of CreditLyonnais (Banco Frances e Brasileiro). He also served as Financial Market Consultant for VotorantimS.A., as Country Treasurer and Executive Vice President at Banco Mantrust SRL, as a Member of theBoard of Andima (Financial Institutions Association) and IBCD (Banking Science Institute), as a memberof the Board of Directors for Latin America & Caribbean MasterCard and COMCORP (Citigroup). In1993, he joined Citibank where he held several positions, including Country Treasurer, Head of Productsand Positioning Group, and as the officer responsible for Brazilian Government relations. He currentlyserves as President of Credicard S.A., a major credit card issuer, and as a consultant to the SteinbruchGroup (Vicunha Textil, Fibra Dupont, Fibrasil Textil, Companhia Siderurgica Nacional — CSN, Vale doRio Doce, Maxiteland others). Mr. Casseb Lima holds a degree in engineering from the São PauloUniversity.

- 57 -

Carmelo Furci, has served as a member of the Board of Directors of the Company sinceSeptember 1998. Previously, Mr. Fure served as a consultant to the Institute for the New Chile andVECTOR Center of Economic and Social Studies in Amsterdam, Holland and Chile (1978-82). He alsoserved as a specialist in international relations at the American University of Rome (1984) and as theCoordinator of Enimont International Agencies in Italy and Belgium (1985-89), as well as manager of thedepartment of Foreign Relations for Europe at the World Bank (1990-94), where he also served asStrategy Manager (1994-97) and as Vice-Director at the Chamber of Commerce of Milan (1997-98). Hecurrently serves as president of Telecom Itália do Brasil (since June 1998), as a member of the Board ofDirectors of Bitel Participações S.A., Solpart, ETECSA, Teleacre S.A., Teleron S.A., Telems S.A.,Telemat S.A., Telegoias S.A., Telebrasilia S.A., Telepar S.A., Telesc S.A., CTMR, Câmara de ComércioItaloBrasileira, Tele Nordeste Celular and Tele Celular Sul (all since 1999). Mr. Furci holds a degree insociology from the Universita degli Studi di Roma and a doctoral degree in economics from the LondonSchool of Economics and Political Science.

Wilson Quintella, has served as a member of the Board of Directors of the Company sinceJanuary 1999. In 1947, Mr. Quintella joined Construções e Comércio Camargo Corrêa S.A., where heheld several positions, including Construction Coordinator (1947-1952), Assistant to the Board ofDirectors (1953-1959), Assistant Director (1953-1964), Executive Director (1964-1965), DirectorSuperintendent (1965-1972), and President-Director (1972-1984). While holding other positions inCamargo Corrêa, he also served as Vice President of Agropecuaria e Industrial S/A (1966-1967), asDirector of Cia. Administradora Morro Vermelho (1967-1979), as Director President of Reago Indústria eComercio S.A. (1967-1971), as Director Vice President of Participações e Gerência de Negócios Ltda.(1965-1972), as Director Superintendent of Participações Morro Vermelho Ltda. in 1972 and as VicePresident of Camargo Corrêa Industrial S/A (1969-1973). Mr. Quintel also served as a member ofCIBPU — Comissão Interestadual da Bacia Parana-Uruguay, UNICON — União de ConstrutorasLtda., the builder of hydroelectric power plant of Itaipu and BRASVEN — Brazilian-VenezuelanConsortium, the builder of hydroelectric power plant of GURI (Venezuela) and Chairman of the Board ofDirectors of Construçoes e Comércio Camargo Corrêa S.A. Mr. Quintella currently serves as President ofADTP — Tietê Paraná Development Agency, as President of Quintella Comércio e Exportação Ltda,, andComercial Quintella Agropecuária Ltda. Mr. Quintella holds a degree in Social and Judicial Science aswell as in Business Administration from the University of São Paulo.

Ronnie Vaz Moreira, has served as a member of the Board of Directors of the Company sinceDecember 1999. Mr. Vaz Moreira worked for the Bank of Montreal from 1981 to 1995 and for BancoPactual from 1993 to 1995 as Corporate Finance Officer. Mr. Vaz Moreira has also worked for BancoABN AMRO as senior vice-president. He currently serves as Finance Director of Petróleo Brasileiro -Petrobrás. Mr. Vaz Moreira holds a degree in Economics from Universidade Federal do Rio de Janeiroand a Masters in International Management from the American Graduate School of InternationalManagement (Thunderbird), Arizona, USA.

Altamiro Boscali, has served as a member of the Board of Directors of the Company sinceJanuary 2000. Mr. Boscali was a legal councilor for the American Chamber of Commerce (Chapter SãoPaulo) from 1983 to 1985. He has also served as board member in several companies, such as AMP doBrasil Ltda., Banco Credibanco S.A., GTE do Brasil Ltda., Itinga S.A., Meritor do Brasil Ltda.,Multishopping Empreendimentos Imobiliários S.A., Rockwell do Brasil Ltda. and Union Carbide doBrasil S.A. Mr. Boscali is a partner at Demarest e Almeida Law Firm, which he joined in 1971. Mr.Boscali holds a degree in Law from Universidade de São Paulo and a Masters degree in Law fromHarvard Law School.

Henrique Pizzolato, has served as a member of the Board of Directors of the Company sinceOctober 1999. He served as President of CUT/PR— Central Unica dos Trabalhadores of Paraná from1989 to 1992, as Director of DIEESE Nacional from 1990 to 1993, as Counselor of GAREB — Office of

- 58 -

the Representatives of the Employees of Banco do Brasil and as a Member of the Curator’s Council of theBanco do Brasil Foundation (1994-1996). He currently serves as Administrative Director of TheInvestment Club of the Employees of Banco do Brasil, Director of the Foreign and CongressionalRelations of ANABB — National Association of the Employees of Banco do Brasil and Director ofPREVI —Pension Fund of the Employees of Banco do Brasil. Mr. Pizzolato holds a degree inArchitecture from University of Vale do Rio Sino.

Board of Executive Officers

The Board of Executive Officers consists of one President, one Vice-President and threeExecutive Officers, with the following titles: Financial Executive Officer, Technical Executive Officerand Human Resources Executive Officer, elected by the Board of Directors for a term of three years. AnExecutive Officer may be removed from office at any time.

The following are the current Executive Officers and their respective positions.

Name (Age) Position Date electedHenrique Sutton de Sousa Neves (46) ... President November 3, 1998Paulo Pedrão Rio Branco (47) .............. Financial Executive Officer November 11, 1999Sergio Leo (52).................................... Technical Executive Officer January 27, 1999João Francisco Rached de Oliveira (46). Human Resources Executive Officer February 24, 1999

Set forth below are brief biographical descriptions of the Executive Officers not included above.

Henrique Sutton de Sousa Neves, has served as an Executive Officer of the Company sinceNovember 1998. Mr. de Sousa Neves joined Shell Brasil S.A. in 1976 as in-house counsel. From 1980to 1985 he held many management positions in Human Resources. From 1986 to 1987 he served asManager of Sales in the central and western parts of Brazil. In 1987 he was appointed as an ExecutiveOfficer of Petróleo Sabbá S.A. (a subsidiary of Shell Brasil). From 1990 to 1992 he served in a RegionalArea Desk of Shell International. In 1993, he returned to Shell Brasil S.A. and was appointed Vice-President for Corporate Affairs and later served as Vice-President for Natural Markets (1995-1997), andas Vice-President for Retail Market (1997-1998). Mr. de Sousa Neves holds a law degree from thePontifica Universidade Católica of Rio de Janeiro and a diploma from the Advanced ManagementProgram at Harvard Business School.

Paulo Pedrão Rio Branco, has served as Chief Financial Officer of the Company since November1999. Mr. Rio Branco joined Coelba (Companhia de Eletricidade do Estado da Bahia) in 1975, workingas General Coordinator of the Presidency. In 1987, he worked as Coordinator of Energy of the Bahiastate Secretariat of Mines and Energy. In April 1998, he joined CHESF (Companhia Hidroelétrica do SãoFrancisco) as advisor to the President. In June 1989, Mr. Pedrão became Special Coordinator of theBahia state Secretariat, becoming Secretariat of Mines and Energy of the state of Bahia in January 1990.In May 1990, Mr. Pedrão became the Chief Financial Officer of CHESF. In 1995, he became Manager ofthe New Business Department at Coelba. Prior to joining Brasil Telecom, he worked as DevelopmentDirector at Iberdrola energia do Brasil Ltda. Mr. Rio Branco holds a degree in Business Administrationand Economics from Universidade Católica de Salvador.

Sérgio Léo, has served as Technical Executive Officer of the Company since January 1999. Mr.Leo joined Telecom Italia in 1975, where among other positions, he was responsible for the Agrientoprovince (1976-1983), for the marketing in Sicily (1983-1986), for the Trapani province (1986-1989), forthe IT in the Campania and Basilicata Regions (1991), for the IT in Sicily (1992-1994) and for ITacquisitions in all Italy (1994-1997). Mr. Leo also served as Director of the region of Sicily (1989-1991)and as Director of the Spanish Television Channel. Mr. Leo holds a degree in Electronic Engineeringfrom the University of Palermo and a Ph.D. in International General Management Program from theCEDEP in Fontainebleau in France.

- 59 -

João Francisco Rached de Oliveira, has served as Human Resources Executive Officer of theCompany since February 1999. Among other positions, he served as Director of Human Resources ofSão Paulo Alpargatas (1997-1998), as Manager of Human Resources of ALCOA Aluminio S/A inSorocaba (1985-1987), in São Paulo (1987-1988 and 1992-1995), in Itapissuna (1988-1992), on a SpecialAssignment at ALCOA Inc. in Pittsburgh, USA (1994-1995) and as Corporate Manager of HumanResources in ALCOA Aluminio S/A in Brazil (1995-1997). He also served as a professor of BusinessAdministration at the Universidade de Sorocaba (1987) and as a professor of graduate studies in HumanResources at the Catholic University of Recife (1991) . He holds a degree in Business Administrationand a graduate degree in Human Resources from the Universidade de Sorocaba.

Audit Committee

The Audit Committee consists of five members, four members elected by the CommonShareholders and one member elected by the Preferred Shareholders.

The following are the current members of the Audit Committee:

Name Date ElectedLuiz Otavio Nunes West .............................................................. April 28, 2000Gilberto Braga............................................................................. April 28, 2000Delmar Nicolau Schmidt .............................................................. April 28, 2000Carlos Fernando Couto de Oliveira Souto...................................... April 28, 2000Carlos Alberto de C. Monteiro...................................................... April 28, 2000

Item 11. Compensation of Directors and Officers

For the year ended December 31, 1999, the aggregate amount of compensation paid by theHolding Company to all directors and executive officers was approximately R$904 thousand.

Item 12. Options to Purchase Securities from Registrant or Subsidiaries

None.

Item 13. Interest of Management in Certain Transactions

None.

PART II

Item 14. Description of Securities to be Registered

None.

PART III

Item 15. Defaults upon Senior Securities

None.

Item 16. Changes in Securities, Changes in Security for Registered Securities and Use of Proceeds

None.

- 60 -

PART IVItem 17. Financial Statements

The Holding Company has responded to Item 18 in lieu of responding to this Item.

Item 18. Financial Statements

Reference is made to pages F-1 through F-64.

Item 19. Financial Statements and Exhibits

(a) The following Financial Statements are filed as part of this Form 20-F:Independent Auditors’ ReportsConsolidated Balance SheetsConsolidated Statements of IncomeConsolidated Statements of Cash FlowsConsolidated Statements of Changes in Shareholders’ EquityNotes to the Consolidated Financial Statements

(b) ExhibitsThe following is a list of all exhibits filed as a part of this Annual Report on Form 20-F:

ExhibitNumber Exhibit1.1 Amended and Restated Charter of Registrant.1.2 Amended and Restated Charter of Registrant (English translation).2.1 Deposit Agreement, dated July 27, 1998, as amended and restated on November

2, 1998, among the Registrant, the Bank of New York, as Depositary, and theOwners and Beneficial Owners of American Depositary Receipts issuedthereunder.(1)

2.2 Standard Concession Agreement for Local, Switched, Fixed-Line TelephoneService and Schedule of Omitted Concession Agreements.(2)

2.3 Standard Concession Agreement for Local, Switched, Fixed-Line TelephoneService and Schedule of Omitted Concession Agreements (English translation).(2)

2.4 Standard Concession Agreement for Domestic Long-Distance, Switched, Fixed-Line Telephone Service and Schedule of Omitted Concession Agreements.(2)

2.5 Standard Concession Agreement for Domestic Long-Distance, Switched, Fixed-Line Telephone Service and Schedule of Omitted Concession Agreements(English translation).(2)

_________________________(1) Filed as an Exhibit to the Company’s Annual Report on Form 20-F, filed July 1, 1999.(2) Filed as an Exhibit to the Company’s Registration Statement on Form 20-F, filed September 18, 1998.

- 61 -

INDEX OF DEFINED TERMSPage Page

ADRs ..........................................................29ADSs...........................................................29Agreement ...................................................30American Depositary Shares .........................29Anatel............................................................2Anatel Decree ..............................................20Brazil.............................................................iiBrazilian Corporation Law............................32Brazilian Securities Law...............................32Breakup .........................................................3Cellular Region...............................................3Center..........................................................19Code............................................................38COFINS ......................................................14Commercial Market......................................44Common Shares ...........................................29Company........................................................iiConcessions ...................................................1Consolidated Financial Statements...................iiCPMF tax ....................................................37Custodian.....................................................33CVM...........................................................32Deposit Agreement.......................................31Depositary....................................................31e&p.............................................................38Embratel........................................................1Federal Government........................................iiFenattel........................................................17Fittel............................................................18Fixed-Line Region ..........................................3Floating Market............................................44General Plan of Concessions and Licenses .....22General Plan on Quality ................................22General Plan on Universal Service.................22IBGE .............................................................4ICMS...........................................................14

IGP-DI ........................................................11IGP-M .........................................................27Intelig ............................................................1IOF tax........................................................37New Holding Companies ................................3non-Brazilian holder .....................................35non-U.S. holder ............................................39PIS ..............................................................14Preferred Shares ...........................................29premium price ..............................................31Privatization ...................................................3R$ .................................................................iireais ..............................................................iireal ...............................................................iiReal Plan .....................................................25Region ...........................................................1Registered Capital.........................................37Rio de Janeiro Stock Exchange ......................31São Paulo Stock Exchange ............................31Selling Parties ..............................................31Solpart ...........................................................3Spun-off Companies .......................................1Statutory Financial Statements.......................42STET...........................................................30Subsidiaries....................................................iiTechold........................................................30Telebrás.........................................................1Telebrás System.............................................2Telecom Italia ..............................................30Telecommunications Regulations.....................2Timepart ......................................................30TJLP ...........................................................36U.S. GAAP..................................................40U.S. holder...................................................38US$ ...............................................................ii

- 62 -

TECHNICAL GLOSSARYThe 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 paid per minute charged by network operators for the use of theirnetwork by other network operators. Also known as an “interconnection charge” or “network usagecharge.”

Access gates: The points of interface between the network equipment (either dedicated orswitched) and the transmission media that connect network equipment to the end user. The quantity ofservice is directly related to the quantity of network access gates.

Analog: A mode of transmission or switching which is not digital, e.g., the representation ofvoice, video or other modulated electrical audio signals which are not in digital form.

Analog network : A network using analog technology with circuit switching, capable ofconnecting one user with all the users, but with limited transmission capacity.

