Before the Brazilian telecommunication system reform, we were the exclusive provider of interstate and international long-distance services in Brazil, although it was subject to indirect competition from a number of sources. The Telebrás companies were the exclusive providers of intrastate and local telephone services. Since 1995, Brazil has adopted broad regulatory changes intended to open the telecommunications market to competition.

Under the Telecommunications Law and the Grant Plan, the Ministry of Communications was required to conduct the privatization of the Telebrás System. According to the privatization model, the Brazilian states were divided into three regions and the Telebrás companies which provided services in each of these regions were grouped under three holding companies, known as the Teles and granted concessions to provide local and intra-regional long-distance services within one of the three regions. On June 2, 1998, we were granted concessions to provide all types of domestic long-distance services (intrastate, intra regional and interregional) and international long-distance services. The privatization occurred on July 29, 1998, but only on July 3, 1999, with the introduction of the PIC code, did we become subject to competition in the intra regional long-distance markets.

The Telecommunications Law and the Grant Plan also required Anatel, to auction:

In July 1999, the PIC code was introduced, which allows customers to choose a carrier by dialing the carrier's code. Voice telephony customers in Brazil are not assigned to a particular carrier. For any telephone call that extends beyond the local calling area, a customer must choose a carrier code. We obtained the number "21" as our PIC code and advertised extensively throughout Brazil in 1999 to establish recognition of the code. We believe we have an advantage over the local phone providers because our PIC code can be used anywhere throughout Brazil to place a phone call. By contrast, the PIC code of intra-regional service providers can only be used in the local calling area.
In July 1999, there were significant problems with busy circuits because numerous customers dialed incorrectly. Accordingly, Anatel allowed temporary completion of calls using old dialing patterns without the PIC code. This was called the "escape code". Escape code dialing was allowed to continue for several months and was gradually phased out beginning in September 1999 and was eliminated by the end of the year. Additionally, certain local areas had not been fully programmed to accept the new PIC code in July 1999. These were referred to as areas de numeração fechada, or the ANUF areas, and were gradually updated to accommodate PIC code dialing in the fourth quarter of 1999.

During 2000, Intelig did not make significant progress in capturing market share from us. Intelig started offering data transmission and internet services in the second half of 2000. However, we view this market as already competitive. Embratel has a broad portfolio of data transmission and internet services and has the advantage of a nationwide network to service our customers. We view Intelig's penetration in the long-distance voice market in 2000 as marginal, not currently constituting a significant factor to our operations. Intelig has recently announced its decision to focus on business customers rather than the non-business related market.

Beginning in 2002, Anatel may grant an unlimited number of additional authorizations for the provision of local and intra-regional, inter-regional and international long-distance telephone services.

During the last ten years, we experienced considerable competition for the provision of international long-distance service from companies outside Brazil known as telephone service resellers. Resellers provided customers with the number of an automated callback system located in countries with lower international rates, generally the United States. Use of such callback systems allowed international long-distance calls to originate in Brazil, yet be charged outside of Brazil, generally at rates significantly below those charged by us. As a result of such competition, the percentage of international telephone calls billed as outgoing compared to calls billed as incoming decreased steadily from 1990 to 1993. From 1994 to 1998 this trend reversed. This was due in part to tariff reduction from 1994 to 1997. The stabilization of Brazilian currency over the years also contributed to the reversal of the trend. See "- International Long-Distance Services" and "- Rates - International Rates".

The identity of potential other new entrants and the scope of increased competition, and any corresponding adverse effect on our results, will depend on a variety of factors. Among such factors are the business strategies and financial and technical capabilities of potential competitors, prevailing market conditions at the time competition is permitted, applicable Brazilian regulations with respect to new entrants and us, as well as the effectiveness of our efforts to prepare for increased competition. The telecommunications industry is subject to rapid and significant changes in technology. Continuing technological advances in telecommunications make it impossible to predict the extent of our future competition. We do not know whether the technologies we presently employ will become outdated or subject to competition from new technologies in the future, or whether we will be able to acquire on reasonable terms, new technologies necessary to compete in changed circumstances, if any.

We are subject to comprehensive regulations that limit our ability to set tariffs for our various services, and that may limit our ability to respond to potential or actual competition. Such regulations may limit our ability to confront competition. See "- Regulation of the Brazilian Telecommunications Industry".