As filed with the Securities and Exchange Commission on March 16, 2006

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 20-F/A



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AMENDMENT NO. 1 TO

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2004



|                                  |  |                                      
|--------------------------------- |  | -------------------------------------
|Commission file number: 001-14499 |  | Commission file number: 333-116323-01



|                                                       |  |                                                       
|------------------------------------------------------ |  | ------------------------------------------------------
|EMBRATEL PARTICIPAÇÕES S.A.                            |  | EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL
|(Exact name of Registrant as specified in its charter) |  | (Exact name of Registrant as specified in its charter)
|                                                       | 
|Embratel Holding Company                               |  | Brazilian Telecommunications Company                  
|(Translation of Registrants name into English)        |  | (Translation of Registrants name into English)       



|                                                                          |  |                                                                      
|------------------------------------------------------------------------- |  | ---------------------------------------------------------------------
|Federative Republic of Brazil                                             |  | Federative Republic of Brazil                                        
|(Jurisdiction of incorporation or organization)                           |  | (Jurisdiction of incorporation or organization)                      
|                                                                          | 
|Rua Regente Feijó, 166, Sala 1687-B Rio de Janeiro, RJ  Brazil 20060-060 |  | Avenida Presidente Vargas, 1012 Rio de Janeiro, RJ - Brazil 20071-910
|(Address of Principal Executive Offices)                                  |  | (Address of Principal Executive Offices)                             



SECURITIES REGISTERED OR TO BE
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



|                                                                                                                   |  |                                          
|------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------
|Title of Each Class                                                                                                |  | Name of Each Exchange on Which Registered
|Embratel Participações S.A. American Depositary Shares,each representing 5,000 preferred shares, without par value |  | New York Stock Exchange                  
|                                                                                                                   | 
|Embratel Participações S.A. preferred shares, without par value*                                                   |  | New York Stock Exchange                  

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|* | Not for trading, but only in connection with the listing of American Depositary Shares on the New York Stock Exchange, pursuant to the requirements of the Securities and Exchange
Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SECURITIES REGISTERED PURSUANT TO SECTION
12(g) OF THE ACT:



None



SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d) OF THE ACT:



|                                                                                               
|-----------------------------------------------------------------------------------------------
|Title of Each
Class                                                                            
|Empresa Brasileira de Telecomunicações S.A. - Embratel Series B 11.0% Guaranteed Notes due 2008



The number of outstanding shares of
each of the Issuers classes of capital or common stock as of the close of the period covered by this annual report:



|                                                        |  |                                                    
|------------------------------------------------------- |  | ---------------------------------------------------
|Embratel Participações S.A.:                            |  | 124,369,030,532 common shares, without par value   
|                                                        |  | 208,595,434,213 preferred shares, without par value
|                                                        | 
|Empresa Brasileira de Telecomunicações S.A. - Embratel: |  | 4,723,843,847 common shares, without par value     



Indicate by check mark whether the
Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports) and (2)
have been subject to such filing requirements for the past 90 days.



|                                                        |  |              
|------------------------------------------------------- |  | -------------
|Embratel Participações S.A.:                            |  | Yes  x    No ̈
|Empresa Brasileira de Telecomunicações S.A. - Embratel: |  | Yes  x    No ̈



Indicate by check mark which
financial statement item the Registrants have elected to follow.



Item 17 ̈Item 18   x



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EXPLANATORY NOTE



This is an amendment to the joint annual report on Form 20-F of Embratel Participações S.A., which we refer to
as Embratel Holdings, and its subsidiary, Empresa Brasileira de Telecomunicações S.A., which we refer to as Embratel, for the fiscal year ended December 31, 2004, filed on June 30, 2005. This amendment is being filed solely
for the following purposes:



| |  |  | to revise Note 34.e and Note 35.d of the consolidated financial statements of Embratel Holdings to provide certain supplemental disclosure regarding the recognition of dividends and
calculation of earnings per share under U.S. GAAP; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | to revise Note 34.s of the consolidated financial statements of Embratel to provide certain supplemental disclosure regarding the recognition of dividends under U.S. GAAP.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This amendment consists of a cover page, this
explanatory note, Item 19 (as amended), the signature pages, the exhibit index (as amended), the consolidated financial statements of Embratel Holdings (as amended), the consolidated financial statements of Embratel (as amended), the required
certifications of the Chief Executive Officer and Chief Financial Officer of Embratel Holdings and the required certifications of the Chief Executive Officer and Chief Financial Officer of Embratel.



Except as described above, no change has been made to the annual report on
Form 20-F filed on June 30, 2005. The filing of this amended annual report does not, and does not purport to, amend, update or restate the information in any other item of the annual report on Form 20-F filed on June 30, 2005 or reflect
any events that have occurred after the annual report on Form 20-F was filed on June 30, 2005.



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PART III



ITEM 19. EXHIBITS



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | Amended by-laws of Embratel Holdings, dated January 5, 2005 (English translation) (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the registration statement on Form F-3 of
Embratel Holdings, filed with the Securities and Exchange Commission on February 7, 2005 (File No. 333-121623)).                                                                                                           
|     | 
|1.2  |  | By-laws of Embratel (incorporated by reference to our amended annual report on Form 20-F, filed with the Securities and Exchange Commission on June 9, 2004 (File No.
001-14499)).                                                                                                                                                                                                                                     
|     | 
|1.3  |  | Amendment to the By-laws of Embratel (incorporated by reference to our amended annual report on Form 20-F, filed with the Securities and Exchange Commission on June 9, 2004 (File No.
001-14499)).                                                                                                                                                                                                                    
|     | 
|2.1  |  | Form of Deposit Agreement (including the form of American Depositary Receipt) among Embratel Participações S.A., the Bank of New York, as Depositary, and Holders and Beneficial
Owners of American Depository Receipts (incorporated by reference to Exhibit 1 to Post Effective Amendment No. 1 to the Registration Statement of Embratel Participações S.A. on Form F-6, filed on June 6, 2003 (File No.
333-9472)).
|     | 
|8.1  |  | Subsidiaries of Embratel Holdings (incorporated by reference to our annual report on Form 20-F, filed with the Securities and Exchange Commission on June 30, 2005 (File No.
001-14499))                                                                                                                                                                                                                               
|     | 
|8.2  |  | Subsidiaries of Embratel (incorporated by reference to our annual report on Form 20-F, filed with the Securities and Exchange Commission on June 30, 2005 (File No.
001-14499))                                                                                                                                                                                                                                        
|     | 
|12.1 |  | Certification of Chief Executive Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                                                          
|     | 
|12.2 |  | Certification of Chief Financial Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                                                          
|     | 
|12.3 |  | Certification of Chief Executive Officer of Embratel                                                                                                                                                                                                                                                                                                                                                                   
|     | 
|12.4 |  | Certification of Chief Financial Officer of Embratel                                                                                                                                                                                                                                                                                                                                                                   
|     | 
|13.1 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                  
|     | 
|13.2 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer of Embratel                                                                                                                                                                                                                                                                                                                           



Omitted from the exhibits filed with
this annual report are certain instruments and agreements with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such
omitted instruments or agreements as the SEC requests.



1



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SIGNATURES



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, we certify that we meet all of the requirements for filing on Form
20-F/A and have duly caused this annual report to be signed on our behalf by the undersigned, thereunto duly authorized.



EMBRATEL PARTICIPAÇÕES S.A.By:

/s/ Carlos Henrique MoreiraName:

Carlos Henrique MoreiraTitle:

Chief Executive OfficerBy:

/s/ José Formoso MartínezName:

José Formoso MartínezTitle:

Vice-President




Date: March 16, 2006



2



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SIGNATURES



Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, we certify that we meet all of the requirements for filing on Form
20-F/A and have duly caused this annual report to be signed on our behalf by the undersigned, thereunto duly authorized.



EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. EMBRATELBy:

/s/ Carlos Henrique MoreiraName:

Carlos Henrique MoreiraTitle:

Chief Executive OfficerBy:

/s/ José Formoso MartínezName:

José Formoso MartínezTitle:

General Officer




Date: March 16, 2006



3



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Exhibit Index



|     |  |                                                                                                                                                                                                                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1.1  |  | Amended by-laws of Embratel Holdings, dated January 5, 2005 (English translation) (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the registration statement on Form F-3 of
Embratel Holdings, filed with the Securities and Exchange Commission on February 7, 2005 (File No. 333-121623)).                                                                                                           
|     | 
|1.2  |  | By-laws of Embratel (incorporated by reference to our amended annual report on Form 20-F, filed with the Securities and Exchange Commission on June 9, 2004 (File No.
001-14499)).                                                                                                                                                                                                                                     
|     | 
|1.3  |  | Amendment to the By-laws of Embratel (incorporated by reference to our amended annual report on Form 20-F, filed with the Securities and Exchange Commission on June 9, 2004 (File No.
001-14499)).                                                                                                                                                                                                                    
|     | 
|2.1  |  | Form of Deposit Agreement (including the form of American Depositary Receipt) among Embratel Participações S.A., the Bank of New York, as Depositary, and Holders and Beneficial
Owners of American Depository Receipts (incorporated by reference to Exhibit 1 to Post Effective Amendment No. 1 to the Registration Statement of Embratel Participações S.A. on Form F-6, filed on June 6, 2003 (File No.
333-9472)).
|     | 
|8.1  |  | Subsidiaries of Embratel Holdings (incorporated by reference to our annual report on Form 20-F, filed with the Securities and Exchange Commission on June 30, 2005 (File No.
001-14499))                                                                                                                                                                                                                               
|     | 
|8.2  |  | Subsidiaries of Embratel (incorporated by reference to our annual report on Form 20-F, filed with the Securities and Exchange Commission on June 30, 2005 (File No.
001-14499))                                                                                                                                                                                                                                        
|     | 
|12.1 |  | Certification of Chief Executive Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                                                          
|     | 
|12.2 |  | Certification of Chief Financial Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                                                          
|     | 
|12.3 |  | Certification of Chief Executive Officer of Embratel                                                                                                                                                                                                                                                                                                                                                                   
|     | 
|12.4 |  | Certification of Chief Financial Officer of Embratel                                                                                                                                                                                                                                                                                                                                                                   
|     | 
|13.1 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer of Embratel Holdings                                                                                                                                                                                                                                                                                                                  
|     | 
|13.2 |  | Section 906 Certification of Chief Executive Officer and Chief Financial Officer of Embratel                                                                                                                                                                                                                                                                                                                           



4



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| |  |                                                                     
| |  | --------------------------------------------------------------------
| |  | Consolidated Financial Statements                                   
| | 
| |  | Embratel Participações S.A. and Subsidiaries                        
| | 
| |  | December 31, 2004, 2003 and 2002 with Report of Independent Auditors













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EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2004, 2003 AND 2002



CONTENTS



|                                                           |  |     
|---------------------------------------------------------- |  | ----
|Reports of Independent Registered Public Accounting Firms  |  | F-1 
|                                                           | 
|Audited Financial Statements                               |  |     
|                                                           | 
|Consolidated Balance Sheets                                |  | F-4 
|Consolidated Statements of Operations                      |  | F-6 
|Consolidated Statements of Changes in Shareholders Equity |  | F-7 
|Consolidated Statements of Changes in Financial Position   |  | F-8 
|Notes to the Consolidated Financial Statements             |  | F-10



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Embratel Participações S.A.



We have audited the accompanying consolidated balance sheet of Embratel
Participações S.A. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders equity and changes in financial position for the year ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Embratel Participações S.A. and subsidiaries as of December 31, 2004, and the consolidated results of its operations and changes in financial position for the year then
ended, in conformity with accounting practices adopted in Brazil, which differ in certain respects from accounting principles generally accepted in the United States of America (see Note 34 to the consolidated financial statements).



Rio de Janeiro, January 31, 2005

(except with respect to Note 33, as to which the date is May 23, 2005)



ERNST & YOUNG

Auditores Independentes S.S.



/s/ Pedro Lucio Siqueira
Farah

Pedro Lucio Siqueira Farah

Partner



F-1



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Embratel Participações S.A.

Rio de Janeiro - RJ, Brazil



We have audited the accompanying consolidated balance sheets
of Embratel Participações S.A. and subsidiaries as of December 31, 2003 and the consolidated statements of operations, changes in shareholders equity and changes in financial position for each of the two years in the period ended
December 31, 2003, all expressed in Brazilian Reais. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our
audits.



Our audits were conducted in accordance with
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Embratel Participações S.A. and subsidiaries as of December 31, 2003, and the results of their operations, the changes in shareholders equity and the changes in their financial position for each of the two years in the period
ended December 31, 2003, in conformity with accounting practices adopted in Brazil.



Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted in the United States of America (U.S. GAAP). Information relating to the nature and effect of
such differences is presented in Note 34 to the consolidated financial statements.



F-2



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As discussed in Note 36, the Company has restated its statements of cash flows prepared in accordance
with U.S. GAAP for the years ended December 31, 2003 and 2002.





/s/ Deloitte Touche Tohmatsu

DELOITTE TOUCHE TOHMATSU



Auditores Independentes



Rio de Janeiro, Brazil



March 17, 2004 (except with respect to the matters discussed in Notes 34 and 35, as to which the date is May 21, 2004 and Note 36, as to which the date is June 21, 2005).



F-3



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EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003

(In thousands of Brazilian reais)



|                                         |  |            |  |           
|---------------------------------------- |  | ---------- |  | ----------
|                                         |  | 2004       |  | 2003      
|Assets                                   |  |            |  |           
|Current assets:                          |  |            |  |           
|Cash and cash equivalents                |  | 832,028    |  | 1,719,496 
|Trade accounts receivable, net           |  | 1,428,059  |  | 1,672,037 
|Deferred and recoverable taxes           |  | 387,572    |  | 465,719   
|Advances to Telecommunications Companies |  | 194,610    |  | 52,130    
|Inventories                              |  | 48,383     |  | 14,017    
|Other current assets                     |  | 164,426    |  | 204,130   
|                                         |  |            |  |           
|                                         |  | 3,055,078  |  | 4,127,529 
|                                         |  |            |  |           
|Non-current assets:                      |  |            |  |           
|Deferred and recoverable taxes           |  | 1,306,320  |  | 1,151,696 
|Legal deposits                           |  | 209,477    |  | 381,561   
|Other non-current assets                 |  | 37,287     |  | 69,930    
|                                         |  |            |  |           
|                                         |  | 1,553,084  |  | 1,603,187 
|                                         |  |            |  |           
|Permanent assets:                        |  |            |  |           
|Investments                              |  | 1,594      |  | 39,888    
|Property, plant and equipment            |  | 6,572,605  |  | 7,194,329 
|Deferred assets                          |  | 92,446     |  | 2,870     
|                                         |  |            |  |           
|                                         |  | 6,666,645  |  | 7,237,087 
|                                         |  |            |  |           
|Total assets                             |  | 11,274,807 |  | 12,967,803
|                                         |  |            |  |           





F-4



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|                                           |  |            |   |  |            |  
|------------------------------------------ |  | ---------- | - |  | ---------- | -
|                                           |  | 2004       |   |  | 2003       |  
|Liabilities and shareholders equity       |  |            |   |  |            |  
|Current liabilities:                       |  |            |   |  |            |  
|Loans and financing                        |  | 2,099,185  |   |  | 1,217,256  |  
|Accounts payable and accrued expenses      |  | 1,355,840  |   |  | 1,822,611  |  
|Taxes and contributions                    |  | 432,194    |   |  | 347,358    |  
|Dividends and interest payable on capital  |  | 35,594     |   |  | 114,244    |  
|Payroll and related accruals               |  | 73,781     |   |  | 87,585     |  
|Employees profit sharing                  |  | 33,190     |   |  | 52,107     |  
|Provision for contingencies                |  | 477,264    |   |  | 73,749     |  
|Actuarial liability  Telos                |  | 68,342     |   |  | 64,442     |  
|Related party liabilities                  |  |           |   |  | 11,994     |  
|Other current liabilities                  |  | 60,991     |   |  | 174,820    |  
|                                           |  |            |   |  |            |  
|                                           |  | 4,636,381  |   |  | 3,966,166  |  
|                                           |  |            |   |  |            |  
|Non-current liabilities:                   |  |            |   |  |            |  
|Loans and financing                        |  | 1,330,621  |   |  | 3,373,341  |  
|Actuarial liability  Telos                |  | 370,764    |   |  | 328,803    |  
|Taxes and contributions                    |  | 48,919     |   |  | 52,061     |  
|Sundry credits and other liabilities       |  | 915        |   |  | 14,890     |  
|                                           |  |            |   |  |            |  
|                                           |  | 1,751,219  |   |  | 3,769,095  |  
|                                           |  |            |   |  |            |  
|Deferred income                            |  | 144,134    |   |  | 135,358    |  
|                                           |  |           
|Minority interest                          |  | 216,703    |   |  | 222,382    |  
|                                           |  |           
|Shareholders equity:                      |  |            |   |  |            |  
|Capital stock paid-in                      |  | 2,273,913  |   |  | 2,273,913  |  
|Revenue reserves                           |  | 2,268,675  |   |  | 2,620,022  |  
|Treasury shares                            |  | (16,218    | ) |  | (19,133    | )
|                                           |  |            |   |  |            |  
|                                           |  | 4,526,370  |   |  | 4,874,802  |  
|                                           |  |            |   |  |            |  
|Total liabilities and shareholders equity |  | 11,274,807 |   |  | 12,967,803 |  
|                                           |  |            |   |  |            |  



The
accompanying notes are an integral part of these consolidated financial statements.



F-5



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EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais, except net income (loss) per thousand outstanding shares)



|                                                             |  |             |   |  |             |   |  |             |  
|------------------------------------------------------------ |  | ----------- | - |  | ----------- | - |  | ----------- | -
|                                                             |  | 2004        |   |  | 2003        |   |  | 2002        |  
|Gross operating revenue                                      |  |             |   |  |             |   |  |             |  
|Telecommunications services and equipment sales              |  | 9,687,605   |   |  | 9,177,182   |   |  | 9,482,424   |  
|Gross revenue deductions                                     |  | (2,354,737  | ) |  | (2,133,572  | ) |  | (2,110,794  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Net operating revenue                                        |  | 7,332,868   |   |  | 7,043,610   |   |  | 7,371,630   |  
|Cost of services and goods sold                              |  | (4,994,389  | ) |  | (4,715,149  | ) |  | (5,000,987  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Gross profit                                                 |  | 2,338,479   |   |  | 2,328,461   |   |  | 2,370,643   |  
|                                                             |  |             |   |  |             |   |  |             |  
|Operating income (expenses):                                 |  | (2,110,735  | ) |  | (1,698,228  | ) |  | (2,059,305  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Selling expenses                                             |  | (900,126    | ) |  | (788,949    | ) |  | (1,095,089  | )
|General and administrative expenses                          |  | (1,107,339  | ) |  | (984,178    | ) |  | (994,745    | )
|Other operating income (expenses), net                       |  | (103,270    | ) |  | 74,899      |   |  | 30,529      |  
|                                                             |  |             |   |  |             |   |  |             |  
|Operating income before financial expenses, net              |  | 227,744     |   |  | 630,233     |   |  | 311,338     |  
|Financial expense, net                                       |  | (618,602    | ) |  | (159,925    | ) |  | (1,552,385  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Operating income (loss)                                      |  | (390,858    | ) |  | 470,308     |   |  | (1,241,047  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Extraordinary non-operating income ILL                      |  | 106,802     |   |  |            |   |  | 198,131     |  
|Other non-operating income (expenses), net                   |  | (43,345     | ) |  | (70,401     | ) |  | 10,989      |  
|                                                             |  |             |   |  |             |   |  |             |  
|Income (loss) before taxes and minority interest             |  | (327,401    | ) |  | 399,907     |   |  | (1,031,927  | )
|                                                             |  |             |   |  |             |   |  |             |  
|Income tax and social contribution benefit (expense)         |  | 25,376      |   |  | (136,906    | ) |  | 414,196     |  
|Minority interest                                            |  | (37,231     | ) |  | (39,367     | ) |  | (8,611      | )
|                                                             |  |             |   |  |             |   |  |             |  
|Net income (loss) for the year                               |  | (339,256    | ) |  | 223,634     |   |  | (626,342    | )
|                                                             |  |             |   |  |             |   |  |             |  
|Quantity of outstanding shares (in thousands)                |  | 332,964,465 |   |  | 333,419,064 |   |  | 332,629,361 |  
|                                                             |  |             |   |  |             |   |  |             |  
|Net income (loss) per thousand outstanding shares (in reais) |  | (1.02       | ) |  | 0.67        |   |  | (1.88       | )
|                                                             |  |             |   |  |             |   |  |             |  



The accompanying notes are an integral
part of these consolidated financial statements.



F-6



---

EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|------------------------------------------ |  | -------------------- |  | ---------------- |  | ------------------------- | - |  | ---------------------- | - |  | -------------- | - |  | ---------------- | - |  | --------- | -
|                                           |  |                      |  | Revenue reserves |  |                           |   |  |                        |   |  |                |   | 
|                                           |  |                      |  |                  |  |                           |   |  | Retentionof profits    |   |  |                |   |  |                  |   |  |           |  
|                                           |  | Capitalstock paid-in |  | Legalreserve     |  | Unrealizedearningsreserve |   |  | Reserve forinvestments |   |  | Treasuryshares |   |  | Retainedearnings |   |  | Total     |  
|Balances as of January 1, 2002             |  | 2,273,913            |  | 190,491          |  | 1,721,622                 |   |  |                       |   |  | (41,101        | ) |  | 1,201,747        |   |  | 5,346,672 |  
|Repurchase of shares                       |  |                     |  |                 |  |                          |   |  |                       |   |  | (534           | ) |  |                 |   |  | (534      | )
|Other                                      |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | (3               | ) |  | (3        | )
|Net loss for the year                      |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | (626,342         | ) |  | (626,342  | )
|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|Balances as of December 31, 2002           |  | 2,273,913            |  | 190,491          |  | 1,721,622                 |   |  |                       |   |  | (41,635        | ) |  | 575,402          |   |  | 4,719,793 |  
|Sale (Repurchase) of shares                |  |                     |  |                 |  |                          |   |  |                       |   |  | 22,502         |   |  | (20,121          | ) |  | 2,381     |  
|Prescribed dividends                       |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | 14,472           |   |  | 14,472    |  
|Realization of unrealized earnings reserve |  |                     |  |                 |  | (131,472                  | ) |  |                       |   |  |               |   |  | 131,472          |   |  |          |  
|Net income for the year                    |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | 223,634          |   |  | 223,634   |  
|Donations and grants                       |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | 659              |   |  | 659       |  
|Destination of profits -                   |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|Constitution of legal reserve              |  |                     |  | 11,215           |  |                          |   |  |                       |   |  |               |   |  | (11,215          | ) |  |          |  
|Proposed dividends                         |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | (86,137          | ) |  | (86,137   | )
|Constitution of reserve for investments    |  |                     |  |                 |  |                          |   |  | 258,413                |   |  |               |   |  | (258,413         | ) |  |          |  
|Transfer to reserve for investments        |  |                     |  |                 |  |                          |   |  | 569,753                |   |  |               |   |  | (569,753         | ) |  |          |  
|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|Balances as of December 31, 2003           |  | 2,273,913            |  | 201,706          |  | 1,590,150                 |   |  | 828,166                |   |  | (19,133        | ) |  |                 |   |  | 4,874,802 |  
|                                           |  |                      |  |                  |  |                           |  
|Sale (repurchase) of shares (Note 28.d)    |  |                     |  |                 |  |                          |   |  |                       |   |  | 2,915          |   |  | (14,146          | ) |  | (11,231   | )
|Net loss for the year                      |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | (339,256         | ) |  | (339,256  | )
|Donations                                  |  |                     |  |                 |  |                          |   |  |                       |   |  |               |   |  | 2,055            |   |  | 2,055     |  
|Absorption of accumulated losses           |  |                      |  |                  |  |                           |   |  | (351,347               | ) |  |               |   |  | 351,347          |   |  |          |  
|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|Balances as of December 31, 2004           |  | 2,273,913            |  | 201,706          |  | 1,590,150                 |   |  | 476,819                |   |  | (16,218        | ) |  |                 |   |  | 4,526,370 |  
|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|                                           |  |                      |  |                  |  | 2,268,675                 |   |  |                        |   |  |                |   |  |                  |   |  |           |  
|                                           |  |                      |  |                  |  |                           |   |  |                        |   |  |                |   | 



The accompanying notes are an integral
part of these consolidated financial statements.



F-7



---

EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                                                                              |  |           |   |  |           |   |  |           |  
|--------------------------------------------------------------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                                                                              |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Source of funds                                                                               |  |           |   |  |           |   |  |           |  
|From operations:                                                                              |  |           |   |  |           |   |  |           |  
|Net income (loss) for the year                                                                |  | (339,256  | ) |  | 223,634   |   |  | (626,342  | )
|Expenses (revenues) not affecting working capital-                                            |  |           |   |  |           |   |  |           |  
|Minority interests                                                                            |  | 37,231    |   |  | 39,367    |   |  | 8,611     |  
|Depreciation and amortization                                                                 |  | 1,145,660 |   |  | 1,152,753 |   |  | 1,142,168 |  
|Monetary and foreign currency exchange variations andOther charges on non-current liabilities |  | (111,014  | ) |  | (391,756  | ) |  | 1,458,740 |  
|Monetary and foreign currency exchange variations andOther revenues from non-current assets   |  | (2,059    | ) |  | (104      | ) |  |          |  
|Exchange variation on investments                                                             |  | 1,671     |   |  | 48,736    |   |  | (97,317   | )
|Realization of deferred income                                                                |  | (23,135   | ) |  | (20,396   | ) |  | (19,132   | )
|Reversal of provision for loss of investment                                                  |  |          |   |  | (10,000   | ) |  |          |  
|Loss on disposal of property, plant and equipment                                             |  | 108,952   |   |  | 21,761    |   |  | 5,887     |  
|Results from long-term derivative contracts                                                   |  | 70,013    |   |  | 12,083    |   |  | (228,536  | )
|Long-term deferred income tax and social contribution                                         |  | (118,300  | ) |  | 110,456   |   |  | (696,869  | )
|Actuarial liabilities update  Medical Health Care Plan                                       |  | 26,207    |   |  | 24,959    |   |  | (16,736   | )
|Impairment of goodwill                                                                        |  |          |   |  | 101,489   |   |  |          |  
|Deposits in court                                                                             |  | (32,669   | ) |  | 35,539    |   |  |          |  
|Pension plan                                                                                  |  | 86,795    |   |  | 46,848    |   |  |          |  
|Other operating revenues                                                                      |  | (27,928   | ) |  | (25,798   | ) |  | (26,445   | )
|                                                                                              |  |           |   |  |           |   |  |           |  
|                                                                                              |  | 822,168   |   |  | 1,369,571 |   |  | 904,029   |  
|From third parties:                                                                           |  |           |   |  |           |   |  |           |  
|Increase in non-current liabilities-                                                          |  |           |   |  |           |   |  |           |  
|Loans and financing                                                                           |  | 322,454   |   |  | 2,144,249 |   |  | 722,585   |  
|Taxes and contributions                                                                       |  | 104       |   |  |          |   |  | 861       |  
|Other liabilities                                                                             |  |          |   |  | 4,616     |   |  | 26,093    |  
|Transfer from non-current to current assets                                                   |  | 366,959   |   |  | 82,187    |   |  | 44,075    |  
|Transfer from investment to current assets                                                    |  | 37,313    |   |  | 189,274   |   |  |          |  
|Transfer from property, plant and equipment to current assets                                 |  |          |   |  | 15,396    |   |  |          |  
|Decrease in non-current assets                                                                |  |          |   |  |          |   |  | 181,220   |  
|Disposal of property, plant and equipment                                                     |  | 37,361    |   |  | 4,784     |   |  | 5,766     |  
|Increase in deferred income                                                                   |  | 31,911    |   |  | 14,485    |   |  | 8,983     |  
|Negative goodwill                                                                             |  |          |   |  | 18,655    |   |  |          |  
|Disposal of treasury shares                                                                   |  | 5,567     |   |  | 6,666     |   |  |          |  
|Prescribed dividends                                                                          |  |          |   |  | 14,472    |   |  |          |  
|Other                                                                                         |  | 2,053     |   |  | 660       |   |  | 1,479     |  
|                                                                                              |  |           |   |  |           |   |  |           |  
|Total sources of funds                                                                        |  | 1,625,890 |   |  | 3,865,015 |   |  | 1,895,091 |  
|                                                                                              |  |           |   |  |           |   |  |           |  





F-8



---

EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                                           |  |            |   |  |            |   |  |            |  
|---------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                           |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Applications of funds:                                     |  |            |   |  |            |   |  |            |  
|Increase in non-current assets                             |  | 120,680    |   |  | 230,880    |   |  | 125,427    |  
|Decrease in non-current liabilities                        |  |           |   |  | 26,226     |   |  | 173,122    |  
|Transfer from current to non-current assets                |  | 43,148     |   |  | 104,541    |   |  |           |  
|Additions to investments                                   |  | 807        |   |  |           |   |  | 98         |  
|Additions to property, plant and equipment                 |  | 630,471    |   |  | 546,377    |   |  | 1,034,700  |  
|Additions to deferred assets                               |  | 101,284    |   |  | 2,870      |   |  |           |  
|Dividends and interest payable on capital                  |  | 37,540     |   |  | 121,908    |   |  | 23,728     |  
|Effect of capital increase in Star One  minority interest |  | 5,395      |   |  | 5,395      |   |  | 5,395      |  
|Repurchase of treasury shares                              |  | 16,798     |   |  | 4,285      |   |  | 534        |  
|Transfer of non-current to current liabilities             |  | 2,412,433  |   |  | 793,207    |   |  | 2,279,793  |  
|                                                           |  |            |   |  |            |   |  |            |  
|Total applications of funds                                |  | 3,368,556  |   |  | 1,835,689  |   |  | 3,642,797  |  
|                                                           |  |            |   |  |            |   |  |            |  
|Increase (decrease) in net working capital                 |  | (1,742,666 | ) |  | 2,029,326  |   |  | (1,747,706 | )
|                                                           |  |            |   |  |            |   |  |            |  
|Current assets:                                            |  |            |   |  |            |   |  |            |  
|At beginning of the year                                   |  | 4,127,529  |   |  | 3,164,880  |   |  | 3,377,607  |  
|At end of the year                                         |  | 3,055,078  |   |  | 4,127,529  |   |  | 3,164,880  |  
|                                                           |  |            |   |  |            |   |  |            |  
|                                                           |  | (1,072,451 | ) |  | 962,649    |   |  | (212,727   | )
|                                                           |  |            |   |  |            |   |  |            |  
|Current liabilities:                                       |  |            |   |  |            |   |  |            |  
|At beginning of the year                                   |  | 3,966,166  |   |  | 5,032,843  |   |  | 3,497,864  |  
|At end of the year                                         |  | 4,636,381  |   |  | 3,966,166  |   |  | 5,032,843  |  
|                                                           |  |            |   |  |            |   |  |            |  
|                                                           |  | 670,215    |   |  | (1,066,677 | ) |  | 1,534,979  |  
|                                                           |  |            |   |  |            |   |  |            |  
|Increase (decrease) in net working capital                 |  | (1,742,666 | ) |  | 2,029,326  |   |  | (1,747,706 | )
|                                                           |  |            |   |  |            |   |  |            |  



The accompanying notes are an integral
part of these consolidated financial statements.



F-9



---

EMBRATEL PARTICIPAÇÕES S.A. AND SUBSIDIARIES



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2004, 2003 and 2002

(Amounts expressed in thousands, except as indicated)



|1. | Operations and Background
|-- | -------------------------



| | a. | Incorporation
| | -- | -------------



Embratel Participações S.A. (the Holding Company) was formed on May 22, 1998, through the spin-off of certain assets and
liabilities of Telecomunicações Brasileiras S.A. - Telebrás.



The Holding Company holds 98.77% of the capital of Empresa Brasileira de Telecomunicações S.A.  Embratel (Embratel).



In November 2000, Embratel incorporated Star One S.A. (Star One) to manage satellite operations, as the main
Brazilian provider of transponders for radio communication services such as (i) network services; (ii) end-to-end telecommunications services; and (iii) transmission of radio and television broadcasting. On the date of incorporation, Embratel
transferred its Brazilian satellite rights and obligations to Star One, which became the licensee for providing these services until December 31, 2005, free of any burden, except when indicated. This license is renewable, at a cost to Star One, for
an additional 15-year term, subject to Anatels regulations.



In August 2003, Embratel incorporated Click 21 Comércio de Publicidade Ltda. (Click 21), to provide Internet access and products for residential customers and small companies, including an exclusive domain, e-mail
accounts with automatic anti-virus, and tools for editing homepages and sending faxes, as well as exclusive content.



In December 2003, the Holding Company acquired Vésper Holding S.A. and Vésper Holding São Paulo S.A. as well as their respective
subsidiaries (Vésper S.A. e Vésper São Paulo S.A.). The operating companies provide local telephony services in the regions of São Paulo (Region III) and in North-Northeastern of Brazil (Region I). Its local telephony
services are rendered in 17 states and its licenses reach 76% of the countrys population. Besides offering an alternative choice of local telecommunications provider for corporate customers. This acquisition strengthens and broadens the
Companys strategy to offering local telephony and broadband access for small businesses and the consumer market. In order to comply with Anatel regulations, the Holding Company will eliminate overlapping service areas by May 26, 2005 through
the consolidation of the licenses of Vésper S.A. and Vésper São Paulo S.A. at Embratel.





F-10



---

On March 2, 2004, Embratel acquired CT Torres Ltda. (CT Torres) from CT Leasing Ltd., an
indirect subsidiary of Qualcomm Inc, for US$45 million (R$131 million). The fixed assets of CT Torres are comprised of 622 communications towers. These towers belonged to Vésper São Paulo S.A. and Vésper S.A. until December 2,
2003, when they were returned to CT Torres, then sold to CT Leasing Ltd.



The acquisition assured Embratel a greater return on investment than if Vésper S.A. and Vésper São Paulo S.A. and were to lease towers from a third party.



On July 23, 2004, Teléfonos de México, S.A. de C.V.
(Telmex) a company established in accordance with the laws of Mexico, acquired all of MCIs direct and indirect interests in Startel Participações Ltda. and New Startel Participações Ltda., parent
companies of the Holding Company, representing 51.79% of common stock (19.26% of total capital). Telmex effected such acquisition through its subsidiaries Latam Brasil LLC and Latam Telecomunicaciones LLC. The U.S. Bankruptcy Court Judge approved
this operation in the second half of 2004. Approval by ANATEL  the National Telecommunications Agency had already occurred in compliance with the telecommunications regulations and approval from a public bidding aspect remained to enable
approval by the Administrative Council for Economic Defense  CADE, although Telmex had already assumed management of the Holding Company on July 23, 2004.



On December 13, 2004, in accordance with Brazilian securities legislation, Telmex Solutions Telecomunicações
Ltda. (subsidiary of Latam Brasil LLC.) offered to purchase shares of the Holding Company from the minority shareholders. Telmex Solutions acquired 47,841,438 thousand shares of additional common stock, thereby increasing Telmexs stake in the
Holding Company to 90.25% of common stock (33.57% of total capital).



| | b. | Business and Regulatory Environment
| | -- | -----------------------------------



The Holding Company, through its subsidiary, Embratel, provides international and domestic long-distance telecommunications services in Brazil. These
services include transmission of voice, data and other services, and are performed under the terms of a concession granted by the Federal Government, which will expire on December 31, 2005. Embratel has the right to renew this license for an
additional 20-year term, at a cost, subject to Anatels regulations.



The business of Embratel and Star One, including the services that they provide and the rates they charge, is regulated by the Agência Nacional de Telecomunicações - Anatel, the regulatory
authority for the Brazilian telecommunications industry, pursuant to Law No. 9,472, of July 16, 1997, and the related regulations, decrees, orders and plans. Embratel and the local fixed telephone operators share interstate and international
long-distance revenues through network usage fees based on the terms of an interconnection agreement with Embratel, which became effective in April 1998.



F-11



---

On August 15, 2002, Anatel authorized Embratel to operate indefinitely Switched Fixed Telephony Services
(Sistema Telefônico Fixo Comutado - STFC), for local services. This authorization is for operations in areas equivalent to regions I, II and III of the General Grant Plan (Plano Geral de Outorgas), which represents the
Brazilian domestic territory. Embratel started rendering those services effective in December 2002.



In July 2002, another carrier was allowed to provide inter-regional long-distance services from the state of São Paulo. Meanwhile, a separate local
service provider also received a fixed telephone long-distance license (Region I) and fixed telephone local licenses (Regions II and III).



As from July 6, 2003, users of the Personal Cellular Service (Serviço Móvel Pessoal - SMP) must choose an operator for domestic and
international long-distance calls through cellular phones. Embratel, in addition to nationwide network coverage, offers its customers the possibility of using pre and post-paid calling cards for cellular phones. Embratel also permits customers
making calls from cellular phones to be charged through the normal invoice made by the cellular operators.



The Holding Company and its consolidated subsidiaries are hereinafter referred to as the Company.



| | c. | Working capital deficiency
| | -- | --------------------------



For the years ended December 31, 2004 and 2002, the Company incurred net losses and at December 31, 2004 the Company has a working capital deficiency of
R$1,742,666. Managements plans to meet working capital requirements and return the Company to profitability are as follows:



c.1.) continuing efforts to reduce operational costs; and



c.2.) lowering financing costs.



|2. | Preparation and Presentation of the Consolidated Financial Statements
|-- | ---------------------------------------------------------------------



The consolidated financial statements are the responsibility of Companys management and were prepared in accordance with accounting practices
adopted in Brazil (BR GAAP). These accounting practices are established by the Brazilian corporate law, instructions applicable to telecommunications concessionaires and rules and accounting procedures established by the Brazilian
Securities and Exchange Commission (CVM - Comissão de Valores Mobiliários).



The accompanying financial statements are translated and adapted from the Companys statutory financial statements issued in Brazil, prepared under Brazilian corporate law, for certain reclassifications,
modifications and changes in terminology to conform more closely to reporting practices in the United States of America.



F-12



---

The consolidated financial statements include the accounts of the Company and all of its subsidiaries in
which the Company directly or indirectly controls the subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. Minority interests refer to the minority shareholder interests in the subsidiaries Embratel
and Star One.



The following subsidiaries are included in the
consolidated financial statements for the years ended December 31:



|                                                       |  |                                 |  |      
|------------------------------------------------------ |  | ------------------------------- |  | -----
|                                                       |  | Voting capital stock           
|                                                       |  | Direct and/orindirect share (%)
|                                                       |  | 2004                            |  | 2003 
|Empresa Brasileira de Telecomunicações S.A. - Embratel |  | 98.8                            |  | 98.8 
|Star One S.A.                                          |  | 80.0                            |  | 80.0 
|BrasilCenter Comunicações Ltda.                        |  | 100.0                           |  | 100.0
|Embratel Americas, Inc.                                |  | 100.0                           |  | 100.0
|Ponape Telecomunicações Ltda.                          |  | 100.0                           |  | 100.0
|Palau Telecomunicações Ltda.                           |  | 100.0                           |  | 100.0
|Embratel Chile S.A.                                    |  | 100.0                           |  | 100.0
|Embratel Internacional S.A.                            |  | 100.0                           |  | 100.0
|Embratel Uruguay S.A.                                  |  | 100.0                           |  | 100.0
|Gollum Investments, Inc.                               |  | 100.0                           |  | 100.0
|Avantis Investments, Inc.                              |  | 100.0                           |  | 100.0
|Click 21 Comércio de Publicidade Ltda.                 |  | 100.0                           |  | 100.0
|Vega 21 Participações Ltda.                            |  | 100.0                           |  | 100.0
|Vetel 21 Participações Ltda.                           |  | 100.0                           |  | 100.0
|Vésper Holding S.A.                                    |  | 100.0                           |  | 100.0
|Vésper São Paulo Holding S.A.                          |  | 100.0                           |  | 100.0
|CT Torres Ltda. (Note 1)                               |  | 100.0                           |  |     
|Participation Investment, Inc.(1)                      |  |                                |  | 100.0

---

|(1) | This subsidiary was dissolved on October 1, 2004.
|--- | -------------------------------------------------



Certain reclassifications have been made to prior years financial statements in order to be consistent with current year presentation.



F-13



---

|3. | Summary of Significant Accounting Practices
|-- | -------------------------------------------



| | a. | Cash and cash equivalents
| | -- | -------------------------



Cash and cash equivalents refer to bank deposits and highly liquid temporary investments with maturity of 90 days or less when purchased. Cash equivalents
are recorded at cost, plus income earned through balance sheet date, which do not exceed market value, when applicable.



| | b. | Trade accounts receivable, net
| | -- | ------------------------------



Trade accounts receivable, net represents primarily amounts receivable from customers for services rendered, billed and/or unbilled at period end,
directly or through operating telecommunications companies, including the taxes related to such services but net of the allowance for doubtful accounts. These services include local, long-distance and international telecommunications services, data
communications services and other services.



Allowance for
doubtful accounts represents a management estimate of the accounts for which collectibility is deemed unlikely. The Company constantly monitors its accounts receivables past due. Beginning on June 30, 2004, the Company recorded a 100% allowance for
doubtful accounts for amounts overdue more than 90 days, from basic voice customer users, advanced voice, data and other services, as well as estimated amounts based on historical losses. Prior to that date, an allowance for doubtful accounts was
recognized from the first day after maturity and was gradually increased until reaching 100% after 120 days. This modification in the estimation process did not generate any material effects in the income statement for the year ended December 31,
2004.



| | c. | Foreign currency transactions
| | -- | -----------------------------



Assets and liabilities denominated in foreign currencies are translated at the period end exchange rates. Exchange gains or losses are recorded in the
income statement, classified as Financial Expense, net. The effects of exchange rate variation are described in Note 9.



| | d. | Inventories
| | -- | -----------



Inventories are stated at the average purchase cost less the provision for realization, when applicable, and refer primarily to handsets (digital
telephone equipment) recorded in the subsidiaries Vésper S.A. and Vésper São Paulo S.A.



| | e. | Investments
| | -- | -----------



At December 31, 2003, investments principally represent a holding in the satellite company New Skies, denominated in U.S. dollars, and were recorded at
acquisition



F-14



---

cost, adjusted for foreign currency exchange gains or losses and net of provisions for probable losses
when applicable. The Companys investment in New Skies was sold in 2004.



Other investments are recorded at cost less provision for losses, when applicable.



| | f. | Property, plant and equipment
| | -- | -----------------------------



Property, plant and equipment are recorded cost of acquisition and/or construction, less accumulated depreciation, monetarily restated up to December 31,
1995.



The current annual depreciation rates used are
calculated on a straight-line basis over the expected useful life of the assets. The depreciation rates are disclosed in Note 17.



Improvements to existing property are capitalized, while maintenance and repair costs are charged to expense as incurred. Materials allocated to specific
projects are added to construction in progress.



The Company
periodically evaluates property, plant and equipment for impairment as a result of technological changes. If the Company determines that property, plant and equipment requires replacement, the remaining depreciation life is shortened to the date of
replacement. In circumstances where advance identification is not feasible or where immediate replacement is made in response to changes in business plans or in the technological environment, the residual value of replaced equipment is written-off
on the date of retirement from service.



Financial charges
arising from financing linked to construction-in-progress are capitalized as part of property, plant and equipment until the asset is placed in service.



As described in Note 17, fixed assets acquired through leasing contracts are capitalized and the corresponding lease finance is registered as a liability.
The liabilities arising from such transactions bear interest and, where applicable, are subject to monetary correction.



Vésper São Paulo S.A. and Vésper S.A. have recorded their operating licenses (authorizations) at their acquisition cost, plus
financial charges from loans until the start-up of operations, net of amortizations calculated as from the start-up (February 2000) under the straight-line method, based on the original 20-year term for the authorizations (to be amortized through
April 2019), and adjusted to their net recoverable amounts.



F-15



---

| | g. | Deferred assets
| | -- | ---------------



Deferred assets refer to the goodwill recorded on the books of CT Torres. Such goodwill resulted from the acquisition of CT Torres by its former parent
company. The parent company was subsequently incorporated by CT Torres and the goodwill was transferred to the books of CT Torres. The goodwill is being amortized based on future profitability (Note 18).



Additionally, there are pre-operating expenses recorded in the subsidiaries
Click 21, Vésper São Paulo S.A. and Vésper S.A. The balances of the subsidiaries, Vésper São Paulo S.A. and Vésper S.A. have been adjusted to the recoverable amounts and are being amortized over five years.



| | h. | Vacation pay accrual
| | -- | --------------------



Cumulative vacation pay due to employees is accrued as earned.



| | i. | Income tax and social contribution
| | -- | ----------------------------------



Income tax and social contribution are calculated according to the rules and rates prevailing during the year and are recorded on an accrual basis.
Deferred taxes are provided on temporary differences, tax losses and on the negative basis for calculation of social contribution based on the assumption of its future realization, according to rules established by CVM Instruction No. 371/02 (see
Notes 12, 15 and 21).



| | j. | Loans and financing
| | -- | -------------------



Loans and financing are updated based on the exchange or monetary variations and accrued interest as of the balance sheet dates according to the terms
defined in the contracts.



| | k. | Provision for contingencies
| | -- | ---------------------------



The provision for contingencies is recorded to cover any probable losses based on the external and internal legal counsels opinions. The basis and
nature of the provisions are described in Note 24.



| | l. | Deferred income
| | -- | ---------------



Deferred income relates to the sale of rights of way primarily for optical fiber cables to Brazilian telecommunications companies and international
companies with activities in the Mercosur region through long-term contracts. In accordance with the terms of the contracts, the clients pay in advance for the right of way and income is recognized on a straight-line basis over the life of the
contracts.



F-16



---

Additionally, it includes the amount of the negative goodwill recorded on the acquisition of
Vésper Holding São Paulo S.A. and Vésper Holding S.A.



| | m. | Revenue recognition
| | -- | -------------------



Revenues from telecommunications services are recorded on an accrual basis, less an estimate for billing problems or disputes. Revenues from international
services include revenues earned under bilateral agreements between Embratel and the foreign telecommunications companies. These agreements govern tariffs paid by Embratel to the foreign companies for the use of equipment required to complete calls
invoiced outside Brazil. Revenues related to international calls are recorded monthly segregating the amounts paid to foreign entities in the cost of services rendered (Note 4).



Certain data and other services are billed on a fixed-price monthly fee basis, plus a variable fee based on usage, when
applicable. Installation revenues on data service contracts are recognized when the installation process is complete.



| | n. | Financial expense, net
| | -- | ----------------------



Represents interest and foreign exchange and monetary variations, loans and financing and other assets and liabilities subject to monetary updated,
recorded on an accrual basis. Additionally, includes banking and fiduciary letters expenses resulting from financial investments, as well as PIS (Employees Profit Participation Program) and COFINS (Tax on Social Security Financing) expenses
(calculated on financial income) and CPMF (Provisional Contribution on Financial Activities  check banking tax).



| | o. | Actuarial liability - Telos
| | -- | ---------------------------



Embratel and Star One sponsor an entity that provides pensions and other post-retirement benefits for their employees (Note 25). Pension and other
post-retirement benefit expenses for the year are recorded on an accrual basis. Contributions for the defined benefit plan and medical assistance plan are actuarially determined.



According to CVM Deliberation No. 371 issued on December 13, 2000, actuarial liabilities were fully recognized in financial
statements as from December 31, 2001.



| | p. | Employees profit sharing
| | -- | -------------------------



A provision for granting employees the right to a share of the profits is accrued based on managements estimate, the payment of which is subject to
approval at the Shareholders General Meeting. As determined by Circular Letter CVM/SEP/SNC No. 01/2003, issued on January 16, 2003, the Company and its subsidiaries Embratel and Star One recorded employees profit sharing as operating
expenses in the statements of income (R$38,881, R$49,587, and R$31,302 for the years ended December 31, 2004, 2003 and 2002, respectively). Information on management profit sharing is included in Note 29 under heading Directors Fees.



F-17



---

| | q. | Net Income (loss) per thousand outstanding shares
| | -- | -------------------------------------------------



Net income (loss) per thousand outstanding shares is calculated based on the number of shares outstanding at the balance sheet date.



| | r. | Use of estimates
| | -- | ----------------



The preparation of consolidated financial statements in conformity with BR GAAP requires Management to make use of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period reported. Actual results may
differ from those estimates and assumptions.



|4. | Net Operating Revenue
|-- | ---------------------



|                               |  |           |  |           |  |          
|------------------------------ |  | --------- |  | --------- |  | ---------
|                               |  | 2004      |  | 2003      |  | 2002     
|Voice                          |  |           |  |           |  |          
|Domestic long-distance         |  | 4,012,763 |  | 4,051,721 |  | 4,356,796
|International long-distance(1) |  | 768,938   |  | 856,585   |  | 931,266  
|                               |  |           |  |           |  |          
|                               |  | 4,781,701 |  | 4,908,306 |  | 5,288,062
|Data & Internet                |  |           |  |           |  |          
|Corporate and other            |  | 1,550,975 |  | 1,658,908 |  | 1,756,507
|Telecommunications companies   |  | 158,433   |  | 97,236    |  | 75,932   
|                               |  |           |  |           |  |          
|                               |  | 1,709,408 |  | 1,756,144 |  | 1,832,439
|                               |  |           | 
|Local services                 |  | 607,644   |  | 134,478   |  | 17,133   
|                               |  |           | 
|Other services                 |  | 234,115   |  | 244,682   |  | 233,996  
|                               |  |           |  |           |  |          
|Total                          |  | 7,332,868 |  | 7,043,610 |  | 7,371,630
|                               |  |           |  |           |  |          

---

|(1) | During the year ended December 31, 2003, the Company began to report international long-distance revenues gross of the amounts payable to foreign administrators, settlement, which
are recorded in cost of services. Previously, these revenues were reported net of settlement. The amounts payable to foreign entities reclassified in 2002 for purposes of comparability totaled R$264,552. This reclassification was made to align the
Companys procedures with the recent changes in the telecommunications market practices and facilitate comparability with other companies in the same industry.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is required to collect ICMS (state value-added taxes) at an average rate of approximately 25% to 27% on all
long-distance revenues in addition to PIS/COFINS taxes (federal taxes at a combined rate of 3.65%), and under BR GAAP, this is classified as gross revenue deductions.



F-18



---

For the years ended December 31, 2004, 2003 and 2002, no single customer represented over 10% of total
gross operating revenues.



|5. | Cost of Services and Goods Sold
|-- | -------------------------------



|                              |  |            |   |  |            |   |  |            |  
|----------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                              |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Interconnection/facilities(1) |  | (3,362,504 | ) |  | (3,233,979 | ) |  | (3,538,843 | )
|Depreciation and amortization |  | (976,907   | ) |  | (977,864   | ) |  | (981,351   | )
|Personnel                     |  | (246,819   | ) |  | (214,801   | ) |  | (228,045   | )
|Third-party services(2)       |  | (229,374   | ) |  | (222,558   | ) |  | (204,281   | )
|Other                         |  | (178,785   | ) |  | (65,947    | ) |  | (48,467    | )
|                              |  |            |   |  |            |   |  |            |  
|Total                         |  | (4,994,389 | ) |  | (4,715,149 | ) |  | (5,000,987 | )
|                              |  |            |   |  |            |   |  |            |  

---

|(1) | Expenses related to interconnection/facilities refer to costs with fixed line telephone companies for the use of private circuit lines and interconnection costs paid by Embratel to
fixed line and mobile telephone companies, in accordance with the interconnection rules as determined by Anatel.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Refers substantially to the maintenance of telecommunications equipment and public utilities.
|--- | ---------------------------------------------------------------------------------------------



|6. | Selling Expenses
|-- | ----------------



|                                |  |          |   |  |          |   |  |            |  
|------------------------------- |  | -------- | - |  | -------- | - |  | ---------- | -
|                                |  | 2004     |   |  | 2003     |   |  | 2002       |  
|Allowance for doubtful accounts |  | (366,590 | ) |  | (353,142 | ) |  | (627,136   | )
|Personnel                       |  | (278,619 | ) |  | (238,892 | ) |  | (246,668   | )
|Third-party services(1)         |  | (244,186 | ) |  | (180,156 | ) |  | (207,335   | )
|Depreciation and amortization   |  | (3,457   | ) |  | (4,173   | ) |  | (3,484     | )
|Other                           |  | (7,274   | ) |  | (12,586  | ) |  | (10,466    | )
|                                |  |          |   |  |          |   |  |            |  
|Total                           |  | (900,126 | ) |  | (788,949 | ) |  | (1,095,089 | )
|                                |  |          |   |  |          |   |  |            |  

---

|(1) | Refers substantially to marketing, advertising, legal and consulting expenses.
|--- | ------------------------------------------------------------------------------



F-19



---

|7. | General and Administrative Expenses
|-- | -----------------------------------



|                               |  |            |   |  |          |   |  |          |  
|------------------------------ |  | ---------- | - |  | -------- | - |  | -------- | -
|                               |  | 2004       |   |  | 2003     |   |  | 2002     |  
|Third-party services(1)        |  | (513,095   | ) |  | (486,500 | ) |  | (517,879 | )
|Depreciation and amortization  |  | (165,296   | ) |  | (170,716 | ) |  | (157,333 | )
|Personnel(2)                   |  | (259,598   | ) |  | (141,742 | ) |  | (134,843 | )
|Taxes                          |  | (81,567    | ) |  | (73,153  | ) |  | (80,121  | )
|Management Fee  MCI (Note 26) |  |           |   |  | (14,024  | ) |  | (36,232  | )
|Employees profit sharing      |  | (38,881    | ) |  | (49,587  | ) |  | (31,302  | )
|Other                          |  | (48,902    | ) |  | (48,456  | ) |  | (37,035  | )
|                               |  |            |   |  |          |   |  |          |  
|Total                          |  | (1,107,339 | ) |  | (984,178 | ) |  | (994,745 | )
|                               |  |            |   |  |          |   |  |          |  

---

|(1) | Refers substantially to the maintenance of installations, public services, conservation and cleaning expenses, printing and postage of invoices, auditing and consulting expenses.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Since 2000, Embratel has a Plan for Retention of Executives and Strategic Employees, aiming at retaining the services of the President, Vice-Presidents, Officers,
Managers and other key employees who retain specialized knowledge. The participants of the plan would have the right to a cash indemnity, calculated using a formula foreseen in the individual Term of Commitment, even in the event of the dismissal of
the executive or of a change in the shareholding control of Embratel. Due to the change in the shareholding control, Embratel paid to executives, during the first half of 2004, indemnities of approximately R$92,000. The amounts paid to statutory
officers who remained with Embratel comply with the total amount of the global compensation package approved by the General Shareholders Meeting of 2004.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | Other Operating Income (Expenses), Net
|-- | --------------------------------------



|                                      |  |          |   |  |        |  |        |  
|------------------------------------- |  | -------- | - |  | ------ |  | ------ | -
|                                      |  | 2004     |   |  | 2003   |  | 2002   |  
|Interconnection cost recovery(1)      |  | 65,647   |   |  |       |  |       |  
|FUST recovery (Note 15)               |  | 37,902   |   |  |       |  |       |  
|COFINS recovery                       |  |         |   |  | 17,736 |  |       |  
|ICMS recovery                         |  | 14,124   |   |  | 13,609 |  | 16,043 |  
|Provision for contingencies (Note 24) |  | (323,059 | ) |  |       |  | 9,779  |  
|Agreement with operators (Note 32)    |  | 68,456   |   |  |       |  |       |  
|Late charges income (expenses)        |  | (16,127  | ) |  | 17,379 |  | 5,872  |  
|Other                                 |  | 49,787   |   |  | 26,175 |  | (1,165 | )
|                                      |  |          |   |  |        |  |        |  
|Total                                 |  | (103,270 | ) |  | 74,899 |  | 30,529 |  
|                                      |  |          |   |  |        |  |        |  

---

|(1) | Based on the decision by the Special Tribunal of the Supreme Court of Justice issued on July 1, 2004, which supported Embratels understanding that the index for readjustment
of telephone rates is the IGP-DI, as established in the concession contracts, with no retroactive application, Embratel has reversed a provision of R$65,647, recorded as cost of services, corresponding to the period from July through December 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-20



---

|9. | Financial Expense, Net
|-- | ----------------------



|                                            |  |            |   |  |          |   |  |            |  
|------------------------------------------- |  | ---------- | - |  | -------- | - |  | ---------- | -
|                                            |  | 2004       |   |  | 2003     |   |  | 2002       |  
|Financial income                            |  |            |   |  |          |   |  |            |  
|Interest on temporary investments and other |  | 271,159    |   |  | 244,154  |   |  | 181,622    |  
|Monetary variation  credit                 |  | 259,949    |   |  | 1,258    |   |  | 396        |  
|Exchange variation  assets(1)              |  | (9,558     | ) |  | (105,557 | ) |  | 337,175    |  
|                                            |  |            |   |  |          |   |  |            |  
|                                            |  | 521,550    |   |  | 139,855  |   |  | 519,193    |  
|                                            |  |            |   |  |          |   |  |            |  
|Financial expenses                          |  |            |   |  |          |   |  |            |  
|Financial charges                           |  | (589,288   | ) |  | (510,340 | ) |  | (441,760   | )
|Monetary variation  charge                 |  | (505,126   | ) |  | (53,064  | ) |  | (41,652    | )
|Exchange variation  liabilities(1)         |  | (45,738    | ) |  | 263,624  |   |  | (1,588,166 | )
|                                            |  |            |   |  |          |   |  |            |  
|                                            |  | (1,140,152 | ) |  | (299,780 | ) |  | (2,071,578 | )
|                                            |  |            |   |  |          |   |  |            |  
|Total                                       |  | (618,602   | ) |  | (159,925 | ) |  | (1,552,385 | )
|                                            |  |            |   |  |          |   |  |            |  

---

|(1) | In 2004, 2003 and 2002, the U.S. dollar devalued by 8.13%, devalued by 18.23% and valued by 52.27%, respectively, against the Brazilian real, and the Japanese Yen devalued by 3.98%,
devalued by 9.48% and devalued by 68.54% against the Brazilian Real, respectively, nevertheless, the Company recorded an exchange variation expense of R$(45,738), R$263,624 and R$(1,588,166), respectively, net of results from hedge contracts
recorded during the year, in the amount of R$(209,935), R$(409,938) and R$703,474 in 2004, 2003 and 2002, respectively. In 2004, the Company registered this exchange variation expense, basically, due to higher devaluation of the real against
dollar, occurred in the first half of 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10. | Extraordinary Non-Operating Income  ILL
|--- | ----------------------------------------



From 1989 through 1992, the Federal Government imposed a tax on profit distributions (ILL  Imposto sobre o Lucro Líquido). During this
period, Embratel regularly paid this tax in accordance with the provisions of tax legislation then in force. In 1996, in a specific lawsuit, the Brazilian Supreme Court ruled that ILL was unconstitutional, since undistributed profits do not
represent a taxable event. This decision created legal precedent, and consequently, other taxpayers filed claims to recover amounts previously paid. In 1999, Embratel filed a lawsuit, and obtained an injunction enabling Embratel to offset the ILL
tax against income taxes payable from May 1999 to July 2001. Since the offset was still subject to final decision by a higher court, Embratel did not reverse its liability for income taxes payable. In March 2001, the second judicial level (Tribunal
Regional Federal) further confirmed the right to offset. In May 2002, the Administrative Tax Court further ruled that ILL recovery was not subject to Income Tax, as it had not been treated as a tax-deductible expense when paid between 1989 and 1992.
Considering that, the Company recorded the reversal of the related income tax liability in 2002 the amount of R$198,131.