ATM (Asynchronous Transfer Mode): A broadband switching technology that permits the use ofone network for different kinds of information (e.g., voice, data and video).

Band A Service Provider: A former Telebrás operating subsidiary that has been granted aconcession to provide cellular telecommunications services in a particular area within a radio spectrumfrequency range referred to by Anatel as “Band A.”

Band B Service Provider: A cellular service provider that has been granted a concession toprovide cellular telecommunications services in a particular area within a radio spectrum frequency rangereferred to by Anatel as “Band B.”

Base station: A radio transmitter/receiver that maintains communications with the cellulartelephones within a given cell. Each base station in turn is interconnected with other base stations andwith the public switched telephone network.

Broadband services: Services characterized by a transmission speed of 2 Mbit/s or more.According to international standards, these services are divided into two categories: (i) Interactiveservices, including video-telephone/video-conferencing (both point-to-point and multipoint); video-monitoring; interconnection of local networks; file transfer; CAD; high-speed fax; e-mail for movingimages or mixed documents; broadband videotext; video on demand; retrieval of sound programs or fixedand moving images; and (ii) Broadcast services, such as sound programs, television programs (includinghigh-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 telecommunicationssystem.

Cellular service: A mobile telecommunications service provided by means of a network ofinterconnected low-powered base stations, each of which covers one small geographic cell within the totalcellular telecommunications system service area.

Digital: A mode of representing a physical variable such as speech using digits 0 and 1 only.The digits are transmitted in binary form as a series of pulses. Digital networks allow for higher capacityand higher flexibility through the use of computer-related technology for the transmission andmanipulation of telephone calls. Digital systems offer lower noise interference and can incorporateencryption as a protection from external interference.

- 63 -

Digital penetration: The substitution of equipment capable of transmitting digital signals forequipment limited to analog transmission.

Exchange: See Switch.

Frame relay: A data transmission service using fast protocols based on direct use of transmissionlines.

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(Internet Protocol) communications protocol.

ISDN (Integrated Services Digital Network): A system in which several services (e.g., speechand data) may be simultaneously transmitted end-to-end in digital form.

Leased high-speed data communication: The digital exchange of information at speedsexceeding 64 Kbps transmitted through mediums that are leased to users for their exclusive use.

Local loop: The system used to connect the subscriber to the nearest switch. It generally consistsof a pair of copper wires, but may also employ fiber-optic circuits, microwave links or other technologies.

Network : An interconnected collection of elements. In a telephone network, these consist ofswitches connected to each other and to customer equipment. The transmission equipment may be basedon fiber-optic or metallic cable or point-to-point radio connections.

Network usage charge: Amount paid per minute charged by network operators for the use oftheir network by other network operators. Also known as an “access charge” or “interconnection charge.”

Optical fiber: A transmission medium which permits extremely high capacities. It consists of athin strand of glass that provides a pathway along which waves of light can travel for telecommunicationspurposes.

Packet-switched data communication services: Data services based on parceling or breaking thedata stream into packets and switching the individual packets. Information transmitted is segmented intocells of a standardized length, which are then transmitted independently of one another, allowingmaximization of available capacity and usage of a single transmission path for multiple communications.The cells are then reassembled upon reaching their destination.

PBX (Private Branch Exchange): Telephone switchboard for private use, but linked to thenational telephone network.

Penetration: The measurement of the take-up of services. At any date, the penetration iscalculated by dividing the number of subscribers by the population to which the service is available andmultiplying the quotient by 100.

Private leased circuits: Voice, data or image transmission mediums leased to users for theirexclusive use.

PSTN (Public Switched Telephone Network): The public telephone network that delivers basictelephone service and, in certain circumstances, more advanced services.

Repeaters: A device that amplifies an input signal for retransmission.

Satellite services: Satellites are used, among other things, for links with countries that cannot bereached by cable or to provide an alternative to cable and to form closed user networks.

- 64 -

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 basestation. Sectorization reduces co-channel interference which permits smaller cells and increases networkcapacity.

Switch: These are used to set up and route telephone calls either to the number called or to thenext switch along the path. They may also record information for billing and control purposes.

TDMA (Time Division Multiple Access): A standard of digital cellular telecommunicationstechnology.

Universal service: The obligation to supply basic service to all users throughout the nationalterritory at reasonable prices.

Value Added Services: Value Added Services provide additional functionality to the basictransmission services offered by a telecommunications network.

- 65 -

SIGNATURESPursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Holding

Company certifies that it meets all of the requirements for filing on Form 20-F and has duly caused thisAnnual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

BRASIL TELECOM PARTICIPAÇÕES S.A.

By: /s/ Henrique Sutton De Sousa Neves Name: Henrique Sutton De Sousa NevesTitle: President

By: /s/ Paulo Pedrão Rio Branco Name: Paulo Pedrão Rio BrancoTitle: Financial Executive Officer

- 66 -

Dated: June 30, 2000INDEX TO EXHIBITS

ExhibitNumber Exhibit

SequentialNumbering

1.1 Amended and Restated Charter of Registrant. 135 of 158

1.2 Amended and Restated Charter of Registrant (English translation). 147 of 158

2.1 Deposit Agreement, dated July 27, 1998, as amended and restated onNovember 2, 1998, among the Registrant, the Bank of New York, asDepositary, and the Owners and Beneficial Owners of AmericanDepositary Receipts issued thereunder.(1)

---

2.2 Standard Concession Agreement for Local, Switched, Fixed-LineTelephone Service and Schedule of Omitted Concession Agreements. (2) ---

2.3 Standard Concession Agreement for Local, Switched, Fixed-LineTelephone Service and Schedule of Omitted Concession Agreements(English translation).(2)

---

2.4 Standard Concession Agreement for Domestic Long-Distance, Switched,Fixed-Line Telephone Service and Schedule of Omitted ConcessionAgreements. (2)

---

2.5 Standard Concession Agreement for Domestic Long-Distance, Switched,Fixed-Line Telephone Service and Schedule of Omitted ConcessionAgreements (English translation).(2)

---

_________________________(1) Filed as an Exhibit to the Company’s Annual Report on Form 20-F, filed July 1, 1999.(2) Filed as an Exhibit to the Company’s Registration Statement on Form 20-F, filed

September 18, 1998

F - 1

TELE CENTRO SUL PARTICIPAÇÕES S.A.

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999

F - 2


CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 1997, 1998 and 1999

CONTENTS

Report of Independent Public Accountants ................................................... F-3, F-4 and F-5

Consolidated Balance Sheets ....................................................................... F-6

Consolidated Statements of Income................................. ........................... F-7

Consolidated Statements of Changes in Shareholders’ Equity...................... F-8

Consolidated Statements of Cash Flows..... ............................................... F-9

Notes to the Consolidated Financial Statements ........................................... F-10 through F-64

F - 3

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and ShareholdersTele Centro Sul Participações S.A.

We have audited the accompanying consolidated balance sheet of Tele Centro Sul Participações S.A.(a Brazilian corporation) and subsidiaries as of December 31, 1999, and the related consolidatedstatements of income, changes in shareholders' equity, and cash flow for the year then ended (allexpressed in constant Brazilian reais as of December 31, 1999). These consolidated financialstatements are the responsibility of the Company’s management. Our responsibility is to express anopinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Brazil, whichare substantially the same as those followed in United States of America. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidencesupporting amounts and disclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, thefinancial position of Tele Centro Sul Participações S.A. and subsidiaries as of December 31, 1999,and the results of their operations, changes in its shareholders’ equity and their cash flow for the yearthen ended in conformity with generally accepted accounting principles in Brazil (Note 2).

Accounting practices of the Company used in preparing the accompanying financial statementsconform with generally accepted accounting principles in Brazil, but do not conform with accountingprinciples generally accepted in the United States of America (US GAAP). A description ofsignificant differences between Brazilian GAAP and US GAAP, and the approximate effect of thosedifferences on shareholders’ equity and net income, are set forth in Note 31.

ARTHUR ANDERSEN S/C

Brasília, BrazilFebruary 28, 2000

F - 4


INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and ShareholdersTele Centro Sul Participações S.A.Brasília - DF

We have audited the accompanying consolidated balance sheet of Tele Centro Sul Participações S.A.as of December 31, 1998, and the related consolidated statements of income, cash flows and changesin shareholders’ equity for the year then ended (all expressed in Brazilian reais). These consolidatedfinancial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in the UnitedStates of America. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of Tele Centro Sul Participações S.A. as of December 31, 1998, andthe results of its operations and cash flows for the year then ended in conformity with accountingprinciples generally accepted in Brazil and on the basis set out in note 2.

Generally accepted accounting principles in Brazil vary in certain respects from generally acceptedaccounting principles in the United States of America. Application of generally accepted accountingprinciples in the United States of America would have affected the determination of net income forthe year ended December 31, 1998 and the determination of shareholders’ equity and financialposition at December 31, 1998 to the extent summarized in note 30 of the consolidated financialstatements.

/s/ DELOITTE TOUCHE TOHMATSU

Rio de Janeiro, BrazilFebruary 19, 1999 (except for note 30.p for which the date is April 9, 1999 and note 29.a for whichthe date is May 31, 1999)

F - 5


The Board of Directors and ShareholdersTele Centro Sul Participações S.A.Brasília - DF

We have audited the accompanying consolidated statements of income, netinterdivisional cash distribution / (receipt) and changes in shareholders’ equity of Tele CentroSul Participações S.A. for the year ended December 31, 1997. These consolidated financialstatements are the responsibility of the Company's management. Our responsibility is toexpress an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards inBrazil, which do not differ in any material respects from generally accepted auditing standardsin the United States of America. Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidence supportingamounts and disclosures in the consolidated financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, aswel1 as evaluating the overall financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, inall material respects, the results of operations and cash flows of Tele Centro Sul ParticipaçõesS.A. for the year ended December 31, 1997, in conformity with accounting principles generallyaccepted in Brazil and on the basis set out in Note 2, including continued recognition of theeffects of changes in the purchasing power of the Brazilian currency as discussed in Note 2.

Generally accepted accounting principles in Brazil vary in certain respects fromgenerally accepted accounting principles in the United States of America. Application ofgenerally accepted accounting principles in the United States of America would have affectedresults of operations for the year ended December 31, 1997 to the extent summarized in Note 31of the consolidated financial statements.

/s/ KPMG Auditores Independentes

July 17, 1998Brasília, Brazil

F - 6

TELE CENTRO SUL PARTICIPAÇÕES S.A.CONSOLIDATED BALANCE SHEETS

As of December 31, 1998 and 1999

(In thousands of constant Brazilian Reais as of December 31, 1999)

1998 1999Notes R$ R$

Current assets: Cash and cash equivalents 11 450,003 1,043,429 Trade accounts receivable, net 12 593,445 687,465 Deferred and recoverable taxes 13 153,443 206,015 Other assets 14 157,827 108,096 Total current assets 1,354,718 2,045,005

Non-current assets: Deferred and recoverable taxes 13 47,847 89,971 Other assets 14 168,054 130,611 Total noncurrent assets 215,901 220,582

Permanent assets: Investments 15 111,981 167,975 Property, plant and equipment, net 16 8,411,003 7,744,244 Intangibles 29 - 1,055,260 Total permanent assets 8,522,984 8,967,479

Total assets 10,093,603 11,233,066

Current liabilities: Payroll and related accruals 17 118,224 81,741 Accounts payable and accrued expenses 546,741 459,986 Taxes other than income taxes 18 152,356 152,497 Dividends 19 149,045 209,453 Income taxes 9 68,501 81,867 Loans and financing 20 12,208 443,891 Provisions for contingencies 21 164,016 22,845 Other liabilities 110,563 106,623 Total current liabilities 1,321,654 1,558,903

Non-current liabilities: Income taxes 9 235,404 530,988 Taxes other than income taxes 18 - 42,448 Loans and financing 20 22,657 26,726 Provision for pensions 22 13,227 12,234 Provisions for contingencies 21 73,570 166,136 Other liabilities 6,487 8,864 Total non-current liabilities 351,345 787,396

Minority interests 1,696,355 1,796,105

Shareholders' equity: Share capital 1,936,659 1,936,659 Capital reserves 389,829 1,446,904 Income reserves 2,297,380 2,012,947 Retained earnings 1,928,329 1,684,296 Total shareholders' equity 6,552,197 7,080,806

Funds for capitalization: Expansion plan contributions 172,052 9,856 Total funds for capitalization 172,052 9,856

Total liabilities andshareholder’s equity 10,093,603 11,233,066

See the accompanying notes to the consolidated financial statements

F - 7

TELE CENTRO SUL PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENTS OF INCOME

Years ended December 31, 1997, 1998 and 1999(In thousands of constant Brazilian Reais as of December 31, 1999)

1997 1998 1999Note R$ R$ R$

Net operating revenue from telecommunications services:Services provided to third parties 2,546,740 3,004,700 3,266,568Services provided to Telebrás operating companies 282,350 123,851 -

4 2,829,090 3,128,551 3,266,568Cost of services:

Provided by third parties (1,260,364) (1,677,582) (2,448,309)Provided by Telebrás operating companies (227,664) (77,783) -

5 (1,488,028) (1,755,365) (2,448,309)

Gross profit 1,341,062 1,373,186 818,259

Operating expenses:Selling expenses (275,696) (268,072) (303,818)General and administrative expenses (457,312) (487,231) (527,909)Other net operating income (expenses) 6 178,140 (6,561) 20,256

Operating income from continuing operations before interest income / expense 786,194 611,322 6,788

Allocated interest expense (41,872) - -Net financial income 7 - 113,993 14,244

Operating income from continuing operations before unallocated interest income / expense 744,322 - -

Operating income - 725,315 21,032

Net non-operating expense 8 (30,138) (83,848) (59,757)Employees' profit share (31,855) (22,641) (17,700)

Income from continuing operations before unallocatedinterest income / expense, taxes and minority interests 682,329 - -

Income from discontinued cellular operations before unallocatedinterest income / expense, taxes and minority interests 410,305 - -

Unallocated interest income 74,357 - -Unallocated interest expense (3,447) - -

Income (loss) before taxes and minority interests 1,163,544 618,826 (56,425)

Income and social contribution taxes 9 (320,606) (186,729) 58,287

Income before minority interests 842,938 432,097 1,862

Minority interests (166,457) (102,759) (28,424)

Net income (loss) 676,481 329,338 (26,562)

Shares outstanding at thebalance sheet date (thousands) 334,399,028 334,399,028

Earnings (loss) per lot of one thousand shares outstandingat the balance sheet date 0.98 (0.08)

See the accompanying notes to the consolidated financial statements.

