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Global Emerging Markets Investor Forum June 16-18, 2004

Global Emerging Markets Investor Forum June 16-18, 2004. Contents. Company Highlights 2 . Industry Overview 3 . Growth Strategy & Revenue Drivers 11 . Regulatory Framework 20 . Financial Performance 23. Nationwide

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Global Emerging Markets Investor Forum June 16-18, 2004

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  1. Global Emerging Markets Investor Forum June 16-18, 2004

  2. Contents Company Highlights 2 Industry Overview 3 Growth Strategy & Revenue Drivers 11 Regulatory Framework 20 Financial Performance 23

  3. Nationwide Long Distance, Data Transmission and Contact Center Services Company Highlights • Goal: Building a fully integrated telecom service provider • Change, adaptation and consolidation • Market share gains • Selective growth (new markets) • Consolidation of investments • Growth in highly competitive markets • GSM Mobile Services (Region I) • Long Distance (domestic and international) • Data & Corporate (nationwide) • Contact Center Services (nationwide) • Exploring new opportunities: • Broadband Rollout (ADSL) • Bundling Services • Enhanced Services for high end residential and SME markets (voice / data) • Target: Ensure a sound market and financial position, with increasing returns to our shareholders Region I Fixed-line and GSM Mobile Services

  4. Telecom Industry in Brazil – Growth of Customer Base Fixed-line platform – LIS (million) Mobile platform – Subscribers (million) Penetration Rate Brazil (%) Penetration Rate Brazil (%) Brazil Brazil Region I Region I 03 Mar/04 02 01 981 99 00 03 Mar/04 02 01 981 99 00 • Since privatization and introduction of competition, mobile growth in Brazil has largely exceed the most optimistic scenarios (over 30% CAGR through 2003). • Having met universalization goals (1998-2001), fixed-line platform growth tends to rely on the performance of Brazilian GDP. 1Privatization (Jul/98). * Source: Company´s Information

  5. Telecom Industry in Brazil – Net Revenues 2002 – R$ 50.6 bn • Growth of telecom service revenues in 2003 was ~13% yoy; • Revenue growth was driven by the mobile sector (+18% yoy); • Given stability of fixed-line platform, mobile sector should continue to drive revenue growth in 2004. 2 1 2003 – R$ 57.0 bn 2 1 1Net Revenues of Incumbent Telcos (Telemar, Telesp, Brasil Telecom, Embratel) – excluding CTBC, Vesper, Intelig, GVT. 2 Net Revenues of main groups: Vivo, Claro, Oi, TIM and Opportunity, including handset sales (excluding: CTBC, Nextel, Sercomtel, etc.).

  6. Telefonica Embratel (DLD & ILD) Telemar Brasil Telecom 15.1 M 32% 20% 9.7 M 31% 12.2 M 17% Telecom Industry in Brazil - Fixed Line Services 2002 Mar/04 1998 2001 2003 38.8 38.9 LIS (million)* 20.0 37.4 39.2 Lines in Service Revenue Share Fixed Line Incumbents (R$ 14.6 bi 1Q04) * Including mirror companies.

  7. TIM (TDMA/GSM) Oi (100% GSM) Telecom Industry in Brazil - Mobile Services Main Groups Vivo (CDMA) Claro (TDMA/GSM) 9.1 m 19% 10.0 m 21.9 m 20% 44% TDMA/GSM / Other* Incumbents Subscribers - Mar/04 Brazil: 49.1 m National Market Share Startup (BRP) 4.4 m 3.8 m 9% 8% * Other groups (Opportunity, CTBC, Sercomtel and Nextel)

  8. Fixed Line Market in Brazil – Gross Revenue / Incumbents Fixed to Mobile Services (VC1) Local Services (ex-VC1) 2002 – R$ 18.4 bi 2002 – R$ 7.0 bi 2003 – R$ 20.7 bi 2003 – R$ 7.9 bi +12.5% +12.8% TMAR Others Others TMAR Others TMAR Others TMAR Average Tariff increase: 12.3% Average Tariff increase: 24% Long Distance Services Data Services1 2002 – R$ 12.7 bi 2003 – R$ 14.5 bi 2002 – R$ 4.4 bi 2003 – R$ 5.1 bi +13.7% +15.9% EMT EMT EMT EMT TMAR TMAR TMAR TMAR Others Others Others Others Average Tariff increase: 8.7% 1 Excludes leased lines to other telecom service providers (EILD).