F-21



---

In 2004, the Supreme Court confirmed the application of the second judicial level decision to the
monetary restatements, which were recorded by Embratel, related to the above ILL of R$106,802, as Extraordinary Non-operating Income.



|11. | Other Non-Operating Income (Expenses), Net
|--- | ------------------------------------------



|                                                                                          |  |         |   |  |          |   |  |         |  
|----------------------------------------------------------------------------------------- |  | ------- | - |  | -------- | - |  | ------- | -
|                                                                                          |  | 2004    |   |  | 2003     |   |  | 2002    |  
|Income                                                                                    |  |         |   |  |          |   |  |         |  
|Gain on of property, plant and equipment(1)                                               |  | 37,361  |   |  | 4,784    |   |  | 5,766   |  
|Gain on sale of investments (Note 16)                                                     |  | 8,502   |   |  | 92,808   |   |  |        |  
|Other                                                                                     |  | 16,623  |   |  | 20,623   |   |  | 24,576  |  
|Expenses                                                                                  |  |         |   |  |          |   |  |         |  
|Write-off of permanent assets(2)                                                          |  | (2,339  | ) |  | (123,637 | ) |  | (11,653 | )
|Provision for write-off of permanent assets(1)                                            |  | (71,492 | ) |  | (20,000  | ) |  |        |  
|Provision for impairment (Note 17)                                                        |  | (32,000 | ) |  |         |   |  |        |  
|Withholding income tax on remittances to foreign Telecommunications companies (Note 24.2) |  |        |   |  | (39,462  | ) |  |        |  
|Other                                                                                     |  |        |   |  | (5,517   | ) |  | (7,700  | )
|                                                                                          |  |         |   |  |          |   |  |         |  
|Total                                                                                     |  | (43,345 | ) |  | (70,401  | ) |  | 10,989  |  
|                                                                                          |  |         |   |  |          |   |  |         |  

---

|(1) | These balances include income from the disposal of Property, Plant and Equipment in the amount of R$31,091 and corresponding provision for write-off in the amount of R$33,092,
related to the agreements with operators as described in Note 32.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On March 24, 2003, the principal customer of Acessonet Ltda. filed a lawsuit requesting the interruption of the long-term contract signed with Embratel. During the second quarter of
2003, this customer began disconnecting several circuits, which were being provided based on the aforementioned contract. Consequently, in June 2003, Embratel wrote-off of the unamortized balance of goodwill related to Acessonet amounting to
R$101,489. Additionally, the loss on sale of Intelsat Ltd. amounting of R$18,679 is recorded in this line item (see Note 16).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. | Income Tax and Social Contribution Benefit (Expense)
|--- | ----------------------------------------------------



The Company is subject to corporate income tax (IRPJ) and social contribution on profits (CSSL) based on taxable income, and has chosen to pay these taxes
based on monthly estimates. As provided in current tax legislation, the monthly estimated payment is suspended or reduced when the amounts calculated according to this criteria exceeds those calculated based on the accumulated actual profit of the
current period, upon balance sheets prepared for this purpose (tax balance sheet). The amounts prepaid of Income Tax and Social Contribution are recorded as Income Tax - Estimated and Social Contribution - Estimated, and are presented as a deduction
from the taxes payable (see Note 21).



F-22



---

The off-set of accumulated tax loss carryforwards and negative basis for calculation of social
contribution is limited to 30% of the respective taxable income in each fiscal year. The losses carried forward have no expiration date. On December 31, 2004 and 2003, Embratels tax losses and negative basis for calculation of social
contribution are as follows:



|                                                       |  |           |  |          
|------------------------------------------------------ |  | --------- |  | ---------
|                                                       |  | 2004      |  | 2003     
|Tax losses                                             |  | 1,055,433 |  | 1,074,911
|Negative basis for calculations of social contribution |  | 930,653   |  | 947,866  



The composition of
deferred tax assets and liabilities, based on temporary differences, is described in Notes 15 and 21, respectively.



At December 31, 2004, Vésper Holding S.A. and Vésper Holding São Paulo S.A. and their subsidiaries had altogether tax losses and
negative basis of social contribution of R$3,309,734 and R$3,313,474, respectively. Due to the fact that these subsidiaries do not have a history of taxable income and there are uncertainties about the realization of these tax credits, credits were
not recognized.



| | a. | Income tax and social contribution income (expenses)
| | -- | ----------------------------------------------------



The income tax and social contribution expense is comprised of the current expense for the year, computed in accordance with current tax legislation, and
deferred expense, corresponding to the effects of the taxes on the temporary differences arising or realized in the year. The deferred income (expense) tax and social contribution income (expense) for the years ended December 31, 2004, 2003 and 2002
totaled R$99,403, R$(90,172) and R$437,327, respectively (consolidated), and were calculated on the allowance for doubtful accounts, tax losses, temporarily non-deductible taxes and other expenses, as well as other temporarily non taxable revenues
(Note 15).



F-23



---

The components of income tax and social contribution for the years ended December 31 are as follows:



|                                                             |  |         |   |  |          |   |  |         |  
|------------------------------------------------------------ |  | ------- | - |  | -------- | - |  | ------- | -
|                                                             |  | 2004    |   |  | 2003     |   |  | 2002    |  
|Current                                                      |  |         |   |  |          |   |  |         |  
|Social contribution                                          |  | (19,427 | ) |  | (12,021  | ) |  | (6,123  | )
|Income tax                                                   |  | (54,600 | ) |  | (34,713  | ) |  | (17,008 | )
|                                                             |  |         |   |  |          |   |  |         |  
|Total current expense                                        |  | (74,027 | ) |  | (46,734  | ) |  | (23,131 | )
|                                                             |  |         |   |  |          |   |  |         |  
|Deferred                                                     |  |         |   |  |          |   |  |         |  
|Social contribution                                          |  | 27,106  |   |  | (24,420  | ) |  | 115,696 |  
|Income tax                                                   |  | 72,297  |   |  | (65,752  | ) |  | 321,631 |  
|                                                             |  |         |   |  |          |   |  |         |  
|Total deferred benefit (expense)                             |  | 99,403  |   |  | (90,172  | ) |  | 437,327 |  
|                                                             |  |         |   |  |          |   |  |         |  
|Social contribution  benefit (expense) current and deferred |  | 7,679   |   |  | (36,441  | ) |  | 109,573 |  
|Income tax  benefit (expense) current and deferred          |  | 17,697  |   |  | (100,465 | ) |  | 304,623 |  
|                                                             |  |         |   |  |          |   |  |         |  
|Total                                                        |  | 25,376  |   |  | (136,906 | ) |  | 414,196 |  
|                                                             |  |         |   |  |          |   |  |         |  



The current income
tax and social contribution expense, reported in the consolidate statements of income for the years ended 2004, 2003 and 2002, are mainly attributable to the subsidiary Star One.



| | b. | Reconciliation of tax benefit (expenses) with statutory rates
| | -- | -------------------------------------------------------------



The provision for income tax was accrued based on taxable income at the rate of 15%, plus an additional 10% on the taxable income in excess of R$240.
Social contribution was calculated at a rate of 9%.



F-24



---

The reconciliation between income tax and social contribution based on statutory rates with the amounts
recognized as income tax and social contribution benefit (expense) is as follows:



|                                                              |  |          |   |  |          |   |  |            |  
|------------------------------------------------------------- |  | -------- | - |  | -------- | - |  | ---------- | -
|                                                              |  | 2004     |   |  | 2003     |   |  | 2002       |  
|Net income (loss) before taxes and minority interest          |  | (327,401 | ) |  | 399,907  |   |  | (1,031,927 | )
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax benefit (expense) at nominal rate (25%)            |  | 81,850   |   |  | (99,977  | ) |  | 257,982    |  
|Adjustments to obtain the effective rate:                     |  |          |   |  |          |   |  |            |  
|Income tax benefit on amortization of goodwill on merger      |  | (6,611   | ) |  | (6,611   | ) |  | (6,611     | )
|Non-deductible finance charges                                |  |         |   |  |         |   |  | 13,837     |  
|Unrecorded tax credits owed to CVM 371(1)                     |  | (39,999  | ) |  |         |   |  |           |  
|Favorable decision on ILL lawsuit (Note 10)                   |  | 9,757    |   |  |         |   |  | 36,002     |  
|Other permanent additions (exclusions)(2)                     |  | (27,300  | ) |  | 6,123    |   |  | 3,413      |  
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax benefit (expense)                                  |  | 17,697   |   |  | (100,465 | ) |  | 304,623    |  
|                                                              |  |          |   |  |          |   |  |            |  
|Social contribution benefit (expense) at statutory rates (9%) |  | 29,466   |   |  | (35,992  | ) |  | 92,873     |  
|Adjustments to obtain the effective rate:                     |  |          |   |  |          |   |  |            |  
|Tax benefit on amortization of goodwill on merger             |  | (2,380   | ) |  | (2,380   | ) |  | (2,380     | )
|Non-deductible finance charges                                |  |         |   |  |         |   |  | 4,981      |  
|Unrecorded tax credits owed to CVM 371(1)                     |  | (14,370  | ) |  |         |   |  |           |  
|Favorable decision on ILL lawsuit (Note 10)                   |  | 3,513    |   |  |         |   |  | 12,961     |  
|Other permanent additions (exclusions)(2)                     |  | (8,550   | ) |  | 1,931    |   |  | 1,138      |  
|                                                              |  |          |   |  |          |   |  |            |  
|Social contribution benefit (expense)                         |  | 7,679    |   |  | (36,441  | ) |  | 109,573    |  
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax and social contribution                            |  | 25,376   |   |  | (136,906 | ) |  | 414,196    |  
|                                                              |  |          |   |  |          |   |  |            |  

---

|(1) | This basically refers to the losses incurred by the subsidiaries Vésper Holding São Paulo S.A. and Vésper Holding S.A., for the period ended December 31, 2004,
in which no tax credits were recorded due to the uncertainties involving their realization.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Permanent additions (exclusions) in the consolidated statements for 2004 mainly correspond to the executive retention plan expenses (Note 7).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



F-25



---

|13. | Cash and Cash Equivalents
|--- | -------------------------



|                                                   |  |         |  |          
|-------------------------------------------------- |  | ------- |  | ---------
|                                                   |  | 2004    |  | 2003     
|Cash                                               |  | 51      |  | 116      
|Bank deposits                                      |  | 45,646  |  | 176,991  
|                                                   |  |         |  |          
|Subtotal                                           |  | 45,697  |  | 177,107  
|                                                   |  |        
|U.S. dollars short-term certificates of deposit(1) |  | 5,198   |  | 218,021  
|Marketable securities -                            |  |         |  |          
|Foreign                                            |  | 119,440 |  | 116,237  
|Local                                              |  | 661,123 |  | 1,189,225
|Bank Certificates of Deposit                       |  | 570     |  | 18,906   
|                                                   |  |         |  |          
|Total                                              |  | 832,028 |  | 1,719,496
|                                                   |  |         |  |          

---

|(1) | Short-term certificates of deposit represent highly liquid marketable securities denominated in U.S. dollars, with maturities of less than 90 days, funded from traffic revenues
collected from international operators.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Marketable securities primarily represent highly liquid fixed income bonds with maturities of less than 90 days.



|14. | Trade Accounts Receivables, Net
|--- | -------------------------------



|                                                      |  |            |   |  |            |  
|----------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                      |  | 2004       |   |  | 2003       |  
|Voice services                                        |  | 2,829,753  |   |  | 2,799,273  |  
|Data, telecommunications companies and other services |  | 508,351    |   |  | 619,924    |  
|Foreign administrators                                |  | 210,435    |   |  | 179,266    |  
|                                                      |  |            |   |  |            |  
|Subtotal                                              |  | 3,548,539  |   |  | 3,598,463  |  
|                                                      |  |           
|Allowance for doubtful accounts                       |  | (2,120,480 | ) |  | (1,926,426 | )
|                                                      |  |            |   |  |            |  
|Total                                                 |  | 1,428,059  |   |  | 1,672,037  |  
|                                                      |  |            |   |  |            |  



No single consumer
accounted for more than 10% of total trade accounts receivable at December 31, 2004 and 2003.



F-26



---

Changes in the allowance for doubtful accounts were as follows:



|                                                        |  |           |   |  |           |   |  |           |  
|------------------------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                                        |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Beginning balance at January 1,                         |  | 1,926,426 |   |  | 1,990,484 |   |  | 1,452,069 |  
|                                                        |  |           |   |  |           |   |  |           |  
|Increase through charge to expenses                     |  | 366,590   |   |  | 353,142   |   |  | 627,136   |  
|                                                        |  |           |  
|Increase (Decrease) through charge to other accounts(1) |  | (24,380   | ) |  | 251,850   |   |  |          |  
|                                                        |  |           |  
|Write-offs for the year                                 |  | (148,156  | ) |  | (669,050  | ) |  | (88,721   | )
|                                                        |  |           |   |  |           |   |  |           |  
|Ending balance at December 31,                          |  | 2,120,480 |   |  | 1,926,426 |   |  | 1,990,484 |  
|                                                        |  |           |   |  |           |   |  |           |  

---

|(1) | In 2003, mainly comprised of increases due to Vésper acquisition (Note 1)
|--- | -------------------------------------------------------------------------



|15. | Deferred and Recoverable Taxes
|--- | ------------------------------



|                                                                                  |  |           |  |          
|--------------------------------------------------------------------------------- |  | --------- |  | ---------
|                                                                                  |  | 2004      |  | 2003     
|Deferred income tax and social contribution assets                                |  |           |  |          
|Provision for write-off of property, plant and equipment/accelerated depreciation |  | 35,215    |  | 15,420   
|Tax losses carryforward                                                           |  | 263,858   |  | 268,728  
|Negative basis of social contribution                                             |  | 83,759    |  | 85,307   
|Allowance for doubtful accounts                                                   |  | 623,672   |  | 564,465  
|Goodwill on the acquisition of investment                                         |  | 8,991     |  | 17,983   
|COFINS/PIS  temporarily non-deductible                                           |  | 30,403    |  | 30,403   
|Other deferred taxes (provisions)                                                 |  | 203,778   |  | 169,929  
|                                                                                  |  |           |  |          
|Subtotal                                                                          |  | 1,249,676 |  | 1,152,235
|                                                                                  |  |          
|Withholding income tax (IRRF)                                                     |  | 80,947    |  | 86,611   
|Recoverable income tax/social contribution                                        |  | 27,674    |  | 40,055   
|Value-added goods and services tax  ICMS                                         |  | 193,754   |  | 271,303  
|Income tax on net income  ILL (Note 10)                                          |  | 41,625    |  |         
|FUST                                                                              |  | 66,205    |  | 2,743    
|FUNTTEL                                                                           |  | 1,446     |  | 1,322    
|Other                                                                             |  | 32,565    |  | 63,146   
|                                                                                  |  |           |  |          
|Total                                                                             |  | 1,693,892 |  | 1,617,415
|                                                                                  |  |           |  |          
|Current                                                                           |  | 387,572   |  | 465,719  
|                                                                                  |  |           |  |          
|Non-current                                                                       |  | 1,306,320 |  | 1,151,696
|                                                                                  |  |           |  |          



F-27



---

Deferred taxes were recorded based on the assumption of future realization, as follows:



| | a. | Tax losses and negative basis of social contribution will be compensated at the limit of 30% of the taxable income in each period.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | b. | Goodwill on investment: recovery will occur proportionally to the amortization of the goodwill from the subsidiary Star One, in a five year-term, ending in 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Other temporary differences: realization will occur with the payment of accrued provisions and the effective write-off of underlying doubtful accounts or any other event which may
result in a recorded loss.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on
managements estimates of future taxable income that were approved by the Board of Directors, the Company believes that it is more likely than not that the amounts recorded as of December 31, 2004 will be realized.



In December 2003, Anatel issued an official letter clarifying that the
connection costs are deductible from the contribution calculation base of FUST  Telecommunications Systems Universalization Fund.



In the second quarter of 2004, Embratel, concluded a review of the calculation basis of the referenced contribution tax pursuant this official letter and
recorded a corresponding credit in the amount of R$57,736. Of this credit, R$37,902, was recorded as Other operating income (expenses), net, and the compensatory interest of R$19,834, was recorded as Financial expense, net.
On December 31, 2004, these credits, monetarily restated, totaled R$63,216.



Additionally, Vésper São Paulo S.A. and Vésper S.A. have a total recorded amount of R$2,989 in 2004 (R$2,743 on December 31, 2003) to recover in FUST contributions of which R$2,743 and R$246 are
recorded as Other operating income (expenses), net and Financial expense, net respectively.



|16. | Investments
|--- | -----------



|                              |  |       |  |           |   |  |       
|----------------------------- |  | ----- |  | --------- | - |  | ------
|                              |  | 2004  |  | Ownership |   |  | 2003  
|Satellite company  New Skies |  |      |  | 2.104549  | % |  | 38,981
|                              |  |       | 
|Other                         |  | 1,594 |  |           |   |  | 907   
|                              |  |       |  |           |   |  |       
|Total                         |  | 1,594 |  |           |   |  | 39,888
|                              |  |       |  |           |   |  |       



The interests in the
satellite company are denominated in U.S. dollars and translated to local currency as described in Note 3.c.



F-28



---

During the years 2004 and 2003, Embratel sold to third parties 100% of its participation in the following
companies:



|                             |  |                   |      |                       |         |               |         |             |         |  
|---------------------------- |  | ----------------- | ---- | --------------------- | ------- | ------------- | ------- | ----------- | ------- | -
|Company                      |  | Month of disposal |      | Balance of investment |         | Sale proceeds |         | Gain/(loss) |        
|Intelsat Ltd.                |  | July              | 2003 |                       | 137,717 |               | 119,038 |             | (18,679 | )
|Embratel Clearinghouse Ltda. |  | October           | 2003 |                       | 2,946   |               | 46,161  |             | 43,215  |  
|Inmarsat Ventures PLC        |  | December          | 2003 |                       | 37,664  |               | 86,366  |             | 48,702  |  
|Telecommunications Companies |  | December          | 2003 |                       | 6,386   |               | 7,277   |             | 891     |  
|New Skies                    |  | November          | 2004 |                       | 35,471  |               | 43,973  |             | 8,502   |  



|17. | Property, Plant and Equipment
|--- | -----------------------------



| | a. | Composition
| | -- | -----------



|                                    |  |            |  |                         |   |  |               
|----------------------------------- |  | ---------- |  | ----------------------- | - |  | --------------
|                                    |  | 2004      
|                                    |  | Cost (1)   |  | Accumulateddepreciation |   |  | Net book value
|Switching equipment                 |  | 2,464,823  |  | (1,297,448              | ) |  | 1,167,375     
|Transmission equipment(2)           |  | 8,546,659  |  | (5,400,560              | ) |  | 3,146,099     
|Buildings and ducts                 |  | 1,360,058  |  | (748,309                | ) |  | 611,749       
|Land                                |  | 196,231    |  |                        |   |  | 196,231       
|Other assets                        |  |            |  |                         |   |  |               
|General use(3)                      |  | 710,120    |  | (538,844                | ) |  | 171,276       
|Intangible(4)                       |  | 1,173,327  |  | (685,917                | ) |  | 487,410       
|Telecommunication infrastructure(5) |  | 713,567    |  | (523,271                | ) |  | 190,296       
|Operating license(6)                |  | 29,836     |  | (28,800                 | ) |  | 1,036         
|Construction in progress            |  | 601,133    |  |                        |   |  | 601,133       
|                                    |  |            |  |                         |   |  |               
|Total                               |  | 15,795,754 |  | (9,223,149              | ) |  | 6,572,605     
|                                    |  |            |  |                         |   |  |               





F-29



---

|                                    |  |            |  |                         |   |  |               
|----------------------------------- |  | ---------- |  | ----------------------- | - |  | --------------
|                                    |  | 2003      
|                                    |  | Cost (1)   |  | Accumulateddepreciation |   |  | Net book value
|Switching equipment                 |  | 2,320,202  |  | (1,028,923              | ) |  | 1,291,279     
|Transmission equipment(2)           |  | 8,539,554  |  | (4,805,845              | ) |  | 3,733,709     
|Buildings and ducts                 |  | 1,343,926  |  | (697,026                | ) |  | 646,900       
|Land                                |  | 190,495    |  |                        |   |  | 190,495       
|Other assets                        |  |            |  |                         |   |  |               
|General use(3)                      |  | 680,458    |  | (472,424                | ) |  | 208,034       
|Intangible(4)                       |  | 1,128,606  |  | (638,579                | ) |  | 490,027       
|Telecommunication infrastructure(5) |  | 712,676    |  | (500,849                | ) |  | 211,827       
|Operating license(6)                |  | 29,285     |  | (29,104                 | ) |  | 181           
|Construction in progress            |  | 421,877    |  |                        |   |  | 421,877       
|                                    |  |            |  |                         |   |  |               
|Total                               |  | 15,367,079 |  | (8,172,750              | ) |  | 7,194,329     
|                                    |  |            |  |                         |   |  |               

---

|(1) | Cost refers to acquisition or construction, monetarily restated through December 31, 1995. Additionally, on November 30, 2003, Vésper São Paulo S.A. and Vésper
S.A. evaluated the recoverability of its permanent assets (property, plant & equipment, operating license and deferred assets). Based on its analysis of the future cash flow generating capacity of these assets, the Companys management
concluded that the permanent assets amounts would not be fully recovered, and, therefore, decided to set up this impairment provision, which is recorded net of the related cost. In December 2004, a new evaluation was conducted which resulted in
recognition of an additional provision of R$32,000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Transmission equipment includes aerial, underground and building cables, private automatic exchanges and power equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(3) | Vehicles, information technology equipment, furniture and fixtures.
|--- | -------------------------------------------------------------------

|(4) | Mainly software licenses and rights of way.
|--- | -------------------------------------------

|(5) | Telecommunications support towers, leasehold improvements and energy and climatization system.
|--- | ----------------------------------------------------------------------------------------------

|(6) | Refers to the cost of the operating licenses (authorizations) acquired by the subsidiary Vésper São Paulo S.A. and Vésper S.A. for engagement switched fixed
telephony services extended to public users in general. This is a private service provided in the intra-regional, domestic long-distance modality, in regions I and III of the General Grant Plan (Plano Geral de Outorgas), while joint and
simultaneous exploitation of the local modality is mandatory. The authorization term is for 20 years, as from the date that the authorization for the use of radio frequency was extended (beginning February 4, 1999), onus bearing and renewable for
one subsequent period only.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a.1.) | Assets related to the concession contract
| | ----- | -----------------------------------------



Certain assets are allocated for use in services provided under the concession, which prevents their removal, disposal, assignment or use as guarantees in
mortgages without the express prior authorization of the regulatory authority.



F-30



---

| | a.2.) | Assets pledged as a guarantee
| | ----- | -----------------------------



As of December 31, 2004, the Company had real estate and other fixed assets listed and/or designated as guarantees in judicial claims, in the amount of
R$845,219 (R$704,501 on December 31, 2003).



| | b. | Depreciation
| | -- | ------------



The annual depreciation rates applied to property, plant and equipment are as follows:



|                       |  |              
|---------------------- |  | -------------
|                       |  | %            
|Switching equipment    |  | 10.00        
|Transmission equipment |  | 5.00 to 20.00
|Buildings and ducts    |  | 4.00         
|Other assets           |  | 4.00 to 20.00



The Company revised
the depreciation rates applicable to approximately 70% of its property, plant and equipment, and, consequently, since January 2003 switching equipment has been depreciated at a 10% annual rate (7.69% until December 31, 2002), and optical fiber
cables (classified as transmission equipment) have been depreciated at a 5% annual rate (6.67% and 10% until December 31, 2002), which resulted in an increase in the depreciation expense in the amount of approximately R$13 million for the year ended
December 31, 2003.



The weighted average depreciation rate for
the year ended December 31, 2004 was 9.11% (9.23% and 8.94% for the years ended December 31, 2003 and 2002, respectively).



| | c. | Construction of the Star One C-1 Satellite
| | -- | ------------------------------------------



In 2001, the subsidiary Star One signed an agreement with Alcatel Space Industries (ASI), for the construction of the Star One C-1 satellite. The cost of
the project was US$141,700 and the construction was expected to last 32 months through 2005. In April 2002, Star One and Alcatel entered into an agreement to review the technical specifications of the satellite Star One C-1, which decreased the
amount of the project to US$126,105.



Because of modifications
to the technical specifications of the satellite, the contract was amended in March 2004 to reflect a total cost of US$212,100 and a new configuration was set of 28, 14 and 1 transponders in C, Ku and X bands, respectively.



F-31



---

The term for delivery of the satellite in orbit and of the earth control station is 30 months as from
September 30, 2003. The launching is scheduled for the first half of 2006.



The amendment provides that in case of cancellation of the satellite Star One C-1 construction, the subsidiary Star One has to reimburse third parties the costs incurred, plus 5%, less the payments already made.



The amount related to this contract is recorded as
construction in progress as of December 31, 2004 and totals R$275,971 (R$189,539 at December 31, 2003).



|18. | Deferred Assets
|--- | ---------------



|                         |  |          |   |  |          |  
|------------------------ |  | -------- | - |  | -------- | -
|                         |  | 2004     |   |  | 2003     |  
|Pre-operating expenses   |  | 170,098  |   |  | 168,467  |  
|Impairment provision     |  | (12,587  | ) |  | (42,787  | )
|Goodwill                 |  | 102,426  |   |  |         |  
|Accumulated amortization |  | (167,491 | ) |  | (122,810 | )
|                         |  |          |   |  |          |  
|Net book value           |  | 92,446   |   |  | 2,870    |  
|                         |  |          |   |  |          |  



The impairment
provision for deferred assets refers to the pre-operating expenses of Vésper São Paulo S.A. and Vésper S.A., which were acquired on December 2, 2003.



The goodwill is recorded on the books of CT Torres, resulted from the acquisition of CT Torres by its the former parent
company, which was subsequently incorporated by CT Torres and, thus, the goodwill was transferred to the books of CT Torres. The goodwill is being amortized based on future profitability, and the amortization term has been reduced from 10 to 6 years
beginning on November 1, 2004.



|19. | Payroll and Related Accruals
|--- | ----------------------------



|                                |  |        |  |       
|------------------------------- |  | ------ |  | ------
|                                |  | 2004   |  | 2003  
|Wages and salaries              |  | 4,177  |  | 1,404 
|Accrued social security charges |  | 64,386 |  | 70,025
|Accrued benefits                |  | 5,218  |  | 16,156
|                                |  |        |  |       
|Total                           |  | 73,781 |  | 87,585
|                                |  |        |  |       



F-32



---

|20. | Accounts Payable and Accrued Expenses
|--- | -------------------------------------



|                              |  |           |  |          
|----------------------------- |  | --------- |  | ---------
|                              |  | 2004      |  | 2003     
|Suppliers                     |  | 1,032,380 |  | 1,413,251
|International operators       |  | 169,283   |  | 226,148  
|Consignment for third parties |  | 128,753   |  | 115,830  
|Other                         |  | 25,424    |  | 67,382   
|                              |  |           |  |          
|Total                         |  | 1,355,840 |  | 1,822,611
|                              |  |           |  |          



|21. | Taxes and Contributions
|--- | -----------------------



|                                                                     |  |         |  |        
|-------------------------------------------------------------------- |  | ------- |  | -------
|                                                                     |  | 2004    |  | 2003   
|Indirect taxes                                                       |  |         |  |        
|ICMS (value-added tax)                                               |  | 210,770 |  | 134,325
|PIS/COFINS (social/finance contributions)                            |  | 40,393  |  | 47,245 
|PIS/Pasep  in suspension                                            |  | 144,342 |  | 132,301
|PIS/COFINS  judicial deposit in court(1)                            |  | 15,030  |  | 15,030 
|ISS (municipal service tax)                                          |  | 11,860  |  | 9,675  
|Other                                                                |  | 20,016  |  | 21,694 
|                                                                     |  |        
|Deferred taxes liabilities                                           |  |         |  |        
|IRPJ and CSSL, law No. 8,200/91  supplementary monetary restatement |  | 36,522  |  | 38,319 
|Other - income taxes(2)                                              |  | 2,180   |  | 830    
|                                                                     |  |         |  |        
|Total                                                                |  | 481,113 |  | 399,419
|                                                                     |  |         |  |        
|Current                                                              |  | 432,194 |  | 347,358
|                                                                     |  |         |  |        
|Non-current                                                          |  | 48,919  |  | 52,061 
|                                                                     |  |         |  |        

---

|(1) | In 1999, Embratel questioned the change introduced by Law No. 9,718/99 which increased: (a) taxable income for the calculation of PIS and COFINS, including financial income and
exchange variations and (b) the COFINS tax rate from 2% to 3%. Despite this questioning, Embratel continued to record the total amount of the tax liability and made a court deposit during the period comprised August 1999 to April 2001. As from May,
2001, and based on case law, the company decided to discontinue making these deposits and began to pay PIS and COFINS according to the terms of prevailing legislation. On August 29, 2002 Provision Measure (MP) No. 66 was published which permitted
the settlement of tax liabilities, which had been under legal dispute without carrying any fines. The subsidiary Embratel then decided based on this MP and on the petition filed in court, to settle the debt by presenting the taxes and contributions
provided for in the amount of R$173,122, net from the corresponding court deposits of an equal amount.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This item mainly refers to the provision for income tax and social contribution (estimate) and withholding income tax  IRRF.
|--- | -----------------------------------------------------------------------------------------------------------------------------



F-33



---

|22. | Loans and Financing
|--- | -------------------



|                    |  |           |  |          
|------------------- |  | --------- |  | ---------
|                    |  | 2004      |  | 2003     
|Loans and financing |  | 3,263,436 |  | 4,479,932
|Accrued interest    |  | 166,370   |  | 110,665  
|                    |  |           |  |          
|Total               |  | 3,429,806 |  | 4,590,597
|                    |  |           |  |          
|Current             |  | 2,099,185 |  | 1,217,256
|                    |  |           |  |          
|Non-current         |  | 1,330,621 |  | 3,373,341
|                    |  |           |  |          



Loans and financing
are principally comprised of credits from various banks and also from suppliers of telecommunications equipment used to enhance domestic and international telecommunications services. This debt finances working capital and equipment purchases
(mainly satellites and cables) and the B1, B2, B3, B4 and C-1 satellites and is to be repaid as set out in the repayment schedule below. The debt is mainly denominated in foreign currencies as shown in the following currency analysis and bears fixed
interest rates ranging from 4.5% to 11% per annum and variable interest rates ranging from 0.25% to 4% per annum over Libor. The Libor rate at December 31, 2004 was 2.50% per annum (1.22% per annum in 2003).



There were no unused commitments for long-term financing as of December 31,
2004 and 2003.



F-34



---

The loans and financing with financial institutions are primarily denominated in foreign currency. Part
of the debt is protected against exchange variation of the Brazilian Real through swap operations (Note 23.c), as described below:



|                                                |  |           |  |       |  |                     
|----------------------------------------------- |  | --------- |  | ----- |  | --------------------
|                                                |  | Amount    |  | %     |  | Average cost of debt
|Current                                         |  |           |  |       |  |                     
|Portion of debt under swap or reais-denominated |  | 1,524,858 |  | 72.6  |  | 97.67% CDI          
|Unhedged debt                                   |  | 574,327   |  | 27.4  |  | US$ + 3.24%         
|                                                |  |           |  |       |  |                     
|Total short-term debt                           |  | 2,099,185 |  | 100.0 |  |                     
|                                                |  |           |  |       |  |                     
|Non-current                                     |  |           |  |       |  |                     
|Portion of debt under swap or reais-denominated |  | 330,687   |  | 24.9  |  | 70.95% CDI          
|Unhedged debt                                   |  | 999,934   |  | 75.1  |  | US$ + 9.37%         
|                                                |  |           |  |       |  |                     
|Total long-term debt                            |  | 1,330,621 |  | 100.0 |  |                     
|                                                |  |           |  |       |  |                     
|Total                                           |  |           |  |       |  |                     
|Portion of debt under swap or reais-denominated |  | 1,855,545 |  | 54.1  |  | 92.91% CDI          
|Unhedged debt                                   |  | 1,574,261 |  | 45.9  |  | US$ + 7.13%         
|                                                |  |           |  |       |  |                     
|Total debt                                      |  | 3,429,806 |  | 100.0 |  |                     
|                                                |  |           |  |       |  |                     



| | a. | Model
| | -- | -----



|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|-------------------------------- |  | ---------- |  | --------- |  | --------- |  | ---------- |  | --------- |  | ---------
|                                 |  | 2004       |  | 2003     
|                                 |  | Short term |  | Long term |  | Total     |  | Short term |  | Long term |  | Total    
|Local currency                   |  |            |  |           |  |           |  |            |  |           |  |          
|Bank loans                       |  |           |  |          |  |          |  | 149,055    |  | 860,337   |  | 1,009,392
|Commercial Paper                 |  | 1,019,050  |  |          |  | 1,019,050 |  |           |  |          |  |         
|Finame                           |  | 6,813      |  | 13,862    |  | 20,675    |  | 6,848      |  | 20,228    |  | 27,076   
|ICMS Financing                   |  | 208        |  | 28,817    |  | 29,025    |  | 398        |  | 20,915    |  | 21,313   
|Leasing                          |  | 1,351      |  | 1,702     |  | 3,053     |  | 564        |  |          |  | 564      
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total                            |  | 1,027,422  |  | 44,381    |  | 1,071,803 |  | 156,865    |  | 901,480   |  | 1,058,345
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Foreign currency                 |  |            |  |           |  |           |  |            |  |           |  |          
|Bank loans                       |  | 957,294    |  | 430,564   |  | 1,387,858 |  | 992,274    |  | 1,566,767 |  | 2,559,041
|Foreign debt security            |  | 3,936      |  | 729,960   |  | 733,896   |  | 7,997      |  | 794,530   |  | 802,527  
|Star One C-1 satellite financing |  | 1,715      |  | 111,301   |  | 113,016   |  | 1,326      |  | 67,249    |  | 68,575   
|Suppliers                        |  | 14,042     |  | 3,623     |  | 17,665    |  | 2,858      |  | 18,023    |  | 20,881   
|Leasing                          |  | 18,265     |  | 158       |  | 18,423    |  | 24,213     |  | 13,206    |  | 37,419   
|Swap / Hedge                     |  | 76,511     |  | 10,634    |  | 87,145    |  | 31,723     |  | 12,086    |  | 43,809   
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total                            |  | 1,071,763  |  | 1,286,240 |  | 2,358,003 |  | 1,060,391  |  | 2,471,861 |  | 3,532,252
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total of debt                    |  | 2,099,185  |  | 1,330,621 |  | 3,429,806 |  | 1,217,256  |  | 3,373,341 |  | 4,590,597
|                                 |  |            |  |           |  |           |  |            |  |           |  |          



F-35



---

| | b. | Repayment Schedule
| | -- | ------------------



The long-term debt amortization schedule, as of December 31, 2004, comprises the following yearly amounts:



|             |  |          
|------------ |  | ---------
|             |  | 2004     
|2006         |  | 180,206  
|2007         |  | 168,302  
|2008         |  | 847,015  
|2009         |  | 50,640   
|2010 to 2013 |  | 84,458   
|             |  |          
|Total        |  | 1,330,621
|             |  |          



| | c. | Percentage breakdown of total debt by foreign currency/original index:
| | -- | ----------------------------------------------------------------------



|                                       |  |                          |   |  |       |   |  |                          |   |  |       |  
|-------------------------------------- |  | ------------------------ | - |  | ----- | - |  | ------------------------ | - |  | ----- | -
|                                       |  | 2004                     |   |  | 2003  |  
|                                       |  | Exchange/Percentagerates |   |  | (%)   |   |  | Exchange/Percentagerates |   |  | (%)   |  
|U.S. Dollar                            |  | 2.6544                   |   |  | 64.1  | % |  | 2.8892                   |   |  | 60.9  | %
|Japanese Yen                           |  |                         |   |  |      |   |  | 0.0270                   |   |  | 10.7  | %
|Euro                                   |  | 3.6195                   |   |  | 4.7   | % |  | 3.6506                   |   |  | 5.3   | %
|CDI (Interbank Certificate of Deposit) |  | 17.75                    | % |  | 29.7  | % |  | 16.50                    | % |  | 22.0  | %
|TJLP                                   |  | 9.75                     | % |  | 0.6   | % |  | 11                       | % |  | 0.6   | %
|Real                                   |  |                         |   |  | 0.9   | % |  |                         |   |  | 0.5   | %
|                                       |  |                          |   |  |       |   |  |                          |   |  |       |  
|Total                                  |  |                          |   |  | 100.0 | % |  |                          |   |  | 100.0 | %
|                                       |  |                          |   |  |       |   |  |                          |   |  |       |  



| | d. | Roll-over of debt
| | -- | -----------------



In June 2004, Embratel completed its debt rollover program, which began in March 2003, whereby all outstanding debt was subject to a new amortization
schedule. The interest rates negotiated in these loans were Libor + 4% p.a. or CDI + 4% p.a.



| | e. | Prepayment of refinancing
| | -- | -------------------------



In December 2004, Embratel prepaid the debt that was part of the 2003 rollover. This process begun in December 2003, which resulted in the disbursement of
approximately US$766 million, mainly in the second half of 2004, the period that approximately US$558 million was paid. This debt was restated by Libor + 4% per annum and CDI + 4% per annum. The funds were raised from the issuance of Notes,
Commercial Paper and other funds raised in the fourth quarter of 2004.



F-36



---

The Company also prepaid US$22 million of other loans, which were not included in the rollover program.
These loans carried an approximate cost of Libor + 3.5% per annum.



The objective of the Company was to reduce the financial charges and terminate the covenants agreed upon the debt refinancing.



| | f. | Foreign debt securities - notes
| | -- | -------------------------------



In June 2004, Embratel conducted a note exchange offer of US$275 million issued in December 2003, for the purpose of aligning debt securities
with Securities and Exchange Commission  SEC. The securities issued previously were private and the new ones are public. The new notes have the same terms as the securities issued previously, mature in 2008 and carry an interest rate of 11%
per annum.



| | g. | Commercial paper
| | -- | ----------------



In November 2004, Embratel issued R$1 billion in promissory notes at 102.3% of CDI, for a period of 180 days renewable for another 180-day period, to
replace the refinancing agreement of March 2003.



| | h. | ICMS Financing
| | -- | --------------



In September 2002, Vésper S.A. began financing of 60% of the amount of ICMS effectively calculated on operating income, through an agreement
entered into with the Rio de Janeiro State Government and the Banco do Brasil, as its financial agent. The credit line is R$940,000, during the 60 month period with a grace period of 84 months and repayment term of 60 months, carrying interest at
rates of 4.5% to 6% per annum and a service fee equal to 1% of the each installment released. Vésper S.A. used R$28,817 (R$20,915 on December 31, 2003) of the total line of credit and the balance amounts to R$29,025 at December 31, 2004
(R$21,313 on December 31, 2003).



| | i. | Foreign currency bank loans
| | -- | ---------------------------



In the fourth quarter of 2004, Embratel obtained loans in the amount of US$165 million, with one year maturities and three-month Libor + 1.2% per annum
interest rates.



| | j. | Suppliers
| | -- | ---------



The suppliers financing is foreign currency denominated and refers to purchases of materials and equipment for the purchase of equipment needed for
providing telecommunications and data (internet) services.



F-37



---

| | k. | Guarantees
| | -- | ----------



The guarantees pledged in connection with outstanding loans and financing were substantially comprised of promissory notes, which although not
representing actual guarantees, are legal instruments that can be executed judicially in the event of default.



The guarantees pledged to the banks participating in the debt rollover program were cancelled in the fourth quarter of 2004, due to the prepayment of the
refinanced debt.



| | l. | Credit agreement defaults
| | -- | -------------------------



Most of the Companys credit agreements include cross-default provisions and cross-acceleration provisions that would permit the holders of such
indebtedness to declare the indebtedness to be in default and to accelerate the maturity thereof if a significant portion of the principal amount of the Companys debt is in default or accelerated. As of December 31, 2004, none of the
outstanding debt was in default.



As stated in Note 1.a., on
November 1, 2000, Embratel incorporated Star One to manage satellite operations, transferring the satellite rights and obligations to Star One, which became the licensee for providing these services until December 31, 2005. The credit agreements
related to these satellites include cross-acceleration provisions that would permit the lenders to accelerate the maturity thereof if the financed assets were sold or transferred to other companies. However, before incorporating Star One and
transferring the assets, Embratels management obtained from the lenders a waiver regarding the transfer of the assets to Star One, as this was a condition that could have caused an event of default. Most of the waivers conditioned to the
maintenance of Embratel as majority shareholder in Star One during the remaining term of agreements.



| | m. | Financial agreement for the construction of satellite  Star One C-1
| | -- | --------------------------------------------------------------------



On April 19, 2002, Star One entered into a financial agreement with BNP Paribas in order to finance 85% of Star One C-1
satellite construction costs and 100% of the insurance premium agreed with Coface (Compagnie Française dAssurance pour le Commerce Extérieur). The total amount was equivalent to US$122,337, with 36 months of grace
period and 14 equal and consecutive semi-annual installments, resulting in a 9.5-year contract. During the grace period, the interest rate would be the six-month LIBOR plus a margin of 0.75% per annum and during the repayment period, 5.96% per
annum.



As the original agreement of the purchase of the
satellite Star One C-1 was renegotiated due to the changes performed in the project, the price and the payment schedule were modified. Consequently, an amendment to the financing contract was signed on August 13, 2003. This amendment was signed with
BNP Paribas (leading



F-38



---

bank) and Societé Génerale, with amounts equivalent to 85% of the price of the satellite
Star One C-1 to be delivered in orbit and 100% of the insurance premium agreed with Coface. The new total amount was US$194,172 (US$19,461 related to 100% of the credit insurance premium), with a 38-month grace period and amortization in 14
semi-annual installments, totaling 10 years of term. During the grace period, the interest rate would be the six-month LIBOR plus 0.75% per annum and during the repayment period, 3.93% per annum. Income tax on remittances of interest is due by the
creditors.



On June 1, 2004, the Credit Agreement was amended
due to modifications of the satellite project and payment schedule. The amount of the credit was changed to US$185,232 (including US$18,547 of the credit insurance premium). All others conditions remained the same. At December 31, 2004, the amount
drawn totaled US$41,717.



The current agreement foresees the
following guarantee clauses:



| | m.1.) | Starting July 1, 2005, Star One will make monthly deposits in the account Debt Service Reserve Account of the amounts in Reais equivalent to 1/12 (one twelfth), in US
dollars, of the first semi-annual installment related to principal and interest. As from the date for beginning of the amortization period, foreseen to occur in November 2006, and until the final term of the agreement, Star One will keep deposited
in the mentioned account the amount in Reais equivalent, in US dollars, to 115% of one semi-annual installment of the debt service;
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m.2.) | A promissory note in favor of BNP Paribas was issued, in the outstanding amount of principal and interest in US dollars. The promissory note has attributable characteristics
according to the French Laws. It is a legal instrument that can be executed judicially for the purpose of reinforcing guarantees offered to creditors, and represents a commitment to pay said amounts, in case Star One delays the payments
contractually scheduled;
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m.3.) | In the event of unavailability of the guarantee in the above mentioned item m.1, there is the guarantee of the accounts receivable originated from the transponder lease
agreement signed between subsidiaries Embratel and Star One;
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m.4.) | In the event of unavailability of guarantees m.1 and m.3, as from July 1, 2006, Embratel is responsible for making deposits to the Debt Service Reserve
Account, limited to US$122,337;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m.5.) | During the term of the agreement, Embratel pledges to hold not less than 51% of the total voting shares of Star One; and
| | ----- | ------------------------------------------------------------------------------------------------------------------------



F-39



---

| | m.6.) | Star One is bound by financial covenants to the creditor banks, on account of the renegotiated agreements, with respect to the level of indebtedness and the minimum earnings before
financial results, income taxes, depreciation and amortization (EBITDA). To date, the subsidiary Star One has complied with all covenants.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | n. | Covenants
| | -- | ---------



Embratel is bound by financial covenants to the creditor banking institutions, on account of the renegotiated agreements, involving the level of
indebtedness, minimum earnings before financial result, income taxes, depreciation and amortization (EBITDA), and limits for capital expenditures, among other requirements. At December 31, 2004, the Company is in compliance with all such
covenants.



|23. | Financial Instruments
|--- | ---------------------



| | a. | Miscellaneous
| | -- | -------------



Embratel carries out transactions with financial instrument designed to reduce the exposure to risks of fluctuation in currency and interest rates, which
usually involve swap of indices and/or earnings/interest rates of cash equivalents, marketable securities and loans. Management of these risks is concluded through a hedging policy based on the measurement of the Companys financial risk, using
the VaR (Value at Risk) Factor.



| | b. | Risk management
| | -- | ---------------



The daily market risk estimate is performed through statistical instruments such as the Value at Risk (VaR) parameter, which enables consolidation of
interest and exchange risks on a common and integrated measurement for all financing operations. In addition to the calculation of VaR, the Stress-Test methodology is also used whereby it is possible to estimate the loss in an extreme situation in a
countrys macroeconomic scenario.



In this sense, a
system which is applies this methodology has been developed named EBTaR (Embratel at Risk). This system also validates the VaR obtained and uses the Back-Test as a historical one-year series.



F-40



---

| | c. | Interest rate, currency and forward currency swaps
| | -- | --------------------------------------------------



Embratel used derivative operations with banks to protect investments against foreign interest rate and currency fluctuations in comparison to the
Brazilian real, which impact the amount in local currency required for the payment of foreign currency liabilities as shown below:



|              |  |                         |  |                      |  |                     |  |                 |  |                 
|------------- |  | ----------------------- |  | -------------------- |  | ------------------- |  | --------------- |  | ----------------
|              |  | As of December 31, 2004
|Classes       |  | Issue date              |  | Maturity Date        |  | Notionalamount(US$) |  | Book value(R$)  |  | Market value(R$)
|Exchange Swap |  | Various                 |  | 01/03/05 to12/12/08  |  | 258,891             |  | 87,145          |  | 84,592          
|Forward       |  | 11/4/04                 |  | 01/12/05 and03/16/05 |  | 65,000              |  | 18,189          |  | 15,138          
|              |  |                         |  |                      |  |                     |  |                 |  |                 
|              |  |                         |  | Total                |  | 323,891             |  | 105,334         |  | 99,730          
|              |  |                         |  |                      |  |                     |  |                 |  |                 
|              | 
|              |  | As of December 31, 2003
|Classes       |  | Issue date              |  | Maturity Date        |  | Notionalamount(US$) |  | Book value (R$) |  | Marketvalue(R$) 
|Exchange Swap |  | Various                 |  | Various              |  | 449,982             |  | 43,809          |  | 46,616          



Losses derived from
these operations are due to the variation of indices contracted and are recorded on an accrual basis in Financial Income (Expense) in the consolidated statements of income.



| | d. | Criteria, assumptions and limitation in the market value calculations
| | -- | ---------------------------------------------------------------------



| | d.1.) | Cash and cash equivalents, current accounts receivable and payable  The carrying values of financial instruments approximate their corresponding market values due to
the short-term maturities of these instruments.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d.2.) | Loans and financing and swap operations (hedge and forward)  The market value is calculated using projections of the yields associated with each instrument at the
present value, using the term structure of the interest rate and the exchange coupon, prevailing on the financial market for the current date.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d.3.) | Limitations  The market values are calculated as a specific time on the basis of available market information and data regarding the financial instruments. The changes
in the assumptions can significantly impact the estimates.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-41



---

The financial instrument recorded as assets and liabilities as of December 31, 2004, which market values
differ from their carrying values are shown below:



|                    |  |            |  |             |  |            |  |            
|------------------- |  | ---------- |  | ----------- |  | ---------- |  | -----------
|                    |  | 2004       |  | 2003       
|                    |  | Book value |  | Marketvalue |  | Book value |  | Marketvalue
|Loans and financing |  | 3,429,806  |  | 3,220,803   |  | 4,590,597  |  | 4,944,239  



|24. | Provision for Contingencies
|--- | ---------------------------



In the normal course of business, the Company and its subsidiaries are parties to legal proceedings and potential discussions which were or may be raised
by the competent authorities, including among others civil, regulatory, tax, social security and labor issues.



A significant portion of the contingencies involve issues that are extremely complex and unique to the Company and/or the telecommunications industry,
arising from different interpretations of the laws in effect, which are not yet covered by consolidated jurisprudence.



It should also be noted that most issues resulted from procedures followed prior to the Holding Companys privatization, based on instructions issued
by government entities at the time.



Based on the facts
currently available and on the legal advisors opinion, the subsidiaries Management believes that the outcome of a significant portion of current and potential disputes will be favorable to the Company, and for those claims which the
unfavorable outcome is considered probable, a provision has been recorded. For those claims evaluated as possible loss, a provision has not been recorded.



Part of the changes in the provision for contingencies is due to monetary and exchange variation and thus affects net financial results.



The amounts involved are described as follows:



|      |  |          |  |          |  |           |  |          
|----- |  | -------- |  | -------- |  | --------- |  | ---------
|      |  | Probable |  | Possible
|      |  | 2004     |  | 2003     |  | 2004      |  | 2003     
|Labor |  | 91,434   |  | 30,753   |  | 75,097    |  | 41,242   
|Tax   |  | 94,294   |  | 6,933    |  | 1,951,393 |  | 1,186,287
|Civil |  | 291,536  |  | 36,063   |  | 191,348   |  | 570,200  
|      |  |          |  |          |  |           |  |          
|Total |  | 477,264  |  | 73,749   |  | 2,217,838 |  | 1,797,729
|      |  |          |  |          |  |           |  |          





F-42



---

| | 24.1. | Labor contingencies
| | ----- | -------------------



Those contingencies involve several labor claims, primarily related to salary issues such as differences in salaries and benefits, overtime and others.



| | 24.2. | Tax contingencies
| | ----- | -----------------



|                                               |  |          |  |          |  |           |  |          
|---------------------------------------------- |  | -------- |  | -------- |  | --------- |  | ---------
|                                               |  | Probable |  | Possible
|Claims                                         |  | 2004     |  | 2003     |  | 2004      |  | 2003     
|ICMS (a)                                       |  | 87,115   |  | 465      |  | 1,154,207 |  | 779,652  
|Income tax on inbound international income (b) |  |         |  |         |  | 351,635   |  | 351,635  
|INSS (Brazilian Social Security Institute) (c) |  |         |  |         |  | 47,000    |  | 55,000   
|PIS (d)                                        |  |         |  |         |  | 159,000   |  |         
|COFINS (e)                                     |  |         |  |         |  | 236,600   |  |         
|Others (f)                                     |  | 7,179    |  | 6,468    |  | 2,951     |  |         
|                                               |  |          |  |          |  |           |  |          
|Total                                          |  | 94,294   |  | 6,933    |  | 1,951,393 |  | 1,186,287
|                                               |  |          |  |          |  |           |  |          

|a. | ICMS
|-- | ----



Embratel has tax contingencies due to the non-payment of ICMS on international and other services considered by Embratel as exempted or nontaxable, as
well as the offset of supposedly non-deductible credits. Part of these contingencies, amounting to R$86,650, have been assessed as probable losses and therefore a provision has been recorded. Those contingencies assessed as possible losses by the
legal counsels amount to an historic amount of approximately R$893,749 (R$539,000 on December 31, 2003). As a result of this evaluation no provision has been recorded.



