a. Incorporation

Embratel Participações S.A. (the "Holding Company") was formed on May 22, 1998, through the spin-off of certain assets and liabilities of Telecomunicações Brasileiras S.A. - Telebrás. Although the Holding Company was not formed until May 22, 1998, the spin-off was effective using balances as of February 28, 1998, and including all income and expense for the period from January 1, 1998 through February 28, 1998, except for the effect of minor cash allocations from Telebrás at February 28, 1998 (Note 25).

b. Change in Control

On July 29, 1998, the Federal Government sold to twelve buyers (the "New Controlling Shareholders") its rights to receive shares of the twelve New Holding Companies upon the distribution of such shares. In connection with this sale, the Federal Government assigned to the New Controlling Shareholders substantially all its economic and voting rights with respect to the New Holding Companies and, as a consequence, effective August 4, 1998, the New Controlling Shareholders control the New Holding Companies.

c. Business and Regulatory Environment

Embratel Participações S.A., through its subsidiary, Empresa Brasileira de Telecomunicações S.A. - Embratel (the "Company"), provides international and domestic long-distance telecommunications services in Brazil. These services include transmission of voice, data and other services, and are performed under the terms of a concession granted by the Federal Government which will expire on December 31, 2005 and may be renewed for an additional term of 20 years.

The Company's business, including the services it may provide and the rates it charges, is regulated by the Agência Nacional de Telecomunicações - Anatel, the regulatory authority for the Brazilian telecommunications industry, pursuant to Law no. 9,472, of July 16, 1997, and the related regulations, decrees, orders and plans.

As of April 1, 1998 the revenue sharing system used to divide interstate and international
long-distance revenues between the Company and the local fixed telephone operators was replaced with a network usage fee for the interconnection based on the terms of an interconnection agreement with the Company which became effective in April 1998.

The terms of this interconnection agreement, particularly pricing and technical requirements affect the Company's results of operations, its competitive environment and its capital expenditure policies. The terms of the interconnection agreement also call for a supplemental per-minute charge called Parcela Adicional de Transição ("PAT") that supplements the network usage charge and will be in force until June 30, 2001. The PAT is charged at rates which vary between regions and is intended to neutralize the impact of the new structure on the combined net income of the operating companies within each of the new fixed-line regions. Under the current regulatory framework, all telecommunications services providers must provide interconnection services on a nondiscriminatory basis. Subject to certain requirements, providers are free to negotiate the terms of interconnection but, in the event the parties fail to reach an agreement, Anatel will establish the terms of interconnection.

Under the General Plan of Concessions and Authorizations, the fixed-line companies and the Company are prohibited from offering certain basic fixed-line telecommunications services until they fulfill certain specified obligations. The Company was prohibited through December 31, 2001 from offering local or cellular services and the regional fixed-line companies are prohibited from offering cellular, interregional long-distance and international long-distance services.

As from July 3, 1999, along with the introduction of a new national dialing numbering system that allows telephone users to choose an operator, the Company was authorized through to December 31, 2001 to provide full intra-regional long-distance service, including any calls between local calling areas, as a competitor to the regional fixed-line companies; other companies are also able to compete with the Company in the intra-region segment.

On January 23, 2000, a holder of a license to provide services to the interregional,
intra-regional and international long-distance markets began to offer its services.

Also, as from January 2000 the Company started to directly bill its customers. Until
December 31, 1999, the regional fixed-line companies and the cellular companies billed customers for all domestic and international long-distance calls, collected payments from customers and transferred to the Company payments for all interregional, intra-regional and all international long-distance calls carried by the Company, without charging it for invoicing, posting and collection services.