F - 8

TELE CENTRO SUL PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Years ended December 31, 1997, 1998 and 1999

(In thousands of constant Brazilian Reais as of December 31, 1999)

Income reservesUnrealized

Share Capital Legal Income Capital and Retainedcapital reserves reserve Reserve reserves Earnings Total

Balances at December 31, 1996 - - - - 4,800,165 1,167,188 5,967,353

Capital increase:Expansion plan contributions - - - - 418,066 - 418,066Resources from Telebrás - - - - 1,878 - 1,878Other resources - - - - 46,554 - 46,554

Donations and subsides for investments - - - - 24,382 - 24,382Interest on construction in progress - - - - 152,048 - 152,048Change in tax rates - - - - 15,902 - 15,902Fiscal incentives - - - - 53,798 - 53,798Forfeited dividends - - - - - 1,426 1,426Net income for the year - - - - - 676,481 676,481Realization of unrealized income - - - - (32,264) 32,264 -Deferred tax on full indexation - - - - - (180,327) (180,327)Appropriations:

Transfers to reserves - - - - 42,983 (42,983) -Dividends - - - - - (231,614) (231,614)

Minority interest movements - - - - (453,895) 6,350 (447,545)

Balances at December 31, 1997 - - - - 5,069,617 1,428,785 6,498,402

Spin-off of the net assets of discontinued operationsNet assets of continuing operations transferred on the breakup of TelebrásAllocation of the shareholders' equity upon creation of Holding Company 1,936,659 389,268 119,351 2,032,150 - 1,750,825 6,228,253Consolidation adjustments:

Capitalized interest - - - - - 61,380 61,380Other - - - - - 20,316 20,316

Fiscal incentive - 561 - - - 561Result for the year - - - - - 329,338 329,338Transfer to reserves - - 24,823 121,056 - (145,879) -Dividends - - - - - (87,651) (87,651)

Balances at December 31, 1998 1,936,659 389,829 144,174 2,153,206 - 1,928,329 6,552,197

Consolidation adjustments - - - - 7,958 7,958Fiscal incentive - 1,815 - - - - 1,815Special reserve for goodwill on merger - 1,055,260 - - - - 1,055,260Result for the year - - - - - (26,562) (26,562)Realization of unrealized income - - - (296,935) - 296,935 -Deferred tax on full indexation - - - - - (353,740) (353,740)Transfer to reserves - - 12,502 - - (12,502) -Dividends - - - - - (156,122) (156,122)

Balances at December 31, 1999 1,936,659 1,446,904 156,676 1,856,271 - 1,684,296 7,080,806


F - 9

TELE CENTRO SUL PARTICIPAÇÕES S.A.CONSOLIDATED STATEMENTS OF CASH FLOWS

Years ended December 31, 1997, 1998 and 1999(In thousands of constant Brazilian Reais as of December 31, 1999)

1997 1998 1999R$ R$ R$

Operating activities:Net income (loss) 676,481 329,338 (26,562)

Less - Income from discontinued cellular operations before taxes (410,305)Income (loss) from continuing operations, net of applicable

taxes to both continuing and discontinued operations 266,176

Adjustments to reconcile net incometo cash provided by operating activities:

Depreciation 847,994 946,628 1,686,878Minority share of net income 166,457 102,759 28,424Foreign exchange loss, net - 509 1,614Loss on permanent asset disposals 24,922 104,413 112,142Other provisions 5,353 5,430 37,338Increase (decrease) in allowance for doubtful accounts 22,100 27,027 (18,020)Net (increase) decrease in income tax, due to change in rate 15,902 - (41,228)(Increase) decrease in customer accounts receivable, gross (80,215) (156,601) (76,000)Decrease in other current assets 12,320 64,139 15,625(Increase) decrease in other non-current assets 6,037 (8,866) (11,883)Decrease in payroll and related accruals (5,832) (4,418) (36,483)Increase (decrease) in accounts payable and accrued expenses (29,817) 330,789 (86,755)Increase (decrease) in taxes other than income taxes 38,993 (13,921) 141Increase (decrease) in other current liabilities 3,868 57,795 (3,941)Increase (decrease) in accrued interest 11,400 (123) 3,879Decrease in income taxes (153,322) (42,968) (257,726)Increase (decrease) in provisions for contingencies 26,589 84,534 (13,877)Increase (decrease) in provision for pensions 5,816 (140,366) (993)Increase in other non-current liabilities 99 5,418 44,828

1,184,840 1,691,516 1,357,401

Investing activities:Additions to investments (4,594) (15,277) (17,607)Additions to property, plant & equipment (1,351,148) (1,469,116) (1,065,878)Proceeds from asset disposals 53,680 12,795 25,784

(1,302,062) (1,471,598) (1,057,701)

Financing activities:Loans repaid (189,228) (30,277) (22,721)New loans obtained 235,312 6,560 438,353Cash received from break-up of Telebrás - 85,285 -Expansion plan and other contributions repaid - - (4,170)Expansion plan and other contributions received 267,325 9,159 2,623Dividends paid (188,828) (36,741) (120,359)

124,581 33,986 293,726

Increase in cash and cash equivalents 7,359 253,904 593,426

Net cash used in discontinued operations (128,553) - -

Cash and cash equivalents at beginning of year 317,293 196,099 450,003

Cash and cash equivalents at end of year 196,099 450,003 1,043,429


TELE CENTRO SUL PARTICIPAÇÕES S.A.(See notes 1 and 2)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in thousands of constant Brazilian Reais as of December 31,1999,except per share amounts (see note 2c))

F - 10

1. Operations and background

Beginning in 1995, the Federal Government of Brazil (the “Federal Government”) undertook acomprehensive reform of the telecommunications industry. In July 1995 the Federal Congressadopted a General Telecommunications Law providing for the privatization of TelecomunicaçõesBrasileiras S.A. (“Telebrás”) which, through its 28 operating subsidiaries, was the primary supplierof public telecommunications services in Brazil.

In preparation for the privatization of the Telebrás system, the operating subsidiaries weredivided into twelve separate groups: (a) three regional fixed line operators, (b) eight regional cellularoperators and (c) one national long-distance operator. The cellular telecommunications businesseswere first separated from the operating subsidiaries and subsequently the fixed-line businesses, thenew cellular businesses and the long-distance operator were combined into the twelve separategroups. Both the separation of the cellular businesses and the subsequent grouping of the formerTelebrás subsidiaries were performed using a procedure under Brazilian corporate law called cisão or“spin-off”. As part of this process Tele Centro Sul Participações S.A. (the “Holding Company”) wasformed.

The Holding Company was formed on May 22, 1998, through the spin-off of certain assets andliabilities of Telebrás (see note 2), including the percentages of participation in the share capital ofthe following companies (collectively referred to as “the Subsidiaries”):

Participation

MinorityInterest

Percentage

Telecomunicações de Santa Catarina S.A ................................................................... 82.99% 17.01%Telecomunicações do Paraná S.A ............................................................................... 67.31% 32.69%Companhia Telefônica Melhoramento e Resistência S.A ........................................... 78.56% 21.44%Telecomunicações de Goiás S.A................................................................................. 83.77% 16.23%Telecomunicações do Mato Grosso do Sul S.A.......................................................... 96.01% 3.99%Telecomunicações do Mato Grosso S.A ..................................................................... 91.87% 8.13%Telecomunicações de Rondônia S.A ........................................................................... 91.31% 8.69%Telecomunicações do Acre S.A .................................................................................. 93.98% 6.02%Telecomunicações de Brasília S.A .............................................................................. 81.40% 18.60%




F - 11

Tele Centro Sul Participações S.A. and its subsidiaries (collectively the “Companies”) are theprincipal providers of fixed-line telecommunications services in the states of Santa Catarina, Paraná,Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia, Acre, the Federal District and in theregion of Pelotas in the state of Rio Grande do Sul, under the terms of the concessions granted by theFederal Government which will expire on December 31, 2005 and may be renewed for a further termof 20 years.

On January 30, 1998 the cellular telecommunications businesses of the Companies were spun-offinto nine new companies (the “Cellular Companies”), effective January 1, 1998.

The Companies’ business, including the services they may provide and the rates they charge, isregulated by Agência Nacional de Telecomunicações (Anatel), the regulatory authority for theBrazilian telecommunications industry pursuant to Law No. 9,472 of July 16, 1997 and the relatedregulations, decrees, orders and plans.

2. Presentation of the financial statements

a. Formation of the new Holding Company Tele Centro Sul Participações S.A. and preparationof the consolidated financial statements as of and for the year ended December 31, 1998

The consolidated financial statements reflect the financial condition and results of operations of TeleCentro Sul Participações S.A. and its subsidiaries (collectively “the Companies”).

On May 22, 1998 the shareholders of Telebrás approved Telebrás’ division into twelve new holdingcompanies by means of a spin-off, whereby existing shareholders received shares in the newcompanies in proportion to their holdings in Telebrás. The new companies contain the assets andliabilities previously recorded in the accounts of Telebrás, with certain exceptions that remained onthe books of Telebrás and were not allocated to the new holding companies. As a result of the spin-off, net assets of R$820,969, excluding investment in subsidiaries, were allocated to Tele Centro Sul.




F - 12

In addition to approving the allocation of assets and liabilities to the new holding companies at theMay 22, 1998 meeting, the shareholders established the shareholders’ equity of each new holdingcompany and allocated to each a portion of the retained earnings of Telebrás. Telebrás retainedsufficient earnings from which to pay certain dividends and other amounts. The balance of Telebrás’retained earnings was allocated to each new holding company in proportion to the total net assetsallocated to each such company. The allocated retained earnings do not represent the historicalretained earnings of the new holding companies. The retained earnings allocated to the Companyresulted in an increase of R$322,040 in relation to the historical retained earnings of the Subsidiaries.

The separation of the fixed and cellular telecommunications business and the formation of theHolding Company were accounted for as reorganizations of entities under common control in amanner similar to a pooling of interests. Brazilian corporate and tax law allows state controlledcompanies which are participating in the government’s privatization program a three month delaybetween the accounting base date for a spin-off and the date on which the shareholders’ meetingapproves the spin-off, including the related accounting basis for the net assets spun-off. Furthermore,as allowed by Brazilian corporate law, the amount of investment in subsidiaries was determinedbased on the balance sheets of those subsidiaries as of December 31, 1997. As a result, theseconsolidated financial statements as of and for the year ended 1998 include the results of operationsand changes in financial conditions of the subsidiaries from January 1, 1998 and the effects of thecash and other assets allocated from Telebrás as of March 1, 1998.

b. Presentation of the consolidated financial statements as of and for the year ended December 31, 1997

The assets and liabilities of the cellular telecommunications businesses were transferred to the ninenewly formed Cellular Companies at their indexed historical cost. The associated revenues andexpenses were also allocated to the respective Cellular Companies. The consolidated financialstatements included in respect of the period ended December 31, 1997 are not necessarily indicativeof the financial position and results of operations that would have occurred for that period had thefixed-line telecommunications businesses of the Companies been separate legal entities during suchperiod.




F - 13

As separate records of revenues and costs of services were maintained for the cellular business, theactual amounts could be identified and transferred. With respect to costs other than costs of services,the methodologies employed in transferring the assets and liabilities included the specificidentification of costs associated with those assets and liabilities, and the allocation of costs wherespecific identification was not possible. Allocations were made using criteria established bymanagement that were designed to ensure that all relevant costs were appropriately included in theresults of operations for the periods presented. The allocation criteria included: square footage (inrelation to land and building related expenses), number of terminals (in relation to generalmanagement, accounting, data processing, legal department and other general staff functions),number of employees (in relation to human resource related expenses), number of requisitions issued(in relation to office material costs) and miles driven for certain transport costs. Managementbelieves that the amounts included in the consolidated financial statements fairly reflect the operatingresults of the business.

Prior to December 31, 1997 cash and certain non-specific debt of the cellular telecommunicationsbusiness could not be segregated from the Companies. Accordingly, these amounts are included inthe consolidated financial statements for periods ended before January 1, 1998. As a result, certaininterest income and expense relating to the cellular telecommunications business could not beidentified and consequently, income from discontinued operations is presented before unallocatedinterest income/expense and taxes.

c. Indexation of the financial statements

The consolidated financial statements were prepared on a fully indexed basis to recognize theeffects of changes in the purchasing power of the Brazilian currency during the periods presentedwith the exception 1998, when inflation was considered to be immaterial. The consolidated financialstatements reflect the effects of indexation adjustments, mainly in relation to the book value ofproperty, plant and equipment and related charges for depreciation and amortization.




F - 14

The principal criteria for indexation were as follows:

i. Inflation restatement index

The consolidated financial statements were indexed and expressed in currency of constantpurchasing power of December 31, 1999 by using the monthly average values of the Unidade Fiscalde Referência (the Tax Reference Unit or “UFIR”) through December 31, 1995 and the Indice Geralde Preços – Mercado (the General Prices Index – Market or the “IGP-M”) index of the FundaçãoGetúlio Vargas from 1996 to 1999 following the cessation of the widespread use of the UFIR, thatresulted from a change in Brazil’s corporate law. Inflation for each year in the three-year periodended December 31, 1999, as measured by the IGP-M, was as follows.

PeriodAnnual

Inflation %

Year ended December 31, 1997 .......................................................... . 7.7Year ended December 31, 1998 (indexation not applied) ...................... . 1.8Year ended December 31, 1999 .......................................................... . 20.1

Management believes that these indexes are appropriate indications of general price level inflationfor purposes of Brazilian and US GAAP, for the years indicated.

In July 1997, the three-year cumulative inflation rate for Brazil fell below 100%. However, foraccounting purposes, the constant currency method continued to be applied through December 31,1999.




F - 15

ii. Consolidated statements of income

In 1997 and 1999, items in the consolidated statements of income were adjusted by:

• allocating inflationary gains or losses on interest bearing monetary assets and liabilities totheir corresponding interest income and expense captions;

• allocating inflationary gains and losses from other monetary items to their correspondingincome or expense captions. Amounts without a corresponding income or expense captionwere allocated to “Other net operating income/expenses”.

iii. Deferred income tax effects of indexation adjustments in 1997 and 1999

As a result of legislation mandating the discontinuation of the indexation system for Braziliancorporate law as from January 1, 1996, the indexation of assets and liabilities for financial reportingpurposes, used for accounting periods up to December 31, 1999 is not permitted for tax purposes.Accordingly, a deferred tax liability arises for the excess of net assets shown for financial reportingpurposes over the tax basis of these net assets. The charge relating to the additional deferred taxliability of R$180,327 and R$353,740 in 1997 and 1999, respectively, was recorded directly againstshareholders’ equity. Amortization of the deferred tax liability occurs in proportion to thedepreciation of the underlying fixed asset values and is recorded as a reduction of income taxexpense.




F - 16

d. Minority Interests

Minority interests relate to the interests of shareholders other than Tele Centro Sul Participações S.A.in the Subsidiaries, as of and for the period ended December 31, 1999 are as follow:

MinorityInterest

Percentage

Telecomunicações de Santa Catarina S.A ........................................................................................... 36.36%Telecomunicações do Paraná S.A ....................................................................................................... 34.47%Companhia Telefônica Melhoramento e Resistência S.A ................................................................... 25.56%Telecomunicações de Goiás S.A......................................................................................................... 17.77%Telecomunicações do Mato Grosso do Sul S.A.................................................................................. 4.66%Telecomunicações do Mato Grosso S.A ............................................................................................. 13.16%Telecomunicações de Rondônia S.A ................................................................................................... 7.04%Telecomunicações do Acre S.A .......................................................................................................... 11.67%Telecomunicações de Brasília S.A ...................................................................................................... 19.42%

For the year ended December 31, 1997 minority interests relate to the interests of shareholders otherthan Telebrás in the Subsidiaries.

e. Discontinued operations for the year ended December 31, 1997

For 1997 the fixed line telecommunications business of the Companies have been presented ascontinuing operations and the cellular telecommunications business as discontinued operations.Accordingly, the revenues, costs and expenses and cash flows of these discontinued operations havebeen excluded from the respective captions in the consolidated statements of income andconsolidated statements of cash flows and have been reported as “Income from discontinued cellularoperations before unallocated interest income/expense, taxes and minority interests” and as “Net cashused in discontinued operations” for 1997. Summarized financial information for the discontinuedoperations is as follows:




F - 17

1997

Net operating revenues ................................................................... 1,050,939Income before unallocated interest income/expense, taxes and minority interests........................................................................... 410,305Current assets ................................................................................ 262,782Property, plant and equipment, net................................................... 1,382,642Total assets.................................................................................... 1,647,698Current liabilities............................................................................ 84,616Total liabilities ............................................................................... 299,684Net assets of discontinued operations ............................................... 1,348,013

f. Previously published financial information

The presentation of the consolidated financial statements is consistent with the presentation of thepublished financial statements of the Companies, from which the accompanying financialinformation was extracted, except for certain adjustments to shareholders’ equity and net income inrespect of 1998 and 1999 detailed in the tables below and certain reclassifications within theConsolidated Balance Sheets and the Consolidated Statements of Income. These reclassificationswere made to conform previously published financial information to the presentation within thisdocument, for the presentation of the cellular businesses of the Companies as discontinued operationsfor the years 1997 and to reflect the portion of equity and net income attributable to shareholdersother than Telebrás minority interests in 1997.