In July 2002, the subsidiary Star One was assessed in Rio de Janeiro in the amount of R$236,000, in which is required the
payment of ICMS on the rental of transponders and on broadband Internet services. In March 2004, the subsidiary Star One was assessed in the Federal District, in the amount of R$19,806 for the nonpayment of the ICMS over satellite capacity and other
accessory obligations. Star Ones management and its legal counsel evaluate the probability of loss of these assessments as possible and, thus, no provision has been recorded.



F-43



---

The subsidiary Vésper S.A. has ICMS-related assessments in the amount of R$5,117, of which R$465
has been accrued in the financial statements, and R$4,652, which the probability of loss has been evaluated as possible, no provision has been recorded.



|b. | Income tax on inbound international income
|-- | ------------------------------------------



Based on its legal advisors opinion, Embratel believes that the foreign operating income from telecommunications services (inbound traffic) is not
subject to taxation. In connection with this matter, in late March 1999, the SRF assessed Embratel in the amount of R$287,239 for failing to pay the related income tax for the years 1996 and 1997. Embratel appealed to the Taxpayers Council and
the decision is still pending.



In June 1999, Embratel was
further assessed for the same subject related to 1998 in the amount of R$64,396.



Due to the unfavorable decision at the administrative level, a Writ of Mandamus was filed which was initially judged unfavorably to Embratel. Nevertheless, this decision was amended due to the appeal filed and the
Federal Regional Court has reached an understanding, which was favorable to Embratel. Based on the opinion of Embratels Management and legal counsel, which consider the probability of loss as possible, the amounts arising from these
assessments have not been recorded in the financial statements.



|c. | INSS (National Institute of Social Security)
|-- | --------------------------------------------



On September 5, 2001, Embratel became aware of the unfavorable decision of the Social Security Council of Appeal on a claim regarding the applicability of
Social Security charges (INSS) to certain fringe benefits, such as vacation bonus, life insurance, etc. The total historical amount of the INSS assessment was R$58,000. Having exhausted all administrative appeals, maintaining the assessment,
Embratel, immediately filed a court appeal seeking to cancel this assessment. Based on this initial appeal presented by Embratel, approximately 60% of the credit was reduced, by force of early relief granted by the Court. Later, the INSS itself
recognized part of the assessment, approximately 20% of the total, as not valid lowering the amount to R$47,000. Upon such change, the credit reduced by force of early relief granted is now R$25,000, corresponding to more than 50% of the total. The
amount of R$22,000, which was not covered by the initial appeal, is currently deposited in court, in an interest-bearing account. In view of analyses conducted internally and by Embratels legal advisors, which have identified a series of
mistakes in the INSSs claims calculations, the probability of loss was considered possible and thus, no provision has been recorded.



F-44



---

|d. | PIS
|-- | ---



In August 2001, Embratel was assessed by the Federal Revenue Agency in the total amount of R$159,000, related to the contributions to PIS before 1995, which were offset according to Complementary Law No. 7/70.



The probability of loss related to the assessment has been
reclassified from remote to possible during 2004 due to the reassessment made by Embratels legal advisors and therefore, no provision was recorded.



|e. | COFINS
|-- | ------



In August 2001, Embratel was assessed by the Federal Revenue Agency in the amount of R$342,000, related to the exemption of COFINS on the revenues
generated from the export of telecommunications in 1999. Substantial errors were detected in the calculations of during the assessment and, consequently, the amount was reduced by R$220,000. Regarding the remaining amount, Embratel appealed to a
higher administrative level, therefore on July 2003, a decision was issued, requiring the claim to be returned to the first administrative level. A new decision was issued by the first administrative level confirming that the remaining updated
amount was R$236,600. Embratel appealed to a higher administrative level which is still pending decision.



Based on the reassessment made by Embratels legal advisors, the chances of loss in the case of this tax assessment have been reclassified from
remote to possible in 2004 and therefore, no provision has been recorded.



|f. | Other taxcontingencies
|-- | ----------------------



Embratel was assessed in May 2004 by the Federal Revenue Agency for the non-withholding of the CIDE on remittances made abroad in the amount of R$2,951.



This subsidiarys Management and its legal counsel
understand that the probability of loss is possible and, therefore, no provision has been recorded in the financial statements for the amounts involved in these claims.



As of December 31, 2004 the Company recorded a provision in the amount of R$5,541 (R$5,076 on December 31, 2003), mainly
related to the dispute involving the subsidiary Vésper S.A. to assure the non-incidence of CPMF tax on the conversion of foreign debt into domestic investment through the signature of notional foreign-exchange contracts.



F-45



---

Additionally, the subsidiaries Vésper S.A and Vésper São Paulo S.A. filed
applications for declaration that the additional FGTS payments instituted by Complementary Law No. 110/2001 were not due. Based on the evaluation of the Management of the subsidiaries Vésper S.A. and Vésper São Paulo S.A. and
that of their legal counsels, the chances of loss in these cases have been classified as probable and a provision was recorded for the amounts involved in the total of R$1,638 as of December 31, 2004 (R$1,392 on December 31, 2003).



|g. | Withholding income tax on remittances to foreign telecommunications companies
|-- | -----------------------------------------------------------------------------



Embratel was assessed by the Federal Revenue Agency (SRF) in the amount of R$410,697, for the non-withholding of Income Tax
on payments to foreign telecommunications companies, related to calls initiated in Brazil and completed by those companies abroad (outbound traffic), from December 1994 to October 1998. In September 2002, the SRF issued a sentence reducing the
assessment to R$12,975, due to errors in the amounts presented in the assessment. In July 2004, this decision became definitive, since the remaining amounts involved in the assessment, with the legal additional, totaling R$39,462, were paid, and,
recognized as expense in the first quarter of 2003.



Embratel
filed a Writ of Mandamus seeking to obtain a pronouncement that the Melbourne Treaty has been in effect in the Brazilian legal system since 1990. In December 2004, the suit was judged extinct without any judgment on its merits, based on the
extinction and release of the aforementioned assessment.



|24.3. | Civil contingencies
|----- | -------------------



|                                   |  |          |  |          |  |         |  |        
|---------------------------------- |  | -------- |  | -------- |  | ------- |  | -------
|                                   |  | Probable |  | Possible
|Claims                             |  | 2004     |  | 2003     |  | 2004    |  | 2003   
|Disputes with local operators (a)  |  | 2,000    |  |         |  | 43,349  |  | 520,200
|Anatel and public institutions (b) |  | 13,004   |  | 1,120    |  | 63,267  |  | 50,000 
|Disputes with third parties (c)    |  | 276,532  |  | 34,943   |  | 84,732  |  |       
|                                   |  |          |  |          |  |         |  |        
|Total                              |  | 291,536  |  | 36,063   |  | 191,348 |  | 570,200
|                                   |  |          |  |          |  |         |  |        

|a. | Disputes with local operators
|-- | -----------------------------



In November 2004, due to the agreements executed separately by Embratel and each one of the local operators (Note 32), the parties required the
extinguishment of all legal suits and the charges which aimed the judgment against Embratel for the payment of amounts arising from interconnection contracts executed with the local operators, which totaled to a historic amount of approximately
R$520,200 at December 31, 2003.



F-46



---

Embratel is the defendant in a collection lawsuit filed by an operator in November 2004. Embratel and its
legal advisors believe that the chances of a partial loss of the amounts in dispute are probable and therefore recorded a provision of R$2,000. In another collection lawsuit in the amount of R$43,349, Embratel and its legal advisors believe that the
chances of loss are possible and therefore no provision has been recorded.



|b. | Contingencies related to Anatel and other public institutions
|-- | -------------------------------------------------------------



b.1. Implementation of the new domestic telephone number system



As a result of the inconveniences caused to telephone system users by the telecommunications carriers on July 3, 1999, the implementation date for the
new domestic dialing system, Embratel was officially notified by Anatel to pay a fine in the amount of R$55,000 related to the administrative proceeding related to the period during which the carriers implemented the change in the dialing codes.
Embratel filed a lawsuit contesting the validity of the fine and the lower court decision was announced, lowering the amount from R$55,000 to R$50,000. At the second judicial level, Embratel prevailed, and the eventual appeals by Anatel, which have
no suspensive effect, are still pending.



Based on the same
facts, Embratel was cited in several lawsuits aiming alleged inconveniences caused to users and presented its defense in each suit. Among the existing suits with estimated amounts, Embratel is the defendant in suits filled by third parties aiming
payments at historic amounts of R$2,569 which are awaiting sentence. In another suit, the state of Rio de Janeiro has filed a tax execution in the amount of R$8,500.



In the opinion of Embratels Management and its legal counsels, the chances of loss regarding the penalty sought by
Anatel and third parties have been classified and possible and thus, have not been provisioned. In regards to the tax execution sought by the state of Rio de Janeiro, Embratel and its legal advisors have classified the chances of loss as probable
and have therefore recorded a provision of R$8,500.



b.2.
Administrative Suits for Noncompliance with Obligations (PADOs)



Due to noncompliance with quality targets, defined by Anatel in the General Plan of Quality Targets for Fixed Telephone Services (PGMQ), Anatel filed several Administrative Procedures for Disregarding Obligation (PADO) against
the subsidiaries Embratel, Vésper S.A. and Vésper São Paulo S.A. Due to the opinion of these subsidiaries management and respective legal counsels, the chances of loss related to the PADOs of subsidiaries
Vésper S.A. and Vésper São Paulo S.A. were classified as probable and therefore provisions have been recorded in the amounts of R$2,161 and R$2,343, respectively (R$959 and R$161 as of December 31, 2003).



F-47



---

In relation to Embratels fines of R$10,698 (January to June 2000 and October 2000), no provisions
were recorded since the chances of loss were classified as possible.



b.3. Portable Vésper



Due to the issuance of
Resolution No. 271, of August 6, 2001, which approved the use of Portable User Terminals to provide fixed telephone services through a cordless fixed access line, the subsidiaries Vésper São Paulo S.A. and Vésper S.A. began
marketing Portable Vésper as an alternative to their tabletop ATSs (Access Terminal Stations).



On July 19, 2002, the mobile phone service providers filed suit to suspend immediately the sale of the product by the subsidiary Vésper S.A., as
well as the indemnification for losses caused by the unauthorized sale of Portable Vésper. On September 27, 2004, the Negative Conflict of Competence was judged, dismissing Anatel of being a part, and declaring the State Justice as competent
to decide on the claim.



Due to the understanding of
Management of Vésper S.A. and that of its legal counsels on this matter, the chances of loss in this case are possible and therefore, no provision has been recorded in the financial statements.



|c. | Disputes with thirdparties
|-- | --------------------------



Embratel was notified of the decision in an arbitration case administrated by the International Chamber of Commerce (ICC), Paris, whereby Embratel and
another company disputed credits and rights resulting from Embratel contractual infringements. Since the arbitration decision ruled in favor of part of the claims of the other company, which resulted in the payment of indemnities, Embratel recorded
a provision of an updated amount of R$22,798 (R$14,118 on December 31, 2003).



Similarly, Vésper São Paulo S.A. was notified of the decision during the course of arbitration administered by the International Chamber of Commerce (ICC), Paris, whereby it and another company discussed
credits and rights resulting from contractual infringements. Since the arbitration decision ruled in favor of part of the claims of the other company, resulting in the payment of damages, the subsidiary Vésper São Paulo S.A. recorded a
provision for an updated amount of R$4,792 (R$4,865 on December 31, 2003).



Vésper São Paulo S.A. and Vésper S.A. recorded a provision related to judicial disputes with third parties in the amount of R$5,980 on December 31,



F-48



---

2004 (R$6,172 on December 31, 2003). These amounts represent the estimate of the Companies
Management, based on the opinion of their legal advisors for probable losses related to several lawsuits filed by clients, service providers and real estate lessors. For those suits with losses classified as possible, amounting to R$23,434, no
provision has been recorded.



Embratel filed lawsuits, aiming
at the annulment of charges from third parties. In such lawsuits, with one exception, which charges have been suspended, Embratel deposited in court the amounts disputed and other damages awarded. These deposits totaled R$19,383. In the opinion of
the Management of Embratel, the chances of loss are probable and a provision in the total amount of R$45,116 has been recorded.



With respects to the unconstitutionality of the provisions of the regulations which introduced procedures burdening the installation and passage ways for
telecommunications equipment, Vésper S.A. filed a lawsuit and an injunction was granted in October 2003, suspending the effects of the regulation related to the requirement of pecuniary retribution and imposition of sanctions until the last
deliberation. On December 31, 2004, Vésper S.A. and its legal counsels reassessed this case and understand that the chances of loss are remote (regarded as probable on December 31, 2003, totaling R$3,288), and thus, no provision has been
recorded.



CT Torres Ltda. is the plaintiff of two Writs of
Mandamus, entered into on June 29, 2001, in the city of São Paulo for the purpose of assuring the right of the subsidiary to maintain telephone towers installed in two different locations in the city, due to discrepancies in the
interpretation of the municipal legislation regarding Construction and Working Permits specifically for both locations.



In the opinion of the management of CT Torres Ltda. and its legal counsels on this matter, the chances of loss are probable in these cases and a provision
in the amount of R$375 has been provisioned.



CT Torres Ltda.
is a defendant in three public civil actions totaling R$4,445, filed by the Public Prosecutor Offices of the States of São Paulo, Ceará and Rio Grande do Norte. The purpose of those public civil actions is the regularization of the
telephone towers installed in the capitals of these states, due to divergences related to the interpretation of the legislation applied by the Municipalities for the analysis and approval of the process to obtain Construction and Work permits. In
the opinion of the Management of CT Torres Ltda. and its legal counsels the chances of loss in these cases are possible, and therefore, no provision has been recorded.



Due to the increased number of unfavorable decisions, agreements reached, and, considering the assessment of its legal
advisors, Embratel recorded a



F-49



---

provision for legal disputes with customers and other legal suits, which losses were classified as
probable, amounting to R$27,011. The suits in which losses were classified as possible amount to R$42,053 and no provision has been recorded.



Embratel and/or other operators are co-defendants in several suits seeking indemnifications for alleged pain and suffering and pecuniary damages arising
from the collection procedures for services rendered by the subsidiary.



In one Public Civil Suit, in which the plaintiff is the Federal Attorneys Office, Embratels management and its legal advisors classified the chances of loss as probable and have thus, recorded a provision
in the amount of R$5,500.



In the other condemnatory suits of
several natures and considering the advanced stage of the referenced suits, as well as the arguments presented by its legal counsels, Embratel believes that the chances of loss in some of the suits are probable, and have therefore recorded a
provision of an updated amount of R$164,960 (R$6,500 on December 31, 2003). In other suits classified as possible, in the amount of R$14,800, R$10,835 has been deposited in court.



Embratel, Vésper S.A. and Vésper São Paulo S.A., and other operators are involved in several class
action suits filed by the Federal Attorneys Office and/or States and Associations involving issues related to the compensation of pain and suffering and pecuniary damages allegedly caused to consumers. In the understanding of the Management of
the subsidiaries and its legal advisors, the chances of loss are probable or possible; however the amounts of any damages awarded are not yet measurable, and therefore, no provisions have been recorded.



|25. | Actuarial Liabilities - Telos
|--- | -----------------------------



Embratel and Star One sponsors a defined contribution plan, a defined benefit plan and a post-retirement medical assistance plan, all managed by the
Fundação Embratel de Seguridade Social (Telos). Telos, a closed private pension fund, is a legal entity under private law, with the objective of providing pensions, assistance and non-profit activities, with
administrative and financial independence, based in Rio de Janeiro. Embratel founded it on August 1, 1975.



The rate of contribution for the defined benefits plan for 2004, 2003 and 2002 was 19.8% of the salary of the active participants in this plan (8
participants on December 31, 2004).



After the privatization,
Embratel introduced a defined contributions plan through Telos, which was reviewed and approved by the Brazilian Federal Government on



F-50



---

November 19, 1998. Star One also became a sponsor effective November 1, 2000. All newly hired employees
automatically adhere to the new plan and no further admittance to the defined benefits plan is allowed. For the defined contributions plan, the sponsors contribution ranges from 3% to 8% of the participants salary, in addition to the
extraordinary contribution, provided in the plans by-laws, for financing administrative expenses, and the balance of the account intended to cover cases of disability and death of the participant in activity.



Contributions to the defined benefit and post-retirement medical assistance
plans are based on actuarial studies prepared by independent actuaries under Brazilian regulations. The actuarial studies are revised periodically to identify whether adjustments to the contributions are necessary.



On September 1, 1999, a statement of recognition, acknowledgement of debt,
acceptance and amortization of actuarial insufficiency was signed between Embratel and Telos, and approved by the Brazilian pensions regulatory authority (Secretaria de Previdência Complementar). In accordance with this statement,
the actuarial insufficiency recognized in favor of Telos will be paid over the next 20 years, based on the monthly flow of benefits to the employees covered by the defined contribution plan. The unamortized balance of the liability is increased
monthly at the rate of remuneration of Telos assets in the month as to which they refer or the actuarial goal, whichever higher. As of December 31, 2004, the outstanding balance payable to Telos amounts to R$174,086 (R$154,429 on December 31, 2003).



The above mentioned previdenciary pension and medical health
care plans sponsored by Embratel and Star One are the only post-employment benefits granted to employees.



Upon the issuance of CVM Deliberation No. 371, on December 13, 2000, which approved the IBRACON pronouncement on accounting for employee benefits, new
accounting guidelines for recording and disclosure of the effects arising from employee benefit plans were instituted and presented in the sponsors financial statements.



Consequently, on December 31, 2001, Embratel recorded an additional liability in the amount of R$193,424 (effect in Holding
Company  R$191,050) against shareholders equity in the form of a prior year adjustment. On December 31, 2004, that liability amounted to R$265,020 (R$238,816 as of December 31, 2003).



F-51



---

Reconciliation of Assets and Liabilities as of December 31, 2004:



|                                                                                    |  |                           |      |  |                              |      |  |                                 |  
|----------------------------------------------------------------------------------- |  | ------------------------- | ---- |  | ---------------------------- | ---- |  | ------------------------------- | -
|                                                                                    |  | DefinedBenefit Plan (DBP) |      |  | DefinedContributionPlan(DCP) |      |  | Medical Health care Plan (MHCP) |  
|Actuarial liabilities - present value                                               |  | (1,099,044                | )    |  | (1,416,364                   | )    |  | (368,225                        | )
|Fair value of the plan assets                                                       |  | 1,174,458                 |      |  | 1,388,211                    |      |  | 58,443                          |  
|                                                                                    |  |                           |      |  |                              |      |  |                                 |  
|Present value of liabilities in excessof assets in excess of liabilities and assets |  | 75,414                    |      |  | (28,153                      | )    |  | (309,782                        | )
|Actuarial (gains) or losses unrecognized                                            |  | (5,742                    | )    |  | (22,167                      | )(2) |  | 44,762                          |  
|Actuarial assets unrecognized by Embratel                                           |  | (69,672                   | )(1) |  | (123,766                     | )(3) |  |                                |  
|                                                                                    |  |                           |      |  |                              |      |  |                                 |  
|Net actuarial liabilities                                                           |  |                          |      |  | (174,086                     | )    |  | (265,020                        | )
|                                                                                    |  |                           |      |  |                              |      |  |                                 |  

---

|(1) | Unrecorded actuarial assets owed mainly to the following reasons: (a) no forecast to reduce the future contributions; and (b) there are no indications that assure that this surplus
will be maintained over the next few years.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This mainly refers to profits computed on the nonpayment of interest and fines on income tax for the January 1, 1997 to August 31, 2001 period according to that provided by
Normative Instruction No. 126 of the Federal Revenue Agency (SRF), of January 25, 2002, and Provisional Measure No. 2.222, of September 4, 2001. Said profits are being deferred in compliance with paragraphs 53 and 54 of CVM Deliberation No. 371,
issued on December 13, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Unrecorded actuarial assets owed to the agreement signed on September 1, 1999 (Acknowledgement, acceptance and amortization of the actuarial deficit Term). According to this
agreement, Embratel commits to paying the stipulated amount within a maximum term of 20 years without review forecast of the liability in the event of the reduction of the actuarial deficit in the future.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Main actuarial assumptions for 2004 and 2003 used at balance sheet date:



| | a. | Economic assumptions:
| | -- | ---------------------



|      |  |                                                                |  |                                                                                         
|----- |  | -------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(i)   |  | Discount rate for present value of actuarial liabilities       |  | Inflation + 6.0% p.a. = 11.3% p.a.                                                      
|(ii)  |  | Expected rate of returns on plan assets                        |  | Inflation + 6.0% p.a. = 11.3% p.a.                                                      
|(iii) |  | Average salary increases, INSS benefit growth and plan benefit |  | Inflation + 0.0% p.a. = 5.0% p.a. (DBP and MHCP) Inflation + 2.0% p.a. = 7,1% p.a. (DCP)
|(iv)  |  | Long term annual inflation rate                                |  | 5.0% p.a.                                                                               
|(v)   |  | Wage and benefits capacity                                     |  | 0.98(1)                                                                                 
|(vi)  |  | Health care cost trend rate                                    |  | Inflation + 4.0% p.a. = 9.2% p.a.                                                       

---

|(1) | The capacity factor serves the purpose of reflecting the lag of the monetary values shown on the date of the study, taking into consideration the timing and indices used for the
recover of inflationary losses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Other assumptions:
| | -- | ------------------



|      |  |                                       |  |                              
|----- |  | ------------------------------------- |  | -----------------------------
|(i)   |  | Table of general mortality rate       |  | UP-94 with 2 year peaks      
|(ii)  |  | Table of mortality rate of disability |  | IAPB-57                      
|(iii) |  | Table of entry into disability        |  | Mercer disability onset chart
|(iv)  |  | Turnover                              |  | Not used (DBP and MHCP)      





F-52



---

Statement of changes in actuarial liabilities:



|                                                                                              |  |         |   |  |         |   |  |         |  
|--------------------------------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                              |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Beginning balance                                                                             |  | 393,245 |   |  | 402,955 |   |  | 419,849 |  
|                                                                                              |  |         |  
|Plus  Interest and updating of actuarial obligations                                         |  | 90,447  |   |  | 33,924  |   |  | 58,548  |  
|Plus - Actuarial liabilities arising from CVM Deliberation No. 371 (medical health care plan) |  | 26,207  |   |  | 24,959  |   |  |        |  
|Debt surplus  January to April 2003  Voluntary Dismissal Program                            |  |        |   |  | 15,413  |   |  |        |  
|Monetary restatement of debt surplus  January to April 2003  PDI                            |  | 270     |   |  |        |   |  |        |  
|Payment of debt surplus  January to April 2003  PDI                                         |  | (15,683 | ) |  |        |   |  |        |  
|Less  Payments made during the year                                                          |  | (55,380 | ) |  | (84,006 | ) |  | (75,442 | )
|                                                                                              |  |         |   |  |         |   |  |         |  
|Actuarial liabilities                                                                         |  | 439,106 |   |  | 393,245 |   |  | 402,955 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Current                                                                                       |  | 68,342  |   |  | 64,442  |   |  | 63,973  |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Non-current                                                                                   |  | 370,764 |   |  | 328,803 |   |  | 338,982 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Actuarial liabilities breakdown:                                                              |  |         |   |  |         |   |  |         |  
|                                                                                              |  |         |  
|Defined contributions plan (unsecured liabilities)                                            |  | 174,086 |   |  | 154,429 |   |  | 189,098 |  
|Medical assistance plan                                                                       |  | 265,020 |   |  | 238,816 |   |  | 213,857 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Total                                                                                         |  | 439,106 |   |  | 393,245 |   |  | 402,955 |  
|                                                                                              |  |         |   |  |         |   |  |         |  



F-53



---

|26. | Transactions with Related Parties
|--- | ---------------------------------



Transactions with related parties are conducted according to conditions and terms similar to market conditions, and the most important balances and values
are shown below:



|                                           |  |       |  |       
|------------------------------------------ |  | ----- |  | ------
|                                           |  | 2004  |  | 2003  
|ASSETS                                     |  |       |  |       
|Current                                    |  |       |  |       
|Accounts receivable (telephone traffic)    |  |       |  |       
|Techtel                                    |  | 137   |  |      
|Telmex  Brazil                            |  | 5,494 |  |      
|BSE                                        |  | 1,011 |  |      
|ATL                                        |  | 4,621 |  |      
|Stemar                                     |  | 1,067 |  |      
|BCP                                        |  | 745   |  |      
|Tess                                       |  | 1,556 |  |      
|Telet                                      |  | 1,199 |  |      
|Albra                                      |  | 7     |  |      
|Americel                                   |  | 369   |  |      
|                                           |  |      
|Foreign administrators (telephone traffic) |  |       |  |       
|Telmex  México                            |  | 2,254 |  |      
|Telmex  Chile                             |  | 133   |  |      
|Telmex  Argentina                         |  | 389   |  |      
|MCI(1)                                     |  |      |  | 64,390
|                                           |  |      
|Other assets                               |  |       |  |       
|Stemar                                     |  | 223   |  |      
|Telmex  Brazil (loan)(2)                  |  | 565   |  |      
|Other                                      |  |      |  | 927   



F-54



---

|                                           |  |         |  |       
|------------------------------------------ |  | ------- |  | ------
|                                           |  | 2004    |  | 2003  
|LIABILITIES                                |  |         |  |       
|Current                                    |  |         |  |       
|Accounts payable (telephone traffic)       |  |         |  |       
|Telmex  Brazil                            |  | 4,425   |  |      
|Telet                                      |  | 2,874   |  |      
|Americel                                   |  | 6,478   |  |      
|Tess                                       |  | 6,320   |  |      
|Algar                                      |  | 7,784   |  |      
|BCP                                        |  | 10,438  |  |      
|BSE                                        |  | 5,569   |  |      
|Stemar                                     |  | 2,816   |  |      
|Albra                                      |  | 1,721   |  |      
|ATL                                        |  | 974     |  |      
|Techtel                                    |  | 6       |  |      
|Foreign administrators (telephone traffic) |  |         |  |       
|Telmex México                              |  | 1,654   |  |      
|Telmex Chile                               |  | 255     |  |      
|Telmex Argentina                           |  | 319     |  |      
|MCI(1)                                     |  |        |  | 42,519
|Proceda(1)                                 |  |        |  | 158   
|Other(1)                                   |  |        |  | 2,553 
|Loans  Inbursa Bank(3)                    |  | 133,401 |  |      
|                                           |  |        
|Related parties                            |  |         |  |       
|MCI administration fee(1)                  |  |        |  | 6,851 
|MCI accounts payable(1)                    |  |        |  | 5,143 



F-55



---

|                                                      |  |         |   |  |         |   |  |         |  
|----------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                      |  | 2004    |   |  | 2003    |   |  | 2002    |  
|STATEMENTS OF OPERATIONS                              |  |         |   |  |         |   |  |         |  
|Net operating revenue                                 |  |         |   |  |         |   |  |         |  
|Domestic traffic                                      |  |         |   |  |         |   |  |         |  
|Telmex  Brazil                                       |  | 14,017  |   |  |        |   |  |        |  
|BSE                                                   |  | 4,538   |   |  |        |   |  |        |  
|ATL                                                   |  | 20,971  |   |  |        |   |  |        |  
|Stemar                                                |  | 1,998   |   |  |        |   |  |        |  
|BCP                                                   |  | 5,455   |   |  |        |   |  |        |  
|TESS                                                  |  | 8,109   |   |  |        |   |  |        |  
|Telet                                                 |  | 10,648  |   |  |        |   |  |        |  
|Albra                                                 |  | 6,313   |   |  |        |   |  |        |  
|Americel                                              |  | 14,300  |   |  |        |   |  |        |  
|International traffic                                 |  |         |   |  |         |   |  |         |  
|Telmex  México                                       |  | 1,770   |   |  |        |   |  |        |  
|Telmex  Argentina                                    |  | 432     |   |  |        |   |  |        |  
|Telmex  Chile                                        |  | 137     |   |  |        |   |  |        |  
|Techtel                                               |  | 51      |   |  |        |   |  |        |  
|MCI(1)                                                |  |        |   |  | 132,782 |   |  | 128,760 |  
|Others(1)                                             |  |        |   |  | 971     |   |  |        |  
|Call Center                                           |  |         |   |  |         |   |  |         |  
|Stemar                                                |  | 223     |   |  |        |   |  |        |  
|                                                      |  |         |  
|Cost of services provided and goods sold              |  |         |   |  |         |   |  |         |  
|Domestic traffic                                      |  |         |   |  |         |   |  |         |  
|Telmex  Brazil                                       |  | (3,924  | ) |  |        |   |  |        |  
|Albra                                                 |  | (4,524  | ) |  |        |   |  |        |  
|Algar                                                 |  | (23,108 | ) |  |        |   |  |        |  
|Americel                                              |  | (15,773 | ) |  |        |   |  |        |  
|BCP                                                   |  | (41,596 | ) |  |        |   |  |        |  
|BSE                                                   |  | (15,433 | ) |  |        |   |  |        |  
|Stemar                                                |  | (4,906  | ) |  |        |   |  |        |  
|Telet                                                 |  | (12,207 | ) |  |        |   |  |        |  
|Tess                                                  |  | (19,201 | ) |  |        |   |  |        |  
|ATL                                                   |  | (2,770  | ) |  |        |   |  |        |  
|International Traffic                                 |  |         |   |  |         |   |  |         |  
|Techtel                                               |  | (140    | ) |  |        |   |  |        |  
|Telmex  México                                       |  | (1,079  | ) |  |        |   |  |        |  
|Telmex  Argentina                                    |  | (254    | ) |  |        |   |  |        |  
|Telmex  Chile                                        |  | (261    | ) |  |        |   |  |        |  
|MCI(1)                                                |  |        |   |  | (68,953 | ) |  | (85,623 | )
|Others(1)                                             |  |        |   |  | (823    | ) |  | (4,044  | )
|                                                      |  |         |  
|General and administrative                            |  |         |   |  |         |   |  |         |  
|Administrative fee MCI(1)                             |  |        |   |  | (14,024 | ) |  | (36,232 | )
|Proceda(1)                                            |  |        |   |  | (9,961  | ) |  | (14,505 | )
|Others MCI(1)                                         |  |        |   |  | (297    | ) |  |        |  
|ATL                                                   |  | 112     |   |  |        |   |  |        |  
|Financial                                             |  |         |   |  |         |   |  |         |  
|Interest on borrowings  Banco Inbursa(3)             |  | (681    | ) |  |        |   |  |        |  
|Exchange variation on the administrative fee - MCI(1) |  |        |   |  | (1,100  | ) |  | (18,395 | )

---

|(1) | In July 2004, the disposal of the shareholding interest of MCI in the Holding Company was concluded (Note 1).
|--- | -------------------------------------------------------------------------------------------------------------

|(2) | Interest rate: SELIC  Special System for Settlement and Custody
|--- | ----------------------------------------------------------------

Maturity of principal: January 30, 2005

|(3) | Interest rate: three month Libor + spread of 1.2%
|--- | -------------------------------------------------

Maturity of principal: November 11, 2005

Guarantee: promissory note



F-56



---

|27. | Insurance (Unaudited)
|--- | ---------------------



The Companys management considers that all assets and liabilities of any material values and risks related thereto have been covered by insurance.



| | a. | Embratel
| | -- | --------



On December 31, 2004, Embratel had Operating Risk type insurance policies for the total risk amount of R$10,802,107, and maximum indemnity limit equal to
R$878,807, including owned equipment and that of third parties housed on its premises and including coverage for loss of profits. The assets and liabilities and material risks are covered by insurance in accordance with the concession contracts.



| | b. | Star One
| | -- | --------



All Earth Station Equipment is insured at its approximate replacement values. The insurance of the satellite in orbit B1 was in effect through September
30, 2004, and was not renewed after this date. The insurance of the satellites B2, B3 and B4 was renewed through April 30, June 30, and August 16, 2005, respectively. The following table shows the amounts insured and the net book value of the
satellites at December 31, 2004 (in local currency equivalent to the US dollar amount insured at December 31, 2004):



|          |  |                           |  |               
|--------- |  | ------------------------- |  | --------------
|Satellite |  | Averageamount insured (*) |  | Net book value
|B2        |  | 17,373                    |  |              
|B3        |  | 142,448                   |  |              
|B4        |  | 252,757                   |  | 49,838        

---

|(*) | December 31, 2004 = US$1.00 = R$2.6544.
|--- | ---------------------------------------



| | c. | Vésper São Paulo S.A. and Vésper S.A. (amounts expressed in local currency equivalent to the amount in US dollars insured as of December 31, 2004)
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------



At December 31, 2004, Vésper São
Paulo S.A. and Vésper S.A. had insurance contracts covering Operational Risks in the total amount in risk of R$1,709,824. The maximum indemnity limit as to the Operational Risk insurance policy is equivalent to R$508,302.



F-57



---

|28. | Shareholders Equity
|--- | --------------------



| | a. | Capital Stock
| | -- | -------------



The authorized capital on December 31, 2004 and 2003 corresponds to 700 billion common or preferred shares. The subscribed and fully paid-in capital stock
at the close of the years 2004 and 2003 amounts to R$2,273,913, comprised of 334,399,028 thousand shares, without par value and distributed as follows (in thousand share lots): 124,369,031 common shares and 210,029,997 preferred shares. The book
value per share of the outstanding shares as of December 31, 2004 (332,964,465 thousand shares) and on December 31, 2003 (333,419,064 thousand shares) is R$13.59 and R$14.62, respectively per thousand share lot, expressed in reais.



The capital may be increased only by a decision taken at a
shareholders meeting or by the board of directors in connection with the capitalization of profits or reserves previously allocated to capital increases at a shareholders meeting.



On January 5, 2005 the authorized capital was increased to 1 trillion common
or preferred shares).



Under BR GAAP the number of non-voting
shares, such as the preferred shares, may not exceed two-thirds of the total number of shares.



| | b. | Revenue reserves
| | -- | ----------------



| | b.1) | Legal reserve
| | ---- | -------------



The constitution of this reserve is mandatory based on 5% of net annual income up to the limit of 20% of the paid-up capital, or 30% of the capital stock
taken together with capital reserves. After this limit, no further appropriation of this reserve is mandatory. The legal reserve may only be used for future capital increase or to offset accumulated losses.



| | b. | Revenue reserves
| | -- | ----------------



| | b.2) | Unrealized earnings reserve
| | ---- | ---------------------------



This reserve originated from the Telebrás spin-off (Note 1), and resulted from net gains on the monetary restatement of the balance sheet and from
the equity pick up of investments through that date. The reserve is realized when dividends are received from Embratel.



Since Law No. 10,303/01 became effective, Unrealized Earnings Reserve are constituted by the amount of the statutory dividend in excess of realized net
earnings for the year. For this purpose the obligatory dividend is calculated



F-58



---

according to the Holding Companys by-laws or the terms foreseen in article 202 of the No.
10,303/01. Therefore, any part of the reserve to be constituted subsequent to the issuance of Law No. 10,303/01 will consist of the postponed dividend itself, and will no longer be the basis for calculation of the dividends.



In connection with Circular Letter CVM/SEP/SNC No. 01/2003, of January 16,
2003, the Unrealized Earnings Reserve balance which originated under the old criteria will keep its original characteristics, i.e., the realized amounts compose the base for calculation of dividends payable.



| | b.3) | Reserve for investments
| | ---- | -----------------------



On December 31, 2004, the accumulated losses were absorbed by the investment reserve.



On December 31, 2003, in order to meet the permanent investment plans provided for in the formal, approved budgets by the
Holding Companys Boards, according to that provided in article 196 of the Corporation Law and article 8 of CVM Instruction No. 59 issued in December 1986, the Holding Company established an Investment Reserve for adjusted net profits remaining
from the period in the amount of R$258,413 and transferred to this reserve the remaining retained profit balances in the amount of R$569,753.



| | c. | Dividends and interest on capital
| | -- | ---------------------------------



According to the Holding Companys by-laws, the preferred shares are non-voting, except under certain limited circumstances. They are entitled (i) a
minimum non-cumulative dividend of 6% per annum on the amount resulting from the division of the subscribed capital by the number of shares, or (ii) a dividend 10% higher than that paid to each ordinary share, whichever is higher (Holding
Companys by-law alteration on December 30, 2002), and have priority in relation to the common shares in the event of liquidation of the Holding Company.



According to the Holding Companys by-laws, dividends must be distributed for each fiscal year ended December 31. These dividends must be at least
25% of the adjusted net income. Dividends are calculated according to the Holding Companys by-laws and in accordance with Brazilian corporate law. The proposed dividends are appropriated at year-end.



F-59



---

The adjusted net profit for the year ended December 31, 2003 is as follows:



|                                                         |  |         |  
|-------------------------------------------------------- |  | ------- | -
|Net income for the year                                  |  | 224,293 |  
|Constitution of legal reserve                            |  | (11,215 | )
|Realization of unrealized earnings reserve               |  | 131,472 |  
|                                                         |  |         |  
|Adjusted net income  basis for calculation of dividends |  | 344,550 |  
|                                                         |  |         |  
|Minimum percentage of statutory dividends                |  | 25      | %
|Minimum dividends                                        |  | 86,137  |  
|                                                         |  |         |  



For the year ended
December 31, 2004 and 2002, the Companys adjusted result, the basis for distribution of dividends, was negative.



In 2003, dividends for payment to holders of preferred shares were accrued, as shown below:



|                                          |  |                 |  
|----------------------------------------- |  | --------------- | -
|Subscribed capital stock                  |  | 2,273,913       |  
|Minimum percentage of statutory dividends |  | 6               | %
|                                          |  |                 |  
|                                          |  | 136,435         |  
|                                          |  |                 |  
|Total number of shares                    |  | 334,399,027,592 |  
|                                          | 
|Total number of preferred shares          |  | 210,029,997,060 |  
|                                          | 
|Single value per thousand shares          |  | 0.41            |  
|                                          | 
|Dividends                                 |  | 86,137          |  



| | d. | Treasury shares
| | -- | ---------------



As of December 31, 2004, the Holding Company held 1,434,563 thousand of its own preferred shares in treasury (979,964 thousand preferred shares on
December 31, 2003), after the sale, during 2004, of 1,615,240 thousand and repurchase of 2,069,839 thousand of these shares. The balance of treasury shares on December 31, 2004 is R$16,218 (R$19,133 on December 31, 2003).



The market value per thousand shares lot at the end of 2004,
expressed in reais was R$5.60.



| | e. | Stock Option Plan
| | -- | -----------------



The stock option plan was approved at the Annual Shareholders General Meeting held on December 17, 1998 and is regulated by the Management Commission of
the stock option plan within the limits of its authority.



F-60



---

The contracts grant to directors and employees the option of acquiring preferred shares at a pre-defined
price on the grant date, establishing terms and conditions under which the beneficiary is eligible to exercise the option (vesting period), within the maximum limit of 10 years.



The acquired shares will maintain all of the rights pertaining to the shares of equal class and type, including dividends.



According to rules established in the Stock Options Plan,
upon the change in shareholding control of the Holding Company on July 23, 2004, the granted options became exercisable.



|                                                                                                                       |  |            |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---------- | -
|Number of preferred share purchase options (thousands of shares)                                                       |  |            |  
|                                                                                                                       | 
|Open options as of January 1, 2002                                                                                     |  | 6,264,711  |  
|                                                                                                                       |  |            |  
|Options offered in 2002                                                                                                |  | 2,097,333  |  
|Options cancelled in 2002                                                                                              |  | (477,615   | )
|                                                                                                                       |  |            |  
|Open options as of December 31, 2002                                                                                   |  | 7,884,429  |  
|Options offered in 2003                                                                                                |  | 2,806,500  |  
|Options sold in 2003                                                                                                   |  | (1,220,853 | )
|Options cancelled in 2003                                                                                              |  | (738,996   | )
|                                                                                                                       |  |            |  
|Open options as of December 31, 2003                                                                                   |  | 8,731,080  |  
|Options offered in 2004                                                                                                |  | 152,500    |  
|Options sold in 2004                                                                                                   |  | (1,615,240 | )
|Options cancelled in 2004                                                                                              |  | (99,846    | )
|                                                                                                                       |  |            |  
|Open options as of December 31, 2004                                                                                   |  | 7,168,494  |  
|                                                                                                                       |  |            |  
|Weighted average exercise price of the purchase options on December 31, 2004 (per thousand shares, expressed in reais) |  | 6.57       |  
|                                                                                                                       |  |            |  



As required by CVM
Official Letter No. 01/04, item 21.9, had the Holding Company opted for accruing, in the statements of income, the loss in sales of treasury shares incurred during the year, net loss for the year ended December 31, 2004 would have been increased by
R$14,146, totaling R$351,347.



F-61



---

| | f. | Reconciliation of net income (loss) of the Holding Company to those of the Consolidated Financial Statements
| | -- | ------------------------------------------------------------------------------------------------------------



As of December 31, the reconciliation between the Holding Companys net
income (loss) for the year and the consolidated net income (loss) is as follows:



|                                                               |  |          |   |  |         |   |  |          |  
|-------------------------------------------------------------- |  | -------- | - |  | ------- | - |  | -------- | -
|                                                               |  | 2004     |   |  | 2003    |   |  | 2002     |  
|Holding Company                                                |  | (337,201 | ) |  | 224,293 |   |  | (626,345 | )
|                                                               |  |          |  
|Recognition of the effects of other subsidiaries in Embratel   |  |         |   |  |        |   |  | 3        |  
|Donations recorded in shareholders equity of the subsidiaries |  | (2,055   | ) |  | (659    | ) |  |         |  
|                                                               |  |          |   |  |         |   |  |          |  
|Consolidated                                                   |  | (339,256 | ) |  | 223,634 |   |  | (626,342 | )
|                                                               |  |          |   |  |         |   |  |          |  



|29. | Directors Fees
|--- | ---------------



During the years 2004, 2003 and 2002, directors fees in the amount of R$38,358, R$25,869 and R$10,894, respectively, were recorded as Operating
Expenses.



F-62



---

|30. | Commitments with Anatel (Unaudited)
|--- | -----------------------------------



The table below shows the main indicators of commitments in connection with the Universal Goals General Plan (UGGP) and Quality Goals General Plan (QGGP)
related to the concession for rendering domestic long-distance (DLD) and international long-distance (ILD) services of Embratel.



|                                                                                                                                                                |  |                         |   |  |                 |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | --------------- | -
|Indicator                                                                                                                                                       |  | Position inDecember2004 |   |  | Target for 2005 |  
|Rate of international long distance calls completed in each peak period for conventional switching telephone services (target in 2004:
70%)                     |  |                         |   |  |                 |  
|Morning                                                                                                                                                         |  | 68.4                    | % |  | 70.0            | %
|Daytime                                                                                                                                                         |  | 68.8                    | % |  | 70.0            | %
|Nighttime                                                                                                                                                       |  | 62.5                    | % |  | 70.0            | %
|Rate of domestic long distance calls completed in each peak period for conventional switching telephone services (target in 2004:
70%)                          |  |                         |   |  |                 |  
|Morning                                                                                                                                                         |  | 69.1                    | % |  | 70.0            | %
|Daytime                                                                                                                                                         |  | 69.2                    | % |  | 70.0            | %
|Nighttime                                                                                                                                                       |  | 68.4                    | % |  | 70.0            | %
|Rate of calls completed to telephone answering services of up to 10 seconds per peak period for conventional switching telephone serviced
(target in 2004: 94%) |  |                         |   |  |                 |  
|Morning                                                                                                                                                         |  | 97.0                    | % |  | 94.0            | %
|Daytime                                                                                                                                                         |  | 96.9                    | % |  | 94.0            | %
|Nighttime                                                                                                                                                       |  | 97.0                    | % |  | 94.0            | %
|Requests for public use telephone repairs per 100 telephones in service (target in 2004: 10)                                                                    |  | 9                       |   |  | 10              |  
|Number of accounts with complaints of errors in each 1000 (target in 2004: 2)                                                                                   |  | 0.3                     |   |  | 2               |  
|Number of Telephones in public use (TUP) in service                                                                                                             |  | 1,400                   |   |  | (*              | )

---

Notes:



|(*) | There is no regulation, one target established for the indicator.
|--- | -----------------------------------------------------------------

All
data shown above can be found in the Anatel site.



|31. | Voluntary Dismissal Program
|--- | ---------------------------



Embratel completed, in the first half of January 2003, a Temporary Dismissal Program (the Program), which granted financial assistance and
social incentives. The Program, initiated in December 2002, was designed for employees who were already retired through the INSS and those who were entitled to retire, proportionally or fully, through the INSS or the employee pension plan (Telos).
In order to implement this Program, Embratel set up a provision in December 2002 in the approximate amount of R$20,000.



F-63



---

|32. | Agreement with Operators
|--- | ------------------------



In November 2004, the Company formalized an agreement with the operators of the Telemar and Brasil Telecom groups to settle administrative, legal and
business disputes arising among the parties over the past several years, establishing guidelines and commitments that will govern their relationships as from that date. As a result, a gain of approximately R$21 million was recorded in the
consolidated statement of income for the year ended December 31, 2004, net of taxes, as: trade accounts receivable, allowance for doubtful accounts, deferred and recoverable taxes, judicial deposits and other current assets, property, plant and
equipment, accounts payable and accrued expenses, taxes and contributions, other liabilities, deferred income, bad debt expenses, other operating income (expense), net, financial income (expense), other non operating income (expenses) and income tax
and social contribution expenses. The Companys Management believes that this agreement will enable a better operating relationship with the referenced companies due to the fact that it sets forth clearer regulations that can lead to a solution
of pending matters and prevent future disputes among the parties as well as bring about an enhanced ability to assess business among the parties.



|33. | Subsequent Events
|--- | -----------------



| | a. | Notes
| | -- | -----



On April 27, 2005, Embratel prepaid 35% of US$275 million of Notes issued in December 2003, which have maturity in 2008.



| | b. | Capital increase
| | -- | ----------------



On May 3, 2005, the Companys capital increase, approved by the Board of Directors on February 3, 2005 and re-ratified on February 23, 2005 is
concluded, with the entire subscription of the shares offered. On May 23, 2005, the Board of Directors ratified the Companys capital increase of R$1,822,800, to R$4,096,713, with the following ownership structure:



|                                       |  |                 |   |  |       |   |  |                 |   |  |       |   |  |                 |   |  |       |  
|-------------------------------------- |  | --------------- | - |  | ----- | - |  | --------------- | - |  | ----- | - |  | --------------- | - |  | ----- | -
|Shareholders                           |  | Common          |   |  | %     |   |  | Preferred       |   |  | %     |   |  | Total           |   |  | %     |  
|Startel Participações Ltda(1)          |  | 148,345,868,474 |   |  | 52.6  | % |  | 118,103,552,586 |   |  | 24.8  | % |  | 266,449,421,060 |   |  | 35.1  | %
|New Startel Participações Ltda(1)      |  | 5,619,208,511   |   |  | 2.0   | % |  | 4,470,908,233   |   |  | 0.9   | % |  | 10,090,116,744  |   |  | 1.3   | %
|Telmex Solutions Telecommunications(1) |  | 114,368,209,714 |   |  | 40.6  | % |  | 90,996,760,410  |   |  | 19.1  | % |  | 205,364,970,124 |   |  | 27.1  | %
|Consertel(1),(2)                       |  |                |   |  | 0.0   | % |  | 2,661,105,000   |   |  | 0.6   | % |  | 2,661,105,000   |   |  | 0.4   | %
|Controller Stake                       |  | 268,333,286,699 |   |  | 95.1  | % |  | 216,232,326,229 |   |  | 45.4  | % |  | 484,565,612,928 |   |  | 63.9  | %
|Treasury Stock                         |  |                |   |  | 0.0   | % |  | 1,263,690,747   |   |  | 0.3   | % |  | 1,263,690,747   |   |  | 0.2   | %
|Others                                 |  | 13,694,395,274  |   |  | 4.9   | % |  | 258,782,305,387 |   |  | 54.3  | % |  | 272,476,700,661 |   |  | 35.9  | %
|                                       |  |                 |   |  |       |   |  |                 |   |  |       |   |  |                 |   |  |       |  
|Total                                  |  | 282,027,681,973 |   |  | 100.0 | % |  | 476,278,322,363 |   |  | 100.0 | % |  | 758,306,004,336 |   |  | 100.0 | %
|                                       |  |                 |   |  |       |   |  |                 |   |  |       |   |  |                 |   |  |       |  
|% by type of shares                    |  | 37.2            | % |  | 0.0   | % |  | 62.8            | % |  | 0.0   | % |  | 100.0           | % |  | 0.0   | %
|                                       |  |                 |   |  |       |   |  |                 |   |  |       |   |  |                 |   |  |       |  

---

|(1) | Telmex;
|--- | -------

|(2) | Held through ADRs
|--- | -----------------



| | c. | Commercial paper
| | -- | ----------------



On May 19, 2005, Embratel prepaid the commercial paper in full, amounting to R$1 billion, with a portion of the proceeds from our capital increase.



F-64



---

| | d. | Business combinations
| | -- | ---------------------



On May 23, 2005, the Board of Directors authorized the management to take the necessary measures for having economic-financial feasibility studies and
analysis in order to assess possible acquisitions by the Holding Company of (i) all of the capital stock of Telmex do Brazil Ltda., and (ii) an equity stake equivalent to 37.11% of the capital stock of Net Serviços de
Comunicação S.A., held by Telmex.



As a result
of the potential acquisitions, Telmex should receive new common shares to be issued by the Company, as a consequence of the capital increase approved for absorbing the assets and liabilities of the merged companies.



The Holding Companys administration believes that the acquisition is
comply with its policy of developing alternatives for expanding its business lines, seeking not only to increment its share in the areas where it already has a consolidated presence, but also its expansion to other segments of the Telecommunications
market in Brazil.



|34. | Summary of the Differences Between Accounting Practices in Accordance with BR GAAP and U.S. GAAP
|--- | ------------------------------------------------------------------------------------------------



As described in Note 2a, the consolidated financial statements are prepared
in accordance with accounting practices generally adopted in Brazil. These accounting practices are established by the Brazilian corporate law, instructions applicable to telecommunications concessionaires and rules and accounting procedures
established by the Brazilian Securities and Exchange Commission (CVM - Comissão de Valores Mobiliários). Accounting policies that differ from accounting principles generally accepted in the United States of America (U.S. GAAP) are
described below:



| | a. | Capitalization of interest cost
| | -- | -------------------------------



Until December 31, 1993, under BR GAAP, interest was capitalized separately and amortized over a period different from the useful lives of the related
assets. Also, until December 31, 1998, under BR GAAP as applied to companies in the telecommunications industry, interest attributable to construction in progress was computed at the rate of 12% per annum on the balance of construction in progress.
The capitalized part, which related to interest on third-party loans, was credited to interest expense based on actual interest costs and the balance related to the Companys own capital was credited to capital reserves. As from January 1,
1999, interest charges and monetary and foreign exchange variation from financing linked to construction in progress are capitalized to the balance of the assets and credited to interest expense and monetary and foreign exchange variation.



Under U.S. GAAP, in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 34, Capitalizationof Interest Costs, interest incurred on borrowings is capitalized as part of the cost of certain assets to the



F-65



---

extent that borrowings do not exceed construction in progress. The credit is recorded as a reduction of
interest expense. The amount of interest capitalized excludes foreign exchange gains and losses on foreign currency borrowings.



During 2003 and 2002, the Company did not have any financings directly linked to fixed assets and consequently, no interest was capitalized under BR GAAP.
During all years presented, amortization under BR GAAP is higher than that under U.S. GAAP because, prior to 1999, a significant portion of interest capitalized under BR GAAP related to amounts credited to capital reserves that were not capitalized
for U.S. GAAP purposes. In 2004, interest was capitalized under BR GAAP on Star Ones books.



The effects of these different criteria for capitalizing and amortizing capitalized interest are presented below:



|                                                                           |  |         |   |  |         |   |  |          |  
|-------------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | -------- | -
|                                                                           |  | 2004    |   |  | 2003    |   |  | 2002     |  
|Capitalized interest difference-                                           |  |         |   |  |         |   |  |          |  
|U.S. GAAP capitalized interest- Interest capitalized during the year       |  | 15,528  |   |  | 27,202  |   |  | 99,497   |  
|U.S. GAAP difference in accumulated capitalized interest on disposals      |  | 8,354   |   |  | 2,212   |   |  | 8,583    |  
|                                                                           |  |         |   |  |         |   |  |          |  
|                                                                           |  | 23,882  |   |  | 29,414  |   |  | 108,080  |  
|                                                                           |  |         |   |  |         |   |  |          |  
|Less: BR GAAP capitalized interest- Interest capitalized during the period |  | (2,954  | ) |  |        |   |  | (6,350   | )
|                                                                           |  |         |   |  |         |   |  |          |  
|U.S. GAAP adjustment                                                       |  | 20,928  |   |  | 29,414  |   |  | 101,730  |  
|                                                                           |  |         |   |  |         |   |  |          |  
|Amortization of capitalized interest difference-                           |  |         |   |  |         |   |  |          |  
|Amortization under BR GAAP                                                 |  | 59,704  |   |  | 136,239 |   |  | 139,685  |  
|                                                                           |  |         |   |  |         |   |  |          |  
|Less: amortization under U.S. GAAP                                         |  | (51,391 | ) |  | (95,064 | ) |  | (128,380 | )
|U.S. GAAP difference in accumulated amortization on disposals              |  | (3,564  | ) |  | (1,241  | ) |  | (8,113   | )
|                                                                           |  |         |   |  |         |   |  |          |  
|                                                                           |  | (54,955 | ) |  | (96,305 | ) |  | (136,493 | )
|                                                                           |  |         |   |  |         |   |  |          |  
|U.S. GAAP adjustment                                                       |  | 4,749   |   |  | 39,934  |   |  | 3,192    |  
|                                                                           |  |         |   |  |         |   |  |          |  



F-66



---

| | b. | Monetary correction of 1996 and 1997
| | -- | ------------------------------------



Under BR GAAP, the Company discontinued accounting for the effects of inflation as of December 31, 1995. As of January 1, 1996, the carrying value of all
non-monetary assets and liabilities became their historical cost basis. Under U.S. GAAP, Brazil was still considered to be a highly inflationary economy until July 1, 1997 and, based on discussions at the meeting of the International Task Force of
the AICPA, the Company continued to record the effects of inflation using the IGP index up to 1997.



The U.S. GAAP adjustment represents the amortization of the restatement of fixed assets, which resulted from the inflation accounting to income applied
during 1996 and 1997.



| | c. | Pension and Other Post-retirement Benefits
| | -- | ------------------------------------------



Under BR GAAP, the Company provides for the costs of pensions and other post-retirement benefits based on a fixed percentage of remuneration, as
recommended annually by Telos actuaries and certified by independent actuaries. For purposes of the U.S. GAAP reconciliation, the provisions of SFAS No. 87, Employers Accounting for Pensions, and SFAS No. 106,
Employers Accounting for Post-retirement Benefits Other than Pensions, have been applied. The provisions of SFAS No. 87 were applied with effect from January 1, 1991 because it was not feasible to apply them from the effective date
specified in the standard. As a result, R$73,743 of the transition liability was transferred directly to shareholders equity at the implementation date.



Under BR GAAP, the Company adopted CVM Deliberation No. 371 during the year ended December 31, 2001 and recorded as an adjustment to the opening
shareholders equity an amount of R$191,050 (Note 25). This adjustment was reversed for U.S. GAAP purposes, since all effects of Pension and Other Post-retirement Benefits have already been recognized after applying SFAS Nos. 87 and 106.