  9. Telecom Industry in Brazil - Long Distance • Telemar is the market share leader in LD calls originated in Region I; • Regional incumbents conquered market share from LD carriers in 2002, as new markets were opened for competition; • Telemar increased its market share from 2000 to 2003, mainly as a result of entry into new markets; • Since 2H03 there has also been a significant contribution of revenues derived from mobile LD calls (SMP); • Challenge: sustaining market share in home market and preserving profitability (avoiding price war/irrational competition). Brazil – Revenue Market Share (1) (1) Incumbents only (rounding %). Source: Company reports.

  10. Dec/03 Mar/04 Dec/03 Mar/04 Telecom Industry in Brazil - Mobile Services Region I Wireless Penetration (%) – April/04 * Brazil • Brazilian mobile subscriber base is growing over 30% annually; • Oi is still the fastest growing player in its home market; • Wireless penetration in Region I (23%) still offers room for growth. *Source: Pyramid Research ^Includes other groups: Opportunity, Nextel, CTBC and Sercomtel.

  11. Telecom Industry in Brazil - Broadband Services Region I Brazil Dec/03 • ADSL represents 82% of total 1.2 mn broadband accesses in Brazil (Dec/03); • Broadband penetration in Brazil expected to reach to 30% of internet users in the next five years; • Broadband subscribers in Brazil expected to increase by 2.5x through 2006*; • Challenge: Develop sales channels to increase offer to SME clients, bundling with other services (LD, wireless). PC Penetration (% of households) * *Source: Pyramid Research ** Total households= 41.5 mn (IBGE- PNAD/2002) 2003

  12. Wireless DLD / ILD Contact Center Wireline Concession Area High Growth High Growth High Growth Moderate Growth Growth Strategy & Revenue Drivers Data, Internet & Corporate Integrated Strategy High Growth

  13. Customer Base Growth (million) • Ability to anticipate wireless growth and traffic migration (F to M); • Capacity to maintain / increase market share in a rapid changing scenario; • Capacity to increase offer of ADSL to our customers and protect our home market; • Keep delivering customer growth; • Developing advanced and segmented services; • Offering innovative and bundled plans. 21.6 CAGR 19.5% 19.8 19.0 16.4 0.5 1 0.3 ADSL Wireline Wireless 1Target: 450K ADSL subscribers.

  14. Mobile Services Revenues (R$ million) • Highly successful GSM rollout  4.4 million subs in 21 months (20% market share; • Market share gains at Oi help to reduce consolidated interconnection costs; • Almost 50% share of all net adds in home market since launching in Jun/02; • Share of total revenues increased from 3% in 2002 to 7% in 2003; • Target: consolidate and increase market share in Region I, reaching # 2 position by 2004 YE, with positive EBITDA margins. +80% yoy Subscribers (thousand) 6,000 4,408 3,893 85% 2,849 83% 2,236 1,722 80% 80% 78% Post paid Pre paid

  15. Local Services Local Revenues (ex- VC1) - R$ million 44.8% 44.1% • Local traffic impacted by low GDP growth and F-M traffic migration (to a lesser extent); • Local revenues growing basically in line with tariffs (no real growth expected); • Outstanding performance of mobile, long distance and data services have caused a decrease in the share of local services in total consolidated revenues; • Target: protection of home market leadership / retention of high-end clients (customer care / bundling/ADSL). 41.8% % of total revenues 8,119 7,098 6,122 2,093 1,881 1Q04 1Q03 Local Traffic – F to F (billion pulses) 22.9 22.6 21.3

  16. Long Distance Services Revenues - R$ million 15.3% % of total revenues • LD revenues growing over 30% yoy, mainly driven by market share gains: • New DLD/ ILD markets (Jul/02) and • Mobile originated LD calls (Jun/03); • LD Market leadership in Region I and “Top of Mind” carrier in Brazil for two consecutive years; • Over three million customers in loyalty programs; • Targets: increase efficiency & quality, keeping revenue growth (2004 ~20%) preserving profitability. 2,963 12.8% 11.5% 2,066 1,568 885 666 1Q04 1Q03 Traffic (billion minutes) 9.5 8.2 7.1