The tables below present reconciliation of net income for the year ended December 31, 1998 and1999 and shareholders’ equity as at that date in accordance with Brazilian Corporate Law to netincome and shareholders’ equity reported herein:




F - 18

Net income: 1998 1999Net income in accordance with Brazilian Corporate Law.................... 396,729 218,022Effect of the indexation of non-monetary assets and liabilities up to December 31, 1999......................................................................... (130,367) (419,219)Additional provision for doubtful accounts receivable (recognized in 1997 for U.S. reporting purposes and in 1998 for Brazilian corporate law purposes)................................................................................. 13,691 -Additional provision for the Telepar supplementary pension plan (recognized in 1997 for U.S. reporting purposes and in 1998 for Brazilian corporate law purposes).................................................... 13,303 -Effect on deferred taxation of the above adjustments........................... 34,112 142,535Minority interest in the above adjustments ......................................... 1,870 32,100Net income (loss) as reported herein .................................................. 329,338 (26,562)

Shareholders’ equity: 1998 1999Shareholders’ equity in accordance with Brazilian Corporate Law....... 6,143,977 6,242,728Effect of the indexation of non-monetary assets up to December 31, 1999........................................................................ 791,368 1,702,702Effect on deferred taxation of the above adjustment ............................ (261,152) (585.252)Minority interest in the above adjustments ......................................... (121,996) (279,372)Shareholders’ equity as reported herein .............................................. 6,552,197 7,080,806

g. Principles of Consolidation

These consolidated financial statements include the financial records of the HoldingCompany and its subsidiaries. All material intercompany balances and transactions have beeneliminated.

h. Consolidated Statements of Cash Flows

These consolidated financial statements include the consolidated statements of cash flowswhich better reflect the source and use of funds in order to provide more significant information,instead of the statements of changes in financial position which are required by Brazilian acceptedaccounting principles.




F - 19

3. Summary of the principal accounting practices

a. Cash and cash equivalents

Cash equivalents are considered to be all highly liquid temporary cash investments with maturitydates of three months or less. They are recorded by the original cost plus the yields until the balancesheet date.

b. Trade accounts receivable

Accounts receivable from telephone subscribers are calculated at the tariff rate on the date theservice was rendered. Customer accounts receivable also include services provided to customers upto the balance sheet date but not yet billed.

c. Allowance for doubtful accounts

Provision is made for trade accounts receivable for which recoverability is consideredimprobable. In calculating the provision, the ratio of losses during the year due to bad and doubtfuldebts compared to gross revenues was applied to those accounts not yet due and those overdue up to90 days. Accounts overdue more than 90 days have been provided for according to the Company’sexperience of losses on such accounts (approximately 80%).

d. Foreign currency transactions

Transactions in foreign currency are recorded at the prevailing exchange rate at the time of therelated transactions. Foreign currency denominated assets and liabilities are translated using theexchange rate at the balance sheet date. Exchange differences are recognized in the consolidatedstatement of income as they occur.

e. Inventories

Inventories are stated at the lower of cost or replacement value. Cost of inventories is determinedon an average cost basis. Inventories are separated into network expansion and maintenanceinventories. 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

Investments are recorded at indexed cost, less a provision for losses when considered necessary.




F - 20

g. Property, plant and equipment

Property, plant and equipment are stated at indexed cost up to 1999 less accumulateddepreciation. Interests on loans related to construction in progress are capitalized.

Improvements to existing property are capitalized while maintenance and repair costs arecharged 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 theunderlying assets and in accordance with tax rules. The principal depreciation rates are shown inNote 16. Beginning in 1999, the subsidiaries of Tele Centro Sul changed their annual depreciationrates, due to the current technological status of the telecommunication equipment. The mostsignificant items are: automatic switching equipment (from 7.69% to 20%) and transmissionequipment (from 10% to 20%). This change resulted in a net income reduction, net of taxes andminority interests, in the approximate amount of R$ 313,000.

h. Vacation pay accrual

Cumulative vacation pay due to employees is accrued as earned.

i. Income and social contribution taxes

Income and social contribution taxes are recorded on accrued basis. Deferred taxes are providedon temporary differences.

j. Loans and financing

Loans and financing include accrued interest and monetary and/or exchange variation to thebalance sheet date.

k. Provisions for contingencies

Provisions for contingencies are formed by the amounts of probable losses based on legal adviceand management’s opinion of the outstanding matters at the balance sheet date.




F - 21

l. Revenue recognition

Revenues for all services are recognized when the service is provided. Charges to customers forcalls are based on time, according to the Brazilian law. Until April 1998, the revenues from outgoinginterregional and international long-distance calls were divided between the Companies and EmpresaBrasileira de Telecomunicações S.A. (“Embratel”), a former subsidiary of Telebrás (see note 25).The Companies retained a fixed percentage of the customer charges for outgoing interregional andinternational long-distance calls and paid the balance to Embratel. The revenues from phone cards forpublic telephones are recorded as they are sold.

m. Interest income and expense

Interest income represents interest earned and gains and losses on marketable securities (afteradjusting in 1997 and 1999 for the effects of inflation as measured by the variation in the inflationindex).

Interest expense represents interest incurred and gains and charges on loans and financing (afteradjusting in 1997 and 1999 for the effects of inflation as measured by the variation in the inflationindex) and exchange gains and losses on foreign currency loans and financing.

Unallocated interest expense in 1997 represents interest expense that could not be allocatedbetween continuing and discontinued operations.

n. Research and development

Research and development costs are recorded to expense as incurred. Total research anddevelopment costs were R$19,329, R$25,243, and R$21,852 for 1997, 1998 and 1999, respectively.

o. Pension and post-retirement benefits

Contributions to pension and post-retirement benefits are determined actuarially and recognizedas incurred. Other information regarding the pension funds are described in Note 22.

p. Employee’s profit share

Tele Centro Sul and its subsidiaries have made a provision for granting employees the right to ashare of their profits. The amount determined to be paid in the following year of the recordedprovision is in accordance with the agreement with the union, the companies by-laws and laboragreement. The amount recorded in 1997 is the employers’ share in the continuing fixed linetelecommunication business.




F - 22

q. Earnings per thousand shares

Earnings per thousand shares have been calculated based on the number of issued shares for thebalance sheet date. Earnings per thousand shares have not been calculated for 1997 as the capitalstructure of Tele Centro Sul Participações S.A. was not in place at December 31, 1997.

r. Segment information

The Companies operate solely in one segment for local and regional fixed-linetelecommunications. All revenues are generated in relation to services provided in the states of SantaCatarina, Paraná, Goiás, Tocantins, Mato Grosso do Sul, Mato Grosso, Rondônia and Acre, in theFederal District and in the region of Pelotas in the State of Rio Grande do Sul.

s. Use of estimates

The preparation of the consolidated financial statements in conformity with Brazilian and USGAAP requires management to make estimates and assumptions relating to the reporting of assetsand liabilities and the disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during the period reported. Actualresults could differ from those estimates.

4. Net operating revenue from fixed telecommunications services

1997 1998 1999Local services:

Monthly charges ..................................... 540,069 784,004 915,042Measured service charges ........................ 947,822 1,106,013 1,264,091Public telephones .................................... 146,460 157,428 158,495Other...................................................... 204,278 207,017 163,044Total....................................................... 1,838,629 2,254,462 2,500,672

Non-local services:Intra-state and interstate........................... 1,438,214 920,616 800,780International............................................ 78,496 18,416 671Total....................................................... 1,516,710 939,032 801,451

Data transmission......................................... 107,820 147,208 155,643Network services ......................................... 194,841 654,630 734,300Other .......................................................... 48,591 33,179 132,425Gross operating revenues.............................. 3,706,591 4,028,511 4,324,491Value added and other indirect taxes............. (867,660) (888,997) (1,029,180)Discounts .................................................... (9,841) (10,963) (28,743)Net operating revenue .................................. 2,829,090 3,128,551 3,266,568




F - 23

There are no customers who contribute more than 5% of gross operating revenues.

5. Cost of services

1997 1998 1999Depreciation and amortization............................. 804,645 891,476 1,623,361Personnel........................................................... 266,584 223,841 165,996Materials ........................................................... 35,950 36,000 12,151Services ............................................................ 357,630 558,518 598,592Other ................................................................ 23,219 45,530 48,209

1,488,028 1,755,365 2,448,309

6. Other net operating income (expenses)

1997 1998 1999Taxes other than income taxes ............................ (1,672) 2,815 (34,455)Provision for retirement incentive plan and lay-offs - (63,361) (130,572)Technical and administrative services ................. 30,180 118,695 71,610Provision for contingencies, net of reversal (note 21) (45,435) (103,291) 13,877Fines and expenses recovered............................. 45,696 54,892 35,697Other ................................................................ 149,371 (16,311) 64,099

178,140 (6,561) 20,256

The retirement incentive plan and lay-offs expenses/provision are related to the followingtermination plans:

Goals

Plans Period coveredNumber ofemployees

EstimatedTermination

costsProjeto Amanhã Dec. 98 – Feb.99 1,230 63,000

Lay-Off May 99 – July 99 1,843 65,000

Apoio Daqui Oct.99- open 2,780 66,000

The plans include termination benefits as part of the Company’s overall restructuring plan. Thecosts were estimated considering the target employees by each subsidiary, departments and jobpositions.




F - 24

Fines and expenses recovered primarily represent penalties collected on past due accountsreceivable and recovery of sales taxes of prior periods. The amount of penalties collected on past dueaccounts receivable amounted to approximately R$34,076, R$35,767 and R$34,192 in 1997, 1998,and 1999, respectively.

7. Net financial income

1998 1999Financial income:

Interest income............................................................. 180,829 57,562Gain on foreign currency denominated assets................. 3,036 11,498

Financial expenses:Interest expense ........................................................... (66,326) (44,434)Losses on foreign currency financing ............................. (3,546) (10,382)

113,993 14,244

8. Net non-operating expense

1997 1998 1999Loss on disposal of permanent assets .................. (24,922) (104,413) (41,312)Other ................................................................ (5,216) 20,565 (18,445)

(30,138) (83,848) (59,757)

9. Income and social contribution taxes

As explained in Note 2, because cash and certain non-specific debt were not allocated to thecellular telecommunications business up to 1997, the associated interest income and expense werealso not allocated. Consequently the Companies’ continuing operations include interest income andexpense relating to discontinued cellular operations and income tax expense and current tax liabilitieshave not been allocated to the discontinued cellular operations.

Brazilian income taxes comprise federal income tax and social contribution tax. In 1997, 1998and 1999 the rate for income tax was 25%, and the rate for social contribution tax was 8.00%. FromMay 1999 the statutory rate for social contribution tax increased to 12%, falling to 9% from February1, 2000. In 1999 the increase of 1% in the COFINS tax on sales could be offset against socialcontribution tax. The changes produced combined statutory rates of 33.00% from 1997 to April 1999,37.00% from May 1999 to February 1, 2000, and 34% thereon.

Deferred taxes are provided on temporary differences which include the effects of indexationadjustments that will not give rise to deductions when subsequently depreciated, amortized ordisposed of.




F - 25

Prior to 1996, the indexation adjustments to permanent assets and shareholders’ equity inaccordance with the tax law gave rise to a tax deductible expense, if the indexation of equityexceeded the indexation of permanent assets, and to taxable income, called “inflationary profit”, ifthe indexation of permanent assets exceeded that of equity. In the latter case, payment of the relatedtax liability could be deferred until it had been deemed to have been realized either throughdepreciation or disposal of the permanent assets in existence at the time the liability was recorded,subject to a minimum realization rate of 10% per annum (5% per annum prior to 1995).

In 1997, management elected to prepay income taxes on inflationary profit that it had previouslydeferred. Brazilian companies making such prepayment in relation to 1997 were entitled to utilize anincome tax rate of 10% instead of the current rate of 25%. The result was gains of R$13,457 for1997, from the reduction in deferred tax liabilities.

The following is an analysis of the income tax expense:

1997 1998 1999Social contribution charge .................................. 95,233 72,718 2,258Income tax ........................................................ 293,229 193,268 70,355Deferred taxes ................................................... (54,399) (79,257) (130,900)Early payment incentives.................................... (13,457) - -Total tax expense............................................... 320,606 186,729 (58,287)

Supplementary information regarding taxes posted directly to shareholders’ equity:

1997 1998 1999Deferred taxes (180,327) - (353,740)Effect of rate changes on deferred tax.................. 15,902 - -

(164,425) - (353,740)




F - 26

The following is a reconciliation of the amount calculated by applying the combined statutory taxrates to the reported income before taxes and the reported income tax expense:

1997 1998 1999Income (loss) before taxes as reported in the accompanying Financial statements................... 1,163,543 618,826 (56,425)Combined statutory rate 33% 33% 34%Tax charge at the combined statutory rate ............ 383,969 204,213 (19,184)Permanent additions: Non-deductible expenses.................................. 7,433 5,271 26,424 Employee’s profit share.................................... 10,512 -Permanent exclusions: Payments of interest on Shareholders’ equity…… (46,427) - (52,444) Tax exempt income .......................................... (3,261) (4,068) (6,958) Capitalized interest........................................... (3,011) (15,061) -Other items: Effect of rate changes ...................................... - - 11,610 Tax recovery (COFINS)………………………… - - (21,373) Early payment incentives.................................. (13,457) - - Other incentives............................................... (1,490) (6,880) -Other, net.......................................................... (13,662) 3,255 3,638Income and social contribution taxes as reported in the accompanying financial statements .............. 320,606 186,729 (58,287)

In 1997 and 1999, part of dividends proposed for payment at the end of the year werecharacterized as interest on shareholders’ funds. As a result, under Brazilian tax law, it was entitledto treat this part of the dividend as a deduction for income tax purposes.




F - 27

The composition of deferred tax assets and liabilities, based on temporary differences, is as follows:

1998 1999Deferred tax assets: Provision for pensions ............................................................... 4,364 4,160 Provision for contingencies........................................................ 78,404 65,577 Provision for voluntary terminations........................................... 16,038 20,579 Unrealized revenue ................................................................... - 16,574 Other ....................................................................................... 80,006 50,131Total (see Note 13) ..................................................................... 178,812 157,021Deferred tax liabilities: Additional indexation expense from pre-1990 ............................. 20,337 16,704 Effect of full indexation 261,152 585,252 Other ....................................................................................... - 9,067Total.......................................................................................... 281,489 611,023

Deferred tax liabilities on the effects of full indexation relate to the difference between the taxbasis of permanent assets, which was not indexed for inflation subsequent to December 31, 1995, andthe reporting basis, which includes indexation through December 31, 1999.