As fully described in Note 25, for BR GAAP purposes, the
recognition of other post-retirement benefit obligations was required since December 2001. Under U.S. GAAP, this pension and other post-retirement benefit obligations have been recorded as of January 1, 1991, resulting in a reconciling item for the
unrecognized net actuarial gains and losses. See Notes 34.q. and 35.b.



F-67



---

| | d. | Items posted directly to shareholders equity accounts
| | -- | ------------------------------------------------------



Under BR GAAP, certain items are posted directly to shareholders equity accounts, which under U.S. GAAP, are posted to the income statement.
Examples include capitalized interest, donations and grants and fiscal incentive investment credits received. The posting of such items to shareholders equity in the subsidiary companies gives rise to consolidation adjustments in the
consolidated statements of changes in shareholders equity. Since the original postings by the subsidiaries to their equity accounts would, under U.S. GAAP, be made directly to the income statement, these consolidation adjustments are included
in the reconciliation of net income in accordance with U.S. GAAP.



| | e.1 | Dividends
| | --- | ---------



Under the Companys bylaws, the Company is required to distribute an aggregate amount equal to at least 25% of the Companys adjusted net income
of each fiscal year as a minimum mandatory dividend. Each preferred share is entitled to priority in the allocation of adjusted net income up to its non-cumulative dividend preference, equal to the greater of: (i) 6% of the portion of total
share capital attributable to preferred shares; or (ii) at least 10% greater than the dividend paid per common share. For more information regarding dividends paid to the Companys shareholders, see Note 28.c.



The Company may refrain from paying the mandatory minimum dividend for a
given fiscal year only if the managing bodies of the corporation (i.e., the board of directors and the board of executive officers (diretoria)) report to the annual general shareholders meeting that payment of the mandatory dividend would be
incompatible with the corporations financial situation.



Under BR GAAP, the minimum mandatory dividend must be recognized in the year in which the related income is earned.



In 2003 and 2002, the Companys accounting policy under U.S. GAAP was to recognize dividends in the period in which the dividends were approved by
the Companys shareholders because the Company believed that the minimum mandatory dividend did not become a liability for U.S. GAAP purposes until that point. Following this policy, in the U.S. GAAP reconciliation of shareholders equity
for 2003, the Company reversed R$86 million in dividends that were recognized in 2003 under BR GAAP and did not take the dividends into account in earnings per share for U.S. GAAP purposes in 2003. Under the policy the Company applied in 2003 and
2002, the dividends should have been taken into account in earnings per share for U.S. GAAP purposes in 2004.



In 2004, the Company changed its accounting policy under U.S. GAAP to recognize the minimum mandatory dividend in the year in which the distributable
profits were earned. The Company believed that because of the limited discretion of shareholders to veto payment the dividend was more properly treated as a liability as of the end of the year in which the distributable profits were earned. Under
the policy the Company applied in 2004, the dividends should have been taken into account in earnings per share for U.S. GAAP purposes in 2003. Because of the change in policy, the dividends were not taken into account in earnings per share for U.S.
GAAP purposes in either year.



The following table sets forth
shareholders equity under U.S. GAAP if the Company had applied in 2003 the same accounting policy that it applied in 2004:



2004

2003Shareholders equity as reported

5,009,010

5,475,633Shareholders equity applying new policy

5,009,010

5,389,496




| | e.2 | Earnings per share
| | --- | ------------------



Under BR GAAP, net income per share is calculated on the number of shares outstanding at the balance sheet date.



In these consolidated financial statements, information is disclosed per lot
of one thousand shares, because this is the minimum number of shares that can be traded on the Brazilian stock exchanges. Until June 15, 2003, each American Depositary Share (ADS) shown is equivalent to one thousand shares. As from June
16, 2003, we implemented a ratio change of ADSs solely to comply with minimum share price (US$1.00) requirement for maintaining its ADS listing on the New York Stock Exchange. The ratio exchange is in the proportion of 1 ADS equal to 5,000 preferred
shares. There was no change in the underlying preferred shares.



Under the U.S. GAAP the Company presents basic and diluted earnings per share in accordance with SFAS No. 128, Earnings per Share.



Since the preferred and common shareholders have different dividends, voting and liquidation rights, basic earnings per share has been calculated using
the two-class method for U.S. GAAP purposes. The two-class method is an earnings allocation formula that determines earnings per share for preferred and common stock according to the dividends to be paid as required by the
Holding Companys bylaws and participation rights in undistributed earnings.



F-68



---

Basic earnings per common share is computed by reducing net income by distributable and undistributable
net income available to preferred shareholders and dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to preferred shareholders is the sum of the
preferred stock dividends not less than a minimum of 6% on the amount resulting from the division of the subscribed capital, by the number of shares of the Holding Company (as defined in the Holding Companys bylaws) (distributable net income)
and the preferred shareholders portion of undistributed net income. Undistributed net income is computed by deducting preferred stock dividends and common stock dividends from net income. The preferred and common shareholders share
undistributed net income equally on a pro rata basis.



The options described in Note 34.k. were not included in the computation of diluted earnings per share because the options exercise prices were greater than the average market price of the Holding Companys common shares for all
periods presented.



The following table sets forth the
calculation of earnings per share under U.S. GAAP:



|                                                                            |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|--------------------------------------------------------------------------- |  | --------------------------------------------- | - |  | ----------- | - | ---- | ----------- |  | ----------- |  | ----------- | - |  | ----------- | -
|                                                                            |  | Year ended December 31,                       |  
|                                                                            |  | 2004                                          |   |  | 2003        |   | 2002 |            
|                                                                            |  | (in thousands ofreais, except per share data) |  
|                                                                            |  | Common                                        |   |  | Preferred   |   |      | Common      |  | Preferred   |  | Common      |   |  | Preferred   |  
|Basic and diluted numerator:                                                |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Allocated net income (loss) available for common and preferred shareholders |  | (138,040                                      | ) |  | (231,215    | ) |      | 142,795     |  | 239,288     |  | (253,334    | ) |  | (424,526    | )
|Basic and diluted denominator:                                              |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Weighted average shares outstanding                                         |  | 124,369,031                                   |   |  | 208,317,101 |   |      | 124,369,031 |  | 208,410,612 |  | 124,369,031 |   |  | 208,411,830 |  
|Basic and diluted earnings per share                                        |  | (1.11                                         | ) |  | (1.11       | ) |      | 1.15        |  | 1.15        |  | (2.04       | ) |  | (2.04       | )





As disclosed in note 34.e.1, in 2004 the Company changed its accounting policy for recognition of dividends under U.S. GAAP to recognize minimum mandatory
dividends in the year in which the distributable profits were earned. The following table sets forth the calculation of earnings per share under U.S. GAAP if the Company had applied in 2003 and 2002 the same accounting policy that it applied in
2004:



|                                                                            |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|--------------------------------------------------------------------------- |  | --------------------------------------------- | - |  | ----------- | - | ---- | ----------- |  | ----------- |  | ----------- | - |  | ----------- | -
|                                                                            |  | Year ended December 31,                       |  
|                                                                            |  | 2004                                          |   |  | 2003        |   | 2002 |            
|                                                                            |  | (in thousands ofreais, except per share data) |  
|                                                                            |  | Common                                        |   |  | Preferred   |   |      | Common      |  | Preferred   |  | Common      |   |  | Preferred   |  
|Basic and diluted numerator:                                                |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Dividends                                                                   |  |                                              |   |  |            |   |      |            |  | 86,137      |  |            |   |  |            |  
|Allocated net income (loss) available for common and preferred shareholders |  | (138,040                                      | ) |  | (231,215    | ) |      | 110,603     |  | 185,343     |  | (253,334    | ) |  | (424,526    | )
|                                                                            |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Total basic and diluted numerator                                           |  | (138,040                                      | ) |  | (231,215    | ) |      | 110,603     |  | 271,480     |  | (253,334    | ) |  | (424,526    | )
|                                                                            |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Basic and diluted denominator:                                              |  |                                               |   |  |             |   |      |             |  |             |  |             |   |  |             |  
|Weighted average shares outstanding                                         |  | 124,369,031                                   |   |  | 208,317,101 |   |      | 124,369,031 |  | 208,410,612 |  | 124,369,031 |   |  | 208,411,830 |  
|Basic and diluted earnings per share                                        |  | (1.11                                         | ) |  | (1.11       | ) |      | 0.89        |  | 1.30        |  | (2.04       | ) |  | (2.04       | )





| | f. | Impairment of long-lived assets
| | -- | -------------------------------



In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates the
carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is separately
identifiable and is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets. The Company has performed a review of its long-lived assets and
concluded that an impairment charge was required, on the permanent assets of Vésper S.A. and Vésper São Paulo S.A., as described in Note 17.



F-69



---

| | g. | Disclosure requirements
| | -- | -----------------------



U.S. GAAP disclosure requirements differ from those required by BR GAAP. However, in these financial statements, the level of disclosure generally has
been expanded to comply with U.S. GAAP, and additional disclosures required by U.S. GAAP are presented in Note 35.



| | h. | Interest income (expense)
| | -- | -------------------------



BR GAAP requires interest to be included as part of operating income. Under U.S. GAAP interest income (expense) is included as non-operating income.



| | i. | Deferred income tax and social contribution assets
| | -- | --------------------------------------------------



As mentioned in Note 12, under BR GAAP, no tax credits were recorded in certain subsidiaries, due to the uncertainties involving their realization.



Under U.S. GAAP, these subsidiaries recorded a deferred
income tax and social contribution assets, with the corresponding valuation allowance, as follows:



|                                                   |  |            |   |  |            |  
|-------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                   |  | 2004       |   |  | 2003       |  
|Deferred income tax and social contribution assets |  | 1,666,877  |   |  | 1,485,006  |  
|                                                   |  |           
|Valuation allowance                                |  | (1,666,877 | ) |  | (1,485,006 | )



This GAAP difference
has no impact on net income (loss) nor shareholders equity for all periods presented.



| | j. | Retained earnings
| | -- | -----------------



For BR GAAP, a company formed as a result of a spin-off may have retained earnings in its balance sheet if the parent company shareholders
resolution adopting the spin-off allocates retained earnings from the parent company to the new company. Under U.S. GAAP, retained earnings allocated in the spin-off would not be considered historical retained earnings as such amount would represent
capital allocated from the parent company and would be described as distributable capital. As a result of the May 22, 1998 spin-off, the Holding Company had U.S. GAAP distributable capital of R$994,594.



Under BR GAAP the remaining outstanding amount of the retained earnings is
transferred to a reserve for investment (see Note 28.b.3). However, for U.S. GAAP purposes this amount is classified as retained earnings.



F-70



---

| | k. | Stock option plan
| | -- | -----------------



As mentioned in Note 28.e., the Holding Company has maintained a stock option plan since December 17, 1998. The Holding Company has granted shares to
employees of the group, exercisable ratably over 3 years, at a grant price equal to market price at date of grant plus indexation based on the IGP-M until April, 2000. From then on, the exercise price is indexed to inflation using IGP-M in excess of
12% per annum until October 2001. As from then, the exercise price is no longer indexed. No options are exercisable for more than 10 years after date of grant.



Based on the terms of the plan, the Holding Company applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, or APB Opinion 25 and related interpretations in accounting for its stock option plan. For all periods presented, compensation expense under U.S. GAAP related to the Companys stock option plan is minimal and consequently, has
not been reflected as a U.S. GAAP adjustment.



The following
table summarizes information about the shares granted and outstanding at December 31, 2004, 2003 and 2002:



|                 |  |                       |  |                                    |  |                                    |  |                                   |  |                                    
|---------------- |  | --------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- |  | -----------------------------------
|                 |  | 2004                 
|                 |  | Options outstanding   |  | Options exercisable               
|Date of Grant    |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-averageexercise price(R$) |  | Number outstanding (in thousands) |  | Weighted-average exercise price(R$)
|March 05, 2004   |  | 80,000                |  | 9.26                               |  | 8.57                               |  | 80,000                            |  | 8.57                               
|January 15, 2004 |  | 72,500                |  | 9.10                               |  | 8,89                               |  | 72,500                            |  | 8,89                               
|October 1, 2003  |  | 2,498,000             |  | 8.85                               |  | 7,60                               |  | 2,498,000                         |  | 7,60                               
|August 7,2003    |  | 30,000                |  | 8.68                               |  | 5.30                               |  | 30,000                            |  | 5.30                               
|February 7, 2003 |  | 11,000                |  | 8.19                               |  | 2.99                               |  | 11,000                            |  | 2.99                               
|October 9, 2002  |  | 607,533               |  | 7.86                               |  | 2.20                               |  | 607,533                           |  | 2.20                               
|December 10,2001 |  | 22,000                |  | 7.04                               |  | 9.44                               |  | 22,000                            |  | 9.44                               
|October 30, 2001 |  | 11,500                |  | 6.88                               |  | 7.17                               |  | 11,500                            |  | 7.17                               
|October 5, 2001  |  | 3,835,961             |  | 6.88                               |  | 6.51                               |  | 3,835,961                         |  | 6.51                               
|                 |  |                       |  |                                    |  |                                    |  |                                   |  |                                    
|                 |  | 7,168,494             |  |                                    |  |                                    |  | 7,168,494                         |  |                                    
|                 |  |                       |  |                                    |  |                                    |  |                                   |  |                                    





F-71



---

|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                     
|----------------- |  | --------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- |  | ------------------------------------
|                  |  | 2003                 
|                  |  | Options outstanding   |  | Options exercisable               
|Date of Grant     |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-averageexercise price(R$) |  | Number outstanding (in thousands) |  | Weighted-average exercise price (R$)
|October1, 2003    |  | 2,550,000             |  | 9.83                               |  | 7.60                               |  |                                  |  | 7.60                                
|August 7, 2003    |  | 30,000                |  | 9.67                               |  | 5.30                               |  |                                  |  | 5.30                                
|August 25, 2003   |  | 50,000                |  | 9.67                               |  | 5.90                               |  |                                  |  | 5.90                                
|February 7, 2003  |  | 13,000                |  | 9.17                               |  | 2.99                               |  |                                  |  | 2.99                                
|November 26, 2002 |  | 2,667                 |  | 8.92                               |  | 2.67                               |  |                                  |  | 2.67                                
|October 9, 2002   |  | 1,763,534             |  | 8.83                               |  | 2.20                               |  | 404,879                           |  | 2.20                                
|December 10, 2001 |  | 22,000                |  | 8.00                               |  | 9.44                               |  | 11,000                            |  | 9.44                                
|October 5, 2001   |  | 4,288,379             |  | 7.83                               |  | 6.51                               |  | 1,714,993                         |  | 6.51                                
|October 30, 2001  |  | 11,500                |  | 7.83                               |  | 7.17                               |  | 5,750                             |  | 7.17                                
|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                     
|                  |  | 8,731,080             |  |                                    |  |                                    |  | 2,136,622                         |  |                                     
|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                     



|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                      
|----------------- |  | --------------------- |  | ---------------------------------- |  | ---------------------------------- |  | --------------------------------- |  | -------------------------------------
|                  |  | 2002                 
|                  |  | Options outstanding   |  | Options exercisable               
|Date of Grant     |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-averageExercise price(R$) |  | Number Outstanding (in thousands) |  | Weighted- average exercise price (R$)
|October 6, 2001   |  | 5,746,099             |  | 8.76                               |  | 6.51                               |  | 1,555,930                         |  | 6.51                                 
|October 30, 2001  |  | 11,500                |  | 8.76                               |  | 7.17                               |  | 2,880                             |  | 7.17                                 
|December 10, 2001 |  | 29,500                |  | 8.76                               |  | 9.44                               |  | 7,380                             |  | 9.44                                 
|June 30, 2002     |  | 2,097,330             |  | 9.76                               |  | 2.20                               |  |                                  |  | 2.21                                 
|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                      
|                  |  | 7,884,429             |  |                                    |  |                                    |  | 1,556,190                         |  |                                      
|                  |  |                       |  |                                    |  |                                    |  |                                   |  |                                      



The following table
summarizes information about the weighted-average exercise price of options during the year ended December 31, 2004, 2003 and 2002:



|          |  |      |  |      |  |     
|--------- |  | ---- |  | ---- |  | ----
|          |  | 2004 |  | 2003 |  | 2002
|Granted   |  | 8.72 |  | 7.52 |  | 2.21
|Exercised |  | 2.19 |  | 1.26 |  |    
|Cancelled |  | 0.88 |  | 1.04 |  | 1.47



The weighted-average
prices of the exercisable options are increased by indexation up to December 31, 2000, based on the IGP-M variation, in accordance with the terms of the plan.



As mentioned in Note 28, according to rules established in the Stock Options Plan, upon the change in control on July 23, 2004, the granted options
became exercisable. Because this acceleration in the vesting period was based on the occurrence of a specific event or condition in accordance with the original terms of the award, a modification has not been made and, therefore, no new measurement
of compensation cost is required, according to FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25, or FIN 44.



F-72



---

In October 1995, the Financial Accounting Standards Board issued SFAS No.123, Accounting for
Stock-Based Compensation, or SFAS 123. SFAS 123 requires disclosure of the compensation cost for stock-based incentives granted after January 1, 1995 based on the fair value. Applying SFAS 123 would result in pro forma net income and earnings
(loss) per share (EPS) amounts as follows:



|                              |  |          |   |  |         |  |          |  
|----------------------------- |  | -------- | - |  | ------- |  | -------- | -
|                              |  | 2004     |   |  | 2003    |  | 2002     |  
|U.S. GAAP net income (loss) - |  |          |   |  |         |  |          |  
|As reported                   |  | (369,255 | ) |  | 382,083 |  | (677,860 | )
|Pro forma                     |  | (376,625 | ) |  | 372,824 |  | (681,285 | )
|                              |  |          |  
|Basic and diluted EPS -       |  |          |   |  |         |  |          |  
|As reported                   |  | (1.11    | ) |  | 1.15    |  | (2.04    | )
|Pro forma                     |  | (1.13    | ) |  | 1.12    |  | (2.05    | )
|                              |  |          |   |  |         |  |          |  



The fair values of the
options granted have been estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions:



|                        |  |      |         |   |      |    |         |      |  |    |         |   |  |    |         |  
|----------------------- |  | ---- | ------- | - | ---- | -- | ------- | ---- |  | -- | ------- | - |  | -- | ------- | -
|                        |  | 2004 |         |   | 2003 |    |         | 2002 |  |    | 2001    |  
|Expected volatility     |  |      | 69.86   | % |      |    | 86.65   | %    |  |    | 202.37  | % |  |    | 117.95  | %
|Risk-free interest rate |  |      | 16.22   | % |      |    | 19.80   | %    |  |    | 17.91   | % |  |    | 19.08   | %
|Grant date fair value   |  | R$   | 2.20    |   |      | R$ | 2.19    |      |  | R$ | 2.16    |   |  | R$ | 2.52    |  
|Expected life           |  |      | 2 years |   |      |    | 2 years |      |  |    | 2 years |   |  |    | 2 years |  
|Dividend yield          |  |      | 0       | % |      |    | 0       | %    |  |    | 0       | % |  |    | 0       | %
|                        |  |      |         |   |      |    |         |      |  |    |         |   |  |    |         |  



| | l. | Goodwill and negative goodwill
| | -- | ------------------------------



Under BR GAAP and CVM Instruction No. 319/99, the goodwill related to AcessoNet, defined as the excess of the acquisition cost over the book value of the
net assets acquired, was reclassified to a deferred asset on the date of the merger into Embratel and was being amortized over 5 years. In 2003, this goodwill was written-off (Note 11). Under U.S. GAAP, this amount remains classified as goodwill and
was amortized over the same period. As from January 1, 2002, the goodwill is no longer amortized and is subject to a yearly impairment test.



On December 2, 2003, the Holding Company acquired Vésper Holding S.A. and Vésper Holding São Paulo S.A. for a nominal consideration
plus expenses. Under Brazilian GAAP, this acquisition generated negative goodwill amounting to R$18,655, which was recorded as a liability. Under U.S. GAAP, this amount was recorded as a reduction to the value allocated to the fixed assets in the
acquisition balance sheets of Vésper Holding S.A. and Vésper Holding São Paulo S.A.



F-73



---

On March 2, 2004, Embratel acquired CT Torres for US$45 million (R$131 million). The principal assets of
CT Torres are communication towers that rent space to telecommunication companies principally in the states of Rio de Janeiro and São Paulo. Under BR GAAP the excess purchase price over the book value of assets acquired was recorded as a
deferred asset and is being amortized based future profitability. Under U.S. GAAP, the purchase price of CT Torres was allocated to the communication towers, which are being depreciated over their remaining useful life.



| | m. | Installation revenues
| | -- | ---------------------



Under BR GAAP, installation revenues and costs are recognized in the statements of operations when incurred. Under U.S. GAAP, installation revenues and
the related costs are deferred and recognized over the term of the related contract. Installation costs that exceed installation revenues are expensed as incurred. This difference in accounting policy has no impact on net income (loss) or on
shareholders equity for all periods presented.



| | n. | Comprehensive income (loss)
| | -- | ---------------------------



BR GAAP does not recognize the concept of comprehensive income (loss).



Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, effective for years beginning after December 15,
1997, requires the disclosure of comprehensive income. Comprehensive income is comprised of net income and other comprehensive income that include charges or credits directly to equity, which are not the result of transactions with
owners. Examples of other comprehensive income items are cumulative translation adjustments under SFAS No. 52, unrealized gains and losses under SFAS No. 115 and minimum pension liabilities under SFAS No. 87, among others.



The Companys comprehensive income (loss) for the years presented is
equal to its net income (loss) for those years, as it has no other comprehensive income (loss) items.



| | o. | Accounting for derivative instruments  SFAS No. 133
| | -- | ----------------------------------------------------



As mentioned in Note 23, the Company uses derivative financial instruments to mitigate its exposure to foreign currency fluctuations related to a portion
of its foreign currency denominated debt. The Company primarily uses foreign currency swap agreements to manage these risks.



F-74



---

Under BR GAAP, foreign currency swap contracts are recorded at the notional amount multiplied by the
terms of the contract as it had been settled at the balance sheet date. The accrual at that date is recorded as expense and payable.



SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133 established accounting and reporting standards
requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the derivatives fair
value are recognized currently in earnings unless specific hedge accounting criteria are met.



For U.S. GAAP purposes, the Companys derivatives do not qualify for hedge accounting using the criteria of SFAS 133, and consequently, the changes in fair value are recorded in earnings. Accordingly, an
adjustment has been included in the reconciliation of U.S. GAAP for the difference between the carrying value for BR GAAP and the fair market value of the derivative as of December 31, 2004 and 2003.



| | p. | Provision for voluntary dismissal program
| | -- | -----------------------------------------



As described in Note 31, for BR GAAP purposes, at December 31, 2002, Embratel recorded a provision in the amount of R$20,000 related to a voluntary
dismissal program. Under U.S. GAAP, pursuant to Emerging Issues Task Force No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring), such costs may only be accrued if (i) they are part of a formal restructuring plan approved by management that specifically identifies the significant actions to be taken to complete the plan and the number and job
classification of employees to be terminated, and (ii) the plan has been communicated to the employees. Since all of the criteria were not met at December 31, 2002, the provision was reversed for U.S. GAAP purposes in 2002 and booked for
2003.



| | q. | Reversal of exchange variation capitalized in Star One local books
| | -- | ------------------------------------------------------------------



Under BR GAAP, capitalization of exchange variation is permitted. Under the provisions of SFAS34, for U.S. GAAP purposes, only interest cost is allowed to
be capitalized.



F-75



---

| | r. | Net Income (Loss) reconciliation of the differences between U.S. GAAP and BR GAAP
| | -- | ---------------------------------------------------------------------------------



|                                                                                |  |          |   |  |          |   |  |          |  
|------------------------------------------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                                                                                |  | 2004     |   |  | 2003     |   |  | 2002     |  
|Income (loss) as reported under BR GAAP                                         |  | (339,256 | ) |  | 223,634  |   |  | (626,342 | )
|Add (deduct)-                                                                   |  |          |   |  |          |   |  |          |  
|Different criteria for-                                                         |  |          |   |  |          |   |  |          |  
|Monetary restatement of 1996 and 1997 (Note 34.b.)                              |  | (96,000  | ) |  | (103,785 | ) |  | (96,016  | )
|Capitalized interest (Note 34.a.)                                               |  | 20,928   |   |  | 29,414   |   |  | 101,730  |  
|Amortization of capitalized interest (Note 34.a.)                               |  | 4,749    |   |  | 39,934   |   |  | 3,192    |  
|Reversal of exchange variation capitalized in Star One local books (Note 34.q.) |  | 12,113   |   |  |         |   |  |         |  
|Pension and other post-retirement benefits- (Note 35.b.)                        |  |          |   |  |          |   |  |          |  
|SFAS No. 87 adjustment                                                          |  | 54       |   |  | 7,776    |   |  | 29,959   |  
|SFAS No. 106 adjustment                                                         |  | (2,149   | ) |  | (3,347   | ) |  | (3,124   | )
|Reversal of goodwill amortization and impairment charge (Note 34.l.)            |  |         |   |  | 121,787  |   |  | 40,595   |  
|Negative goodwill amortization (Note 34.l.)                                     |  | 2,103    |   |  |         |   |  |         |  
|SFAS No. 133  fair value of swap contracts (Note 34.o.)                        |  | 8,410    |   |  | 173,017  |   |  | (175,823 | )
|                                                                                |  |          |  
|Reversal of provision for voluntary dismissal program (Note 34.p.)              |  |         |   |  | (20,000  | ) |  | 20,000   |  
|                                                                                |  |          |  
|Items posted directly to shareholders equity accounts-                         |  |          |   |  |          |   |  |          |  
|                                                                                |  |          |  
|Other (Note 34.d.)                                                              |  | 2,377    |   |  | (2,092   | ) |  | 553      |  
|Deferred tax effect of the above adjustments                                    |  | 16,829   |   |  | (82,295  | ) |  | 26,837   |  
|Effect of minority interest in the above adjustments                            |  | 587      |   |  | (1,960   | ) |  | 579      |  
|                                                                                |  |          |   |  |          |   |  |          |  
|U.S. GAAP net income (loss)                                                     |  | (369,255 | ) |  | 382,083  |   |  | (677,860 | )
|                                                                                |  |          |   |  |          |   |  |          |  
|U.S. GAAP basic and diluted net income (loss) per thousand shares-              |  |          |   |  |          |   |  |          |  
|Preferred                                                                       |  | (1.11    | ) |  | 1.15     |   |  | (2.04    | )
|                                                                                |  |          |   |  |          |   |  |          |  
|Common                                                                          |  | (1.11    | ) |  | 1.15     |   |  | (2.04    | )
|                                                                                |  |          |   |  |          |   |  |          |  



| | s. | Weighted average number of thousand shares outstanding in accordance with U.S. GAAP
| | -- | -----------------------------------------------------------------------------------



|                                                                            |  |             |  |             |  |            
|--------------------------------------------------------------------------- |  | ----------- |  | ----------- |  | -----------
|                                                                            |  | 2004        |  | 2003        |  | 2002       
|Weighted average number of shares outstanding (in lots of thousand shares): |  |             |  |             |  |            
|Weighted average common shares outstanding                                  |  | 124,369,031 |  | 124,369,031 |  | 124,369,031
|                                                                            |  |             |  |             |  |            
|Weighted average preferred shares outstanding                               |  | 208,317,101 |  | 208,410,612 |  | 208,411,830
|                                                                            |  |             |  |             |  |            



F-76



---

| | t. | Net equity reconciliation of the differences between U.S. GAAP and BR GAAP
| | -- | --------------------------------------------------------------------------



|                                                                                |  |           |   |  |           |  
|------------------------------------------------------------------------------- |  | --------- | - |  | --------- | -
|                                                                                |  | 2004      |   |  | 2003      |  
|Total shareholders equity as reported                                          |  | 4,526,370 |   |  | 4,874,802 |  
|Add (deduct)-                                                                   |  |           |   |  |           |  
|Different criteria for-                                                         |  |           |   |  |           |  
|Monetary restatement of 1996 and 1997 (Note 34.b.)                              |  | 68,273    |   |  | 164,273   |  
|Capitalized interest (Note 34.a.)                                               |  | (385,705  | ) |  | (406,633  | )
|Amortization of capitalized interest (Note 34.a.)                               |  | 746,860   |   |  | 742,111   |  
|Reversal of exchange variation capitalized in Star One local books (Note 34.q.) |  | 12,113    |   |  |          |  
|Dividends (Note 34.i.)                                                          |  |          |   |  | 86,137    |  
|Pension and other post-retirement benefits (Note 35.b.)                         |  |           |   |  |           |  
|SFAS No. 87 adjustment                                                          |  | (45,958   | ) |  | (46,012   | )
|SFAS No. 106 adjustment                                                         |  | 76,327    |   |  | 78,476    |  
|Reversal of goodwill amortization and impairment charges (Note 34.l.)           |  | 162,382   |   |  | 162,382   |  
|Negative goodwill amortization (Note 34.l.)                                     |  | 2,103     |   |  |          |  
|SFAS No. 133  fair value of swap contracts (Note 34.o.)                        |  | 5,604     |   |  | (2,806    | )
|Other (Note 34.d.)                                                              |  | (3,983    | ) |  | (4,279    | )
|Deferred tax effects of the above adjustments                                   |  | (151,968  | ) |  | (168,797  | )
|Effect of minority interest on the above adjustments                            |  | (3,408    | ) |  | (4,021    | )
|                                                                                |  |           |   |  |           |  
|U.S. GAAP shareholders equity                                                  |  | 5,009,010 |   |  | 5,475,633 |  
|                                                                                |  |           |   |  |           |  



The deferred tax
effect of the U.S. GAAP adjustments above of R$(151,968) and R$(168,797) as of December 31, 2004 and 2003 would be classified substantially as non-current on the balance sheet.



F-77



---

|                                                                                                                         |  |             |   |  |            |   |  |            |  
|------------------------------------------------------------------------------------------------------------------------ |  | ----------- | - |  | ---------- | - |  | ---------- | -
|                                                                                                                         |  | 2004        |   |  | 2003       |   |  | 2002       |  
|U.S. GAAP supplementary information-                                                                                     |  |             |   |  |            |   |  |            |  
|Reconciliation of operating income (loss) under BR GAAP to operating income (loss) under U.S. GAAP-                      |  |             |   |  |            |   |  |            |  
|BR GAAP operating income (expense)                                                                                       |  | (390,858    | ) |  | 470,308    |   |  | (1,241,047 | )
|                                                                                                                         |  |             |  
|Exclusion from U.S. GAAP operating income-                                                                               |  |             |   |  |            |   |  |            |  
|Management fee                                                                                                           |  |            |   |  | 14,024     |   |  | 36,232     |  
|Net financial expense                                                                                                    |  | 618,602     |   |  | 159,925    |   |  | 1,552,385  |  
|Inclusion in U.S. GAAP operating income-                                                                                 |  |             |   |  |            |   |  |            |  
|Amortization of capitalized interest                                                                                     |  | 26,956      |   |  | 41,175     |   |  | 11,305     |  
|Extraordinary income  ILL (Note 10)                                                                                     |  | 106,802     |   |  |           |   |  | 198,131    |  
|U.S. GAAP adjustments-                                                                                                   |  |             |   |  |            |   |  |            |  
|Monetary restatement of 1996 and 1997 (Note 34.b.)                                                                       |  | (96,000     | ) |  | (96,000    | ) |  | (96,016    | )
|Pension and other post-retirement benefits (Note 35.b.)                                                                  |  |             |   |  |            |   |  |            |  
|SFAS No. 87 pension adjustment                                                                                           |  | 54          |   |  | 7,776      |   |  | 29,959     |  
|SFAS No. 106 adjustment                                                                                                  |  | (28,356     | ) |  | (28,306    | ) |  | (23,557    | )
|Reversal of goodwill amortization and impairment charge (Note 34.l.)                                                     |  |            |   |  | 20,298     |   |  | 40,585     |  
|Negative goodwill amortization (Note 34.l.)                                                                              |  | 2,103       |   |  |           |   |  |           |  
|Reversal of provision for voluntary dismissal program (Note 35.p.)                                                       |  |            |   |  | (20,000    | ) |  | 20,000     |  
|Other                                                                                                                    |  | 3,456       |   |  | (2,751     | ) |  | 626        |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|U.S. GAAP operating income                                                                                               |  | 242,759     |   |  | 566,449    |   |  | 528,603    |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Reconciliation of net revenue and cost of services under BR GAAP to net revenue and cost of services under U.S. GAAP(1)- |  |             |   |  |            |   |  |            |  
|Net revenue under BR GAAP                                                                                                |  | 7,332,868   |   |  | 7,043,610  |   |  | 7,371,630  |  
|Installation revenues (Note 34.m.)                                                                                       |  | 961         |   |  | 2,675      |   |  | 5,222      |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Net revenue under U.S. GAAP                                                                                              |  | 7,333,829   |   |  | 7,046,285  |   |  | 7,376,852  |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|                                                                                                                         |  |             |  
|                                                                                                                         |  | 2004        |   |  | 2003       |   |  | 2002       |  
|Cost of services under BR GAAP                                                                                           |  | (4,994,389  | ) |  | (4,715,149 | ) |  | (5,000,987 | )
|Installation revenues (Note 34.m.)                                                                                       |  | (961        | ) |  | (2,675     | ) |  | (5,222     | )
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Cost of services under U.S. GAAP                                                                                         |  | (4,995,350  | ) |  | (4,717,824 | ) |  | (5,006,209 | )
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Total assets  under U.S. GAAP                                                                                           |  | 11,987,836  |   |  | 13,652,867 |   |  | 13,858,778 |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Property, plant and equipment  under U.S. GAAP                                                                          |  | 17,574,187  |   |  | 16,984,957 |   |  | 14,674,794 |  
|Accumulated depreciation  under U.S. GAAP                                                                               |  | (10,462,573 | ) |  | (9,308,761 | ) |  | (6,351,876 | )
|                                                                                                                         |  |             |   |  |            |   |  |            |  
|Net property, plant and equipment  under U.S. GAAP                                                                      |  | 7,111,614   |   |  | 7,676,196  |   |  | 8,322,918  |  
|                                                                                                                         |  |             |   |  |            |   |  |            |  

---

|(1) | Under BR GAAP, value added and other sales taxes are recorded as a deduction to revenues. In
the Companys previously issued financial statements, the Company recorded these taxes as costs of services under U.S. GAAP. During the year ended December 31, 2004, the Company changed the classification of these taxes under U.S. GAAP to be
consistent with BR GAAP. The prior periods have been reclassified for this change in accounting policy. This reclassification had no impact on net income (loss) nor shareholders equity for all periods presented. The change in accounting policy
was made to align U.S. GAAP with BR GAAP since management believes that the Company acts as an agent for the government with regards to the
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-78



---

collection of these taxes. Additionally, the Company believes that this presentation allows for better
comparability with other Brazilian companies. The taxes previously included in costs of services, resulting in an increase in net revenues under U.S. GAAP for the years ended December 31, 2003 and 2002 amounted to R$2,109,216 and R$2,110,794,
respectively.



| | u. | Statements of changes in total shareholders equity in accordance with U.S. GAAP for the years ended December 31, 2004, 2003 and 2002
| | -- | -------------------------------------------------------------------------------------------------------------------------------------



|                                     |  |           |  
|------------------------------------ |  | --------- | -
|                                     |  | Total     |  
|Balances as of January 1, 2002       |  | 5,755,091 |  
|Loss under U.S. GAAP                 |  | (677,860  | )
|Repurchase of treasury shares        |  | (534      | )
|                                     |  |           |  
|Balances as of December 31, 2002     |  | 5,076,697 |  
|Net income under U.S.GAAP            |  | 382,083   |  
|Sale / Repurchase of treasury shares |  | 2,381     |  
|Prescribed Dividends                 |  | 14,472    |  
|                                     |  |           |  
|Balances as of December 31, 2003     |  | 5,475,633 |  
|Loss under U.S. GAAP                 |  | (369,255  | )
|Dividends                            |  | (86,137   | )
|Sale / Repurchase of treasury shares |  | (11,231   | )
|                                     |  |           |  
|Balances as of December 31, 2004     |  | 5,009,010 |  
|                                     |  |           |  



F-79



---

|35. | Additional Disclosures Required by U.S. GAAP
|--- | --------------------------------------------



| | a. | Defined contribution plan
| | -- | -------------------------



|                                                                          |  |         |   |  |         |  
|------------------------------------------------------------------------- |  | ------- | - |  | ------- | -
|                                                                          |  | 2004    |   |  | 2003    |  
|Beginning balance - unfunded liability (*)                                |  | 154,429 |   |  | 189,098 |  
|Plus  adjustments for percentage yield on plan assets                    |  | 90,450  |   |  | 33,924  |  
|Plus  debt surplus  January to April 2003  Voluntary Dismissal Program |  |        |   |  | 15,413  |  
|Monetary restatement of debt surplus  January to April 2003  PDI        |  | 270     |   |  |        |  
|Payment of debt surplus  January to April 2003 - PDI                     |  | (15,683 | ) |  |        |  
|Less  payments during the year                                           |  | (55,380 | ) |  | (84,006 | )
|                                                                          |  |         |   |  |         |  
|Ending balance                                                            |  | 174,086 |   |  | 154,429 |  
|                                                                          |  |         |   |  |         |  
|Total expense                                                             |  |         |   |  |         |  
|Matching contribution plus risk benefits                                  |  | 20,481  |   |  | 19,379  |  
|                                                                          |  |         |   |  |         |  
|Total                                                                     |  | 20,481  |   |  | 19,379  |  
|                                                                          |  |         |   |  |         |  

| | 
| | 

| | (*) | The unfunded liability of R$154,429 as of January 1, 2004 (R$189,098 as of January 1, 2003) represented the amount due by the plan sponsor for the participants that migrated from
the defined benefit plan to the defined contribution plan. This liability is being amortized over a period of 20 years from January 1, 1999 (according to a specific cash flow schedule). Any unpaid balance is adjusted monthly based on the return on
the portfolio assets at that time, subject to a minimum increase based on the General Price Index (IGP-DI) plus 6% p.a.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Pension and post-retirement benefits
| | -- | ------------------------------------



Following are the disclosures required pursuant to SFAS No. 132, Employers Disclosures about Pensions and Other Post-retirement
Benefits, and SFAS No. 132R, it requires additional disclosure to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans.



F-80



---

Pension Benefits



|                                               |  |           |   |  |           |  
|---------------------------------------------- |  | --------- | - |  | --------- | -
|                                               |  | 2004      |   |  | 2003      |  
|Change in benefit obligation                   |  |           |   |  |           |  
|Benefit obligation at beginning of year        |  | 1,006,720 |   |  | 894,115   |  
|Service cost                                   |  | 115       |   |  | 80        |  
|Interest cost                                  |  | 109,270   |   |  | 96,934    |  
|Plan participants contributions               |  | 24        |   |  | 140       |  
|Actuarial loss                                 |  | 71,946    |   |  | 52,857    |  
|Benefits paid                                  |  | (89,031   | ) |  | (82,708   | )
|Assumptions                                    |  |          |   |  | 45,302    |  
|                                               |  |           |   |  |           |  
|Benefit obligation at end of year              |  | 1,099,044 |   |  | 1,006,720 |  
|                                               |  |           |   |  |           |  
|Change in plan assets                          |  |           |   |  |           |  
|Fair value of plan assets at beginning of year |  | 1,012,658 |   |  | 956,116   |  
|Actual return on plan assets                   |  | 252,789   |   |  | 138,918   |  
|Employer contributions                         |  | 65        |   |  | 192       |  
|Plan participants contributions               |  | 24        |   |  | 140       |  
|Benefits paid                                  |  | (89,031   | ) |  | (82,708   | )
|                                               |  |           |   |  |           |  
|Fair value of plan assets at end of year       |  | 1,176,505 |   |  | 1,012,658 |  
|                                               |  |           |   |  |           |  
|Funded status                                  |  | 77,461    |   |  | 5,938     |  
|Unrecognized net transition obligation         |  | 2,221     |   |  | 2,915     |  
|Unrecognized net actuarial (gain)              |  | (125,640  | ) |  | (54,865   | )
|                                               |  |           |   |  |           |  
|Accrued benefit cost                           |  | (45,958   | ) |  | (46,012   | )
|                                               |  |           |   |  |           |  





F-81



---

|                                               |  |          |   |  |          |   |  |          |  
|---------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                                               |  | 2004     |   |  | 2003     |   |  | 2002     |  
|Components of net periodic benefit cost        |  |          |   |  |          |   |  |          |  
|Service cost                                   |  | 139      |   |  | 220      |   |  | 292      |  
|Interest cost                                  |  | 109,270  |   |  | 96,934   |   |  | 80,350   |  
|Expected return on plan assets                 |  | (109,960 | ) |  | (103,971 | ) |  | (108,303 | )
|Amortization of net transition obligation      |  | 693      |   |  | 693      |   |  | 693      |  
|Recognized net actuarial gain                  |  |         |   |  | (1,246   | ) |  | (2,384   | )
|Expected employee contribution                 |  | (131     | ) |  | (214     | ) |  | (274     | )
|Actual Companys contributions during the year |  | (65      | ) |  | (192     | ) |  | (333     | )
|                                               |  |          |   |  |          |   |  |          |  
|Net periodic benefit income                    |  | (54      | ) |  | (7,776   | ) |  | (29,959  | )
|                                               |  |          |   |  |          |   |  |          |  
|Weighted-average assumptions as of December 31 |  |          |   |  |          |   |  |          |  
|Discount rate                                  |  | 6.00     | % |  | 6.00     | % |  | 6.00     | %
|Expected return on plan assets                 |  | 6.00     | % |  | 6.00     | % |  | 6.00     | %
|Rate of compensation increase                  |  | 0.00     | % |  | 0.00     | % |  | 0.00     | %



The above rates are
calculated over inflation as measured by the Fiscal Reference Unit (Ufir) through December 31, 1995 and the IGP-DI thereafter.





F-82



---

Other post-retirement benefits



|                                               |  |          |   |  |          |  
|---------------------------------------------- |  | -------- | - |  | -------- | -
|                                               |  | 2004     |   |  | 2003     |  
|Change in benefit obligation                   |  |          |   |  |          |  
|Benefit obligation at beginning of year        |  | 293,582  |   |  | 278,606  |  
|Service cost                                   |  | 20       |   |  | 118      |  
|Interest cost                                  |  | 32,588   |   |  | 30,960   |  
|Actuarial loss                                 |  | 54,563   |   |  | (6,183   | )
|Benefits paid                                  |  | (11,357  | ) |  | (8,594   | )
|Administrative expenses                        |  | (1,170   | ) |  | (1,325   | )
|                                               |  |          |   |  |          |  
|Benefit obligation at end of year              |  | 368,226  |   |  | 293,582  |  
|                                               |  |          |   |  |          |  
|Change in plan assets                          |  |          |   |  |          |  
|Fair value of plan assets at beginning of year |  | 61,863   |   |  | 58,103   |  
|Actual return on plan assets                   |  | 9,100    |   |  | 13,655   |  
|Administrative expenses                        |  | (1,170   | ) |  | (1,325   | )
|Employer contributions                         |  | 8        |   |  | 25       |  
|Benefits paid                                  |  | (11,357  | ) |  | (8,594   | )
|                                               |  |          |   |  |          |  
|Fair value of plan assets at end of year       |  | 58,444   |   |  | 61,864   |  
|                                               |  |          |   |  |          |  
|Funded status                                  |  | (309,782 | ) |  | (231,718 | )
|Unrecognized net actuarial loss                |  | 123,460  |   |  | 73,752   |  
|                                               |  |          |   |  |          |  
|Accrued benefit cost                           |  | (186,322 | ) |  | (157,966 | )
|Reversal of amount recorded under BR GAAP      |  | 262,649  |   |  | 236,442  |  
|                                               |  |          |   |  |          |  
|Effect on shareholders equity                 |  | 76,327   |   |  | 78,476   |  
|                                               |  |          |   |  |          |  





F-83



---

|                                               |  |         |   |  |         |   |  |         |  
|---------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                               |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Components of net periodic benefit cost        |  |         |   |  |         |   |  |         |  
|Service cost                                   |  | 20      |   |  | 118     |   |  | 139     |  
|Interest cost                                  |  | 32,588  |   |  | 30,960  |   |  | 27,433  |  
|Expected return on plan assets                 |  | (6,405  | ) |  | (6,045  | ) |  | (7,139  | )
|Recognized net actuarial loss                  |  | 2,161   |   |  | 3,298   |   |  | 3,168   |  
|Actual Companys contributions during the year |  | (8      | ) |  | (25     | ) |  | (44     | )
|                                               |  |         |   |  |         |   |  |         |  
|Net periodic benefit cost                      |  | 28,356  |   |  | 28,306  |   |  | 23,557  |  
|                                               |  |         |  
|Reversal of amount recorded under BR GAAP      |  | (26,207 | ) |  | (24,959 | ) |  | (20,433 | )
|Effect on U.S. GAAP net income                 |  | 2,149   |   |  | 3,347   |   |  | 3,124   |  
|                                               |  |         |   |  |         |   |  |         |  
|Weighted-average assumptions as of December 31 |  |         |   |  |         |   |  |         |  
|Discount rate                                  |  | 6.00    | % |  | 6.00    | % |  | 6.00    | %
|Expected return on plan assets                 |  | 6.00    | % |  | 6.00    | % |  | 6.00    | %



There was no
unrecognized liability at transition.



Medical assistance cost
trend rates of increase were projected at annual rates excluding inflation ranging from 4.00% in 2004 to 2.7% in 2046. The effect of a one percent annual increase/decrease in the assumed medical assistance cost trend rates would increase/decrease
the accumulated post-retirement benefit obligation at December 31, 2004 by R$56,964/R$45,959 (December 2003 by R$45,623/ R$36,646) and the aggregate of service and interest cost components by R$6,443/R$5,197 (December 2003 by R$5,160/R$4,145).



The funded status of the pension and post-retirement plans
under Brazilian and U.S. GAAP differ. Benefit obligations differ because they have been prepared using different actuarial assumptions permitted under Brazilian and U.S. GAAP.



Plan assets



Pension and other post-retirement benefits totaled R$1,234,947 and R$1,074,521 at December 31, 2004 and 2003. The TELOS fund managers seek to match the
plan assets with benefit obligations over the long-term. Brazilian pension funds are subject to certain restrictions relating to their ability to invest in foreign assets and consequently, the funds primarily invest in Brazilian securities. Under
its current investment strategy, pension assets of TELOS are allocated with a goal to achieve the following distribution:



| |  |  | 10% in nominal bonds to guarantee the short-term liabilities
| | - |  | ------------------------------------------------------------



F-84



---

| |  |  | 75% in inflation-indexed bonds to guarantee the long-term liabilities
| | - |  | ---------------------------------------------------------------------



| |  |  | 10% in stocks to hedge an unexpected decrease in the long-term real interest rate
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 5% in real estate as a strategy of diversification
| | - |  | --------------------------------------------------



| |  |  | seek the duration and convexity matching between its assets and liabilities
| | - |  | ---------------------------------------------------------------------------



The actual allocations for the pension assets as of December 31, 2004 and 2003 as follows:



|                  |  |                      |  |     |                          |  |       |              |     |   |       |      |  |     |   |  |         |  |     |  
|----------------- |  | -------------------- |  | --- | ------------------------ |  | ----- | ------------ | --- | - | ----- | ---- |  | --- | - |  | ------- |  | --- | -
|                  |  | 2004                 | 
|                  |  | Defined benefit plan |  |     | DefinedContribution plan |  |       | Medical plan |     |   | Total |     
|Fixed Income      |  | 917.8                |  | 78  | %                        |  | 740.3 |              | 96  | % |       | 57.8 |  | 99  | % |  | 1,715.9 |  | 86  | %
|Stocks            |  | 164.7                |  | 14  | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 164.7   |  | 8   | %
|Real State        |  | 82.3                 |  | 7   | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 82.3    |  | 4   | %
|Beneficiary Loans |  | 11.7                 |  | 1   | %                        |  | 32.4  |              | 4   | % |       | 0.6  |  | 1   | % |  | 44.7    |  | 2   | %
|TOTAL             |  | 1,176.5              |  | 100 | %                        |  | 772.7 |              | 100 | % |       | 58.4 |  | 100 | % |  | 2,007.6 |  | 100 | %
|                  | 
|                  |  | 2003                 | 
|                  |  | Defined benefit plan |  |     | Definedcontribution plan |  |       | Medical plan |     |   | Total |     
|Fixed Income      |  | 788.2                |  | 78  | %                        |  | 560.5 |              | 95  | % |       | 61.9 |  | 100 | % |  | 1,410.6 |  | 85  | %
|Stocks            |  | 132.6                |  | 13  | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 133.1   |  | 8   | %
|Real State        |  | 77.6                 |  | 8   | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 77.9    |  | 5   | %
|Beneficiary Loans |  | 14.3                 |  | 1   | %                        |  | 26.5  |              | 5   | % |       |     |  | 0   | % |  | 40.7    |  | 2   | %
|TOTAL             |  | 1,012.7              |  | 100 | %                        |  | 587.0 |              | 100 | % |       | 61.9 |  | 100 | % |  | 1,662.3 |  | 100 | %



TELOS has determined
the overall expected long-term rate of return on assets of 6.0% based on historical returns and the extent to which adjustments were made to those historical returns, and how those adjustments were determined.



Estimate future benefits payments -



The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid:



|             |  |                     |  |              |  |                
|------------ |  | ------------------- |  | ------------ |  | ---------------
|Years        |  | Defined BenefitPlan |  | Medical Plan |  | Total per annum
|2005         |  | 94,170              |  | 15,272       |  | 109,442        
|2006         |  | 97,882              |  | 16,905       |  | 114,787        
|2007         |  | 101,634             |  | 18,699       |  | 120,333        
|2008         |  | 105,413             |  | 20,662       |  | 126,075        
|2009         |  | 109,371             |  | 22,788       |  | 132,159        
|2010 to 2014 |  | 605,665             |  | 152,175      |  | 758,380        



F-85



---

| | c. | Concentrations of risk
| | -- | ----------------------



Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade
receivables and temporary cash investments. The Company places its temporary cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any financial institution.



Approximately 30% of Embratels employees are affiliated with state
and/or municipal labor unions. The most significant of these is Sindicato dos Trabalhadores em Empresas de Telecomunicações (Sinttel), which is associated with the Federação Nacional dos Trabalhadores em Empresas de
Telecomunicações e Operadores de Mesas Telefônicas (Fenattel), or with the Federação Interestadual dos Trabalhadores em Empresas de Telecomunicações (Fittel), with which labor agreements are
negotiated. Approximately 0.3% of the employees of BrasilCenter, 18.0% of the employees of Star One and 1.4% of the employees of Vésper are associated with labor unions. Labor agreements are negotiated for BrasilCenter employees with the
state labor unions of each of five different states where BrasilCenter operates, and for Star One employees with the labor union of the state of Rio de Janeiro. Labor agreements are negotiated for Vésper employees with the labor unions of the
states of Rio de Janeiro and São Paulo. The Companys relationship with its employees and unions is generally good. The Company has not experienced a work stoppage that had a material effect on their operations for many years.



Except for labor agreements with BrasilCenter employees in
Ribeirão Preto, Juiz de Fora and Rio de Janeiro, labor agreements with their employees have a two-year term. Some economic issues (e.g., salaries and benefits) pertaining to the two-year labor agreements, however, are subject to revision
after 12 months. Currently, the labor agreements for employees of BrasilCenter, Embratel and Vésper are effective.



| | d. | Recently issued accounting pronouncements
| | -- | -----------------------------------------



In December 2003, the FASB issued a revised FIN 46 (FIN 46R) that replaced the original interpretation and codified proposed modifications and other
decisions previously issued through certain FASB Staff Positions including the deferral of the effective date of applying FIN 46R to certain variable interests created before February 1, 2003. FIN 46R is effective March 31, 2004 for such
arrangements. The adoption on FIN46R did not have any significant impact on the Companys financial position, cash flows or results of operations.



F-86



---

On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003),
Employers Disclosures about Pensions and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88 and 106 (SFAS 132 (revised 2003)). SFAS 132 (revised 2003) is effective for fiscal years ending after December 15,
2003. There is a provision deferring the effectiveness of this new rule for foreign plans as from periods ending after June 15, 2004, which is applicable for the Company. SFAS 132 (revised 2003) replaces the disclosure requirements in SFAS 87, SFAS
88 and SFAS 106. SFAS 132 (revised 2003) addresses disclosures only and does not address measurement and recognition accounting for pension and postretirement benefits. SFAS 132 (revised 2003) requires additional disclosures related to the
description of plan assets including investment strategies, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other defined benefit postretirement plans.



On March 31, 2004, the Emerging Issues Task Force (EITF) reached final
consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share. Typically, a participating security is entitled to share in a companys earnings, often via a formula tied to
dividends on the companys common stock. The issue clarifies what is meant by the term participating security, as used in Statement 128. When an instrument is deemed to be a participating security, it has the potential to significantly reduce
basic earnings per common share because the two-class method must be used to compute the instruments effect on earnings per share. The consensus also covers other instruments whose terms include a participation feature. The consensus also
addresses the allocation of losses. If undistributed earnings must be allocated to participating securities under the two-class method, losses should also be allocated. However, EITF 03-6 limits this allocation only to situations when the security
has the right to participate in the earnings of the company, and an objectively determinable contractual obligation to share in net losses of the company.



The consensus reached in EITF 03-6 is effective for fiscal periods beginning after March 31, 2004. EPS in prior periods must be retroactively adjusted in
order to comply with the consensus decisions reached in EITF 03-6.



If the Company had adopted EITF 03-06 for 2004, 2003 and 2002, earnings per share under U.S. GAAP would have been as follows:



|                                                                            |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|--------------------------------------------------------------------------- |  | --------------------------------------------- | - | ---- | ----------- | ---- | ----------- |  | ----------- |  | ----------- | - |  | -----------
|                                                                            |  | Year ended December 31,                      
|                                                                            |  | 2004                                          |   | 2003 |             | 2002
|                                                                            |  | (in thousands ofreais, except per share data)
|                                                                            |  | Common                                        |   |      | Preferred   |      | Common      |  | Preferred   |  | Common      |   |  | Preferred  
|Basic and diluted numerator                                                 |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Allocated net income (loss) available for common and preferred shareholders |  | (369,255                                      | ) |      |            |      | 142,795     |  | 239,288     |  | (677,860    | ) |  |           
|Basic and diluted denominator                                               |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Weighted average shares outstanding                                         |  | 124,369,031                                   |   |      | 208,317,101 |      | 124,369,031 |  | 208,410,612 |  | 124,369,031 |   |  | 208,411,830
|Basic and diluted earnings per share                                        |  | (2.97                                         | ) |      |            |      | 1.15        |  | 1.15        |  | (5.45       | ) |  |           



As disclosed in note
34.e.1, in 2004 the Company changed its accounting policy for recognition of dividends under U.S. GAAP. The following table sets forth the calculation of earnings per share under U.S. GAAP if the Company had (a) applied in 2003 and 2002 the
same accounting policy that it applied in 2004 and (b) adopted EITF 03-06 for 2004, 2003 and 2002:



|                                                                            |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|--------------------------------------------------------------------------- |  | --------------------------------------------- | - | ---- | ----------- | ---- | ----------- |  | ----------- |  | ----------- | - |  | -----------
|                                                                            |  | Year ended December 31,                      
|                                                                            |  | 2004                                          |   | 2003 |             | 2002
|                                                                            |  | (in thousands ofreais, except per share data)
|                                                                            |  | Common                                        |   |      | Preferred   |      | Common      |  | Preferred   |  | Common      |   |  | Preferred  
|Basic and diluted numerator                                                 |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Dividends                                                                   |  |                                              |   |      |            |      |            |  | 86,137      |  |            |   |  |           
|Allocated net income (loss) available for common and preferred shareholders |  | (369,255                                      | ) |      |            |      | 110,603     |  | 185,343     |  | (677,860    | ) |  |           
|                                                                            |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Total basic and diluted numerator                                           |  | (369,255                                      | ) |      |            |      | 110,603     |  | 271,480     |  | (677,860    | ) |  |           
|                                                                            |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Basic and diluted denominator                                               |  |                                               |   |      |             |      |             |  |             |  |             |   |  |            
|Weighted average shares outstanding                                         |  | 124,369,031                                   |   |      | 208,317,101 |      | 124,369,031 |  | 208,410,612 |  | 124,369,031 |   |  | 208,411,830
|Basic and diluted earnings per share                                        |  | (2.97                                         | ) |      |            |      | 0.89        |  | 1.30        |  | (5.45       | ) |  |           



On December 12, 2004
The FASB issued SFAS No. 151 Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that . . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and
rehandling costs may be so abnormal as to require treatment as current



F-87



---

period charges . . . This Statement requires that those items be recognized as current-period
charges regardless of whether they meet the criterion of so abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production
facilities. It becomes effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company believes that the adoption this FASB will not have impact on its financial position, results of operations or cash flows.



