As filed with
  the Securities and Exchange Commission on June 27, 2003

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SECURITIES
  AND EXCHANGE COMMISSION Washington,
  D.C. 20549

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FORM
  20-F


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|(Mark
      One)
|----------------
|                
|                
|                
|                
|                

Commission
  file number:001-14499

EMBRATEL
  PARTICIPAÇÕES S.A. (Exact Name of
  Registrant as Specified in Its Charter)

|Embratel
      Holding Company                        | The
      Federative Republic of Brazil              
|----------------------------------------------------- | -----------------------------------------------------
|(Translation
      of Registrants Name into English) | (Jurisdiction
      of Incorporation or Organization)

Rua
  Regente Feijó, 166, Sala 1687-B Rio de Janeiro, RJ 20060-060 
  (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
|------------------------------------------ | ------------------------------------------------------
|                                           |                                                       
|preferred
      shares, without par value* | New York
      Stock Exchange                         

|  |                                                                                                                                                                                                                 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
|* | 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 or to be 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:None

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

124,369,031(thousands)
  common shares, without par value 
  208,260,330 (thousands) preferred shares, without par value

Indicate by check
  mark whether the Registrant (1) has 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 Registrant was required to file
  such reports) and (2) has been subject to such filing requirements for the past
  90 days.

Yes
  No

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item
  17       Item
  18

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|                         | TABLE
      OF CONTENTS                                                            |     
|------------------------ | ---------------------------------------------------------------------------------- | ----
|                         |                                                                                    |     
|                         |                                                                                    |     
|                         |                                                                                    | Page
|PART
      I            
|                         |                                                                                    |     
|ITEM
      1.            | IDENTITY
      OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                        | 4   
|ITEM
      2.            | OFFER
      STATISTICS AND EXPECTED TIMETABLE                                      | 4   
|ITEM
      3.            | KEY
      INFORMATION                                                              | 4   
|ITEM
      4.            | INFORMATION
      ON THE COMPANY                                                   | 15  
|ITEM
      5.            | OPERATING
      AND FINANCIAL REVIEW AND PROSPECTS                                 | 33  
|ITEM
      6.            | DIRECTORS,
      SENIOR MANAGEMENT AND EMPLOYEES                                   | 51  
|ITEM
      7.            | MAJOR
      SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            | 56  
|ITEM
      8.            | FINANCIAL
      INFORMATION                                                        | 58  
|ITEM
      9.            | THE
      OFFER AND LISTING                                                        | 64  
|ITEM
      10.           | ADDITIONAL
      INFORMATION                                                       | 67  
|ITEM
      11.           | QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   | 78  
|ITEM
      12.           | DESCRIPTION
      OF SECURITIES OTHER THAN EQUITY SECURITIES                       | 80  
|                        
|PART
      II           
|                         |                                                                                    |     
|ITEM
      13.           | DEFAULTS,
      DIVIDEND ARREARAGES AND DELINQUENCIES                              | 80  
|ITEM
      14.           | MATERIAL
      MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS | 80  
|ITEM
      15.           | CONTROLS
      AND PROCEDURES                                                      | 80  
|ITEM
      16.           | RESERVED                                                                           | 81  
|                        
|PART
      III          
|                         |                                                                                    |     
|ITEM
      17.           | FINANCIAL
      STATEMENTS                                                         | 81  
|ITEM
      18.           | FINANCIAL
      STATEMENTS                                                         | 81  
|ITEM
      19.           | EXHIBITS                                                                           | 81  
|TECHNICAL
      GLOSSARY | 81                                                                                

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PRESENTATION OF FINANCIAL INFORMATION

Embratel Participações S.A., a corporation organized under the laws of the Federative Republic of Brazil, was formed upon the reorganization of Telecomunicações Brasileiras S.A.Telebrás, a corporation organized under the laws of Brazil that, together with its operating subsidiaries, was the primary provider of public telecommunications services in Brazil. We refer to Telebrás, together with its operating subsidiaries, as the Telebrás System. In this annual report, the terms we, us and our mean Embratel Participações S.A. and our consolidated subsidiaries, unless we indicate otherwise.

On May 22, 1998, the
shareholders of Telebrás approved the restructuring of the
Telebrás System to form, in addition to Telebrás, twelve new telecommunications companies,
known as the New Holding Companies, by means of a procedure under Brazilian corporate law
calledcisão
or split-up. The New Holding
Companies were allocated substantially all of the assets and liabilities of Telebrás,
including the shares held by Telebrás of the operating subsidiaries of the Telebrás System.
The New Holding Companies, together with their respective subsidiaries, comprise three regional fixed-line
operators, eight regional cellular operators and one domestic and international long-distance operator.
The restructuring of the Telebrás System into the New Holding Companies is referred to in this annual
report as the Breakup of Telebrás.

We are one of the New Holding
Companies formed upon the Breakup of Telebrás. In the Breakup, all of the share capital of Empresa
Brasileira de Telecomunicações S.A., or Embratel, held by Telebrás, which represented 98.75% of the
total share capital of Embratel, was transferred to us. We are a premier communications provider in Brazil offering a
wide array of advanced communications services over our own state-of-the-art network. We are a leading provider of data
and Internet services in Brazil, based on revenues and network area coverage. Our service offerings include advanced
voice, high-speed data communications services, Internet, satellite data communications and corporate networks. Our
principal assets are the shares of our operating subsidiary, Embratel. We rely almost exclusively on dividends from
Embratel to meet our needs for cash, including for the payment of dividends to our shareholders. See
 Item 5. Operating and Financial Review and Prospects.

Financial Statements

The
  audited consolidated balance sheets included in this annual report as of December
  31, 2001 and 2002 and the related consolidated statements of operations, changes
  in financial position and changes in shareholders equity for each of the
  years ended December 31, 2000, 2001 and 2002, including the notes thereto, are
  our consolidated financial statements. The selected financial information presented
  below should be read in conjunction with our consolidated financial statements
  and the notes thereto. You should carefully review the following discussion
  when evaluating the selected financial information and in reading Item
  5. Operating and Financial Review andProspects.

Accounting Methodologies in Brazil

Until December 31, 1995, publicly-traded companies in Brazil were required to prepare financial statements pursuant to one of two methods: (1) the corporate law method, which was and remains valid for all legal purposes, including for determining income taxes and calculating mandatory minimum dividends; and (2) the constant currency method to present supplementary price-level adjusted financial statements pursuant to standards prescribed by the Brazilian securities commission, known as theComissão de Valores Mobiliáriosor CVM.

| |  | Corporate
      law method.
      The corporate law method, which we refer to as Brazilian corporate law in
      this annual report, provides a simplified methodology for accounting for
      the effects of inflation until December 31, 1995. This method consisted
      of restating permanent assets (property, plant and equipment, investments
      and deferred charges) and shareholders equity accounts using indices
      mandated by the federal government. The net effect of these restatements
      was credited or charged to the statement of operations in a single caption,
      usually entitled monetary correction adjustments or inflation
      adjustments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | Constant
      currency method.
      The Brazilian Institute of Independent Accountants, or IBRACON, and the
      Federal Accounting Council, or CFC, required inflation indexing, known as
      the constant currency method, of financial statements prepared in accordance
      with the accounting principles generally accepted in Brazil, or Brazilian
      GAAP, when the inflationary effect for the year is significant. Under the
      constant currency method, all historical Brazilianrealamounts
      in the financial statements and notes thereto were expressed in constant
      purchasing power as of the latest balance sheet date, in accordance with
      standards prescribed by the CVM for publicly-traded entities.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in Reporting of Results of Operations

Until December 31, 1999, we were required to present our financial statements using the constant currency method in accordance with Brazilian GAAP, which included restatement to constant purchasing power. In accordance with the discussion paper issued by the International Task Force of the American Institute of Certified Public Accountants (AICPA), as of January 1, 2000, Brazilian companies have been allowed to prepare their financial statements in accordance with Brazilian corporate law as the primary basis of accounting in filings with the U.S. Securities and Exchange Commission, or SEC.

Until 1999, our consolidated financial statements were prepared in accordance with the constant currency method. However, for local reporting purposes, we prepared our consolidated financial statements in accordance with accounting practices promulgated by Brazilian corporate law, standards applicable to concessionaires of public telecommunications services, and accounting standards and procedures established by the CVM, which includes monetary restatement of permanent assets and shareholders equity through December 31, 1995.

In order to conform the financial statements made available to our shareholders in the United States of America to the same basis used in the primary market in Brazil, effective from January 1, 2000, our management elected to change the presentation of our financial statements from Brazilian GAAP to Brazilian corporate law. Given that this change constitutes a change in the reporting currency, all prior periods presented have been restated to be in accordance with Brazilian corporate law and to facilitate comparability with subsequent periods.

Brazilian Corporate Law and U.S. GAAP

Our consolidated financial statements are prepared in accordance with Brazilian corporate law, which differs in certain material respects from generally accepted accounting principles in the United States, or U.S. GAAP. See note 29 to our consolidated financial statements for a summary of the differences between the Brazilian corporate law accounting method and U.S. GAAP, and a reconciliation to U.S. GAAP of shareholders equity as of December 31, 2001 and 2002, and net income for the three years ended December 31, 2000, 2001 and 2002.

Brazilian corporate law is considered to be a comprehensive basis of GAAP, and it is used as the primary basis of reporting in Brazil. As described above, Brazilian corporate law does not allow for price-level accounting for periods after December 31, 1995. Under U.S. GAAP, inflation accounting continued until July 1, 1997, when Brazil was no longer considered to be a highly inflationary economy for U.S. GAAP purposes.

The amortization of the restatement of fixed assets, which resulted from the inflation accounting in 1996 and 1997 is recognized in the reconciliation to U.S. GAAP, net of related deferred tax.

Minority Interests

The portion of equity and net income attributable to shareholders other than those of the registrant is reflected as minority interests in our consolidated financial statements. At December 31, 2002, such minority shareholders owned 1.23% of the share capital of our subsidiary, Embratel. Institutional shareholders, including pension funds, hold approximately 30% of the minority interests in Embratel. These shareholders obtained their interests in Embratel in auctions held in April 1988, December 1991, and February 1997, whereby Companhia Vale do Rio Doce S.A., Banco do Brasil S.A. and Centrais Elétricas Brasileiras S.A., then state-owned companies that formerly held interests in Embratel, sold
their interests to the public. The remainder of the minority interests is held by Companhia Brasileira de Liquidação e Custódia, a clearinghouse of the São Paulo Stock Exchange.

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FORWARD-LOOKING INFORMATION

This annual report contains forward-looking statements. We and our representatives may also make forward-looking statements in press releases and oral statements. Statements that are not statements of historical fact, including statements about the beliefs and expectations of our management, are forward-looking statements. The words anticipates, believes, estimates, expects, forecasts, intends, plans, predicts, projects, targets and other similar words are intended to identify these statements, which necessarily involve known and unknown risks and uncertainties. Known risks and uncertainties, some of which are discussed in this annual report, include those resulting from the following factors:

| |  | the short
      history of our operations as an independent, private-sector entity;
| | - | -----------------------------------------------------------------------------------
| |   |                                                                                    
| |  | the introduction
      of competition to the Brazilian telecommunications sector;  
| |   |                                                                                    
| |  | the cost
      and availability of financing;                                      
| |   |                                                                                    
| |  | the performance
      of the Brazilian economy generally;                          
| |   |                                                                                    
| |  | the exchange
      rates between Brazilian and foreign currencies; and             
| |   |                                                                                    
| |  | the federal
      governments telecommunications policy.                          

Our actual results of operations may be different from our current expectations, and you should not place undue reliance on these forward-looking statements. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments.

Neither our independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures, with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information.

Certain
  terms are defined the first time that they are used in this annual report. Technical
  terms are defined in the Technical Glossary that begins on page
  81.

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PART I

ITEM
  1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM
  2.   OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM
  3.   KEY INFORMATION

A.  Selected
  financial data

The
  information in this section should be read in conjunction with our consolidated
  financial statements, and the notes thereto, included elsewhere in this annual
  report. Our consolidated financial statements have been prepared in accordance
  with Brazilian corporate law, which differs in certain respects from U.S. GAAP.
  See note 29 to our consolidated financial statements for a discussion of these
  differences. Such data as of December 31, 2001 and 2002 and for each of the
  three years ended December 31, 2002 have been derived from our audited consolidated
  financial statements, which appear elsewhere in this document. The information
  below should be read in conjunction with, and is qualified in its entirety by
  reference to, the consolidated financial statements and notes thereto and Item
  5. Operating and Financial Review and Prospects. In addition, the following
  table presents selected financial data as of December 31, 1998, 1999, 2000,
  2001 and 2002, and for each of the five years in the period ended December 31,
  2002, which has been prepared in a manner consistent with the information set
  forth in the consolidated financial statements.

|                                                    | Year
        Ended December 31,                               |           
|--------------------------------------------------- | ------------------------------------------------------------- | ----------
|                                                    |                                                               |           
|                                                    |                                                               | 1998      
|                                                    |                                                               |           
|                                                    | (in
        thousands ofReais,
        except per share data) |           
|STATEMENT
      OF OPERATIONS DATA:                 |                                                               |           
|Brazilian
      Corporate Law                       |                                                               |           
|Net operating
      revenue                         | $                                                             | 4,000,106 
|Cost
      of services(1)                           |                                                               | (2,785,741
|Gross profit                                        |                                                               | 1,214,365 
|Operating
      income (expenses):                  |                                                               |           
|Selling
      expenses                              |                                                               | (180,176  
|General
      and administrative expenses(2)        |                                                               | (398,194  
|Other
      operating income (expenses), net        |                                                               | (577,244  
|Operating
      income (loss) before interest       |                                                               | 58,751    
|Interest
      income                               |                                                               | 245,854   
|Interest
      expense                              |                                                               | (177,124  
|Operating
      income (loss)                       |                                                               | 127,481   
|Operating
      income (loss) per thousand shares  |                                                               |           
|Basic
      and diluted                             |                                                               |           
|Common shares                                       |                                                               | 0.38      
|Preferred
      shares                              |                                                               | 0.38      
|Extraordinary
      non-operating income           |                                                               |           
|ILL(3)                                              |                                                               |          
|Non-operating
      income (expense)                |                                                               | (65,975   
|Income (loss)
      before income taxes and         |                                                               |           
|minority
      interest                             |                                                               | 61,506    
|Income tax
      and social contribution benefit    |                                                               |           
|(expense)                                           |                                                               | 63,585    
|Income (loss)
      before minority interest        |                                                               | 125,091   
|Minority
      interest(4)                          |                                                               | (1,513    
|Net income
      (loss)                             |                                                               | 123,578   
|                                                    |                                                               |           

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|                                                        | Year
      Ended December 31,                             |  
|------------------------------------------------------- | --------------------------------------------------------- | -
|                                                        |                                                           |  
|                                                        | 1998                                                      |  
|                                                        |                                                           |  
|                                                        | (in
      thousands ofReais,
      except per share data) |  
|Net income
      (loss) per thousand shares            |                                                           |  
|Basic
      and diluted:                                |                                                           |  
|Common shares                                           | 0.37                                                      |  
|Preferred
      shares                                  | 0.37                                                      |  
|                                                        |                                                           |  
|U.S.
      GAAP                                         |                                                           |  
|Gross Revenues                                          | 5,123,234                                                 |  
|Cost of
      services (including gross receipts taxes) | (3,908,869                                                | )
|Operating
      income (loss)                           | 447,275                                                   |  
|Operating
      income (loss) per thousand shares      |                                                           |  
|Basic
      and diluted:                                |                                                           |  
|Common shares                                           | 1.36                                                      |  
|Preferred
      shares                                  | 1.36                                                      |  
|Net income
      (loss)                                 | 418,412                                                   |  
|Net income
      (loss) per thousand shares            |                                                           |  
|Basic
      and diluted:                                |                                                           |  
|Common shares                                           | 1.27                                                      |  
|Preferred
      shares                                  | 1.27                                                      |  
|                                                        |                                                           |  
|Weighted
      average number of shares                 |                                                           |  
|outstanding:                                            |                                                           |  
|Common shares
      (thousands)                         | 124,369,031                                               |  
|Preferred
      shares (thousands)                      | 205,457,214                                               |  
|Cash dividend
      paid per thousand shares:           |                                                           |  
|Common shares
      (in Reais)                          |                                                          |  
|Common shares
      (in U.S. dollars)(5)                |                                                          |  
|Preferred
      shares (in Reais)                       |                                                          |  
|Preferred
      shares (in U.S. dollars)(5)             |                                                          |  
|                                                        |                                                           |  
|BALANCE
      SHEET DATA:                               |                                                           |  
|Brazilian
      Corporate Law                           |                                                           |  
|Property,
      plant and equipment, net                | 6,023,703                                                 |  
|Total assets                                            | 8,527,507                                                 |  
|Loans and
      financing  current portion             | 155,088                                                   |  
|Loans and
      financing  non-current portion         | 511,085                                                   |  
|Net assets                                              | 5,510,581                                                 |  
|Capital
      share                                     | 5,256,609                                                 |  
|Quantity
      of outstanding shares (thousands)        | 334,399,028                                               |  
|U.S. GAAP                                               |                                                           |  
|Property,
      plant and equipment, net                | 6,286,183                                                 |  
|Total assets                                            | 8,998,963                                                 |  
|Loans and
      financing  current portion             | 638,044                                                   |  
|Loans and
      financing  non-current portion         | 28,129                                                    |  
|Net assets                                              | 5,637,273                                                 |  
|Capital
      share                                     | 5,256,609                                                 |  
|Quantity
      of outstanding shares (thousands)        | 334,399,028                                               |  
|                                                        |                                                           |  

|   
|---
|(1)
|   
|(2)

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|    | (loss)
      before income taxes and minority interest for the periods ended December
      31, 1998, 1999, 2000 and 2001 also reflect such reallocations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(3) | Extraordinary
      non-operating income  ILL refers to recognition of a tax credit related
      to the federal governments imposition from 1989 to 1992 of a tax on
      certain profits that had not been distributed. From 1989 through 1992, we
      paid this tax in accordance with the provisions of tax legislation then
      in force. In 1996, the Brazilian Supreme Court ruled that ILL was unconstitutional,
      since undistributed profits do not represent a taxable event. Based on this
      decision on the issue, we sought a tax credit to the court in 1999 and received
      the final decision affirming the tax credit in 2002. See note 10 to our
      consolidated financial statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(4) | Minority
      interests represent the portion of net income attributable to shareholders
      other than the registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(5) | Calculated
      using exchange rate of Reais per U.S. dollar at period end. See 
      Exchange Rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(6) | Includes
      net book value of R$56.4 million for capital leases in 2002. In 2001, the
      company was accruing the contracts only for U.S. GAAP purposes. Net book
      value for December 31, 2001 was R$38.3 million. For Brazilian corporate
      law purposes in 2001 the amounts were expensed as incurred. See note 15.a.2.
      to our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                      

Exchange Rates

The following table sets forth the period-end average, high and low noon buying rate, expressed inReaisper U.S. dollar for the periods indicated.

|                                      |  | Exchange
      Rates of NominalReaisPer
      U.S. dollar | 
|------------------------------------- |  | --------------------------------------------------------- | 
|                                      |  |                                                           | 
|Period                                |  | High                                                      | 
|                                      |  |                                                           | 
|1998                                  |  | 1.209                                                     | 
|1999                                  |  | 2.165                                                     | 
|2000                                  |  | 1.985                                                     | 
|2001                                  |  | 2.800                                                     | 
|2002                                  |  | 3.955                                                     | 
|January
      2003                    |  | 3.662                                                     | 
|February
      2003                   |  | 3.658                                                     | 
|March
      2003                      |  | 3.564                                                     | 
|April
      2003                      |  | 3.336                                                     | 
|May
      2003                        |  | 3.028                                                     | 
|June 2003 (as of June
      23, 2003) |  | 2.978                                                     | 
|                                      |  |                                                           | 

|                                      
|--------------------------------------
|Source:   Central
      Bank of Brazil

|                                                  | 
|------------------------------------------------- | 
|B.Capitalization
      and Indebtedness          
|                                                  | 
|Not
      applicable.                            
|                                                  | 
|C.Reasons
      for the Offer and Use of Proceeds
|                                                  | 
|Not
      applicable.                            
|                                                  | 
|D.Risk
      Factors                             

You
  should consider the following risks with respect to an investment in our company
  and investments in Brazilian
  corporations that are not normally associated with investments in the securities
  of issuers in the United States and other jurisdictions.

Risk Factors Relating to Embratel and the Brazilian Telecommunications Industry

The Brazilian telecommunications regulatory environment is uncertain.

The adoption of telecommunications regulations and the privatization of the Telebrás System in 1997 have led to broad changes in the operating, regulatory and competitive environment for Brazilian telecommunications.

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The changes include:

   establishment
  of an independent regulator:Agência
  Nacional de Telecomunicações  Anatel;

   development of comprehensive regulation of the telecommunications sector;

   sale of a controlling interest in the companies of the Telebrás System to private investors; and

   introduction of competition in the provision of all telecommunications services.

All of these developments have materially affected us and the other telecommunications companies, and we cannot predict the effects of further regulatory changes on our business, financial condition, results of operations or prospects. In reviewing historical information and in evaluating our future financial and operating performance, you must consider carefully the extensive changes in the structure and regulation of our industry.

The concessions granted by Anatel that allow us to provide telecommunications services expire in 2005 and we cannot be sure that it will be renewed.


In Brazil, companies wishing to offer telecommunications services to consumers are required to obtain a concession from Anatel. Concessions to Embratel have been granted until 2005, subject to certain obligations, with the possibility of renewal for an additional 20 years. Our business relies on such concessions, and revocation will result in severe adverse effects on us and our financial condition. Although we are confident that Anatel will renew our concession, we cannot be certain that the concession will be renewed.

We are obligated to meet certain quality of service goals and maintain quality of service standards. Failure to meet such obligations can result in fines.


We are obligated by Anatel to meet certain quality of service goals, including, for example, minimum call completion rates, maximum busy circuit rates, operator availability and responsiveness to repair requests. Failure to meet quality of service obligations can result and has resulted in the imposition of fines by Anatel and other governmental entities. Our ability to meet these goals can be impeded by factors beyond our control and we cannot assure you that we will meet these goals in the future or that we will not be fined in the future.

We operate in a highly competitive industry with participants that have significant resources and existing customers, which could intensify price competition and limit our ability to increase our market share.


If we are unable to compete effectively against our competitors, it could lead to price reductions, lower revenue, underutilization of our services, reduced operating margins and loss of market share. Some of our competitors in certain markets where we operate have, and some potential competitors may have, competitive advantages including the following:

   greater
  presence, brand awareness, infrastructure and capilarity;

   networks directly connected to each home and businesses;

   greater financial, technical, marketing and other resources;

   significantly lower interconnection costs with other networks; and

   well-established relationships with customers.

The industry in which we conduct our business is subject to rapid technological changes and such changes could have a material adverse effect on our ability to provide competitive services.


The telecommunications industry is in a period of rapid technological change. Our future success depends, in part, on our ability to anticipate and adapt in a timely manner to technological changes. We expect that new products and technologies will emerge and that existing products and technologies will further develop. These new

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products and technologies may reduce the prices for our services or they may be superior to, and render obsolete, the products and services we offer and the technologies we use, and may consequently reduce the revenues generated by our products and services and require investment in new technology. As a result, our most significant competitors in the future may be new entrants to our markets that would not be burdened by an installed base of older equipment. It may be very expensive for us to upgrade our products and technology in order to continue to compete effectively.

We
  are subject to regulatory limitations on most of the prices we can charge our
  customers.

Rates for most of the telecommunications services provided by us are subject to final approval by Anatel, to which we submit requests for rate adjustments. Concessions to the regional fixed-line companies and Embratel provide for a price-cap mechanism to set and adjust rates on an annual basis. We are subject to comprehensive regulations that limit our ability to set tariffs for our services. Such regulations may limit our ability to respond to potential or actual competition.

Under Brazils telecommunications regulatory framework, telecommunications companies have the ability to set their own tariffs beginning three years after privatization if there is effective competition in the market. In light of existing competition in the long distance market, we filed on May 15, 2002 a request with Anatel for permission to set our tariffs. However, we are still not certain whether Anatel will approve our request.

We
  must successfully implement our business plan, but factors beyond our control
  may prevent us from doing so, which could have a material adverse effect on
  our business.


Our ability to increase our revenues and maintain our position as a leading Brazilian provider of advanced telecommunications and Internet services will depend in large part on the successful, timely and cost-effective completion of our business plan.

Factors
  that could affect the timing of the completion of our business plan include
  our ability to:

| |  | manage adverse
      regulatory changes;                                       
| | - | -------------------------------------------------------------------------------
| |   |                                                                                
| |  | cope with
      price wars;                                                    
| |   |                                                                                
| |  | maintain
      our access to capital in times of adverse macroeconomic changes;
| |   |                                                                                
| |  | enter into
      necessary contracts with third parties;                       
| |   |                                                                                
| |  | manage costs;
      and                                                        
| |   |                                                                                
| |  | attract
      and retain highly skilled and qualified personnel.               

We
  are exposed to special risks in connection with our international call services.

Revenues from international service also reflect payments under approximately 268 bilateral agreements between us and foreign telecommunications administrations or private carriers, which are influenced by the guidelines of the international tariff and trade regulations and cover virtually all international calls to and from Brazil. Various factors, including unauthorized international traffic (commonly known asbypass), could affect the amount of net settlement payments from U.S. or other international carriers to us in future years. These include increases in the proportion of outgoing to incoming calls. Calls originated by U.S. carriers currently exceed calls we originate.

Our
  controlling shareholder may be able to take actions that do not reflect the
  best interests of our other shareholders.

As of December 31, 2002, WorldCom, through its affiliates, owned 51.8% of our voting shares. As a result, WorldCom is able to elect a substantial majority of the members of our board of directors and has the power to determine the outcome of most actions requiring shareholder approval, including, subject to the requirements of

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Brazilian law,
  the payment of dividends and the disposition of assets. See also Item
  6. Directors, SeniorManagement
  and Employees and Item 7. Major Shareholders and Related Party Transactions.
  Our relationship with WorldCom provides us with certain competitive advantages
  obtained through technology transfer and a management agreement as a result
  of WorldComs experience in the telecommunications business. WorldCom also
  provides us with increased negotiating power through alliances with other affiliates,
  as well as access to technology, product research and development and purchasing
  power.

