Beginning in 1995, the federal government undertook a comprehensive reform of Brazilian regulation of the telecommunications industry. In August 1995, the federal Constitution was amended to permit the federal government to grant concessions to private companies to provide telecommunications services. In July 1997, the federal Congress adopted Law No. 9,472 of July 16, 1997, the Lei Geral de Telecomunicações, or the Telecommunications Law, which provided for the establishment of a new regulatory framework, the introduction of competition and the privatization of the Telebrás System. The Telecommunications Law established an independent regulatory agency called Agência Nacional de Telecomunicações, or Anatel, which has begun to adopt a series of regulatory enactments that implement the provisions of the Telecommunications Law (together with the regulations, decrees, orders and plans issued by the President of Brazil on telecommunications, the Telecommunications Regulations and the Plano Geral de Outorgas (General Grant Plan of Concessions and Licenses -"Grant Plan"). See "- B. Business Overview - Regulation of the Brazilian Telecommunications Industry - Regulatory Agency - Anatel".

On May 22, 1998, in preparation for the privatization of the Telebrás System, the Telebrás System was restructured to form, in addition to Telebrás, the twelve New Holding Companies. Embratel Participacões S.A. is one of such New Holding Companies. Virtually all of the assets and liabilities of Telebrás were allocated to the New Holding Companies, which, together with their respective subsidiaries, now comprise three regional fixed-line operators, eight regional cellular operators and one domestic and international long-distance operator.

Prior to the Breakup of the Telebrás, Embratel provided all interstate telephone service and the other subsidiaries of Telebrás provided fixed-line and cellular service in their respective territories, which, subject to limited exceptions, corresponded to the separate Brazilian states. Following the Breakup, each of the eight cellular operators provides cellular telephone service on Band A in one of eight cellular regions into which Brazil has been divided for purposes of cellular telephony, and each of the three fixed-line operators provides local fixed-line telephone service and intra-regional long-distance fixed-line telephone service in one of three regions into which Brazil has been divided for purposes of fixed-line telephone service. We provide domestic long-distance telephone service, including intra-regional and interregional long-distance telephone service, throughout Brazil. Fixed-line operators now provide interstate telephone services within their regions, which were exclusively provided by us prior to the Breakup. We are now authorized to provide long-distance services within the states, which we did not provide prior to the Breakup. In addition to changes in the nature of telephone services provided by Embratel, the method of revenue division between the fixed-line operators and us for international and domestic long-distance calls has also changed. See "- B. Business Overview - Division of Revenues and Access Fees".

On July 29, 1998, the federal government sold its shares of the twelve New Holding Companies to twelve buyers. The total consideration paid to the federal government for the shares of the twelve New Holding Companies was R$26.5 billion. 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, the new controlling shareholders now control the New Holding Companies. Following the distribution of the shares of the New Holding Companies, Telebrás was delisted from the New York Stock Exchange and is expected to be liquidated. WorldCom, Inc., through its subsidiary, Startel Participações Ltda., acquired a controlling shareholders interest in our company. Before May 1, 2000, WorldCom was called MCI WorldCom, Inc. WorldCom is the entity resulting from the merger of MCI Communications Corporation and WorldCom, Inc. on September 14, 1998. In August 1998, MCI agreed to pay R$2.65 billion for the federal government's stake in our company, R$1.06 billion and R$795 million of which were paid on August 4, 1998 and 1999, respectively. The remainder was paid on August 4, 2000. The federal government retained the entire proceeds of the sale of its stake in our company. See "Item 7. Major Shareholders and Related Party Transactions - A. Major Shareholders".

On August 20, 1998, Brazil's Minister of Communications determined that Telebrás would be dissolved and liquidated. The liquidation of Telebrás is still pending as of the date of this annual report.

The adoption of the Telecommunications Law and Telecommunications Regulations and the privatization of the Telebrás System have led to broad changes in the operating, regulatory and competitive environment for Brazilian telecommunications. The changes include:

All of these developments have materially affected us and the other New Holding 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 also consider carefully the extensive changes in the structure and regulation of the Brazilian telecommunications industry.