On December 12, 2004 The FASB issued SFAS No. 153
Statement of Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. This Statement is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the
International Accounting Standards Board (IASB) toward development of a single set of high-quality accounting standards. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the
exchange. It becomes effective for financial statements for fiscal periods beginning after June 15, 2005. The Company believes that the adoption of this FASB will not have impact on its financial position, results of operations or cash flows.



On December 12, 2004, The FASB issued a revised SFAS No. 123
Statement of Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. It requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their fair values. It becomes effective for public entities (excluding small business issuers) no later than the first fiscal year beginning after June 15,
2005. The Company expects the effects of adopting SFAS 123R to be similar of the effects disclosed in Note 34k.



| | e. | Segment information
| | -- | -------------------



The Company presents its segment information under U.S. GAAP in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 introduces a management approach concept for reporting segment information, whereby financial information is required to be reported on same basis that the chief operating decision-maker uses such
information internally for evaluating segment performance and deciding how to allocate resources to segments.



F-88



---

The Company has two reportable segments, the Telecommunications segment and Space segment. The
Telecommunications segment is comprised of local, domestic and international long-distance, data communication and other services. The Space segment is represented by the Companys satellite operations and provides transponders for radio
communication services such as (i) network services, (ii) end-to-end telecommunications services, and (iii) transmission of radio and television broadcasting. The Companys chief operating decision-maker evaluates performance of the segments
based on revenues and operating income.



Information presented
to management with respect to the performance of each segment is generally derived directly from the accounting records maintained in accordance with BR GAAP.



|             |  |                           |  |               |  |                  |   |  |             
|------------ |  | ------------------------- |  | ------------- |  | ---------------- | - |  | ------------
|             |  | 2004                     
|             |  | Telecommunicationssegment |  | Space segment |  | Eliminations (*) |   |  | Consolidated
|Total assets |  | 11,041,682                |  | 1,053,099     |  | (819,974         | ) |  | 11,274,807  
|             |  |                           |  |               |  |                  |   |  |             
|             | 
|             |  | 2003                     
|             |  | Telecommunicationssegment |  | Space segment |  | Eliminations (*) |   |  | Consolidated
|Total assets |  | 12,817,766                |  | 956,326       |  | (806,289         | ) |  | 12,967,803  
|             |  |                           |  |               |  |                  |   |  |             



|                                   |  |                           |  |               |  |             
|---------------------------------- |  | ------------------------- |  | ------------- |  | ------------
|                                   |  | 2004                     
|                                   |  | Telecommunicationssegment |  | Space segment |  | Consolidated
|Property, plant and equipment, net |  | 6,103,659                 |  | 468,946       |  | 6,572,605   
|                                   |  |                           |  |               |  |             
|                                   | 
|                                   |  | 2003                     
|                                   |  | TelecommunicationsSegment |  | SpaceSegment  |  | Consolidated
|Property, plant and equipment, net |  | 6,753,501                 |  | 440,828       |  | 7,194,329   
|                                   |  |                           |  |               |  |             



|                                |  |                           |   |  |               |   |  |                  |   |  |              |  
|------------------------------- |  | ------------------------- | - |  | ------------- | - |  | ---------------- | - |  | ------------ | -
|                                |  | 2004                      |  
|Income statements               |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                     |  | 7,127,712                 |   |  | 404,779       |   |  | (199,623         | ) |  | 7,332,868    |  
|Cost of services and goods sold |  | (5,042,122                | ) |  | (154,466      | ) |  | 202,199          |   |  | (4,994,389   | )
|                                |  |                           |   | 
|Gross profit                    |  | 2,085,590                 |   |  | 250,313       |   |  | 2,576            |   |  | 2,338,479    |  
|Operating income (expenses)     |  | (2,054,537                | ) |  | (53,622       | ) |  | (2,576           | ) |  | (2,110,735   | )
|                                |  |                           |   |  |               |   |  |                  |   |  |              |  
|Operating income                |  | 31,053                    |   |  | 196,691       |   |  |                 |   |  | 227,744      |  
|                                |  |                           |   |  |               |   |  |                  |   |  |              |  



F-89



---

|                                |  |                           |   |  |               |   |  |                  |   |  |              |  
|------------------------------- |  | ------------------------- | - |  | ------------- | - |  | ---------------- | - |  | ------------ | -
|                                |  | 2003                      |  
|Income statements               |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                     |  | 6,850,435                 |   |  | 378,520       |   |  | (185,345         | ) |  | 7,043,610    |  
|Cost of services and goods sold |  | (4,730,673                | ) |  | (171,743      | ) |  | 187,267          |   |  | (4,715,149   | )
|                                |  |                           |   | 
|Gross profit                    |  | 2,119,762                 |   |  | 206,777       |   |  | 1,922            |   |  | 2,328,461    |  
|Operating income (expenses)     |  | (1,656,045                | ) |  | (45,678       | ) |  | 3,495            |   |  | (1,698,228   | )
|                                |  |                           |   |  |               |   |  |                  |   |  |              |  
|Operating income                |  | 463,717                   |   |  | 161,099       |   |  | 5,417            |   |  | 630,233      |  
|                                |  |                           |   |  |               |   |  |                  |   |  |              |  



|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|--------------------------- |  | ------------------------- | - |  | ------------- | - |  | ---------------- | - |  | ------------ | -
|                            |  | 2002                      |  
|Income statements           |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                 |  | 7,181,027                 |   |  | 347,259       |   |  | (156,656         | ) |  | 7,371,630    |  
|Cost of services            |  | (4,926,008                | ) |  | (230,750      | ) |  | 155,771          |   |  | (5,000,987   | )
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|Gross profit                |  | 2,255,019                 |   |  | 116,509       |   |  | (885             | ) |  | 2,370,643    |  
|Operating income (expenses) |  | (2,006,458                | ) |  | (58,136       | ) |  | 5,289            |   |  | (2,059,305   | )
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|Operating income            |  | 248,561                   |   |  | 58,373        |   |  | 4,404            |   |  | 311,338      |  
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  

---

|(*) | Eliminations refer basically to inter-segment transactions and balances eliminated on consolidation.
|--- | ----------------------------------------------------------------------------------------------------



Capital expenditures made by subsidiaries from the telecommunications segment and the space segment amounted to R$451,078
and R$128,533 respectively, for the year ended December 31, 2004 (R$362,971 and R$125,877, respectively, for the year ended December 31, 2003).



F-90



---

| | f. | Statements of cash flows
| | -- | ------------------------



The following statements of cash flows are prepared using the BR GAAP reported figures, including the classification of cash and cash equivalents as
determined under BR GAAP. Other than the classification of cash and cash equivalents, the following statements of cash flows comply with the classification requirements of SFAS No. 95, Statement of Cash Flows:



|                                                                             |  |           |   |  |           |   |  |            |  
|---------------------------------------------------------------------------- |  | --------- | - |  | --------- | - |  | ---------- | -
|                                                                             |  | 2004      |   |  | 2003      |   |  | 2002       |  
|Cash flow from operating activities -                                        |  |           |   |  |           |   |  |            |  
|Net income (loss)                                                            |  | (339,256  | ) |  | 223,634   |   |  | (626,342   | )
|Adjustment to reconcile net income to cash provided by operating activities- |  |           |   |  |           |   |  |            |  
|Depreciation and amortization                                                |  | 1,119,212 |   |  | 1,126,305 |   |  | 1,115,724  |  
|Exchange and monetary gains/losses                                           |  | 255       |   |  | (281,971  | ) |  | 1,250,991  |  
|Minority interest                                                            |  | 37,231    |   |  | 39,367    |   |  | 8,611      |  
|Net loss on permanent assets disposal                                        |  | 145,458   |   |  | 26,545    |   |  | 11,653     |  
|Goodwill write-off                                                           |  |          |   |  | 101,489   |   |  |           |  
|Reversal of provision for permanent assets losses                            |  | (1,495    | ) |  | (10,000   | ) |  |           |  
|Increase (decrease) in allowance for doubtful accounts                       |  | 194,054   |   |  | (64,058   | ) |  | 538,416    |  
|Effect of capital increase completed by Star One                             |  | (5,395    | ) |  | (5,395    | ) |  | (5,395     | )
|Decrease (increase) in trade accounts receivable                             |  | 49,925    |   |  | 57,559    |   |  | (200,134   | )
|Decrease (increase) in deferred and recoverable taxes                        |  | (76,477   | ) |  | 22,066    |   |  | (526,679   | )
|(Increase) in other accounts receivables                                     |  | (136,937  | ) |  | (23,249   | ) |  | (59,070    | )
|Decrease (increase) in legal deposits                                        |  | 172,084   |   |  | (111,797  | ) |  | 71,779     |  
|Increase (decrease) in payroll and related accruals                          |  | (13,863   | ) |  | (45,676   | ) |  | 18,873     |  
|Increase (decrease) in accounts payable and accrued expenses                 |  | (466,995  | ) |  | 14,791    |   |  | 111,567    |  
|Increase in provision for contingencies                                      |  | 403,515   |   |  | 5,473     |   |  | 19,805     |  
|Increase (decrease) in other current liabilities                             |  | (175,282  | ) |  | (104,963  | ) |  | 134,194    |  
|Increase (decrease) in income tax and other taxes                            |  | 81,230    |   |  | 71,778    |   |  | (371,929   | )
|Increase (decrease) in deferred income                                       |  | 8,776     |   |  | (13,854   | ) |  | (10,149    | )
|Increase (decrease) in pension plan liability                                |  | 45,861    |   |  | (9,710    | ) |  | (14,997    | )
|Increase (decrease) in other non-current assets and liabilities              |  | 18,666    |   |  | 18,973    |   |  | 26,450     |  
|                                                                             |  |           |   |  |           |   |  |            |  
|                                                                             |  | 1,060,567 |   |  | 1,037,307 |   |  | 1,493,368  |  
|                                                                             |  |           |   |  |           |   |  |            |  
|Cash flow from investing activities-                                         |  |           |   |  |           |   |  |            |  
|Acquisition of subsidiary, net of cash acquired                              |  | (130,169  | ) |  | 43,725    |   |  |           |  
|Additions to investments                                                     |  | (807      | ) |  |          |   |  | (98        | )
|Additions to property, plant and equipment                                   |  | (599,442  | ) |  | (488,068  | ) |  | (1,034,700 | )
|Deferred assets                                                              |  | (563      | ) |  | (2,870    | ) |  |           |  
|Proceeds from sale of interest in subsidiary                                 |  | 43,973    |   |  | 248,157   |   |  |           |  
|                                                                             |  |           |   |  |           |   |  |            |  
|                                                                             |  | (687,008  | ) |  | (199,056  | ) |  | (1,034,798 | )
|                                                                             |  |           |   |  |           |   |  |            |  



F-91



---

|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------- | - |  | --------------- | - |  | --------------- | -
|                                                                                                                              |  | 2004       |   |  | 2003            |   |  | 2003            |  
|Cash flow from financing activities-                                                                                          |  |            |   |  |                 |   |  |                 |  
|Loans repaid                                                                                                                  |  | (2,827,111 | ) |  | (2,003,377      | ) |  | (1,520,818      | )
|New loans obtained                                                                                                            |  | 1,823,124  |   |  | 1,893,258       |   |  | 1,297,620       |  
|Swap/hedge settlement                                                                                                         |  | (129,632   | ) |  | 132,888         |   |  |                |  
|(Repurchase)/sales of shares                                                                                                  |  | (11,231    | ) |  | 2,381           |   |  | (534            | )
|Dividends paid                                                                                                                |  | (116,177   | ) |  | (30,896         | ) |  |                |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|                                                                                                                              |  | (1,261,027 | ) |  | (5,746          | ) |  | (223,732        | )
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|Increase/(decrease) in cash and cash equivalents                                                                              |  | (887,468   | ) |  | 832,505         |   |  | 234,838         |  
|Cash and cash equivalents at the beginning of the year                                                                        |  | 1,719,496  |   |  | 886,991         |   |  | 652,153         |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|Cash and cash equivalents at the end of year                                                                                  |  | 832,028    |   |  | 1,719,496       |   |  | 886,991         |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|Supplemental disclosure of cash paid for-                                                                                     |  |            |   |  |                 |   |  |                 |  
|Income and social contribution tax paid                                                                                       |  | 40,881     |   |  | 37,227          |   |  | 6,412           |  
|Interest paid                                                                                                                 |  | 438,202    |   |  | 439,790         |   |  | 236,191         |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|                                                                                                                             
|The reconciliation of cash flows from operating activities under BR GAAP to the amounts under U.S. GAAP is as follows:        | 
|                                                                                                                              |  |            |  
|                                                                                                                              |  | 2004       |   |  | 2003 (Restated) |   |  | 2002 (Restated) |  
|Cash flows from operating activities under BR GAAP                                                                            |  | 1,060,567  |   |  | 1,037,307       |   |  | 1,493,368       |  
|Decrease (increase) in debt security trading investments under U.S. GAAP                                                      |  | 191,528    |   |  | (600,835        | ) |  | (24,992         | )
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|Cash flows from operating activities under U.S. GAAP                                                                          |  | 1,252,095  |   |  | 436,472         |   |  | 1,468,376       |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|                                                                                                                             
|The reconciliation of cash and cash equivalents recorded under BR GAAP to the amounts recorded under U.S. GAAP is as follows: | 
|                                                                                                                              |  |            |  
|                                                                                                                              |  | 2004       |   |  | 2003 (Restated) |   |  | 2002 (Restated) |  
|Cash and cash equivalents at the end of year under BR GAAP                                                                    |  | 832,028    |   |  | 1,719,496       |   |  | 886,991         |  
|Debt security trading investments                                                                                             |  | 434,299    |   |  | 625,827         |   |  | 24,992          |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  
|Cash and cash equivalents at the end of year under U.S. GAAP                                                                  |  | 397,729    |   |  | 1,093,669       |   |  | 861,999         |  
|                                                                                                                              |  |            |   |  |                 |   |  |                 |  



F-92



---

| | g. | Intangible assets
| | -- | -----------------



Following is a summary of the Companys intangible assets subject to amortization under U.S. GAAP:



|                            |  |                   |   |  |                        |   |  |                  |   |  |                        |  
|--------------------------- |  | ----------------- | - |  | ---------------------- | - |  | ---------------- | - |  | ---------------------- | -
|                            |  | 2004              |   |  | 2003                   |  
|                            |  | Software licenses |   |  | Rights of wayand other |   |  | Softwarelicenses |   |  | Rights of wayand other |  
|Gross                       |  | 895,317           |   |  | 394,910                |   |  | 768,407          |   |  | 360,199                |  
|Accumulated amortization    |  | (573,375          | ) |  | (227,345               | ) |  | (470,899         | ) |  | (167,680               | )
|                            |  |                   |   |  |                        |   |  |                  |   |  |                        |  
|Net                         |  | 321,942           |   |  | 167,565                |   |  | 297,508          |   |  | 192,519                |  
|                            |  |                   |   |  |                        |   |  |                  |   |  |                        |  
|Amortization expense        |  | 115,969           |   |  | 32,043                 |   |  | 87,539           |   |  | 33,069                 |  
|                            |  |                   |   |  |                        |   |  |                  |   |  |                        |  
|Amortization period (years) |  | 5                 |   |  | *                      |   |  | 5                |   |  | *                      |  
|                            |  |                   |   |  |                        |   |  |                  |   |  |                        |  

---

|(*) | Rights of way are amortized on a straight-line basis over the periods of the respective contracts, which range from 4 to 30 years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



The estimated aggregate amortization expense for the next five years is as
follows:



|     |  |        
|---- |  | -------
|     |  | Amount 
|2005 |  | 129,907
|2006 |  | 116,888
|2007 |  | 86,013 
|2008 |  | 56,113 
|2009 |  | 28,803 
|     |  |        



| | h. | Renegotiation of debt
| | -- | ---------------------



As described in Note 22.d, Embratel finalized the renegotiation of a portion of its long-term debt with certain banking institutions. Under U.S. GAAP,
pursuant to Emerging Issues Task Force (EITF) Issue No. 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments, the exchange of debt instruments with substantially different terms is considered a
debt extinguishment for accounting purposes, resulting in the recognition by the debtor of gain or loss on extinguishment. The Company has determined that certain of the renegotiated debt agreements qualify for extinguishment treatment under EITF
No. 96-19. The effect of accounting for the extinguishment is immaterial for the year ended December 31, 2004 and 2003. Under BR GAAP, the renegotiation of debt is accounted for on a prospective basis and consequently, no gain or loss on
extinguishment is recorded.



F-93



---

|36. | Restatement of Previously Issued Financial Statements
|--- | -----------------------------------------------------



Subsequent to the issuance of the Holding Companys financial statements for the year ended December 31, 2003, management determined that certain
investments included in private investment funds that were previously classified as cash equivalents should have been classified as trading securities in accordance with FASB Statement No.115 Accounting for Certain Investments in Debt and
Equity Securities under U.S. GAAP, since a portion of these Funds underlying investments are acquired and held with the intention of selling in the near term. Cash flows from operating activities in Note 35.f have been restated to
correct this classification. These reclassifications had no impact on shareholders equity nor net income for the periods presented. Under U.S. GAAP, the summary of the effects of these restatements is as follows:



|                                                       |  |                    |  |           |  |                    |  |          
|------------------------------------------------------ |  | ------------------ |  | --------- |  | ------------------ |  | ---------
|                                                       |  | 2003               |  | 2002     
|                                                       |  | Previouslyreported |  | Restated  |  | Previouslyreported |  | Restated 
|Net cash from operating activities                     |  | 1,037,307          |  | 436,472   |  | 1,493,368          |  | 1,468,376
|Increase/(decrease) in cash and cash equivalents       |  | 832,505            |  | 231,670   |  | 234,838            |  | 209,846  
|Cash and cash equivalents at the beginning of the year |  | 886,991            |  | 861,999   |  | 652,153            |  | 652,153  
|Cash and cash equivalents at the end of year           |  | 1,719,496          |  | 1,093,669 |  | 886,991            |  | 861,999  



F-94



---

| |  |                                                                               
| |  | ------------------------------------------------------------------------------
| |  | Consolidated Financial Statements                                             
| | 
| |  | Empresa Brasileira de Telecomunicações S.A. - Embratel                        
| | 
| |  | December 31, 2004, 2003 and 2002 with Report of Independent Public Accountants













---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A.  EMBRATEL AND

SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



December 31, 2004, 2003 and 2002



Contents



|                                                           |  |      
|---------------------------------------------------------- |  | -----
|Reports of Independent Registered Public Accounting Firms  |  | F-97 
|                                                           | 
|Audited Consolidated Financial Statements                  |  |      
|                                                           | 
|Consolidated Balance Sheets                                |  | F-100
|Consolidated Statements of Operations                      |  | F-102
|Consolidated Statements of Changes in Shareholders Equity |  | F-103
|Consolidated Statements of Changes in Financial Position   |  | F-104
|Notes to the Consolidated Financial Statements             |  | F-106







---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Empresa Brasileira de Telecomunicações S.A.Embratel



We have audited the accompanying consolidated balance sheet of Empresa Brasileira de
Telecomunicações S.A.Embratel and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, changes in shareholders equity and changes in financial position for the year ended December 31,
2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial
reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Companys internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Empresa Brasileira de Telecomunicações S.A.Embratel and subsidiaries as of December 31, 2004, and the consolidated results of its operations and changes in financial
position for the year then ended, in conformity with accounting practices adopted in Brazil, which differ in certain respects from accounting principles generally accepted in the United States of America (see Note 34 to the consolidated financial
statements).



Rio de Janeiro, January 31, 2005

(except with respect to Note 33, as to which the date is May 19, 2005)



ERNST & YOUNG

Auditores Independentes S.S.



/s/ Pedro Lucio
Siqueira Farah

Pedro Lucio Siqueira Farah

Partner





F-97



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Empresa Brasileira de Telecomunicações S.A. - Embratel

Rio de Janeiro - RJ, Brazil



We have audited the accompanying
consolidated balance sheets of Empresa Brasileira de Telecomunicações S.A. - Embratel and subsidiaries as of December 31, 2003 and the consolidated statements of operations, changes in shareholders equity and changes in financial
position for each of the two years in the period ended December 31, 2003, all expressed in Brazilian Reais. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.



Our audits
were conducted in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of Empresa Brasileira de Telecomunicações S.A. - Embratel and subsidiaries as of December 31, 2003, and the results of their operations, the changes in shareholders equity and the changes in their financial position for
each of the two years in the period ended December 31, 2003, in conformity with accounting practices adopted in Brazil.



F-98



---

Accounting practices adopted in Brazil vary in certain significant respects from accounting principles generally accepted
in the United States of America (U.S. GAAP). Information relating to the nature and effect of such differences is presented in Note 34 to the consolidated financial statements.



As discussed in Note 36, the Company has restated its statements of cash flows prepared in accordance with U.S. GAAP for the years ended
December 31, 2003 and 2002.



/s/  Deloitte Touche Tohmatsu

DELOITTE TOUCHE TOHMATSU



Auditores Independentes



Rio de Janeiro, Brazil



March 17, 2004 (except
with respect to the matters discussed in Notes 34 and 35, as to which the date is May 21, 2004 and Note 36, as to which the date is June 21, 2005).



F-99



---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL



CONSOLIDATED BALANCE SHEETS

December 31, 2004 and 2003

(In thousands of Brazilian reais)



|                                         |  |            |  |           
|---------------------------------------- |  | ---------- |  | ----------
|                                         |  | 2004       |  | 2003      
|Assets                                   |  |            |  |           
|Current assets:                          |  |            |  |           
|Cash and cash equivalents                |  | 813,807    |  | 1,654,014 
|Trade accounts receivable, net           |  | 1,367,767  |  | 1,596,963 
|Deferred and recoverable taxes           |  | 369,703    |  | 436,717   
|Related party assets                     |  | 138,138    |  | 17,638    
|Advances to telecommunications companies |  | 194,610    |  | 52,130    
|Other current assets                     |  | 117,971    |  | 187,308   
|                                         |  |            |  |           
|                                         |  | 3,001,996  |  | 3,944,770 
|                                         |  |            |  |           
|Non-current assets:                      |  |            |  |           
|Deferred and recoverable taxes           |  | 1,293,748  |  | 1,138,422 
|Legal deposits                           |  | 188,749    |  | 361,511   
|Other non-current assets                 |  | 86,541     |  | 48,980    
|                                         |  |            |  |           
|                                         |  | 1,569,038  |  | 1,548,913 
|                                         |  |            |  |           
|Permanent assets:                        |  |            |  |           
|Investments                              |  | 1,594      |  | 39,888    
|Property, plant and equipment            |  | 6,552,580  |  | 7,138,034 
|Deferred assets                          |  | 92,307     |  | 1,143     
|                                         |  |            |  |           
|                                         |  | 6,646,481  |  | 7,179,065 
|                                         |  |            |  |           
|Total assets                             |  | 11,217,515 |  | 12,672,748
|                                         |  |            |  |           





F-100



---

|                                           |  |            |  |           
|------------------------------------------ |  | ---------- |  | ----------
|                                           |  | 2004       |  | 2003      
|Liabilities and shareholders equity       |  |            |  |           
|Current liabilities:                       |  |            |  |           
|Loans and financing                        |  | 2,087,841  |  | 1,216,856 
|Accounts payable and accrued expenses      |  | 1,287,898  |  | 1,697,083 
|Taxes and contributions                    |  | 420,435    |  | 324,065   
|Dividends and interest payable on capital  |  | 23,294     |  | 104,969   
|Payroll and related accruals               |  | 62,591     |  | 79,262    
|Employees profit sharing                  |  | 33,190     |  | 52,107    
|Provision for contingencies                |  | 451,809    |  | 50,028    
|Actuarial liability  Telos                |  | 68,342     |  | 64,442    
|Related party liabilities                  |  | 5,240      |  | 13,259    
|Other current liabilities                  |  | 46,272     |  | 149,332   
|                                           |  |            |  |           
|                                           |  | 4,486,912  |  | 3,751,403 
|                                           |  |            |  |           
|Non-current liabilities:                   |  |            |  |           
|Loans and financing                        |  | 1,301,805  |  | 3,340,221 
|Actuarial liability  Telos                |  | 370,764    |  | 328,803   
|Taxes and contributions                    |  | 36,402     |  | 39,544    
|Sundry credits and other liabilities       |  |           |  | 13,976    
|                                           |  |            |  |           
|                                           |  | 1,708,971  |  | 3,722,544 
|                                           |  |            |  |           
|Deferred income                            |  | 122,118    |  | 112,862   
|                                           |  |            |  |           
|Minority interest                          |  | 158,524    |  | 161,957   
|                                           |  |            |  |           
|Shareholders equity:                      |  |            |  |           
|Capital stock paid-in                      |  | 2,700,000  |  | 2,700,000 
|Capital reserves                           |  | 1,001,241  |  | 999,162   
|Revenue reserves                           |  | 1,039,749  |  | 1,224,820 
|                                           |  |            |  |           
|                                           |  | 4,740,990  |  | 4,923,982 
|                                           |  |            |  |           
|Total liabilities and shareholders equity |  | 11,217,515 |  | 12,672,748
|                                           |  |            |  |           



The accompanying notes are an integral
part of these consolidated financial statements.



F-101



---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL



CONSOLIDATED STATEMENTS OF OPERATIONS

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais, except net income (loss) per thousand shares)



|                                                     |  |            |   |  |            |   |  |            |  
|---------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                     |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Gross operating revenue:                             |  |            |   |  |            |   |  |            |  
|Telecommunications services                          |  | 9,268,176  |   |  | 9,139,348  |   |  | 9,482,424  |  
|Gross revenue deductions                             |  | (2,223,972 | ) |  | (2,127,263 | ) |  | (2,110,794 | )
|                                                     |  |            |   |  |            |   |  |            |  
|Net operating revenue                                |  | 7,044,204  |   |  | 7,012,085  |   |  | 7,371,630  |  
|Cost of services                                     |  | (4,676,769 | ) |  | (4,685,259 | ) |  | (5,000,987 | )
|                                                     |  |            |   |  |            |   |  |            |  
|Gross profit                                         |  | 2,367,435  |   |  | 2,326,826  |   |  | 2,370,643  |  
|                                                     |  |            |   |  |            |   |  |            |  
|Operating income (expenses)                          |  |            |   |  |            |   |  |            |  
|Selling expenses                                     |  | (865,915   | ) |  | (788,386   | ) |  | (1,095,089 | )
|General and administrative expenses                  |  | (1,089,296 | ) |  | (969,426   | ) |  | (991,751   | )
|Other operating income (expenses), net               |  | (60,091    | ) |  | 72,617     |   |  | 30,529     |  
|                                                     |  |            |   |  |            |   |  |            |  
|Total                                                |  | (2,015,302 | ) |  | (1,685,195 | ) |  | (2,056,311 | )
|                                                     |  |            |   |  |            |   |  |            |  
|Operating income before financial expenses, net      |  | 352,133    |   |  | 641,631    |   |  | 314,332    |  
|Financial expense, net                               |  | (612,264   | ) |  | (163,523   | ) |  | (1,555,861 | )
|                                                     |  |            |   |  |            |   |  |            |  
|Operating income (loss)                              |  | (260,131   | ) |  | 478,108    |   |  | (1,241,529 | )
|Extraordinary non-operating income ILL              |  | 106,802    |   |  |           |   |  | 198,131    |  
|Other non-operating income (expense), net            |  | (18,454    | ) |  | (70,485    | ) |  | 11,041     |  
|                                                     |  |            |   |  |            |   |  |            |  
|Income (loss) before taxes and minority interest     |  | (171,783   | ) |  | 407,623    |   |  | (1,032,357 | )
|                                                     |  |            |  
|Income tax and social contribution benefit (expense) |  | 26,214     |   |  | (137,411   | ) |  | 414,274    |  
|Minority interest                                    |  | (39,502    | ) |  | (36,497    | ) |  | (16,398    | )
|                                                     |  |            |   |  |            |   |  |            |  
|Net income (loss) for the year                       |  | (185,071   | ) |  | 233,715    |   |  | (634,481   | )
|                                                     |  |            |   |  |            |   |  |            |  
|Quantity of shares (in thousands)                    |  | 4,723,844  |   |  | 4,723,844  |   |  | 4,723,844  |  
|                                                     |  |            |   |  |            |   |  |            |  
|Net income (loss) per thousand shares (in reais)     |  | (39.18     | ) |  | 49.48      |   |  | (134.31    | )
|                                                     |  |            |   |  |            |   |  |            |  



The accompanying notes are an integral
part of these consolidated financial statements.





F-102



---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A.  EMBRATEL AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|--------------------------------------- |  | -------------------- |  | ---------------------------------- |  | ------------ |  | ------------------- |  | ---------------------- | - |  | ---------------- | - |  | --------- | -
|                                        |  |                      |  |                                    |  |              |  | Revenue reserves    |  |                        |   |  |                  |   | 
|                                        |  |                      |  | Capital reserves                   |  |              |  | Retention ofprofits |  |                        |   |  |                  |   | 
|                                        |  | Capitalstock paid-in |  | Interest onconstructionin progress |  | Otherreserve |  | Legalreserve        |  | Reserve forinvestments |   |  | Retainedearnings |   |  | Total     |  
|Balance as of January 1, 2002           |  | 2,700,000            |  | 865,593                            |  | 132,718      |  | 296,805             |  |                       |   |  | 1,415,787        |   |  | 5,410,903 |  
|                                        |  |                      |  |                                    |  |              | 
|Donations and other                     |  |                     |  |                                   |  | 183          |  |                    |  |                       |   |  | (186             | ) |  | (3        | )
|Loss for the year                       |  |                     |  |                                   |  |             |  |                    |  |                       |   |  | (634,481         | ) |  | (634,481  | )
|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|Balance as of December 31, 2002         |  | 2,700,000            |  | 865,593                            |  | 132,901      |  | 296,805             |  |                       |   |  | 781,120          |   |  | 4,776,419 |  
|                                        |  |                      |  |                                    |  |              | 
|Donations                               |  |                     |  |                                   |  | 668          |  |                    |  |                       |   |  |                 |   |  | 668       |  
|Net income for the year                 |  |                     |  |                                   |  |             |  |                    |  |                       |   |  | 233,715          |   |  | 233,715   |  
|Destination of profits-                 |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|Constitution of legal reserve           |  |                     |  |                                   |  |             |  | 11,687              |  |                       |   |  | (11,687          | ) |  |          |  
|Proposed dividends                      |  |                     |  |                                   |  |             |  |                    |  |                       |   |  | (86,820          | ) |  | (86,820   | )
|Constitution of reserve for investments |  |                     |  |                                   |  |             |  |                    |  | 135,208                |   |  | (135,208         | ) |  |          |  
|Transfer to reserve for investments     |  |                     |  |                                   |  |             |  |                    |  | 781,120                |   |  | (781,120         | ) |  |          |  
|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|Balance as of December 31, 2003         |  | 2,700,000            |  | 865,593                            |  | 133,569      |  | 308,492             |  | 916,328                |   |  |                 |   |  | 4,923,982 |  
|                                        |  |                      |  |                                    |  |              | 
|Donations                               |  |                     |  |                                   |  | 2,079        |  |                    |  |                       |   |  |                 |   |  | 2,079     |  
|Loss for the year                       |  |                     |  |                                   |  |             |  |                    |  |                       |   |  | (185,071         | ) |  | (185,071  | )
|Absorption of accumulated losses        |  |                     |  |                                   |  |             |  |                    |  | (185,071               | ) |  | 185,071          |   |  |          |  
|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|Balance as of December 31, 2004         |  | 2,700,000            |  | 865,593                            |  | 135,648      |  | 308,492             |  | 731,257                |   |  |                  |   |  | 4,740,990 |  
|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                  |   |  |           |  
|                                        |  |                      |  | 1,001,241                          |  | 1,039,749    |  |                     |  |                        |   |  |                 
|                                        |  |                      |  |                                    |  |              |  |                     |  |                        |   |  |                 



The accompanying notes are an integral
part of these consolidated financial statements.



F-103



---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

For the years ended December
31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                                                                              |  |           |   |  |           |   |  |           |  
|--------------------------------------------------------------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                                                                              |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Source of funds                                                                               |  |           |   |  |           |   |  |           |  
|From operations:                                                                              |  |           |   |  |           |   |  |           |  
|Net income (loss) for the year                                                                |  | (185,071  | ) |  | 233,715   |   |  | (634,481  | )
|Expenses (revenues) not affecting working capital                                             |  |           |   |  |           |   |  |           |  
|Minority interests                                                                            |  | 39,502    |   |  | 36,497    |   |  | 16,398    |  
|Depreciation and amortization                                                                 |  | 1,130,879 |   |  | 1,151,425 |   |  | 1,142,168 |  
|Monetary and foreign currency exchange variations andother charges on non-current liabilities |  | (110,980  | ) |  | (391,756  | ) |  | 1,458,740 |  
|Monetary and foreign currency exchange variations andother revenues from non-current assets   |  | (2,059    | ) |  | (104      | ) |  |          |  
|Exchange variation on investments                                                             |  | 1,671     |   |  | 48,736    |   |  | (97,317   | )
|Realization of deferred income                                                                |  | (22,655   | ) |  | (20,396   | ) |  | (19,132   | )
|Reversal of provision for loss of investment                                                  |  |          |   |  | (10,000   | ) |  |          |  
|Loss on disposal of property, plant and equipment                                             |  | 72,202    |   |  | 21,761    |   |  | 5,887     |  
|Results from long-term derivative contracts                                                   |  | 70,013    |   |  | 12,083    |   |  | (228,536  | )
|Long-term deferred income tax and social contribution                                         |  | (118,300  | ) |  | 110,456   |   |  | (696,869  | )
|Actuarial liabilities update  Medical Health Care Plan                                       |  | 26,207    |   |  | 24,959    |   |  | (16,736   | )
|Impairment of goodwill                                                                        |  |          |   |  | 101,489   |   |  |          |  
|Deposits in court                                                                             |  | (32,669   | ) |  | 35,539    |   |  |          |  
|Pension plan                                                                                  |  | 86,795    |   |  | 46,846    |   |  |          |  
|Other operating revenues                                                                      |  | (26,456   | ) |  | (26,292   | ) |  | (26,445   | )
|                                                                                              |  |           |   |  |           |   |  |           |  
|                                                                                              |  | 929,079   |   |  | 1,374,958 |   |  | 903,677   |  
|From third parties:                                                                           |  |           |   |  |           |   |  |           |  
|Increase in non-current liabilities-                                                          |  |           |   |  |           |   |  |           |  
|Taxes and contributions                                                                       |  | 104       |   |  |          |   |  | 861       |  
|Loans and financing                                                                           |  | 314,552   |   |  | 2,111,129 |   |  | 722,585   |  
|Other liabilities                                                                             |  |          |   |  | 4,616     |   |  | 26,093    |  
|Transfer from non-current to current assets                                                   |  | 345,308   |   |  | 82,187    |   |  | 44,075    |  
|Transfer from investment to current assets                                                    |  | 37,313    |   |  | 189,274   |   |  |          |  
|Transfer from property, plant and equipment to current assets                                 |  |          |   |  | 14,650    |   |  |          |  
|Decrease in non-current assets                                                                |  |          |   |  |          |   |  | 181,220   |  
|Disposal of property, plant and equipment                                                     |  | 37,361    |   |  | 4,784     |   |  | 5,766     |  
|Increase in deferred income                                                                   |  | 31,911    |   |  | 10,643    |   |  | 8,983     |  
|Other                                                                                         |  | 2,079     |   |  | 668       |   |  | 1,479     |  
|                                                                                              |  |           |   |  |           |   |  |           |  
|Total sources of funds                                                                        |  | 1,697,707 |   |  | 3,792,909 |   |  | 1,894,739 |  
|                                                                                              |  |           |   |  |           |   |  |           |  





F-104



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EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL



CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION

Years ended December 31, 2004, 2003 and 2002

(In thousands of Brazilian reais)



|                                                              |  |            |   |  |            |   |  |            |  
|------------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                              |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Applications of funds                                         |  |            |   |  |            |   |  |            |  
|Increase in non-current assets                                |  | 169,256    |   |  | 189,121    |   |  | 125,428    |  
|Decrease in non-current liabilities - taxes and contributions |  |           |   |  | 26,225     |   |  | 173,122    |  
|Additions to investments                                      |  | 807        |   |  |           |   |  | 98         |  
|Additions to property, plant and equipment                    |  | 618,860    |   |  | 488,754    |   |  | 1,034,700  |  
|Additions to deferred assets                                  |  | 100,720    |   |  |           |   |  |           |  
|Dividends and interest payable on capital                     |  | 37,540     |   |  | 121,433    |   |  | 23,728     |  
|Effect of capital increase in Star One  minority interest    |  | 5,395      |   |  | 5,395      |   |  | 5,395      |  
|Transfer from current to non-current assets                   |  | 43,148     |   |  | 104,541    |   |  |           |  
|Transfer of non-current to current liabilities                |  | 2,400,264  |   |  | 793,178    |   |  | 2,279,793  |  
|                                                              |  |            |   |  |            |   |  |            |  
|Total applications of funds                                   |  | 3,375,990  |   |  | 1,728,647  |   |  | 3,642,264  |  
|                                                              |  |            |   |  |            |   |  |            |  
|Increase (decrease) in net working capital                    |  | (1,678,283 | ) |  | 2,064,262  |   |  | (1,747,525 | )
|                                                              |  |            |   |  |            |   |  |            |  
|Current assets:                                               |  |            |   |  |            |   |  |            |  
|At beginning of the year                                      |  | 3,944,770  |   |  | 3,115,757  |   |  | 3,328,309  |  
|At end of the year                                            |  | 3,001,996  |   |  | 3,944,770  |   |  | 3,115,757  |  
|                                                              |  |            |   |  |            |   |  |            |  
|                                                              |  | (942,774   | ) |  | 829,013    |   |  | (212,552   | )
|                                                              |  |            |   |  |            |   |  |            |  
|Current liabilities:                                          |  |            |   |  |            |   |  |            |  
|At beginning of the year                                      |  | 3,751,403  |   |  | 4,986,652  |   |  | 3,451,679  |  
|At end of the year                                            |  | 4,486,912  |   |  | 3,751,403  |   |  | 4,986,652  |  
|                                                              |  |            |   |  |            |   |  |            |  
|                                                              |  | 735,509    |   |  | (1,235,249 | ) |  | 1,534,973  |  
|                                                              |  |            |   |  |            |   |  |            |  
|Increase (decrease) in net working capital                    |  | (1,678,283 | ) |  | 2,064,262  |   |  | (1,747,525 | )
|                                                              |  |            |   |  |            |   |  |            |  



The accompanying notes are an integral
part of these consolidated financial statements.



F-105



---

EMPRESA BRASILEIRA DE TELECOMUNICAÇÕES S.A. - EMBRATEL



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 2004, 2003 and
2002

(Amounts expressed in thousands, except as indicated)



|1. | Operations and Background
|-- | -------------------------



| | a. | Incorporation
| | -- | -------------



Empresa Brasileira de Telecomunicações S.A.  Embratel (Embratel) started operating on September 16, 1965, in accordance
with Law No. 4.117, dated August 27, 1962, providing long-distance services, and being responsible for domestic and international public telecommunications services.



In November 2000, Embratel incorporated Star One S.A. (Star One) to manage satellite operations, as the main
Brazilian provider of transponders for radio communication services such as (i) network services; (ii) end-to-end telecommunications services; and (iii) transmission of radio and television broadcasting. On the date of incorporation, Embratel
transferred its Brazilian satellite rights and obligations to Star One, which became the licensee for providing these services until December 31, 2005, free of any burden, except when indicated. This license is renewable, at a cost to Star One, for
an additional 15-year term, subject to Anatels regulations.



In August 2003, Embratel incorporated Click 21 Comércio de Publicidade Ltda. (Click 21), to provide Internet access and products for residential customers and small companies, including an exclusive domain, e-mail
accounts with automatic anti-virus, and tools for editing homepages and sending faxes, as well as exclusive content.



On March 2, 2004, Embratel acquired CT Torres Ltda. (CT Torres) from CT Leasing Ltd., an indirect subsidiary of Qualcomm Inc, for US$45
million (R$ 131 million). The fixed assets of CT Torres are comprised of 622 communications towers. These towers belonged to Vésper São Paulo S.A. and Vésper S.A. until December 2, 2003, when they were returned to CT Torres,
then sold to CT Leasing Ltd.



The acquisition assured Embratel
a greater return on investment than if Vésper S.A. and Vésper São Paulo S.A. were to lease towers from a third party.



F-106



---

On July 23, 2004, Teléfonos de México, S.A. de C.V. (Telmex) a company
established in accordance with the laws of Mexico, acquired all of MCIs direct and indirect interests in Startel Participações Ltda. and New Startel Participações Ltda., parent companies of Embratel
Participações S.A. (Embrapar), the holding company of Embratel, representing 51.79% of common stock (19.26% of total capital). Telmex effected such acquisition through its subsidiaries Latam Brasil LLC and Latam
Telecomunicaciones LLC. The U.S. Bankruptcy Court Judge approved this operation in the second half of 2004. Approval by ANATEL  the National Telecommunications Agency had already occurred in compliance with the telecommunications regulations
and approval from a public bidding aspect remained to enable approval by the Administrative Council for Economic Defense  CADE, although Telmex had already assumed management of Embrapar on July 23, 2004.



On December 13, 2004, in accordance with Brazilian securities legislation,
Telmex Solutions Telecomunicações Ltda. (subsidiary of Latam Brasil LLC) offered to purchase shares of Embrapar from the minority shareholders. Telmex Solutions acquired 47,841,438 thousand shares of additional common stock, thereby
increasing Telmexs stake in Embrapar to 90.25% of common stock (33.57% of total capital).



| | b. | Business and regulatory environment
| | -- | -----------------------------------



Embratel provides international and domestic long-distance telecommunications services in Brazil. These services include transmission of voice, data and
other services, and are performed under the terms of a concession granted by the Federal Government, which will expire on December 31, 2005. Embratel has the right to renew this license for an additional 20-year term, at a cost, subject to
Anatels regulations.



The business of Embratel and Star
One, including the services that they provide and the rates they charge, is regulated by the Agência Nacional de Telecomunicações - Anatel, the regulatory authority for the Brazilian telecommunications industry, pursuant to Law
No. 9,472, of July 16, 1997, and the related regulations, decrees, orders and plans. Embratel and the local fixed telephone operators share interstate and international long-distance revenues through network usage fees based on the terms of an
interconnection agreement with Embratel, which became effective in April 1998.



On August 15, 2002, Anatel authorized Embratel to operate indefinitely Switched Fixed Telephony Services (Sistema Telefônico Fixo Comutado - STFC), for local services. This authorization is for
operations in areas equivalent to regions I, II and III of the General Grant Plan (Plano Geral de Outorgas), which represents the Brazilian domestic territory. Embratel started rendering those services effective in December 2002.



F-107



---

In July 2002, another carrier was allowed to provide inter-regional long-distance services from the state
of São Paulo. Meanwhile, a separate local service provider also received a fixed telephone long-distance license (Region I) and fixed telephone local licenses (Regions II and III).



As from July 6, 2003, users of the Personal Cellular Service (PCS) must
choose an operator for domestic and international long-distance calls through cellular phones. Embratel, in addition to nationwide network coverage, offers its customers the possibility of using pre and post-paid calling cards for cellular phones.
Embratel also permits customers making calls from cellular phones to be charged through the normal invoice made by the cellular operators.



Embratel and its consolidated subsidiaries are hereinafter referred to as the Company.



| | c. | Working capital deficiency
| | -- | --------------------------



For the years ended December 31, 2004 and 2002, the Company incurred net losses and at December 31, 2004 the Company has a working capital deficiency of
R$1,678,283. Managements plans to meet working capital requirements and return the Company to profitability are as follows:



| | c.1) | continuing efforts to reduce operational costs; and
| | ---- | ---------------------------------------------------



| | c.2) | lowering financing costs.
| | ---- | -------------------------



|2. | Preparation and Presentation of the Consolidated Financial Statements
|-- | ---------------------------------------------------------------------



The consolidated financial statements are the responsibility of Companys management and were prepared in accordance with accounting practices
adopted in Brazil (BR GAAP). These accounting practices are established by the Brazilian corporate law, instructions applicable to telecommunications concessionaires and rules and accounting procedures established by the Brazilian
Securities and Exchange Commission (CVM - Comissão de Valores Mobiliários).



The accompanying financial statements are translated and adapted from the Companys statutory financial statements issued in Brazil, prepared under BR GAAP, with for certain reclassifications, modifications and
changes in terminology to conform more closely to reporting practices in the United States of America.



The consolidated financial statements include the accounts of Embratel and all of its subsidiaries in which the Company directly or indirectly controls
the subsidiaries. All significant intercompany accounts and transactions are eliminated upon consolidation. Minority interests refer to the minority shareholder interests in the subsidiary Star One.



F-108



---

The following subsidiaries are included in the consolidated financial statements for the years ended
December 31:



|                                                  |  |                                  |  |      
|------------------------------------------------- |  | -------------------------------- |  | -----
|                                                  |  | Voting capital stock            
|                                                  |  | Direct and/or indirect share (%)
|                                                  |  | 2004                             |  | 2003 
|Star One S.A.                                     |  | 80.0                             |  | 80.0 
|BrasilCenter Comunicações Ltda.                   |  | 99.0                             |  | 99.0 
|Click 21 Comércio de Publicidade Ltda. (Note 1.a) |  | 100.0                            |  | 100.0
|Embratel Americas, Inc.                           |  | 100.0                            |  | 100.0
|Embratel Chile S.A.                               |  | 100.0                            |  | 100.0
|Embratel Internacional S.A.                       |  | 99.0                             |  | 99.0 
|Embratel Uruguay S.A.                             |  | 100.0                            |  | 100.0
|Palau Telecomunicações Ltda.                      |  | 100.0                            |  | 100.0
|Gollum Investments, Inc.                          |  | 100.0                            |  | 100.0
|Avantis Investments, Inc.                         |  | 100.0                            |  | 100.0
|Vega 21 Participações Ltda.                       |  | 100.0                            |  | 100.0
|Vetel 21 Participações Ltda.                      |  | 100.0                            |  | 100.0
|CT Torres Ltda. (Note 1)                          |  | 100.0                            |  |     
|Participation Investment, Inc.(1)                 |  |                                 |  | 100.0

---

|(1) | This subsidiary was dissolved on October 1, 2004.
|--- | -------------------------------------------------



Certain reclassifications have been made to prior years financial statements in order to be consistent with current year presentation.



|3. | Summary of Significant Accounting Practices
|-- | -------------------------------------------



| | a. | Cash and cash equivalents
| | -- | -------------------------



Cash and cash equivalents refer to bank deposits and highly liquid temporary investments with maturity of 90 days or less when purchased. Cash equivalents
are recorded at cost, plus income earned through balance sheet date, which do not exceed market value, when applicable.



| | b. | Trade accounts receivable, net
| | -- | ------------------------------



Trade accounts receivable, net represents primarily amounts receivable from customers for services rendered, billed and/or unbilled at period end,
directly or through operating telecommunications companies, including the taxes related to such services but net of the allowance for doubtful accounts. These services include local, long-distance and international telecommunications services, data
communications services and other services.



F-109



---

Allowance for doubtful accounts represents a management estimate of the accounts for which collectibility
is deemed unlikely. The Company constantly monitors its accounts receivables past due. Beginning on June 30, 2004, the Company recorded a 100% allowance for doubtful accounts for amounts overdue more than 90 days, from basic voice customer users,
advanced voice, data and other services, as well as estimated amounts based on historical losses. Prior to that date, an allowance for doubtful accounts was recognized from the first day after maturity and was gradually increased until reaching 100%
after 120 days. This modification in the estimation process did not generate any material effects in the income statement for the year ended December 31, 2004.



| | c. | Foreign currency transactions
| | -- | -----------------------------



Assets and liabilities denominated in foreign currencies are translated at the period end exchange rates. Exchange gains or losses are recorded in the
income statement, classified as Financial Income (Expense). The effects of exchange rate variation are described in Note 9.



| | d. | Investments
| | -- | -----------



At December 31, 2003, investments principally represent a holding in the satellite company New Skies, denominated in U.S. dollars, and were recorded at
acquisition cost, adjusted for foreign currency exchange gains or losses and net of provisions for probable losses when applicable. The Companys investment in New Skies was sold in 2004.



Other investments are recorded at cost less provision for losses, when
applicable.



| | e. | Property, plant and equipment
| | -- | -----------------------------



Property, plant and equipment are recorded cost of acquisition and/or construction, less accumulated depreciation, monetarily restated up to December 31,
1995.



The current annual depreciation rates used are
calculated on a straight-line basis over the expected useful life of the assets. The depreciation rates are disclosed in Note 17.



Improvements to existing property are capitalized, while maintenance and repair costs are charged to expense as incurred. Materials allocated to specific
projects are added to construction in progress.



The Company
periodically evaluates property, plant and equipment for impairment as a result of technological changes. If the Company determines that property, plant



F-110



---

and equipment requires replacement, the remaining depreciation life is shortened to the date of
replacement. In circumstances where advance identification is not feasible or where immediate replacement is made in response to changes in business plans or in the technological environment, the residual value of replaced equipment is written-off
on the date of retirement from service.



Financial charges
arising from financing linked to construction-in-progress are capitalized as part of property, plant and equipment until the asset is placed in service.



As described in Note 17, fixed assets acquired through leasing contracts are capitalized and the corresponding lease finance is registered as a liability.
The liabilities arising from such transactions bear interest and, where applicable, are subject to monetary correction.



| | f. | Deferred assets
| | -- | ---------------



Deferred assets refer to the goodwill recorded on the books of CT Torres. Such goodwill resulted from the acquisition of CT Torres by its former parent
company. The parent company was subsequently incorporated by CT Torres and the goodwill was transferred to the books of CT Torres. The goodwill is being amortized based on future profitability (Note 18).



Additionally, there are pre-operating expenses recorded in the subsidiary
Click 21. The balance of the subsidiary has been adjusted to the recoverable amounts and is being amortized over five years.



| | g. | Vacation pay accrual
| | -- | --------------------



Cumulative vacation pay due to employees is accrued as earned.



|
|

| | h. | Income tax and social contribution
| | -- | ----------------------------------



Income tax and social contribution are calculated according to the rules and rates prevailing during the year and are recorded on an accrual basis.
Deferred taxes are provided on temporary differences, tax losses and on the negative basis for calculation of social contribution based on the assumption of its future realization, according to rules established by CVM Instruction No. 371/02 (see
Notes 12, 15 and 21).



| | i. | Loans and financing
| | -- | -------------------



Loans and financing are updated based on the exchange or monetary variations and accrued as of the balance sheet dates according to the terms defined in
the contracts



F-111



---

| | j. | Provision for contingencies
| | -- | ---------------------------



The provision for contingencies is recorded to cover any probable losses based on the external and internal legal counsels opinions. The basis and
nature of the provisions are described in Note 24.



| | k. | Deferred income
| | -- | ---------------



Deferred income relates to the sale of rights of way primarily for optical fiber cables to Brazilian telecommunications companies and international
companies with activities in the Mercosur region through long-term contracts. In accordance with the terms of the contracts, the clients pay in advance for the right of way and income is recognized on a straight-line basis over the life of the
contracts.



| | l. | Revenue recognition
| | -- | -------------------



Revenues from telecommunications services are recorded on an accrual basis, less an estimate for billing problems or disputes. Revenues from international
services include revenues earned under bilateral agreements between Embratel and the foreign telecommunications companies. These agreements govern tariffs paid by Embratel to the foreign companies for the use of equipment required to complete calls
invoiced outside Brazil. Revenues related to international calls are recorded monthly segregating the amounts paid to foreign entities in the cost of services rendered (Note 4).



Certain data and other services are billed on a fixed-price monthly fee basis, plus a variable fee based on usage, when
applicable. Installation revenues on data service contracts are recognized when the installation process is complete.



| | m. | Financial income (expense, net)
| | -- | -------------------------------



Represents interest and foreign exchange and monetary variations, loans and financing and other assets and liabilities subject to monetary updated,
recorded on an accrual basis. Additionally, includes banking and fiduciary letters expenses resulting from financial investments, as well as PIS (Employees Profit Participation Program) and COFINS (Tax on Social Security Financing) expenses
(calculated on financial income) and CPMF (Provisional Contribution on Financial Activities  check banking tax).



| | n. | Actuarial liabilities - Telos
| | -- | -----------------------------



Embratel and Star One sponsor an entity that provides pensions and other post-retirement benefits for their employees (Note 25). Pension and other
post-retirement benefit expenses for the year are recorded on an accrual basis. Contributions for the defined benefit plan and medical assistance plan are actuarially determined.



F-112



---

According to CVM Deliberation No. 371 issued on December 13, 2000, actuarial liabilities were fully
recognized in financial statements as from December 31, 2001.



| | o. | Employees profit sharing
| | -- | -------------------------



A provision for granting employees the right to a share of the profits is accrued based on managements estimate, the payment of which is subject to
approval at the Shareholders General Meeting. As determined by Circular Letter CVM/SEP/SNC No. 01/2003, issued on January 16, 2003, Embratel and its subsidiary Star One recorded employees profit sharing as operating expenses in the
statements of income (R$38,881, R$49,587, and R$31,302 for the years ended December 31, 2004, 2003 and 2002, respectively). Information on management profit sharing is included in Note 29 under heading Directors Fees.



| | p. | Net income (loss) per thousand shares
| | -- | -------------------------------------



Net income (loss) per thousand shares is calculated based on the number of shares at the balance sheet date.



| | q. | Use of estimates
| | -- | ----------------



The preparation of consolidated financial statements in conformity with BR GAAP requires Management to make use of estimates and assumptions relating to
the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the period reported. Actual results may
differ from those estimates and assumptions.