On July 21, 2002, WorldCom filed for protection from its creditors under the provisions of Chapter 11 of the U.S. Bankruptcy Code, after it disclosed that it had not reported in accordance with generally accepted accounting principles charges, now in an aggregate amount of more than US$11 billion, on its financial statements during the years from 2000 through the first quarter of 2002. WorldCom disclosed that it intends to restate and re-issue its financial statements for these years and announced on March 13, 2003 that it will write down its assets by US$79.8 billion, consisting of US$45 billion of goodwill and US$34.8 billion in fixed assets. WorldCom filed its plan of reorganization with the bankruptcy court on April 14, 2003, and on the same day it announced that it will carry on its business under the MCI brand.

On
  May 22, 2003, the court approved the plan to be sent to its creditors for a
  vote.

On June 26, 2002, the SEC announced that it had filed charges against WorldCom, alleging violations of antifraud and reporting provisions of the U.S. federal securities laws. On November 26, 2002, WorldCom announced that it had agreed to settle its civil lawsuit with the SEC and has consented to a permanent injunction that will resolve claims brought by the SECs suit regarding the companys past accounting practices. On May 19, 2003, WorldCom and the SEC submitted a settlement agreement to the U.S. District Court for approval pursuant to which WorldCom has agreed to pay
US$500 million in fines to be distributed to investors. We cannot assure you that developments at or any actions by our controlling shareholder will not have a material adverse effect on the price of our preferred shares or ADSs or our financial conditions and results of operations.

We
  are parties to various legal proceedings.

We
  are parties to various legal proceedings. Our management believes that such
  actions, if decided adversely to us, would have a material adverse impact on
  our business, financial condition and results of operations. Some of these legal
  proceedings are with respect to:

| |  | the Breakup
      of Telebrás;                                                                                                                                                         
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                        
| |  | foreign
      source operating income;                                                                                                                                                 
| |   |                                                                                                                                                                                        
| |  | withholding
      tax on remittances to foreign telecommunications companies;                                                                                                          
| |   |                                                                                                                                                                                        
| |  | Contribuição
      para Financiamento da Seguridade Social(COFINS),
      a federal social contribution charge;                                                                        
| |   |                                                                                                                                                                                        
| |  | COFINS levied
      on inbound traffic;                                                                                                                                                
| |   |                                                                                                                                                                                        
| |  | Programa
      de Integração Social(PIS)
      credits raised in accordance with the rules issued by the Superior Tribunal
      of Justice not accepted by the Federal Revenue Agency;
| |   |                                                                                                                                                                                        
| |  | Imposto
      sobre Circulação de Mercadorias e Serviços(ICMS)
      tax on international outbound traffic and bundled services;                                                       
| |   |                                                                                                                                                                                        
| |  | legal proceedings
      against Telebrás; and                                                                                                                                          
| |   |                                                                                                                                                                                        
| |  | legal proceedings
      initiated by Anatel against us.                                                                                                                                

See Item 8. Financial InformationConsolidated Statements and Other Financial InformationLegal Proceedings for a detailed discussion of these proceedings.

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Risks Relating to Our Preferred Shares and ADSs.

The
  ADSs generally do not give you voting rights.

Our American Depositary Shares, or ADSs, represent preferred shares of Embratel Participações. Under Brazilian law, holders of preferred shares generally do not have the right to vote at our shareholder meetings. Our preferred shares do not entitle the holder to vote at such shareholders meetings, except under specific circumstances. See Item 10. Additional InformationVoting Rights for further information on this subject.

The
  preferred shares and ADSs do not entitle you to a fixed dividend.

Under Brazilian corporate law and our by-laws, unless our board of directors decides otherwise, we must pay our shareholders a mandatory distribution equal to 25% of our net income as adjusted for this purpose. Therefore, whether or not you receive a dividend depends on the amount of the mandatory distribution, if any, and whether our board of directors exercises its discretion subject to shareholder ratification to suspend these payments. See Item 8. Financial InformationConsolidated Statements and Other Financial InformationDistribution Policy and Dividends for a more detailed discussion of mandatory distributions.

You
  might be unable to exercise preemptive rights with respect to the preferred
  shares.

In the event of a capital increase, which would result in reducing the proportion of capital represented by preferred shares, preferred shareholders have preemptive rights to subscribe to preferred shares in proportion to their shareholdings to the extent necessary to prevent dilution of their interest in our company.

ADS holders may not be able to exercise preemptive rights relating to the preferred shares underlying the ADSs unless a registration statement under the U.S. Securities Act of 1933, or the Securities Act, as amended, is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares relating to these preemptive rights, and therefore, we cannot assure you that any such registration statement will be filed. Unless we file a registration statement or an exemption from registration applies, you may receive only the net proceeds from the sale of your preemptive rights by the depositary of the ADSs or, if the preemptive rights cannot be sold, they will be allowed to lapse.

If
  you exchange the ADSs for preferred shares, you risk losing certain foreign
  currency remittances and Brazilian tax advantages.

The ADSs benefit from the depositarys certificate of foreign capital registration, which permits the depositary to convert dividends and other distributions with respect to the preferred shares into foreign currency and remit the proceeds abroad. If you exchange your ADSs for preferred shares, you will be entitled to rely on the depositarys certificate of foreign capital registration for five business days from the date of exchange. Thereafter, you will not be able to remit abroad non-Brazilian currency unless you obtain your own certificate of foreign capital registration or you qualify under Resolution 2,689 of the Central Bank of Brazil dated January 26, 2000, known as Resolution 2,689, which entitles certain investors to buy and sell shares on Brazilian stock exchanges without obtaining separate certificates of registration. If you do not qualify under Resolution 2,689, you will generally be subject to
 less favorable tax treatment on distributions with respect to the preferred shares. We cannot assure you that the depositarys certificate of registration or any certificate of foreign capital registration obtained by you may not be affected by future legislative or regulatory changes, or that additional Brazilian law restrictions applicable to your investment in the ADSs may not be imposed in the future. For a more complete description of Brazilian tax regulations, see Item 10. Additional InformationTaxationBrazil.

The
  relative volatility and illiquidity of the Brazilian securities markets may
  adversely affect you.

Investing in securities, such as the preferred shares or ADSs, of issuers from emerging market countries, including Brazil, involves a higher degree of risk than investing in securities of issuers from more developed countries.

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Investments involving risks relating to Brazil, such as investments in ADSs, are generally considered speculative in nature and are subject to certain economic and political risks, such as:

| | changes
      to the regulatory, tax, economic and political environment that may affect
      the ability of investors to receive payment, in whole or in part, with respect
      to their investments; and
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                              
| | restrictions
      on foreign investment and on repatriation of capital invested.                                                                                                                            

The Brazilian securities market is substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States. This may substantially limit your ability to sell the preferred shares underlying your ADSs at a price and time at which you wish to do so. The São Paulo Stock ExchangeBOVESPA, the only Brazilian stock exchange, had a market capitalization of approximately US$124.0 billion as of December 31, 2002 and an average daily trading volume of approximately US$197.9 million for 2002. In comparison, the NYSE had a market capitalization of US$9.4 trillion as of December 31, 2002 and an average daily trading volume of approximately US$40.9 billion for 2002.

There
  is also signifiantly greater concentration
  in the Brazilian securities market. The ten largest companies in terms of market
  capitalization represented approximately 48.6% of the aggregate market capitalization
  of the São Paulo Stock Exchange as of December 31, 2002. The top ten
  stocks in terms of trading volume accounted for approximately 56.5% of all shares
  traded on the São Paulo Stock Exchange in 2002.

| | If we were treated
      as a passive foreign investment company, a U.S. holder of ADSs would be
      subject to disadvantageous rules under the U.S. tax laws.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

If
    we are characterized as a passive foreign investment company, or PFIC, in
    any year, U.S. holders of ADSs could be subject to unfavorable U.S. federal
    income tax treatment. Although we do not believe that we were a PFIC in 2002,
    there can be no assurance that our business and activities will not lead to
    PFIC status for us in the future. PFIC classification is a factual determination
    made annually and thus may be subject to change. For a description of the
    PFIC rules, see Item 10. Additional InformationTaxationUnited
    States.


Risks Relating to Brazil

| | The Brazilian government
      has exercised, and continues to exercise, significant influence over the
      Brazilian economy. Brazilian political and economic conditions have a direct impact
      on our business and the market price of the preferred shares.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Brazilian
government frequently intervenes in the Brazilian economy and occasionally makes drastic
changes in policy. The governments actions to control inflation and other policies have
often involved, among other measures, wage and price controls, currency devaluations, capital
controls and limits on imports. Our business, financial condition and results of operations
may be adversely affected by changes in policy involving tariffs and exchange controls, as well
as factors such as:

| | currency
        fluctuations;                                                                       
|- | -----------------------------------------------------------------------------------------------------
|  |                                                                                                      
| | inflation;                                                                                           
|  |                                                                                                      
| | price
        instability;                                                                           
|  |                                                                                                      
| | interest
        rates;                                                                              
|  |                                                                                                      
| | tax policy;
        and                                                                              
|  |                                                                                                      
| | other
        political, diplomatic, social and economic developments in or affecting
        Brazil.



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The Brazilian governments actions to maintain economic stability and public speculation about possible future actions may contribute significantly to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.


Brazil has historically experienced extremely high rates of inflation. Inflation, along with governmental measures to combat inflation, has had significant negative effects on the Brazilian economy in general. Beginning in December 1993, the Brazilian government introduced an economic stabilization plan called theRealPlan. The primary objectives of theRealPlan were to reduce inflation and build a foundation for sustained economic growth.

On
  July 1, 1994, the Brazilian government introduced the new currency, thereal.
  Since the introduction of thereal,
  Brazils inflation rate has been substantially lower than in previous periods.
  The annual rates of inflation, as measured by the National Consumer Price Index,
  orÍndice
  Nacional de Preços ao Consumidor,
  were:

|Year |  | Rate
      of Inflation
|---- |  | -----------------------
|     |  |                        
|1993 |  | 2,489.1                
|1994 |  | 929.3                  
|1995 |  | 22.0                   
|1996 |  | 9.1                    
|1997 |  | 4.3                    
|1998 |  | 2.5                    
|1999 |  | 8.4                    
|2000 |  | 5.3                    
|2001 |  | 9.4                    
|2002 |  | 14.7                   

Brazil may experience high levels of inflation in the future. We cannot assure you that recent lower levels of inflation will continue. Future governmental actions, including actions to adjust the value of thereal, may trigger increases in inflation. Accordingly, periods of substantial inflation may in the future have material adverse effects on the Brazilian economy, the Brazilian financial markets and on our business, financial condition and results of operations.

Fluctuations in the value of Brazils currency against the value of the U.S. dollar may result in uncertainty in the Brazilian economy and the Brazilian securities market, which may adversely affect our financial condition and results of operations and, consequently, the market value of the preferred shares and ADSs.


As a result of inflationary pressures, the Brazilian currency has been devalued periodically during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over long periods, devaluations of the Brazilian currency generally have correlated with the rate of inflation in Brazil, devaluations over shorter periods have resulted in significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies.

Devaluations of therealand continued currency instability could affect our ability to meet our foreign currency obligations in the future and result in a monetary loss relating to this indebtedness. See Item 11. Quantitative and Qualitative Disclosures About Market Risk for information about our hedging policy. In addition, fluctuations in the value of therealrelative to the U.S. dollar can affect the market value of the ADSs. Devaluation may reduce the U.S. dollar value of distributions and dividends on the ADSs and may also reduce the market value of the preferred shares and the ADSs.

Brazil has a newly-elected government.

Presidential elections were held in Brazil in 2002. Over the past eight years our government has strengthened democratic institutions and improved economic fundamentals. The newly-elected government has largely continued the economic policies of the previous government; however, we cannot provide assurances that the new government

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will not change policies in a way that undermines investor confidence and/or adversely affects our operations and/or the price of our preferred shares and ADSs.

The markets perception of the risk of investing in Brazil as measured by the spread-over-U.S. treasuries on the Brazilian sovereign debt C-bonds, has improved since the beginning of 2003 due at least in part to the lessening of uncertainties associated with the economic policies to be followed by Brazils new president. However, there is no assurance that the perception of the risk of investing in Brazil will remain at current levels or continue to drop.

Thependingtax reform in Brazil may result in an increased tax burden upon us, with adverse effects on our financial condition and results of operations.


The Brazilian government has proposed broad tax reform bills, mainly designed to reduce the public deficit through a tax increase. It is anticipated that the tax reform will include, for example, the creation of a value-added tax on goods and services which would replace six existing taxes:

| | Contribuição
        Social sobre o Lucro Líquido(CSLL),
        a social contribution tax on profits;
|- | ------------------------------------------------------------------------------------------------------
|  |                                                                                                       
| | Imposto
        sobre Produtos Industrializados(IPI),
        a federal tax on industrial products;   
|  |                                                                                                       
| | PIS, a
        social contribution tax on salaries;                                                   
|  |                                                                                                       
| | COFINS,
        a social contribution tax on gross revenues (operating and financial);                
|  |                                                                                                       
| | ICMS,
        a state tax on the circulation of goods and services; and                               
|  |                                                                                                       
| | Imposto
        sobre Serviços(ISS),
        a municipal tax on services.                             

In addition, on June 12, 2002, Constitutional Amendment No. 37/2002 extendedContribuição Provisória sobre Movimentações Financeiras(CPMF), a temporary tax on financial transactions, until 2004. The CPMF rate will be levied at 0.38% until December 31, 2003, and will be reduced to 0.08% in 2004, in accordance with this amendment. See Item 4. Information on the CompanyBusiness OverviewTaxes on Telecommunications Services. Although there can be no assurance regarding the outcome of this proposed tax reform in Brazil, it may subject us to taxes higher than the ones to which we are currently subject, with adverse effects on our business, financial condition and results of operations.

Restrictions on the movement of capital out of Brazil may hinder your ability to receive dividends and distributions on, and the proceeds of any sale of, the preferred shares.


The Brazilian government may impose temporary restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors, such as yourself, of proceeds from your investments in Brazil. Brazilian law permits the government to impose these restrictions whenever there is a serious imbalance in Brazils balance of payments or reasons to foresee a serious imbalance.

Government restrictions on capital outflow may hinder or prevent the custodian of our preferred shares in Brazil, or you if you have exchanged your ADSs for the underlying preferred shares, from converting the proceeds relating to the preferred shares into U.S. dollars and remitting those proceeds abroad. You could be adversely affected by delays in obtaining any required governmental approval for conversion of Brazilian currency payments and remittances abroad in respect of the preferred shares underlying the ADSs. In addition, the Brazilian government may institute a more restrictive exchange control policy in the future. See Item 10. Additional InformationTaxationBrazil.

Our creditors may be unable to attach certain of our assets to secure a judgment.


Brazilian courts will not enforce any attachment with respect to property located in Brazil and determined by the court to be dedicated to the provision of essential public services. A substantial portion of our assets may be considered to be dedicated to the provision of an essential public service. If a Brazilian court were to make such a

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determination
  with respect to certain of our assets, those assets would not be subject to
  attachment, execution or other legal process and our creditors may not be able
  to realize a judgment against our assets.

Developments
  in other emerging market countries may affect the Brazilian securities markets.


Developments
  in other emerging markets, including Latin America, may adversely affect the
  market price of our preferred shares and ADSs.

Economic
  and market conditions in other emerging market countries, especially those in
  Latin America, influence the market for securities issued by Brazilian companies
  and investors perception of economic conditions in Brazil.

For
  example, in 2001, after prolonged periods of recession and political instability,
  Argentina announced that it would not service its public debt. In order to address
  the worsening economic and social crisis, the Argentine government abandoned
  its decade-old fixed U.S. dollar-peso exchange rate and allowed its currency
  to float. The Argentine peso experienced an approximate 70% devaluation against
  the U.S. dollar in 2002.

Crises
  in Argentina and other Latin America countries have and may continue to affect
  the perception of risk in Brazil by foreign investors and impact the volatility
  in market prices for Brazilian securities. These types of events may adversely
  affect our ability to borrow funds at an acceptable interest rate or to raise
  equity capital when and if there should be a need. Accordingly, adverse developments
  in other emerging market countries could lead to a reduction in the demand for,
  and market price of, our preferred shares and ADSs.

Our
  financial statements may not give you the same information as financial statements
  prepared under U.S. accounting rules.


Publicly
  available information about public companies in Brazil is generally less detailed
  and not as frequently updated as the information that is regularly published
  by or about listed companies in the United States and certain other countries.
  In addition, although we are subject to the periodic reporting requirements
  of the Securities Exchange Act of 1934, as amended, or the Exchange Act, the
  periodic disclosure required of foreign issuers under the Exchange Act is more
  limited than the periodic disclosure required of domestic U.S. issuers. We prepare
  our consolidated financial statements in accordance with Brazilian corporate
  law, which differs in significant respects from U.S. GAAP. See note 29 to our
  consolidated financial statements.

Risk
  of error in forward-looking statements.


All
  statements in this annual report that are not clearly historical in nature are
  forward-looking. Examples of forward-looking statements include:

| | statements
      concerning our operations and prospects;                                                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                         
| | the expected
      size of growth in the Brazilian telecommunications market;                                                           
|  |                                                                                                                                         
| | estimated
      demand forecasts;                                                                                                       
|  |                                                                                                                                         
| | our ability
      to secure and maintain telecommunications infrastructure licenses, rights-of-way
      and other regulatory approvals;
|  |                                                                                                                                         
| | our strategic
      initiatives and plans for business growth;                                                                          
|  |                                                                                                                                         
| | industry
      conditions;                                                                                                              
|  |                                                                                                                                         
| | funding
      needs and financing sources;                                                                                              
|  |                                                                                                                                         
| | network
      completion and product development schedules;                                                                             
|  |                                                                                                                                         
| | expected
      characteristics of competing networks, products and services; and                                                        

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| | other statements
      of our expectations, beliefs, future plans and strategies, anticipated developments
      and other matters that are not historical facts.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

These
  forward-looking statements are uncertain, and we cannot assure you that any
  such statements will prove to be correct. Actual results and developments may
  be materially different from those expressed or implied by such statements.
  You should carefully review the other risk factors set forth in this section
  for a discussion of factors that could result in any of these forward-looking
  statements proving to be inaccurate.

ITEM
  4.   INFORMATION ON THE COMPANY

A.  History
  and Development of the Company

The
  Telebrás System, the Regulatory Reform and the Privatization

Until
  1972, more than 900 independent companies provided telephone services in Brazil.
  Between 1972 and 1975, Telecomunicações Brasileiras S.A.Telebrás,
  a company controlled by the federal government, acquired almost all the telephone
  companies in Brazil, constituting the Telebrás System.

Embratel
  was one of Telebrás subsidiaries and owned and operated all of
  the interstate and international telephone transmission facilities in Brazil
  at that time. Through the remaining 27 operating subsidiaries, Telebrás
  was the principal provider of local and intrastate telecommunications service
  and the leading provider of cellular mobile telephone service. The Telebrás
  System also provided telecommunications-related services such as data communication,
  sound and image transmission and other value-added services throughout Brazil.

On
  July 16, 1997, the federal Congress adopted Law No. 9,472, theLei
  Geral de Telecomunicações,
  or the Telecommunications Law, which established an independent regulatory agency
  calledAgência
  Nacional de Telecomunicações,
  or Anatel, and provided for the establishment of a new regulatory framework,
  the introduction of competition and the privatization of the Telebrás
  System.

On
  January 30, 1998, in preparation for the privatization, each of the operating
  subsidiaries, other than Embratel and Companhia Telefônica da Borda do
  CampoCTBC, spun off its cellular telephone operations into a separate
  company. On April 2, 1998, the Presidential Decree No. 2,534, known as General
  Grant Plan, orPlano
  Geral de Outorgas,
  divided the Brazilian states into three regions. The Telebrás companies,
  which provided services in each of these regions, were grouped under three holding
  companies, known as the Teles. Embratel Participações S.A. is
  the fourth holding company, and was created to control our operating company
  Embratel and to provide national and international long distance services for
  all of Brazil. On June 2, 1998, the operating companies were granted concessions
  to provide local and intra-regional long-distance services within one of the
  three regions. On the same date, we were granted concessions to provide all
  types of domestic long-distance services (intra-state, intra-regional and inter-regional)
  and international long-distance services. On July 29, 1998, the federal government
  sold all of its shares in the privatization and, consequently, the control of
  the twelve New Holding Companies. WorldCom, Inc. (then MCI Communications Corporation),
  through its subsidiary, Startel Participações Ltda., acquired
  a controlling shareholders interest in our company for R$2.65 billion.

Following
  the privatization of the Telebrás System, Anatel auctioned:

| | licenses
      for the provision of local and intra-regional long-distance telephone service
      in each of the three regions (six licenses in total: three local and three
      intra-regional long-distance); and   
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                          
| | licenses
      for the provision of intra-regional, inter-regional and international long-distance
      telephone service (one for intra-regional and inter-regional services and
      one for international services).

These licenses
  are commonly known as mirror licenses since they refer to the same
  geographical area and services of the then existing concessions.

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Since
  the opening of the Brazilian telecommunications market in January 1, 2002, Anatel
  is authorized to grant an unlimited number of licenses for the provision of
  any type of telecommunications service. The most significant licenses granted
  by Anatel to date are:

| | local license
      in Regions I (Southeast/northeast Brazil), II (São Paulo state) and
      III (Central/southern Brazil) to Embratel;
|- | ----------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                         
| | local license
      in Regions II and III and long distance license in Region I to our competitor,
      Telemar; and                   
|  |                                                                                                                                         
| | local license
      in Regions I and II and national long distance to our competitor, Telefónica
      S.A. (Telefónica).               

The
  Company

Embratel
  Participações S.A. is one of the New Holding Companies formed
  on May 22, 1998 as part of the Breakup of Telebrás. Embratel was founded
  in 1965 to provide domestic and international long-distance telephone service
  and was the only provider of such services in Brazil until January 23, 2000.
  Our business consists principally of providing domestic long-distance, Internet,
  data and international communication services in Brazil to businesses and consumers.
  Our service products include high-speed data transmission, Internet, frame relay,
  satellite and packet-switched data communication, toll-free service and switched
  and dedicated long-distance service. Beginning in 2002, we also provide local
  telephony services in major cities around Brazil.

We
  operate under a domestic long-distance concession and an international concession,
  known as the Concession, granted by Anatel on June 2, 1998. Our Concession has
  been granted under the public regime. For a description of the public regime,
  see Concessions and Authorizations below. Together with the three
  regional fixed-line companies, we are one of four companies in Brazil operating
  under public regime concessions. Under the public regime, we are required to
  perform certain obligations, including principally obligations concerning the
  continuous provision of service throughout the country, referred to in this
  annual report as universal service, quality of service, and network expansion
  and modernization. If certain of these obligations are not met, Anatel has the
  power to impose penalties, including the revocation of our Concession. See Business
  OverviewRegulation of the BrazilianTelecommunications IndustryRegulatory AgencyAnatel.

Our
  network consists of the largest long distance telecommunications network in
  Latin America providing both national and international connections to thousands
  of businesses. The network connects all of the regional fixed-line and cellular
  operators throughout Brazil. We are the main provider of high-speed data transmission
  and Internet in Brazil, utilizing the largest network of broadband fiber optic
  transmission systems. The domestic long-distance and international transmission
  facilities extend to all 26 states of Brazil and the Federal District. Following
  the privatization, the competitive environment in which we operated changed.
  We now face new competitors and are authorized to offer certain services, which
  we were previously prohibited from offering. Anatel issued two new licenses
  to a single new entrant for the provision of inter-regional long-distance and
  international long-distance service in competition with us. In addition, Anatel
  authorized us to compete with the three regional fixed-line companies in the
  provision of full intra-regional long-distance service within their regions,
  including the provision of certain services that had exclusively been provided
  by the fixed-line companies. See Business
  OverviewCompetition and Business OverviewRegulation
  of the Brazilian Telecommunications IndustryRegulatory AgencyAnatel.

Our
  headquarters are located at Rua Regente Feijó, 166, Sala 1687-B, Rio
  de Janeiro, RJ, 20060-060, Brazil and our telephone number is 55-21-2121-6474.

Capital
  Expenditures

Our
  priorities include implementing the last mile access network to directly link
  our corporate clients to Embratels long distance network, adding intelligence
  to our switching systems to support advanced services and enhancing flexibility
  in the billing, collections, network and management systems.In particular,
  we give high priority to capital projects that bring us closer to our corporate
  clients. In 2002, we began offering local service to our top corporate clients,
  which expanded our product portfolio and allows us to position ourselves as
  a full service

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provider without relying on the local fixed-line operators, thereby reducing the costs of connecting clients to our network, i.e., our interconnection costs. Also, we implemented several projects related to billing, call management and improvements in collection systems.

We incurred capital expenditures of R$1.03 billion in 2002, compared to R$1.47 billion during 2001. We estimate that capital expenditures for 2003 will be approximately R$1 billion, virtually all of which is expected to be funded with internally generated funds from operations.

In 2002, our subsidiary, Star One S.A. signed an agreement for construction of the satellite C-1. The cost of the project to Star One, S.A. is approximately equivalent to US$126.1 million. Star One made a 15% downpayment on the estimated project cost in 2002. The project is expected to be concluded in 2005. See note 15.c in the consolidated financial statements.

The following table sets forth our capital expenditures for the years 2000, 2001 and 2002:

|                                      | Year
      Ended December 31, | 
|------------------------------------- | ----------------------------- | 
|                                      |                               | 
|                                      | 2000                          | 
|                                      |                               | 
|                                      | (in
      millions ofReais)   | 
|Local infrastructure
      and access | 299                           | 
|Network
      infrastructure          | 452                           | 
|Data and
      Internet service       | 256                           | 
|Other                                 | 413                           | 
|                                      |                               | 
|Total capital
      expenditures      | 1,420                         | 
|                                      |                               | 

|   |                        
|-- | -----------------------
|B. | Business
      Overview

Our
  business is divided into two segments: telecommunications and space.

