Until 1972, telephone services in Brazil were provided by more than 900 independent companies, which supplied non-integrated basic telephone services. Telebrás was incorporated on November 9, 1972, pursuant to special legislation, for the principal purposes of acting as a holding company for operating companies providing public telecommunications services in Brazil and implementing the policies of the federal government of Brazil in the modernization and expansion of the Brazilian telecommunications system. Between 1972 and 1975, Telebrás, through its subsidiaries, acquired almost all the other telephone companies in Brazil. Telebrás and its operating subsidiaries are referred to collectively in this annual report as the "Telebrás System".

Only four operating companies remained outside the Telebrás System, representing approximately 9% of all lines in service in Brazil as of December 31, 1997. In 1997, Telebrás was the second-largest company in Brazil as measured by gross revenues of R$24.9 billion. The federal government of Brazil controlled Telebrás and the operations of the Telebrás System were subject to regulation by the federal government. The operating subsidiaries of Telebrás were controlled by the federal government until August 4, 1998. See "-Regulatory Reform and Privatization" below.

At December 31, 1997, Telebrás, through 28 operating subsidiaries, was the primary supplier of public telecommunications services in Brazil. Embratel owned and operated all of the interstate and international telephone transmission facilities in Brazil at that time. Through the remaining 27 operating subsidiaries, the Telebrás System was the main provider of local and intrastate telecommunications service and the leading provider of cellular mobile telephone service. The Telebrás System also provided telecommunications-related services such as data communication, sound and image transmission and other value-added services throughout Brazil. On January 30, 1998, each of the operating subsidiaries other than Embratel and Companhia Telefônica da Borda do Campo-CTBC spun off its cellular telephone operations into a separate company. Telebrás no longer engages in its historic business activities.