F-113



---

|4. | Net Operating Revenue
|-- | ---------------------



|                               |  |           |  |           |  |          
|------------------------------ |  | --------- |  | --------- |  | ---------
|                               |  | 2004      |  | 2003      |  | 2002     
|Voice                          |  |           |  |           |  |          
|Domestic long-distance         |  | 4,018,210 |  | 4,052,168 |  | 4,356,796
|International long-distance(1) |  | 768,938   |  | 856,585   |  | 931,266  
|                               |  |           |  |           |  |          
|                               |  | 4,787,148 |  | 4,908,753 |  | 5,288,062
|Data & Internet                |  |           |  |           |  |          
|Corporate and other            |  | 1,575,429 |  | 1,660,919 |  | 1,756,507
|Telecommunications companies   |  | 158,433   |  | 97,236    |  | 75,932   
|                               |  |           |  |           |  |          
|                               |  | 1,733,862 |  | 1,758,155 |  | 1,832,439
|                               |  |           |  |           |  |          
|Local services                 |  | 284,946   |  | 100,496   |  |         
|Other services                 |  | 238,248   |  | 244,681   |  | 251,129  
|                               |  |           |  |           |  |          
|Total                          |  | 7,044,204 |  | 7,012,085 |  | 7,371,630
|                               |  |           |  |           |  |          

---

|(1) | During the year ended December 31, 2003, Embratel began to report international long-distance revenues gross of the amounts payable to foreign administrators (settlement), which are
recorded in cost of services. Previously, these revenues were reported net of settlement. The amounts payable to foreign entities reclassified in 2002 for purpose of comparability totaled R$264,552. This reclassification was made to align the
Companys procedures with the recent changes in the telecommunications market practices and facilitate comparability with other companies in the same industry.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company is required to collect ICMS (state value-added taxes) at an average rate of approximately 25% to 27% on all
long-distance revenues in addition to PIS/COFINS taxes (federal taxes at a combined rate of 3.65%), and under BR GAAP, this is classified as gross revenue deductions.



For the years ended December 31, 2004, 2003 and 2002, no single customer represented over 10% of total gross operating
revenues.



F-114



---

|5. | Cost of Services
|-- | ----------------



|                              |  |            |   |  |            |   |  |            |  
|----------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                              |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Interconnection/facilities(1) |  | (3,207,651 | ) |  | (3,212,868 | ) |  | (3,538,843 | )
|Depreciation and amortization |  | (965,459   | ) |  | (976,536   | ) |  | (981,351   | )
|Personnel                     |  | (229,823   | ) |  | (213,104   | ) |  | (228,045   | )
|Third-party services(2)       |  | (199,759   | ) |  | (220,510   | ) |  | (204,281   | )
|Other                         |  | (74,077    | ) |  | (62,241    | ) |  | (48,467    | )
|                              |  |            |   |  |            |   |  |            |  
|Total                         |  | (4,676,769 | ) |  | (4,685,259 | ) |  | (5,000,987 | )
|                              |  |            |   |  |            |   |  |            |  

---

|(1) | Expenses related to interconnection/facilities refer to costs with fixed line telephone companies for the use of private circuit lines and interconnection costs paid by Embratel to
fixed line and mobile telephone companies, in accordance with the interconnection rules as determined by Anatel.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Refers substantially to the maintenance of telecommunications equipment and public utilities.
|--- | ---------------------------------------------------------------------------------------------



|6. | Selling Expenses
|-- | ----------------



|                                |  |          |   |  |          |   |  |            |  
|------------------------------- |  | -------- | - |  | -------- | - |  | ---------- | -
|                                |  | 2004     |   |  | 2003     |   |  | 2002       |  
|Allowance for doubtful accounts |  | (344,032 | ) |  | (352,579 | ) |  | (627,136   | )
|Personnel                       |  | (273,320 | ) |  | (238,892 | ) |  | (246,668   | )
|Third-party services(1)         |  | (237,958 | ) |  | (180,156 | ) |  | (207,335   | )
|Depreciation and amortization   |  | (3,457   | ) |  | (4,173   | ) |  | (3,484     | )
|Other                           |  | (7,148   | ) |  | (12,586  | ) |  | (10,466    | )
|                                |  |          |   |  |          |   |  |            |  
|Total                           |  | (865,915 | ) |  | (788,386 | ) |  | (1,095,089 | )
|                                |  |          |   |  |          |   |  |            |  

---

|(1) | Refers substantially to marketing, advertising, legal and consulting expenses.
|--- | ------------------------------------------------------------------------------



|7. | General and Administrative Expenses
|-- | -----------------------------------



|                              |  |            |   |  |          |   |  |          |  
|----------------------------- |  | ---------- | - |  | -------- | - |  | -------- | -
|                              |  | 2004       |   |  | 2003     |   |  | 2002     |  
|Third-party services(1)       |  | (471,275   | ) |  | (494,921 | ) |  | (551,537 | )
|Depreciation and amortization |  | (161,963   | ) |  | (170,716 | ) |  | (157,333 | )
|Personnel(2)                  |  | (243,860   | ) |  | (139,413 | ) |  | (134,518 | )
|Taxes                         |  | (94,157    | ) |  | (72,644  | ) |  | (80,029  | )
|Employees profit sharing     |  | (38,881    | ) |  | (49,587  | ) |  | (31,302  | )
|Other                         |  | (79,160    | ) |  | (42,145  | ) |  | (37,032  | )
|                              |  |            |   |  |          |   |  |          |  
|Total                         |  | (1,089,296 | ) |  | (969,426 | ) |  | (991,751 | )
|                              |  |            |   |  |          |   |  |          |  

---

|(1) | Refers substantially to the maintenance of installations, public services, conservation and cleaning expenses, printing and postage of invoices, auditing and consulting expenses.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-115



---

|(2) | Since 2000, Embratel has a Plan for Retention of Executives and Strategic Employees, aiming at retaining the services of the President, Vice-Presidents, Officers,
Managers and other key employees who retain specialized knowledge. The participants of the plan would have the right to a cash indemnity, calculated using a formula foreseen in the individual Term of Commitment, even in the event of the dismissal of
the executive or of a change in the shareholding control of Embratel. Due to the change in the shareholding control, Embratel paid to executives, during the first half of 2004, indemnities of approximately, R$92,000. The amounts paid to statutory
officers who remained with Embratel comply with the total amount of the global compensation package approved by the General Shareholders Meeting of 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8. | Other Operating Income (Expenses), Net
|-- | --------------------------------------



|                                        |  |          |   |  |        |  |        |  
|--------------------------------------- |  | -------- | - |  | ------ |  | ------ | -
|                                        |  | 2004     |   |  | 2003   |  | 2002   |  
|Interconnection cost recovery(1)        |  | 65,647   |   |  |       |  |       |  
|FUST recovery (Note 15)                 |  | 37,902   |   |  |       |  |       |  
|COFINS recovery                         |  |         |   |  | 17,736 |  |       |  
|ICMS recovery                           |  | 14,124   |   |  | 13,609 |  | 16,043 |  
|Provision for contingencies (Note 24)   |  | (322,859 | ) |  |       |  | 9,779  |  
|Agreement with operators (Note 32)      |  | 54,500   |   |  |       |  |       |  
|Late charges income (expenses)          |  | (14,040  | ) |  | 17,431 |  | 5,872  |  
|Sales of telephonic devices (handset) |  | 62,804   |   |  |       |  |       |  
|Other                                   |  | 41,831   |   |  | 23,841 |  | (1,165 | )
|                                        |  |          |   |  |        |  |        |  
|Total                                   |  | (60,091  | ) |  | 72,617 |  | 30,529 |  
|                                        |  |          |   |  |        |  |        |  

---

|(1) | Based on the decision by the Special Tribunal of the Supreme Court of Justice, issued on July 1, 2004, which supported Embratels understanding that the index for readjustment
of telephone rates is the IGP-DI, as established in the concession contracts, with no retroactive application, Embratel has reversed a provision of R$65,647, recorded as cost of services, corresponding to the period from July through December 2003.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|9. | Financial Expense, Net
|-- | ----------------------



|                                            |  |            |   |  |          |   |  |            |  
|------------------------------------------- |  | ---------- | - |  | -------- | - |  | ---------- | -
|                                            |  | 2004       |   |  | 2003     |   |  | 2002       |  
|Financial income                            |  |            |   |  |          |   |  |            |  
|Interest on temporary investments and other |  | 266,689    |   |  | 239,769  |   |  | 177,982    |  
|Monetary variation  credit                 |  | 259,940    |   |  | 1,258    |   |  | 396        |  
|Exchange variation  assets(1)              |  | (11,234    | ) |  | (106,026 | ) |  | 337,175    |  
|                                            |  |            |   |  |          |   |  |            |  
|                                            |  | 515,395    |   |  | 135,001  |   |  | 515,553    |  
|                                            |  |            |   |  |          |   |  |            |  
|Financial expenses                          |  |            |   |  |          |   |  |            |  
|Financial charges                           |  | (576,434   | ) |  | (509,082 | ) |  | (441,596   | )
|Monetary variation  charge                 |  | (505,126   | ) |  | (53,066  | ) |  | (41,652    | )
|Exchange Variation  liabilities(1)         |  | (46,099    | ) |  | 263,624  |   |  | (1,588,166 | )
|                                            |  |            |   |  |          |   |  |            |  
|                                            |  | (1,127,659 | ) |  | (298,524 | ) |  | (2,071,414 | )
|                                            |  |            |   |  |          |   |  |            |  
|Total                                       |  | (612,264   | ) |  | (163,523 | ) |  | (1,555,861 | )
|                                            |  |            |   |  |          |   |  |            |  

---

|(1) | In 2004, 2003 and 2002, the U.S. dollar devalued by 8.13%, devalued by 18.23% and valued by 52.27%, respectively, against the Brazilian real, and the Japanese Yen devalued by 3.98%,
devalued by 9.48% and devalued by 68.54% against the Brazilian Real, respectively, nevertheless, the Company recorded an exchange variation expense of R$(46,099), R$263,624 and R$(1,588,166), respectively, net of results from hedge contracts
recorded during the year, in the amount of R$(209,935), R$(409,938) and R$703,474 in 2004, 2003 and 2002, respectively. In 2004, the Company registered this exchange variation expense, basically, due to higher devaluation of the real against
dollar, occurred in the first half of 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-116



---

|10. | Extraordinary Non-Operating Income  ILL
|--- | ----------------------------------------



From 1989 through 1992, the Federal Government imposed a tax on undistributed profit distributions (ILL  Imposto sobre o Lucro Líquido).
During this period, Embratel regularly paid this tax in accordance with the provisions of tax legislation then in force. In 1996, in a specific lawsuit, the Brazilian Supreme Court ruled that ILL was unconstitutional, since undistributed profits do
not represent a taxable event. This decision created legal precedent, and consequently, other taxpayers filed claims to recover amounts previously paid. In 1999, Embratel filed a lawsuit, and obtained an injunction enabling it to offset the ILL tax
against income taxes payable from May 1999 to July 2001. Since the offset was still subject to final decision by a higher court, Embratel did not reverse its liability for income taxes payable. In March 2001, the second judicial level (Tribunal
Regional Federal) further confirmed the right to offset. In May 2002, the Administrative Tax Court further ruled that ILL recovery was not subject to Income Tax as it had not been treated as a tax-deductible expense when paid between 1989 and 1992.
Considering that, Embratel recorded the reversal of the related income tax liability in 2002 the amount of R$198,131.



In 2004, the Supreme Court, confirmed the application of the second judicial level decision to the monetary restatements, which were recorded by Embratel,
related to the above ILL of R$106,802, as Extraordinary Non-operating Income.



F-117



---

|11. | Other Non-Operating Income (Expenses), Net
|--- | ------------------------------------------



|                                                                                              |  |         |   |  |          |   |  |         |  
|--------------------------------------------------------------------------------------------- |  | ------- | - |  | -------- | - |  | ------- | -
|                                                                                              |  | 2004    |   |  | 2003     |   |  | 2002    |  
|Income                                                                                        |  |         |   |  |          |   |  |         |  
|Gain on disposal of property, plant and equipment(1)                                          |  | 37,361  |   |  | 4,784    |   |  | 5,766   |  
|Gain on sale of investments (Note 16)                                                         |  | 8,502   |   |  | 92,808   |   |  |        |  
|Other                                                                                         |  | 9,481   |   |  | 20,545   |   |  | 24,576  |  
|Expenses                                                                                      |  |         |   |  |          |   |  |         |  
|Write-off of permanent assets(2)                                                              |  | (2,306  | ) |  | (128,637 | ) |  | (11,653 | )
|Provision for write-off of permanent assets(1)                                                |  | (71,492 | ) |  | (15,000  | ) |  |        |  
|Withholding income tax on remittances to foreign telecommunications companies (Note 24.1 c.1) |  |        |   |  | (39,462  | ) |  |        |  
|Other                                                                                         |  |        |   |  | (5,523   | ) |  | (7,648  | )
|                                                                                              |  |         |   |  |          |   |  |         |  
|Total                                                                                         |  | (18,454 | ) |  | (70,485  | ) |  | 11,041  |  
|                                                                                              |  |         |   |  |          |   |  |         |  

---

|(1) | These balances include income from the disposal of property, plant and equipment in the amount of R$31,091 and corresponding provision for write-off in the amount of R$33,092,
related to the agreements with operators as described in Note 32.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | On March 24, 2003, the principal customer of Acessonet Ltda. filed a lawsuit requesting the interruption of the long-term contract signed with Embratel. During the second quarter of
2003, this customer began disconnecting several circuits, which were being provided based on the aforementioned contract. Consequently, in June 2003, Embratel wrote-off of the unamortized balance of goodwill related to Acessonet amounting to
R$101,489. Additionally, the loss on sale of Intelsat Ltd. amounting of R$18,679 is recorded in this line item (see Note 16).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|12. | Income Tax and Social Contribution Benefit (Expense)
|--- | ----------------------------------------------------



The Company is subject to corporate income tax (IRPJ) and social contribution on profits (CSSL) based on taxable income, and has chosen to pay these taxes
based on monthly estimates. As provided in current tax legislation, the monthly estimated payment is suspended or reduced when the amounts according to this criteria exceeds those calculated those obtained through calculation made based on the
accumulated actual profit of the current period, upon balance sheets prepared for this purpose (tax balance sheet). The amounts of the prepaid Income Tax and Social Contribution are recorded as Income Tax - Estimated and Social Contribution -
Estimated, and are presented as a deduction from the taxes payable (see Note 21).



F-118



---

The off-set of accumulated tax loss carryforwards and negative basis for calculation of social
contribution is limited to 30% of the respective taxable income in each fiscal year. The losses carried forward have no expiration date. On December 31, 2004 and 2003, Embratels tax losses and negative basis for calculation of social
contribution are as follows:



|                                                      |  |           |  |          
|----------------------------------------------------- |  | --------- |  | ---------
|                                                      |  | 2004      |  | 2003     
|Tax losses                                            |  | 1,055,433 |  | 1,074,911
|                                                      |  |           |  |          
|Negative basis for calculation of social contribution |  | 930,653   |  | 947,866  
|                                                      |  |           |  |          



The composition of
deferred tax assets and liabilities, based on temporary differences, is described in Notes 15 and 21, respectively.



| | a. | Income tax and social contribution income (expenses)
| | -- | ----------------------------------------------------



The income tax and social contribution expense is comprised of the current expense for the year, computed in accordance with current tax legislation, and
deferred expense, corresponding to the effects of the taxes on the temporary differences arising or realized in the year. The deferred income tax and social contribution income (expense) for the years ended December 31, 2004, 2003 and 2002 totaled
R$100,241, R$(91,010) and R$428,385, respectively (consolidated), and were calculated on the allowance for doubtful accounts, tax losses, temporarily non-deductible taxes and other expenses, as well as other temporarily non taxable revenues (Note
15).



F-119



---

The components of income tax and social contribution for the years ended December 31 are as follows:



|                                 |  |         |   |  |          |   |  |         |  
|-------------------------------- |  | ------- | - |  | -------- | - |  | ------- | -
|                                 |  | 2004    |   |  | 2003     |   |  | 2002    |  
|Current                          |  |         |   |  |          |   |  |         |  
|Social contribution              |  | (19,427 | ) |  | (11,928  | ) |  | (3,798  | )
|Income tax                       |  | (54,600 | ) |  | (34,473  | ) |  | (10,313 | )
|                                 |  |         |   |  |          |   |  |         |  
|Total current expense            |  | (74,027 | ) |  | (46,401  | ) |  | (14,111 | )
|                                 |  |         |   |  |          |   |  |         |  
|Deferred                         |  |         |   |  |          |   |  |         |  
|Social contribution              |  | 27,328  |   |  | (24,641  | ) |  | 113,398 |  
|Income tax                       |  | 72,913  |   |  | (66,369  | ) |  | 314,987 |  
|                                 |  |         |   |  |          |   |  |         |  
|Total deferred benefit (expense) |  | 100,241 |   |  | (91,010  | ) |  | 428,385 |  
|                                 |  |         |   |  |          |   |  |         |  
|Total                            |  | 26,214  |   |  | (137,411 | ) |  | 414,274 |  
|                                 |  |         |   |  |          |   |  |         |  



The current income tax
and social contribution expense, reported in the consolidate statements of income for the years ended 2004, 2003 and 2002 are mainly attributable to the subsidiary Star One.



| | b. | Reconciliation of tax benefit (expenses) with statutory rates
| | -- | -------------------------------------------------------------



The provision for income tax was accrued based on taxable income at the rate of 15%, plus an additional 10% on the taxable income in excess of R$240.
Social contribution was calculated at a rate of 9%.



F-120



---

The reconciliation between income tax and social contribution based on statutory rates with the amounts
recognized as income tax and social contribution benefit (expense) is as follows:



|                                                              |  |          |   |  |          |   |  |            |  
|------------------------------------------------------------- |  | -------- | - |  | -------- | - |  | ---------- | -
|                                                              |  | 2004     |   |  | 2003     |   |  | 2002       |  
|Net income (loss) before taxes and minority interest          |  | (171,783 | ) |  | 407,623  |   |  | (1,032,357 | )
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax benefit (expense) at nominal rate (25%)            |  | 42,946   |   |  | (101,906 | ) |  | 258,089    |  
|Adjustments to obtain the effective rate:                     |  |          |   |  |          |   |  |            |  
|Income tax benefit on amortization of goodwill on merger      |  | (6,611   | ) |  | (6,611   | ) |  | (6,611     | )
|Unrecorded tax credits owed to CVM 371(1)                     |  | (878     | ) |  |         |   |  |           |  
|Non-deductible finance charges                                |  |          |   |  |         |   |  | 13,837     |  
|Favorable decision on ILL lawsuit (Note 10)                   |  | 9,757    |   |  |         |   |  | 36,002     |  
|Other permanent additions (exclusions)(2)                     |  | (26,901  | ) |  | 7,675    |   |  | 3,357      |  
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax benefit (expense)                                  |  | 18,313   |   |  | (100,842 | ) |  | 304,674    |  
|                                                              |  |          |   |  |          |   |  |            |  
|Social contribution benefit (expense) at statutory rates (9%) |  | 15,460   |   |  | (36,686  | ) |  | 92,912     |  
|Adjustments to obtain the effective rate:                     |  |          |   |  |          |   |  |            |  
|Tax benefit on amortization of goodwill on merger             |  | (2,380   | ) |  | (2,380   | ) |  | (2,380     | )
|Unrecorded tax credits owed to CVM 371(1)                     |  | (321     | ) |  |         |   |  |           |  
|Non-deductible finance charges                                |  |         |   |  |         |   |  | 4,981      |  
|Favorable decision on ILL lawsuit (Note 10)                   |  | 3,513    |   |  |         |   |  | 12,961     |  
|Other permanent additions (exclusions)(2)                     |  | (8,371   | ) |  | 2,497    |   |  | 1,126      |  
|                                                              |  |          |   |  |          |   |  |            |  
|Social contribution benefit (expense)                         |  | 7,901    |   |  | (36,569  | ) |  | 109,600    |  
|                                                              |  |          |   |  |          |   |  |            |  
|Income tax and social contribution                            |  | 26,214   |   |  | (137,411 | ) |  | 414,274    |  
|                                                              |  |          |   |  |          |   |  |            |  

---

|(1) | This basically refers to the losses incurred by the subsidiary Click 21, for the period ended December 31, 2004, on which no tax credits were recorded due to the uncertainties
involving their realization.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Permanent additions (exclusions) in the consolidated statements for 2004 mainly correspond to the executive retention plan expenses (Note 7).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



F-121



---

|13. | Cash and Cash Equivalents
|--- | -------------------------



|                                                   |  |         |  |          
|-------------------------------------------------- |  | ------- |  | ---------
|                                                   |  | 2004    |  | 2003     
|Cash                                               |  | 51      |  | 116      
|Bank accounts                                      |  | 34,204  |  | 131,623  
|                                                   |  |         |  |          
|Subtotal                                           |  | 34,255  |  | 131,739  
|U.S. dollars short-term certificates of deposit(1) |  | 5,198   |  | 218,021  
|Marketable securities:                             |  |         |  |          
|Foreign                                            |  | 119,440 |  | 116,237  
|Local                                              |  | 654,344 |  | 1,169,112
|Bank Certificates of Deposit                       |  | 570     |  | 18,905   
|                                                   |  |         |  |          
|Total                                              |  | 813,807 |  | 1,654,014
|                                                   |  |         |  |          

---

|(1) | Short-term certificates of deposit represent highly liquid marketable securities denominated in U.S. dollars, with maturities of less than 90 days, funded from traffic revenues
collected from international operators.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Marketable securities primarily represent highly liquid fixed income bonds with maturities of less than 90 days.



|14. | Trade Accounts Receivables, Net
|--- | -------------------------------



|                                                      |  |            |   |  |            |  
|----------------------------------------------------- |  | ---------- | - |  | ---------- | -
|                                                      |  | 2004       |   |  | 2003       |  
|Voice services                                        |  | 2,495,793  |   |  | 2,467,496  |  
|Data, telecommunications companies and other services |  | 508,351    |   |  | 619,924    |  
|Foreign administrators                                |  | 210,435    |   |  | 179,266    |  
|                                                      |  |            |   |  |            |  
|Subtotal                                              |  | 3,214,579  |   |  | 3,266,686  |  
|                                                      |  |           
|Allowance for doubtful accounts                       |  | (1,846,812 | ) |  | (1,669,723 | )
|                                                      |  |            |   |  |            |  
|Total                                                 |  | 1,367,767  |   |  | 1,596,963  |  
|                                                      |  |            |   |  |            |  



No single consumer
accounted for more than 10% of total trade accounts receivable at December 31, 2004 and 2003.



F-122



---

Changes in the allowance for doubtful accounts were as follows:



|                                          |  |           |   |  |           |   |  |           |  
|----------------------------------------- |  | --------- | - |  | --------- | - |  | --------- | -
|                                          |  | 2004      |   |  | 2003      |   |  | 2002      |  
|Beginning balance at January 1,           |  | 1,669,723 |   |  | 1,990,484 |   |  | 1,452,069 |  
|                                          |  |           |   |  |           |   |  |           |  
|Increase through charge to expenses       |  | 344,032   |   |  | 352,579   |   |  | 627,136   |  
|                                          |  |           |  
|Decrease through charge to other accounts |  | (19,560   | ) |  | (4,290    | ) |  |          |  
|                                          |  |           |  
|Write-offs for the year                   |  | (147,383  | ) |  | (669,050  | ) |  | (88,721   | )
|                                          |  |           |   |  |           |   |  |           |  
|Ending balance at December 31,            |  | 1,846,812 |   |  | 1,669,723 |   |  | 1,990,484 |  
|                                          |  |           |   |  |           |   |  |           |  



|15. | Deferred and Recoverable Taxes
|--- | ------------------------------



|                                                                                    |  |           |  |          
|----------------------------------------------------------------------------------- |  | --------- |  | ---------
|                                                                                    |  | 2004      |  | 2003     
|Deferred income tax and social contribution assets                                  |  |           |  |          
|Provision for write-off of property, plant and equipment / accelerated depreciation |  | 35,215    |  | 15,420   
|Tax losses carryforward                                                             |  | 263,858   |  | 268,728  
|Negative basis of social contribution                                               |  | 83,759    |  | 85,307   
|Allowance for doubtful accounts                                                     |  | 623,672   |  | 564,465  
|Goodwill on the acquisition of investment                                           |  | 8,991     |  | 17,983   
|COFINS/PIS  temporarily non-deductible                                             |  | 28,531    |  | 28,531   
|Other deferred taxes (provisions)                                                   |  | 203,778   |  | 169,091  
|                                                                                    |  |           |  |          
|Subtotal                                                                            |  | 1,247,804 |  | 1,149,525
|                                                                                    |  |          
|Withholding income tax (IRRF)                                                       |  | 75,194    |  | 80,199   
|Recoverable income tax/social contribution                                          |  | 25,578    |  | 39,331   
|Value-added goods and services tax  ICMS                                           |  | 178,676   |  | 242,936  
|Income Tax on net income  ILL (Note 10)                                            |  | 41,625    |  |         
|FUST                                                                                |  | 63,216    |  |         
|Other                                                                               |  | 31,358    |  | 63,148   
|                                                                                    |  |           |  |          
|Total                                                                               |  | 1,663,451 |  | 1,575,139
|                                                                                    |  |           |  |          
|Current                                                                             |  | 369,703   |  | 436,717  
|                                                                                    |  |           |  |          
|Non-current                                                                         |  | 1,293,748 |  | 1,138,422
|                                                                                    |  |           |  |          



F-123



---

Deferred taxes were recorded based on the assumption of future realization, as follows:



| | a. | Tax losses and negative basis of social contribution will be compensated at the limit of 30% of the taxable income in each period.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------



| | b. | Goodwill on investment: recovery will occur proportionally to the amortization of the goodwill from the subsidiary Star One, in a five year-term, ending in 2006.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| | c. | Other temporary differences: realization will occur with the payment of accrued provisions and the effective write-off of underlying doubtful accounts or any other event which may
result in a recorded loss.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Based on
managements estimates of future taxable income that were approved by the Board of Directors, the Company believes that it is more likely than not that the amounts recorded as of December 31, 2004 will be realized.



In December 2003, Anatel issued an official letter clarifying that the
connection costs are deductible from the contribution calculation base of FUST  Telecommunications Systems Universalization Fund.



In the second quarter of 2004, Embratel, concluded a review of the calculation basis of the referenced contribution tax pursuant this official letter and
recorded a corresponding credit in the amount of R$57,736. Of this credit, R$37,902, was recorded as Other operating income (expenses), and the compensatory interest of R$19,834, was recorded as Other Financial Income
(Expense). On December 31, 2004, these credits, monetarily restated, totaled R$63,216.



|16. | Investments
|--- | -----------



|                              |  |       |  |           |   |  |       
|----------------------------- |  | ----- |  | --------- | - |  | ------
|                              |  | 2004  |  | Ownership |   |  | 2003  
|Satellite company - New Skies |  |      |  | 2.104549  | % |  | 38,981
|Other                         |  | 1,594 |  |           |   |  | 907   
|                              |  |       |  |           |   |  |       
|Total                         |  | 1,594 |  |           |   |  | 39,888
|                              |  |       |  |           |   |  |       



The interests in the
satellite company are denominated in U.S. dollars and translated to local currency as described in Note 3.c.



F-124



---

During the years 2004 and 2003, Embratel sold to third parties 100% of its participation in the following
companies:



|                             |  |                   |  |                       |  |               |  |              |  
|---------------------------- |  | ----------------- |  | --------------------- |  | ------------- |  | ------------ | -
|Company                      |  | Month of disposal |  | Balance of investment |  | Sale proceeds |  | Gain/ (loss) |  
|Intelsat Ltd.                |  | July 2003         |  | 137,717               |  | 119,038       |  | (18,679      | )
|Embratel Clearinghouse Ltda. |  | October 2003      |  | 2,946                 |  | 46,161        |  | 43,215       |  
|Inmarsat Ventures PLC        |  | December 2003     |  | 37,664                |  | 86,366        |  | 48,702       |  
|Telecommunications Companies |  | December 2003     |  | 6,386                 |  | 7,277         |  | 891          |  
|New Skies                    |  | November 2004     |  | 35,471                |  | 43,973        |  | 8,502        |  



|17. | Property, Plant and Equipment
|--- | -----------------------------



| | a. | Composition
| | -- | -----------



|                                    |  |            |  |                          |   |  |               
|----------------------------------- |  | ---------- |  | ------------------------ | - |  | --------------
|                                    |  | 2004      
|                                    |  | Cost (1)   |  | Accumulated depreciation |   |  | Net book value
|Switching equipment                 |  | 2,255,593  |  | (1,088,655               | ) |  | 1,166,938     
|Transmission equipment(2)           |  | 8,104,314  |  | (4,958,910               | ) |  | 3,145,404     
|Buildings and ducts                 |  | 1,339,964  |  | (728,266                 | ) |  | 611,698       
|Land                                |  | 186,943    |  |                         |   |  | 186,943       
|Other assets                        |  |            |  |                          |   |  |               
|General use(3)                      |  | 670,777    |  | (499,552                 | ) |  | 171,225       
|Intangible(4)                       |  | 1,005,324  |  | (518,011                 | ) |  | 487,313       
|Telecommunication infrastructure(5) |  | 667,908    |  | (477,676                 | ) |  | 190,232       
|Construction in progress            |  | 592,827    |  |                         |   |  | 592,827       
|                                    |  |            |  |                          |   |  |               
|Total                               |  | 14,823,650 |  | (8,271,070               | ) |  | 6,552,580     
|                                    |  |            |  |                          |   |  |               



F-125



---

|                                    |  |            |  |                          |   |  |               
|----------------------------------- |  | ---------- |  | ------------------------ | - |  | --------------
|                                    |  | 2003      
|                                    |  | Cost (1)   |  | Accumulated depreciation |   |  | Net book value
|Switching equipment                 |  | 2,173,868  |  | (896,709                 | ) |  | 1,277,159     
|Transmission equipment(2)           |  | 8,089,220  |  | (4,384,334               | ) |  | 3,704,886     
|Buildings and ducts                 |  | 1,338,342  |  | (691,871                 | ) |  | 646,471       
|Land                                |  | 190,495    |  |                         |   |  | 190,495       
|Other assets                        |  |            |  |                          |   |  |               
|General use(3)                      |  | 650,482    |  | (443,633                 | ) |  | 206,849       
|Intangible(4)                       |  | 866,133    |  | (382,539                 | ) |  | 483,594       
|Telecommunication infrastructure(5) |  | 644,334    |  | (437,631                 | ) |  | 206,703       
|Construction in progress            |  | 421,877    |  |                         |   |  | 421,877       
|                                    |  |            |  |                          |   |  |               
|Total                               |  | 14,374,751 |  | (7,236,717               | ) |  | 7,138,034     
|                                    |  |            |  |                          |   |  |               

---

|(1) | Cost refers to acquisition or construction, monetarily restated through December 31, 1995.
|--- | ------------------------------------------------------------------------------------------

|(2) | Transmission equipment includes aerial, underground and building cables, private automatic exchanges and power equipment.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(3) | Vehicles, information technology equipment, furniture and fixtures.
|--- | -------------------------------------------------------------------

|(4) | Software licenses and rights of way.
|--- | ------------------------------------

|(5) | Telecommunications support towers, leasehold improvements and energy and acclimatization system.
|--- | ------------------------------------------------------------------------------------------------



| | a.1.) | Assets related to the concession contract
| | ----- | -----------------------------------------



Certain assets are allocated for use in services provided under the concession, which prevents their removal, disposal, assignment or use as guarantees
in mortgages without the express prior authorization of the regulatory authority.



| | a.2.) | Assets pledged as a guarantee
| | ----- | -----------------------------



As of December 31, 2004, Embratel had real estate and other fixed assets listed and/or designated as guarantees in judicial claims, in the amount of
R$842,424 (R$704,501 as of December 31, 2003).



F-126



---

| | b. | Depreciation
| | -- | ------------



The annual depreciation rates applied to property, plant and equipment are as follows:



|                       |  |              
|---------------------- |  | -------------
|                       |  | %            
|Switching equipment    |  | 10.00        
|Transmission equipment |  | 5.00 to 20.00
|Buildings and ducts    |  | 4.00         
|Other assets           |  | 4.00 to 20.00



The Company revised
the depreciation rates applicable to approximately 70% of its property, plant and equipment. Consequently, since January 2003 switching equipment has been depreciated at a 10% annual rate (7.69% until December 31, 2002), and optical fiber cables
(classified as transmission equipment) have been depreciated at a 5% annual rate (6.67% and 10% until December 31, 2002). This resulted in an increase in depreciation expense in the amount of approximately R$13 million for the year ended December
31, 2003.



The weighted average depreciation rate for the year
ended December 31, 2004 is 9.81% (9.33% and 8.94% for the years ended December 31, 2003 and 2002, respectively).



| | c. | Construction of the Star One C-1 Satellite
| | -- | ------------------------------------------



In 2001, the subsidiary Star One signed an agreement with Alcatel Space Industries (ASI), for the construction of the Star One C-1 satellite. The cost of
the project was US$141,700 and the construction was expected to last 32 months through 2005. In April 2002, the subsidiary Star One and Alcatel entered into an agreement to review the technical specifications of the satellite Star One C-1, which
decreased the amount of the project to US$126,105.



Because of
modifications to the technical specifications of the satellite, the contract was amended in March 2004 to reflect a total cost of US$212,100 and a new configuration was set of 28, 14 and 1 transponders in C, Ku and X bands, respectively.



The term for delivery of the satellite in orbit and of the earth control
station is 30 months as from September 30, 2003. The launching is scheduled for the first half of 2006.



The amendment provides that in case of cancellation of the satellite Star One C-1 construction, the subsidiary Star One has to reimburse third parties the
costs incurred, plus 5%, less the payments already made.



F-127



---

The amount related to this contract is recorded as construction in progress as of December 31, 2004 and
totals R$275,971 (R$189,539 as of December 31, 2003).



|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | --------- | - |  | --------- | -
|18. |  | Deferred Assets                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2004      |   |  | 2003      |  
|    |  | Pre-operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                           |  | 1,183     |   |  | 1,183     |  
|    |  | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | 102,426   |   |  |          |  
|    |  | Accumulated amortization                                                                                                                                                                                                                                                                                                                                                                                                                         |  | (11,302   | ) |  | (40       | )
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  | Net book value                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | 92,307    |   |  | 1,143     |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|    |  | The goodwill is recorded on the books of CT Torres, resulted from the acquisition of CT Torres by its the former parent company, which was subsequently incorporated by CT Torres
and, thus, the goodwill was transferred to the books of CT Torres. The goodwill is being amortized based on future profitability, and the amortization term for the aforementioned goodwill has been reduced from 10 to 6 years beginning on November 1,
2004. | 
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|19. |  | Payroll and Related Accruals                                                                                                                                                                                                                                                                                                                                                                                                                     |  |           |   |  |           |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2004      |   |  | 2003      |  
|    |  | Wages and salaries                                                                                                                                                                                                                                                                                                                                                                                                                               |  | 171       |   |  | 1,110     |  
|    |  | Accrued social security charges                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 60,634    |   |  | 66,686    |  
|    |  | Accrued benefits                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 1,786     |   |  | 11,466    |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  | Total                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 62,591    |   |  | 79,262    |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|20. |  | Accounts Payable and Accrued Expenses                                                                                                                                                                                                                                                                                                                                                                                                            |  |           |   |  |           |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  | 2004      |   |  | 2003      |  
|    |  | Suppliers                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | 1,002,160 |   |  | 1,360,628 |  
|    |  | International operators                                                                                                                                                                                                                                                                                                                                                                                                                          |  | 169,283   |   |  | 226,148   |  
|    |  | Consignment for third parties/other                                                                                                                                                                                                                                                                                                                                                                                                              |  | 114,942   |   |  | 110,069   |  
|    |  | Other                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 1,513     |   |  | 238       |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  
|    |  | Total                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | 1,287,898 |   |  | 1,697,083 |  
|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |           |   |  |           |  



F-128



---

|21. | Taxes and Contributions
|--- | -----------------------



|                                                                     |  |         |  |        
|-------------------------------------------------------------------- |  | ------- |  | -------
|                                                                     |  | 2004    |  | 2003   
|Indirect taxes                                                       |  |         |  |        
|ICMS (value-added tax)                                               |  | 201,049 |  | 124,220
|PIS/COFINS (social/finance contributions)                            |  | 39,010  |  | 34,856 
|PIS/Pasep - in suspension                                            |  | 144,342 |  | 132,261
|PIS/COFINS  judicial deposit in court(1)                            |  | 2,513   |  | 2,514  
|ISS (municipal service tax)                                          |  | 11,696  |  | 9,628  
|Other                                                                |  | 19,536  |  | 21,413 
|                                                                     |  |        
|Deferred taxes liabilities                                           |  |         |  |        
|IRPJ and CSSL, law No. 8,200/91  supplementary monetary restatement |  | 36,522  |  | 38,319 
|                                                                     |  |        
|Other  income taxes(2)                                              |  | 2,169   |  | 398    
|                                                                     |  |         |  |        
|Total                                                                |  | 456,837 |  | 363,609
|                                                                     |  |         |  |        
|Current                                                              |  | 420,435 |  | 324,065
|                                                                     |  |         |  |        
|Non-current                                                          |  | 36,402  |  | 39,544 
|                                                                     |  |         |  |        

---

|(1) | In 1999, Embratel questioned the change introduced Law No. 9,718/99 which increased: (a) the taxable income for calculation of PIS and COFINS, including financial income and
exchange variation and (b) the COFINS rate from 2% to 3%. Despite this questioning, Embratel continued to record the total amount of the tax liability and made a court deposit during the period comprised August 1999 through April 2001. As from May
2001, Embratel began paying PIS and COFINS. On August 29, 2002, Provisional Measure (PM) No. 66 was issued, which permitted the liquidation of fiscal liabilities that were being challenged in court without fines. Embratel decided to avail itself on
PM No. 66 and paid this liability amounting to R$173,122, using the corresponding court deposits.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This item mainly refers to the provision for income tax and social contribution (estimate) and withholding income tax  IRRF.
|--- | -----------------------------------------------------------------------------------------------------------------------------





F-129



---

|22. | Loans and Financing
|--- | -------------------



|                    |  |           |  |          
|------------------- |  | --------- |  | ---------
|                    |  | 2004      |  | 2003     
|Loans and financing |  | 3,223,699 |  | 4,447,130
|Accrued interest    |  | 165,947   |  | 109,947  
|                    |  |           |  |          
|Total               |  | 3,389,646 |  | 4,557,077
|                    |  |           |  |          
|Current             |  | 2,087,841 |  | 1,216,856
|                    |  |           |  |          
|Non-current         |  | 1,301,805 |  | 3,340,221
|                    |  |           |  |          



Loans and financing
are principally comprised of credits from various banks and also from suppliers of telecommunications equipment used to enhance domestic and international telecommunications services. This debt finances working capital and equipment purchases
(mainly satellites and cables) and the B1, B2, B3, B4 and C-1 satellites and is to be repaid as set out in the repayment schedule below. The debt is mainly denominated in foreign currencies as shown in the following currency analysis and bears fixed
interest rates ranging from 4.5% to 11% per annum and variable interest rates ranging from 0.25% to 4% per annum over Libor. The Libor rate at December 31, 2004 was 2.50% per annum (1.22% per annum in 2003).



There were no unused commitments for long-term financing as of December 31,
2004 and 2003.



The loans and financing with financial
institutions are primarily denominated in foreign currency. Part of the debt is protected against exchange variation of the Brazilian Real through swap operations (Note 23.c), as described below:



|                                                  |  |           |  |       |  |                     
|------------------------------------------------- |  | --------- |  | ----- |  | --------------------
|                                                  |  | Amount    |  | %     |  | Average cost of debt
|Current                                           |  |           |  |       |  |                     
|Portion of debt under swap or reais - denominated |  | 1,524,650 |  | 73.0  |  | 97.67% CDI          
|Unhedged debt                                     |  | 563,191   |  | 27.0  |  | US$ + 3.20%         
|                                                  |  |           |  |       |  |                     
|Total short-term debt                             |  | 2,087,841 |  | 100.0 |  |                     
|                                                  |  |           | 
|Non-current                                       |  |           |  |       |  |                     
|Portion of debt under swap or reais - denominated |  | 301,870   |  | 23.2  |  | 74.90% CDI          
|Unhedged debt                                     |  | 999,935   |  | 76.8  |  | US$ + 9.37%         
|                                                  |  |           |  |       |  |                     
|Total long-term debt                              |  | 1,301,805 |  | 100.0 |  |                     
|                                                  |  |           | 
|Total                                             |  |           |  |       |  |                     
|Portion of debt under swap or reais - denominated |  | 1,826,520 |  | 53.9  |  | 93.91% CDI          
|Unhedged debt                                     |  | 1,563,126 |  | 46.1  |  | US$ + 7.15%         
|                                                  |  |           |  |       |  |                     
|Total debt                                        |  | 3,389,646 |  | 100.0 |  |                     
|                                                  |  |           |  |       |  |                     





F-130



---

| | a. | Model
| | -- | -----



|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|-------------------------------- |  | ---------- |  | --------- |  | --------- |  | ---------- |  | --------- |  | ---------
|                                 |  | 2004       |  | 2003     
|                                 |  | Short term |  | Long term |  | Total     |  | Short term |  | Long term |  | Total    
|Local currency                   |  |            |  |           |  |           |  |            |  |           |  |          
|Bank loans                       |  |           |  |          |  |          |  | 149,053    |  | 860,337   |  | 1,009,390
|Commercial Papers                |  | 1,019,050  |  |          |  | 1,019,050 |  |           |  |          |  |         
|Finame                           |  | 6,813      |  | 13,862    |  | 20,675    |  | 6,848      |  | 20,228    |  | 27,076   
|Leasing                          |  | 1,351      |  | 1,702     |  | 3,053     |  | 564        |  |          |  | 564      
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total                            |  | 1,027,214  |  | 15,564    |  | 1,042,778 |  | 156,465    |  | 880,565   |  | 1,037,030
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Foreign currency                 |  |            |  |           |  |           |  |            |  |           |  |          
|Bank loans                       |  | 957,294    |  | 430,564   |  | 1,387,858 |  | 992,274    |  | 1,566,767 |  | 2,559,041
|Foreign debt securities          |  | 3,936      |  | 729,960   |  | 733,896   |  | 7,997      |  | 794,530   |  | 802,527  
|Star One C-1 satellite financing |  | 1,715      |  | 111,301   |  | 113,016   |  | 1,326      |  | 67,249    |  | 68,575   
|Suppliers                        |  | 2,906      |  | 3,624     |  | 6,530     |  | 2,858      |  | 5,818     |  | 8,676    
|Leasing                          |  | 18,265     |  | 158       |  | 18,423    |  | 24,213     |  | 13,206    |  | 37,419   
|Swap / Hedge                     |  | 76,511     |  | 10,634    |  | 87,145    |  | 31,723     |  | 12,086    |  | 43,809   
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total                            |  | 1,060,627  |  | 1,286,241 |  | 2,346,868 |  | 1,060,391  |  | 2,459,656 |  | 3,520,047
|                                 |  |            |  |           |  |           |  |            |  |           |  |          
|Total of debt                    |  | 2,087,841  |  | 1,301,805 |  | 3,389,646 |  | 1,216,856  |  | 3,340,221 |  | 4,557,077
|                                 |  |            |  |           |  |           |  |            |  |           |  |          



| | b. | Repayment schedule
| | -- | ------------------



The long-term debt amortization schedule, as of December 31, 2004, comprises the following yearly amounts:



|             |  |          
|------------ |  | ---------
|             |  | 2004     
|2006         |  | 178,845  
|2007         |  | 163,194  
|2008         |  | 829,432  
|2009         |  | 45,875   
|2010 to 2013 |  | 84,459   
|             |  |          
|Total        |  | 1,301,805
|             |  |          



| | c. | Percentage breakdown of total debt by foreign currency/original index:
| | -- | ----------------------------------------------------------------------



|                                       |  |                            |   |  |                            |   |  |        |   |  |       |  
|-------------------------------------- |  | -------------------------- | - |  | -------------------------- | - |  | ------ | - |  | ----- | -
|                                       |  | 2004                       |   |  | 2003                       |  
|                                       |  | Exchange /Percentage rates |   |  | Exchange /Percentage rates |  
|U.S. Dollar                            |  | 2.6544                     |   |  | 64.5                       | % |  | 2.8892 |   |  | 61.1  | %
|Japanese Yen                           |  |                           |   |  |                           |   |  | 0.0270 |   |  | 10.8  | %
|Euro                                   |  | 3,6195                     |   |  | 4.7                        | % |  | 3.6506 |   |  | 5.3   | %
|CDI (Interbank Certificate of Deposit) |  | 17.75                      | % |  | 30.1                       | % |  | 16.50  | % |  | 22.1  | %
|TJLP                                   |  | 9.75                       | % |  | 0.6                        | % |  | 11     | % |  | 0.7   | %
|Real                                   |  |                           |   |  | 0.1                        | % |  |       |   |  |      |  
|                                       |  |                            |   |  |                            |   |  |        |   |  |       |  
|Total                                  |  |                            |   |  | 100.0                      | % |  |        |   |  | 100.0 | %
|                                       |  |                            |   |  |                            |   |  |        |   |  |       |  



F-131



---

| | d. | Roll-over of debt
| | -- | -----------------



In June 2004, Embratel completed its debt rollover program, which began in March 2003, whereby all outstanding debt was subject to a new amortization
schedule. The interest rates negotiated in these loans were Libor + 4% p.a. or CDI + 4% p.a.



| | e. | Prepayment of refinancing
| | -- | -------------------------



In December 2004, Embratel prepaid the debt that was part of the 2003 rollover. This process begun in December 2003, which resulted in the disbursement of
approximately US$766 million, mainly in the second half of 2004, the period that approximately US$558 million was paid. This debt was restated by Libor + 4% per annum and CDI + 4% per annum. The funds were raised from the issuance of Notes,
Commercial Paper and other funds raised in the fourth quarter of 2004.



Embratel also prepaid US$22 million of other loans which were not included in the rollover program. These loans carried an approximate cost of Libor + 3.5% per annum.



The objective of Embratel was to reduce the financial charges and terminate the covenants agreed upon the debt refinancing.



| | f. | Foreign debts securities - notes
| | -- | --------------------------------



In June 2004, Embratel conducted a note exchange offer of US$275 million issued in December 2003, for the purpose of aligning debt securities
with Securities and Exchange Commission  SEC. The securities issued previously were private and the new ones are public. The new notes have the same terms as the securities issued previously, mature in 2008 and carry an interest rate of 11%
per annum.



| | g. | Commercial paper
| | -- | ----------------



In November 2004, Embratel issued R$1 billion in promissory notes at 102.3% of CDI, for a period of 180 days renewable for another 180-day period, to
replace the refinancing agreement of March 2003.



| | h. | Foreign currency bank loan
| | -- | --------------------------



In the fourth quarter of 2004, Embratel obtained loans in the amount of US$165 million with one year maturities and three month Libor + 1.2% per annum
interest rates.



F-132



---

| | i. | Suppliers
| | -- | ---------



The suppliers financing is foreign currency denominated and refers to purchases of materials and equipment used to enhance domestic and
international telecommunication services.



| | j. | Guarantees
| | -- | ----------



The guarantees pledged in connection with outstanding loans and financing were substantially comprised of promissory notes, which, although not
representing actual guarantees, are legal instruments that can be executed judicially in the event of default.



The guarantees pledged to the banks participating in the debt rollover program were cancelled in the fourth quarter of 2004, due to the prepayment of the
refinanced debt.



| | k. | Credit agreement defaults
| | -- | -------------------------



Most of Embratels credit agreements include cross-default provisions and cross-acceleration provisions that would permit the holders of such
indebtedness to declare the indebtedness to be in default and to accelerate the maturity thereof if a significant portion of the principal amount of Embratels debt is in default or accelerated. As of December 31, 2004, none of the outstanding
debt was in default.



As stated in Note 1.a., on November 1,
2000, Embratel incorporated Star One to manage satellite operations, transferring the satellite rights and obligations to Star One, which became the licensee for providing these services until December 31, 2005. The credit agreements related to
these satellites include cross-acceleration provisions that would permit the lenders to accelerate the maturity thereof if the financed assets were sold or transferred to other companies. However, before incorporating Star One and transferring the
assets, Embratels management obtained from the lenders a waiver regarding the transfer of the assets to Star One, as this was a condition that could have caused an event of default. Most of the waivers conditioned to the maintenance of
Embratel as majority shareholder in Star One during the remaining term of agreements.



| | l. | Financial agreement for the construction of satellite  Star One C-1
| | -- | --------------------------------------------------------------------



On April 19, 2002, Star One entered into a financial agreement with BNP Paribas in order to finance 85% of Star One C-1
satellite construction costs and 100% of the insurance premium agreed with Coface (Compagnie Française dAssurance pour le Commerce Extérieur). The total amount was equivalent to US$122,337, with 36 months of grace
period and 14 equal and consecutive semi-annual installments, resulting in a 9.5-year contract. During the grace period, the interest rate would be the six-month Libor plus a margin of 0.75% per annum and during the repayment period, 5.96% per
annum.



F-133



---

As the original agreement of the purchase of the satellite Star One C-1 was renegotiated due to the
changes performed in the project, the price and the payment schedule were modified. Consequently, an amendment to the financing contract was signed on August 13, 2003.



This amendment was signed with BNP Paribas (leading bank) and Societé Génerale, with amounts equivalent to 85%
of the price of the satellite Star One C-1 to be delivered in orbit and 100% of the insurance premium agreed with Coface. The new total amount was US$194,172 (US$19,461 related to 100% of the credit insurance premium), with a 38-month grace period
and amortization in 14 semi-annual installments, totaling 10 years of term. During the grace period, the interest rate would be the six-month Libor plus 0.75% per annum and during the repayment period, 3.93% per annum. Income tax on remittances of
interest is due by the creditors.



On June 1, 2004, the Credit
Agreement was amended due to modifications of the satellite project and payment schedule. The amount of the credit was changed to US$185,232 (including US$18,547 of the credit insurance premium). All others conditions remained the same.



At December 31, 2004, the amount drawn totaled US$41,717.



The current agreement foresees the following guarantee clauses:



| | l.1.) | Starting July 1, 2005, the subsidiary Star One will make monthly deposits in the account Debt Service Reserve Account of the amounts in Reais equivalent to 1/12 (one
twelfth), in US dollars, of the first semi-annual installment related to principal and interest. As from the date for beginning of the amortization period, foreseen to occur in November 2006, and until the final term of the agreement, the subsidiary
Star One will keep deposited in the mentioned account the amount in Reais equivalent, in US dollars, to 115% of one semi-annual installment of the debt service;
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l.2.) | A promissory note in favor of BNP Paribas was issued, in the outstanding amount of principal and interest in US dollars. The promissory note has attributable characteristics
according to the French Laws. It is a legal instrument that can be executed judicially for the purpose of reinforcing guarantees offered to creditors, and represents a commitment to pay said amounts, in case subsidiary Star One delays the payments
contractually scheduled;
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l.3.) | In the event of unavailability of the guarantee in the above mentioned item l.1, there is the guarantee of the accounts receivable originated from the agreement signed
between Embratel and the subsidiary Star One transponder release; and
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-134



---

| | l.4.) | In the event of unavailability of guarantees l.1 and l.3, as from July 1, 2006, Embratel is responsible for making deposits to the Debt Service Reserve
Account, limited to US$122,337;
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l.5.) | During the term of the agreement, Embratel pledges to hold not less than 51% of the total voting shares of the subsidiary Star One; and
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------



| | l.6.) | Star One is bound by financial covenants to the creditor banks, on account of the renegotiated agreements, with respect to the level of indebtedness and the minimum earnings before
financial results, income taxes, depreciation and amortization (EBITDA). To date, the subsidiary Star One has complied with all covenants.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | m. | Covenants
| | -- | ---------



Embratel is bound by financial covenants to the creditor banking institutions, on account of the renegotiated agreements, involving the level of
indebtedness, minimum earnings before financial result, income taxes, depreciation and amortization (EBITDA), and limits for capital expenditures, among other requirements. At December 31, 2004, Embratel is in compliance with all such
covenants.



|23. | Financial Instruments
|--- | ---------------------



| | a. | Miscellaneous
| | -- | -------------



The Company carries out transactions with financial instrument designed to reduce the exposure to risks of fluctuation in currency and interest rates,
which usually involve swap of indices and/or earnings/interest rates of cash equivalents, marketable securities and loans. Management of these risks is concluded through a hedging policy based on the measurement of the Companys financial risk,
using the VaR (Value at Risk) Factor.



| | b. | Risk management
| | -- | ---------------



The daily market risk estimate is performed through statistical instruments such as the Value at Risk (VaR) parameter, which enables consolidation of
interest and exchange risks on a common and integrated measurement for all financing operations. In addition to the calculation of VaR, the Stress-Test methodology is also used whereby it is possible to estimate the loss in an extreme situation in a
countrys macroeconomic scenario.



F-135



---

In this sense, a system which applies this methodology has been developed named EBTaR (Embratel at Risk).
This system also validates the VaR obtained and uses the Back-Test as a historical one-year series.



| | c. | Interest rate, currency and forward currency swaps
| | -- | --------------------------------------------------



Embratel used derivative operations with banks to protect investments against foreign interest rate and currency fluctuations in comparison to the
Brazilian real, which impact the amount in local currency required for the payment of foreign currency liabilities as shown below:



|              |  |                         |  |                       |  |                      |  |                |  |                 
|------------- |  | ----------------------- |  | --------------------- |  | -------------------- |  | -------------- |  | ----------------
|              |  | As of December 31, 2004
|Classes       |  | Issue date              |  | Maturity date         |  | Notionalamount (US$) |  | Book value(R$) |  | Market value(R$)
|Exchange Swap |  | Various                 |  | 01/03/05 to 12/12/08  |  | 258,891              |  | 87,145         |  | 84,592          
|Forward       |  | 11/4/04                 |  | 01/12/05 and 03/16/05 |  | 65,000               |  | 18,189         |  | 15,138          
|              |  |                         |  |                       |  |                      |  |                |  |                 
|              |  |                         |  | Total                 |  | 323,891              |  | 105,334        |  | 99,730          
|              |  |                         |  |                       |  |                      |  |                |  |                 
|              | 
|              |  | As of December 31, 2003
|Classes       |  | Issue date              |  | Maturity date         |  | Notionalamount(US$)  |  | Book value(R$) |  | Market value(R$)
|Exchange Swap |  | Various                 |  | Various               |  | 449,982              |  | 43,809         |  | 46,616          



Losses derived from
these operations are due to the variation of indices contracted and are recorded on an accrual basis in Financial Income (Expense) in the consolidated statements of income.



| | d. | Criteria, assumptions and limitation in the market value calculations
| | -- | ---------------------------------------------------------------------



| | d.1) | Cash and cash equivalents, current accounts receivable and payable  The carrying values of financial instruments approximate their corresponding market values due to the
short-term maturities of these instruments.
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d.2) | Loans and financing and swap operations (hedge and forward)  The market value is calculated using projections of the yields associated with each instrument at the present
value, using the term structure of the interest rate and the exchange coupon, prevailing on the financial market for the current date.
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d.3) | Limitations  The market values are calculated as a specific time on the basis of available market information and data regarding the financial instruments. The changes in the
assumptions can significantly impact the estimates.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-136



---

The financial instrument recorded as assets and liabilities as of December 31, 2004, which market values
differ from their carrying values, are shown below:



|                    |  |            |  |             |  |            |  |            
|------------------- |  | ---------- |  | ----------- |  | ---------- |  | -----------
|                    |  | 2004       |  | 2003       
|                    |  | Book value |  | Marketvalue |  | Book value |  | Marketvalue
|Loans and financing |  | 3,389,646  |  | 3,180,923   |  | 4,557,077  |  | 4,910,129  



|24. | Provision for Contingencies
|--- | ---------------------------



In the normal course of business, the Company is party to legal proceedings and potential discussions, which were or may be raised by competent
Authorities, including among others, labor, social security, tax, administrative and civil issues.