Telecommunications Segment

Our telecommunications segment consists principally of providing local, domestic long-distance, Internet, data and international communication services in Brazil to businesses and consumers. Our service products include high-speed data transmission, Internet, frame relay, satellite and packet-switched data communication, toll-free service and switched and dedicated long-distance service.

Domestic
  Long-Distance Service

We provide domestic long-distance telephone service, including intra-regional and inter-regional long-distance telephone service, throughout Brazil. Before July 3, 1999, we were the exclusive provider of inter-state long-distance service under Brazilian law. Under the regulatory regime in effect before the Breakup and privatization, each cellular and fixed-line company generally operated within one of the 26 states of Brazil or the Federal District, and we had the exclusive right to carry calls between any two cellular or fixed-line companies. Two of the three fixed-line regions encompass several states. On July 3, 1999, the fixed-line operators began to provide inter-state telephone services within their regions. Meanwhile, we were authorized to provide long-distance services within the states, which we did not provide prior to that date.
We rely upon the fixed-line telephone companies and the cellular operators to carry most
calls between end users and our network. The fixed-line telephone companies and the cellular
operators, which previously were our affiliates, are now our competitors. During 2002, Anatel
authorized two of the three fixed-line telephony companies to provide inter-regional services.

Our domestic net long-distance telephone service accounted for 58.4%, 61.1% and 61.3% of our total net operating revenues in 2000, 2001 and 2002, respectively.

Since
  2000, the Breakup and privatization, our domestic long-distance telephone service
  has consisted of (i) inter-regional long-distance telephone service and (ii)
  intra-regional long-distance telephone service.

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Inter-regional long-distance telephone service consists of all calls that originate within one of the three fixed-line regions and terminate in another of the three fixed-line regions, and all calls carried by us that originate in one cellular region and terminate in another cellular region. See Competition and Regulation of the Brazilian Telecommunications IndustryConcessions and Authorizations.

Intra-regional
  long-distance telephone service consists of all calls that originate in one
  local calling area within a fixed-line region and terminate in another local
  calling area within the same fixed-line region. A local calling area is generally
  equivalent to a municipality, and there are usually several local calling areas
  within an area code. Since July 3, 1999, we have been authorized to provide
  intra-state long-distance telephone service, which is a part of intra-regional
  service. This represents an extension of the service we may offer, since we
  were previously restricted to providing inter-state long-distance service. See
  Competition and Regulation of the Brazilian
  Telecommunications
  IndustryConcessions and Authorizations.

International
  Long-Distance Services

Until 1999, we were the sole provider of international long-distance telephone services in Brazil. In 1999, Anatel licensed a new entrant, Intelig, to provide such services in competition with us. Intelig began operations on January 23, 2000. During 2002, Anatel authorized two of the three fixed-line telephony companies to provide international services. Our international long-distance telephone services generated 14.5%, 11.5% and 9.4% of our total net operating revenues during 2000, 2001 and 2002, respectively.

Revenues generated by international long-distance telephone services are primarily derived from (1) other international telecommunications operators for incoming calls carried through our network in Brazil and (2) charges for international outgoing calls originating in Brazil. We must pay a portion of our revenues received from the regional fixed-line and cellular operators for international outgoing calls to other international operators on whose networks such calls are carried outside of Brazil.

For a description of the new model for the division of revenues between us and the regional fixed-line operators, see Rate Regulation.

Data
  Communication Services

We provide data communication services, including leased high-speed data communication service, satellite data communication, Internet services, packet-switched data communication, frame relay and message-handling systems. Data communication services accounted for approximately 23.9%, 24.3% and 25.8% of our total net operating revenues in 2000, 2001 and 2002, respectively. We own our microwave and fiber optic data transmission network. The packet-switched networks of the regional fixed-line companies, which are low-speed, are connected to our low-speed network. We also own metropolitan area fiber-optic networks in major cities with high access capacity to clients and are expanding our fiber-optic network throughout Brazil in order to increase the quality of services currently provided. We also use our satellite system to provide additional data communication services.

The three principal customer groups that use our data communication services are financial institutions, governmental entities and large corporations. Financial institutions primarily use such services for banking operations, telecommuting and inter-office communication. Governmental entities primarily use such services for data processing, legal and other databases, and voice, data and image integration. Large corporations primarily use such services for e-mail, data processing, voice, data and image integration, billing and administration.

Other
  Services

In addition to telephone and data communication services, we provide other services, including text, telex, sound and image transmission and mobile satellite and maritime communications. The net amounts of these additional services accounted for 3.2%, 3.1% and 3.5% of our total net operating revenues in 2000, 2001 and 2002, respectively.

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Local
  Services

On August 16, 2002, Anatel granted Embratel an authorization to provide local telephony services in all regions in Brazil. These services became operational in a small number of cities in the fourth quarter of 2002, representing a net operating revenue of 0.2% of the total 2002 net operating revenue.

Subsequent
  Events

On March 31, 2003, we entered into an outsourcing contract with IBM Brasil for a term of ten (10) years. The contract amount is R$828 million payable over thirteen (13) installment payments. Under the contract IBM Brasil will provide Help Desk, Field Service, network, Intranet and Extranet technical support, software inventory distribution, and other technical and IT support services.

Space Segment

Our space segment consists principally of Star One S.A., which is a company incorporated by our subsidiary, Embratel, on November 1, 2000, to carry out our satellite operations. We transferred to Star One the rights and obligations related to the space segment services, as well as the rights and obligations related to the insurance contracts of the satellites, which were used to subscribe to the capital of Star One.

Star One is a leading provider of satellite transponder capacity in Brazil. This capacity is leased to customers for:

| |  | network
      services;         
| | - | --------------------------------
| |   |                                 
| |  | up-link
      trunking; and     
| |   |                                 
| |  | entertainment
      broadcasting

This segments principal customers include television broadcasters, cable operators, telecommunications service providers and financial institutions. A significant amount of our capacity in this segment is leased directly to our telecommunications segment. Our telecommunications segment utilizes this capacity, together with equipment and software, for the provision of certain data communications and other services to our customers.

On
  June 6, 2003, we signed the share purchase agreement to sell 100% of our shares
  in Intelsat Ltd. in the amount of R$118.1 million, to be received, resulting
  in a non-operating loss of R$18.5 million. As to that date, the outstanding
  balance of Intelsat was R$136.6 million. Intelsat Ltd. is a company which provides
  satellite services located in Washington D.C.

Taxes on Telecommunications Services

The cost of all telecommunications services to the customer includes a variety of taxes. The principal tax is a state value-added tax, theImposto sobre Circulação de Mercadorias e Serviços, or the ICMS, which the Brazilian states impose at varying rates on revenues from the provision of domestic and international telecommunications services. The majority of Brazilian states impose a 25% tax rate, however, this rate varies from state to state.

In
  September 1996, Complementary Law No. 87/96 was issued and provided rules for
  consistent imposition of ICMS. One of its provisions was to call for the abolishment
  of ICMS for outbound international calls. Based on an official interpretation
  of this law, the operating subsidiaries of Telebrás were instructed in
  November 1996 to stop collecting ICMS on outbound international telecommunications.
  Contrary to these instructions, some state tax agencies have assessed local
  fixed-line operators for collection of ICMS on international calls, including
  those companies for which the operators provided billing services. These billing
  arrangements ended as of December 31, 1999. From January 2000, Embratel began
  directly collecting ICMS at a rate applicable to each state, on international
  telecommunications, as a precautionary measure in order to avoid other assessments.
  We are unable to predict the outcome of the judicial decisions regarding the
  interpretation of Complementary Law No. 87/96.

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In 2000, Complementary Law 87/96 was amended in order to restrict tax credits on fixed asset purchases. As a consequence those credits are recovered ratably over 48 months rather than in the month that the asset is purchased. Since we have significant capital spending, this restriction has had an adverse impact on our cash flow and has continuously increased the amount of deferred taxes benefit.

Other
  taxes collected on revenues include two federal social contribution taxes, which
  are:

| |  | Programa
      de Integração Social
      PIS; and                      
| | - | -------------------------------------------------------------------------
| |   |                                                                          
| |  | Contribuição
      para Financiamento da Seguridade Social
      COFINS.

Such charges have been applied at a rate of 3.65% (3.0% COFINS and 0.65% PIS) on all revenues since February 1, 1999. As of December 2002, the PIS contribution rate for most providers of goods and services increased to 1.65% and started to be collected on a value-added basis. However, revenues derived from telecommunications services are subject to a 0.65% rate and is not collected in accordance with the value-added system. Collection on a value-added basis is supposed to be implemented to COFINS in 2004. This may have an impact on us depending on the final form of the regulation.

FUST and FUNTTEL Contributions. These two federal contributions,Fundo de Universalização dos Serviços de Telecomunicações(FUST) andFundo de Desenvolvimento Tecnológico das Telecomunicações(FUNTTEL) are applicable to gross revenue from telecommunications services (not including data and other services), at a combined rate of 1.5% (1% FUST and 0.5% FUNTTEL). In accordance with the provisions that introduced FUST and FUNTTEL into law, these taxes cannot be collected from customers,
and, as a consequence, are borne by us.

Income Tax, or IRPJ, and Social Contribution, or CSLL, levied on inbound revenues.With respect to income tax levied upon inbound international calls, we currently pay income tax as well as social contribution on income from such calls as a precautionary measure, pending a judicial decision on this matter. See note 19 to our consolidated financial statements.

IPI.IPI is a federal tax on industrial products that is imposed on us in connection with the acquisition of equipment from foreign suppliers. IPI rates vary with the nature of the equipment. The average rate applicable for telecommunications items acquired by Embratel is 15%.

ISS.ISS is a municipal tax on services that we pay at an average rate of 5% with respect to various services rendered by us that are not subject to ICMS. ISS rates may vary amongst Brazilian municipalities, although currently ISS is not levied at a rate lower than 2%.

Billing Administration

We have two core billing platforms. Standard voice products are billed through the Arbor Billing system of CSG Systems International, Inc. (previously Lucent Technologies). Advanced voice services, data and other services are being billed through our own proprietary billing system calledFaturamento e Cobrança, or FTC.

In the fourth quarter of 1999, we began directly billing and collecting payments from our domestic and international long-distance telephony customers on a trial basis. We then pay to fixed-line and cellular companies the applicable interconnection charges for such long-distance calls. See Rate Regulation.

We fully implemented this direct billing in the first quarter of 2000. Prior to that time, we did not directly bill standard voice services to our end-user customers. Instead, the fixed-line operators were obligated to provide billing and collection services at no cost to us. The regional fixed-line companies and the cellular companies billed customers for all domestic and international long-distance calls, collected payments from customers and transferred to us payments for all inter-regional, certain intra-regional and all international long-distance calls carried by us. All other telecommunications and related services provided by us, including toll-free service, have been and continue to be billed directly by us.

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The process of implementing direct billing of traditional telephone services represented a major challenge and opportunity for us. It significantly changed the magnitude of the billing and customer service requirements. We moved from processing a monthly average of 70,000 invoices in 1999 to approximately 8 million invoices per month in 2000, and an average of 10 million invoices per month in 2001 and 2002.

In addition to the increased volume of invoices,
another one of the challenges we face is to maintain up-to-date customer data for the subscribers of the fixed-line companies.
Since callers select the long-distance operator on a call-by-call basis, we started operations without a direct customer database
and had to rely on information provided by our competitors, the fixed-line companies, who were required to provide it under Anatel
regulation. Since 2000, the quality of our customer database has constantly improved, due to systems and process enhancements. We
implemented a new Customer Data System (CDS) in early second quarter of 2003 that allows us to accelerate the processing of the
information received from the local companies, reduce errors and better track errors if they do occur. In 2002, we implemented
co-billing arrangements with three local operators, and approximately 11 million customers now have the ability to receive
their long-distance bill through their local carrier. Embratel is one of the few carriers that offers a portfolio of payment
options. Besides the traditional direct remittances and automatic debit, customers can pay their bills online, by credit card,
or via co-billing.

Rates

Rate Regulation and Policy

Rates for most domestic and international long-distance switched fixed telephone services, or SFTS, that we provide are subject to the final approval of Anatel, to which we submit requests for rate adjustments.

On June 2, 1998, when Anatel granted Concessions to the Telebrás System companies, it established initial price-caps based on the April and May 1997 rates. These initial price-caps may be adjusted on an annual basis under a formula contained in the Concession. On June 22, 1999, June 23, 2000, June 25, 2001 and July 7, 2002, we raised our tariffs pursuant to the formula with the approval of Anatel.

Data Communication Prices

Data communications services are not regulated and are subject to price competition. Data prices have been trending downward, and we expect this to continue.

Domestic Long-Distance Rates

Rates for domestic long-distance calls, including intra-regional long-distance and inter-regional long-distance, are computed on the basis of the time of day and day of the week when the calls are made, the calls duration, the distance covered and whether special services, such as operator assistance, are used. The rates for domestic long-distance calls are established by Anatel and are uniform throughout Brazil. Domestic long-distance rates are divided into five distance and location components: 0 to 50 kilometers; 50 to 100 kilometers; 100 to 300 kilometers; over 300 kilometers; and special metropolitan area rates.

Average
  domestic long-distance rates were increased in June 1999 by 5.5%, on June 23,
  2000 by 11.9%, on June 25, 2001 by 7.76% and on July 7, 2002 by 5.02%according
  to the General Price IndexAnnual
  Availability, or IGP-DI, pursuant to the formula for domestic long-distance
  rates prescribed in the concession agreement.

The following table illustrates our domestic long-distance rates for the periods indicated.

|                                       | As
      of December 31,
|-------------------------------------- | ------------------------
|                                       |                         
|                                       | 1998                    
|                                       |                         
|                                       | (inReais)               
|Domestic
      long-distance rates(1): |                         
|0 to 50
      km                       | 0.32                    
|50 to 100
      km                     | 0.54                    

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|                    | As
      of December 31,
|------------------- | ------------------------
|                    |                         
|                    | 1998                    
|                    |                         
|                    | (inReais)               
|100 to 300
      km | 0.81                    
|Over 300
      km   | 1.08                    
|                    |                         

|   
|---
|(1)

While
  these rates apply to most customers, we have developed a variety of promotional
  and customer retention programs since 2000. The majority of our customers for
  long-distance voice services are not pre-subscribed. In other words,
  they do not register with us as customers before we begin providing services
  to them. Each time they initiate a long-distance domestic or international call,
  they choose whether to use our services by dialing the 21 selection
  code or some other service provider by dialing another code. Our customer discount
  programs allow us to pre-establish the identity of our customers, thereby improving
  collections from such customers along with increasing customer loyalty and retention.
  These programs are designed to increase our market share and promote usage of
  the 21 selection code. Accordingly, customers may agree to a specific
  plan that provides discounts on the rates approved by Anatel.

International Rates

Rates charged for outgoing international calls vary depending on the time of day and day of the week when the calls are made, the calls duration, the country of destination and whether special services, such as operator assistance, are used. Maximum rates for international long-distance service are established by Anatel and are uniform throughout Brazil. We have substantially reduced rates for outgoing international calls in recent years. This has been in part in response to considerable competition from companies outside Brazil known as telephone service resellers. Resellers provide customers with the number of an automated callback system located in a country with lower international rates, allowing calls to be charged outside of Brazil. In order to compete more effectively, we have reduced the cost of outgoing calls to levels similar to those charged by resellers. See Competition.

On June 22, 1999, the international rates were increased by 1.66%, adjusted on an annual basis as measured by the IGP-DI, pursuant to the formula applicable to international rates in our Concession, and on June 23, 2000, Anatel approved a rate increase of 3.74%. However, in 2001, the rates charged for calls to the United States decreased approximately 9%, and to Mercosur (Argentina, Chile, Paraguay and Uruguay), Germany, Spain, France, Italy, the United Kingdom, Switzerland and Japan, rates decreased approximately 10%. These decreases were a result of intense competition and the aggressive pricing policy of our competitors in the international long-distance market. In 2002, rates charged for the countries described above did not change, as shown in the table below.

We have developed a variety of promotional and customer retention programs over the past two years for our international outbound customers. These programs are designed to increase usage of the 21 selection code for international calls. These represent discounts from the Anatel approved rates.

The following table illustrates our international rates for the periods indicated. For 1998 and 1999 this table reflects the Anatel approved rates, not including promotional discounts. All other rates reflect promotional rates.

|                              | As
      of December 31,
|----------------------------- | ------------------------
|                              |                         
|                              | 1998(1)                 
|                              |                         
|                              | (inReais)               
|International
      rates(3): |                         
|United States                 | 3.21                    
|Mercosur                      | 4.50                    
|Western
      Europe(4)       | 5.08                    
|                              |                         

|   
|---
|(1)



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|(2) | Promotional
      rates.                                                                                                                         
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                  
|(3) | Rate for
      international calls, three minutes in duration between the hours of 5 a.m.
      and 8 p.m. on weekdays, net of value-added taxes.
|    |                                                                                                                                                  
|(4) | Includes
      France, Germany, Italy, Spain, Switzerland and the United Kingdom.                                                                

Revenues from
  international service also reflect payments under approximately 268 bilateral
  agreements between us and foreign telecommunications administrations or private
  carriers, which are influenced by the guidelines of the international tariff
  and trade regulations and cover virtually all international calls to and from
  Brazil. These agreements set forth the settlement rates of payment from us to
  foreign carriers for the use of their facilities in connecting international
  calls billed in Brazil and from foreign carriers to us for the use of our facilities
  in connecting international calls billed abroad. The settlement rates under
  such agreements are negotiated with each foreign carrier. Settlements among
  carriers are normally made monthly on a net basis.

The major bilateral agreements with carriers in the United States include American Telephone and Telegraph Company, or AT&T, Sprint International and subsidiaries of WorldCom. Our service agreement with AT&T has been in force since October 1, 1969, but the terms governing the amounts payable by each party have been renegotiated from time to time. The service agreements with the other United States carriers have similar terms. Amounts we are entitled to receive from United States carriers have historically exceeded amounts we have to pay to United States carriers in respect of international calls.

Various factors could affect the amount of net settlement payments from United States carriers to us in future years. These include increases in the proportion of outgoing as opposed to incoming calls. Calls originated by United States carriers currently exceed calls originated by us. Net settlement payments from United States carriers could also be affected by decreases in the rates paid by such carriers.

In
  April 1999, we initiated a program of price differentiation for incoming international
  calls to Brazil by offering different rates depending on the destination within
  Brazil. Calls to the Rio de Janeiro, São Paulo and Belo Horizonte areas
  were discounted by as much as 50% from the base rate. This program gave us greater
  flexibility in competing with other carriers. We continue to negotiate bilateral
  settlement agreements with major carriers based on traffic volume in order to
  promote mutual traffic commitments.

Network and Facilities

We have the largest long-distance telecommunications network in Latin America providing both national and international connections to thousands of points throughout Brazil.

Domestic Long-Distance and Data Network

We are the main provider of high-speed data transmission and Internet service in Brazil, with the largest national network of broadband fiber-optic transmission systems. Our network has nationwide coverage with 28,868 kilometers of fiber cables comprising of 1,068,657 kilometers of optical fibers as of the end of 2002. In addition, we use a 100% digital switching system for voice and data and use packet-switched data communications, asynchronous transfer mode (ATM) and frame relay for data and Internet services. We have metropolitan digital fiber networks in the largest cities in Brazil with direct fiber or wireless connections to businesses. We are implementing lateral fiber extensions with commercial buildings connected to metropolitan rings, providing high quality direct connections. We continue to expand construction of metropolitan digital fiber optic networks to additional strategic cities with a high concentration of busi

ness customers. We utilize digital microwave transmission systems in areas where installation of fiber cables is less cost effective. We also use satellites to provide services to remote locations within the country.

The following table sets forth certain details regarding our domestic long-distance and data network:

|                                           | As
      of December 31,
|------------------------------------------ | ------------------------
|                                           |                         
|Network
      Information                  |                         
|                                           |                         
|Urban fiber
      rings (fiber kilometers) |                         
|Optical
      fiber (fiber kilometers)     |                         
|Long-distance
      Trunks                 |                         

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The decrease in the number of trunks in 2001 was due to the modernization of our switch network. Several old switch platforms that did not support centralized blocking of lines were replaced. As a result, the total number of installed trunks decreased while the performance of the network improved.

International Network

We provide international services
primarily through the major international undersea cable systems, which link Brazil with key trading partners around
the world. Embratels international submarine cable network reaches all continents through 28 different submarine
cable systems. It includes Atlantis 2, which connects directly to Europe, Africa and Argentina, and Americas II which,
together with Americas I, provides a high capacity link between Brazil and the United States. Atlantis 2 and Americas II,
together with Columbus III that connects Europe to U.S., create the Embratels Optical Atlantic Ring with diversity
for the traffic capacity and restoration routes among these systems. This ring is extended through other fiber optical
submarine cable systems to Asia, the Middle East and Oceania. To enhance the network diversity we use some additional
capacity in private cables. We have direct international network border connections via digital fiber-optic cables to
Argentina, Uruguay, Paraguay and digital radio transmission to Bolivia. To complement and diversify our international
network, increasing our global service capacity in a cost-effective way, we currently utilize leased satellite capacities
from international satellite systems. The satellite channels are controlled and monitored through our two earth station
complexes for international services, one located in Tangua (in the state of Rio de Janeiro) and one located in Morungaba
(in the state of São Paulo). We have three international telephony digital switches in strategic locations and
international data network platforms (Frame Relay, ATM and IPL), all with interconnection to the main international
telecom companies to provide voice and data services worldwide.

Satellite Infrastructure

We currently own and operate a domestic earth station in Guaratiba, located in the state of Rio de Janeiro. This station, activated in 1985, accesses the Brasilsat A2, B1, B2, B3 and B4 satellites. These satellites cover the entire territory of Brazil, Argentina, Uruguay and Paraguay and were launched by Arianespace S.A. The satellites are maintained and monitored by us through the Guaratiba earth station.

Regulation of the Brazilian Telecommunications Industry

In July 1997, the Brazilian Congress passed the Telecommunications Law, which became the main basis for regulation of the telecommunications sector. Anatel regulates our business, including the services we provide and the rates we charge for telecommunications services, pursuant to the Telecommunications Law, the Telecommunications Regulations and the Concessions and Authorizations.

Regulatory Agency  Anatel

The
  Telecommunications Law provides a framework for telecommunications regulation.
  Article 8 of the Telecommunications Law established Anatel to develop and enforce
  those regulations. The President of Brazil in Decree No. 2,338 of October 7,
  1997, the Regulamento
  da Agência Nacional de Telecomunicações,
  known as the Anatel Decree, set forth the specific functions of Anatel. Pursuant
  to the Telecommunications Law and the Anatel Decree, Anatel replaced the Ministry
  of Communications as the regulatory agency for the telecommunications sector.
  Anatel is an independent regulatory agency with its own funding and administration,
  and exists separately from the Ministry of Communications and other agencies
  of the Brazilian Government. However, Anatel maintains a close working relationship
  with the Ministry of Communications. Article 19, Section XXIX of the Telecommunications
  Law requires Anatel to submit an annual report summarizing its activities to
  the Ministry of Communications.

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A five-member board of directors, headed by an executive president, manages Anatel. The President of Brazil, subject to approval by the Senate, nominates the directors of Anatel. Each director serves for a single fixed term of 5 years; directors may be reappointed. In order to further ensure Anatels independence, the first directors have been appointed for different terms, from 3 to 7 years, so that only one directors mandate will expire per year, ensuring a staggered appointment of directors in the future. The directors may not exercise any other professional, business, union or political function (other than university professor), nor may they hold any significant direct or indirect interest in any company related to telecommunications.

Anatel is financed through theFundo de Fiscalização das Telecomunicações, known as Fistel. Fistel is a fund administered by Anatel and its funds are currently the sole source of financing for Anatels activities. Fistel receives the proceeds of, among others, a tax imposed on service providers and fees charged for concessions, permissions and authorizations.

Anatel has the authority to propose and issue regulations that are legally binding on telecommunications services providers. Any proposed regulation of Anatel is subject to a period of public comment, which may include public hearings. Anatels actions may ultimately be challenged in Brazilian courts.

Concessions and Authorizations

Companies wishing to offer telecommunications services to consumers are required to apply to Anatel for a concession or an authorization. Concessions and authorizations are granted for services in the public regime and services in the private regime, respectively. The public regime is differentiated from the private regime primarily by the obligations imposed on the companies in the public regime rather than the type of services offered by those companies. There are only four companies in the public regime, us and the three former Telebrás regional companies, known as the Telcos, that provide switched fixed telephone services, or SFTS. All other telecommunications companies, including other companies providing the same services as the four public regime companies, operate in the private regime.

Fixed-line Services  Public Regime.The four service providers in the public regime, are the primary providers of the following SFTS to the general public: local, intra-regional long-distance, inter-regional long-distance and international long-distance. Each of these four companies holds concessions, as required by the Telecommunications Law. Each public regime concession is a specific grant of authority that allows the concessionaire to offer a specific type of SFTS and imposes certain obligations on the concessionaire concerning network expansion (universal service obligations) and continuity of service.

Concessions for Embratel and the Telcos are granted until 2005, subject to certain obligations, with the possibility of full renewal for additional 20 years or revocation. The current concessions granted to the four companies in the public regime have not required payment of a fee. The companies are, however, required to pay renewal fees every two years after 2005 equal to 2% of annual net revenues from the provision of SFTS in the prior year (excluding taxes and social contributions) during the 20-year renewal period.

Fixed-line Services  Private Regime.After privatization, authorizations were granted to new competitors wishing to offer SFTS services, including local, intra-regional long-distance, inter-regional long-distance and international long-distance, in the private regime. Authorizations will not be subject to the same obligations concerning network expansion (universal service obligations) and continuity of service to which concessionaires providing SFTS in the public regime are subject, although individual authorizations may contain certain related obligations.

Obligations of Telecommunications Companies

Providers of telecommunications services are subject to certain restrictions and obligations pursuant to applicable laws and regulations and their concessions and authorizations.

Public Regime  Service Restrictions.The four providers of telecommunications services in the public regime are subject to a set of special restrictions regarding the services they may offer, contained in the General Grant Plan.

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Under the General Grant Plan, before December 31, 2001, we were prohibited from offering local SFTS or other telecommunications services not covered by our authorizations, and the Telcos were prohibited from offering inter-regional long-distance and international SFTS or other telecommunications services not covered by their authorizations, unless we fulfilled the universal service and network expansion obligations as described below.