Other deferred tax liability refers to unrealized revenue from other receivables which are beenjudicially contested (Note 14).

The composition of tax liabilities is as follows:1998 1999

Social contribution tax payable .................................................... 8,545 -Federal income tax payable .......................................................... 13,871 1,832Deferred tax liabilities................................................................. 281,489 611,023 Total................................................................................... 303,905 612,855

Current....................................................................................... 68,501 81,867Non-current................................................................................ 235,404 530,988




F - 28

10. Cash flow information

1997 1998 1999Income and social contribution tax paid.................... 437,881 251,921 121,507Interest paid............................................................ 24,778 6,417 4,557Cash paid against provisions for contingencies.......... 9,423 19,557 41,106Non-cash transactions:

Fiscal incentive investment credits received........... 45,561 13,439 13,359 Property, plant and equipment received from Community Expansion Plans and from donations . 24,382 153,977 73,943 Conversion of capitalizable funds into share capital and goodwill 418,066 215,604 298,683 Recovery of fixed assets previously written off ...... - 46,098 9,165 Net assets other than cash and investment in subsidiaries received on the spin-off from Telebrás .......................................................... - 820,969 -

Net assets of cellular operations spun off ............ - 1,348,013 -

11. Cash and cash equivalents

1998 1999Cash ..................................................................... 218 73Bank accounts ....................................................... 18,596 28,530Temporary cash investments................................... 431,189 1,014,826

450,003 1,043,429

Temporary cash investments are composed of public federal securities managed by a financialinstitution with average yield equivalent to the CDI (Interbank deposit rate) and are denominated inBrazilian reais.




F - 29

12. Trade accounts receivable, net

1998 1999Accrued amounts ................................................... 175,203 200,752Billed amounts....................................................... 472,179 522,630Allowance for doubtful accounts............................. (53,937) (35,917)

593,445 687,465

The changes in the allowance for doubtful accounts were as follows:

1998 1999Beginning balance ................................................. 26,910 53,937Provision charged to selling expense ....................... 70,365 53,820Write-offs.............................................................. (43,338) (71,840)Ending balance ...................................................... 53,937 35,917

13. Deferred and recoverable taxes

1998 1999Tax withheld at source ........................................... 4,062 8,796Recoverable social contribution tax......................... 1,593 19,954Recoverable income tax ......................................... 2,630 49,040Deferred tax assets................................................. 178,812 157,021Sales and other taxes .............................................. 14,193 61,175

201,290 295,986Current.................................................................. 153,443 206,015Non-current........................................................... 47,847 89,971




F - 30

14. Other assets

1998 1999Amounts receivable from loans to cellular operators………. 47,580 62,207Maintenance inventories.....................................………… 23,685 5,954Prepayments.................................................................… 3,532 1,938Accounts receivable from assets disposals and others……… 34,255 31,305Recoverable advances....................................................... 17,104 15,681Judicial deposits................................................................ 58,165 67,083Fiscal incentive investments .............................................. 63,953 -Other ............................................................................... 77,607 54,539

325,881 238,707Current............................................................................. 157,827 108,096Non-current...................................................................... 168,054 130,611

Loans to cellular operators of R$62,207 (R$47,580 in 1998) was allocated to Tele Centro SulParticipações S.A. on the break-up of Telebrás. These loans to Telebrasília Celular S.A. andTelegoiás Celular S.A. were used in their expansions. These amounts are indexed to US dollars andbear interest that varies between Libor plus 1% per semester and 11.55% per annum.

These loans are being judicially contested by the parent company of Telebrasília Celular S.A. andTelegoiás Celular S.A. Thus they are not being paid. Based on the opinion of company legaladvisors, no provision for losses regarding these balances has been made.

The Company is deferring the tax effects on the financial income generated from such loans. Thecorresponding deferred tax is recognized as a long-term liability.

15. Investments

1998 1999Investments recorded at restated cost ...................... 67,884 67,884Fiscal incentive and other investments..................... 44,097 100,091

111,981 167,975




F - 31

The investments recorded at restated cost represent 2.94% of the capital stock on December 31, 1999(3.1% in 1998) of CRT – Companhia Riograndense de Telecomunicações as well 2.07% of capitalstock of CRT Celular as of December 31, 1999. The investments were transferred to Tele Centro SulParticipações S.A. as part of the spin-off of Telebrás.

16. Property, plant and equipment, net

a. Composition:

1998 1999Construction-in-progress ............................................................... 1,159,572 830,134Automatic switching equipment ..................................................... 4,338,841 4,413,137Transmission and other equipment ................................................. 6,786,070 7,300,599Buildings ...................................................................................... 1,844,638 1,986,414Other assets .................................................................................. 2,314,879 2,511,405Total cost ..................................................................................... 16,444,000 17,041,689Accumulated depreciation.............................................................. (8,032,997) (9,297,445)Property, plant and equipment, net ................................................. 8,411,003 7,744,244

Transmission and other equipment include: transmission equipment, aerial, underground andbuilding 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$89,996 at December 31, 1998 andR$84,757 at December 31, 1999.

b. Depreciation rates

The annual depreciation rates for certain classes of assets were changed as from 1999 following astudy of current technological level of the Company’s telecommunications equipment. The annualdepreciation rates applied to property, plant and equipment are as follows:

%1998 1999

Automatic switching equipment .................................. 7.69 20.00Transmission and other equipment .............................. 10.00 20.00Buildings ................................................................... 4.00 4.00Other assets (excluding land) ...................................... 5.00-20.00 5.00-20.00




F - 32

c. Rentals

The Companies rent equipment and premises through a number of operating agreements thatexpire at different dates. Total annual rent expense under these agreements was as follows:

1997 1998 1999Rent expenditure in the year ............................... 36,205 49,389 15,981

Rental commitments relate primarily to facilities where the future minimum rental paymentsunder leases with remaining noncancellable terms in excess of one year are:

Year ending December 31,

2000………………………………………………………………… 956

2001………………………………………………………………… 956

2002………………………………………………………………… 876

2003………………………………………………………………… 876

2004………………………………………………………………… 876

After 2004…………………………….…………………………… 876

5,416

17. Payroll and related accruals

1998 1999Salaries and wages................................................. 41,831 21,499Accrued social security charges .............................. 50,307 44,187Accrued benefits.................................................... 25,974 16,055Payroll withholdings .............................................. 112 -

118,224 81,741

18. Taxes other than income taxes1998 1999

Value-added taxes ................................................. 142,171 176,337Other indirect taxes on operating revenues............... 10,185 18,608

152,356 194,945Current 152,356 152,497Long term - 42,448




F - 33

19. Dividends

1998 1999Payable to:Controlling shareholder............................................ - 26,196Other...................................................................... 149,045 183,257

149,045 209,453

20. Loans and financing

1998 1999Financial institutions ..................................................................... - 428,017Other financing ............................................................................. 34,117 40,632Accrued interest............................................................................ 748 1,968

34,865 470,617Current......................................................................................... 12,208 443,891Non-current.................................................................................. 22,657 26,726

a. Financial Institutions

Loans from financial institutions are denominated in Brazilian reais and bear interest based on thelong term interest rate (TJLP, which averaged 13.22% during 1999) plus 6.85% per annum.

b. Other Financing

Loans from suppliers of telecommunications equipment are denominated in US dollars and inBrazilian reais. Amounts denominated in US dollars are repayable in six monthly installments up to2001 and bear interest at a fixed rate of 10.25% per annum and at a variable rate of LIBOR plus0.44% per annum, which at December 31, 1999 was 6.48%. Amounts denominated in Brazilian reaisbear local short-term market interest rates.




F - 34

c. Repayment Schedule

Non-current debt is scheduled to be repaid as follows:

2001………………………………………………………………… 7,734

2002………………………………………………………………… 6,732

2003………………………………………………………………… 1,994

2004………………………………………………………………… 1,992

2005 and after………………………….…………………………… 8,274

26,726

d. Currency analysis

Total debt is denominated in the following currencies:

Exchange rate atDecember 31, 1999(Units of oneBrazilian real) 1998 1999

Brazilian reais ...................................... 1.0000 6,107 428,123US dollars............................................ 1.789 28,758 42,494

34,865 470,617

The Companies do not hedge their foreign currency liabilities as amounts receivable indexed to USdollars exceed the amount of US dollar liabilities.

21. Provisions for contingencies

The Companies are party to certain legal proceedings arising in the normal course of business,including civil, administrative, tax, social security and labor proceedings. Tele Centro Sul and itssubsidiaries review periodically their legal proceedings and other contingencies, based on legal,economic and accounting principles. They consider the risk of loss of each contingency, which isclassified as probable, possible or remote, considering also the analysis of their legal advisors. Thecontingencies where a loss was considered probable to occur were recorded in the financialstatements.




F - 35

The components of the charge included in the consolidated statements of income for contingentliabilities are as follows:

1997 1998 1999Additional provisions.............................................. 36,012 97,538 95,267Payments in excess of provisions ............................. 9,423 5,753 8,325Reversal of provisions………………...……………… - - (117,469)

45,435 103,291 (13,877)

As a part of the periodical review of its legal proceedings and other contingencies, the Companyrecalculated the estimated amount of labor contingencies, taking into consideration such factors asrecent favorable decisions by judicial court, its experience on negotiations on similar claims andreduction of the expected incidence of potential labor contingencies, resulting in a reversal ofR$117,469 on the related provision.

Provisions for contingent liabilities were as follows:1998 1999

Labor claims ................................................................................. 195,145 71,987Disputed taxes .............................................................................. 11,962 82,714Civil claims .................................................................................. 30,479 34,280

237,586 188,981Current......................................................................................... 164,016 22,845Non-current.................................................................................. 73,570 166,136

The contingencies in which the related risks of loss were considered possible (estimated loss below50%), and therefore not recorded in the financial statements, are listed below.

1998 1999Labor claims ................................................................................. 10,401 77,393Disputed taxes .............................................................................. 376,047 217,574Civil claims .................................................................................. 104,032 47,482

490,480 342,449

Labor claims

The provisions for labor claims comprise management’s estimate of the probable loss inrelation to various suits filed by current and former employees.




F - 36

Disputed taxes

The tax contingencies refer mainly to tax assessment due to differences in interpretation of taxlegislation. The determination of the manner in which the various federal, state and municipalBrazilian taxes apply to the operations of the Company is subject to varying interpretations arisingfrom the unique nature of the Company’s operations. Management believes that its interpretation ofthe Company’s tax obligations is substantially in compliance with the applicable legislation.Accordingly, any changes in the tax treatment afforded to the Company’s operations will be theresult of new legislation or interpretive rulings of the tax authorities that will, in the opinion ofmanagement, not have any retroactive impact.

Civil claims

The civil claims relate mainly to contractual adjustments due to changes in the federal economicplan and other causes.

Other

Telebrás, the legal predecessor of the Holding Company, is a defendant in a number of legalproceedings and subject to other claims and contingencies. Under the terms of the breakup, liabilityfor any claims arising out of acts committed by Telebrás prior to the effective date of the breakupremains with Telebrás, except for labor and tax claims (for which Telebrás and the New HoldingCompanies are jointly and severally liable) and any liability for which specific accounting provisionshave been assigned to the Holding Company or one of the other New Holding Companies. Creditorsof Telebrás may challenge this allocation of liability. Management of the Holding Company believesthat the chances of any such claims materializing and having a material adverse financial effect onthe Holding Company are remote and, accordingly, no provision has been recorded.

Litigation

The Company is a party to certain legal proceedings arising in the normal course of business,including civil, administrative, tax, social security and labor proceedings. The Company hasprovided for or deposited in court amounts to cover its estimated losses due to adverse legaljudgments. In the opinion of management, such actions, if decided adversely to the Company, wouldnot have a material adverse effect on the Company's business and financial condition.




F - 37

Taxes - ICMS on activation fees and other services

On June 19, 1998 the Secretaries of the Treasury of the individual Brazilian states approved anagreement to interpret existing Brazilian tax law to broaden the application of the ICMS (Impostosobre Circulação de Mercadorias e Serviços), a state value-added tax, to cover not onlytelecommunication services but also other services, including cellular activation, which had not beenpreviously subject to such tax. Pursuant to this new interpretation of tax law, the ICMS tax may beapplied retroactively for such services rendered during the last five years.

The Company believes that the attempt by the State Treasury secretaries to extend the scope ofICMS tax to services which are supplementary to basic telecommunications services is unlawfulbecause: (i) the state secretaries acted beyond the scope of their authority; (ii) their interpretationwould subject certain services to taxation which are not considered telecommunications services; and(iii) new taxes may not be applied retroactively. No provision for such taxes has been made in theaccompanying consolidated financial statements as the Company does not believe it is probable thatsuch taxes will be payable for services rendered during the last five years.

There can be no assurance that the Company will prevail in its position that the newinterpretation by the state Treasury secretaries is unlawful. If the ICMS tax was applied retroactivelyfor five years to activation fees earned by the discontinued cellular operations, it would give rise to amaximum liability estimated at R$207,000.

22. Pension plans

Tele Centro Sul Participações S.A. and its subsidiaries participate in a multi-employer definedbenefit pension plan and other post-retirement benefit plans - PBS (Plano de Benefício da SISTEL),that are administered by the Fundação Telebrás de Seguridade Social (“Sistel”). The subsidiaryTelepar also sponsors another defined benefit pension plan, called PBT (Plano de Benefícios –TELEPAR), also managed by SISTEL.

The Companies contributed and charged to expense R$48,663, R$43,010 and R$36,844 in 1997,1998 and 1999, respectively, in respect of pension fund contributions. As a member of a multi-employer plan, the Companies’ contributions are not segregated in separate accounts or restricted toprovide benefits only to employees of the Companies. The Companies are also contingently liable forthe total obligations of the plans. The funded status of the SISTEL Plan is presented below.




F - 38

The pension benefit is generally defined as the difference between (i) 90% of the retiree’saverage salary during the last 36 months indexed to the date of retirement and (ii) the value of theretirement pension paid by the Brazilian social security system. For retired employees, the initialpension payment is subsequently adjusted upwards to recognize cost of living increases andproductivity awards granted to active employees. In addition to the pension supplements, post-retirement health care and life insurance benefits are provided to eligible pensioners and theirdependents.

Contributions to the plans are based on actuarial studies prepared by independent actuariesunder Brazilian regulations. The actuarial studies are revised periodically to identify whetheradjustments to the contributions are necessary. A summary relating to the overall SISTEL plan, incompliance with accounting principles generally accepted in Brazil, is as follows:

1998 1999Accumulated pension and other post-retirement benefit obligations 4,415,628 4,375,090Reserve for contingencies ………………………………………….. 117,888 1,090,001Reserve for the adjustment of pension plan ……………...……..….. - 627,306Other obligations ................................................................... … 262,617 348,136

Total obligations.............................................................. 4,796,133 6,440,533Combined plan assets: Interest bearing deposits ........................................................... 3,049,745 3,776,188 Stocks and shares..................................................................... 2,013,000 2,911,487 Investment properties ............................................................... 473,858 423,899 Loans to beneficiaries............................................................... 139,140 89,413 Other investments .................................................................... 57,199 44,180

Total plan assets.............................................................. 5,732,942 7,245,167Excess of total plan assets over total obligations........................... 936,809 804,634

In addition to the formal SISTEL plan, a subsidiary, Telepar, had entered into an agreement withits employees who joined the company before December 31, 1982 that grants them a supplementarypension, called PBT – Plano de Benefícios – Telepar.