A significant portion of the contingencies involve issues that are extremely complex and unique to the Company and/or the telecommunications industry,
arising from different interpretations of the laws in effect, which are not yet covered by consolidated jurisprudence.



It should also be noted that most issues resulted from procedures followed prior to the Companys privatization, based on instructions issued by
government entities at the time.



Based on the facts currently
available and on the legal advisors opinion, Companys management believes that the outcome of a significant portion of present and future claims will be favorable to the Company, and for those claims for which the unfavorable outcome is
considered probable, a provision has been recorded.



For those
claims evaluated as possible loss, a provision has not been recorded.



Part of the changes in the provision for contingencies is due to monetary and exchange variation and thus affects net financial results.



F-137



---

The amounts involved are described as follows:



|       |  |          |  |          |  |           |  |          
|------ |  | -------- |  | -------- |  | --------- |  | ---------
|       |  | Probable |  | Possible
|Nature |  | 2004     |  | 2003     |  | 2004      |  | 2003     
|Labor  |  | 88,899   |  | 29,410   |  | 71,930    |  | 38,712   
|Tax    |  | 86,650   |  |         |  | 1,946,741 |  | 1,181,635
|Civil  |  | 276,260  |  | 20,618   |  | 167,914   |  | 570,200  
|       |  |          |  |          |  |           |  |          
|Total  |  | 451,809  |  | 50,028   |  | 2,186,585 |  | 1,790,547
|       |  |          |  |          |  |           |  |          



| | 24.1. | Labor contingencies
| | ----- | -------------------



These are contingencies involving several labor claims, primarily related to salary issues such as differences in salary and benefits, overtime and
others.



| | 24.2. | Tax contingencies
| | ----- | -----------------



|                                                 |  |          |  |          |  |           |  |          
|------------------------------------------------ |  | -------- |  | -------- |  | --------- |  | ---------
|                                                 |  | Probable |  | Possible
|Nature                                           |  | 2004     |  | 2003     |  | 2004      |  | 2003     
|ICMS (a)                                         |  | 86,650   |  |         |  | 1,149,555 |  | 775,000  
|Income tax on inbound international (b)          |  |         |  |         |  | 351,635   |  | 351,635  
|INSS (National Institute of Social Security) (c) |  |         |  |         |  | 47,000    |  | 55,000   
|PIS (d)                                          |  |         |  |         |  | 159,000   |  |         
|COFINS (e)                                       |  |         |  |         |  | 236,600   |  |         
|Other (f)                                        |  |         |  |         |  | 2,951     |  |         
|                                                 |  |          |  |          |  |           |  |          
|Total                                            |  | 86,650   |  |         |  | 1,946,741 |  | 1,181,635
|                                                 |  |          |  |          |  |           |  |          

|a. | ICMS
|-- | ----



Embratel has tax contingencies due to the non-payment of ICMS on international and other services considered by Embratel as exempted or nontaxable, as well as the offset of supposedly non-deductible credits. Part of
these contingencies, amounting to R$86,650, have been assessed as probable losses and therefore a provision has been recorded. Those contingencies assessed as possible losses by the legal counsels amount to an historic amount of approximately
R$893,749 (R$539,000 as of December 31, 2003). As a result of this evaluation no provision has been recorded.



In July 2002, the subsidiary Star One was assessed in Rio de Janeiro in the amount of R$236,000, in which is required the payment of ICMS on the rental of
transponders and on broadband Internet services. In March 2004, the subsidiary Star One was assessed in the Federal District, in the amount of R$19,806 for the nonpayment of the ICMS over satellite capacity and other accessory obligations. Star
Ones management and its legal counsel evaluate the probability of loss of these assessments as possible and, thus, no provision has been recorded.



F-138



---

|b. | Income tax on inbound international income
|-- | ------------------------------------------



Based on its legal advisors opinion, Embratel believes that the foreign operating income from telecommunications services (inbound traffic) is not
subject to taxation. In connection with this matter, in late March 1999, the SRF assessed Embratel in the amount of R$287,239 for failing to pay the related income tax for the years 1996 and 1997. Embratel appealed to the Taxpayers Council and
the decision is still pending.



In June 1999, Embratel was
further assessed for the same subject related to 1998 in the amount of R$64,396.



Due to the unfavorable decision at the administrative level, a Writ of Mandamus was filed which was initially judged unfavorably to Embratel. Nevertheless, this decision was amended due to the appeal filed and the
Federal Regional Court has reached an understanding, which was favorable to Embratel. Based on the opinion of Embratels Management and legal counsel, which consider the probability of loss as possible, the amounts arising from these
assessments have not been recorded in the financial statements.



|c. | INSS (National Institute of Social Security)
|-- | --------------------------------------------



On September 5, 2001, Embratel became aware of the unfavorable decision of the Social Security Council of Appeal on a claim regarding the applicability of
Social Security charges (INSS) to certain fringe benefits, such as vacation bonus, life insurance, etc. The total historical amount of the INSS assessment was R$58,000. Having exhausted all administrative appeals, maintaining the assessment,
Embratel, immediately filed a court appeal seeking to cancel this assessment. Based on this initial appeal presented by Embratel, approximately 60% of the credit was reduced, by force of early relief granted by the Court. Later, the INSS itself
recognized part of the assessment, approximately 20% of the total, as not valid lowering the amount to R$47,000. Upon such change, the credit reduced by force of early relief granted is now R$25,000, corresponding to more than 50% of the total. The
amount of R$22,000, which was not covered by the initial appeal, is currently deposited in court, in an interest-bearing account. In view of analyses conducted internally and by Embratels legal advisors, which have identified a series of
mistakes in the INSSs claims calculations, the probability of loss was considered possible and thus, no provision has been recorded.



F-139



---

|d. | PIS
|-- | ---



In August 2001, Embratel was assessed by the Federal Revenue Agency in the total amount of R$159,000, related to the contributions to PIS before 1995, which were offset according to Complementary Law No. 7/70.



The probability of loss related to the assessment has been
reclassified from remote to possible during 2004 due to the reassessment made by Embratels legal advisors and therefore, no provision was recorded.



|e. | COFINS
|-- | ------



In August 2001, Embratel was assessed by the Federal Revenue Agency in the amount of R$342,000, related to the exemption of COFINS on the revenues generated from the export of telecommunications in 1999. Substantial
errors were detected in the calculations of during the assessment and, consequently, the amount was reduced by R$220,000. Regarding the remaining amount, Embratel appealed to a higher administrative level, therefore on July 2003, a decision was
issued, requiring the claim to be returned to the first administrative level. A new decision was issued by the first administrative level confirming that the remaining updated amount was R$236,600. Embratel appealed to a higher administrative level,
which is still pending decision.



Based on the reassessment
made by Embratels legal advisors, the chances of loss in the case of this tax assessment have been reclassified from remote to possible in 2004 and therefore, no provision has been recorded.



|f. | Other tax contingencies
|-- | -----------------------



Embratel was assessed in May 2004 by the Federal Revenue Agency for the non-withholding of the CIDE on remittances made abroad in the amount of R$2,951.



Management and its legal counsel understand that the
probability of loss is possible and, therefore, no provision has been recorded in the financial statements for the amounts involved in these claims.



|g. | Withholding income tax on remittances to foreign telecommunications companies
|-- | -----------------------------------------------------------------------------



Embratel was assessed by the Federal Revenue Agency (SRF) in the amount of R$410,697, for the non-withholding of Income Tax on payments to foreign
telecommunications companies, related to calls initiated in Brazil and completed by those companies abroad (outbound traffic), from



F-140



---

December 1994 to October 1998. In September 2002, the SRF issued a sentence reducing the assessment to
R$12,975, due to errors in the amounts presented in the assessment. In July 2004, this decision became definitive, since the remaining amounts involved in the assessment, with the legal additional, totaling R$39,462, were paid, and, recognized as
expense in the first quarter of 2003.



Embratel filed a Writ
of Mandamus seeking to obtain a pronouncement that the Melbourne Treaty has been in effect in the Brazilian legal system since 1990. In December 2004, the suit was judged extinct without any judgment on its merits, based on the extinction and
release of the aforementioned assessment.



| | 24.3. | Civil contingencies
| | ----- | -------------------



|                                   |  |          |  |          |  |         |  |        
|---------------------------------- |  | -------- |  | -------- |  | ------- |  | -------
|                                   |  | Probable |  | Possible
|Nature                             |  | 2004     |  | 2003     |  | 2004    |  | 2003   
|Disputes with local operators (a)  |  | 2,000    |  |         |  | 43,349  |  | 520,200
|Anatel and public institutions (b) |  | 8,500    |  |         |  | 63,267  |  | 50,000 
|Disputes with third parties (c)    |  | 265,760  |  | 20,618   |  | 61,298  |  |       
|                                   |  |          |  |          |  |         |  |        
|Total                              |  | 276,260  |  | 20,618   |  | 167,914 |  | 570,200
|                                   |  |          |  |          |  |         |  |        

---

|a. | Disputes with local operators
|-- | -----------------------------



In November 2004, due to the agreements executed separately by Embratel and each one of the local operators (Note 32), the parties required the
extinguishment of all legal suits and the charges which aimed the judgment against Embratel for the payment of amounts arising from interconnection contracts executed with the local operators, which totaled to a historic amount of approximately
R$520,200 at December 31, 2003.



Embratel is the defendant in
a collection lawsuit filed by an operator in November 2004. Embratel and its legal advisors believe that the chances of a partial loss of the amounts in dispute are probable and therefore recorded a provision of R$2,000. In another collection
lawsuit in the amount of R$43,349, Embratel and its legal advisors believe that the chances of loss are possible and therefore no provision has been recorded.



|b. | Contingencies related to Anatel and other public institutions
|-- | -------------------------------------------------------------



b.1. Implementation of the new domestic telephone number system



As a result of the inconveniences caused to telephone system users by the telecommunications carriers on July 3, 1999, the implementation date for the
new domestic dialing system, Embratel was officially notified by Anatel to pay a fine in the amount of R$55,000 related to the administrative proceeding related to the period during which the carriers implemented the change in the



F-141



---

dialing codes. Embratel filed a lawsuit contesting the validity of the fine and the lower court decision
was announced, lowering the amount from R$55,000 to R$50,000. At the second judicial level, Embratel prevailed, and the eventual appeals by Anatel, which have no suspensive effect, are still pending.



Based on the same facts, Embratel was cited in several lawsuits aiming
alleged inconveniences caused to users, and presented its defense in each suit. Among the existing suits with estimated amounts, Embratel is the defendant in suits filled by third parties aiming payments at historic amounts of R$2,569 which are
awaiting sentence. In another suit, the state of Rio de Janeiro has filed a tax execution in the amount of R$8,500.



In the opinion of Embratels Management and its legal counsels, the chances of loss regarding the penalty sought by Anatel and third parties have
been classified and possible and thus, have not been provisioned. In regards to the tax execution sought by the state of Rio de Janeiro, Embratel and its legal advisors have classified the chances of loss as probable and have therefore recorded a
provision of R$8,500.



b.2. Administrative Suits for
Noncompliance with Obligations (PADOs)



Due to noncompliance
with quality targets, defined by Anatel in the General Plan of Quality Targets for Fixed Telephone Services (PGMQ), Anatel filed several Administrative Procedures for Disregarding Obligation (PADO) against Embratel. In relation to the
fines of R$10,698 (January to June 2000 and October 2000), no provisions were recorded since the chances of loss were classified as possible.



|c. | Disputes with third parties
|-- | ---------------------------



Embratel was notified of the decision in an arbitration case administrated by the International Chamber of Commerce (ICC), Paris, whereby Embratel and
another company disputed credits and rights resulting from Embratel contractual infringements. Since the arbitration decision ruled in favor of part of the claims of the other company, which resulted in the payment of indemnities, Embratel recorded
a provision of an updated amount of R$22,798 (R$14,118 as of December 31, 2003).



Embratel filed lawsuits, aiming at the annulment of charges from third parties. In such lawsuits, with one exception, which charges have been suspended, Embratel deposited in court the amounts disputed and other
damages awarded. These deposits totaled R$19,383. In the opinion of Embratels Management, the chances of loss are probable and a provision in the total amount of R$45,116 has been recorded.



CT Torres Ltda. is the plaintiff of two Writs of Mandamus, entered into on
June 29, 2001, in the city of São Paulo for the purpose of assuring the right



F-142



---

of the subsidiary to maintain telephone towers installed in two different locations in the city, due to
discrepancies in the interpretation of the municipal legislation regarding Construction and Working Permits specifically for both locations.



In the opinion of the management of CT Torres Ltda. and its legal counsels on this matter, the chances of loss are probable in these cases and a provision
in the amount of R$375 has been provisioned.



CT Torres Ltda.
is a defendant in three public civil actions totaling R$4,445, filed by the Public Prosecutor Offices of the States of São Paulo, Ceará and Rio Grande do Norte. The purpose of those public civil actions is the regularization of the
telephone towers installed in the capitals of these states, due to divergences related to the interpretation of the legislation applied by the Municipalities for the analysis and approval of the process to obtain Construction and Work permits. In
the opinion of the Management of CT Torres Ltda. and its legal counsels the chances of loss in these cases are possible, and therefore, no provision has been recorded.



Due to the increased number of unfavorable decisions, agreements reached, and, considering the assessment of its legal
advisors, Embratel recorded a provision for legal disputes with customers and other legal suits, which losses were classified as probable, amounting to R$27,011. The suits in which losses were classified as possible amount to R$42,053 and no
provision has been recorded.



Embratel and/or other operators
are co-defendants in several suits seeking indemnifications for alleged pain and suffering and pecuniary damages arising from the collection procedures for services rendered by the subsidiary.



In one Public Civil Suit, in which the plaintiff is the Federal
Attorneys Office, Embratels management and its legal advisors classified the chances of loss as probable and have thus, recorded a provision in the amount of R$5,500.



In the other condemnatory suits of several natures and considering the advanced stage of the referenced suits, as well as
the arguments presented by its legal counsels, Embratel believes that the chances of loss in some of the suits are probable, and have therefore recorded a provision of an updated amount of R$164,960 (R$6,500 as of December 31, 2003). In other suits
classified as possible, in the amount of R$14,800, R$10,835 has been deposited in court.



Embratel and other operators are involved in several class action suits filed by the Federal Attorneys Office and/or States and Associations involving



F-143



---

issues related to the compensation of pain and suffering and pecuniary damages allegedly caused to
consumers. In the understanding of the Management of Embratel and its legal advisors, the chances of loss are probable or possible; however the amounts of any damages awarded are not yet measurable, and therefore, no provisions have been recorded.



|25. | Actuarial Liabilities - Telos
|--- | -----------------------------



Embratel and Star One sponsors a defined contribution plan, a defined benefit plan and a post-retirement medical assistance plan, all managed by the
Fundação Embratel de Seguridade Social (Telos). Telos, a closed private pension fund, is a legal entity under private law, with the objective of providing pensions, assistance and non-profit activities, with
administrative and financial independence, based in Rio de Janeiro. Embratel founded it on August 1, 1975.



The rate of contribution for the defined benefits plan for 2004, 2003 and 2002 was 19.8% of the salary of the active participants in this plan (8
participants on December 31, 2003).



After the privatization,
Embratel introduced a defined contributions plan through Telos, which was reviewed and approved by the Brazilian Federal Government on November 19, 1998. The subsidiary Star One also became a sponsor effective November 1, 2000. All newly hired
employees automatically adhere to the new plan and no further admittance to the defined benefits plan is allowed. For the defined contributions plan, the sponsors contribution ranges from 3% to 8% of the participants salary, in addition
to the extraordinary contribution, provided in the plans by-laws, for financing administrative expenses, and the balance of the account intended to cover cases of disability and death of the participant in activity.



Contributions to the defined benefit and post-retirement medical assistance
plans are based on actuarial studies prepared by independent actuaries under Brazilian regulations. The actuarial studies are revised periodically to identify whether adjustments to the contributions are necessary.



On September 1, 1999, a statement of recognition, acknowledgement of debt,
acceptance and amortization of actuarial insufficiency was signed between Embratel and Telos, and approved by the Brazilian pensions regulatory authority (Secretaria de Previdência Complementar). In accordance with this statement,
the actuarial insufficiency recognized in favor of Telos will be paid over the next 20 years, based on the monthly flow of benefits to the employees covered by the defined contribution plan. The unamortized balance of the liability is increased
monthly at the rate of remuneration of Telos assets in the month as to which they refer or the actuarial goal, whichever higher. As of December 31, 2004, the outstanding balance payable to Telos amounts to R$174,086 (R$154,429 as of December 31,
2003).



F-144



---

The above mentioned previdenciary pension and medical health care plans sponsored by Embratel and the
subsidiary Star One are the only post-employment benefits granted to employees.



Upon the issuance of CVM Deliberation No. 371, on December 13, 2000, which approved the IBRACON pronouncement on accounting for employee benefits, new accounting guidelines for recording and disclosure of the effects
arising from employee benefit plans were instituted and presented in the sponsors financial statements.



Consequently, on December 31, 2001, Embratel recorded an additional liability in the amount of R$193,424 against shareholders equity in the form of
a prior year adjustment. As of December 31, 2004, that liability amounted to R$265,020 (R$238,816 as of December 31, 2003).



Reconciliation of Assets and Liabilities as of December 31, 2004:



|                                                                                     |  |                           |      |  |                               |      |  |                                 |  
|------------------------------------------------------------------------------------ |  | ------------------------- | ---- |  | ----------------------------- | ---- |  | ------------------------------- | -
|                                                                                     |  | DefinedBenefit Plan (DBP) |      |  | DefinedContributionPlan (DCP) |      |  | Medical Health care Plan (MHCP) |  
|Actuarial liabilities  present value                                                |  | (1,099,044                | )    |  | (1,416,364                    | )    |  | (368,225                        | )
|Fair value of the plan assets                                                        |  | 1,174,458                 |      |  | 1,388,211                     |      |  | 58,443                          |  
|                                                                                     |  |                           |      |  |                               |      |  |                                 |  
|Present value of liabilities in excess of assets in excess of liabilities and assets |  | 75,414                    |      |  | (28,153                       | )    |  | (309,782                        | )
|Actuarial (gains) or losses unrecognized                                             |  | (5,742                    | )    |  | (22,167                       | )(2) |  | 44,762                          |  
|Actuarial assets unrecognized by Embratel                                            |  | (69,672                   | )(1) |  | (123,766                      | )(3) |  |                                |  
|                                                                                     |  |                           |      |  |                               |      |  |                                 |  
|Net actuarial liabilities                                                            |  |                          |      |  | (174,086                      | )    |  | (265,020                        | )
|                                                                                     |  |                           |      |  |                               |      |  |                                 |  

---

|(1) | Unrecorded actuarial assets owed mainly to the following reasons: (a) no forecast to reduce the future contributions; and (b) there are no indications that assure that this surplus
will be maintained over the next few years.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This mainly refers to profits computed on the nonpayment of interest and fines on income tax for the January 1, 1997 to August 31, 2001 period according to that provided by
Normative Instruction No. 126 of the Federal Revenue Agency (SRF), of January 25, 2002, and Provisional Measure No. 2.222, of September 4, 2001. Said profits are being deferred in compliance with paragraphs 53 and 54 of CVM Deliberation No. 371,
issued on December 13, 2000.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Unrecorded actuarial assets owed to the agreement signed on September 1, 1999 (Acknowledgement, acceptance and amortization of the actuarial deficit Term). According to this
agreement, the subsidiary Embratel commits to paying the stipulated amount within a maximum term of 20 years without review forecast of the liability in the event of the reduction of the actuarial deficit in the future.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-145



---

Main actuarial assumptions for 2004 and 2003 used at balance sheet date:



| | a. | Economic assumptions:
| | -- | ---------------------



|      |  |                                                                |  |                                                                                         
|----- |  | -------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|(i)   |  | Discount rate for present value of actuarial liabilities       |  | Inflation + 6.0% p.a. = 11.3% p.a.                                                      
|(ii)  |  | Expected rate of returns on plan assets                        |  | Inflation + 6.0% p.a. = 11.3% p.a.                                                      
|(iii) |  | Average salary increases, INSS benefit growth and plan benefit |  | Inflation + 0.0% p.a. = 5.0% p.a. (DBP and MHCP) Inflation + 2.0% p.a. = 7,1% p.a. (DCP)
|(iv)  |  | Long term annual inflation rate                                |  | 5.0% p.a.                                                                               
|(v)   |  | Wage and benefits capacity                                     |  | 0.98(1)                                                                                 
|(vi)  |  | Health care cost trend rate                                    |  | Inflation + 4.0% p.a. = 9.2% p.a.                                                       
|      |  |                                                               



| | (1) | The capacity factor serves the purpose of reflecting the lag of the monetary values shown on the date of the study, taking into consideration the timing and indices used for the
recover of inflationary losses.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Other assumptions:
| | -- | ------------------



|      |  |                                       |  |                              
|----- |  | ------------------------------------- |  | -----------------------------
|(i)   |  | Table of general mortality rate       |  | UP-94 with 2 year peaks      
|(ii)  |  | Table of mortality rate of disability |  | IAPB-57                      
|(iii) |  | Table of entry into disability        |  | Mercer disability onset chart
|(iv)  |  | Turnover                              |  | Not used (DBP and MHCP)      



Statement of changes
in actuarial liabilities:



|                                                                                              |  |         |   |  |         |   |  |         |  
|--------------------------------------------------------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                                                                              |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Beginning balance                                                                             |  | 393,245 |   |  | 402,955 |   |  | 419,849 |  
|Plus  Interest and updating of actuarial obligations                                         |  | 90,447  |   |  | 33,924  |   |  | 58,548  |  
|Plus - Actuarial liabilities arising from CVM Deliberation No. 371 (medical health care plan) |  | 26,207  |   |  | 24,959  |   |  |        |  
|Debt surplus  January to April 2003 - Voluntary Dismissal Program                            |  |        |   |  | 15,413  |   |  |        |  
|Payment of debt surplus  January to April 2003  PDI                                         |  | (15,683 | ) |  |        |   |  |        |  
|Monetary restatement of debt surplus  January to April 2003  PDI                            |  | 270     |   |  |        |   |  |        |  
|Less  Payments made during the year                                                          |  | (55,380 | ) |  | (84,006 | ) |  | (75,442 | )
|                                                                                              |  |         |   |  |         |   |  |         |  
|Actuarial liabilities                                                                         |  | 439,106 |   |  | 393,245 |   |  | 402,955 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Current                                                                                       |  | 68,342  |   |  | 64,442  |   |  | 63,973  |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Non-current                                                                                   |  | 370,764 |   |  | 328,803 |   |  | 338,982 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Actuarial liabilities breakdown:                                                              |  |         |   |  |         |   |  |         |  
|                                                                                              |  |         |  
|Defined contributions plan (unsecured liabilities)                                            |  | 174,086 |   |  | 154,429 |   |  | 189,098 |  
|Medical assistance plan                                                                       |  | 265,020 |   |  | 238,816 |   |  | 213,857 |  
|                                                                                              |  |         |   |  |         |   |  |         |  
|Total                                                                                         |  | 439,106 |   |  | 393,245 |   |  | 402,955 |  
|                                                                                              |  |         |   |  |         |   |  |         |  





F-146



---

|26. | Transactions with Related Parties
|--- | ---------------------------------



Transactions with related parties are conducted according to conditions and terms similar to market conditions, and the most important balances and values
are shown below:



|                                           |  |                    |  |       
|------------------------------------------ |  | ------------------ |  | ------
|                                           |  | As of December 31,
|                                           |  | 2004               |  | 2003  
|ASSETS:                                    |  |                    |  |       
|Current                                    |  |                    |  |       
|Accounts receivable (telephone traffic)    |  |                    |  |       
|Techtel                                    |  | 137                |  |      
|Telmex  Brazil                            |  | 2,359              |  |      
|BSE                                        |  | 942                |  |      
|ATL                                        |  | 3,851              |  |      
|Stemar                                     |  | 83                 |  |      
|BCP                                        |  | 720                |  |      
|Tess                                       |  | 562                |  |      
|Telet                                      |  | 1,199              |  |      
|Albra                                      |  | 7                  |  |      
|Americel                                   |  | 369                |  |      
|Foreign administrators (telephone traffic) |  |                    |  |       
|Telmex - México                            |  | 2,254              |  |      
|Telmex  Chile                             |  | 133                |  |      
|Telmex  Argentina                         |  | 389                |  |      
|MCI(1)                                     |  |                   |  | 64,390
|Other                                      |  |                   |  | 927   
|Related parties                            |  |                    |  |       
|Vésper                                     |  | 138,138            |  | 10,935
|Embrapar                                   |  |                   |  | 6,703 
|Other current assets                       |  |                    |  |       
|Stemar                                     |  | 223                |  |      
|Telmex  Brazil(2)                         |  | 565                |  |      
|Noncurrent receivables                     |  |                    |  |       
|Mutual  Embrapar(3)                       |  | 49,254             |  |      





F-147



---

|                                                 |  |                    |  |       
|------------------------------------------------ |  | ------------------ |  | ------
|                                                 |  | As of December 31,
|                                                 |  | 2004               |  | 2003  
|LIABILITIES:                                     |  |                    |  |       
|Current                                          |  |                    |  |       
|Account payable (telephone traffic)              |  |                    |  |       
|Telmex  Brazil                                  |  | 1,180              |  |      
|Telet                                            |  | 2,874              |  |      
|Americel                                         |  | 6,478              |  |      
|Tess                                             |  | 6,124              |  |      
|Algar                                            |  | 7,784              |  |      
|BCP                                              |  | 9,774              |  |      
|BSE                                              |  | 5,251              |  |      
|Stemar                                           |  | 2,785              |  |      
|Albra                                            |  | 1,773              |  |      
|Techtel                                          |  | 6                  |  |       
|ATL                                              |  | 112                |  |      
|Foreign administrators (telephone traffic)       |  |                    |  |       
|Telmex  México                                  |  | 1,654              |  |      
|Telmex  Chile                                   |  | 255                |  |      
|Telmex  Argentina                               |  | 319                |  |      
|MCI(1)                                           |  |                   |  | 42,519
|Proceda                                          |  |                   |  | 158   
|Other telecom companies                          |  |                   |  | 2,553 
|Related parties                                  |  |                    |  |       
|Vésper                                           |  | 5,240              |  | 1,265 
|MCI  Administration fee(1)                      |  |                   |  | 6,851 
|MCI  Others accounts payable(1)                 |  |                   |  | 5,143 
|Loans  Inbursa(1)                               |  | 133,401            |  |      
|Dividends payable  Embratel Participações S. A. |  |                   |  | 85,754



F-148



---

|                          |  |         |   |  |         |  |        
|------------------------- |  | ------- | - |  | ------- |  | -------
|                          |  | 2004    |   |  | 2003    |  | 2002   
|INCOME STATEMENT:         |  |         |   |  |         |  |        
|Net operating revenue -   |  |         |   |  |         |  |        
|Domestic traffic          |  |         |   |  |         |  |        
|Telmex - Brazil           |  | 14,013  |   |  |        |  |       
|BSE                       |  | 4,326   |   |  |        |  |       
|ATL                       |  | 20,514  |   |  |        |  |       
|Stemar                    |  | 1,789   |   |  |        |  |       
|BCP                       |  | 5,192   |   |  |        |  |       
|Tess                      |  | 7,770   |   |  |        |  |       
|Telet                     |  | 10,648  |   |  |        |  |       
|Albra                     |  | 6,213   |   |  |        |  |       
|Americel                  |  | 14,300  |   |  |        |  |       
|International traffic     |  |         |   |  |         |  |        
|MCI(1)                    |  |        |   |  | 132,782 |  | 128,760
|Telmex  México           |  | 1,770   |   |  |        |  |       
|Telmex  Chile            |  | 137     |   |  |        |  |       
|Telmex  Argentina        |  | 432     |   |  |        |  |       
|Techtel                   |  | 51      |   |  |        |  |       
|Others                    |  |        |   |  | 971     |  |       
|Towers rental             |  |         |   |  |         |  |        
|Vésper                    |  | 18,740  |   |  |        |  |       
|                          |  |         |  
|Cost of services provided |  |         |   |  |         |  |        
|Domestic traffic          |  |         |   |  |         |  |        
|Telmex  Brazil           |  | (3,479  | ) |  |        |  |       
|Albra                     |  | (4,524  | ) |  |        |  |       
|Algar                     |  | (23,108 | ) |  |        |  |       
|Americel                  |  | (15,773 | ) |  |        |  |       
|BCP                       |  | (38,725 | ) |  |        |  |       
|BSE                       |  | (14,599 | ) |  |        |  |       
|Stemar                    |  | (4,722  | ) |  |        |  |       
|Telet                     |  | (12,207 | ) |  |        |  |       
|Tess                      |  | (17,918 | ) |  |        |  |       





F-149



---

|                                                        |  |        |   |  |         |   |  |         |  
|------------------------------------------------------- |  | ------ | - |  | ------- | - |  | ------- | -
|                                                        |  | 2004   |   |  | 2003    |   |  | 2002    |  
|International traffic                                   |  |        |   |  |         |   |  |         |  
|MCI(1)                                                  |  |       |   |  | (68,953 | ) |  | (85,623 | )
|Telmex  México                                         |  | (1,079 | ) |  |        |   |  |        |  
|Telmex  Chile                                          |  | (261   | ) |  |        |   |  |        |  
|Telmex  Argentina                                      |  | (254   | ) |  |        |   |  |        |  
|Techtel                                                 |  | (140   | ) |  |        |   |  |        |  
|Others                                                  |  |       |   |  | (823    | ) |  | (4,591  | )
|General and administrative expenses- Management fee MCI |  |       |   |  | (14,024 | ) |  | (36,232 | )
|MCI(1)                                                  |  |       |   |  | (297    | ) |  |        |  
|Proceda(1)                                              |  |       |   |  | (9,961  | ) |  |         |  
|ATL                                                     |  | (112   | ) |  |        |   |  |        |  
|                                                        |  |        |  
|Others Operational Income                               |  |        |   |  |         |   |  |         |  
|Sales of telephonic devices Handsets - Vésper         |  | 62,804 |   |  |        |   |  |        |  
|                                                        |  |        |  
|Financial                                               |  |        |   |  |         |   |  |         |  
|Exchange variation on the administration fee  MCI(1)   |  |       |   |  | (1,100  | ) |  | (18,395 | )
|Interest on loan  Embrapar(3)                          |  | 654    |   |  |        |   |  |        |  
|Interest on borrowings  Inbursa Bank(4)                |  | (681   | ) |  |        |   |  |        |  

---

|(1) | In July 2004, the disposal of the shareholding interest of MCI in Embrapar was concluded (Note 1).
|--- | --------------------------------------------------------------------------------------------------

|(2) | Interest rate: SELIC  Special System for Settlement and Custody
|--- | ----------------------------------------------------------------

Maturity of principal: January 30, 2005

|(3) | Interest rate: 100% CDI
|--- | -----------------------

Maturity of principal: March 29,
2005

Guarantee: promissory note

|(4) | Interest rate: libor 3 months + spread de 1.2%
|--- | ----------------------------------------------

Maturity
of principal: November 11, 2005

Guarantee: promissory note



F-150



---

|27. | Insurance (Unaudited)
|--- | ---------------------



The Companys Management considers that all assets and responsibilities of significant values and risks are covered by insurance policies.



| | a. | Embratel
| | -- | --------



As of December 31, 2004, Embratel had Operating Risk type insurance policies for the total risk amount of R$10,802,107, and maximum indemnity limit equal
to R$878,807, including owned equipment and that of third parties housed on its premises and including coverage for loss of profits. The assets and liabilities and material risks are covered by insurance in accordance with the concession contracts.



| | b. | Star One
| | -- | --------



All Earth Station Equipment is insured at its approximate replacement values. The insurance of the satellite in orbit B1 was in effect through September
30, 2004, and was not renewed after this date. The insurance of the satellites B2, B3 and B4 was renewed through April 30, June 30, and August 16, 2005, respectively. The following table shows the amounts insured and the net book value of the
satellites at December 31, 2004 (in local currency equivalent to the US dollar amount insured at December 31, 2004):



|          |  |                            |  |               
|--------- |  | -------------------------- |  | --------------
|Satellite |  | Average amount insured (*) |  | Net book value
|B2        |  | 17,373                     |  |              
|B3        |  | 142,448                    |  |              
|B4        |  | 252,757                    |  | 49,838        

| | (*) | December 31, 2004 = US$1.00 = R$2.6544
| | --- | --------------------------------------



|28. | Shareholders Equity
|--- | --------------------



| | a. | Capital stock
| | -- | -------------



The authorized capital as of December 31, 2004 and 2003 corresponds to 10 billion common shares. The subscribed and fully paid-in capital stock as of
December 31, 2004 and 2003, amounts to R$2,700,000, comprised of 4,723,844 thousand common shares, without par value. The book value per share (per thousand share lot), expressed in reais as of December 31, 2004, amounts to R$1,003.63
(R$1,042.37 as of December 31, 2003).



F-151



---

The Companys shareholders are as follows:



|         |  |                   |  |       
|-------- |  | ----------------- |  | ------
|         |  | Quantity ofshares |  | %     
|Embrapar |  | 4,665,874,845     |  | 98.77 
|Others   |  | 57,969,002        |  | 1.23  
|         |  |                   |  |       
|Total    |  | 4,723,843,847     |  | 100.00
|         |  |                   |  |       



| | b. | Revenue reserves
| | -- | ----------------



| | b.1) | Legal reserve
| | ---- | -------------



The constitution of this reserve is mandatory based on 5% of net annual income up to the limit of 20% of the paid-up capital, or 30% of the capital stock
taken together with capital reserves. After this limit, no further appropriation of this reserve is mandatory. The legal reserve may only be used for future capital increase or to offset accumulated losses.



| | b.2) | Reserve for investments
| | ---- | -----------------------



As of December 31, 2004, the accumulated losses were absorbed by the investment reserve.



On December 31, 2003, in order to meet the permanent investment plans provided for in the formal, approved budgets by the
Companys Boards, according to that provided in article 196 of the Corporation Law and article 8 of CVM Instruction No. 59 issued in December 1986, Embratel established an Investment Reserve for adjusted net profits remaining from the period in
the amount of R$135,208 and transferred to this reserve the remaining retained profit balances in the amount of R$781,120.



| | c. | Capital reserve  interest on construction in progress
| | -- | ------------------------------------------------------



Until 1998, in accordance with Ordinances No. 21 of February 21, 1994, and No. 03 of February 25, 1994, Embratel recognized interest on construction in
progress at the rate of 12% per annum on the capital invested in such construction. This interest was added to the cost of construction, and credited to the non-operating revenue, up to the limit of financial charges on third parties capital
that financing the construction. The excess of the 12% over the total financial charges, if any, was credited to capital reserves.



F-152



---

| | d. | Dividends and interest on capital
| | -- | ---------------------------------



According to the Companys by-laws, dividends must be distributed for each fiscal year ended December 31. These dividends must be at least 25% of the
adjusted net income. Dividends are calculated according to the Companys by-laws and in accordance with Brazilian corporate law. The proposed dividends are appropriated at year-end.



In December 2004, Embratel presented adjusted loss for dividends distribution purposes.



As of December 31, 2004, Embratel recorded R$57,227 of interest on capital
receivable and R$93,024 of dividends receivable, credited by the subsidiary Star One. Therefore, the subsidiary Star Ones retained earnings were fully distributed to its shareholders.



For the year ended December 31, 2002, the Companys adjusted result,
the basis for distribution of dividends, was negative.



| | e. | Retained Earnings
| | -- | -----------------



In order to provide for permanent investment plans, duly documented in budgetary appraisals approved by management, as foreseen in Article 196 of the
Corporate Law and in Article 8 of CVM Instruction No. 59, of December 22, 1986, Embratel set up a reserve for investments with the adjusted net income remaining from 2003, of R$135,208. The outstanding balance of retained earnings, in the amount of
R$781,120, is also being transferred to this reserve, and has the same purpose as adopted up to the year ended December 31, 2002. The proposal by the Companys management will be deliberated in the General Shareholders Meeting. As mentioned at
b.2 above, on December 31, 2004, the amount of R$185,071 were absorbed by the investment reserve.



| | f. | Allocation of adjusted net income
| | -- | ---------------------------------



Breakdown of adjusted net income as of December 31, 2003:



|                                                                     |  |         |  
|-------------------------------------------------------------------- |  | ------- | -
|Net income for the year                                              |  | 233,715 |  
|Constitution of legal reserve                                        |  | (11,687 | )
|                                                                     |  |         |  
|Adjusted net income basis for calculation of dividends              |  | 222,028 |  
|Dividends                                                            |  | (86,820 | )
|                                                                     |  |         |  
|Remaining Adjusted net income transferred to reserve for investments |  | 135,208 |  
|                                                                     |  |         |  



F-153



---

|29. | Directors Fees
|--- | ---------------



During the years 2004, 2003 and 2002, directors fees in the amount of R$38,145, R$25,821 and R$10,846, respectively, were classified under the
heading of Operating Expenses.



|30. | Commitments with Anatel (Unaudited)
|--- | -----------------------------------



The table below shows the main indicators of commitments in connection with the Universal Goals General Plan (UGGP) and Quality Goals General Plan (QGGP)
related to the concession for rendering domestic long-distance (DLD) and international long-distance (ILD) services of Embratel.



|                                                                                                                                                                          |  |                               |   |  |                                   |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------- | - |  | --------------------------------- | -
|Indicator                                                                                                                                                                 |  | Situation onDecember 31, 2004 |   |  | Goalestablished byAnatel for 2005 |  
|Rates of international long distance calls completed in each peak period for conventional switching telephone services (target in 2004:
70%)                              |  |                               |   |  |                                   |  
|Morning                                                                                                                                                                   |  | 68.4                          | % |  | 70.0                              | %
|Daytime                                                                                                                                                                   |  | 68.8                          | % |  | 70.0                              | %
|Nighttime                                                                                                                                                                 |  | 62.5                          | % |  | 70.0                              | %
|Rates of domestic long distance calls completed in each peak period for conventional switching telephone services (target in 2004:
70%)                                   |  |                               |   |  |                                   |  
|Morning                                                                                                                                                                   |  | 69.1                          | % |  | 70.0                              | %
|Daytime                                                                                                                                                                   |  | 69.2                          | % |  | 70.0                              | %
|Nighttime                                                                                                                                                                 |  | 68.4                          | % |  | 70.0                              | %
|Rates of calls completed to telephone answering services of up to 10 seconds per peak period for greatest conventional switching telephone
serviced (target in 2004: 94%) |  |                               |   |  |                                   |  
|Morning                                                                                                                                                                   |  | 97.0                          | % |  | 94.0                              | %
|Daytime                                                                                                                                                                   |  | 96.9                          | % |  | 94.0                              | %
|Nighttime                                                                                                                                                                 |  | 97.0                          | % |  | 94.0                              | %
|Requests for public use telephone repairs per 100 telephones in service (target in 2004:10)                                                                               |  | 9                             |   |  | 10                                |  
|Number of accounts with complaints of errors in each 1000 (target in 2004: 2)                                                                                             |  | 0.3                           |   |  | 2                                 |  
|Number of Telephones in public use (TUP) in service                                                                                                                       |  | 1,400                         |   |  | (*)                               |  

---

|(*) | There is no regulation, one target established for the indicator.
|--- | -----------------------------------------------------------------

All data shown above can be found in the Anatel site.



F-154



---

|31. | Voluntary Dismissal Program
|--- | ---------------------------



Embratel completed, in the first half of January 2003, a Temporary Dismissal Program (the Program), which granted financial assistance and
social incentives. The Program, initiated in December 2002, was designed for employees who were already retired through the INSS and those who were entitled to retire, proportionally or fully, through the INSS or the employee pension plan (Telos).
In order to implement this Program, Embratel set up a provision in December 2002 in the approximate amount of R$20,000.



|32. | Agreement with Operators
|--- | ------------------------



In November 2004, Embratel formalized an agreement with the operators of the Telemar and Brasil Telecom groups to settle administrative, legal and
business disputes arising among the parties over the past several years, establishing guidelines and commitments that will govern their relationships as from that date. As a result, a gain of approximately R$12 million was recorded in the
consolidated statement of income for the year ended December 31, 2004, net of taxes, as: trade accounts receivable, allowance for doubtful accounts, deferred and recoverable taxes, judicial deposits and other current assets, property, plant and
equipment, accounts payable and accrued expenses, taxes and contributions, other liabilities, deferred income, bad debt expenses, other non operating income (expenses) and income tax and social contribution expenses. Embratels Management
believes that this agreement will enable a better operating relationship with the referenced companies due to the fact that it sets forth clearer regulations that can lead to a solution of pending matters and prevent future disputes among the
parties as well as bring about an enhanced ability to assess business among the parties.



|33. | Subsequent Events
|--- | -----------------



| | a. | Notes
| | -- | -----



On April 27, 2005, Embratel prepaid 35% of US$275 million of Notes issued in December 2003, which have maturity in 2008.



| | b. | Commercial paper
| | -- | ----------------



On May 19, 2005, Embratel prepaid the commercial paper in full, amounting to R$1 billion, with a portion of the proceeds from our capital increase.



F-155



---

|34. | Summary of the Differences between Accounting Practices in Accordance with BR GAAP and U.S. GAAP
|--- | ------------------------------------------------------------------------------------------------



As described in Note 2a, the consolidated financial statements are prepared in accordance with accounting practices
generally adopted in Brazil. These accounting practices are established by the Brazilian corporate law, instructions applicable to telecommunications concessionaires and rules and accounting procedures established by the Brazilian Securities and
Exchange Commission (CVM - Comissão de Valores Mobiliários). Accounting policies that differ from accounting principles generally accepted in the United States of America (U.S. GAAP) are described below:



| | a. | Capitalization of interest cost
| | -- | -------------------------------



Until December 31, 1993, under BR GAAP, interest was capitalized separately and amortized over a period different from the useful lives of the related
assets. Also, until December 31, 1998, under BR GAAP as applied to companies in the telecommunications industry, interest attributable to construction in progress was computed at the rate of 12% per annum on the balance of construction in progress.
The capitalized part, which related to interest on third-party loans, was credited to interest expense based on actual interest costs and the balance related to the Companys own capital was credited to capital reserves. As from January 1,
1999, interest charges and monetary and foreign exchange variation from financing linked to construction in progress are capitalized to the balance of the assets and credited to interest expense and monetary and foreign exchange variation.



Under U.S. GAAP, in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 34, Capitalization of Interest Costs, interest incurred on borrowings is capitalized as part of the cost of certain assets to the extent that borrowings do not exceed construction in
progress. The credit is recorded as a reduction of interest expense. The amount of interest capitalized excludes foreign exchange gains and losses on foreign currency borrowings.



During 2003 and 2002, the Company did not have any financings directly linked to fixed assets and consequently, no interest
was capitalized under BR GAAP. During all years presented, amortization under BR GAAP is higher than that under U.S. GAAP because, prior to 1999, a significant portion of interest capitalized under BR GAAP related to amounts credited to capital
reserves that were not capitalized for U.S. GAAP purposes. In 2004, interest was capitalized under BR GAAP on Star Ones books.



F-156



---

The effects of these different criteria for capitalizing and amortizing capitalized interest are
presented below:



|                                                 |  |         |   |  |         |   |  |          |  
|------------------------------------------------ |  | ------- | - |  | ------- | - |  | -------- | -
|                                                 |  | 2004    |   |  | 2003    |   |  | 2002     |  
|Capitalized interest difference-                 |  |         |   |  |         |   |  |          |  
|U.S. GAAP capitalized interest-                  |  |         |   |  |         |   |  |          |  
|Interest capitalized during the year             |  | 15,528  |   |  | 27,202  |   |  | 99,497   |  
|U.S. GAAP difference in accumulated              |  |         |   |  |         |   |  |          |  
|Capitalized interest on disposals                |  | 8,354   |   |  | 2,212   |   |  | 8,583    |  
|                                                 |  |         |   |  |         |   |  |          |  
|                                                 |  | 23,882  |   |  | 29,414  |   |  | 108,080  |  
|                                                 |  |         |   |  |         |   |  |          |  
|Less: BR GAAP capitalized interest-              |  |         |   |  |         |   |  |          |  
|Interest capitalized during the period           |  | (2,954  | ) |  |        |   |  | (6,350   | )
|                                                 |  |         |   |  |         |   |  |          |  
|U.S. GAAP adjustment                             |  | 20,928  |   |  | 29,414  |   |  | 101,730  |  
|                                                 |  |         |   |  |         |   |  |          |  
|Amortization of capitalized interest difference- |  |         |   |  |         |   |  |          |  
|Amortization under BR GAAP                       |  | 59,704  |   |  | 136,239 |   |  | 139,685  |  
|                                                 |  |         |   |  |         |   |  |          |  
|Less: amortization under U.S. GAAP               |  | (51,391 | ) |  | (95,064 | ) |  | (128,380 | )
|U.S. GAAP difference in accumulated              |  |         |   |  |         |   |  |          |  
|Amortization on disposals                        |  | (3,564  | ) |  | (1,241  | ) |  | (8,113   | )
|                                                 |  |         |   |  |         |   |  |          |  
|                                                 |  | (54,955 | ) |  | (96,305 | ) |  | (136,493 | )
|                                                 |  |         |   |  |         |   |  |          |  
|U.S. GAAP adjustment                             |  | 4,749   |   |  | 39,934  |   |  | 3,192    |  
|                                                 |  |         |   |  |         |   |  |          |  



| | b. | Monetary correction of 1996 and 1997
| | -- | ------------------------------------



Under BR GAAP, the Company discontinued accounting for the effects of inflation as of December 31, 1995. As of January 1, 1996, the carrying value of all
non-monetary assets and liabilities became their historical cost basis. Under U.S. GAAP, Brazil was still considered to be a highly inflationary economy until July 1, 1997 and, based on discussions at the meeting of the International Task Force of
the AICPA, the Company continued to record the effects of inflation using the IGP index up to 1997.



The U.S. GAAP adjustment represents the amortization of the restatement of fixed assets, which resulted from the inflation accounting to income applied
during 1996 and 1997.



F-157



---

| | c. | Pension and other post-retirement benefits
| | -- | ------------------------------------------



Under BR GAAP, the Company provides for the costs of pensions and other post-retirement benefits based on a fixed percentage of remuneration, as
recommended annually by Telos actuaries and certified by independent actuaries. For purposes of the U.S. GAAP reconciliation, the provisions of SFAS No. 87, Employers Accounting for Pensions, and SFAS No. 106,
Employers Accounting for Post-retirement Benefits Other than Pensions, have been applied. The provisions of SFAS No. 87 were applied with effect from January 1, 1991 because it was not feasible to apply them from the effective date
specified in the standard. As a result, R$73,743 of the transition liability was transferred directly to shareholders equity at the implementation date.



Under BR GAAP, the Company adopted CVM Deliberation No. 371 during the year ended December 31, 2001 and recorded as an adjustment to the opening
shareholders equity an amount of R$193,424 (Note 25). This adjustment was reversed for U.S. GAAP purposes, since all effects of Pension and Other Post-retirement Benefits have already been recognized after applying SFAS Nos. 87 and 106.



As fully described in Note 25, for BR GAAP purposes, the
recognition of other post-retirement benefit obligations was required since December 2001. Under U.S. GAAP, this pension and other post-retirement benefit obligations have been recorded as of January 1, 1991, resulting in a reconciling item for the
unrecognized net actuarial gains and losses. See Notes 34.r. and 35.b.



| | d. | Items posted directly to shareholders equity accounts
| | -- | ------------------------------------------------------



Under BR GAAP, certain items are posted directly to shareholders equity accounts, which under U.S. GAAP, are posted to the income statement.
Examples include capitalized interest, donations and grants and fiscal incentive investment credits received. The posting of such items to shareholders equity in the subsidiary companies gives rise to consolidation adjustments in the
consolidated statements of changes in shareholders equity. Since the original postings by the subsidiaries to their equity accounts would, under U.S. GAAP, be made directly to the income statement, these consolidation adjustments are included
in the reconciliation of net income in accordance with U.S. GAAP.



| | e. | Earnings per share
| | -- | ------------------



Under BR GAAP, net income per share is calculated on the number of shares outstanding at the balance sheet date.



Under U.S. GAAP the Company calculates earnings per share in accordance with
SFAS No. 128, Earnings Per Share. Basic earnings per share is calculated by dividing net earnings available to common shares by average common shares



F-158



---

outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive
effect of common stock equivalents. Since the Company had no common stock equivalents outstanding for all periods presented, diluted earnings per share is equal to basic earnings per share.



| | f. | Impairment of long-lived assets
| | -- | -------------------------------



In accordance with SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the Company periodically evaluates the
carrying value of long-lived assets to be held and used, when events and circumstances warrant such a review. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such assets is separately
identifiable and is less than their carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the assets. The Company has performed a review of its long-lived assets and
concluded that the recognition of an impairment charge was not required.



| | g. | Disclosure requirements
| | -- | -----------------------



U.S. GAAP disclosure requirements differ from those required by BR GAAP. However, in these financial statements, the level of disclosure generally has
been expanded to comply with U.S. GAAP, and additional disclosures required by U.S. GAAP are presented in Note 35.



| | h. | Interest income (expense)
| | -- | -------------------------



BR GAAP requires interest to be included as part of operating income. Under U.S. GAAP interest income (expense) is included as non-operating income.



| | i. | Deferred income tax and social contribution assets
| | -- | --------------------------------------------------



As mentioned in Note 12, under BR GAAP, no tax credits were recorded in certain subsidiaries, due to the uncertainties involving their realization.



Under U.S. GAAP, these subsidiaries recorded a deferred
income tax and social contribution assets, with the corresponding valuation allowance, as follows:



|                                                   |  |         |   |  |        |  
|-------------------------------------------------- |  | ------- | - |  | ------ | -
|                                                   |  | 2004    |   |  | 2003   |  
|Deferred income tax and social contribution assets |  | 11,516  |   |  | 5,672  |  
|Valuation allowance                                |  | (11,516 | ) |  | (5,672 | )



This GAAP difference
has no impact on net income (loss) nor shareholders equity for all periods presented.



F-159



---

| | j. | Retained earnings
| | -- | -----------------



For BR GAAP, a company formed as a result of a spin-off may have retained earnings in its balance sheet if the parent company shareholders
resolution adopting the spin-off allocates retained earnings from the parent company to the new company. Under U.S. GAAP, retained earnings allocated in the spin-off would not be considered historical retained earnings as such amount would represent
capital allocated from the parent company and would be described as distributable capital. As a result of the May 22, 1998 spin-off, the Company had U.S. GAAP distributable capital of R$994,594.



Under BR GAAP the remaining outstanding amount of the retained earnings is
transferred to a reserve for investment (see Note 28.f). However, for U.S. GAAP purposes this amount is classified as retained earnings.



| | k. | Stock option plan
| | -- | -----------------



Embrapar has maintained a stock option plan since December 17, 1998. Embrapar has granted shares to employees of the group, exercisable ratably over 3
years, at a grant price equal to market price at date of grant plus indexation based on the IGP-M until April, 2000. From then on, the exercise price is indexed to inflation using IGP-M in excess of 12% per annum until October 2001. As from then,
the exercise price is no longer indexed. No options are exercisable for more than 10 years after date of grant.



Based on the terms of the plan, Embrapar applies Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB
Opinion 25 and related interpretations in accounting for its stock option plan. For all periods presented, compensation expense under U.S. GAAP related to the Companys stock option plan is minimal and consequently, has not been reflected as a
U.S. GAAP adjustment.



F-160



---

The following table summarizes information about the shares granted and outstanding at December 31, 2004,
2003 and 2002:



|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|----------------- |  | --------------------- |  | ---------------------------------- |  | ----------------------------------- |  | --------------------------------- |  | -----------------------------------
|2004             
|                  |  | Options outstanding   |  | Options exercisable               
|Date of grant     |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-average exercise price(R$) |  | Number outstanding (in thousands) |  | Weighted-averageexercise price(R$) 
|March 05, 2004    |  | 80,000                |  | 9.26                               |  | 8.57                                |  | 80,000                            |  | 8.57                               
|January 15, 2004  |  | 72,500                |  | 9.10                               |  | 8,89                                |  | 72,500                            |  | 8,89                               
|October 1, 2003   |  | 2,498,000             |  | 8.85                               |  | 7,60                                |  | 2,498,000                         |  | 7,60                               
|August 7,2003     |  | 30,000                |  | 8.68                               |  | 5.30                                |  | 30,000                            |  | 5.30                               
|February 7, 2003  |  | 11,000                |  | 8.19                               |  | 2.99                                |  | 11,000                            |  | 2.99                               
|October 9, 2002   |  | 607,533               |  | 7.86                               |  | 2.20                                |  | 607,533                           |  | 2.20                               
|December 10,2001  |  | 22,000                |  | 7.04                               |  | 9.44                                |  | 22,000                            |  | 9.44                               
|October 30, 2001  |  | 11,500                |  | 6.88                               |  | 7.17                                |  | 11,500                            |  | 7.17                               
|October 5, 2001   |  | 3,835,961             |  | 6.88                               |  | 6.51                                |  | 3,835,961                         |  | 6.51                               
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|                  |  | 7,168,494             |  |                                    |  |                                     |  | 7,168,494                         |  |                                    
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|                 
|2003             
|                  |  | Options outstanding   |  | Options exercisable               
|Date of grant     |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-average exercise price(R$) |  | Number (in thousands)             |  | Weighted-averageexercise price(R$) 
|October1, 2003    |  | 2,550,000             |  | 9.83                               |  | 7.60                                |  |                                  |  | 7.60                               
|August 7, 2003    |  | 30,000                |  | 9.67                               |  | 5.30                                |  |                                  |  | 5.30                               
|August 25, 2003   |  | 50,000                |  | 9.67                               |  | 5.90                                |  |                                  |  | 5.90                               
|February 7, 2003  |  | 13,000                |  | 9.17                               |  | 2.99                                |  |                                  |  | 2.99                               
|November 26, 2002 |  | 2,667                 |  | 8.92                               |  | 2.67                                |  |                                  |  | 2.67                               
|October 9, 2002   |  | 1,763,534             |  | 8.83                               |  | 2.20                                |  | 404,879                           |  | 2.20                               
|December 10, 2001 |  | 22,000                |  | 8.00                               |  | 9.44                                |  | 11,000                            |  | 9.44                               
|October 5, 2001   |  | 4,288,379             |  | 7.83                               |  | 6.51                                |  | 1,714,993                         |  | 6.51                               
|October 30, 2001  |  | 11,500                |  | 7.83                               |  | 7.17                                |  | 5,750                             |  | 7.17                               
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|                  |  | 8,731,080             |  |                                    |  |                                     |  | 2,136,622                         |  |                                    
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|                 
|2002             
|                  |  | Options outstanding   |  | Options exercisable               
|Date of grant     |  | Number (in thousands) |  | Remaining contractual life (years) |  | Weighted-average exercise price(R$) |  | Number outstanding (in thousands) |  | Weighted-averageexercise price (R$)
|October 6, 2001   |  | 5,746,099             |  | 8.76                               |  | 6.51                                |  | 1,555,930                         |  | 6.51                               
|October 30, 2001  |  | 11,500                |  | 8.76                               |  | 7.17                                |  | 2,880                             |  | 7.17                               
|December 10, 2001 |  | 29,500                |  | 8.76                               |  | 9.44                                |  | 7,380                             |  | 9.44                               
|June 30, 2002     |  | 2,097,330             |  | 9.76                               |  | 2.20                                |  |                                  |  | 2.21                               
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    
|                  |  | 7,884,429             |  |                                    |  |                                     |  | 1,556,190                         |  |                                    
|                  |  |                       |  |                                    |  |                                     |  |                                   |  |                                    





F-161



---

The following table summarizes information about the weighted-average exercise price of options during
the year ended December 31, 2004, 2003 and 2002:



|          |  |      |  |      |  |     
|--------- |  | ---- |  | ---- |  | ----
|          |  | 2004 |  | 2003 |  | 2002
|Granted   |  | 8.72 |  | 7.52 |  | 2.21
|Exercised |  | 2.19 |  | 1.26 |  |    
|Cancelled |  | 0.88 |  | 1.04 |  | 1.47



The weighted-average
prices of the exercisable options are increased by indexation up to December 31, 2000, based on the IGP-M variation, in accordance with the terms of the plan.