Public Regime  Universal Service and Network Expansion Obligations.The Grant Plan provided certain incentives to encourage us and the Telcos to fulfill, before December 31, 2003, individual universal service and network expansion obligations according to thePlano Geral de Metas de Universalização, known as the General Plan on Universal Service.

The Telcos are required to expand SFTS to cover all of Brazil with individual access. We are also subject to the universal service requirement of providing access to direct-dial domestic and international long-distance service by installing public telephones in remote regions and isolated communities.

Formal universal service requirements do not apply to SFTS providers in the private regime and to cellular companies, although these companies are subject to certain similar requirements under their respective authorizations and certain regulations, including obligations to expand their networks and to provide services without pricing discrimination within customer categories.

We and the Telcos are each individually responsible for financing our respective universal service obligation of network expansion. No subsidies or other supplemental financings are anticipated to finance our network expansion obligations. If any of the concessionaires fails to meet its obligations in its region, Anatel may grant authorizations to competing companies to provide the service and may compel such failing concessionaire to make its network available for the competitors use.

The following table sets forth, according to Anatels Resolution, our universal service and network expansion obligations for the period 2003-2005. We met all of our obligations in 2002.

Universal Service, Network Expansion and Modernization

|                                                                   | Status
      as ofDecember
      31, |     | Required
      for the years
|------------------------------------------------------------------ | ------------------------------------ | --- | ----------------------------
|                                                                   |                                      |     |                             
|                                                                   | 2002                                 |     | 2003                        
|                                                                   |                                      |     |                             
|Full-Service Public telephone availability (A)
      in areas with |                                      |     |                             
|no fixed switched service
      that are located 30 km from the    |                                      |     |                             
|nearest fixed-line telephone
      and a population of at least    | 300                                  |     | 300                         
|Number (estimated) of such localities where
      availability     |                                      |     |                             
|requirements must be met                                           | 1,240                                | (B) | 1,600                       
|Number of state capitols connected by digital
      transmission   |                                      |     |                             
|system                                                             | 26                                   |     | 26                          
|                                                                   |                                      |     |                             
|                                                                   |                                      |     |                             
|                                                                   |                                      |     |                             

|   
|---
|(A)
|   
|(B)



The following table sets forth our main quality of service obligations as stated in the List of Obligations for the period 2003-2005 and our status (as reported in Anatels Contract Management and Control System database) with

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respect to each obligation as of December 31, 2001 and 2002. These items are measured and reported on a monthly basis. We are reporting below the annual averages.



|                                                     | Status
      as ofDecember
      31, |  | Status
      as ofDecember
      31, |  | Required
      for the years
|---------------------------------------------------- | ------------------------------------ |  | ------------------------------------ |  | ----------------------------
|                                                     |                                      |  |                                      |  |                             
|                                                     | 2001                                 |  | 2002                                 |  | 2003                        
|                                                     |                                      |  |                                      |  |                             
|Busy circuit rate during peak periods (% of          |                                      |  |                                      |  |                             
|calls
      attempted) (domestic)                    | 7.6*                                 |  | 4.1                                  |  | 5.0                         
|                                                     |                                      |  |                                      |  |                             
|Direct-dial call completion rate during peak         |                                      |  |                                      |  |                             
|periods
      (% of calls attempted) (domestic)      | 59.0*                                |  | 64.7                                 |  | 65.0                        
|                                                     |                                      |  |                                      |  |                             
|Busy circuit rate during peak periods (% of          |                                      |  |                                      |  |                             
|calls
      attempted) (international, ingoing)      | 4.8                                  |  | 3.3                                  |  | 5.0                         
|                                                     |                                      |  |                                      |  |                             
|Direct-dial call completion rate during peak         |                                      |  |                                      |  |                             
|periods
      (% of calls attempted) (international, |                                      |  |                                      |  |                             
|ingoing)                                             | 63.0                                 |  | 67.9                                 |  | 65.0                        
|                                                     |                                      |  |                                      |  |                             
|Operator availability (% of calls attempted)         | 93.4                                 |  | 94.2                                 |  | 93.0                        
|                                                     |                                      |  |                                      |  |                             
|Public telephone repair response speed               |                                      |  |                                      |  |                             
|(% within
      8 hours)                             | (1)                                  |  | (1)                                  |  | 96.0                        
|                                                     |                                      |  |                                      |  |                             

|   
|---
|(1)
|   
|*  

There
  were a variety of external factors impeding our ability to meet these goals
  each month during the year. Because our network connects with those of regional
  fixed-line operators, regional cellular operators and foreign operators, the
  quality of service provided by us may also be significantly affected by the
  quality of the networks on which calls originate or terminate. We have had various
  discussions with Anatel with respect to these issues. Failure to meet these
  goals does carry the possibility of fines and penalties from Anatel.

For example, when the carrier selection code, known as the PIC code, was introduced in July 1999, the telephony system throughout Brazil experienced an unusually high rate of busy circuits and certain domestic and international long-distance calls could not be completed. As a result, Anatel established a non-public administrative process to review these problems. The process resulted in fines of approximately R$55 million, as provided for in the Concession. On April 24, 2001, the lower court issued a decision in favor of Anatel. However, the judge reduced the penalty from R$55 million to R$50 million due to partial violation of the administrative procedure. We have appealed this decision. See Item 8. Financial Information  Legal Proceedings. However, given the significant improvements in the quality of service we made from 2001 to 2002, and given our ongoing dialogue with Anatel on these matters, we
believe that no fines will be assessed against us for failure to achieve these goals in 2002 for each month of the year.

In addition, in April 2000, the state of São Paulo also imposed a fine of R$30 million on us and on a local fixed-line operator, and mandated that we refund our customers the value of all phone calls made between July 3 and July 12, 1999. We are challenging these administrative procedures and fines in order to nullify them. See Item 8. Financial Information  Legal Proceedings.

Collective Interest Obligations.Under the terms of the Authorizations relating to the ancillary services we provide in the private regime, we have some collective interest obligations. We are required to continue offering telex services until Anatel determines that there is another service that fully replaces telex. We are already in the

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process of obtaining an approval from Anatel for services which will replace them. We have been required to comply with the terms and conditions of the contracts signed before July 27, 1998  the date the Authorization was executed  to give the government preferential access to these services and to notify the government sixty months in advance in the event we decide to discontinue offering such services.

Interconnection.Interconnection is mandatory between all telecommunications networks upon request by any party. Interconnection tariffs are subject to a price cap established by Anatel. Rates below the applicable price cap may be negotiated between the parties. If a company offers an interconnection tariff below the price cap, it must offer that price to any other requesting party on a non-discriminatory basis.

Co-location.Co-location means that a party requesting interconnection may
place its switching equipment in or near the local exchange of the network operator whose network the requesting
party wishes to use and connect to the network at this point of presence. Co-location is currently a matter of
negotiation between the parties. Anatel stated that unbundling of network elements and services by the providers
of such elements and services are mandatory, according to existing regulation. However, the regulation does not
establish which elements and services shall be unbundled and how unbundling should occur. For this reason, the
Telcos have been denying our requests. Anatel declared that it will enact further regulation on this matter.
In an unbundled regime, every network operator is required to provide a detailed list of network services and elements
which may be purchased by a party requesting interconnection and the requesting party
then has the right to select and purchase a subset of the network elements and services available.

Number Portability.Number portability is the ability of a customer to move to a new home or office or switch service providers while retaining the same telephone number. Full number portability is mandatory within a local area although the rules mandating implementation have not yet been enacted.

Rate Regulation

General.As of April 1, 1998, the regime used to divide domestic and international long-distance revenues between us and the fixed-line companies was replaced with a network usage charge for interconnection, as had already existed for use of cellular networks by the fixed-line companies and for use of the fixed networks by cellular operators. In addition to the network usage charge, we were also required to pay a supplemental per-minute charge calledParcela Adicional de Transição, or PAT, that supplements the network usage charge. We were the only entity required to pay PAT charges. We were required to pay PAT charges until June 30, 2001, at which time the charges were phased out.

Price Caps.Concessions with the regional fixed-line companies and Embratel provide for a price cap mechanism to set and adjust rates on an annual basis. The price cap mechanism consists of a maximum amount, or price cap, stipulated by Anatel, that may be charged for a particular service and on a weighted average rate for a basket of basic services. The services include all of the services in the basic service plan, such as installation charges, monthly subscription fees, local, intra-regional long-distance, inter-regional long-distance and international long-distance service, as well as public telephone service and interconnection charges, including network usage fees. The main baskets for the regional fixed-line companies are for local services, including installation charges, the monthly subscription fee, and measured usage charges,
and for interconnection services, including network usage fees and equipment rental charges. The main baskets for us are intra-regional long-distance, inter-regional long-distance, international long-distance and interconnection.

The
  initial price cap established by Anatel in the Concession is based on the previously
  existing tariffs. The initial price cap will be adjusted on an annual basis
  under a formula contained in the Concession. The formula allows two adjustments
  to the price cap. First, the price cap is revised upward to reflect increases
  in inflation by multiplying the price cap by (1+1(y)), where y represents
  the rate of inflation as measured by theÍndice
  Geral de Preços-Disponibilidade Interna,or IGP-DI, an inflation index developed by the Fundação Getúlio
  Vargas, a private Brazilian economic research organization. Second, the inflation-adjusted
  price cap is adjusted downward to ensure productivity gains by multiplying the
  inflation-adjusted price cap by (1-K), where K represents a set productivity
  factor, known as the K-factor.

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In order to provide an incentive to the regional fixed-line companies and us to increase efficiency and to reward consumers of telecommunications services, Anatel applies a K-factor representing annual productivity adjustments to our tariffs and those of the regional fixed-line companies. During the period from January 1, 2003 to December 31, 2005, the tariffs of Embratel and the regional fixed-line companies will be adjusted downward as follows:

K-Factor
Annual Productivity Adjustments

|                                                                    |      |   |      |    |      |  |      |   |  |    |  
|------------------------------------------------------------------- | ---- | - | ---- | -- | ---- |  | ---- | - |  | -- | -
|                                                                    | 2002 |   | 2003 |    | 2004 |  | 2005
|                                                                    |      |   |      |    |      |  |     
|Fixed-line
      companies  local                                  | 1    | % |      | 1  | %    |  | 1    | % |  | 1  | %
|Fixed-line
      companies  local interconnection                  | 10   | % |      | 15 | %    |  | 20   | % |  | 20 | %
|Embratel-domestic
      long-distance                               | 4    | % |      | 4  | %    |  | 5    | % |  | 5  | %
|Embratel-international
      long-distance                          | 15   | % |      | 15 | %    |  | 15   | % |  | 15 | %
|Fixed-line
      companies  intra-regional long-distance and long- |      |   |      |    |      |  |      |   |  |    |  
|distance
      interconnection                                      | 4    | % |      | 4  | %    |  | 5    | % |  | 5  | %

The price cap covers a basket of basic services.While the weighted average tariff for the entire basket may not exceed the price cap, the tariffs for individual services within the basket may be increased. We may increase the tariff for any individual service by up to 9% for local services and 5% for long-distance services, subject to a downward adjustment for inflation effects already captured in the annual upward adjustments of the overall price cap for the basket, so long as it adjusts other prices downward to ensure that the weighted average tariff does not exceed the price cap.

We may also offer alternative plans in addition to the basic service plan. For instance, a customer might wish to choose an alternative plan that allows unlimited calling for a set fee rather than pay the per minute fee under the basic service plan. Alternative plans must be submitted to Anatel for approval, but are not currently subject to a price cap. For information on our current tariffs and service plans, see Rates.

Domestic Long-Distance
Rates.Direct-dial domestic long-distance tariffs
are calculated per minute for the first minute and per tenth of a minute for every minute thereafter based on
the distance the call must travel, duration of the call, the time of day and the day of the week. As part of
the April 1997 tariff rebalancing, domestic long-distance tariffs were substantially reduced, with an effective
reduction of approximately 32%. There are currently 20 domestic long-distance tariffs, based on combinations of
five distance categories and four day/time categories. For a breakdown of our current domestic
long-distance tariffs, see RatesDomestic Long-Distance Rates.

International Long-Distance Rates.Direct-dial international long-distance tariffs are calculated on a per minute basis according to the time of day and the day of the week when the call is made, the calls duration and the country of destination (nine country groups). For a breakdown of our current international long-distance tariffs, see RatesInternational Rates.

The General Telecommunications Law provides for freedom of tariffs three years after privatization if there is effective competition. Considering the existing competition in the long distance market, we filed, on May 15, 2002, a request with Anatel for freedom of tariffs. We are still not certain if Anatel will approve it.

Network Usage Charges or Interconnection Rates.Other telecommunications companies who wish to interconnect with and use our network must pay certain fees, primarily a network usage fee known astarifa de uso de rede. The network usage fee is subject to a price cap stipulated by Anatel. The price cap for the network usage fee specified by Anatel varies from company to company based on the underlying cost characteristics of each companys network. The fee is charged on a per distance and/or per minute of use basis that represents an average charge for a basket of network elements and services.

On April 15, 2002, we filed a complaint with Anatel alleging anti-competitive practices by the three local concessionaires seeking a reduction of the interconnection rates. Anatel has declared that there are indications of anti-competitive practices, and it is expected to conclude its review of the matter and forward the complaint to the Brazilian Antitrust Commission, commonly known as the CADE, within the next few months.

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On February 27, 2003 CADE issued a preliminary order that Telesp must offer the same prices to any other company for the EILD (Dedicated Line Industrial Exploitation) as those offered to Telefônica Empresas, a Telesp company.

In the end of 2002, Anatel published for public comment new drafts of the Concession Contracts. The concessionaire companies have to decide by June 30, 2003 if they will extend their contracts under the new terms and conditions. We sent our comments to Anatel and are waiting for the definitive terms prior to making a decision regarding extension of our Concession Contracts.

Competition

Before the reform of the Brazilian telecommunications system, we were the exclusive provider of inter-state and international long-distance services in Brazil, although these services were subject to indirect competition from a number of sources. The Telebrás companies were the exclusive providers of intra-state and local telephone services. Since 1995, Brazil has adopted broad regulatory changes intended to open the telecommunications market to competition. See History and Development of the Company.

Although the privatization of the Telebrás System occurred on July 29, 1998, we were not subject to competition in the intra-regional long distance market until July 3, 1999. On that date, the PIC code was introduced, which allowed customers to choose a particular carrier by dialing that carriers code.

From
  July 3, 1999 to December 31, 2002, we faced competition as follows:

| |  | Region
      I Southeast/northeast
      Brazil.
      Our three competitors for the provision of intra-regional long-distance
      services in the southeast and northeast regions are:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |  | Region
      II São
      Paulo state.Our
      competitors for the provision of intra-regional long-distance services in
      the São Paulo state region are:                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |  | Region
      III Central/southern
      Brazil.
      Our competitors for the provision of intra-regional long-distance services
      in the central and southern regions are:          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |   |                                                                                                                                                                                          
| |   |                                                                                                                                                                                           
| |  | Inter-regional
      and international long-distance markets.
      Our competitor is Intelig, which began to compete with us in January 2000.                                            

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Effective January 1, 2002, Anatel is authorized to grant an unlimited number of licenses for the provision of any type of telecommunications service.

On April 26, 2002, Telefónica S.A.s operating subsidiary, Telecomunicações de São Paulo S.A.  Telesp, complied with all its universal service obligations and was granted an extension to its concession to provide inter-regional long-distance services originating from the state of São Paulo, as well as licenses to provide international telephone services throughout Brazil, inter-regional long-distance services originating in states other than São Paulo, and local services in the other two regions where it did not previously operate. We filed a lawsuit against Anatel and Telesp with respect to the extension of Telesps concession on procedural grounds and obtained a stay until July 26, 2002. Since then, Telesp has been allowed to provide inter-regional long-distance services originating from the state of São Paulo.

We have also complied with our universal service obligations and received Anatels permission on May 7, 2002 and signed the Term of Authorization to provide local fixed telephone services throughout Brazil.

Telemar also received a fixed telephone long-distance license for Region I and fixed telephone local licenses for Regions II and III. Brazil Telecom announced on March 31, 2003 that it will satisfy its universal service obligations in the time proscribed by ANATEL. This claim, which we have challenged, is being reviewed by ANATEL. We also expect other companies to enter the market.

Long-distance voice telephony customers in Brazil are not assigned to a particular carrier. For any telephone call that extends beyond the local calling area, a customer must choose a carrier code. We obtained the number 21 as our PIC code and advertised extensively throughout Brazil in and since 1999 to establish recognition of the code. Until 2002 the long-distance carriers were not responsible for long-distance calls made on mobile phones (the SMC regime  cellular phones using CDMA and TDMA technology). Anatel created a new service called Serviço Móvel Pessoal (SMP  PCS, mobile phones using GSM technology), which will replace the SMC services over time as Anatel will not be renewing SMC licenses.

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

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

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

Although the new Telecommunications Ministry, which is the governmental body responsible for the telecommunications policy, is pushing for real and fair competition in the local fixed telephone markets, we are subject to regulations that limit our ability to set tariffs for our various services, and may restrict our ability to respond to potential or actual competition. See Regulation of the Brazilian Telecommunications Industry.

C. Organizational
  Structure

WorldCom
  is our majority shareholder. As of January 1, 2003, Startel Participações
  Ltda., an indirect wholly-owned subsidiary of WorldCom, held 62,054,576,448
  common shares of Embratel Participações. These shares amounted
  to 49.90% of the voting shares of, and a 18.56% economic interest in, Embratel
  Participações. Also on January 1, 2002, New Startel Participações
  Ltda., an indirect wholly-owned subsidiary of WorldCom, held 2,350,574,677 common
  shares of Embratel Participações. These shares amounted to 1.89%
  of the voting shares of, and a 0.70% economic interest in, Embratel Participações.
  Through the two companies WorldCom holds a total of 64,405,151,125 common shares,
  which amounted to 51.79% of the voting shares and 19.26% of economic interest.
  See Item 7. Major Shareholders and Related Party TransactionsMajor
  Shareholders.



Subsidiaries

We hold 98.8% of the capital of our principal subsidiary, Empresa Brasileira de Telecomunicações S.A.  Embratel. Embratel provides international and domestic long-distance telecommunications services in Brazil, under the terms of the concession authorized by the Federal Government, which will expire on December 31, 2005, and may be renewed for a 20-year term.

Embratels
    principal subsidiary during 2002 was Star One S.A. Star One was formed in
    November 2000. Embratel currently owns 80% of Star Ones share capital
    and the remainder is held bySociété Européene
    des Satellites S.A.(SES
    ASTRA). Star One is our satellite subsidiary and currently owns five C-band
    satellites and has contracted for the production of a fifth satellite. It
    provides transponder rentals, radio and TV signal transmission and trunking
    communications transmission. It has landing rights in the United States,
    Chile and Peru and is obtaining rights for Argentina, Uruguay and Paraguay.
    Star One expanded its scope to offer broadband services in Brazil and is
    expanding its scope to offer broadband services in South America. On July
    23, 2001, the subsidiary AcessoNet was merged into Embratel. 100% of AcessoNet
    was acquired by Embratel on December 27, 2000, for R$195.8 million through
    a holding company called Keshara Empreendimentos Ltda. AcessoNet was the
    Internet network provider of Universo OnLine, or UOL, the largest ISP in
    Brazil. AcessoNet had a 66,000 port dial-up network and a five-year renewable
    services contract with UOL.

BrasilCenter Comunicações Ltda., wholly owned by Embratel, is another important subsidiary of Embratel. BrasilCenter was formed in December 1998, and employs workers to man our customer service call-center facility.

D. Property,
  Plant and Equipment

Telecommunications
  segment.
  The principal properties of our telecommunications segment consist of our long-distance
  network, including broadband fiber optic transmission systems, digital switching
  systems, international ocean cables, and related real estate. As of December
  31, 2002, the net book value of our property, plant and equipment was approximately
  R$7,356 million.



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Our properties are located throughout Brazil, providing the necessary infrastructure to support nationwide long-distance and international telecommunications. We conduct the majority of our management functions from Rio de Janeiro, and own and lease office space in other cities including São Paulo, Porto Alegre, Belo Horizonte, Curitiba, Brasília, Salvador and Belém. Our network facilities are in good condition and are suitable to support the wide array of advanced communications services. Our network facilities position us to be the prime all-distance telecommunications service provider in South America.

Space segment. Our space segment properties primarily consist of satellites along with miscellaneous administrative assets held by our Star One, S.A. subsidiary. The net book value of these assets as of December 31, 2002 is R$439 million.

ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.Operating
  Results

The
  following discussion of our results of operations for the years ended December
  31, 2000, 2001 and 2002 should be read in conjunction with our consolidated
  financial statements, including the notes thereto, included elsewhere in this
  annual report. Our consolidated financial statements have been prepared in accordance
  with Brazilian corporate law, which differs in certain respects from U.S. GAAP.
  Note 29 to our consolidated financial statements provides a description of the
  principal differences between U.S. GAAP and Brazilian corporate law as they
  relate to our consolidated financial statements, and a reconciliation to U.S.
  GAAP of net income and total shareholders equity for the periods and as
  of the dates presented. For a discussion of the presentation of our financial
  information, see Presentation of Financial Information. This section
  contains forward-looking statements that involve risks and uncertainties. Our
  actual results may differ materially from those discussed in the forward-looking
  statements as a result of various factors, including, without limitation, those
  set forth in Item 3. Key Information  D. Risk Factors and
  the matters set forth in this annual report generally.



Critical Accounting Policies

The significant accounting policies which we believe are critical to fully understanding and evaluating our reported financial position and results of operations reported under Brazilian corporate law are described in note 3 of our consolidated financial statements. A description of the differences in accounting policies between Brazilian corporate law and U.S. GAAP is included in note 29 of our consolidated financial statements. The accounting policies require us to make estimates, judgments and assumptions that we believe are reasonable based upon the information available to us. The most important estimates include the revenue recognition, allowance for doubtful accounts, useful lives of our equipment, realization of deferred tax assets, provision for contingencies, the fair value of our financial instruments and the future liability of our pension fund.

With the exception of contingencies and allowance for doubtful accounts, we do not believe that we are required to make any estimates having a significant impact on the preparation of our financial statements with respect to our historical financial position, results of operations and cash flows that would require us to make assumptions about matters that are highly uncertain. Instead, our assumptions are based on our experience in matters such as operating our equipment and dealing with our customers.

Revenue recognition. Revenues from services are recognized using the accrual method of accounting, after deducting an estimate for billing errors or disputes. For long-distance voice services, customers are billed throughout the month based on the volume of minutes that must be processed during the month, and invoices are due at various intervals during the subsequent month. For data and other services, revenue is booked in the month that the customer is billed. Revenues from international services also include revenues earned under bilateral agreements between overseas telecommunications companies and us. Revenues from international calls are recognized monthly, net of the cost of services rendered by overseas telecommunications companies. Revenues are recorded net of actual discounts granted to customers under the customer loyalty and
 volume usage agreements.

Allowance for doubtful accounts. We constantly monitor our past due accounts receivables. An allowance for doubtful accounts is recognized as from the first day after maturity, and is gradually increased to reflect any

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deterioration in recoverability with the aging of receivables. We fully provision for uncollectable accounts receivables that are over 120 days past due for long-distance services, and over 360 days past due for data services. Other services are provisioned based on specific estimates. The balance of the allowance for doubtful accounts as of December 31, 2002 and 2001 refers substantially to provisions for amounts over 120 days past due on voice services. See note 3.b of our consolidated financial statements. During the year of 2001, the Company experienced a significant deterioration in the collection of past due receivables. This resulted in a provision for doubtful accounts in the amount of R$1,155,498, representing a substantial increase, as compared to the R$362,878 recorded in 2000.

Useful lives of our equipment. Adopted depreciation rates are based on estimated useful lives of the underlying assets, derived from historical information available to us as well as known industry trends. In the event that we reduce the remaining useful lives of our equipment in future periods, depreciation expense will increase, resulting in a negative impact on future results.

Realization of deferred tax assets. The decision to recognize deferred taxes on temporary differences, on tax losses and on the negative basis for calculating social contribution is supported by the history of taxable income and our estimate of future profitability. In July 2002, CVM Instruction No. 371 was issued, establishing cumulative conditions for recording and maintenance of these deferred assets, which were approved by our board of directors and reviewed by our fiscal committee. Based on these financial projections, we believe that these assets will be realized over a period of seven years. A future change in our projections of profitability could result in the need to record a valuation allowance against deferred tax assets, resulting in a negative impact on future results.

Provision for contingencies. We are subject to proceedings, lawsuits and other claims related to tax, labor and civil matters. We are required to assess the likelihood of any adverse judgments or outcomes to these matters as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies are made after careful analysis of each individual issue, based on legal counsel advice. The required reserves may change in the future due to new developments in each matter or changes in approach, such as a change in settlement strategy in dealing with these matters. Such charges could result in a negative impact on future results and cash flows.

Fair value of our financial instruments.With respect to financial instruments, we must make assumptions as to future foreign exchange and interest rates. For a discussion of the possible impact of fluctuations in the foreign exchange and interest rates on our principal financial instruments and positions, see Item 11. Quantitative and Qualitative Disclosures About Market Risk.

Future
  liability of our post-retirement benefits (pension fund and medical health care).
  With respect to post-retirement liabilities, we must make assumptions as to
  interest rates, investment returns and levels of inflation, mortality rates
  and future employment levels. These assumptions are based on actuarial calculations
  certified by independent actuaries, and affect our liability for accrued pension
  and medical health care costs and the amount we are required to provideeach
  year as our post-retirement cost.

Overview

You should carefully review the following discussion in evaluating our results of operations for the three-year period ended December 31, 2002.

Net Income (Loss)

Our loss for 2002 was R$626.3 million in contrast to a loss of R$553.7 million in 2001. The loss was primarily attributable to increased interest expense due to negative foreign currency exchange variation (net of foreign currency exchange variation gains and income on derivative contracts) associated with the impact of the devaluation of the currency on our foreign currency denominated debt that was not protected by hedge instruments. In 2001, our loss was primarily related to the large increase in allowance for doubtful accounts due to collection problems. Collections improved in 2002 and the bad debts provision recorded was R$627.1 million in 2002 versus R$1,155.5 million in 2001.