In June 1998, in connection with the breakup of Telebrás, the Company determined that thesupplementary pension plan would be terminated. As a result of the termination of the supplementarypension plan, the Company allowed the members of the plan to elect to receive a cash pay out of theiraccumulated benefits or to transfer their accumulated benefit obligations to the SISTEL plan, whichresulted in payments in 1998 of R$65,844 in compensation to employees and R$82,959 to SISTEL.The remaining accrual is to be used to cover those employees for whom no election had yet beenmade.




F - 39

1998 1999Provision for pension................................................ 13,227 12,234

Tele Centro Sul, its subsidiaries and other of SISTEL´s administrative plan sponsors negotiatedan agreement to create separate plans, by sponsor group, for the active participants in the pensionplan. The inactive participants in the pension plan and post-retirement health care plan remain asmulti-employer plans, with the Company jointly and severally liable for those obligations. As aconsequence, a restructuring of SISTEL’s by-laws and regulation proposal were approved by theGovernment special agency. SISTEL’s new by-laws were approved on January 20, 2000. A summaryrelating to the Companies’ plan after the withdrawal, in compliance with accounting principlesgenerally accepted in the United States is presented in Note 32a.

On February 28, 2000, the Companies released a new Defined Contribution Pension Plan: theTCSPREV. In this case the employees and sponsors contribute the same monthly amount. Theemployees may elect to contribute from 3% to 8% of their salary. PBS participant employees weregiven the option to migrate to TCSPREV and transfer the cumulative participant rights (LiquidatedBenefit) for past services as of the date of migration.

23. Shareholders’ equity

a. Share capital

Authorized capital stock as of December 31, 1999 was 700 billion shares. The Company’sissued and paid up capital stock on the balance sheet date was R$1,936,659 and composed by thefollowing shares without par value:

1998 1999Common shares (in thousands)…………………………… 124,369,031 124,369,031Preferred shares (in thousands)…………………………… 210,029,997 210,029,997Total 334,399,028 334,399,028

Shareholders’ equity per thousand shares (Brazilian reais) 19.59 21.17

The capital may be increased only by a decision taken at the shareholders’ meeting inconnection with the capitalization of profits or reserves previously allocated to capital increases at theshareholders’ meeting.

The preferred shares are non-voting except under limited circumstances and are entitled to aminimum preferential, noncumulative dividend of 6% of the value of capital stock per share and topriority over the common shares in the case of liquidation of the company. Under Brazilian




F - 40

Corporate Law, the number of non-voting shares or shares with limited voting rights, such as thepreferred shares, may not exceed two-thirds of the total number of shares.

On June 7, 1990, the Board of Directors of Telebrás authorized an increase in Telebrás’ sharecapital by public offer. During the offer period, the Brazilian Securities Commission (CVM) initiatedan investigation as to whether Brazilian securities law and regulations regarding the correct pricing ofthe new shares issued had been violated, because the shares were issued at a discount to equity valueper share. After its investigation, the CVM notified the Federal Prosecutor’s Office that it believed noviolation occurred since the price was established in line with market prices for Telebrás’ sharestraded on the Brazilian stock exchanges. Nevertheless, the Federal Prosecutor decided to pursue theissue through judicial channels. In April 1998, resolution was reached on the disputed Telebráscapital increase of 1990. In connection with the resolution Telebrás issued 13,718,350 thousandshares of preferred stock. These preferred shares are included in the amount of 210,030 millionshares shown in the table above.

b. Capital Reserves

Special reserve of goodwill

This reserve represents the goodwill transferred in the merger with Bluetel Participações S.A., asdescribed in Note 29.

Other capital reserves

Represented by tax incentive investments.

c. Income Reserves

Legal reserve

A Brazilian company is required to appropriate 5% of annual net income to a legal reserve untilthat reserve equals 20% of paid-up share capital, or 30% of nominal paid-up share capital plus capitalreserves; thereafter, appropriations to this reserve are not compulsory. This reserve can only be usedto increase capital or offset accumulated losses.

Unrealized income reserve

This reserve represents income recognized but not yet received relating to net gains on indexationthrough December 31, 1995 and to adjustments to investments valued on the equity basis. Therealization of this reserve will occur when fixed assets are depreciated or disposed of and asdividends or other distributions are received from the subsidiary companies. Future realizations ofthis reserve will be transferred to retained earnings.




F - 41

In 1999 the Company reversed R$ 296,935, according to its current polices for common andpreferred shareholders remuneration. In 1998 there was a net appropriation of R$ 121,056.

d. DividendsPursuant to its By-laws and Brazilian Corporate Law, the Company is required to distribute as

dividends in respect of each fiscal year ending on December 31, to the extent amounts are availablefor distribution, an aggregate amount equal to at least 25% of Adjusted Net Income (as definedbelow) on such date. The annual dividend distributed to holders of preferred shares (the ‘‘PreferredDividend’’) has priority in the allocation of Adjusted Net Income taking in consideration theminimum of 6% of preferred capital as defined in the Company’s by-laws. Remaining amounts to bedistributed are allocated first to the payment of a dividend to holders of common shares in an amountequal to the Preferred Dividend and the remainder is distributed equally among holders of preferredshares and common shares.

The Brazilian legislation has allowed the deductibility for income tax purposes of interest oncapital paid to shareholders, provided such interest is computed based on the TJLP rate, effective inthe year the interest on capital is computed.

As of December 31, 1999 the Company elected to pay interest on shareholders’ equity in theamount of R$154,249 instead of dividends for the year.

For the purposes of Brazilian Corporate Law, and in accordance with the Company’s by-laws,the “Adjusted Net Income” is an amount equal to Tele Centro Sul Participações S.A.’s net profitsadjusted to reflect allocations to or from (i) the statutory reserve, (ii) a contingency reserve foranticipated losses, if any, and (iii) the unrealized revenue reserve.




F - 42

The calculation of Adjusted Net Income is shown in the table below:

1998 1999Net Income (loss) 329,338 (26,562)Reversal of the unrealized income reserves……………………… 248,380 296,935Consolidation adjustments: Directly to shareholders’ equity ………………………………... 81,696 7,958 To the income statement (capitalized interest)………………….. - 21,525Income of Telebrás in January and February, 1998 subsequently transferred to Tele Centro Sul Participações S.A………………. 18,062Adjustments required to arrive at distributable income on a:Corporate law basis………………………………………………. 67,391 244,584Transfer to legal reserve………………………………………….. (24,823) (12,502)Transfer to unrealized income reserve……………………………. (369,436) -Adjusted Net Income……………………………………….…….. 350,608 531,938Proposed remuneration to shareholders

Interest on shareholders’ equity – Grossvalue………………..

- 154,249

Common……………………………………………………..…. - 57,368 Preferred………………………………………………………… - 96,881

Withholding income tax on interest on shareholders’equity

- (23,137)

Common……………………………………………………….... - (8,605) Preferred………………………………………………………… - (14,532)

Dividends87,651 1,873

Common…………..…………….………………………………. - 696 Preferred………………………………………………………… 87,651 1,177Total remuneration 87,651 132,985 Common………………………………………………………… - 49,459 Preferred………………………………………………………… 87,651 83,526Remuneration per thousand shares ( in Brazilian Reais) Common………………………………………………………… - 0.40 Preferred………………………………………………………… 0.42 0.40




F - 43

24. Expansion plan contributions

Expansion plan contributions are the means by which the Companies financed the growth of theirtelecommunications network up to July 1997. The contributions were made by companies orindividuals to be connected to the national telephone network. Such contributions were paid directlyto the Companies and interest received, when payments were made in installments, was transferred toTelebrás. The capital value received from the prospective telephone subscribers was treated asfollows:

• 80% was capitalized by the Companies in the name of Telebrás, with the value per shareissued to Telebrás being equal to the equity value per share of each of the Companies at theend of the year preceding the capitalization.

• 20% was remitted by the Companies to Telebrás in the month following receipt.

• Until December 31, 1995, the total capital value received was indexed from the month ofreceipt to the date of the next audited balance sheet and then capitalized in the name of theprospective subscriber by Telebrás or by the Companies, at a value per share equal to theequity value per share shown in the audited balance sheet. From January 1, 1996, indexationwas no longer applied and, for contracts signed as from that date, Telebrás or the Companieswere allowed the option of using a market value per share, when that was higher than theequity value. Also, as from June 1995, the capitalization of expansion plan contributions waseffected by the Companies issuing their own shares to expansion plan subscribers.

In addition to the expansion plans that it promoted directly, the Companies also sponsoredagreements between companies or individuals in a particular community and independent contractorswho undertook to develop the telecommunications infrastructure required to connect them to thenational telephone network (Community Expansion Plan). The companies or individuals paid thecontractor. On completion of the project, the Companies incorporated the completed equipment intotheir fixed assets at the appraised value and credited expansion plan contributions which were thentreated in the same manner as the capital values received from prospective telephone subscribers, asdescribed above.

In 1997, 1998 and 1999 expansion plan contributions received were of R$218,892,R$158,245 and R$67,835, respectively. Expansion plan contributions approved by the generalmeeting of shareholders for capitalization and transfer to shareholders’ equity amounted toR$418,066, R$215,604 and R$197,070 in 1997, 1998 and 1999, respectively. The Companies’expansion plan contribution program has been terminated, with no new contracts being signed afterJune 30, 1997.




F - 44

25. Transactions with related parties

Until August 4, 1998, the Company was ultimately controlled by the Federal Government ofBrazil, through its shareholding in Telebrás. This gave rise to the related party transactions describedbelow and disclosed on the face of the profit and loss account.

The principal related party transactions took place with Embratel and with the cellular operatingcompanies. The transactions with Embratel are in respect of long-distance telecommunications. TheCompanies have operating agreements with Embratel, which define the charge per minute for inter orintrastate long-distance or international telephone calls with origin or destination in the area specifiedby the telecommunications concession granted to the Companies by the Federal Government. Allcharges to customers, including long-distance, are billed by the Companies who transfer the long-distance portion of the charges to Embratel. As a result, the Companies normally have a payable toEmbratel.

In addition, Embratel and the cellular companies of Telebrás must pay a network usage fee ifthey access end customers via the network of the Companies. In practical terms, even though thenetwork usage fee includes the costs of a variety of network elements and services, the networkusage fee primarily reflects the use of certain facilities of the Companies for which Embratel and thecellular companies do not have adequate substitutes, particularly the local loop between localexchanges and customers.

In the past, the Companies shared revenues for interregional and international long-distance callswith Embratel rather than charging Embratel a network usage fee for the use of the Companies’network. Under this system, the Companies retained a fixed percentage of the revenues associatedwith such calls and paid the balance of the revenues associated with such calls to Embratel. Thissystem was replaced on April 28, 1998 with the interconnection charge that had already been in placefor interconnection of the Companies’ network with cellular networks, under which the Companiescharge for connection to their network and usage of their network.

Until the breakup of Telebrás, the Companies contributed to the research and development centeroperated by Telebrás (Centro de Pesquisa e Desenvolvimento da Telebrás). Following the breakup ofTelebrás, the research and development center became a private, independently administeredfoundation financed by contributions from the New Holding Companies resulting from the breakup.




F - 45

Additionally, Telebrás charged a 1% per annum administration fee on the allocation to theCompanies of debt originally contracted by Telebrás. On the split-up of Telebrás as of March 1,1998, a part of these loans originally made by Telebrás to certain Cellular Companies previouslywithin the Telebrás group of companies were allocated to Tele Centro Sul Participações S.A.. Theinterest received and the administration charge on these loans have been defined as related partytransactions until the change of control on August 4, 1998.

Telebrás also charged interest on intercompany loans at a rate that was at the moment the interestrate on federal treasure bills plus 0.25%. These interest charges are included in the table below withininterest expense.

A summary of the transactions with these related parties until July 1998 was as follows:

19977 months toJuly 1998

Net operating revenues....................................... 282,350 123,851Cost of services ................................................. (227,664) (77,783)Operating expenses............................................ (116,074) (11,909)Interest expense................................................. (27,302) (15,298)Interest income .................................................. 4,265 38,695

Other related parties until August 4, 1998 were Federal, State and Municipal Governments.Revenues from telephone calls made by government bodies and related organizations have not beenincluded above because details of that type of telephone users were not maintained by theCompanies.

On August 4, 1998, the control of the Companies passed from the Federal Government to theNew Controlling Shareholders. From that date, Embratel, the other subsidiaries of Telebrás, and theother New Holding Companies were no longer related parties of the Companies. Transactions withthese companies have, from August 4, 1998, been included within the appropriate lines in the incomestatement relating to transactions with third parties.

The Companies believe that all the costs of doing business are reflected in the consolidatedfinancial statements and that no additional expenditures have been incurred during 1998 and 1999 orwill be incurred in the future as a result of the cessation of the activities previously performed byTelebrás.




F - 46

Control of Tele Centro Sul Participações S.A. was acquired by Solpart Participações S.A.,through the purchase of 64,405,151,125 common shares corresponding to 51.79% of the votingCapital and to 19.26% of the total Capital stock.

In 1999 the Companies recorded a provision for management fees in the amount of R$ 42,481payable to Solpart. As of December 31, 1999, the amount of R$ 33,724 has not been paid. Themanagement fee was fixed in 1% of the Companies net operating revenue.

The SISTEL – Fundação Sistel de Seguridade Social is one of the shareholders of the SolpartParticipações S.A. The operations between the Companies and SISTEL are the contributions for thepension plan managed by the SISTEL, as mentioned in Note 22.

26. Commitments and planned capital expenditures

At December 31, 1999 the Companies had approximately the following capital expenditurecommitments:

Expected year of expenditure

2000 ................................................................................................................................................................ 413,7502001 ................................................................................................................................................................ 35,666

These commitments are to be spent on continuing expansion and modernization of the system,transmission equipment and data transmission equipment.

27. Insurance

At December 31, 1999, in the opinion of management, all significant and high risk assets wereinsured.

28. Fair values of financial assets and liabilities

Tele Centro Sul holds no derivative instruments. At the end of the year, the recorded amounts offinancial assets and liabilities classified as Financial Instruments were close to market values (or fairvalues), and therefore they have not been disclosed in detail.




F - 47

29. Bluetel Participações S.A. merger

Tele Centro Sul Participações S.A. (TCS) was acquired by Solpart Participações S.A. (Solpart) inthe Telebrás privatization process. The amount paid by Solpart, approximately R$ 2.1 billion,included goodwill over the TCS book value.

With the objective of providing an operational structure that would permit amortization of thegoodwill paid by Solpart, with a reduction of taxes on TCS income, the Companies restructured asdescribed below.

Solpart formed a new holding company named Bluetel Participações S.A. (Bluetel), with paid incapital with TCS shares. This subscription was made at book value, which included the goodwill paidon acquisition. Bluetel became TCS's stockholder with the same equity Solpart had prior to thetransfer to Bluetel.

On recognizing its investment in TCS, Bluetel recorded goodwill of R$ 1,055,260.

The final stage was the incorporation of Bluetel by TCS. As a result, TCS recognized as adeferred asset the goodwill previously recorded by Bluetel. The corresponding credit was made to aspecial reserve in the TCS shareholder’s equity.