  17. Broadband rollout (ADSL) Subscribers (thousands) - EoP 450 • Fastest growing subscriber base in Brazil (~37% of all net adds in 2003); • Presence in 110 of the largest cities in Region I (~10x larger than other technologies, including cable); • Revenue growth of almost 4x in 2003 (and still significant room to grow in coming periods); • Target: Increase our broadband penetration in Region I from 2% of LIS to 5% in 2-3 years. 217 284 59 41 6 1Q04 1Q03 Revenues (R$ million) 128 33 69 17 1Q04 1Q03

  18. Data Services Revenues (R$ million) 1,056 873 787 • Data revenues (ex-broadband) growing at a 16% annual rate; • Sustainable real growth driven by relevant long term corporate contracts; • High quality network and services (SLA/ End-to-end); • Target: Increasingly provide integrated nationwide solutions to top corporate customers in Brazil. 295 255 1Q04 1Q03 Major Clients

  19. Value Added Services (VAS) Revenues (R$ million) • Based on full digitalization of our network, VAS revenues are increasing more than 20% annually; • Besides adding to basic fixed line revenues, services like “follow me”, ‘’call forwarding” and “voice mail” help sustain fixed line traffic; • Total services sold increased from 25% of our LIS in 2001 to 40% in 2003; • Target: develop new services to foster penetration traffic and revenues. 423 303 258 117 94 1Q03 1Q04

  20. Contact Center Services Attendant Positions • Focus on profitability: EBITDA positive since inception; • Customized solutions for all areas of customer relationship; • Leverage traffic to Telemar´s network; • Contax customers include major banks, utilities, insurance, media, telecom, retail; • Target: Consolidate #1 position among call center operators in Brazil. >15,000 12,907 7,337 4,947 12,543 8,270 1Q04 1Q03 Net Revenues (R$ million) 421 223 146 125 82 1Q04 1Q03

  21. Regulatory Framework – Main Issues 1. Tariffs – Annual Revisions 2003 • IGP- DI (30.05%) x IPC-A (17.24%) • Tariffs have been adjusted based on IPC-A • Still pending “merit” judgment by the Courts 2004 • Tariff increase most likely based on 12 month IGP-DI (7.97%) and not IPC-A (5.15%) Base for tariff increase: Currently authorized prices (based on Court injunction / 2003) • Productivity factors: Local Basket – 1% Long Distance Basket – 4.5% Local Interconnection – 17.5% 2005 • Most likely based on IGP-DI 2006 on • Tariff increases based on: IST – A “Telecom Sector” price index (TBD) “K” – New Productivity factors (TBD) Interconnection: a) Defined as a % of local tariff (60%-2006; 50%-2007) b) From 2008 on based on a “Long Range Incremental Cost Model” (TBD)

  22. Regulatory Framework 1. Tariffs Reduction of Local Areas • LD calls between neighboring areas to be considered local calls (local areas from 4,289 to 2,920); • To be implemented in up to 90 days after June 07, 2004; • Change already expected: Telemar has been rebalancing its rates = local ~ neighboring. Fixed to Mobile Interconnection Rate • Free negotiation scheduled to start as of July, 2004; • Currently F-M local calls is a non profitable business for Telemar; • Target:Recover margins on this business Share the uncollectibles with mobile operators

  23. Regulatory Framework 2. Competition Unbundling • In May 2004, Anatel established the overall conditions for: a) Line Sharing: setting maximum reference values, such as monthly rental prices, at R$ 15.42 / pair and b) Full unbundling: determining that prices should be set by the incumbents, based on the overall conditions defined by Anatel. Co-Billing • System already in place between all telecom operators in Brazil Fixed line Number Portability • To be implemented as of 2006 (TBD) 3. Transparency Local Traffic in Minutes • Conversion of local traffic billing: Pulses to Minutes (to be implemented as of 2006 / the frame and extension of adjustments) (TBD)