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Results of operations for the years ended December 31, 2000, 2001 and 2002

The following table sets forth, for each of the periods indicated, selected components of our results of operations and as a percentage of net operating revenues, as well as the percentage change from the prior year.

|                                                                |                               | Year
    Ended December 31, |   | Percentage
      Change |   
|--------------------------------------------------------------- | ----------------------------- | --------------------------- | - | ----------------------- | --
|                                                                |                               |                             |   |                        
|                                                                |                               | 2000                        |   | %                       |   
|                                                                |                               |                             |   |                         |   
|                                                                | (in
      thousands of Reais) |                             |   |                         |   
|Telecommunications
    services                                 |                               | 8,954,688                   |   | 133.4                   | % 
|Gross
    revenues deductions                                   |                               | (2,240,180                  | ) | (33.4                   | %)
|                                                                |                               |                             |   |                         |   
|Net
    operating revenue:                                      |                               | 6,714,508                   |   | 100.0                   | % 
|Cost
    of services                                            |                               | (4,399,267                  | ) | (65.5                   | %)
|                                                                |                               |                             |   |                         |   
|Gross profit                                                    |                               | 2,315,241                   |   | 34.5                    | % 
|                                                                |                               |                             |   |                         |   
|Operating
      expenses                                        |                               | (1,505,207                  | ) | (22.4                   | %)
|                                                                |                               |                             |   |                         |   
|Selling
    expenses                                            |                               | (795,470                    | ) | (11.8                   | %)
|General & administrative
    expenses (1)                       |                               | (697,487                    | ) | (10.4                   | %)
|Other
    operating income (expense), net                       |                               | (12,250                     | ) | (0.2                    | %)
|                                                                |                               |                             |   |                         |   
|Operating
    income (loss) before interest                     |                               | 810,034                     |   | 12.1                    | % 
|Interest
    expense, net                                       |                               | (188,316                    | ) | (2.8                    | %)
|                                                                |                               |                             |   |                         |   
|Operating
    income (loss)                                     |                               | 621,718                     |   | 9.3                     | % 
|Extraordinary
    non-operating income  ILL (2)                |                               |                            |   |                        |   
|Non-operating
    income (expense)                              |                               | 111,224                     |   | 1.7                     | % 
|                                                                |                               |                             |   |                         |   
|Net
    income (loss) before income taxes and minority interest |                               | 732,942                     |   | 10.9                    | % 
|Income
    tax and social contribution benefit (expense)        |                               | (145,312                    | ) | (2.2                    | %)
|Minority
    interest                                           |                               | (10,540                     | ) | (0.2                    | %)
|                                                                |                               |                             |   |                         |   
|Net
      income (loss)                                         |                               | 577,090                     |   | 8.6                     | % 
|                                                                |                               |                             |   |                         |   
|                                                                |                               |                             |   |                         |   

|   
|---
|(1)
|   
|(2)

Net revenues

Our net revenues consist of gross operating revenues from the following four services: data communication services, domestic and international long-distance telecommunications services and other services, net of sales taxes collected with respect to such services.

Net revenues decreased 4.7% to R$7,107.1 million in 2002 from R$7,461.0 million in 2001, which in turn represented an increase of 11.1% from R$6,714.5 million in 2000. The reduction in net revenues in 2002 was due to a 4.4% reduction in domestic long-distance revenues to R$4,356.8 million as a result of the implementation of a call management program to reduce exposure to non-paying customers and increased competition due to the entrance of local operators in the long-distance market.

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The decrease in net revenues was mitigated in part by revenues from data and Internet services which increased by 3.9% in 2002 to R$1.76 billion from 2001. We also had an increase of 7.4% to R$251.1 million in revenues from other telecommunications services, as described below.

The increase in net revenues in 2001 from 2000 was primarily due to a 21.7% growth in revenues from data and Internet services and a 16.2% increase in domestic long-distance voice revenues. We maintained our market share despite more competition, steep price declines and the migration of services. We also had an increase of 8.5% to R$233.9 million in other telecommunications services revenues, as described below.

The table below sets forth, for each of the periods indicated, the principal components of our net revenues, the percentage of those revenues, and the percentage change of each from the prior year.

|                                |  | Year
      Ended December 31, |   | Percentage
      Change
|------------------------------- |  | ----------------------------- | - | -----------------------
|                                |  |                               |   |                        
|                                |  | 2000                          |   | %                      
|                                |  |                               |   |                        
|                                |  | (in
      thousands ofReais)  |   |                        
|Telecommunications
    services |  | 8,954,688                     |   | 133.4                  
|Gross
    revenue deduction     |  | (2,240,180                    | ) | (33.4                  
|Net
    operating revenue       |  | 6,714,508                     |   | 100.0                  
|Data
    and Internet           |  | 1,389,703                     |   | 20.7                   
|Wholesale                       |  | 215,860                       |   | 3.2                    
|Subtotal                        |  | 1,605,563                     |   | 23.9                   
|Domestic
    long-distance      |  | 3,921,377                     |   | 58.4                   
|International
    long-distance |  | 971,921                       |   | 14.5                   
|Other
    services              |  | 215,647                       |   | 3.2                    
|Net
    operating revenue       |  | 6,714,508                     |   | 100.0                  

Data
      communication services.Net
      revenues from data communication services increased 1.0% in 2002 to R$1,832.4
      million from R$1,814.7 million in 2001, which in turn represented an increase
      of 13.0% from R$1,605.6 million in 2000. Data communications include revenues
      from providing dedicated corporate networks, frame relay services and Internet
      services. Some of these same services are provided on a wholesale basis
      to other telecommunications companies and we classify this as wholesale
      data revenues.

The
    increase in 2002 of 1.0% resulted from moderate growth in data and Internet
    services largely offset by a reduction of 38.6% in wholesale data revenues.
    The data services revenues, which include corporate networks, frame relay
    services and Internet grew 3.9% when compared to 2001 despite a year of slow
    economic growth, considerable uncertainty and continued downward pressure
    on prices. Internet revenues continue to represent approximately 30.0% of
    our data communication revenues. Our core data services experienced volume
    growth in 2002. The number of billed frame relay ports rose more than 50.0%.
    Volumes expressed in 2 Mbits equivalents of dedicated services for corporate
    networks rose 43.0%. The growth in the installed circuit base was the result
    of new services, net client additions and bandwidth capacity growth for existing
    clients. This volume growth was offset by price declines on new sales and
    contract renewals.

Data communications services also increased in 2002 due to the elections in Brazil. We provided the data services to support federal and state elections. Such elections occur on a nation-wide level every four years.

We have sought to diversify our client base, expanding sales to medium and small companies. During the last two years, the number of installed data customers increased 28%. This has been the result of a coordinated strategy involving sales effort, product and access development. These new sales have helped to compensate losses due to declining prices.

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The wholesale market continued to decline in 2002. The wholesale market represents customers who buy network capacity from us and sell to their customers. This market has been declining as these customers build out their own networks. On an annual basis, wholesale revenues dropped 38.6% to R$75.9 million. These revenues now represent 4.1% of total data communication revenues.

On March 24, 2003, the major customer that we obtained through the acquisition of AcessoNet Ltda. filed a lawsuit in which it sought to break its long-term contract with us. During the second quarter of 2003, the customer began disconnecting various circuits that were provided by us. If we are unsuccessful in enforcing the contract, it is likely that we will be required to write off the remaining unamortized balance of the goodwill related to AcessoNet in 2003. Data revenues from this customer have been approximately R$12 million per quarter.

The
    increase in 2001 resulted from increases in data services revenues outpacing
    a decline in wholesale data revenues. The data services revenues grew 21.7%
    when compared to 2000. Internet revenues rose more than 60.0% in the year.
    Internet revenues increased to represent almost 30.0% of our data communication
    revenues in 2001 compared to 20.3% in 2000. Our core communication services
    also experienced strong volume growth in 2001. The number of billed frame
    relay ports rose more than 100.0%. Volumes expressed in 2 Mbits equivalents
    of dedicated services for corporate networks rose 60.0%. In addition, during
    2001, we grew our Internet capacity by 153.0% in response to continued demand
    for nationwide quality services. Despite the strong price competition in
    2001, we maintained our core data market share. In preparing for continued
    aggressive competition and to maintain leadership in the Internet market,
    we reduced, at the end of 2001, certain product prices to drive further growth
    and insulate ourselves from competitors. On an annual basis, wholesale revenues
    dropped 42.7% to R$123.6 million in 2001 and decreased to represent only
    6.8% of total data communication revenues.

Domestic
      long-distance revenues.
      Net revenues from domestic long-distance services decreased 4.4% to R$4,356.8
      million in 2002 from R$4,555.3 million in 2001, which in turn represented
      a 16.2% increase from R$3,921.4 million in 2000.

The
    reduction in 2002 was primarily due to the increased number of lines blocked
    because of delinquency and fraud. At the end of 2001, approximately 1.8 million
    lines were blocked. This number more than doubled to 4.6 million in December
    2002. However, as a result of our more stringent collection systems and procedures,
    average domestic long-distance revenue per minute increased 9% in comparison
    to 2001.

The
    long-distance market was also opened to further competition in 2002 as two
    of the three regional operators were authorized to handle inter-regional
    long-distance calls. With this authorization, they were able to carry the
    long-distance portion of the traffic for their own toll-free customers. The
    impact of this authorization resulted in a reduction in our revenues from such
    services by R$73 million in the first half of 2002 to R$20 million in the
    third quarter and nothing in the fourth quarter. This reduction will continue
    to impact our results in 2003 and could be further impacted should the third
    regional operator receive authorization to enter this market.

The
    impact of increased competition in the long-distance market was mitigated
    in our core business market. Our strategy is to replace basic voice services
    with services that provide more value to corporate clients such asAdvanced
    Voiceservices.
    These products reward customer loyalty and help us retain good customers.
    For the residential and small business clients, our strategy has been to
    focus on retaining customers and facilitating timely payment by increasing
    the number of customers who use automatic debit and Internet payment options.
    These two payment options are used with respect to 30% of basic long-distance
    voice revenues. We are also co-billing customers with low usage. Under co-billing,
    the customer receives a combined bill with local and long-distance usage
    and need only make one monthly payment.

The
    increase in 2001 over 2000 was principally due to the growth in traffic,
    increased volumes of fixed to cellular calls, and increases in advanced voice
    services such as toll-free services. Revenues from advanced voice services,
    which are sold exclusively to businesses, increased in excess of 70.0% in
    2001, which further strengthened our competitive position in this key business
    area.

International long-distance telephone service. Net revenues from international long-distance voice services decreased 22.2% to R$666.7 million in 2002 from R$857.1 million in 2001, which in turn represented a reduction of

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11.8% from R$971.9 million in 2000. Improved ability to detect fraud along with the larger number of blocked lines resulted in this decline in international long-distance voice revenues, since non-payers were prevented from using our network. As a fraudulent international call is detected, it is important to block it prior to connection with a call-base service to avoid what can often be very expensive settlement costs to terminate the call if such a call is connected. We account for these international revenues net of settlement costs associated with terminating these calls. These settlement costs are in foreign currencies and can also result in variations in our international long-distance revenues. Additionally, two of the three regional operators were authorized to begin providing international services and some traffic was lost due to this competition. Pricing for outbound calls remained relatively stable in 2002 despite this increased competition.

Other
  telecommunications services.
  Net revenues from other telecommunications services, which includes revenues
  from the transmission of television and radio, clearinghouse services, telex
  and mobile satellite communication services, increased 7.4.% to R$251.1 million
  in 2002 from R$233.9 million in 2001, which in turn represented an increase
  of 8.5% from R$215.6 million in 2000. The increase in 2002 was due to introduction
  of local service in our portfolio, and the increase in 2001 was due primarily
  to increases in revenues for transmission of radio and television services.
  Local services were launched at the end of 2002 and, the R$17.1 million impact
  on revenue was from the provision of local access to our own toll-free customers
  rather than utilizing the regional operator.

Cost
  of services

The
  following table sets forth, for each of the periods indicated, selected components
  of our cost of services as a percentage of net operating revenues, as well as
  the percentage change from the prior year.

|                                       |  | Year
      Ended December 31, |   | Percentage
      Change |   
|-------------------------------------- |  | ----------------------------- | - | ----------------------- | --
|                                       |  |                               |   |                         |   
|                                       |  | 2000                          |   | %                       |   
|                                       |  |                               |   |                         |   
|                                       |  | (in
      thousands ofReais)  |   |                         |   
|Interconnection
        and facilities |  | (3,210,104                    | ) | (47.8                   | %)
|Depreciation                           |  | (797,510                      | ) | (11.9                   | %)
|Personnel                              |  | (217,233                      | ) | (3.2                    | %)
|Third-party services(1)                |  | (136,150                      | ) | (2.0                    | %)
|Other                                  |  | (38,270                       | ) | (0.6                    | %)
|                                       |  |                               |   |                         |   
|Total                                  |  | (4,399,267                    | ) | (65.5                   | %)
|                                       |  |                               |   |                         |   

|   
|---
|(1)

Cost
  of services decreased 4.4% to R$4,736.4 million in 2002 from R$4,954.8 million
  in 2001, which in turn represented a 12.6% increase from R$4,399.3 million in
  2000. Our cost of services consists of interconnection & facilities costs,
  depreciation and other costs or services (such as personnel and third party
  expenses).

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associated line cost. We also
  pay facilities fees to rent circuits from other telecommunications companies
  in order to support interconnection with end-user customers, mainly for data
  communication services. Another important factor for the improvement of line
  costs as a percentage of net revenue was the application of Anatels different
  productivity adjustment, or K-factor, to our basic plan rate and local network
  usage rate. For 2002, the K-factor applicable to the local network usage was
  10%, while the K-factor applicable to the basic plan rate was 4%.

Depreciation.
  The depreciation associated with our domestic long-distance and data networks
  and our international network including satellites and ocean cable systems are
  included in cost of services. Depreciation expense increased to R$981.3 million
  in 2002 from R$929.2 million in 2001 and R$797.5 million in 2000. The increase
  in 2002 was due to significant investments in fixed assets and the completion
  of construction efforts that had been initiated in prior periods. The investments
  were primarily focused on local infrastructure and access to achieve the above-referenced
  savings in interconnection and facilities costs. In addition, there were continued
  installations of equipment to support data and Internet services in 2002. The
  large increase in 2001 from 2000 was attributable to installation of transmission
  equipment, local, Internet and data infrastructure which drove an increase of
  R$40 million. Depreciation was also accelerated in 2002 and 2001 for selective
  asset categories resulting in an increase of R$33 million and R$10.8 million,
  respectively, in depreciation expense.

Third-party
  services.These consist
  of costs associated with network maintenance and outsourced customer installation
  costs. These costs increased to R$204.3 million in 2002 from R$161.1 million
  in 2001 and R$136.2 million in 2000. As our network expanded, the cost of maintaining
  this network also increased. In addition, our obligations under some contracts
  such as ocean cable maintenance agreements are denominated in foreign currencies,
  and the devaluation of therealincreased the cost of these contracts in our operating currency. In 2002, the
  other third-party costs of services increased because of the significant growth
  in the size of our data plants.

Selling
  expenses

Our
  selling expenses consist of sales personnel, marketing, advertising expenses
  and bad debt expenses. These expenses reduced substantially in 2002 to R$1,076.1
  million from R$1,579.6 million in 2001. The improvement was attributable to
  lower bad debts expense in 2002 due to improved collection procedures and improved
  ability to quickly block customers who were not paying their bills.

The
  following table sets forth, for each of the periods indicated, selected components
  of our selling expenses as a percentage of net operating revenues, as well as
  the percentage change from the prior year.

|                                        |  | Year
      Ended December 31, |   | Percentage
      Change |   
|--------------------------------------- |  | ----------------------------- | - | ----------------------- | --
|                                        |  |                               |   |                         |   
|                                        |  | 2000                          |   | %                       |   
|                                        |  |                               |   |                         |   
|                                        |  | (in
      thousands ofReais)  |   |                         |   
|                                        |  |                               |   |                         |   
|Allowance
        for doubtful accounts |  | (362,878                      | ) | (5.4                    | %)
|Personnel                               |  | (197,869                      | ) | (2.9                    | %)
|Third-party services(1)                 |  | (221,167                      | ) | (3.3                    | %)
|Depreciation
        and amortization   |  | (898                          | ) | 0.0                     | % 
|Other                                   |  | (12,658                       | ) | (0.2                    | %)
|                                        |  |                               |   |                         |   
|Total                                   |  | (795,470                      | ) | (11.8                   | %)
|                                        |  |                               |   |                         |   

|   
|---
|(1)

Allowance
  for doubtful accounts or bad debt expense is recorded based on a management
  estimate of the collectability of accounts receivables. In 2002, bad debt expense
  totaled R$627.1 million or 8.8% of net revenues versus R$1,155.5 million or
  15.5% of net revenue in 2001. Though the rate of bad debt expense to cash revenues
  improved significantly in 2002, this amount of bad debt expense is still high
  by international standards and represents a significant risk to our ongoing
  profitability. Some of the reasons for continued high levels of bad debt provisions
  include:

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| | No pre-registration
      of customers for long-distance telephone usage:
      Any user may access and utilize long-distance services from the carrier
      of their choice on a per call basis by dialing the carrier selection code
      or, PIC code. There is no verification of a users credit history and
      no registration of the customers name, address or social security
      number prior to granting access to our network. While fixed-line companies
      are obligated to provide such information to us, the quality of the information
      is often inconsistent and limits our ability to accurately bill and collect
      from users. As a result, customers are provided access to our network without
      any assurance that they are legitimate, paying users. Only upon billing
      the customer and initiating collection procedures are we able to determine
      the credit worthiness of the user. Blocking procedures are then implemented
      along with other measures to recover the amounts billed.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Significant amount
      of gross receipt taxes in Brazil:
      For long distance voice services, the tax burden is approximately 42% of
      the total cost to customers, which includes ICMS, the state value-added
      taxes, along with federal taxes of PIS and COFINS. The government collects
      these taxes from us whether or not the user pays for the call. There is
      no provision in the existing law for the government to refund such taxes
      on uncollected accounts. Accordingly, approximately 42% of the bad debt
      expense represents tax amounts that have already been paid to the state
      and federal governments.                                                                                                                                                                                                                                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | Increase in fixed-line
      and cellular phone lines:
      As fixed-line companies rushed to meet universal service goals imposed by
      Anatel, there was a significant effort to install more fixed and cellular
      phones throughout the country, which increased the likelihood of bad debt
      expense. The number of phone lines increased from 38.3 million at the end
      of 2000 to 47.9 million at the end of 2001, and 49.2 million at the end
      of 2002. The number of cellular units increased from 23.2 million to 28.7
      million and 34.9 million in 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                      

We
  made significant investments in measures to improve our collection rate in 2002.
  We continued to aggressively manage calls to ensure that non-payers are prevented
  from using our network. At the end of the year, the number of blocked lines
  increased to 4.6 million. We also completed installation of a new collections
  system, known as CACS, that provides us with better information on collections
  and past due accounts.

In
  2001, we experienced a significant deterioration in our collections of past
  due accounts. This resulted in an allowance for doubtful accounts of R$1,155.5
  million or 15.5% of our net revenue for 2001. This represented a substantial
  increase from 2000 when the allowance for doubtful accounts was R$362.8 million
  or 5.4% of our net revenue.

During
  2001, we faced significant hurdles in canceling services to those persons or
  entities that did not pay their accounts on a timely basis. We had very limited
  capabilities to implement a comprehensive program that would prevent non-payers
  from accessing our network. In late 2001, we were finally able to obtain the
  necessary capability and instituted measures to prevent such abuses. As a result,
  in March 2001, we could prevent only 30,000 non-paying lines from utilizing
  our services. By September 30, 2001, this number increased to 500,000, and by
  the end of the year the number had increased to 1.8 million. While some of these
  non-payers started to pay their accounts, many others did not. We had assumed
  that, when faced with the inability to use long-distance voice services, non-payers
  would quickly seek to settle their debts. However, this trend did not materialize.
  As a result, it was necessary for us to revise our estimates of doubtful accounts
  and increase the provisions for 2001.

General
  and administrative expenses

Our
  general and administrative expenses, or G&A, increased to R$1,109.1 million
  or 15.6% of our net revenues in 2002 from R$987.9 million or 13.2% of our net
  revenues in 2001. Included in general and administrative expenses are the costs
  of billing, taxes, administration, consulting and legal fees.

The
  following table sets forth, for each of the periods indicated, selected components
  of our general and administrative expenses as a percentage of net operating
  revenues, as well as the percentage change from the prior year.

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|                                      | Year
      Ended December 31, |   |       | Percentage
      Change |     
|------------------------------------- | ----------------------------- | - | ----- | ----------------------- | ----
|                                      |                               |   |       |                         |     
|                                      | 2000                          |   | %     |                         | 2001
|                                      |                               |   |       |                         |     
|                                      |                               |   |       |                         |     
|Third-party services (1)              | (283,257                      | ) | (4.2  | %)                      |     
|Taxes                                 | (97,477                       | ) | (1.5  | %)                      |     
|Personnel                             | (128,282                      | ) | (1.9  | %)                      |     
|Depreciation
        and amortization | (58,396                       | ) | (0.9  | %)                      |     
|Management
        fee  WorldCom     | (67,367                       | ) | (1.0  | %)                      |     
|Employees
        profit sharing     | (36,775                       | ) | (0.5  | %)                      |     
|Other                                 | (25,933                       | ) | (0.4  | %)                      |     
|                                      |                               |   |       |                         |     
|Total                                 | (697,487                      | ) | (10.4 | %)                      |     
|                                      |                               |   |       |                         |     

|   
|---
|(1)

The
  increase to R$1,109.1 million in 2002 from R$987.9 million in 2001, was a result
  of increased billing and collection costs along with higher maintenance costs
  for administrative systems that handle billing and collections. Postage rates
  have risen 35% in August 2001 and represent approximately one-third of our cost
  to bill customers. Depreciation expense also increased in 2002 as a result of
  additional billing and collections systems that were installed. While every
  effort is being made to contain these costs, there can be no assurance that
  these costs will not continue to increase in future periods.

G&A
  for 2002 included a management fee expense to WorldCom of R$36.2 million.

The
  increase to R$987.9 million in 2001 from R$697.5 million in 2000 resulted from
  the increase of billing and collection costs. In addition, the imposition of
  new regulatory taxes in 2001, such as the Fund for Universalization of Telecommunications
  Services, known as FUST, which is a 1% tax on net telecommunications revenues,
  and the Fund for the Technological Development of Telecommunications, known
  as FUNTTEL, which is a 0.5% tax on net telecommunications revenues became effective
  in April 2001.

From
  2000 to 2001, the depreciation and amortization expense increased due to the
  amortization of goodwill associated with our investment in AcessoNet Ltda. This
  goodwill amortization is based on forecasted future profits over a five-year
  period. However, on March 24, 2003, the major customer that we obtained through
  the acquisition of AcessoNet filed a lawsuit in which it sought to break its
  long-term contract with us. During the second quarter of 2003, the customer
  began disconnecting various circuits that were provided by us. If we are unsuccessful
  in enforcing the contract, it is likely that we will be required to write off
  the remaining unamortized balance of the goodwill related to AcessoNet in 2003.

G&A
  for 2001 included a management fee expense to WorldCom of R$38.0 million compared
  to R$67.4 million in 2000. See note 23 to our consolidated financial statements
  for a description of the terms of the management agreement.

Brazilian
  companies are required under Brazilian law to compensate employees, in addition
  to their salary and benefits, with profit sharing. We have developed an employee
  profit sharing plan that ties the distribution of these incentives to key performance
  indicators such as revenue growth, cost containment, customer satisfaction and
  quality of work. We have worked with labor unions and have carefully communicated
  these goals to obtain their support. In 2002, the CVM determined that employee
  profit sharing not solely linked to profits should be classified under operating
  expenses. Following standard practice, we previously reported this expense below
  the operating income line. We now record this expense as part of general and
  administrative expenses. The 2002 employees profit sharing was R$31.3
  million versus R$18.2 million in 2001. In 2000, the employee employees
  profit sharing was R$36.8 million.

Other
  operating income (expense), net

We
  recognized other operating income of R$30.5 million in 2002, an improvement
  from an expense of R$2.9 million in 2001 and an expense of R$12.3 million in
  2000. In 2002, the employer matching related to employee

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contributions to our pension
  fund were reverted for employees who had left the company prior to vesting over
  the past few years. In 2002, we instituted new procedures, which resulted in
  a refund to us of non-vested employer matching contribution for 2002 and prior
  periods. The other operating expense in 2001 included a write-off of value-added
  tax credits of R$29.0 million.

Interest
  expense, net

Net
  interest income (expense) represents the net effect of interest income, interest
  expense, foreign currency exchange gain/loss, net of any income or expense from
  foreign currency hedging transactions. In 2002, we incurred a net interest expense
  of R$1,457.0 million compared to an expense of R$630.0 million in 2001 and R$188.3
  million in 2000.

The
  following table sets forth, for each of the periods indicated, selected components
  of our interest income and expenses as a percentage of net operating revenues,
  as well as the percentage change from the prior year.

|                                          |  | Year
      Ended December 31, |   | Percentage
      Change |    |     
|----------------------------------------- |  | ----------------------------- | - | ----------------------- | -- | ----
|                                          |  |                               |   |                         |    |     
|                                          |  | 2000                          |   | %                       |    | 2001
|                                          |  |                               |   |                         |    |     
|                                          |  |                               |   |                         |    |     
|Interest income:                          |  |                               |   |                         |    |     
|Interest
        on temporary investments |  | 151,577                       |   | 2.3                     | %  |     
|Exchange
        variation  gain         |  | 51,529                        |   | 0.7                     | %  |     
|                                          |  |                               |   |                         |    |     
|Subtotal                                  |  | 203,106                       |   | 3.0                     | %  |     
|                                          |  |                               |   |                         |    |     
|Interest expense:                         |  |                               |   |                         |    |     
|Interest
        on temporary investments |  | (217,630                      | ) | (3.2                    | %) |     
|Exchange
        variation  loss         |  | (173,792                      | ) | (2.6                    | %) |     
|                                          |  |                               |   |                         |    |     
|Subtotal                                  |  | (391,422                      | ) | (5.8                    | %) |     
|                                          |  |                               |   |                         |    |     
|Total                                     |  | (188,316                      | ) | (2.8                    | %) |     
|                                          |  |                               |   |                         |    |     

The
  increase in net interest expenses in both 2002 and 2001 was primarily due to
  net exchange and monetary variation losses of R$1,251.0 million and R$407.2
  million, respectively. The devaluation of the Brazilianrealin relation to the U.S. dollar was 52.3% in 2002 versus a devaluation of 18.7%
  in 2001. This level of devaluation has had a significant impact on our overall
  net interest expense and has added considerable volatility and uncertainty to
  our results. The increase in interest expense was mitigated by interest from
  late payments from customers. Prior to 2002, we did not bill residential customers
  for interest and penalties on late payments. We now regularly charge interest
  to customers for late payments and record such interest as income upon collection.
  The financing program described below in Liquidity and Capital Resources
   Liquidity with Respect to Loans Maturing in 2003 and 2004 will
  have some impact on our overall net interest expense. As loans mature and are
  extended under this program, the cost of borrowing will likely increase. However,
  this will occur over an extended period of time based on the normal maturity
  dates of these loans.