On December 31, 1999, the Shareholder’s General Meeting that approved the merger withBluetel, covered the following issues: i) the tax benefit to be realized, due to the goodwill recorded asa deferred asset, should be capitalized in favor of the controlling stockholder (the shares of suchcapital increase issued in the same proportion of tax benefit realization), the minority shareholdersretaining their right to subscribe such capital increase based on their holdings; ii) the expense due tothe goodwill amortization recorded in deferred assets will not influence the future dividend paymentsand, iii) the Bluetel merger by the Company occurred without a capital increase, as per BrazilianExchange Commission regulations, but with the issuance of common shares to be attributed toSolpart, Bluetel´s stockholder.




F - 48

30. Subsequent Events

A corporate reorganization of Telecomunicações do Paraná S.A. – Telepar, one of theSubsidiaries, was implemented on February 28, 2000. Through such reorganizationTelecomunicações de Santa Catarina S.A. – Telesc, Telecomunicações de Goiás S.A. – Telegoiás,Telecomunicações de Brasília S.A. – Telebrasília, Telecomunicações do Mato Grosso S.A. –Telemat, Telecomunicações do Mato Grosso do Sul S.A. – Telems, Telecomunicações de RondôniaS.A. – Teleron, Telecomunicações do Acre S.A. – Teleacre and Companhia TelefônicaMelhoramento e Resistência – CTMR were merged into Telepar. The objective of the corporatereorganization was to simplify the corporate and administrative structure of all the Subsidiaries into asingle company. After the reorganization of the Subsidiaries, substantially all of the assets of theHolding Company consist of shares in Telepar (the Merged Subsidiary).

31. Summary of the differences between Brazilian and US GAAP

The Companies’ accounting policies comply with generally accepted accounting principles inBrazil (“Brazilian GAAP”). Accounting policies that differ significantly from generally acceptedaccounting principles in the United States (“US GAAP”) are described below:

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 differentfrom the estimated useful lives of the related assets. Under US GAAP, capitalized interest is added tothe 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 ofconstruction-in-progress and that part which relates to interest on third party loans is credited tointerest expense based on actual interest costs with the balance relating to self-funding being creditedto capital reserves. Starting 1999, Brazilian GAAP requires capitalization of interest on loansspecifically related to financing of construction in progress.

Under US GAAP, in accordance with the provisions of SFAS 34, interest incurred on borrowingsis capitalized to the extent that borrowings do not exceed construction-in-progress. The credit is areduction of interest expense. Under US GAAP, the amount of interest capitalized excludes themonetary gain associated with the borrowings and the foreign exchange gains and losses on foreigncurrency borrowings. The US GAAP differences between the accumulated capitalized interest ondisposals and in accumulated amortization on disposals relate to the differences between capitalizedinterest and related accumulated amortization under Brazilian and US GAAP, which is included inthe net book value of property, plant and equipment disposed of. Although these amounts have beendetermined to be the same, they are presented individually in both the determination of thecapitalized interest difference and in the determination of the amortization of the capitalized interest




F - 49

difference, in order to demonstrate the origin of the reconciling items for capitalized interest andamortization of capitalized interest which are disclosed in the net income reconciliation of thedifferences between US and Brazilian GAAP.

The effects of these different criteria for capitalizing and depreciating capitalized interest arepresented below:

1997 1998 1999Capitalized interest differenceUS GAAP Capitalized Interest:

Interest which would have been capitalized andcredited to income under US GAAP (Interestaccrued on loans from Telebrás in 1997 and fromthird parties for 1997, 1998 and 1999, except inyears when total loans exceeded total construction-in-progress, when capitalized interest was reducedproportionately) ................................................... 27,765 6,096 23,668

Difference in accumulated capitalized interest on Disposals ............................................................ 20,558 35,968 24,811

48,323 42,064 48,479

Less Brazilian GAAP capitalized interest:Interest capitalized and credited to income underBrazilian GAAP (Up to the limit of interest incurredon loans obtained for financing capital investments)..........................................................................

(29,507) (60,249) (4,664)

Interest capitalized and credited to reserves andminority interest.................................................. (129,208) (75,658) -Total capitalized interest under Brazilian GAAP (158,715) (135,907) (4,664)

US GAAP difference ............................................ (110,392) (93,843) 43,815

Amortization of Capitalized Interest differenceAmortization under Brazilian GAAP...................... 101,957 79,760 135,406Less: Amortization under US GAAP...................... (31,792) (26,229) (43,682)

Difference in accumulated amortization ondisposals ....................................................... (20,559) (24,510) (19,040)

US GAAP difference ............................................ 49,606 29,021 72,684b. Dividends and interest on shareholders’ equity

Under Brazilian GAAP, proposed dividends are accrued for in the consolidated financialstatements in anticipation of their approval at the shareholders’ meeting. Under US GAAP, dividends




F - 50

are not accrued until they are formally declared. Interest on shareholders’ equity is a legal liabilityfrom the time it is announced and is accrued under both US and Brazilian GAAP at that time.

c. Pension and other post-retirement benefits

The Companies participate in a multi-employer plan that is operated and administered by Sisteland provide for the costs of pension and other post-retirement benefits based on a fixed percentage ofsalaries, as recommended annually by independent actuaries. For the purposes of US GAAP, theCompanies are considered to contribute to a multi-employer plan and consequently are required todisclose their annual expense and the funded status of the plan in accordance with US GAAP. InDecember 1999 the Companies announced their intention to withdraw from the portion of the planwhich covered its active employees. See note 32a, which shows the funded status of the plan after thewithdraw. The provisions of SFAS 87 for the purposes of calculating the funded status were appliedwith effect from January 1, 1992, because it was not feasible to apply them from the effective datespecified in the standard.

d. Items posted directly to shareholders’ equity accounts

Under Brazilian GAAP, various items are posted directly to shareholders’ equity, which underUS GAAP would be posted to the consolidated statement of income.

e. Earnings per share

Under Brazilian GAAP, net income per share is calculated on the number of shares outstandingat the balance sheet date. In these consolidated financial statements, information is disclosed per lotof one thousand shares, because this is the minimum number of shares that can be traded on theBrazilian stock exchanges. Each American Depositary Share (“ADS”) is equivalent to five thousandshares.

As discussed in Note 1, the Holding Company was not formed until subsequent to December 31,1997. For US GAAP purposes, the equity structure utilized for the earnings per share computations isthat of the new entity formed in May 1998. The Holding Company’s equity structure has been usedfor all years presented. At the date of formation, the Holding Company had 124,369,031 thousandcommon shares and 196,311,647 thousand preferred shares outstanding (exclusive of the 13,718,350thousand preferred shares resulting from the settlement in April 1998 with Telebrás).

In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 “EarningsPer Share”. This statement became effective for financial statements for periods ending afterDecember 15, 1997, and provides computation, presentation and disclosure requirements for earningsper share.

Since the preferred and common stockholders have different dividend, voting and liquidationrights, 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




F - 51

and common stock according to the dividends to be paid as required by the Company’s by-laws andparticipation rights in undistributed earnings.

Basic earnings per common share is computed by dividing net income available to commonshareholders by the weighted average number of common shares outstanding during the period. Netincome available to preferred shareholders is the sum of the preferred stock dividends (a minimum of6% of preferred capital, as defined in the Company’s by-laws) and the preferred shareholders’portion of undistributed net income. Undistributed net income is computed by deducting totaldividends (the sum of preferred and common stock dividends) from net income. Undistributed netincome is shared equally by the preferred and common shareholders on a pro rata basis. Totaldividends are calculated as described in note 23. Diluted earnings per share is computed by reducingnet income for an increase to net earnings allocated to minority shareholders and dividing such netincome available to common and preferred shareholders by the monthly weighted-average number ofcommon and preferred shares outstanding during the period. The weighted-average (thousand) sharesoutstanding for diluted earnings per share is not greater than such shares used in the basic earningsper share calculation since the dilutive share issue is that of the Holding Company’s subsidiaries, asindicated below.

The weighted-average number of common and preferred shares used in computing basic earningsper share for 1999 was 124,369,031 thousand (the same amount in 1998) and 210,029,997 thousand(206,028,812 thousand in 1998) respectively. The weighted average number of preference shares in1998 reflects the increase due to the issue of 13,718,350 thousand preferred shares as a consequenceof the settlement in April 1998 with Telebrás. The Companies have received certain contributionsfrom customers or customers have independently paid suppliers of telecommunication equipment andservices for the installation of fixed line services. These amounts are reflected as “funds forcapitalization” in the accompanying consolidated balance sheets. Once the installation is essentiallycomplete and the contributions have been received, the funds will be converted into equity (see Note24 to the consolidated financial statements). These activities are dilutive in nature to the shareholdersof the Holding Company or the Companies, whether the shares to be issued are those of the HoldingCompany’s subsidiaries (which will impact the minority interest recognized) or of the companyitself. The expectation is that the shares would be issued in the subsidiary companies rather than inthe Holding Company based on the manner in which such shares were issued in 1998 and 1999.Management of the Holding Company determined this manner of issuing the shares in these twoyears was appropriate as a result of the dilution of the Tele Centro Sul share of the ordinary votingshares of the Holding Company below the 50% level which would have occurred if the shares hadbeen issued by the Holding Company. The shares are treated as outstanding and included in the basicEPS calculation only when such funds are converted to equity and the shares issued. The shares aretreated as outstanding for diluted EPS purposes when expansion plan contributions are received orwhen Community Expansion Plan agreements have been approved (see note 24). If subsidiary shareshad been issued historically, the reduction to net income to increase net earnings attributable tominority shareholders for 1997, 1998 and 1999 would have been R$47,182, R$8,736 and R$150,respectively.




F - 52

The Company’s preferred shares are non-voting except under certain limited circumstances andare entitled to a preferential, noncumulative dividend and to priority over the common shares in theevent of liquidation of the Company. The preferred shareholders were entitled to a non-cumulativedividend of R$0.72, R$0.42 and R$0.40 per thousand of preferred shares in 1997, 1998 and 1999respectively. The preferred shareholders would share equally in the undistributed earnings / (losses)of the Company in the amount of R$1.80, R$1.20 and R$1.12 per thousand of preferred shares in1997, 1998 and 1999 respectively.

For 1997, earnings per share has been presented for net income only since interest income,certain interest expense and social contribution taxes have not been allocated between income fromcontinuing operations and income from discontinued operations.

f. Disclosure requirements

US GAAP disclosure requirements differ from those required by Brazilian GAAP. However, inthese consolidated financial statements, the level of disclosure has been expanded to comply with USGAAP.

g. Income taxes

The Company fully accrues for deferred income taxes on temporary differences between tax andreporting records. The existing policies for providing for deferred taxes are substantially inaccordance with SFAS 109. “Accounting for Income Taxes”, except in connection with the deferredincome tax effects of indexation adjustments in 1997 and 1999 (see Note 2c).

Under US GAAP the deferred tax effects of the 1997 and 1999 indexation for financial reportingpurposes would be charged to income and social contribution taxes in the consolidated statement ofincome. In addition under SFAS 109, the provisional measures, which are used by the Government todetermine changes in tax rates, are not considered to be enacted law. Therefore, the deferred taxeffect calculated using the new social contribution rate of 9% as described in Note 9, would bechanged to 8% for US GAAP purposes.




F - 53

h. Interest expense

Brazilian GAAP requires interest to be shown as part of operating income. Under US GAAPinterest expense would be shown after operating income and accrued interest would be included inaccounts payable and accrued expenses.

i. Employees’ profit share

Brazilian GAAP requires employees’ profit share to be shown as an appropriation of net incomefor the year. Under US GAAP, employee profit sharing is included as an expense in arriving atoperating income.

j. Permanent assets

Brazilian GAAP has a class of assets called permanent assets. This is the collective name for allassets on which indexation adjustments were calculated in the corporate and fiscal law accounts ofBrazilian companies. Under US GAAP, the assets in this classification would be non-current assetsand property, plant and equipment. Losses on the disposal of permanent assets were R$24,922,R$104,413 and R$47,805 in 1997, 1998 and 1999, respectively. Such losses are classified as non-operating expense for Brazilian GAAP. Under US GAAP, such losses would reduce operatingincome.

k. Price-level adjustments and US GAAP presentation

The effects of price-level adjustments have not been eliminated in the reconciliation to USGAAP nor are the monetary gains or losses associated with the various US GAAP adjustmentsseparately identified, because the application of inflation restatement as measured by the IGP-Mrepresents a comprehensive measure of the effects of price level changes in the Brazilian economyand, as such, is considered a more meaningful presentation than historical cost-based financialreporting for both Brazilian and US accounting purposes.




F - 54

l. Funds for capitalization

i. Expansion plan contributions and resources for capital increaseUnder Brazilian GAAP, resources for capital increase and expansion plan contributions received

are included in the consolidated balance sheet below equity until proposed subscribers have paid fortheir telephone connection in full and a general meeting of shareholders approves the capitalincreases.

From January 1, 1996 indexation of the expansion plan contributions was no longer applied and,for contracts signed as from that date, Telebrás was allowed the option of using a value per shareequal to the market value, when this is higher than the equity value. For US GAAP purposes, aportion of the resources for capital increase and expansion plan contributions would be allocated toshareholders’ equity (whether the Holding Company issues the shares) or minority interests (whetherthe subsidiaries issue the shares) 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 beclassified as a deferred credit and amortized to reduce depreciation expense from the time the relatedconstruction-in-progress is completed.

ii. Donations and subsidies for investments

Under Brazilian GAAP those amounts, which comprise principally the excess of the value ofproperty, plant and equipment incorporated into the Company’s assets over the corresponding creditsto expansion plan contributions received, are recorded as a credit to other capital reserves. For USGAAP purposes, the credit to capital reserves would be classified as a deferred credit and amortizedto reduce depreciation expense.

m. Valuation of long-lived Assets

For US GAAP, effective January 1, 1996 the Company adopted SFAS 121 “Accounting for theImpairment of long-lived assets and for long-lived assets to be disposed of.” In accordance with thisstandard, the Company periodically evaluates the carrying value of long-lived assets to be held andused, when events and circumstances warrant such a review. The carrying value of long-lived assetsare considered impaired when the anticipated undiscounted cash flow from such assets is separatelyidentifiable and is less than their carrying value. In that event, a loss is recognized based on theamount by which the carrying value exceeds the fair market value of the assets. The adoption of thisstandard did not have a material effect on the Company’s results or financial condition.




F - 55

n. Retained earnings

For Brazilian GAAP, a company formed as a result of a cisão may have retained earnings in itsbalance sheet if the parent company shareholders’ resolution adopting the spin-off allocates retainedearnings from the parent company to the new company. Under US GAAP, “retained earnings”allocated in the spin-off would not be considered historical retained earnings as such amount wouldrepresent capital allocated from the parent company and would be described as “distributablecapital.” As a result of the May 22, 1998 spin-off, the Company had US GAAP distributable capitalof R$1,474,063.

o. Recognition of gains from disputed taxes

Brazilian GAAP is less rigorous than US GAAP in establishing the criteria which must be metfor the recognition of a gain such as the R$10,670 and R$7,439, recognized by the Company in 1995and 1996, respectively in relation to overpaid FINSOCIAL taxes. Under US GAAP these amountswhich total R$18,109 was considered as a potential contingency which credit would be recognizedonly by receipt of the benefits considered as full and final. In 1999, the Company recognized such taxliability in the official books, due to recent against decisions by the judicial court on similar matters,requiring, therefore, a reversal on the US GAAP reconciliation.

p. Stock Compensation

As part of the privatization of the Telebrás System, the Federal Government offered TelebrásSystem employees the right to purchase the Federal Government’s entire holding of Telebráspreferred shares and preferred shares of each of the twelve new holding companies formed as a resultof the breakup of Telebrás (“New Holding Companies”) (representing 2.18% of the outstandingcapital stock of Telebrás and of each New Holding Company) at a price of R$83.16 per “lot” of13,000 shares (each “lot” is comprised of 1,000 preferred shares of each of Telebrás and the twelveNew Holding Companies). This price represents a 50% discount from the market price of 1,000Telebrás preferred shares at the time the Federal Government authorized the plan. Each employeehad the right to purchase up to 144 lots of 13,000 preferred shares, subject to proration if the shareswere oversubscribed.




