You should consider the following risks with respect to an investment in our company and investments in Brazilian corporations that are not normally associated with investments in the securities of issuers in the United States and other jurisdictions.


Risk Factors Relating to Embratel and Brazilian Telecommunications Industry
Uncertain regulatory environment of the Brazilian telecommunication sector.

The recent adoption of new telecommunications laws and regulations as well as the privatization of the Telebrás System have led to broad changes in the operating, regulatory and competitive environment for Brazilian telecommunications.

The changes include the following:

All of these developments have materially affected us and the other telecommunications companies, and we cannot predict the effects of these changes on our business, financial condition, results of operations or prospects. In reviewing historical information and in evaluating our future financial and operating performance, you must consider carefully the extensive changes in the structure and regulation of our industry.


We are subject to special obligations applicable to certain telecommunication companies operating in Brazil.

Companies wishing to offer telecommunications services to consumers in Brazil are required to apply to Anatel, the Brazilian telecommunications regulatory authority, for a concession or an authorization. Concessions and authorizations are granted for services in either the public or the private regime. The public regime differs from the private regime primarily by the obligations imposed on the companies in the public regime rather than the type of services offered by those companies. We are one of the four companies that operate within the public regime. All other telecommunications companies, including those that provide the same services as the four public regime companies, operate in the private regime. For a complete description of Brazilian telecommunication regulations, see "Item 4. Information on the Company - B. Business Overview - Regulation of the Brazilian Telecommunications Industry".

In order to attract new entrants and ensure competition, there are also certain restrictions on alliances, joint ventures, mergers and acquisitions involving public regime concessionaires, applicable to us, including:

Anatel has not yet determined whether the restrictions under its control will expire in the future or under what conditions they would expire. The four providers of telecommunications services in the public regime are also subject to a set of special restrictions regarding the services they may offer, contained in document known as the "Grant Plan", and to special obligations regarding network expansion contained primarily in the document known as the "General Plan on Universal Service". These restrictions and obligations are also contained in the concessions of the four companies, particularly in the requirements known as the "List of Obligations".

We are directly responsible for financing our respective universal service obligations of network expansion from our own revenues. No subsidies or other supplemental financing are anticipated to finance the network expansion obligations contained in the List of Obligations. If any of the concessionaires fails to meet its obligations in its own region, Anatel may grant licenses to competing companies to provide the service and may compel the existing concessionaires to make its network available for the competitors' use.

Failure to meet both network expansion and modernization obligations and quality of service obligations in the List of Obligations may result in fines and penalties of up to R$50 million as well as potential revocation of our concession. Our ability to meet these obligations will depend upon certain factors outside our control.


We operate in a highly competitive industry with participants that have significant resources and existing customers, which could intensify price competition and limit our ability to increase our market share.

If we are unable to compete effectively against our competitors, then it could lead to price reductions, lower revenue, underutilization of our services, reduced operating margins and loss of market share. Some of our competitors in certain markets where we operate have, and some potential competitors may enjoy, competitive advantages including the following:

The industry in which we conduct our business is subject to rapid technological changes and such changes could have a material adverse effect on our ability to provide competitive services.

The telecommunications industry is in a period of rapid technological change. Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will further develop. These new products and technologies may reduce the prices for our services or they may be superior to, and render obsolete, the products and services we offer and the technologies we use, and may consequently reduce the revenues generated by our products and services and require investment in new technology. As a result, our most significant competitors in the future may be new entrants to our markets which would not be burdened by an installed base of older equipment. It may be very expensive for us to upgrade our products and technology in order to continue to compete effectively.


We are subject to regulatory limitation on most of the prices we can charge our customers.

Rates for most of the telecommunications services provided by us are subject to final approval by Anatel, to which we submit requests for rate adjustments. Concessions with the regional fixed-line companies and Embratel provide for a price-cap mechanism to set and adjust rates on an annual basis. We are subject to such comprehensive regulations that limit our ability to set tariffs for various of our services, and that may limit our ability to respond to potential or actual competition. Such regulations may limit our ability to confront competition.


We must successfully implement our business plan, but factors beyond our control may prevent us from doing so, which could have a material adverse effect on our business.

Our ability to increase our revenues and maintain our position as a leading Brazilian provider of advanced telecommunications and Internet services will depend in large part on the successful, timely and cost-effective completion of our business plan.

Factors beyond our control that could affect the timing of the completion of our business plan include our ability to:

We are exposed to special risks in connection with our international call services.

Revenues from international service also reflect payments under approximately 230 bilateral agreements between us and foreign telecommunications administrations or private carriers, which are influenced by the guidelines of the international tariff and trade regulations and cover virtually all international calls to and from Brazil. Various factors, including declining settlement rates, could affect the amount of net settlement payments from United States carriers to us in future years. These include increases in the proportion of outgoing as opposed to incoming calls. Calls originated by United States carriers currently exceed calls we originate.


We may not be able to control the costs associated with our billing practices.

In the fourth quarter of 1999, we began directly billing and collecting payments from our domestic and international long-distance telephony customers on a trial basis. We officially implemented direct billing in the first quarter of 2000. Prior to that time, we did not directly bill traditional telephone services to our end-user customers. As a result of our new billing practice, we had an increase in sales, general and administration expenses due to the cost of directly billing millions of customers. Although we are employing various strategies to minimize this cost increase, we face risks associated with controlling the costs of billing, ensuring the quality and accuracy of billing, maintaining the customer information database and collecting from a large customer base. If we are unsuccessful in containing these risks, our collection period may increase, and operating results may be negatively affected.


WorldCom, as our principal shareholder, may exercise its control in a manner that is not in our best interest.

WorldCom, our principal shareholder, owns approximately 51.79% of our voting capital as of the date of this report. WorldCom has the ability to determine the outcome of any action requiring shareholder approval, including the election of a majority of directors and, subject to the requirements of Brazilian law, the payment of dividends. Also, WorldCom may exercise its control in a manner that is not in our best interest.