Extraordinary
  non-operating income

In
  2002, a tax contingency with respect to income tax on profit distributions
  for profits not yet distributed, known as the Imposto sobre o Lucro Liquido,
  or ILL, was resolved through final judicial decisions. This tax was imposed
  from 1989 to 1992 and we paid all amounts due in accordance with the tax legislation
  in force at that time. In 1996, the Brazilian Supreme Court ruled that the ILL
  was unconstitutional since undistributed profits do not represent a taxable
  event. In 1999, we filed a lawsuit based on this ruling and obtained an injunction
  in court to receive a tax credit. We used this tax credit to offset normal income
  taxes payable from May 1999 to July 2001. However, we did not record any income
  for this potential tax credit at that time, as there was still a risk that this
  decision could be overturned. In May 2002, the Administrative Tax Court further
  ruled that the ILL recovery was not subject to income taxes as it had not been
  treated as a tax deductible expense when initially paid. Because the Brazilian
  Supreme Court was no longer accepting appeals on this matter, we decided to
  recognize the amount of

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R$198.1 million as an extraordinary
  income in 2002. This amount includes the principal amount of R$144.0 million
  and interest of R$54.1 million.

Net
  non-operating income (expense)

Non-operating
  income was R$10.9 million in 2002 compared to a net non-operating expense of
  R$75.9 million in 2001 and a non-operating income of R$111.2 million in 2000.
  The net non-operating income in 2002 was mainly attributable to an increase
  on rent of infrastructure of third parties. The net non-operating expense in
  2001 was mainly due to losses on disposals of fixed assets of R$76.4 million
  (net of proceeds from disposals) compared to R$44.8 million in 2000. The increase
  in losses on disposals of fixed assets in 2001 was due to disposal of switching
  equipment necessary to improve our ability to block non-payers on a centralized
  basis.

In
  2000, we had non-operating income of R$111.2 million mainly attributable to
  the sale of minority interests in our satellite business, which resulted in
  a gain of R$132.2 million and income from international consortia in the amount
  of R$10.4 million, offset by expenses from losses on disposals of assets of
  R$44.8 million (net of proceeds from disposals) and other non-operating expenses
  of R$23.8 million.

Income
  and social contribution benefit (expense)

Our
  income and social contribution taxes for 2002 were a benefit of R$414.2 million
  compared to a benefit of R$222.1 million in 2001. It should be noted that we
  are closely monitoring the accounting for these tax benefits in accordance with
  Brazilian accounting standards for deferred tax assets. In the event that we
  are unable to improve operating results in future periods, it is possible that
  we may no longer be able to recognize a tax benefit associated with net losses.
  It is also possible that we may be forced to write-off tax benefits previously
  recognized, in the event that the financial projections that support the recoverability
  of these assets are not met. See note 13 to our consolidated financial statements
  for a detailed discussion of deferred and recoverable taxes and note 22 to our
  consolidated financial statements regarding the new CVM deliberation number
  371 on deferred assets. In 2000, we benefited from recording interest
  in lieu of dividends of R$153 million which we paid and resulted in R$52
  million in income tax saving. The current combined income and social contributions
  tax rate in Brazil is 34%.

Net
  income (loss)

In
  2002, we had a loss of R$626.3 million compared to a loss of R$553.7 million
  in 2001 and a net income of R$577.1 million in 2000.

The
  loss for 2002 was primarily attributable to the devaluation of therealvis-à-vis the U.S. dollar (52.3% in the year) on our foreign currency
  debt. The net loss for 2001 was primarily attributable to the increase in bad
  debt provision, regulatory tax expenses, as well as the effect of the devaluation
  of therealvis-à-vis
  the U.S. dollar (18.7% in the year) on our foreign currency debt. The net income
  in 2000 was due mainly to strong revenue growth, reduced line costs (as a percentage
  of revenue), the gain on the sale of a minority interest in our satellite subsidiary
  and the income tax benefits from recording interest on capital in lieu
  of dividends.

Segment Information

In
  2001, we began to manage our space segment as a separate business segment. This
  segment consists ofour subsidiary Star
  One S.A., which was formed in November 2000 to manage our satellite operations.
  See Item 4. Information ontheCompanyBusiness
  OverviewSpace Segment. A significant amount of our capacity in this
  segment is leased directly to our telecommunications segment, which utilizes
  this capacity, together with equipment and software, for the provision of certain
  data communications and other services to their customers.

We
  are presenting segment information for our satellite services business for 2002
  and 2001 only because Star One began its operations on November 1, 2000. Prior
  to that date, our satellite services business was an integrated unit of our
  overall business operations. As a result, our management did not analyze this
  business on a stand-alone basis and no separate financial information was available
  prior to November 1, 2000. See note 30.e of our consolidated financial statements
  for additional information.

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The
  following table sets forth the results of operations on a consolidated basis
  and for our two segments, telecommunications and space, as of December 31, 2002
  and 2001:

|                     | For
        Year Ended December 31, 2002 |  
|-------------------- | ---------------------------------------- | -
|                     |                                         
|                     | Telecommunications
        Segment       |  
|                     |                                          |  
|                     | (in
        thousands ofReais)           |  
|Net revenue          | 6,916,475                                |  
|Cost of services     | (4,667,560                               | )
|                     |                                          |  
|                     |                                          |  
|Gross profit         | 2,248,915                                |  
|Operational expenses | (2,095,488                               | )
|                     |                                          |  
|Operating income     | 153,427                                  |  
|                     |                                          |  



|                        | For
        Year Ended December 31, 2001 |                    
|----------------------- | ---------------------------------------- | -------------------
|                        |                                          |                    
|                        | Telecommunications
      Segment         |                    
|                        |                                          | Space
      Segment
|                        |                                          |                    
|                        | (in
        thousands of Reais)          |                    
|Net revenue             | 7,274,693                                |                    
|Cost of services        | (4,864,261                               | )                  
|                        |                                          |                    
|                        |                                          |                    
|Gross profit            | 2,410,432                                |                    
|Operational expenses    | (2,538,858                               | )                  
|                        |                                          |                    
|Operating income (loss) | (128,426                                 | )                  
|                        |                                          |                    

Net
  revenue

In
  2002, our space segment had net revenues of R$347.3 million primarily from the
  leasing of satellite transponder capacity to various telecommunications providers,
  including Embratel. Customers include local and long-distance fixed-line and
  cellular telephony companies who use this facility for high speed point-to-point
  network links or provide end users with data communications services and/or
  VSAT network services. Satellite capacity is also provided for broadcasting
  television programming, such as studio-to-studio connections, contribution channels,
  cable head-end program feeders and television distribution for broadcasters.
  During the third quarter of 2001, we launched our satellite broadband Internet
  access service, through a proprietary two-way satellite-based network using
  VSAT technology. The increase in 2002 from 2001 stems from R$12.3 million of
  additional revenue from the new satellite broadband Internet access business,
  launched during the third quarter of 2001. Additionally, our data communications
  services increased R$20.9 million mostly due to price adjustments triggered
  by contractual inflation index adjustments averaging 13% during the year.

Cost
  of services

In
  2002, our space segment had cost of services of R$224.6 million primarily attributable
  to depreciation expense on the current fleet of five satellites. This increased
  by R$17.4 million from 2001 due to additional costs of R$11.3 million associated
  with the new satellite broadband Internet access service along with other cost
  increases.

B.  Liquidity
  and Capital Resources

Sources
  of Cash

Our
  primary sources of funds are cash from operations and financing activities.
  Net cash flow provided by operating activities was R$1,493.4 million, R$744.2
  million, and R$934.2 million in 2002, 2001 and 2000, respectively. Net cash
  flow provided by (used in) financing activities was R$(223.7 million), R$967.6
  million and R$496.2 million in 2002, 2001 and 2000, respectively. We do not
  have any unused sources of funds, such as undrawn bank facilities. As of December
  31, 2002, we had cash and cash equivalents of R$887.0 million.

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Our
  total long-term indebtedness was R$2,325.5 million, R$2,648.2 million and R$1,364.4
  million as of December 31, 2002, 2001 and 2000, respectively. The decrease in
  long-term indebtedness at December 31, 2002 from December 31, 2001 was due to
  the fact that the original amount of indebtedness maturing during 2003 is much
  greater than the amount that will mature in 2004, R$2,566 and R$1,088, respectively.
  R$1,747.3 million of our debt matured in 2002. We benefit from a strong relationship
  with export credit agencies such as the Export-Import Bank of the United States
  and the Export Development Corporation of Canada and we are able to obtain direct
  long-term loans and have the advantage of lower tax remittances on such loans.
  Besides these two primary agencies, we also have loans supported by Compagnie
  Française dAssurance pour le Commerce Exterieur, or COFACE (France),
  the Export Credits Guarantee Department, or ECGD (England), Overseas Private
  Investment Corporation (United States), the National Bank of Economic and Social
  Development, or BNDES (Brazil) and Hermes (Germany). In order to qualify for
  these loans, the financing must be related to our capital expenditure program.
  The terms of these loans are generally more favorable than terms from commercial
  banks, and they help finance projects such as satellites, international ocean
  cables, and domestic fiber routes.

Our
  two principal categories of indebtedness (including the current portion thereof)
  as of December 31, 2002 were:

Financial
  institutions(R$4,883.1
  million). Borrowings (principal and interest) from financial institutions consist
  of various unsecured short- and long-term loans, generally in foreign currencies.
  Our policy has been to incur foreign currency debt whenever the cost and terms
  are more favorable to us than real-denominated bank borrowings. In light
  of the volatility of the real since 1999, we have increased our short-term
  borrowings in Reais to reduce our exposure to foreign currency fluctuations.
  In recent months, new short-term borrowings have been hedged to Reais
  to further reduce this exposure.

Supplier
  credits(R$8.8 million).
  Supplier credits (in the form of principal and accrued interest) are available
  for purchases of imported equipment, principally fiber optic transmission equipment.

Most
  of our 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 our debt is in default or accelerated. As
  of December 31, 2002, none of our outstanding debt was in default.

Debt
  Ratings

We
  do not have any capital market financings.

Liquidity
  with Respect to Loans Maturing in 2003 and 2004

A
  significant portion of our debt matures in 2003 and 2004. As a result, we initiated
  discussions with creditor institutions. On March 17, 2003, an agreement was
  reached with approximately 25 financial institutions to roll over maturing debt,
  in the amount of R$861.4 million, which is expected to (1) reduce our overall
  debt, if market conditions permit, (2) mitigate refinancing risk in 2003, and
  (3) reduce financing requirement in 2004.

In
  April 2003, new contracts were signed, in the amount of R$20.4 million, raising
  the renegotiated total amount to US$881.9 million (R$3,116.0 million at December
  31, 2002 parity) corresponding to debt maturing in 2003 and the first half of
  2004. We also used this financing program to reduce our debt by repaying approximately
  US$151.6 million (R$535.6 million). The interest rates negotiated under the
  financing agreement are LIBOR plus 4% per annum for foreign currency debt and
  CDI plus 4% for BrazilianReaisdebt.

Other
  features of the financing agreements include:

| | Bullet
      loans in the principal amount US$758 million (R$2,678.2 million). The repayment
      schedule for each bullet loan is as follows:
|- | -----------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                
|  | (1)                                                                                                                                            

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|  | (2)                                                                                                                                                                                                                                                                                                                                                                                                                 | 30 percent
      to be repaid through 7 equal quarterly payments starting the first quarter
      after the original maturity date of the applicable bullet loan; and
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                      
|  | (3)                                                                                                                                                                                                                                                                                                                                                                                                                 | the remaining
      50 percent to be repaid by a balloon payment due 2 years after the original
      maturity date of the applicable bullet loan.                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                      
|  | Current
        interest rates will remain effective until the original maturity date
        of each loan, and the negotiated interest rates will apply to the debt
        after such date.                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                      
|  | Creditors
        were given the choice of converting the original currency of the debt
        into other currency, includingReais,
        to be effective from the original maturity date.                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Amortizing
      loan in the principal amount of US$123.9 million (R$437.8 million). For
      the existing amortizing loans, all repayments due between January 2003 and
      June 30, 2004 will be extended. The amounts being extended will be repaid
      equally over the remaining installments due after June 30, 2004. The negotiated
      interest rates will apply to the loan amounts being extended.

We
  provided certain guarantees to all banking institutions with outstanding loan
  agreements on March 17, 2003. These guarantees include part of the receivables
  from corporate customers, as well as pledges of shares in certain subsidiaries
  and any dividends received from our subsidiaries.

The
  renegotiated agreements contain certain restrictions and covenants including,
  among others, limitations on debt, minimum EBITDA (earnings before interest,
  taxes, depreciation and amortization), limitations on capital expenditures,
  negative pledge provisions, limitations on mergers and consolidations and limitations
  on the selling, transferring or otherwise disposing of all or substantially
  all of our assets.

Foreign
  Currency Indebtedness and Interest Rates

Almost
  all of our indebtedness (including the current portion thereof), totaling R$4,891.9
  million as of December 31, 2002, was denominated in foreign currencies, 54.0%
  of which was in U.S. dollars. Our effective cost of borrowing in foreign currencies
  depends principally on the exchange rate between therealand the currencies in which our borrowings are denominated. In 2000, we started
  to hedge our short-term debt against foreign currency losses to ensure that
  debt payments would remain in BrazilianReais,
  including new transactions with a maximum of three-years (market conditions
  permitting). We have not hedged our obligations under our foreign currency-denominated
  long-term indebtedness. In 2002, the U.S. dollar appreciated 52.27% against
  thereal.If this appreciation is sustained, or worsens, the cost in BrazilianReaisof servicing our U.S. dollar-denominated debt will increase proportionately.
  Our loans and other financing obtained from financial institutions were primarily
  denominated in foreign currency. We are exploring various alternatives with
  respect to hedging this risk to avoid future additional foreign exchange losses.

Uses
  of Cash

Our
  principal liquidity and capital resource requirements are applied to finance
  capital expenditures and investments related to the expansion, improvement and
  maintenance of our property, plant and equipment. Historically, we have financed
  capital expenditures and investments with internally generated funds and indebtedness.

We
  incurred capital expenditures of R$1,034.7 million, R$1,465.0 million and R$1,420.2
  million in 2002, 2001 and 2000, respectively. See Item 4. Information
  on the CompanyHistory and Development of the CompanyCapital Expenditures
  for additional information. We estimate that capital expenditures for 2003 will
  be approximately R$1.0 billion. We believe that cash flow from operations and
  available cash will be sufficient to meet a portion of our capital needs and
  debt service requirements for the next twelve months. The other portion will
  require additional financing.

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We
  paid dividends and interest on capital (a form of dividend that receives favorable
  tax treatment in Brazil) of R$211.5 million in 2000. Because of the net loss
  in 2001 and 2002, we did not pay dividends or interest on capital in lieu of
  dividends in either of these years. With respect to dividend payments, under
  Brazilian law and the regulations of the Brazilian securities commission, persons
  holding more than 10% of the voting stock of a company (a percentage that may
  decrease up to 5% in the case of listed companies) may require us to adopt cumulative
  voting. We believe that, based on current holdings in our operating subsidiary,
  if cumulative voting were required, we would still be able to control the payment
  of dividends by Embratel, which, with respect to the mandatory dividend, could
  be limited only under very strict circumstances. Board members, even if elected
  by one specific shareholder, have fiduciary duties toward the company and all
  our shareholders.

1.  Reconciliation
  to U.S. GAAP

We
  prepare our consolidated financial statements in accordance with Brazilian corporate
  law, which differs in significant respects from U.S. GAAP.

Under
  U.S. GAAP, we recorded a net loss of R$677.9 million for the year ended December
  31, 2002 (compared to a net loss of R$626.3 million under Brazilian corporate
  law), a net loss of R$464.2 million for the year ended December 31, 2001 (compared
  to a net loss of R$553.7 million under Brazilian corporate law), and net income
  of R$658.7 million for 2000 (compared to net income of R$577.1 million under
  Brazilian corporate law). The principal differences between Brazilian corporate
  law and U.S. GAAP as they affect our results of operations during the reported
  periods are:

| |  | differences in the classification
      of goodwill;                                                    
| | - | --------------------------------------------------------------------------------------------------------
| |   |                                                                                                         
| |  | differences in the accounting
      for the effects of inflation;                                       
| |   |                                                                                                         
| |  | differences in the criteria
      for capitalizing and amortizing capitalized interest;                 
| |   |                                                                                                         
| |  | differences in the recognition
      of costs of pensions and other post-retirement benefits;           
| |   |                                                                                                         
| |  | differences in the criteria
      for recordation of provisions related to voluntary dismissal programs;
| |   |                                                                                                         
| |  | differences in posting
      certain items directly to shareholders equity; and                        
| |   |                                                                                                         
| |  | differences in the recognition
      of installation revenues and costs.                                

Shareholders
  equity determined in accordance with U.S. GAAP was R$5,076.7 million as of December
  31, 2002 compared to R$4,719.8 million under Brazilian corporate law, R$5,755.1
  million as of December 31, 2001 compared to R$5,346.7 million under Brazilian
  corporate law, and R$6,279.9 million as of December 31, 2000 compared to R$6,082.2
  million under Brazilian corporate law. The principal differences affecting the
  determination of shareholders equity are those described above.

For
  a discussion of the principal differences between Brazilian corporate law and
  U.S. GAAP as they relate to our consolidated net income (loss) and shareholders
  equity and a quantitative reconciliation of these differences, see note 29 to
  our consolidated financial statements.

2.  Recently
  Issued Accounting Pronouncements

In
  June 2001, the Financial Accounting Standards Board, known as FASB, issued Statement
  of Financial Accounting Standards No. 142, Goodwill and Other Intangible
  Assets, or SFAS 142. SFAS 142 addresses financial accounting and reporting
  for acquired goodwill and other intangible assets, and supersedes APB Opinion
  17, Intangible Assets. SFAS 142 also amends SFAS No. 121, Accounting for
  the Impairment of Long Lived Assets and for Long-Lived Assets to Be Disposed
  Of, to exclude from its scope goodwill and intangible assets that are
  not amortized. SFAS 142 addresses how intangible assets that are acquired individually
  or with a group of other assets (but not those acquired in a business combination)
  should be accounted for in financial statements upon their acquisition. This
  statement also addresses how goodwill and other intangible assets should be
  accounted for after

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they have been initially recognized
  in the financial statements. The provisions of SFAS 142 are required to be applied
  starting with fiscal years beginning after December 15, 2001. Early application
  is permitted for entities with fiscal years beginning after March 15, 2001,
  provided that the first interim financial statements have not been issued. An
  exception to SFAS 142 application date is for goodwill and intangible assets
  acquired after June 30, 2001, which will be immediately subject of the non-amortization
  and amortization provisions of this statement. The adoption of SFAS 142 on January
  1, 2002, did not have any impact on our financial position, cash flows or results
  of operations.

In
  June 2001, the FASB issued Statement of Financial Accounting Standards No. 143,
  Accounting for Asset Retirement Obligations, or SFAS 143, which
  is effective for years beginning after June 15, 2002, which will be our fiscal
  year 2003. SFAS 143 addresses legal obligations associated with the retirement
  of tangible long-lived assets that result from the acquisition, construction,
  development or normal operation of a long-lived asset. The standard requires
  that the fair value of a liability for an asset retirement obligation be recognized
  in the period in which it is incurred if a reasonable estimate of fair value
  can be made. The fair value of the liability is added to the carrying amount
  of the related asset and depreciated over the life of the asset. The liability
  is accrued each period through charges to operating expense. If the obligation
  is settled for other than the carrying amount of the liability, we will recognize
  a gain or loss on settlement. We have not yet determined what the effect of
  SFAS 143 will be on our earnings and financial position.

In
  August 2001, the FASB issued Statement of Financial Accounting Standards No.
  144, Accounting for the Impairment or Disposal of Long-Lived Assets,
  or SFAS 144. SFAS 144 addresses financial accounting and reporting for the impairment
  or disposal of long-lived assets. SFAS 144 supersedes SFAS No. 121, Accounting
  for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
  Of, and the accounting and reporting provisions of Accounting Principles
  Board Opinion No. 30, Reporting the Results of Operations  Reporting the
  Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and
  Infrequently Occurring Events and Transactions. SFAS 144 also amends Accounting
  Research Bulletin No. 51, Consolidated Financial Statements, to
  eliminate the exception to consolidation for a subsidiary for which control
  is likely to be temporary. SFAS 144 requires that one accounting model be used
  for long-lived assets to be disposed of by sale, whether previously held and
  used or newly acquired. SFAS 144 also broadens the presentation of discontinued
  operations to include more disposal transactions. The adoption of SFAS 144 on
  January 1, 2002, did not have any impact on our financial position, cash flows
  or results of operations.

In
  April 2002, the FASB issued Statement of Financial Accounting Standards No.
  145, Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical
  Corrections as of April 2002, or SFAS 145. SFAS 145 rescinds SFAS No.
  4, Reporting Gains and Losses from Extinguishment of Debt, SFAS
  No. 44, Accounting for Intangible Assets of Motor Carriers, and
  SFAS No. 64, Extinguishments of Debt made to satisfy Sinking-Fund requirements.
  As a result, gains and losses from extinguishment of debt will no longer be
  classified as extraordinary items unless they meet the criteria of unusual or
  infrequent as described in Accounting Principles Board Opinion 30, Reporting
  the Results of Operations  Reporting the Effects of Disposal of a Segment
  of a Business, and Extraordinary, Unusual and Infrequently Occurring Events
  and Transactions. In addition, SFAS 145 amends SFAS No. 13, Accounting
  for Leases, to eliminate an inconsistency between the required accounting
  for sale-leaseback transactions and the required accounting for certain lease
  modifications that have economic effects that are similar to sale-leaseback
  transactions. SFAS 145 also amends other existing authoritative pronouncements
  to make various technical corrections, clarify meanings, or describe their applicability
  under changed conditions. SFAS 145 is effective for fiscal years beginning after
  15 May 2002. We are currently evaluating the impact that the adoption of SFAS
  145 will have on our results of operations and financial position. However,
  we do not believe that the adoption of SFAS 145 will have a material impact
  on our results of operations and financial position.

In
  June 2002, the FASB issued Statement of Financial Accounting Standards No. 146,
  Accounting for Costs Associated with Exit or Disposal Activities,
  or SFAS 146. SFAS 146 addresses financial accounting and reporting for costs
  associated with exit or disposal activities and nullifies Emerging Issues Task
  Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
  Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
  in a Restructuring) (EITF 94-3). SFAS 146 eliminates the definition
  and requirements for recognition of exit costs in EITF 94-3. SFAS 146 requires
  that a liability for a cost associated with an exit or disposal activity be
  recognized when the liability is incurred. Under EITF 94-3, a liability for
  an exit cost as defined

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in EITF 94-3 was recognized
  at the date of an entitys commitment to an exit plan. SFAS 146 also concluded
  that an entitys commitment to a plan, by itself, does not create a present
  obligation to others that meets the definition of a liability. SFAS 146 also
  establishes that fair value is the objective for initial measurement of the
  liability. The requirements of SFAS 146 apply prospectively to activities initiated
  after December 31, 2002, and as such, we cannot reasonably estimate the impact
  of the adoption of these new rules until and unless they affect relevant activities
  in future periods.

In
  December 2002, the FASB issued Statement of Financial Accounting Standards No.
  148, Accounting for Stock-Based Compensation  Transition and Disclosure,
  or SFAS 148. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based
  Compensation, or SFAS 123, and provides alternative methods of transition
  for a voluntary change to the fair value based method of accounting for stock-based
  employee compensation. SFAS 148 also amends the disclosure requirements of SFAS
  123 to require more prominent and frequent disclosures in financial statements
  about the effects of stock-based compensation. The transition guidance and annual
  disclosure provisions of SFAS 148 are effective for financial statements issued
  for fiscal years ending after December 15, 2002. Adoption of SFAS 148 is not
  expected to materially impact our financial position, cash flows or results
  of operations.

In
  November 2002, the FASB issued Interpretation Number 45, Guarantors
  Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees
  of Indebtedness of Others, or FIN 45. This interpretation requires certain
  disclosures to be made by a guarantor in its interim and annual financial statements
  about its obligations under certain guarantees that it has issued. It also requires
  a guarantor to recognize, at the inception of a guarantee, a liability for the
  fair value of the obligation undertaken in issuing the guarantee. The disclosure
  requirements of FIN 45 are effective for interim and annual periods after December
  15, 2002 and we have adopted those requirements for our financial statements.
  The initial recognition and initial measurement requirements of FIN 45 are effective
  prospectively for guarantees issued or modified after December 31, 2002. We
  are assessing, but at this point do not believe the adoption of the recognition
  and initial measurement requirements of FIN 45 will have a material impact on
  our financial position, cash flows or results of operations.