F - 56

The Federal Government made 7.2 million lots available for sale, or 60% of the 12.1 million lotsthat would be taken up if each employee purchased the maximum 144 lots allowed. The period tosign up to purchase the shares ended on October 30, 1998. This date was subsequently extended bythe Brazilian government to April 9, 1999. On August 4, 1998, the date on which the offer toemployees commenced and the measurement date for 60% of the shares, the market price per 1,000Telebrás shares was R$152.77. Under U.S. GAAP, the charge for 1998 was R$72,454, whichrepresents Tele Centro Sul’s share of the offer price/market price differential on 60% of the sharesoffered for which the measurement date was August 4, 1998. As of April 9, 1999, the expiration dateof the program, Tele Centro Sul employees had subscribed to 1,041,550 lots.

Although the Federal Government, rather than the Company or Telebrás, offered the shares toemployees, under U.S. GAAP the deemed compensation amount is “pushed down” to each of theNew Holding Companies in accordance with the number of shares purchased by each New HoldingCompany and its subsidiaries’ employees.


(See notes 1 and 2)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Amounts expressed in thousands of constant Brazilian Reais as of December 31,1999, except per share amounts (see note 2c))

F - 57

Net income reconciliation of the differences 1997 1998 1999 between US and Brazilian GAAP R$ R$ R$

Net income from continuing operations before unallocated interestincome/expense, taxes and minority interest as reported 682,329 - -

Net income (loss) as reported - 329,338 (26,562)Add (deduct):

Different criteria for:Capitalized interest (110,392) (93,843) 43,815Amortization of capitalized interest 49,606 29,021 72,684

Pension and other post retirement benefits:SFAS 87 adjustment - - (253,802)

Contributions to plant expansion:Amortization of deferred credit 38,844 42,611 88,889

Reversal of FINSOCIAL tax credit - - 18,109Reversal of deferred tax rate of Social Contribution - - 13,353Costs related to the stock compensation plan - (72,454) -Items posted directly to shareholder's equity:

Interest on construction in progress 129,208 61,380 -Other consolidation adjustments - 20,316 7,958Less: donations received - (4,298) -Fiscal incentive received - 561 1,815

Deferred tax on above adjustments - 70,777 47,176Minority interest in above adjustments - 72,546 (5,939)Deferred tax on full indexation - charged to equity - - (353,740)

US-GAAP income of continuing operations before unallocated interestincome/expense, income taxes and minority interests 789,595 455,955 (346,244)

Income as reported from discontinued cellular operations before unallocatedincome/expense, income taxes and minority interests 410,305 - -

Effect of US-GAAP differences on income from discontinued activities 25,160 - -US-GAAP income from discontinuing operations before unallocated

interest income/expense, income taxes and minority interests 435,465 - -Items relating to continued and discontinued operations:

Unallocated interest income 74,358 - -Unallocated interest expense (3,447) - -Income and social contribution taxes (320,606) - -Minority interests, Brazilian GAAP basis (166,457) - -Add/(deduct):Items posted directly to shareholder's equity:

Effects of changes in income tax rates 15,902 - -Tax incentive investment credits 53,798 - -Deferred tax on full indexation (180,327) - -

Deferred tax effects of the above adjustments:In respect of continuing operations 24,837 - -In respect of discontinuing operations (576) - -

Minority interest in above adjustments 86,622 - -US-GAAP net income (loss) 809,164 455,955 (346,244)

Net income per thousand shares in accordance with US GAAPCommon shares – Basic 2.52 1.12 (1.04)

Weighted average (thousand) common shares outstanding 124,369,031 124,369,031 124,369,031Common shares – Diluted 2.38 1.09 (1.04)

Weighted average (thousand) common shares outstanding 124,369,031 124,369,031 124,369,031Preferred shares – Basic 2.52 1.54 (1.04)

Weighted average (thousand) preferred shares outstanding 196,311,647 206,028,812 210,029,997Preferred shares – Diluted 2.38 1.51 (1.04)

Weighted average (thousand) preferred shares outstanding 196,311,647 206,028,812 210,029,997




F - 58

Net equity reconciliation of the differences 1998 1999 between US and Brazilian GAAP R$ R$

Total shareholders' equity as reported 6,552,197 7,080,806

Add/(deduct):Different criteria for:

Capitalized interest (935,921) (892,106)Amortization of capitalized interest 398,402 471,086

Reversal of accrued dividends 87,651 1,873Pension and other post retirement benefits:

SFAS 87 adjustment - (253,802)Reversal of FINSOCIAL tax credit (18,109) -Reversal of deferred tax rate - 13,353Reversal of special reserve for goodwill on merger - (696,472)Contributions to plant expansion:

Amortization of deferred credit 144,587 233,476Subscribed capital stock (469,063) (582,687)Donations and subscriptions for investment (167,276) (166,307)

Deferred tax effects of above adjustments 345,636 392,812Minority interest in above adjustments 144,316 138,378

US-GAAP shareholders' equity 6,082,420 5,740,410

Supplementary information:Total assets under US-GAAP 9,901,719 10,503,768

Property, plant and equipment 15,508,079 16,149,583Accumulated depreciation (7,634,595) (8,826,359)

Net property, plant and equipment 7,873,484 7,323,224




F - 59

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY INACCORDANCE WITH US GAAP

1997 1998 1999

Shareholders’ equity under US GAAP as ofbeginning of the year ………………………… 6,037,497 6,390,101 6,082,420Capital increase ………………………………... 48,432 - -Expansion plan contributions: Received ……………………………………... 218,892 - - Deferred credits ……………………………… (28,939) (382,580) (112,655)Forfeited dividends ……………………………. 1,426 - -Net income (loss) for the year …………………. 809,165 455,955 (346,244)Dividends paid ………………………………… (188,828) - (241,900)Dividends declared but unclaimed …………….. (5,457) - -Minority interest on all movements inshareholders’ equity except for net income …… (502,087) - -Overreversal of dividend liability in 1997 USGAAP Reconciliation …………………………. - (19,510) -Spin-off of the net assets of discontinuedoperations ……………………………………… - (1,075,620) -Net assets of continuing operations transferredon the breakup of Telebrás …………………….. - 656,520 -Contribution by the Federal government relatedto the costs of the stock compensation plan …… - 57,554 -Special reserve for goodwill merger …………... - - 358,789

Shareholders’ equity under US GAAP as ofending of the year 6,390,101 6,082,420 5,740,410




F - 60

32. Additional disclosures required by US GAAP

a. Pension and other post-retirement benefits

The Company, together with other former companies in the Telebrás group, sponsor multi-employerdefined benefit pension and other post-retirement benefit plans, through the end of 1999, which areoperated and administered by Sistel. In December of 1999, the Company and the other companies whichparticipate in the Sistel plan reached an agreement to withdraw the active participants to the pension planand establish a new plan for each of the New Holding Companies. The parties have agreed to allocate theplan assets based on the liabilities in accordance with the Brazilian GAAP. The allocation of the initialtransition 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 inactiveemployees of all of the New Holding Companies which participated in the Sistel defined benefit pensionplan will remain as part of the multiemployer plan in Sistel. The post-retirement benefit plans will alsoremain as a multiemployer plan; however, Sistel will no longer subsidize life insurance premiums forinactive (retired) employees.

Since withdrawal of the active participants from the plan was probable as of December 31, 1999, andthe liability could be estimated, under US GAAP the Company has recorded a charge to net income in1999 for the estimated liability for the active employees, which totaled R$ 253,802. The Companyremains jointly and severally liable for the multiemployer portion of the plan, therefore, no amounts wererecorded under those plans.

A summary of the liability as of December 31, 1999 for the Company’s active employees’ definedbenefit pension plan is as follows:

1999Funded statusAccumulated benefit obligation: Vested 19,765 Non-vested 309,463 Total 329,228Projected benefit obligation 514,315

397,302Projected obligation in excess of assets 117,013Unrecognized gains 255,256Unrecognized net transition obligation (118,467)Accrued pension cost 253,802

A summary of the Sistel pension plan as of December 31, 1999 for the multiemployer portion(inactive employees pension plan) is as follows:

Projected benefit obligation (100% vested) 2,649,103Fair value of plan assets (2,479,020)Excess of assets over projected obligation 170,083




F - 61

The funded status of the Sistel pension and other post-retirement benefit plans as of December 31,1998 were as follows:

Pension benefit plan

1998Funded status:Accumulated benefit obligation:Vested 2,908,421Non vested 4,826,042Total 7,734,463Projected benefit obligation 9,946,515Fair value of plan assets (4,577,912)Projected obligation in excess of assets 5,368,603

The actuarial assumptions used in 1998 and 1999 were as follows:1998 1999

Discount rate for determining projected benefit obligations 6.00% 6.00%Rate of increase in compensation levels 3.25% 3.00%Expected long-term rate of return on plan assets 6.00% 9.00%

The above are real rates and exclude inflation.

A summary of the post-retirement benefits plan (which remains a multiemployer plan) is as follows:

1998 1999Funded status:Accumulated post-retirement benefit obligations:Retirees and dependents 531,770 584,080Active plan participants 1,220,145 598,376

1,751,915 1,182,456Fair value of plan assets (119,186) (156,074)Obligations in excess of plan assets 1,632,729 1,026,382

During December 1999, Sistel agreed with the New Holding Companies that it would no longersubsidize life insurance premiums for retirees. Therefore, there was a curtailment of the plan whichresulted in a reduction in the accumulated benefit obligation.

Health care cost trend rates of increase were projected at annual rates excluding inflation rangingfrom 6.48% in 1998 decreasing to 2.00% in 2047. Measurement of the accumulated post-retirementbenefit obligation was based on the same assumptions as were used in the pension fund liabilitycalculations.




F - 62

The funded status of the pension and post retirement plans under Brazilian and US GAAP differ.Benefit obligations differ because they have been prepared using different actuarial assumptionspermitted under Brazilian and US GAAP.

The net assets of the plans differ under Brazilian and US GAAP principally due to the accrual ofincome tax contingencies of the pension fund for US GAAP purposes in the amount of R$764,619 andR$650,446 in 1998 and 1999, respectively. The contingency arises out of uncertainty as to the income taxstatus of Brazilian pension funds in general because the tax law is unclear as to whether these funds areexempt from tax on their investment gains. Under Brazilian GAAP two methods of accounting for theincome tax contingency are currently permitted. The tax is either deducted from plan assets for thepurposes of determining the funded status of the plan or it is not deducted, but is disclosed in a note asbeing a contingency. Management of the pension fund have determined that the Brazilian GAAP financialstatements of the fund be prepared on the basis that the legal arguments against assessment of the tax onthe investment gains are sufficiently strong as to avoid the need for the potential liability to be recognized.However, for US GAAP purposes, management of the Company believes that the assessment of thispotential income tax liability is probable. Accordingly, in determining the funded status for US GAAPpurposes, the potential income tax liability (calculated in accordance with SFAS 109) has been deductedfrom the fair value of the plan assets.

b. Changes in accounting estimate

Starting on January 1, 1999, the Company made a change in accounting estimate totalingapproximately R$313,000 to recognize the effect of the change on the annual depreciation rates onautomatic switching and transmission equipment, net of income taxes and minority interest. The earningsper share (basic and diluted) computed on the change in accounting estimate are as follows:

Basic earnings per common share ……………… (0.94)Basic earnings per preferred share ……………... (0.94)Diluted earnings per common share ……………. (0.94)Diluted earnings per preferred share …………… (0.94)

c. Concentration of risk

The Companies were prohibited until the date of privatization from investing any surplus cashbalances in financial instruments other than government securities controlled by the Central Bank ofBrazil or the Federal Government owned bank, Banco do Brasil S.A. There have been no losses in cashequivalents. Credit risk with respect to trade accounts receivable is diversified. The Companiescontinually monitor the level of trade accounts receivable and limit the exposure to bad debts by cuttingaccess to the telephone network if any invoice is one month past-due. Exceptions comprise telephoneservices that must be maintained for reasons of safety or national security.

For conducting their business, the Companies are fully dependent upon the fixed-linetelecommunications concession as granted by the Federal Government. Approximately 80.32% of allemployees are members of state labor unions associated either with the Federação Nacional dosTrabalhadores em Telecomunicações (“Fenattel”), or with the Federação Interestadual dos Trabalhadores




F - 63

em Telecomunicações (“Fittel”). Management negotiates new collective labor agreements every year withthe local unions. The collective agreements currently in force expire in November 2000. There is noconcentration of available sources of labor, services, concessions or rights, other than those mentionedabove, that could, if suddenly eliminated, severely impact the Companies’ operations.

d. Comprehensive Income

The Company does not have any other comprehensive income items during 1999. As discussed inNote 31d, certain adjustments were posted directly to shareholder’s equity for 1997 as Telebrás wasunable to allocate certain items such as taxes and interest to the Company. Therefore presentation of suchstatement is not included herein.

e. Subsequent events for US GAAP purposes

In the corporate restructuring, mentioned in note 30, the subsidiary Telecomunicações do Paraná S.A.- TELEPAR merged the other Tele Centro Sul subsidiaries through the exchange of shares, using thebook value as the basis for the exchange. For US GAAP purposes, the capital increase would be allocatedto shareholders’ equity or minority interests based on the market value of the shares to be issued tosubscribers. This transaction generated negative goodwill of approximately R$35 million, under USGAAP.




F - 64

f. New accounting pronouncements

In June 1998, the FASB issued Statement of Financial Accounting Standards No 133, “Accountingfor Derivative Instruments and Hedging Activities, which establishes accounting and reporting standardsfor derivative instruments and for hedging activities by requiring that all derivatives be recognized in thebalance sheet and measured at fair value. SFAS 133 will be effective for the fiscal years beginning afterJune 15, 2000. The companies do not believe this SFAS will have a significant effect on them.

In December 1999, the staff of the Securities and Exchange Commission issued Staff AccountingBulletin No. 101, “Views on Selected Revenue Recognition Issues” (“SAB 101”), which sets forth thestaff's views in applying generally accepted accounting principles to selected revenue recognition issues.SAB 101 is effective for the second quarter of 2000. The Companies do not believe this SAB will have asignificant effect on them.

In March 2000, the FASB issued Statement of Financial Accounting Standards Interpretation No 44(“FIN 44”). FIN 44 is effective July 1, 2000 and should also be applied prospectively to certain eventsafter December 15, 1998, but prior to July 1, 2000. FIN 44 clarifies the application of APB opinion 25“Accounting for Stock Issued to Employees” for certain issues. The Company understands that this newpronouncement has no impact on its Financial Statements.

* * * * * * *

brasil telecom participaÇÕes s.a. · de telecomunicações (the “general telecommunications...

Documents