According to rules established in the Stock Options Plan, upon the change in control on July 23, 2004, the granted options became exercisable. Because
this acceleration in the vesting period was based on the occurrence of a specific event or condition in accordance with the original terms of the award, a modification has not been made and, therefore, no new measurement of compensation cost is
required, according to FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation an interpretation of APB Opinion No. 25, or FIN 44.



In October 1995, the Financial Accounting Standards Board issued SFAS No.123, Accounting for Stock-Based
Compensation, or SFAS 123. SFAS 123 requires disclosure of the compensation cost for stock-based incentives granted after January 1, 1995 based on the fair value. Applying of SFAS 123 would result in pro forma net income and earnings (loss)
per share (EPS) amounts as follows:



|                              |  |          |   |  |         |  |          |  
|----------------------------- |  | -------- | - |  | ------- |  | -------- | -
|                              |  | 2004     |   |  | 2003    |  | 2002     |  
|U.S. GAAP net income (loss) - |  |          |   |  |         |  |          |  
|As reported                   |  | (217,880 | ) |  | 395,274 |  | (686,578 | )
|Pro forma                     |  | (225,250 | ) |  | 386,015 |  | (690,003 | )
|                              |  |          |  
|Basic and diluted EPS -       |  |          |   |  |         |  |          |  
|As reported                   |  | (46.12   | ) |  | 83.68   |  | (145.34  | )
|Pro forma                     |  | (47.68   | ) |  | 81.72   |  | (146.07  | )





F-162



---

The fair values of the options granted have been estimated at the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:



|                        |  |      |         |   |      |    |         |      |  |    |         |   |  |    |         |  
|----------------------- |  | ---- | ------- | - | ---- | -- | ------- | ---- |  | -- | ------- | - |  | -- | ------- | -
|                        |  | 2004 |         |   | 2003 |    |         | 2002 |  |    | 2001    |  
|Expected volatility     |  |      | 69.86   | % |      |    | 86.65   | %    |  |    | 202.37  | % |  |    | 117.95  | %
|Risk-free interest rate |  |      | 16.22   | % |      |    | 19.80   | %    |  |    | 17.91   | % |  |    | 19.08   | %
|Grant date fair value   |  | R$   | 2.20    |   |      | R$ | 2.19    |      |  | R$ | 2.16    |   |  | R$ | 2.52    |  
|Expected life           |  |      | 2 years |   |      |    | 2 years |      |  |    | 2 years |   |  |    | 2 years |  
|Dividend yield          |  |      | 0       | % |      |    | 0       | %    |  |    | 0       | % |  |    | 0       | %



| | l. | Goodwill and negative goodwill
| | -- | ------------------------------



Under BR GAAP and CVM Instruction No. 319/99, the goodwill related to Acessonet, defined as the excess of the acquisition cost over the book value of the
net assets acquired, was reclassified to a deferred asset on the date of the merger into Embratel and was being amortized over 5 years. In 2003, this goodwill was written-off (Note 11). Under U.S. GAAP, this amount remains classified as goodwill and
was amortized over the same period. As from January 1, 2002, the goodwill is no longer amortized and is subject to a yearly impairment test.



On March 2, 2004, Embratel acquired CT Torres for US$45 million (R$131 million). The principal assets of CT Torres are communication towers that rent
space to telecommunication companies principally in the states of Rio de Janeiro and São Paulo. Under BR GAAP the excess purchase price over the book value of assets acquired was recorded as a deferred asset and is being amortized based
future profitability. Under U.S. GAAP, the purchase price of CT Torres was allocated to the communication towers, which are being depreciated over their remaining useful life.



| | m. | Installation revenues
| | -- | ---------------------



Under BR GAAP, installation revenues and costs are recognized in the statements of operations when incurred. Under U.S. GAAP, installation revenues and
the related costs are deferred and recognized over the term of the related contract. Installation costs that exceed installation revenues are expensed as incurred. This difference in accounting policy has no impact on net income (loss) or on
shareholders equity for all periods presented.



F-163



---

| | n. | Comprehensive income (loss)
| | -- | ---------------------------



BR GAAP does not recognize the concept of comprehensive income (loss).



Under U.S. GAAP, SFAS No. 130, Reporting Comprehensive Income, effective for years beginning after December 15,
1997, requires the disclosure of comprehensive income. Comprehensive income is comprised of net income and other comprehensive income that include charges or credits directly to equity, which are not the result of transactions with
owners. Examples of other comprehensive income items are cumulative translation adjustments under SFAS No. 52, unrealized gains and losses under SFAS No. 115 and minimum pension liabilities under SFAS No. 87, among others.



The Companys comprehensive income (loss) for the years presented is
equal to its net income (loss) for those years, as it has no other comprehensive income (loss) items.



| | o. | Accounting for derivative instruments  SFAS No. 133
| | -- | ----------------------------------------------------



As mentioned in Note 23, the Company uses derivative financial instruments to mitigate its exposure to foreign currency fluctuations related to a portion
of its foreign currency denominated debt. The Company primarily uses foreign currency swap agreements to manage these risks.



Under BR GAAP, foreign currency swap contracts are recorded at the notional amount multiplied by the terms of the contract as it had been settled at the
balance sheet date. The premium accrued at that date is recorded as expense and payable.



SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133 established accounting and reporting standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or a liability measured at its fair value. Changes in the derivatives fair value are recognized currently in earnings unless specific hedge
accounting criteria are met.



For U.S. GAAP purposes, the
Companys derivatives do not qualify for hedge accounting using the criteria of SFAS 133, and consequently, the changes in fair value are recorded in earnings. Accordingly, an adjustment has been included in the reconciliation of U.S. GAAP for
the difference between the carrying value for BR GAAP and the fair market value of the derivative as of December 31, 2004 and 2003.



| | p. | Provision for voluntary dismissal program
| | -- | -----------------------------------------



As described in Note 31, for BR GAAP purposes, at December 31, 2002, Embratel recorded a provision in the amount of R$20,000 related to a voluntary
dismissal



F-164



---

program. Under U.S. GAAP, pursuant to Emerging Issues Task Force No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), such costs may only be accrued if (i) they are part of a formal restructuring plan approved by management that
specifically identifies the significant actions to be taken to complete the plan and the number and job classification of employees to be terminated, and (ii) the plan has been communicated to the employees. Since all of the criteria were not met at
December 31, 2002, the provision was reversed for U.S. GAAP purposes in 2002 and booked for 2003.



| | q. | Reversal of exchange variation capitalized in Star One local books
| | -- | ------------------------------------------------------------------



Under BR GAAP, capitalization of exchange variation is permitted. Under the provisions of SFAS34, for U.S. GAAP purposes, only interest cost is allowed
to be capitalized.



| | r. | Net income (loss) reconciliation of the differences between U.S. GAAP and BR GAAP
| | -- | ---------------------------------------------------------------------------------



|                                                                                |  |          |   |  |          |   |  |          |  
|------------------------------------------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                                                                                |  | 2004     |   |  | 2003     |   |  | 2002     |  
|Income (loss) as reported under BR GAAP                                         |  | (185,071 | ) |  | 233,715  |   |  | (634,481 | )
|Add (deduct)-                                                                   |  |          |   |  |          |   |  |          |  
|Different criteria for-                                                         |  |          |   |  |          |   |  |          |  
|Monetary restatement of 1996 and 1997 (Note 34.b.)                              |  | (96,000  | ) |  | (103,785 | ) |  | (96,016  | )
|Capitalized interest (Note 34.a.)                                               |  | 20,928   |   |  | 29,414   |   |  | 101,730  |  
|Amortization of capitalized interest (Note 34.a.)                               |  | 4,749    |   |  | 39,934   |   |  | 3,192    |  
|Reversal of exchange variation capitalized in Star One local books (Note 34.q.) |  | 12,113   |   |  |         |   |  |         |  
|Pension and other post-retirement benefits- (Note 35.b.)                        |  |          |   |  |          |   |  |          |  
|SFAS No. 87 adjustment                                                          |  | 54       |   |  | 7,776    |   |  | 29,959   |  
|SFAS No. 106 adjustment                                                         |  | (2,149   | ) |  | (3,347   | ) |  | (3,124   | )
|Reversal of goodwill amortization and impairment charge (Note 34.l.)            |  |         |   |  | 121,787  |   |  | 40,595   |  
|SFAS No. 133  fair value of swap contracts (Note 34.p.)                        |  | 8,410    |   |  | 173,017  |   |  | (175,823 | )
|Reversal of provision for voluntary dismissal program (Note 34.q.)              |  |         |   |  | (20,000  | ) |  | 20,000   |  
|Other (Note 34.d.)                                                              |  | 1,002    |   |  | (353     | ) |  | 553      |  
|Deferred tax effect of the above adjustments                                    |  | 18,084   |   |  | (82,884  | ) |  | 26,837   |  
|                                                                                |  |          |   |  |          |   |  |          |  
|U.S. GAAP net income (loss)                                                     |  | (217,880 | ) |  | 395,274  |   |  | (686,578 | )
|                                                                                |  |          |   |  |          |   |  |          |  
|U.S. GAAP basic and diluted net income (loss) per thousand common shares        |  | (46.12   | ) |  | 83.68    |   |  | (145.34  | )
|                                                                                |  |          |   |  |          |   |  |          |  





F-165



---

| | s.1. | Net equity reconciliation of the differences between U.S. GAAP and BR GAAP
| | ---- | --------------------------------------------------------------------------



|                                                                                |  |           |   |  |           |  
|------------------------------------------------------------------------------- |  | --------- | - |  | --------- | -
|                                                                                |  | 2004      |   |  | 2003      |  
|Total shareholders equity as reported                                          |  | 4,740,990 |   |  | 4,923,982 |  
|Add (deduct)-                                                                   |  |           |   |  |           |  
|Different criteria for-                                                         |  |           |   |  |           |  
|Monetary restatement of 1996 and 1997 (Note 34.b.)                              |  | 68,273    |   |  | 164,273   |  
|Capitalized interest (Note 34.a.)                                               |  | (385,705  | ) |  | (406,633  | )
|Amortization of capitalized interest (Note 34.a.)                               |  | 746,860   |   |  | 742,111   |  
|Reversal of exchange variation capitalized in Star One local books (Note 34.q.) |  | 12,113    |   |  |          |  
|Dividends (Note 34.i.)                                                          |  |          |   |  | 86,820    |  
|Pension and other post-retirement benefits (Note 35.b.)                         |  |           |   |  |           |  
|SFAS No. 87 adjustment                                                          |  | (45,958   | ) |  | (46,012   | )
|SFAS No. 106 adjustment                                                         |  | 78,698    |   |  | 80,850    |  
|Reversal of goodwill amortization and impairment charges (Note 34.l.)           |  | 162,382   |   |  | 162,382   |  
|SFAS No. 133  fair value of swap contracts (Note 34.o.)                        |  | 5,604     |   |  | (2,806    | )
|Other (Note 34.d.)                                                              |  | (3,626    | ) |  | (2,552    | )
|Deferred tax effects of the above adjustments                                   |  | (151,298  | ) |  | (169,382  | )
|                                                                                |  |           |   |  |           |  
|U.S. GAAP shareholders equity                                                  |  | 5,228,333 |   |  | 5,533,033 |  
|                                                                                |  |           |   |  |           |  



F-166



---

The deferred tax effect of the U.S. GAAP adjustments above of R$(151,298) and R$(169,382) as of December
31, 2004 and 2003 would be classified substantially as non-current on the balance sheet.



|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                                                                                                                                            |  | 2004       |   |  | 2003       |   |  | 2002       |  
|U.S. GAAP supplementary information- Reconciliation of operating income (loss) under BR GAAP to operating income (loss) under U.S. GAAP- BR
GAAP operating income (expense) |  | (260,131   | ) |  | 478,108    |   |  | (1,241,529 | )
|Exclusion from U.S. GAAP operating income-Management fee                                                                                                                    |  |           |   |  | 14,024     |   |  | 36,232     |  
|Net financial expense                                                                                                                                                       |  | 612,264    |   |  | 163,583    |   |  | 1,555,861  |  
|Inclusion in U.S. GAAP operating income-                                                                                                                                    |  |            |   |  |            |   |  |            |  
|Amortization of capitalized interest                                                                                                                                        |  | 26,956     |   |  | 41,175     |   |  | 11,305     |  
|Extraordinary income  ILL (Note 10)                                                                                                                                        |  | 106,802    |   |  |           |   |  | 198,131    |  
|U.S. GAAP adjustments-Monetary restatement of 1996 and 1997 (Note 34.b.)                                                                                                    |  | (96,000    | ) |  | (96,000    | ) |  | (96,016    | )
|Pension and other post-retirement benefits (Note 35.b.)                                                                                                                     |  |            |   |  |            |   |  |            |  
|SFAS No. 87 pension adjustment                                                                                                                                              |  | 54         |   |  | 7,776      |   |  | 29,959     |  
|SFAS No. 106 adjustment                                                                                                                                                     |  | (28,356    | ) |  | (28,306    | ) |  | (23,557    | )
|Reversal of goodwill amortization and impairment charge (Note 34.l.)                                                                                                        |  |           |   |  | 20,298     |   |  | 40,585     |  
|Reversal of provision for voluntary dismissal program (Note 34.p.)                                                                                                          |  |           |   |  | (20,000    | ) |  | 20,000     |  
|Other                                                                                                                                                                       |  | 1,867      |   |  | (1,023     | ) |  | 626        |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|U.S. GAAP operating income                                                                                                                                                  |  | 363,456    |   |  | 579,635    |   |  | 531,597    |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Reconciliation of net revenue and cost of services under BR GAAP to net revenue and cost of services under U.S. GAAP(1)-                                                    |  |            |   |  |            |   |  |            |  
|Net revenue under BR GAAP                                                                                                                                                   |  | 7,044,204  |   |  | 7,012,085  |   |  | 7,371,630  |  
|Installation revenues (Note 34.m.)                                                                                                                                          |  | 961        |   |  | 2,675      |   |  | 5,222      |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Net revenue under U.S. GAAP                                                                                                                                                 |  | 7,045,165  |   |  | 7,014,760  |   |  | 7,376,852  |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Cost of services under BR GAAP                                                                                                                                              |  | (4,676,769 | ) |  | (4,685,259 | ) |  | (5,000,987 | )
|Installation revenues (Note 34.m.)                                                                                                                                          |  | (961       | ) |  | (2,675     | ) |  | (5,222     | )
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Cost of services under U.S. GAAP                                                                                                                                            |  | (4,677,730 | ) |  | (4,687,934 | ) |  | (5,006,209 | )
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Total assets  under U.S. GAAP                                                                                                                                              |  | 11,947,187 |   |  | 13,376,467 |   |  | 13,798,168 |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Property, plant and equipment  under U.S. GAAP                                                                                                                             |  | 16,620,737 |   |  | 16,011,284 |   |  | 14,674,794 |  
|Accumulated depreciation  under U.S. GAAP                                                                                                                                  |  | (9,512,598 | ) |  | (8,372,728 | ) |  | (6,351,876 | )
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  
|Net property, plant and equipment  under U.S. GAAP                                                                                                                         |  | 7,108,139  |   |  | 7,638,556  |   |  | 8,322,918  |  
|                                                                                                                                                                            |  |            |   |  |            |   |  |            |  

---

|(1) | Under BR GAAP, value added and other sales taxes are recorded as a deduction to revenues. In
the Companys previously issued financial statements, the Company recorded these taxes as costs of services under U.S. GAAP. During the year ended December 31, 2004, the Company changed the classification of these taxes under U.S. GAAP to be
consistent with BR GAAP. The prior periods have been reclassified for this change in accounting policy. This reclassification had no impact on net income (loss) nor shareholders equity for all periods presented. The change in accounting policy
was made to align U.S. GAAP with BR GAAP since management believes that the Company acts as an agent for the government with regards to the collection of these taxes. Additionally, the Company believes that this presentation allows for better
comparability with other Brazilian companies. The taxes previously included in costs of services, resulting in an increase in net revenues under U.S. GAAP for the years ended December 31, 2003 and 2002 amounted to R$2,102,908 and R$2,110,794,
respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-167



---

| | s.2 | Dividends
| | --- | ---------



Under the Companys bylaws, the Company is required to distribute an aggregate amount equal to at least 25% of the Companys adjusted net income
of each fiscal year as a minimum mandatory dividend. For more information regarding dividends paid to the Companys shareholders, see Notes 28.d and 28.f.



The Company may refrain from paying the mandatory minimum dividend for a given fiscal year only if the managing bodies of the corporation (i.e., the
board of directors and the board of executive officers (diretoria)) report to the annual general shareholders meeting that payment of the mandatory dividend would be incompatible with the corporations financial situation.



Under BR GAAP, the minimum mandatory dividend must be
recognized in the year in which the related income is earned.



In 2003 and 2002, the Companys accounting policy under U.S. GAAP was to recognize dividends in the period in which the dividends were approved by the Companys shareholders because the Company believed that the minimum mandatory
dividend did not become a liability for U.S. GAAP purposes until that point. Following this policy, in the U.S. GAAP reconciliation of shareholders equity for 2003, the Company reversed R$87 million in dividends that were recognized in 2003
under BR GAAP.



In 2004, the Company changed its accounting
policy under U.S. GAAP to recognize the minimum mandatory dividend in the year in which the distributable profits were earned. The Company believed that because of the limited discretion of shareholders to veto payment the dividend was more properly
treated as a liability as of the end of the year in which the distributable profits were earned.



The following table sets forth shareholders equity under U.S. GAAP if the Company had applied in 2003 the same accounting policy that it applied in
2004:



2004

2003Shareholders equity as reported

5,228,333

5,533,033Shareholders equity applying new policy

5,228,333

5,446,213


| | 
| | 

| | t. | Statements of changes in total shareholders equity in accordance with U.S. GAAP for the years ended December 31, 2004, 2003 and 2002
| | -- | -------------------------------------------------------------------------------------------------------------------------------------



|                                 |  |           |  
|-------------------------------- |  | --------- | -
|                                 |  | Total     |  
|Balances as of January 1, 2002   |  | 5,824,337 |  
|Loss under U.S. GAAP             |  | (686,578  | )
|                                 |  |           |  
|Balances as of December 31, 2002 |  | 5,137,759 |  
|Net income under U.S.GAAP        |  | 395,274   |  
|                                 |  |           |  
|Balances as of December 31, 2003 |  | 5,533,033 |  
|Net loss under U.S. GAAP         |  | (217,880  | )
|Dividends                        |  | (86,820   | )
|                                 |  |           |  
|Balances as of December 31, 2004 |  | 5,228,333 |  
|                                 |  |           |  



|35. | Additional Disclosures Required by U.S. GAAP
|--- | --------------------------------------------



| | a. | Defined contribution plan
| | -- | -------------------------



|                                                                          |  |         |   |  |         |  
|------------------------------------------------------------------------- |  | ------- | - |  | ------- | -
|                                                                          |  | 2004    |   |  | 2003    |  
|Beginning balance  unfunded liability (*)                                |  | 154,429 |   |  | 189,098 |  
|Plus  adjustments for percentage yield on plan assets                    |  | 90,450  |   |  | 33,924  |  
|Plus  debt surplus  January to April 2003  Voluntary Dismissal Program |  |        |   |  | 15,413  |  
|Monetary restatement of debt surplus  January to April 2003  PDI        |  | 270     |   |  |        |  
|Payment of debt surplus  January to April 2003  PDI                     |  | (15,683 | ) |  |        |  
|Less  payments during the year                                           |  | (55,380 | ) |  | (84,006 | )
|                                                                          |  |         |   |  |         |  
|Ending balance                                                            |  | 174,086 |   |  | 154,429 |  
|                                                                          |  |         |   |  |         |  
|Total expense                                                             |  |         |   |  |         |  
|Matching contribution plus risk benefits                                  |  | 20,481  |   |  | 19,379  |  
|                                                                          |  |         |   |  |         |  
|Total                                                                     |  | 20,481  |   |  | 19,379  |  
|                                                                          |  |         |   |  |         |  

---

|(*) | The unfunded liability of R$154,429 as of January 1, 2004 (R$189,098 as of January 1, 2003) represented the amount due by the plan sponsor for the participants that migrated from
the defined benefit plan to the defined contribution plan. This liability is being amortized over a period of 20 years from January 1, 1999 (according to a specific cash flow schedule). Any unpaid balance is adjusted monthly based on the return on
the portfolio assets at that time, subject to a minimum increase based on the General Price Index (IGP-DI) plus 6% p.a.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Pension and post-retirement benefits
| | -- | ------------------------------------



Following are the disclosures required pursuant to SFAS No. 132, Employers Disclosures about Pensions and Other Post-retirement
Benefits, and SFAS No. 132R, it requires additional disclosure to those in the original SFAS No. 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit
post-retirement plans.



F-168



---

Pension benefits



|                                               |  |           |   |  |           |  
|---------------------------------------------- |  | --------- | - |  | --------- | -
|                                               |  | 2004      |   |  | 2003      |  
|Change in benefit obligation                   |  |           |   |  |           |  
|Benefit obligation at beginning of year        |  | 1,006,720 |   |  | 894,115   |  
|Service cost                                   |  | 115       |   |  | 80        |  
|Interest cost                                  |  | 109,270   |   |  | 96,934    |  
|Plan participants contributions               |  | 24        |   |  | 140       |  
|Actuarial loss                                 |  | 71,946    |   |  | 52,857    |  
|Benefits paid                                  |  | (89,031   | ) |  | (82,708   | )
|Assumptions                                    |  |          |   |  | 45,302    |  
|                                               |  |           |   |  |           |  
|Benefit obligation at end of year              |  | 1,099,044 |   |  | 1,006,720 |  
|                                               |  |           |   |  |           |  
|Change in plan assets                          |  |           |   |  |           |  
|Fair value of plan assets at beginning of year |  | 1,012,658 |   |  | 956,116   |  
|Actual return on plan assets                   |  | 252,789   |   |  | 138,918   |  
|Employer contributions                         |  | 65        |   |  | 192       |  
|Plan participants contributions               |  | 24        |   |  | 140       |  
|Benefits paid                                  |  | (89,031   | ) |  | (82,708   | )
|                                               |  |           |   |  |           |  
|Fair value of plan assets at end of year       |  | 1,176,505 |   |  | 1,012,658 |  
|                                               |  |           |   |  |           |  
|Funded status                                  |  | 77,461    |   |  | 5,938     |  
|Unrecognized net transition obligation         |  | 2,221     |   |  | 2,915     |  
|Unrecognized net actuarial (gain)              |  | (125,640  | ) |  | (54,865   | )
|                                               |  |           |   |  |           |  
|Accrued benefit cost                           |  | (45,958   | ) |  | (46,012   | )
|                                               |  |           |   |  |           |  



|                                               |  |          |   |  |          |   |  |          |  
|---------------------------------------------- |  | -------- | - |  | -------- | - |  | -------- | -
|                                               |  | 2004     |   |  | 2003     |   |  | 2002     |  
|Components of net periodic benefit cost        |  |          |   |  |          |   |  |          |  
|Service cost                                   |  | 139      |   |  | 220      |   |  | 292      |  
|Interest cost                                  |  | 109,270  |   |  | 96,934   |   |  | 80,350   |  
|Expected return on plan assets                 |  | (109,960 | ) |  | (103,971 | ) |  | (108,303 | )
|Amortization of net transition obligation      |  | 693      |   |  | 693      |   |  | 693      |  
|Recognized net actuarial gain                  |  |         |   |  | (1,246   | ) |  | (2,384   | )
|Expected employee contribution                 |  | (131     | ) |  | (214     | ) |  | (274     | )
|Actual Companys contributions during the year |  | (65      | ) |  | (192     | ) |  | (333     | )
|                                               |  |          |   |  |          |   |  |          |  
|Net periodic benefit income                    |  | (54      | ) |  | (7,776   | ) |  | (29,959  | )
|                                               |  |          |   |  |          |   |  |          |  
|                                               |  |          |  
|                                               |  | 2004     |   |  | 2003     |   |  | 2002     |  
|Weighted-average assumptions as of December 31 |  |          |   |  |          |   |  |          |  
|Discount rate                                  |  | 6.00     | % |  | 6.00     | % |  | 6.00     | %
|Expected return on plan assets                 |  | 6.00     | % |  | 6.00     | % |  | 6.00     | %
|Rate of compensation increase                  |  | 0.00     | % |  | 0.00     | % |  | 0.00     | %



The above rates are
calculated over inflation as measured by the Fiscal Reference Unit (Ufir) through December 31, 1995 and the IGP-DI thereafter.



F-169



---

Other post-retirement benefits



|                                               |  |          |   |  |          |  
|---------------------------------------------- |  | -------- | - |  | -------- | -
|                                               |  | 2004     |   |  | 2003     |  
|Change in benefit obligation                   |  |          |   |  |          |  
|Benefit obligation at beginning of year        |  | 293,582  |   |  | 278,606  |  
|Service cost                                   |  | 20       |   |  | 118      |  
|Interest cost                                  |  | 32,588   |   |  | 30,960   |  
|Actuarial loss                                 |  | 54,563   |   |  | (6,183   | )
|Benefits paid                                  |  | (11,357  | ) |  | (8,594   | )
|Administrative expenses                        |  | (1,170   | ) |  | (1,325   | )
|                                               |  |          |   |  |          |  
|Benefit obligation at end of year              |  | 368,226  |   |  | 293,582  |  
|                                               |  |          |   |  |          |  
|Change in plan assets                          |  |          |   |  |          |  
|Fair value of plan assets at beginning of year |  | 61,863   |   |  | 58,103   |  
|Actual return on plan assets                   |  | 9,100    |   |  | 13,655   |  
|Administrative expenses                        |  | (1,170   | ) |  | (1,325   | )
|Employer contributions                         |  | 8        |   |  | 25       |  
|Benefits paid                                  |  | (11,357  | ) |  | (8,594   | )
|                                               |  |          |   |  |          |  
|Fair value of plan assets at end of year       |  | 58,444   |   |  | 61,864   |  
|                                               |  |          |   |  |          |  
|Funded status                                  |  | (309,782 | ) |  | (231,718 | )
|Unrecognized net actuarial loss                |  | 123,460  |   |  | 73,752   |  
|                                               |  |          |   |  |          |  
|Accrued benefit cost                           |  | (186,322 | ) |  | (157,966 | )
|Reversal of amount recorded under BR GAAP      |  | 265,020  |   |  | 238,816  |  
|                                               |  |          |   |  |          |  
|Effect on shareholders equity                 |  | 78,698   |   |  | 80,850   |  
|                                               |  |          |   |  |          |  



|                                               |  |         |   |  |         |   |  |         |  
|---------------------------------------------- |  | ------- | - |  | ------- | - |  | ------- | -
|                                               |  | 2004    |   |  | 2003    |   |  | 2002    |  
|Components of net periodic benefit cost        |  |         |   |  |         |   |  |         |  
|Service cost                                   |  | 20      |   |  | 118     |   |  | 139     |  
|Interest cost                                  |  | 32,588  |   |  | 30,960  |   |  | 27,433  |  
|Expected return on plan assets                 |  | (6,405  | ) |  | (6,045  | ) |  | (7,139  | )
|Recognized net actuarial loss                  |  | 2,161   |   |  | 3,298   |   |  | 3,168   |  
|Actual Companys contributions during the year |  | (8      | ) |  | (25     | ) |  | (44     | )
|                                               |  |         |   |  |         |   |  |         |  
|Net periodic benefit cost                      |  | 28,356  |   |  | 28,306  |   |  | 23,557  |  
|                                               |  |         |   |  |         |   |  |         |  
|Reversal of amount recorded under BR GAAP      |  | (26,207 | ) |  | (24,959 | ) |  | (20,433 | )
|Effect on U.S. GAAP net income                 |  | 2,149   |   |  | 3,347   |   |  | 3,124   |  
|                                               |  |         |   |  |         |   |  |         |  
|Weighted-average assumptions as of December 31 |  |         |   |  |         |   |  |         |  
|Discount rate                                  |  | 6.00    | % |  | 6.00    | % |  | 6.00    | %
|Expected return on plan assets                 |  | 6.00    | % |  | 6.00    | % |  | 6.00    | %



There was no
unrecognized liability at transition.



Medical assistance cost
trend rates of increase were projected at annual rates excluding inflation ranging from 4.00% in 2004 to 2.7% in 2046. The effect of a



F-170



---

one percent annual increase/decrease in the assumed medical assistance cost trend rates would
increase/decrease the accumulated post-retirement benefit obligation at December 31, 2004 by R$56,964/R$45,959 (December 2003 by R$45,623/R$36,646) and the aggregate of service and interest cost components by R$6,443/R$5,197 (December 2003 by
R$5,160/R$4,145).



The funded status of the pension and
post-retirement plans under Brazilian and U.S. GAAP differ. Benefit obligations differ because they have been prepared using different actuarial assumptions permitted under Brazilian and U.S. GAAP.



Plan assets



Pension and other post-retirement benefits totaled R$1,234,947 and R$1,074,521 at December 31, 2004 and 2003. The TELOS fund
managers seek to match the plan assets with benefit obligations over the long-term. Brazilian pension funds are subject to certain restrictions relating to their ability to invest in foreign assets and consequently, the funds primarily invest in
Brazilian securities. Under its current investment strategy, pension assets of TELOS are allocated with a goal to achieve the following distribution:



| |  |  | 10% in nominal bonds to guarantee the short-term liabilities
| | - |  | ------------------------------------------------------------



| |  |  | 75% in inflation-indexed bonds to guarantee the long-term liabilities
| | - |  | ---------------------------------------------------------------------



| |  |  | 10% in stocks to hedge an unexpected decrease in the long-term real interest rate
| | - |  | ---------------------------------------------------------------------------------



| |  |  | 5% in real estate as a strategy of diversification
| | - |  | --------------------------------------------------



| |  |  | seek the duration and convexity matching between its assets and liabilities
| | - |  | ---------------------------------------------------------------------------



The actual allocations for the pension assets as of December 31, 2004 and 2003 as follows:



|                  |  |                      |  |     |                          |  |       |              |     |   |       |      |  |     |   |  |         |  |     |  
|----------------- |  | -------------------- |  | --- | ------------------------ |  | ----- | ------------ | --- | - | ----- | ---- |  | --- | - |  | ------- |  | --- | -
|2004              |  | Defined benefit plan |  |     | Definedcontribution plan |  |       | Medical plan |     |   | Total |     
|Fixed Income      |  | 917.8                |  | 78  | %                        |  | 740.3 |              | 96  | % |       | 57.8 |  | 99  | % |  | 1,715.9 |  | 86  | %
|Stocks            |  | 164.7                |  | 14  | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 164.7   |  | 8   | %
|Real State        |  | 82.3                 |  | 7   | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 82.3    |  | 4   | %
|Beneficiary Loans |  | 11.7                 |  | 1   | %                        |  | 32.4  |              | 4   | % |       | 0.6  |  | 1   | % |  | 44.7    |  | 2   | %
|TOTAL             |  | 1,176.5              |  | 100 | %                        |  | 772.7 |              | 100 | % |       | 58.4 |  | 100 | % |  | 2,007.6 |  | 100 | %
|                  |  |                      |  |    
|2003              |  | Defined benefit plan |  |     | Definedcontribution plan |  |       | Medical plan |     |   | Total |     
|Fixed Income      |  | 788.2                |  | 78  | %                        |  | 560.5 |              | 95  | % |       | 61.9 |  | 100 | % |  | 1,410.6 |  | 85  | %
|Stocks            |  | 132.6                |  | 13  | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 133.1   |  | 8   | %
|Real State        |  | 77.6                 |  | 8   | %                        |  |      |              | 0   | % |       |     |  | 0   | % |  | 77.9    |  | 5   | %
|Beneficiary Loans |  | 14.3                 |  | 1   | %                        |  | 26.5  |              | 5   | % |       |     |  | 0   | % |  | 40.7    |  | 2   | %
|TOTAL             |  | 1,012.7              |  | 100 | %                        |  | 587.0 |              | 100 | % |       | 61.9 |  | 100 | % |  | 1,662.3 |  | 100 | %



F-171



---

TELOS has determined the overall expected long-term rate of return on assets of 6.0% based on historical
returns and the extent to which adjustments were made to those historical returns, and how those adjustments were determined.



Estimate future benefits payments-



The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:



|             |  |                      |  |              |  |                
|------------ |  | -------------------- |  | ------------ |  | ---------------
|Years        |  | Defined benefit plan |  | Medical Plan |  | Total per annum
|2005         |  | 94,170               |  | 15,272       |  | 109,442        
|2006         |  | 97,882               |  | 16,905       |  | 114,787        
|2007         |  | 101,634              |  | 18,699       |  | 120,333        
|2008         |  | 105,413              |  | 20,662       |  | 126,075        
|2009         |  | 109,371              |  | 22,788       |  | 132,159        
|2010 to 2014 |  | 605,665              |  | 152,175      |  | 758,380        



| | c. | Concentrations of risk
| | -- | ----------------------



Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of trade
receivables and temporary cash investments. The Company places its temporary cash investments with high credit quality financial institutions and, by policy, limits the amount of credit exposure to any financial institution.



Approximately 30% of Embratels employees are affiliated with state
and/or municipal labor unions. The most significant of these is Sindicato dos Trabalhadores em Empresas de Telecomunicações (Sinttel), which is associated with the Federação Nacional dos Trabalhadores em Empresas de
Telecomunicações e Operadores de Mesas Telefônicas (Fenattel), or with the Federação Interestadual dos Trabalhadores em Empresas de Telecomunicações (Fittel), with which labor agreements are
negotiated. Approximately 0.3% of the employees of BrasilCenter and 18.0% of the employees of Star One are associated with labor unions. Labor agreements are negotiated for BrasilCenter employees with the state labor unions of each of five different
states where BrasilCenter operates, and for Star One employees with the labor union of the state of Rio de Janeiro.



The Companys relationship with its employees and unions is generally good. Embratel has not experienced a work stoppage that had a material effect
on their operations for many years.



Except for labor
agreements with BrasilCenter employees in Ribeirão Preto, Juiz de Fora and Rio de Janeiro, labor agreements with our employees have a two-year term. Some economic issues (e.g., salaries and benefits) pertaining to the two-year labor
agreements, however, are subject to revision after 12 months. Currently, the labor agreements for employees of BrasilCenter and Embratel are effective.



F-172



---

| | d. | Recently issued accounting pronouncements
| | -- | -----------------------------------------



In December 2003, the FASB issued a revised FIN 46 (FIN 46R) that replaced the original interpretation and codified proposed modifications and other
decisions previously issued through certain FASB Staff Positions including the deferral of the effective date of applying FIN 46R to certain variable interests created before February 1, 2003. FIN 46R is effective March 31, 2004 for such
arrangements. The adoption on FIN46R did not have any significant impact on the Companys financial position, cash flows or results of operations.



On December 23, 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003), Employers Disclosures about Pensions
and Other Postretirement Benefits-an amendment of FASB Statements No. 87, 88 and 106 (SFAS 132 (revised 2003)). SFAS 132 (revised 2003) is effective for fiscal years ending after December 15, 2003. There is a provision deferring the
effectiveness of this new rule for foreign plans as from periods ending after June 15, 2004, which is applicable for the Company. SFAS 132 (revised 2003) replaces the disclosure requirements in SFAS 87, SFAS 88 and SFAS 106. SFAS 132 (revised 2003)
addresses disclosures only and does not address measurement and recognition accounting for pension and postretirement benefits. SFAS 132 (revised 2003) requires additional disclosures related to the description of plan assets including investment
strategies, plan obligations, cash flows and net periodic benefit cost of defined benefit pension and other defined benefit postretirement plans.



On March 31, 2004, the Emerging Issues Task Force (EITF) reached final consensus on EITF Issue No. 03-6, Participating Securities and the Two-Class Method
under FASB Statement No. 128, Earnings per Share. Typically, a participating security is entitled to share in a companys earnings, often via a formula tied to dividends on the companys common stock. The issue clarifies what is meant by
the term participating security, as used in Statement 128. When an instrument is deemed to be a participating security, it has the potential to significantly reduce basic earnings per common share because the two-class method must be used to compute
the instruments effect on earnings per share. The consensus also covers other instruments whose terms include a participation feature. The consensus also addresses the allocation of losses. If undistributed earnings must be allocated to
participating securities under the two-class method, losses should also be allocated. However, EITF 03-6 limits this allocation only to situations when the security has the right to participate in the earnings of the company, and an objectively
determinable contractual obligation to share in net losses of the company.



The consensus reached in EITF 03-6 is effective for fiscal periods beginning after March 31, 2004. EPS in prior periods must be retroactively adjusted in order to comply with the consensus decisions reached in EITF
03-6. This consensus is not applied for the Company, since it has only common shares.



F-173



---

On December 12, 2004 The FASB issued SFAS No. 153 Statement of Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29. This Statement is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (IASB)
toward development of a single set of high-quality accounting standards. This Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. It becomes effective for financial
statements for fiscal periods beginning after June 15, 2005. The Company believes that the adoption of this FASB will not have impact on its financial position, results of operations or cash flows.



On December 12, 2004, The FASB issued a revised SFAS No. 123 Statement
of Accounting for Stock-Based Compensation (SFAS 123R). This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. It requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the income statement based on their fair values. It becomes effective for public entities (excluding small business issuers) no later than the first fiscal year beginning after June 15,
2005. The Company expects the effects of adopting SFAS 123R to be similar of the effects disclosed in Note 34.k.



| | e. | Segment information
| | -- | -------------------



The Company presents its segment information under U.S. GAAP in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS No. 131 introduces a management approach concept for reporting segment information, whereby financial information is required to be reported on same basis that the chief operating decision-maker uses such
information internally for evaluating segment performance and deciding how to allocate resources to segments.



The Company has two reportable segments, the Telecommunications segment and Space segment. The Telecommunications segment is comprised of local, domestic
and international long-distance, data communication and other services. The Space segment is represented by the Companys satellite operations and provides transponders for radio communication services such as (i) network services, (ii)
end-to-end telecommunications services, and (iii) transmission of radio and television broadcasting. The Companys chief operating decision-maker evaluates performance of the segments based on revenues and operating income.



F-174



---

Information presented to management with respect to the performance of each segment is generally derived
directly from the accounting records maintained in accordance with BR GAAP.



|             |  |                           |  |               |  |                  |   |  |             
|------------ |  | ------------------------- |  | ------------- |  | ---------------- | - |  | ------------
|             |  | 2004                     
|             |  | Telecommunicationssegment |  | Space segment |  | Eliminations (*) |   |  | Consolidated
|Total assets |  | 10,984,390                |  | 1,053,099     |  | (819,974         | ) |  | 11,217,515  
|             |  |                           |  |               |  |                  |   |  |             
|             | 
|             |  | 2003                     
|             |  | Telecommunicationssegment |  | Space segment |  | Eliminations (*) |   |  | Consolidated
|Total assets |  | 12,522,711                |  | 956,326       |  | (806,289         | ) |  | 12,672,748  
|             |  |                           |  |               |  |                  |   |  |             



|                                   |  |                           |  |               |  |             
|---------------------------------- |  | ------------------------- |  | ------------- |  | ------------
|                                   |  | 2004                     
|                                   |  | Telecommunicationssegment |  | Space segment |  | Consolidated
|Property, plant and equipment, net |  | 6,083,634                 |  | 468,946       |  | 6,552,580   
|                                   |  |                           |  |               |  |             
|                                   | 
|                                   |  | 2003                     
|                                   |  | Telecommunicationssegment |  | Space segment |  | Consolidated
|Property, plant and equipment, net |  | 6,697,206                 |  | 440,828       |  | 7,138,034   
|                                   |  |                           |  |               |  |             



|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|--------------------------- |  | ------------------------- | - |  | ------------- | - |  | ---------------- | - |  | ------------ | -
|                            |  | 2004                      |  
|Income statements           |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                 |  | 6,839,048                 |   |  | 404,779       |   |  | (199,623         | ) |  | 7,044,204    |  
|Cost of services            |  | (4,724,502                | ) |  | (154,466      | ) |  | 202,199          |   |  | (4,676,769   | )
|Gross profit                |  | 2,114,546                 |   |  | 250,313       |   |  | 2,576            |   |  | 2,367,435    |  
|Operating income (expenses) |  | (1,959,104                | ) |  | (53,622       | ) |  | (2,576           | ) |  | (2,015,302   | )
|Operating income            |  | 155,442                   |   |  | 196,691       |   |  |                 |   |  | 352,133      |  
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|                            | 
|                            |  | 2003                      |  
|Income statements           |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                 |  | 6,815,441                 |   |  | 378,520       |   |  | (181,876         | ) |  | 7,012,085    |  
|Cost of services            |  | (4,697,314                | ) |  | (171,743      | ) |  | 183,798          |   |  | (4,685,259   | )
|Gross profit                |  | 2,118,127                 |   |  | 206,777       |   |  | 1,922            |   |  | 2,326,826    |  
|Operating income (expenses) |  | (1,643,012                | ) |  | (45,678       | ) |  | 3,495            |   |  | (1,685,195   | )
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|Operating income            |  | 475,115                   |   |  | 161,099       |   |  | 5,417            |   |  | 641,631      |  
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  



F-175



---

|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|--------------------------- |  | ------------------------- | - |  | ------------- | - |  | ---------------- | - |  | ------------ | -
|                            |  | 2002                      |  
|Income statements           |  | Telecommunicationssegment |   |  | Space segment |   |  | Eliminations (*) |   |  | Consolidated |  
|Net revenue                 |  | 7,181,027                 |   |  | 347,259       |   |  | (156,656         | ) |  | 7,371,630    |  
|Cost of services            |  | (4,926,008                | ) |  | (230,750      | ) |  | 155,771          |   |  | (5,000,987   | )
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|Gross profit                |  | 2,255,019                 |   |  | 116,509       |   |  | (885             | ) |  | 2,370,643    |  
|Operating income (expenses) |  | (2,003,464                | ) |  | (58,136       | ) |  | 5,289            |   |  | (2,056,311   | )
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  
|Operating income            |  | 251,555                   |   |  | 58,373        |   |  | 4,404            |   |  | 314,332      |  
|                            |  |                           |   |  |               |   |  |                  |   |  |              |  

---

|(*) | Eliminations refer basically to inter-segment transactions and balances eliminated on consolidation.
|--- | ----------------------------------------------------------------------------------------------------



Capital expenditures made by subsidiaries from the telecommunications segment and the space segment amounted to R$439,467
and R$128,533 respectively, for the year ended December 31, 2004 (R$362,971 and R$125,877, respectively, for the year ended December 31, 2003).



F-176



---

| | f. | Statements of cash flows
| | -- | ------------------------



The following statements of cash flows are prepared using the BR GAAP reported figures, including the classification of cash and cash equivalents as
determined under BR GAAP. Other than the classification of cash and cash equivalents, the following statements of cash flows comply with the classification requirements of SFAS No. 95, Statement of Cash Flows:



|                                                                             |  |            |   |  |            |   |  |            |  
|---------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | - |  | ---------- | -
|                                                                             |  | 2004       |   |  | 2003       |   |  | 2002       |  
|Cash flow from operating activities-                                         |  |            |   |  |            |   |  |            |  
|Net income (loss)                                                            |  | (185,071   | ) |  | 233,715    |   |  | (634,481   | )
|Adjustment to reconcile net income to cash provided by operating activities- |  |            |   |  |            |   |  |            |  
|Depreciation and amortization                                                |  | 1,104,431  |   |  | 1,124,981  |   |  | 1,115,727  |  
|Exchange and monetary gains/losses                                           |  | 531        |   |  | (281,509   | ) |  | 1,250,991  |  
|Minority interest                                                            |  | 39,502     |   |  | 36,497     |   |  | 16,398     |  
|Net loss on permanent assets disposal                                        |  | 108,592    |   |  | 26,545     |   |  | 11,653     |  
|Goodwill write-off                                                           |  |           |   |  | 101,489    |   |  |           |  
|Reversal of provision for investment losses                                  |  |           |   |  | (10,000    | ) |  |           |  
|Increase (decrease) in allowance for doubtful accounts                       |  | 177,089    |   |  | (63,792    | ) |  | 538,416    |  
|Effect of capital increase completed by Star One                             |  | (5,395     | ) |  | (5,425     | ) |  | (5,425     | )
|Decrease (increase) in trade accounts receivable                             |  | 52,109     |   |  | 57,825     |   |  | (200,134   | )
|Decrease (increase) in deferred and recoverable taxes                        |  | (88,311    | ) |  | 6,115      |   |  | (526,147   | )
|(Increase) in other accounts receivables                                     |  | (191,556   | ) |  | (15,212    | ) |  | (59,070    | )
|Decrease (increase) in legal deposits                                        |  | 172,761    |   |  | (111,734   | ) |  | 71,779     |  
|Increase (decrease) in payroll and related accruals                          |  | (16,730    | ) |  | (38,813    | ) |  | 18,873     |  
|Increase (decrease) in accounts payable and accrued expenses                 |  | (409,413   | ) |  | 18,201     |   |  | 111,490    |  
|Increase (decrease) in provision for contingencies                           |  | 401,781    |   |  | (3,350     | ) |  | 19,805     |  
|Increase (decrease) in other current liabilities                             |  | (162,125   | ) |  | (121,351   | ) |  | 134,289    |  
|Increase (decrease) in income tax and other taxes                            |  | 92,761     |   |  | 90,920     |   |  | (371,956   | )
|Increase (decrease) in deferred income                                       |  | 9,256      |   |  | (13,815    | ) |  | (10,149    | )
|Increase (decrease) in pension plan liability                                |  | 45,861     |   |  | (9,710     | ) |  | (14,997    | )
|Increase (decrease) in other non-current assets and liabilities              |  | (51,539    | ) |  | 14,708     |   |  | 26,480     |  
|                                                                             |  |            |   |  |            |   |  |            |  
|                                                                             |  | 1,094,534  |   |  | 1,036,285  |   |  | 1,493,542  |  
|                                                                             |  |            |   |  |            |   |  |            |  
|Cash flow from investing activities-                                         |  |            |   |  |            |   |  |            |  
|Acquisition of CT Torres, net of cash acquired                               |  | (130,169   | ) |  |           |   |  |           |  
|Additions to investments                                                     |  |           |   |  |           |   |  | (98        | )
|Additions to property, plant and equipment                                   |  | (587,809   | ) |  | (488,068   | ) |  | (1,034,700 | )
|Deferred assets                                                              |  |            |   |  | (1,143     | ) |  |           |  
|Proceeds from sale of interest in subsidiary                                 |  | 43,973     |   |  | 248,157    |   |  |           |  
|                                                                             |  |            |   |  |            |   |  |            |  
|                                                                             |  | (674,005   | ) |  | (241,054   | ) |  | (1,034,798 | )
|                                                                             |  |            |   |  |            |   |  |            |  
|Cash flow from financing activities-                                         |  |            |   |  |            |   |  |            |  
|Loans repaid                                                                 |  | (2,827,114 | ) |  | (2,003,377 | ) |  | (1,520,818 | )
|New loans obtained                                                           |  | 1,815,224  |   |  | 1,893,258  |   |  | 1,297,620  |  
|Swap/hedge settlement                                                        |  | (129,632   | ) |  | 132,888    |   |  |           |  
|Dividends paid                                                               |  | (119,214   | ) |  | (30,800    | ) |  |           |  
|                                                                             |  |            |   |  |            |   |  |            |  
|                                                                             |  | (1,260,736 | ) |  | (8,031     | ) |  | (223,198   | )
|                                                                             |  |            |   |  |            |   |  |            |  
|Increase/(decrease) in cash and cash equivalents                             |  | (840,207   | ) |  | 787,200    |   |  | 235,546    |  
|Cash and cash equivalents at the beginning of the year                       |  | 1,654,014  |   |  | 866,814    |   |  | 631,268    |  
|                                                                             |  |            |   |  |            |   |  |            |  
|Cash and cash equivalents at the end of year                                 |  | 813,807    |   |  | 1,654,014  |   |  | 866,814    |  
|                                                                             |  |            |   |  |            |   |  |            |  





F-177



---

|                                          |  |         |  |         |  |        
|----------------------------------------- |  | ------- |  | ------- |  | -------
|                                          |  | 2004    |  | 2003    |  | 2002   
|Supplemental disclosure of cash paid for- |  |         |  |         |  |        
|Income and social contribution tax paid   |  | 40,881  |  | 37,227  |  | 6,412  
|Interest paid                             |  | 435,939 |  | 439,790 |  | 236,191
|                                          |  |         |  |         |  |        



The reconciliation of
cash flows from operating activities under BR GAAP to the amounts under U.S. GAAP is as follows:



|                                                                         |  |           |  |                 |   |  |                 |  
|------------------------------------------------------------------------ |  | --------- |  | --------------- | - |  | --------------- | -
|                                                                         |  | 2004      |  | 2003 (Restated) |   |  | 2002 (Restated) |  
|Cash flows from operating activities under BR GAAP                       |  | 1,094,534 |  | 1,036,285       |   |  | 1,493,542       |  
|Decrease (increase) in debt security trading investments under U.S. GAAP |  | 187,527   |  | (585,406        | ) |  | (22,011         | )
|                                                                         |  |           |  |                 |   |  |                 |  
|Cash flows from operating activities under U.S. GAAP                     |  | 1,282,061 |  | 450,879         |   |  | 1,471,531       |  
|                                                                         |  |           |  |                 |   |  |                 |  



The reconciliation of
cash and cash equivalents recorded under BR GAAP to the amounts recorded under U.S. GAAP is as follows:



|                                                             |  |         |  |                 |  |                
|------------------------------------------------------------ |  | ------- |  | --------------- |  | ---------------
|                                                             |  | 2004    |  | 2003 (Restated) |  | 2002 (Restated)
|Cash and cash equivalents at the end of year under BR GAAP   |  | 813,807 |  | 1,654,014       |  | 866,814        
|Debt security trading investments under U.S. GAAP            |  | 419,890 |  | 607,417         |  | 22,011         
|                                                             |  |         |  |                 |  |                
|Cash and cash equivalents at the end of year under U.S. GAAP |  | 393,917 |  | 1,046,597       |  | 844,803        
|                                                             |  |         |  |                 |  |                

| | g. | Intangible assets
| | -- | -----------------



Following is a summary of the Companys intangible assets subject to amortization under U.S. GAAP:



|                            |  |                  |   |  |                        |   |  |                  |   |  |                        |  
|--------------------------- |  | ---------------- | - |  | ---------------------- | - |  | ---------------- | - |  | ---------------------- | -
|                            |  | 2004             |   |  | 2003                   |  
|                            |  | Softwarelicenses |   |  | Rights of wayand other |   |  | Softwarelicenses |   |  | Rights of wayand other |  
|Gross                       |  | 640,367          |   |  | 364,958                |   |  | 505,934          |   |  | 360,199                |  
|Accumulated amortization    |  | (319,492         | ) |  | (198,518               | ) |  | (214,859         | ) |  | (167,680               | )
|                            |  |                  |   |  |                        |   |  |                  |   |  |                        |  
|Net                         |  | 320,875          |   |  | 166,440                |   |  | 291,075          |   |  | 192,519                |  
|                            |  |                  |   |  |                        |   |  |                  |   |  |                        |  
|Amortization expense        |  | 104,634          |   |  | 30,839                 |   |  | 87,277           |   |  | 33,069                 |  
|                            |  |                  |   |  |                        |   |  |                  |   |  |                        |  
|Amortization period (years) |  | 5                |   |  | *                      |   |  | 5                |   |  | *                      |  
|                            |  |                  |   |  |                        |   |  |                  |   |  |                        |  

---

|(*) | Rights of way are amortized on a straight-line basis over the periods of the respective contracts, which range from 4 to 30 years.
|--- | ----------------------------------------------------------------------------------------------------------------------------------



F-178



---

The estimated aggregate amortization expense for the next five years is as follows:



|     |  |        
|---- |  | -------
|     |  | Amount 
|2005 |  | 127,643
|2006 |  | 116,150
|2007 |  | 85,405 
|2008 |  | 55,733 
|2009 |  | 28,509 
|     |  |        



As described in Note
22.d, Embratel finalized the renegotiation of a portion of its long-term debt with certain banking institutions. Under U.S. GAAP, pursuant to Emerging Issues Task Force (EITF) Issue No. 96-19, Debtors Accounting for a
Modification or Exchange of Debt Instruments, the exchange of debt instruments with substantially different terms is considered a debt extinguishment for accounting purposes, resulting in the recognition by the debtor of gain or loss on
extinguishment. Embratel has determined that certain of the renegotiated debt agreements qualify for extinguishment treatment under EITF No. 96-19. The effect of accounting for the extinguishment is immaterial for the year ended December 31, 2004
and 2003. Under BR GAAP, the renegotiation of debt is accounted for on a prospective basis and consequently, no gain or loss on extinguishment is recorded.



|36. | Restatement of Previously Issued Financial Statements
|--- | -----------------------------------------------------



Subsequent to the issuance of the Companys financial statements for the year ended December 31, 2003, management determined that certain investments
included in private investment funds that were previously classified as cash equivalents should have been classified as trading securities in accordance with FASB Statement No.115 Accounting for Certain Investments in Debt and Equity
Securities under U.S. GAAP, since a portion of these Funds underlying investments are acquired and held with the intention of selling in the near term. Cash flows from operating activities in Note 35.f have been restated to correct this
classification. These reclassifications had no impact on shareholders equity nor net income for the periods presented. Under U.S. GAAP, the summary of the effects of these restatements is as follows:



|                                                       |  |                    |  |           |  |                    |  |          
|------------------------------------------------------ |  | ------------------ |  | --------- |  | ------------------ |  | ---------
|                                                       |  | 2003               |  | 2002     
|                                                       |  | Previouslyreported |  | Restated  |  | Previouslyreported |  | Restated 
|Net cash from operating activities                     |  | 1,036,285          |  | 450,879   |  | 1,493,542          |  | 1,471,531
|Increase/(decrease) in cash and cash equivalents       |  | 787,200            |  | 201,794   |  | 235,546            |  | 213,535  
|Cash and cash equivalents at the beginning of the year |  | 866,814            |  | 844,803   |  | 631,268            |  | 631,268  
|Cash and cash equivalents at the end of year           |  | 1,654,014          |  | 1,046,597 |  | 866,814            |  | 844,803  



F-179