At
  the September and October 2002 meetings of the Emerging Issues Task Force (EITF),
  the Task Force reached a tentative conclusion on Issue No. 00-21, Revenue
  Arrangements with Multiple Deliverables, which outlines an approach to
  be used to determine when a revenue arrangement for multiple deliverables should
  be divided into separate units of accounting and, if separation is appropriate,
  how the arrangement consideration should be allocated to the identified accounting
  units. Specifically, in an arrangement with multiple deliverables, the delivered
  item(s) should be considered a separate unit of accounting if (1) the delivered
  item(s) has value to the customer on a standalone basis, (2) there is objective
  and reliable evidence of the fair value of the undelivered item(s) and (3) if
  the arrangement includes a general right of return, delivery or performance
  of the undelivered item(s) is considered probable and substantially in the control
  of the vendor. The arrangement consideration allocable to a delivered item(s)
  that does not qualify as a separate unit of accounting within the arrangement
  should be combined with the amount allocable to the other applicable undelivered
  item(s) within the arrangement. The appropriate recognition of revenue should
  then be determined for those combined deliverables as a single unit of accounting.
  The guidance in EITF 00-21 is effective prospectively for revenue arrangements
  entered into in fiscal years beginning after December 15, 2002. Alternatively,
  entities may elect to report the change in accounting as a cumulative-effect
  adjustment in accordance with Accounting Principles Board Opinion 20, Accounting
  Changes. We are currently evaluating the impact of EITF 00-21 on our financial
  statements, specifically including our treatment of revenue from handset sales
  under US GAAP. We currently cannot reasonably estimate the impact of adopting
  the new rule.

In
  January 2003, the FASB issued FASB Interpretation No. 46  Consolidation
  of Variable Interest Entities  an interpretation of ARB No. 51,
  or FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin
  No. 51, Consolidated Financial Statements, to certain entities in which equity
  investors do not have the characteristics of a controlling financial interest
  or do not have sufficient equity at risk for the entity to finance its activities
  without additional subordinated financial support from other parties. FIN 46
  explains how to identify variable interests entities and how an enterprise assesses
  its interests in a variable interest entity to decide whether to consolidate
  that entity. It requires existing unconsolidated variable interest entities
  to be consolidated by their primary beneficiaries

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if the entities do not effectively
  disperse risks among parties involved. It also requires certain disclosures
  by the primary beneficiary of a variable interest entity and by an enterprise
  that holds significant variable interests in a variable interest entity where
  the enterprise is not the primary beneficiary. FIN 46 is effective immediately
  to variable interest entities created after January 31, 2003 and to variable
  interest entities in which an enterprise obtains an interest after that date,
  and effective for the first fiscal year or interim period beginning after June
  15, 2003 to variable interest entities in which an enterprise holds a variable
  interest that it acquired before February 1, 2003. FIN 46 requires an entity
  to disclose certain information regarding a variable interest entity, if when
  the Interpretation becomes effective, it is reasonably possible that an enterprise
  will consolidate or have to disclose information about that variable interest
  entity, regardless of the date on which the variable entity interest was created.

In
  May 2003 the FASB issued Statement of Financial Accounting Standards No. 150,
  Accounting for Certain Financial Instruments with Characteristics of both
  Liabilities and Equity, or SFAS 150. SFAS 150 modifies the accounting
  for certain financial instruments that, under previous guidance, issuers could
  account for as equity. The Statement requires that those instruments be classified
  as liabilities in statements of financial position. SFAS 150 affects an issuers
  accounting for three types of freestanding financial instruments, namely:

| |  | mandatorily
      redeemable shares, which the issuing company is obligated to buy back in
      exchange for cash or other assets.                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                           
| |  | instruments,
      other than outstanding shares, that do or may require the issuer to buy
      back some of its shares in exchange for cash or other assets. These instruments
      include put options and forward purchase contracts.
| |   |                                                                                                                                                                                                                                           
| |  | obligations
      that can be settled with shares, the monetary value of which is fixed, tied
      solely or predominantly to a variable such as a market index, or varies
      inversely with the value of the issuers shares.        

SFAS
  150 does not apply to features embedded in financial instruments that are not
  derivatives in their entirety. In addition to its requirements for the classification
  and measurement of financial instruments within its scope, SFAS 150 also requires
  disclosures about alternative ways of settling those instruments and the capital
  structure of entities, all of whose shares are mandatorily redeemable. SFAS
  150 is effective for financial instruments entered into or modified after May
  31, 2003, and otherwise is effective at the beginning of the first interim period
  beginning after June 15, 2003. It is to be implemented by reporting the cumulative
  effect of a change in an accounting principle for financial instruments created
  before the issuance date of the Statement and still existing at the beginning
  of the interim period of adoption. Restatement is not permitted. We are currently
  evaluating the impact of SFAS 150 on our financial position, results of operations
  and cash flows.

C. Research and Development,
  Patents and Licenses, etc.

We
  rely on vendors to develop new technologies to improve service offerings and
  reduce costs. We expend minimal amounts on research and development. Until the
  Breakup of Telebrás, Embratel and the other companies of the Telebrás
  System were required to contribute to the research and development center operated
  by Telebrás, known asCentro
  de Pesquisa e Desenvolvimento da Telebrásor the CPqD, in addition to their own independent research and development activities.

The
  CPqD is a private, independently administered, non-profit foundation financed
  with resources from the public and private sectors that continues to develop
  communications technology. Pursuant to a three-year contract signed in May 1998
  between Telebrás and Embratel, we contributed approximately R$63.2 million
  to the CPqD during the four years ending July 31, 2001. We contributed R$13.9
  million, R$22.1 million, R$19.5 million and R$7.7 million at December 31, 2001,
  2000, 1999 and 1998, respectively. No such expenditures occurred in 2002. During
  the term of this agreement, we had access to telecommunications software developed
  by the CPqD and other technological services provided by the CPqD such as equipment
  testing and consulting and training services. The CPqD also provided such services
  to third parties on a fee-for-service basis.

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We
  actively protect our intellectual property rights in Brazil and relevant foreign
  jurisdictions. Most of our trademarks, including the Embratel trade name and
  other related Embratel product names, are protected through trademark legislation.

|D. | Trend
      Information          
|-- | ---------------------------------
|   |                                  
|   |                                  
|   |                                  
|E. | Off-Balance
      Sheet Financing

We
  do not have any off-balance sheet financing. We have no majority-owned subsidiaries
  that are not included in our consolidated financial statements, nor do we have
  any interests in or relationships with any special purpose entities that are
  not reflected in our consolidated financial statements.

F. Contractual Obligations

The
  following table represents our long-term contractual obligations as of December
  31, 2002:

|                                         | Payments
      due by Period |                
|---------------------------------------- | ---------------------------- | ---------------
|                                         |                             
|                                         |                              | Less
      than
|Total                                    | 1 year                       | years          
|                                         |                              |                
|(in
      thousands of Reais)           
|Contractual obligations:                 |                              |                
|Long-term debt                           | 2,285,168                    |                
|Capital lease obligations                | 80,175                       |                
|Suppliers of equipments                  | 278,326                      |                
|Other long-term obligation
      (1)     | 189,098                      |                
|                                         |                              |                
|Total contractual cash
      obligations | 2,832,767                    |                
|                                         |                              |                

|   
|---
|(1)

In
  addition, we have contractual commitments, such as right-of-ways, which are
  not material to our financial condition. We also have swap agreements described
  in Item 11. Quantitative and Qualitative Disclosures About Market Risk.

ITEM 6.  DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES

A.  Directors
  and Senior Management

Board
  of Directors

The
  following are the current members of the board of directors and their respective
  positions.

| | Name                      | Position     
| | ------------------------- | -------------
| | Daniel Eldon Crawford     | Chairman     
| | Dilio Sergio Penedo       | Vice-Chairman
| | Edson Soffiatti           | Director     
| | Antonio Carlos Tettamanzy | Director     
| | Jorge Luis Rodriguez      | Director     
| | Joaquim de Sousa Correia  | Director     
| | Jonathan Crane            | Director     

Set
  forth below are brief biographical descriptions of the Directors.

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Daniel
  Eldon Crawford, born
  on June 10, 1939, has been a member of the Board since September 1998 and has
  served as Chairman of the board of directors since February 1999. He serves
  as President and CEO of WorldCom Latin America, for WorldCom. He also has served
  as Chairman of the board of directors of Embratel since March 1999. Since 1994,
  he has served as Chief Operating Officer of Avantel, S.A., a joint venture of
  WorldCom and Grupo Financiero Banamex-Accival, which competes in the Mexican
  long-distance marketplace. Previously, he held a number of positions at MCI,
  including President of the Network Services Division and President of MCIs
  Southwest Division. He holds a Bachelor of Science degree in electrical engineering
  from the University of Nebraska and a Masters degree in electrical engineering
  from New York University.

Dilio
  Sergio Penedo, born
  on July 5, 1942, has served as a Vice-Chairman of the board of directors since
  August 1998. He served as General Area Manager for South America at SAFT, a
  company of the Alcatel Alsthom Group; President of NifeArgentina; Superintendent
  Director of IndesulSaft Equipamentos Eletronicos; and Superintendent Director
  of Nife BrasilSistemas Elétricos. In addition, he served as President
  of Embratel from February 1995 until November, 1999, and President of Embratel
  Participações S.A. from May 22, 1998 to December 19, 2002. He holds
  a degree in electrical engineering from Pontifical Catholic University of Rio
  de Janeiro.

Edson
  Soffiatti, born on
  November 9, 1943, has served as a member of the board of directors since June
  2001. In December 2000, he was elected the Chief Executive Officer (CEO) of
  Star One, Embratels satellite subsidiary in a partnership with SES GLOBAL
  (LUX). Prior to Star One, he served as manager of the international project
  in the area of satellite and submarine cables in Embratel. He has also served
  as the International Officer of Embratel since 1990. In addition, from 1998
  until 2000, he served as Director of the Board of the New Skies Satellites (Holland).
  He holds a degree in electronics engineering.

Antonio
  Carlos Tettamanzy,
  born on February 27, 1942, has served as a member of the board of directors
  since June 1999. He started his career in the Embratel legal department and
  later served for 11 years as legal counsel, reporting directly to the President
  of Embratel. He became a member of the Legal Committee of INTELSAT in 1985 and
  was reelected in 1987 and 1992. He was also a member of the Aeroespacial Legal
  Committee of the Interamerican Bar Association. He was the representative of
  the Infra-Structure Ministry in 1990 during the GATT negotiations in Geneva.
  He holds a law degree from the Pontifical Catholic University of Rio de Janeiro.

Jorge
  Luis Rodriguez, born
  on April 3, 1957, was appointed as a member of the board of directors in September
  2000, effective on March 14, 2001. He has been the President of Embratel since
  November 1999 and was elected President and CEO of Embratel Participações
  S.A. on December 19, 2002. Prior to Embratel, he served as Chief Marketing Officer
  and Senior Vice President of WorldComs Global Ventures and Alliances group.
  Prior to that, he served as Chief Executive Officer for Avantel, the Mexican
  joint venture between MCI and Grupo Financiero Banamex-Accival. Mr. Rodriguez
  joined MCI in 1979 and held positions in marketing analysis, pricing and product
  management and development in MCIs Business and Consumer Markets groups.

Joaquim
  de Sousa Correia,born
  on February 16, 1947, has served as a member of the board of directors since
  June 2001. He has served as the Human Resources Officer of Embratel since January
  2000. Prior to that, he served in various positions in the human resources area
  of Embratel. He holds a degree in administration from Moraes Junior University,
  Rio de Janeiro.

Jonathan
  Crane,born on October
  15, 1949, has served as a member of the board of directors since April 17, 2003.
  He is the Executive Vice President of Strategy and Marketing for MCI. Mr. Crane
  is a 30-year veteran of the telecommunications industry. Prior to joining MCI,
  he served most recently as chairman and CEO of Adero, Inc., an Internet-based
  content distribution company and chairman and CEO of Marcam Solutions, Inc.,
  an ERP software company focused on manufacturing, customer relationship management
  and supply chain management applications. Mr. Crane holds a bachelors
  degree in history and education from Dartmouth College.

Board
  of Executive Officers

The
  following are the current Executive Officers and their respective positions.
  Unless otherwise indicated, all current members were appointed in August 1998.

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| | Name                                | Position                               
| | ----------------------------------- | ---------------------------------------
| | Jorge Luis Rodriguez                | President
      & CEO                  
| | Daniel Eldon Crawford               | Vice-President                         
| | Norbert Glatt                       | CFO & Investor Relations
      Director
| | Pedro Antonio Batista
      Martins | Director                               
| | Sultana Shamim Khan                 | Director                               

Set
  forth below are brief biographical descriptions of the executive officers who
  are not members of the board of directors of Embratel.

Norbert
  Glatt, born on March
  29, 1959, has served as a member of the board of executive officers since December
  2002. He previously worked as CFO of GLB Serviços Interativos S.A., which
  is the exclusive internet entertainment and news portal of Organizações
  Globo (a leading Brazilian media concern), as Head of Business Development of
  Globo Participações e Comunicações S.A. (Globopar),
  which is a holding company for a number of subsidiaries and associated companies
  involved in pay television in Brazil (including a leading cable/satellite television
  program producer and a cable/satellite distribution system), as Head of Strategic
  Planning and also as Treasury Operations Manager of Aracruz Celulose S.A.. Mr.
  Glatt holds a degree in Mechanical Engineering from Federal University of Rio
  de Janeiro and an MBA from California State University, Long Beach.

Pedro
  Antonio Batista Martins,
  born on August 9, 1955, has served as a member of the board of executive officers
  since October 1999 and as Legal Counsel of Embratel since May 1999. Mr. Batista
  is also a member of the Brazilian Institute of Lawyers. He previously worked
  as Legal Director for Globo Cabo Holding S.A., the largest Brazilian cable company,
  as well as for Texaco de Brasil Produtos do Petróleo. Mr. Batista holds
  a degree from the University of the State of Rio De Janeiro Law School.

Sultana
  Shamim Khan, born
  on September 21, 1960, has served as a member of the board of executive officers
  since August 2000, having been effectively empowered on March 14, 2001. She
  is also the Vice President of Strategic Development and Planning at Embratel.
  In this capacity, she is responsible for developing and executing Embratels
  strategy, mainly through restructuring efforts, alliances and merger and acquisition
  activities. Prior to this role, she was responsible for WorldCom merger and
  acquisition activities in Latin America and Asia and was the primary person
  responsible for the Embratel acquisition. During her 15-year career in the telecommunications
  industry, she has held positions in financial planning, marketing and strategic
  development. She has a B.A. in Economics from George Washington University in
  Washington D.C. and an MBA from Indiana University in Bloomington, Indiana,
  U.S.A.

B.  Compensation

For
  the year ended December 31, 2002, the aggregate amount of compensation paid
  by our subsidiaries to all directors
  and executive officers of our subsidiaries as a group was approximately R$10.6
  million.

At
  the Extraordinary General Meeting of Shareholders held on December 17, 1998,
  we approved the creation of a stock option plan under which our directors, executive
  Officers and other management employees may be granted options to purchase shares
  of Embratel. Our board of directors provided the details of the stock option
  plan at a meeting held on the same date.

The
  total number of shares under the stock option plan shall not exceed 10% of the
  total number of outstanding shares of Embratel (in accordance with the authorized
  capital limits). The stock option plan will initially involve only preferred
  shares. The price will be the closing market price at the date the option is
  granted, known as the option date. The maximum term for exercise of the rights
  under the stock option plan is ten years from the option date, and for each
  option, the beneficiary will be vested with powers to exercise up to 25% of
  the shares in each period, the first period ending eight months after the option
  date and the subsequent periods ending each January from 2003 on. A committee
  was established and granted powers to define who will be granted the options,
  and for how many shares. Dilio Sergio Penedo, Daniel Eldon Crawford and Joaquim
  de Sousa Correia serve on the committee.

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In
  2002, 640 employees were granted options to purchase Embratels shares
  under the stock option plan. There were 7,884,429 open options as of December
  31, 2002, with a weighted average exercise price of R$5.44 per thousand shares
  for options granted up to 2002. The options vest in the amount of 33.33% per
  year, commencing one year after the grant date, and expire after a period of
  10 years. Until the third quarter of 2001, the exercise price at the grant date
  was restated by the General Market Price Index (IGP-M) until the options vested.
  Since October 2001, the exercise price is no longer restated by the IGP-M. The
  acquired shares maintain all of the rights pertaining to the shares of equal
  class and type, including dividends.

The
  summarized information on the plan is as follows:

|Number of preferred
      share purchase options (thousands of shares) |            |  
|---------------------------------------------------------------------- | ---------- | -
|Open options as of January
      1, 2000                               | 1,762,667  |  
|Options offered in 2000                                                | 2,048,265  |  
|Options exercised in 2000                                              | (122,700   | )
|Options sold in 2000                                                   | (4,800     | )
|Options cancelled in 2000                                              | (130,000   | )
|                                                                       |            |  
|Open options as of December
      31, 2000                             | 3,553,432  |  
|Options offered in 2001                                                | 6,264,711  |  
|Options sold in 2001                                                   | (13,333    | )
|Options cancelled in 2001                                              | (3,540,099 | )
|                                                                       |            |  
|Open options as of December
      31, 2001                             | 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  |  
|                                                                       |            |  
|Weighted average exercise
      price of the purchase options on       | 5.44       |  
|December 31, 2002 (per thousand shares, expressed in Reais)            |            |  

C.  Board Practices

We
  are managed by our board of directors and by our Executive Officers.

Board
  of Directors

Our
  board of directors, or theConselho
  de Administração,
  generally meets monthly or whenever called by our Chairman. Each board of directors
  meeting requires a quorum of the majority of the board members as well as the
  presence of either the Chairman or Vice-Chairman. The board of directors has
  responsibility for establishing our general business policies, and for electing
  our executive officers and supervising their management of the registrant. Certain
  matters require the approval of our board of directors, including, among other
  things, capital increases up to the authorized capital, intermediate dividend
  distributions, our investments in fixed assets, investments in other companies,
  proposing to our stockholders the dissolution or merger of the registrant and
  the appointment of independent auditors. The members of the board of directors
  are elected by the holders of common stock for a period of three years and may
  be reelected.

Brazilian
  corporate law provides for cumulative voting if a shareholder or shareholders
  whose interests represent at least 10% of the voting capital request it no later
  than 48 hours prior to the general shareholders meeting. As a result,
  some members of the board of directors may be elected as follows:

| | each share entitles the
      holder to cast as many votes as there are board members;                                                                                                                                                                                                                                         
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                
| | after consulting the attendance
      book, the board conducting the meeting shall inform the shareholders in
      advance of the number of votes required to elect each director; and each
      shareholder the right to vote cumulatively for only one candidate or to
      distribute his votes among several candidates;
|  |                                                                                                                                                                                                                                                                                                                                
| | The non-controlling shareholders
      are entitled to elect two directors in a separate election in which the
      controlling shareholder does not vote, provided that:                                                                                                                                                     

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|  |                                                                                                                                                                                                                                                                                                                                                                                                                    | in case of common shares,
      they represent, at least, 15% of the voting capital; and                                    
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    | in case of non-voting
      or restricted voting preferred shares, they represent, at least, 10% of
      the total capital.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | If neither
      the minority-voting shareholders, nor the preferred shareholders reach the
      above-referred quorum, they can jointly elect one director, provided that,
      together, they represent 10% of the total capital.                                                                                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | If the non-controlling
      shareholders exercise such rights, the controlling shareholder is entitled
      to elect, at least, a number of directors so elected by the non-controlling
      shareholders, plus one.                                                                                                                                                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Until the
      shareholders ordinary general meeting to approve the financial statements
      of the year ended in 2004, the directors by the non-controlling shareholders
      must be chosen out of a list of three names prepared by the controlling
      shareholders. From the shareholders ordinary general meeting of 2006 on,
      such Director will be elected without respect to such restrictions.

Executive
  Officers

There
  shall be no fewer than two and no more than nine executive officers, or theDiretoria,
  one of them being the President. The executive officers work as a board and
  are responsible for our day-to-day management. The board of directors has appointed
  each of our current executive officers for a three-year term, which began on
  April 25, 2001 and may remain in office until reappointed or replaced. Executive
  officers may be successively reappointed.

Fiscal
  Committee

Under
  our by-laws, we are required to, and currently maintain, a permanent fiscal
  committee, or theConselho
  Fiscal. In accordance
  with Brazilian corporate law and our by-laws, such fiscal committee consists
  of a minimum of three and a maximum of five members and an equal number of alternates.
  The members of the fiscal committee are elected for one-year terms. Preferred
  stockholders, who do not have voting rights, are entitled to elect, as a class,
  one member of the fiscal committee and the respective alternate by majority
  vote of the stockholders present at the meeting at which members of the fiscal
  committee are elected. Non-controlling holders of common shares comprising at
  least 10% of the common shares outstanding may also elect one member of the
  fiscal committee and the respective alternate. Controlling holders of common
  shares would be entitled to elect one member for each member elected by the
  preferred stockholders and non-controlling holders of common shares, respectively,
  plus one member and his or her alternate.

The
  primary responsibility of the fiscal committee, which is independent of our
  management and our external auditors, is to review our financial statements
  and report on them to the stockholders.

Audit
  Committee

We
  do not have a formal audit committee. Our board of directors undertakes the
  functions and responsibilities of an audit committee.

D.  Employees

Telecommunications
  segment

As
  of December 31, 2002, we had 11,823 employees in our Telecommunications segment
  (11,859 in 2001 and 11,893 in 2000), of which 7,106 were employees of Embratel
  (7,203 in 2001 and 7,684 in 2000), and 4,717 were employees of BrasilCenter
  Comunicações Ltda. (BrasilCenter) (4,656 in 2001 and
  4,209 in 2000). Approximately 31% of our employees (32% in 2001 and 35% in 2000)
  were employed in repair, engineering, operations maintenance and other similar
  positions, 53% in customer service and sales and marketing positions (54% in
  2001 and 50% in 2000) and 16% in administrative positions (14% in 2001 and 15%
  in 2000) (including those in information technology), whereas 2% (3% in 2001
  and 2.73% in 2000) of our employees were in executive

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management positions and 1%
  (3% in 2001 and 2.66% in 2000) in supervisory positions related to customer
  service and sales and marketing.

Space
  segment

As
  of December 31, 2002, our space segment had 187 employees (158 in 2001 and 107
  in 2000), all were employees of Star One.

Labor
  unions

Approximately
  37% of Embratels employees are affiliated with state and/or municipal
  labor unions (Sindicato
  dos Trabalhadores em Empresas de Telecomunicações,
  known as Sinttel), which is associated with theFederação
  Nacional dos Trabalhadores em Empresas de Telecomunicações e Operadores
  de Mesas Telefônicas,
  known as Fenattel, or with theFederação
  Interestadual dos Trabalhadores em Empresas de Telecomunicações,
  known as Fittel, with which labor agreements are negotiated. Approximately 0.5%
  and 24% of the employees of Brasil Center and Star One, respectively, 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. Our relationship with our employees and their unions are generally
  good. For many years we have not experienced a work stoppage that had a material
  effect on our operations. The labor agreements with all of our employees have
  a two-year term. Some economic issues pertaining to the labor agreements are
  subject to revision after 12 months. Currently, the labor agreements
  BrasilCenters employees
  are effective, and those of Embratel and Star One are under negotiation.

Employee
  Benefit Plans

We
  have established a pension fund, Fundação Embratel de Seguridade
  Social  Telos, known as Telos, the purpose of which is to supplement
  government provided retirement benefits for our and Star One employees. Telos
  administers two different plans. The first is a defined benefit plan under which
  we make monthly contributions to Telos, currently equal to 19.8%of the
  aggregate salary. In addition, we contribute 2.32% of the aggregate salary base
  for funding the post-retirement medical plan for 29 employees who remain in
  the defined benefit plan. Each employee member of this first plan also makes
  a monthly contribution to Telos based on age and salary. Members of Telos generally
  qualify for full pension benefits after reaching age 58 and having completed
  at least 35 years of service for men and 30 years of service for women. The
  second plan is a defined contribution plan that was formed in the last half
  of 1998. All of our new employees may only enter this defined contribution plan.
  Under an offer made by our management, existing employees had the option of
  migrating from the defined benefit plan to the defined contribution plan. The
  offer expired on December 31, 1998, and the transfer to the defined contribution
  plan became effective January 1, 1999. Approximately 93%of all our employees
  (including Star One S.A. employees) belong to the new defined contribution plan.
  We match employees contributions to the fund up to a maximum of 8% of
  each employees salary.

BrasilCenter
  Comunicações Ltda. employees do not have a retirement benefit plan.
  Telos operates independently from us, and its assets and liabilities are fully
  segregated from ours. See note 22 to our consolidated financial statements.

E.  Share Ownership

None
  of our directors or executive officers individually beneficially own one percent
  or more of our shares. All of
  our common shares carry the same voting rights. Our preferred shares are non-voting
  shares. Each ADS represents 5,000 preferred shares. See Compensation
  for a discussion of our stock option plan.

ITEM 7.   MAJOR
  SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.  Major Shareholders

Of
  our two classes of capital share outstanding, only the common shares have full
  voting rights. The preferred shares
  have voting rights under limited circumstances. WorldCom is our majority shareholder.
  WorldComs

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ownership of our shares is
  held through two subsidiaries, Startel Participações Ltda. and New
  Startel Participações Ltda.

As
  of December 31, 2002, Startel Participações Ltda., an indirect wholly-owned
  subsidiary of WorldCom, held 62,054,576,448 common shares of Embratel Participações.
  These shares amounted to 49.90% of the voting shares of, and a 18.56% economic
  interest in, Embratel Participações. Also on December 31, 2002,
  New Startel Participações
  Ltda., an indirect wholly-owned subsidiary of WorldCom, held 2,350,574,677 common
  shares of Embratel Participações. These shares amounted to 1.89%
  of the voting shares of, and a 0.70% economic interest in, Embratel Participações.
  Through the two companies WorldCom holds a total of 64,405,151,125 common shares
  which amounted to 51.79% of the voting shares and 19.26% of economic interest.
  WorldCom, through one of its affiliates, entered into a management agreement
  with us. See Related Party Transactions below.

