According to its by-laws, Embratel is required to distribute as dividends in respect of each fiscal year ending on December 31, to the extent amounts are available for distribution, an aggregate amount equal to at least 25% of adjusted net income on such date as mandatory dividend. The annual dividend distributed to holders of Embratel preferred shares has priority in the allocation of adjusted net income by shareholders.

For the purposes of the Brazilian Corporate Law, and in accordance with Embratel's by-laws, the adjusted net income is an amount equal to the Embratel's net profit, adjusted to reflect allocations to and from

  · the statutory reserve;

· the contingency reserve; and

· the unrealized revenue reserve.

Remaining amounts to be distributed are allocated first to the payment of a dividend to holders of ordinary shares in an amount equal to the dividend paid to the preferred shareholders. The remainder is distributed equally among holders of preferred shares and ordinary shares.

Under the Brazilian Corporate Law, a company is permitted to withhold payment of the mandatory dividend in respect of ordinary shares and preferred shares not entitled to a fixed or minimum dividend if:

  · its board of directors and audit committee report to the shareholders' meeting that the distribution would be incompatible with the financial circumstances of that company; and

· the shareholders ratify this decision at the shareholder's meeting. In this case,

· the board of directors must forward to the Brazilian securities commission within five days of the shareholders' meeting an explanation justifying the information transmitted at the meeting; and

· the profits which were not distributed, are to be recorded as a special reserve and, if not absorbed by losses in subsequent fiscal years, are to be paid as dividends as soon as its financial situation permits.

The Embratel preferred shares are entitled to a minimum dividend and thus the mandatory dividend may be withheld only with respect to its ordinary shares. Embratel may pay dividends out of its respective retained earnings or accumulated profits in any given fiscal year.

For the purposes of the Brazilian Corporate Law, accumulated profits are defined as net income after income tax and social contribution for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to warrants, income bonds, employees' and management's participation in a company's profits.

At each annual shareholder's meeting, the board of directors is required to suggest the allocation of net profits obtained during the preceding fiscal year. Under the Brazilian Corporate Law, we are required to maintain a statutory reserve, to which we must allocate 5% of net profits for each fiscal year, up to the moment in which such reserve equals 20% of our paid-in capital. Net losses, if any, may be charged against statutory reserve if necessary.

The Brazilian Corporate Law also provides for two additional discretionary allocations of net profits to special accounts, which are also subject to approval by shareholders at the annual shareholders' meeting:

  · first, a percentage of net profits may be allocated to the contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either:

· reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur; or

· written off in the event that the anticipated loss occurs.

· second, net profits may be allocated to the unrealized revenue reserve in case the total amount of unrealized revenue reserve exceeds the sum of:

· the statutory reserve;

· the contingency reserve; and

· retained earnings.

Allocations of net profit may not hinder the payment of dividends on the preferred shares. Unrealized revenue is defined under the Brazilian Corporate Law as the sum of:

  · the equity share of earnings of affiliated companies, not paid as cash dividends; and

· profits from installment sales to be received after the end of the following fiscal year.
The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the Brazilian Corporate Law.