  24. Revenue Growth Net Revenue Growth – R$ million CAGR 17.7% • Telemar continues delivering real revenue growth in spite of a slowdown in Brazilian economy. Changes in Revenue Mix • Real growth has been driven by competitive and less regulated segments of mobile, long distance and data. 2001 2003

  25. Costs & Expenses Costs & Expenses: R$ million CAGR 9.0% 7,782 6,545 6,521 • After the huge expansion of fixed line platform and installation of our GSM network costs & expenses are being kept under strict control. 2,009 1,733 1Q04 1Q03 Main Cost Items (% of Total Costs) Intercon. • In line with the growth of our mobile operations, associated costs, such as handsets and dealer commissions increased their stakes in total costs, as opposed to consolidated interconnection costs. 3rd Party Headcount Handsets Marketing Bad Debt 2002 2003

  26. EBITDA (R$ million) 45% 44% 35% • Recurring EBITDA margins have been stable over time, in the mid-forties1; • For 2004 we expect an EBITDA margin of ~43%. 1,680 1,486 1 EBITDA for 2001 was impacted by extraordinary provisioning. 1Q03 1Q04

  27. CAPEX (R$ billion) 10.1 Wireless 2.2 • CAPEX / 2003: c.12% of net revenues (17% in 2002); • Main investments in fixed line network expansion already made; • Total CAPEX since 1998 of R$ 21.3 bn (US$ 10.4 bn); • Target: Stabilize CAPEX at ~15% of sales to support growth in mobile subscribers and in less regulated services. 7.9 2.8 2.5 2.2 2.0/2.3 2.0 1.7 40% 0.9 0.6 60% Wireline 1.1 1.1 Anatel Targets Mobile License

  28. Operating Cash Flow after Capex (R$ million) 1999 2000 2001 2002 2003 Given our level of EBITDA generation and strict control over CAPEX, our Free Cash Flow is expected to remain strong in the coming years.

  29. 16.7 22.5 27.5 10.0 5.8 17.5 Net Debt Position and Repayment Schedule – Mar/04 Debt Repayment Schedule R$ billion Net Debt – R$ billion Total Debt = R$ 12. bn Net Debt/EBITDA (x) ~ % of total • Given our current strong cash generation, we expect to reduce our net debt to around 1x EBITDA by year end 2004.

  30. Cash Position x Short Term Debt (R$ million) • Our cash position has largely exceeds our short-term debt, giving Telemar a cushion against unfavorable shifts in global financial markets. Short Term Debt Cash & Equivalents

  31. Net Financial Expenses Net Financial Expenses – R$ million • Our foreign currency debt is 74% of our total debt (mar/04); • Given that 96% of our foreign debt is hedged, we swap our currency exposure to Brazilian interest rates; • Reduction in Brazilian interest rates have helped us reduce our net financial expenses; • Our average cost of debt is 16% (mar/04). Average Interest Rate (SELIC) 1Q04 4Q03 1Q03 2Q03 3Q03

  32. Debt Amortization (Cash Expenses) (R$ million) 3,094 2,932 1,525 1,072 Interest Principal

  33. Dividend Payments - 1999/2003 (R$ million) * Dividend yield Dividend** Our goal is to provide high cash returns to shareholders * Based on June/04, stock prices **Includes interest on capital

  34. Key Financial Ratios Net Debt / EBITDA Amortization*/ EBITDA * Principal and interest (*) 12- Month EBITDA Dividends* / EBITDA CAPEX / EBITDA * Includes interest on capital

  35. Key Financial Ratios Enterprise Value / EBITDA Market Cap / EBITDA EBITDA / Net Financial Expenses

  36. “Safe Harbor” Statement This presentation contains forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements and involve inherent risks and uncertainties. These statements are based on current plans, estimates and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update publicly any of them in light of new information or future events Investor Relations Rua Humberto de Campos, 425 / 8º andar Leblon Rio de Janeiro -RJ Phone: ( 55 21) 3131-1314/1313/1315/1316 Fax: (55 21) 3131-1155 E-mail: invest@telemar.com.br Visit our website: http://www.telemar.com.br/ir

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