The
  table below provides information on the common shares owned by WorldCom and
  by our officers and directors as a group. We are not aware of any other shareholder
  owning more than 5.0% of our common shares.

|                                                      | Number
      of    |                     | Percentage
      of |  
|----------------------------------------------------- | ------------------ | ------------------- | ------------------- | -
|Common                                                | Outstanding       
|Name of owner                                         | Shares
      Owned | Common
      Shares
|                                                      |                    |                     |                     |  
|WorldCom through subsidiaries:                        | 64,405,151,125     |                     | 51.79               | %
|Startel
      Participações Ltda.                     | 62,054,576,448     |                     | 49.90               | %
|New
      Startel Participações Ltda                  | 2,350,574,677      |                     | 1.89                | %
|All directors and executive
      officers as a group | 20,594             |                     | 0.00                | %

B.  Related Party
  Transactions

We
  entered into a management agreement with WorldCom, effective August 4, 1998,
  which was approved by our
  shareholders (other than WorldCom), pursuant to which WorldCom provides us with
  advice regarding our management, operations and business. Under the agreement,
  we paid to WorldCom, as compensation for its management services in 1999 and
  2000, an amount equal to 1%, and in 2001 and 2002, an amount equal to 0.5%,
  of our annual net revenues during each such year. The compensation for management
  services to be provided in 2003 is 0.2% of our annual net revenue. The management
  services agreement expires on December 31, 2003 and may be extended, subject
  to further negotiation and minority shareholder approval. As of December 31,
  2002, we had accrued approximately R$36.2 million of management services fees
  pursuant to the management agreement with respect to management services provided
  from January 1, 2002 to December 31, 2002. Pursuant to the terms of the management
  agreement, the amount of fees accrued with respect to such services was determined
  based on net revenues reported during the period from January 1, 2002 through
  December 31, 2002.

In
  addition to this management agreement, we have normal settlement costs with
  WorldCom for completion of international long-distance services to our customers.
  These services are carried out with WordCom, under normal market conditions
  for these types of operations. We have similar arrangements with other carriers
  in the United States, and this relationship is carried out on an arms-length
  basis. The balances receivable and payable between WorldCom and us are described
  more fully in note 23 of the consolidated financial statements Transactions
  With Related Parties.

On
  August 7, 2002, we (as borrower) signed a loan agreement with our subsidiary
  Star One (as lender). As of December 31, 2002, we had a credit line of R$150,000
  from Star One. This loan agreement is guaranteed by promissory notes issued
  by us. The interest rate to be applied to the outstanding balance at any time
  shall be equal to 100% of the CDI rate (the interest rate applicable to inter-bank
  certificates in Brazil) applicable to the corresponding period.

We
  do not have any other material service contracts with current or former related
  parties, executives or directors.

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C.  Interests
  of Experts and Counsel

Not
  applicable.

ITEM 8.  FINANCIAL
  INFORMATION

A.  Consolidated
  Statements and Other Financial Information

See
  Part III  Item 18. Consolidated Financial Statements.

Legal Proceedings

The
  Breakup

The
  Breakup of Telebrás is subject to several lawsuits in which the plaintiffs
  have requested, and in certain cases obtained, preliminary injunctions against
  the Breakup. All of these preliminary injunctions have been quashed by decisions
  of the relevant Federal Court, although several of these decisions are currently
  on appeal. If any such appeal is successful, the shareholders of Telebrás
  will be required to reapprove the Breakup and other legislative actions may
  be required.

The
  lawsuits to which the Breakup has been subjected are based on a number of legal
  theories, the principal among which are that:

| |  | the Brazilian Constitution
      requires that the creation of the twelve New Holding Companies be specifically
      authorized by the Telecommunications Law;                                                                                                                                               
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                               
| |  | the shareholders
      meeting of Telebrás held on May 22, 1998 which approved the Breakup
      was not properly convened;                                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                               
| |  | national sovereignty will
      be threatened if the countrys telecommunications companies are controlled
      by foreign entities; and                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                               
| |  | the Telecommunications
      Law requires that certain matters, such as the entry of new competitors
      and the administration of development and technology funds, be regulated
      prior to the Breakup and privatization either by an executive order of the
      President or by an act of Congress.

If
  any of the plaintiffs in these lawsuits ultimately prevail, the Breakup may
  have to be reinitiated. This could require, depending upon the prevailing plaintiffs
  theory, any combination of the following:

| |  | amendment of the Telecommunications
      Law;                                                    
| | - | --------------------------------------------------------------------------------------------------
| |   |                                                                                                   
| |  | reconvening the May 22,
      1998 Telebrás shareholders meeting; and                            
| |   |                                                                                                   
| |  | the passing of additional
      laws by Congress or issuance of executive orders by the President.

It
  is theoretically possible under Brazilian law for a court to require that the
  Breakup be unwound, although we believe that this is unlikely to occur. We were
  a party in a public civil action brought by the Federal Department of Justice
  initially to impede the privatization auction. This lawsuit, filed before the
  First Federal Circuit of Rio de Janeiro on July 27, 1998, was dismissed, but
  a final decision is still pending because the Public Ministry challenged the
  dismissal.

Arbitration
  decision

The
  International Court of Arbitration  ICA, Paris, France, where we and another
  company were disputing credits and rights deriving from alleged contractual
  infringements, notified us of a decision against us in an arbitration case.
  As a result of this decision, we accrued a provision in 2002 of R$17.3 million
  adjusted with accrued interest up to December 31, 2002, which represents the
  estimated loss.

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Foreign
  source operating income

Foreign
  source operating income consists of payments made to us by foreign companies
  for connecting incoming international calls to Brazil. In March 1999, we received
  from the Federal Revenue Agency a tax assessment in the amount of R$287.2 million
  for failing to pay income tax on net foreign source operating income for the
  years 1996 and 1997. In June 1999, we were further assessed for non-payment
  of income tax on net foreign source income for the year 1998 in the amount of
  R$111.1 million. However, of this total, approximately R$46.7 million related
  to the period from August to December 1998 for which we had already recorded
  and paid in full the income tax and related interest during 1999. We have appealed
  the remaining assessments. We intend to continue to pay income tax on net foreign
  source income until this tax controversy is resolved. We continue to discuss
  the first assessment (years 1996 and 1997) with the Federal Revenue Agency,
  pending a decision from the Tax Administrative Court. The second assessment
  (year 1998) was maintained at the administrative level, therefore Embratel appealed
  to the judicial courts. Meanwhile, we received an injunction from the Federal
  Tribunal to suspend the assessment until a decision from the Federal Tribunal
  is rendered. We plan to continue to dispute the assessment and to discuss this
  issue with the appropriate authorities. See note 21 to our consolidated financial
  statements.

Withholding
  tax on remittances to foreign telecommunications companies

We
  regularly make payments to foreign telecommunications companies for completing
  international calls that originate in Brazil and terminate in a foreign country.
  Brazilian income tax law generally requires Brazilian recipients of services
  from foreign companies to withhold 25% from payments to foreign companies for
  such services. However, pursuant to the International Telecommunications Regulations
  approved in Melbourne, Australia on December 9, 1988, known as the Melbourne
  Regulations, we have never withheld Brazilian income tax from such payments.
  See note 21 to our consolidated financial statements.

On
  December 23, 1999, we received a tax assessment in the amount of R$410.7 million
  for failing to pay the related withholding tax on outbound revenue for the period
  from December 1994 to October 1998. Meanwhile, the Federal Revenue Agency concluded
  that starting October 1998, we are exempt from any such withholding requirement.
  We believe that other double taxation treaties should also apply to remittances
  made to countries that are parties to such treaties. After presenting our administrative
  defense to allow us to discuss the amount levied by the Federal Revenue Agency,
  we filed a parallel lawsuit to contest the date of applicability of the Melbourne
  Regulations, which exempts us from this withholding requirement, and we intend
  to demonstrate that it was applicable prior to 1992 and not limited to the period
  beginning October 1998.

In
  order to avoid the collection and imposition of penalties by the tax authorities
  while the courts are reviewing the matter, we have obtained an injunction which
  suspends the imposition of penalties until a final decision from the federal
  courts. After a decision at the first judicial level that ruled against Embratel,
  we appealed the decision to a higher court, from which a decision is still pending.
  Meanwhile, the administrative judges have issued a decision to reduce Embratels
  tax assessment from R$410.7 million to R$12.9 million. The administrative judges
  arrived at this decision by amending the criteria used by tax auditors to impose
  the assessment and taking into account the exclusion of payments to countries
  with double taxation treaty. This reduction has yet to be confirmed by the Tax
  Administrative Court (Appellate Level).

Recently,
  based on a legal opinion issued by Federal Attorney Generals office on
  October 31, 2000, the Federal Revenue Agency notified us that it has modified
  its position with regard to the applicability of the exemption contained in
  the Melbourne Regulations. According to this new interpretation, we would be
  subject to the withholding income tax on payments made from December 23, 2002
  on. We continue to believe that the application of this tax to us is inappropriate
  and plan to continue the administrative and judicial appeals.

We
  continue to believe that the application of this tax to us is inappropriate
  and plan to continue the administrative and judicial appeals.

We
  have notified Telebrás, our legal predecessor, of both issues concerning
  the foreign source operating income and the withholding tax on remittances to
  foreign administrations.

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PIS
  credits and COFINS on inbound revenues

On
  August 21, 2001, we received two tax assessments from the Federal Revenue Agency
  (SRF), totaling R$501 million, including fines and interest, for prior years
  PIS/COFINS taxes. The first claim, in the amount of R$159 million, was related
  to PIS charges prior to 1995, which had been offset against other tax payables
  in accordance with Complementary Law No. 7/70. In similar cases, both the Taxpayers
  Council, and more recently the Federal Court of Justice (STJ), in a decision
  of its First Section, recognized the legality of such offsetting of PIS credits.
  With regard to the first assessment, we had presented our administrative defense,
  and in July 2002 the first Administrative Level decision was issued and the
  assessment was upheld. We appealed this decision to the Administrative Tax Court,
  from which we are still waiting for a final decision. The second claim, in the
  amount of R$342 million, was related to a COFINS exemption on the exportation
  of telecommunication services for revenues through the end of 1999. We believe
  that these revenues were exempt, based on legal opinions on the legislation
  in effect at that time. In this COFINS claim, there were substantial errors
  in the calculations of the assessment made by the tax auditor. Consequently,
  after we filed our administrative defense, in July 2002 the First Administrative
  Level reduced the assessment by R$220 million. We are presently appealing to
  eliminate the remaining balance of the assessment. Based on facts and arguments
  provided and the opinion of our external legal counsel, we view the probability
  of a loss in both assessments as remote. Accordingly, no provision was recorded
  in our financial statements for these two assessments.

COFINS
  and PIS

In
  1999, we challenged the changes caused by Law No. 9,718/99 which increased:
  (1) the taxable revenues for calculation of PIS and COFINS, including financial
  income and exchange variation and (2) the COFINS rate from 2% to 3%. Despite
  this challenge, we continued to accrue the total amount of the tax liability
  and made judicial deposits in the period from August 1999 through April 2001.
  Since May 2001, based on jurisprudence, we decided to cease making deposits
  and started paying PIS and COFINS. On August 29, 2002, Provisional Measure (PM)
  No. 66 was issued, which permitted the liquidation of fiscal liabilities which
  were being challenged in court without the incidence of fines. Then, we decided,
  based on this PM, to liquidate this liability, writing off taxes and social
  contributions provisioned in the amount of R$173,122 and the corresponding judicial
  deposits in the same amount.

INSS
  (Brazilian Social Security Institute)

On
  September 5, 2001, Embratel became aware of an unfavorable decision of the Social
  Security Council of Appeal on a claim regarding the applicability of Social
  Security charges, or the INSS, to certain fringe benefits, such as vacation
  bonus, life insurance, etc. The total amount of the INSS assessment is R$55,000.
  See note 21 in our consolidated financial statements.

Regulatory
  sanctions

When
  the carrier selection code, or PIC code, was introduced in July 1999, the telephony
  system throughout Brazil experienced an unusually high rate of busy circuits.
  Domestic and international long-distance calls could not be completed. As a
  result, Anatel established an administrative hearing process and imposed a penalty
  of R$55 million on us. We filed a lawsuit to avoid Anatels administrative
  procedure and received an injunction and a favorable opinion from the Attorney
  General, and thus avoided the collection of the penalty. With respect to such
  lawsuit filed against the Anatel administrative procedure, on April 24, 2001,
  the lower court issued a decision in favor of Anatel. However, the judge decided
  to reduce the penalty from R$55 million to R$50 million due to a partial violation
  of the administrative procedures by Anatel. We appealed and obtained a court
  injunction in order to avoid the imposition of the penalties while we contest
  this issue in court. In April 2000, the state of São Paulo imposed a
  fine of R$30 million on a local fixed-line operator and us, and ordered us to
  refund to our customers an amount equivalent to the value of all calls made
  between July 3 and July 12, 1999. After the first judicial level decided that
  we were bound to pay the amount, we filed an appeal before the São Paulo
  Tribunal of Justice. The appeal was accepted by the court which decided in favor
  of Embratel. Thus, the lawsuit was rejected in favor of Embratel by the São
  Paulo Tribunal of Justice.

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ICMS
  on international outbound traffic and bundled services

Until
  the enactment of Complementary Law No. 87 of September 13, 1996, known as the
  Complementary Law, local telecommunications companies invoiced and collected
  state value-added tax, or ICMS, on fixed-line telecommunications services at
  a statutory rate of 13% in accordance with ICMS Convention No. 27 of March 29,
  1994. When the Complementary Law went into effect, Telebrás instructed
  its telecommunications operating companies to stop collecting ICMS on international
  outbound telephone traffic. However, certain state tax agencies fined local
  telecommunications companies for not collecting and paying ICMS on international
  outbound traffic from 1996 to 1999. As a precautionary measure, we began collecting
  ICMS on international traffic in January 2000. We were also assessed for non-payment
  of ICMS on certain services (bundled services) considered to be exempt or non-taxable
  for ICMS purposes. Our management and legal counsel believe that there is a
  sound basis for defending the position that ICMS is not payable on revenues
  derived from international outbound traffic as well as from certain exempt and
  non-taxable services (bundled services). Based on the facts currently available
  and on advice from legal counsel, it is possible that we may be required to
  pay these assessments. The possible losses amount to approximately R$351 million
  as of December 31, 2002. This amount includes assessments received after December
  2000 from the various states in Brazil.

In
  addition, our management is considering challenging in court the ICMS on international
  outbound traffic. Accordingly, no provision has been recorded. Meanwhile, we
  are taking an active role in the telecommunications industrys effort to
  inform the tax authorities about the detrimental effect of the high ICMS rate.
  In July 2002, the subsidiary Star One was assessed by the ICMS (value added
  tax) tax authorities, in the state of Rio de Janeiro, a tax in the amount of
  R$236 million. These assessments refer to the ICMS tax on the rental of transponders
  and on broadband internet services. See note 21 in our consolidated financial
  statements.

Other
  judicial claims

Our
  subsidiary Embratel is a defendant in two judicial claims for payment of indemnities
  for alleged unsettled contractual charges. In light of the current status of
  the lawsuits and the arguments presented by legal counsel, we have concluded
  that the probability of loss in such claims is probable and have recorded a
  loss provision in the amount of R$6,500 in our financial statements since the
  first quarter of 2002.

Our
  subsidiary Embratel is also a defendant in two judicial claims against the Company
  for payment of amounts arising from interconnection agreements with two local
  operators, which totaled approximately R$520 million. This amount relates to
  disputed amounts from 2000. See note 21.f in our consolidated financial statements.

Telebrás

Telebrás,
  our legal predecessor, is a defendant in a number of legal proceedings and subject
  to other claims and contingencies. Under the terms of the Breakup, liability
  for any claims arising out of acts committed by Telebrás prior to the
  effective date of the Breakup remains with Telebrás, except for labor
  and tax claims (for which Telebrás and the New Holding Companies are
  jointly and severally liable by operation of law) and any liability for which
  specific accounting provisions have been assigned to the registrant or one of
  the other New Holding Companies. Creditors of Telebrás could challenge
  this allocation of liability until September 14, 1998. We are not aware of any
  such challenge having been made.

Although
  we are considered to be the surviving entity of Telebrás for financial
  reporting purposes under U.S. GAAP, we will not be liable for any claims arising
  out of acts committed by Telebrás except for such claims as have been
  assigned to us under the terms of the Breakup and except for labor and tax claims
  as discussed above.

We
  are a party to certain other legal proceedings arising in the normal course
  of business. We have provided for or deposited in court amounts to cover estimated
  losses due to adverse legal judgments. In the opinion of our management, such
  actions, if decided adversely to us, would not have a material adverse impact
  on our business, financial condition or results of operations.

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Distribution Policy and
  Dividends

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

For
  the purposes of Brazilian corporate law, and in accordance with our by-laws,
  the adjusted net income is an amount equal to our net profit, adjusted to reflect
  allocations to and from:

| |  | the statutory reserve;               
| | - | -------------------------------------
| |   |                                      
| |  | the contingency reserve;
      and   
| |   |                                      
| |  | the unrealized revenue
      reserve.

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

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

| |  | the shareholders meeting
      so decided exclusively for collection of resources by issuing debentures,
      not convertible into shares, provided that no shareholder votes against
      it;                                                                                    
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                     
| |  | its board of directors
      and fiscal committee report to the shareholders meeting that the distribution
      would be incompatible with the financial circumstances of that company;
      and                                                                                 
| |   |                                                                                                                                                                                                                                                                                     
| |  | the shareholders ratify
      this decision at the shareholders meeting (in which case the board
      of directors must forward to CVM, within five days of the shareholders
      meeting, a justification of the information provided at such shareholders
      meeting); and
| |   |                                                                                                                                                                                                                                                                                     
| |  | the profits that were
      not distributed, are to be recorded as a special reserve and, if not absorbed
      by losses in subsequent fiscal years, are to be paid as dividends as soon
      as the Companys financial situation permits.                                       

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

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

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

Brazilian
  corporate law also provides for two additional discretionary allocations of
  net profits to special accounts, which are also subject to approval by shareholders
  at the annual shareholders meeting.

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

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

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| |  |  | written off in the event
      that the anticipated loss occurs.
| |  | - | ----------------------------------------------------------------
| |  |   |                                                                 

| |  | Second, net profits may
      be allocated to the unrealized revenue reserve in case the total amount
      of mandatory dividends exceeds the portion of the realized net profit in
      the same fiscal year.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  | the equity share of earnings
      of affiliated companies, not paid as cash dividends; and    
| | - | -----------------------------------------------------------------------------------------------
| |   |                                                                                                
| |  | profits from installment
      sales to be received after the end of the following fiscal year.

The
  unrealized revenue reserve can only be used to pay the mandatory dividends.
  In order to calculate the mandatory dividends, each years future profits
  that are the first realized (cash payment) must be deemed as part of the unrealized
  revenue reserve.

The
  profits registered in the unrealized revenue reserve, when received and if not
  absorbed by the losses of subsequent years, must be added to the first dividend
  declared after the respective realization.

According
  to Brazilian corporate law, the profits not registered in any of the permitted
  reserves, shall be distributed as dividends.

Priority
  and Amount of Preferred Dividends

Under
  Brazilian corporate law, the listed companies can only issue preferred shares
  with one of the following rights:

| |  | priority in receipt of
      dividends corresponding to at least 3% of the book value per share of ordinary
      stock;
| | - | ------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                         
| |  | dividends that are 10%
      higher than those paid for ordinary shares; or                                             
| |   |                                                                                                                         
| |  | tag-along rights at 80%
      of the price paid to the controlling shareholder in case of transfer of
      control.    

Our
  by-laws provide for (i) a minimum yearly per share dividend equal to 6% of the
  amount obtained by dividing the total share capital by the total number of shares
  or (ii) the right to receive dividends, per preferred share, at least 10% greater
  than the dividends attributed to each common share, whichever is higher. As
  a result of such provision, holders of our preferred shares are entitled to
  receive, in any year, distributions of cash dividends prior to any distribution
  of cash dividends to the holders of our ordinary shares in a certain year. In
  addition, in case of item (i) above,
  distributions of cash dividends in any year are made:

| |  | first, to the holders
      of our preferred shares, up to the amount of the minimum dividend to be
      paid to the holders of preferred shares for such year;                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                         
| |  | then, to the holders of
      our ordinary shares, in an amount sufficient to distribute to each of our
      ordinary shareholders an amount equal to the minimum dividend distributed
      to each of our preferred shareholders; and
| |   |                                                                                                                                                                                                                                         
| |  | thereafter, to the holders
      of our ordinary shares and preferred shares on apro
      ratabasis.                                                                                                                                   

If
  our mandatory declared dividend in any year is less than or equal to the dividend
  that must be paid to the holders of our preferred shares in that year, the holders
  of our ordinary shares will not be entitled to receive any dividends from us
  in that year.

If
  the dividend to be paid to the holders of our preferred shares is not paid for
  a period of three years, holders of our preferred shares will be entitled to
  full voting rights until such time as that dividend is paid in full.

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Payment
  of Dividends

We
  are required by law and by our by-laws to hold an annual shareholders
  meeting by April 30 of each year at which, among other issues, an annual dividend
  may be discussed and declared by decision of our ordinary shareholders, acting
  on the recommendation of the Executive Officers, as approved by the board of
  directors. The payment of annual dividends is based on the financial statements
  prepared for the fiscal year ending December 31. Under Brazilian corporate law,
  dividends are required to be paid within 60 days following the date the dividend
  is declared to shareholders of record on such declaration date, unless a shareholders
  resolution sets forth another date of payment, which must occur prior to the
  end of the fiscal year in which such dividend was declared. A shareholder has
  a three-year period from the dividend payment date to claim dividends in respect
  of its shares, after which we have no liability for such payment. Because our
  shares are issued in book-entry form, dividends with respect to any share are
  automatically credited to the account holding such share and no action is required
  on the part of the shareholder. We are not required to adjust the amount of
  paid-in capital for inflation.

If
  a shareholder is not a resident of Brazil, he or she must register with the
  Central Bank of Brazil in order to be eligible to receive dividends, sales proceeds
  or other amounts with respect to his or her shares outside of Brazil. Our preferred
  shares underlying the ADSs are held in Brazil by the Brazilian custodian, Banco
  Itaú S.A., as the agent for The Bank of New York, or the depositary,
  which is the registered owner of our shares.

Payments
  of cash dividends and distributions, if any, will be made in Brazilian currency
  to the custodian on behalf of the Depositary, who will then convert those proceeds
  into U.S. dollars and will cause such U.S. dollars to be delivered to the Depositary
  for distribution to holders of ADSs. In the event that the custodian is unable
  to immediately convert the Brazilian currency received as dividends into U.S.
  dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely
  affected by devaluations of the Brazilian currency that occur before such dividends
  are converted and remitted. Dividends in respect of our preferred shares paid
  to resident and nonresident shareholders, including holders of ADSs, are not
  currently subject to Brazilian withholding tax.

B.  Significant
  Changes

Since
  Law No. 10,303/01 was enacted on October 31, 2001, Brazilian entities have been
  subject to a material change in accounting for unrealized earnings reserves:
  Prior to October 31, 2001, the unrealized earnings reserve was calculated on
  the basis of increases in shareholders equity and was reduced as dividends
  were paid to preferred shareholders. According to guidance published by the
  CVM on January 16, 2003, the unrealized earnings reserve established prior to
  October 31, 2001 will retain its original characteristics,i.e.,
  will be available for use as the basis of calculations of dividends. For periods
  after October 31, 2001 the unrealized earnings reserve reflects the amount of
  by which the statutory dividend exceeds the net earnings for the applicable
  period and thus remains unpaid.

ITEM
  9.   THE OFFER AND LISTING

A.  Offer
  and Listing Details

Prior
  to September 21, 1998, there was no trading market for the common shares or
  the preferred shares of the New Holding Companies. Following the Breakup and
  until September 21, 1998, the preferred shares of each of the New Holding Companies,
  including the preferred shares, traded on the Brazilian Stock Exchanges only
  as a unit with the preferred shares of Telebrás. Telebrás ADSs,
  each representing 1,000 Telebrás preferred shares and, since the Breakup
  and until November 16, 1998, each also representing 1,000 preferred shares of
  each of the New Holding Companies, have continued to trade on the NYSE.

On
  September 21, 1998, common shares and preferred shares of each New Holding Company,
  including our preferred shares, commenced trading separately on the Brazilian
  Stock Exchanges. The table below sets forth, for the periods indicated, the
  high and low sales prices for our preferred shares as reported on the São
  Paulo Stock Exchange.

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|                                                   | Prices
        per 1,000
        preferred shares of the registrant | 
|-------------------------------------------------- | ------------------------------------------------------------------- | 
|                                                   |                                                                     | 
|                                                   | High                                                                | 
|                                                   |                                                                     | 
|                                                   | (in
        nominalReais)                                           | 
|September 21, 1998 through
      December 31, 1998 | 16.50                                                               | 
|January 1, 1999 through
      December 31, 1999    | 49.00                                                               | 
|January 1, 2000 through
      December 31, 2000    | 53.00                                                               | 
|January 1, 2001 through
      December 31, 2001    | 34.80                                                               | 
|January 1, 2002 through
      December 31, 2002    | 11.38                                                               | 
|                                                   |                                                                     | 
|January 1, 2001 through
      March 31, 2001       | 34.80                                                               | 
|April 1, 2001 through
      June 30, 2001          | 23.10                                                               | 
|July 1, 2001 through September
      30, 2001      | 17.80                                                               | 
|October 1, 2001 through
      December 31, 2001    | 11.75                                                               | 
|                                                   |                                                                     | 
|January 1, 2002 through
      March 31, 2002       | 11.38                                                               | 
|April 1, 2002 through
      June 30, 2002          | 7.82                                                                | 
|July 1, 2002 through September
      30, 2002      | 3.08                                                                | 
|October 1, 2002 through
      December 31, 2002    | 4.49                                                                | 
|                                                   |                                                                     | 
|January 1, 2003 through
      January 31, 2003     | 4.90                                                                | 
|February 1, 2003 through
      February 28, 2003   | 3.56                                                                | 
|March 1, 2003 through
      March 31, 2003         | 3.51                                                                | 
|April 1, 2003 through
      April 30, 2003         | 4.94                                                                | 
|May 1, 2003 through May
      31, 2003             | 5.69                                                                | 
|June 1, 2003 through June
      23, 2003           | 7.37                                                                | 

On
  November 16, 1998, ADSs representing preferred shares of each New Holding Company
  were issued and commenced trading separately on the NYSE. The ADSs, each representing
  1,000 of our preferred shares, were issued to the holders of Telebrás
  ADSs pursuant to a deposit agreement with us, the Depositary and the holders
  of the ADSs from time to time. The SEC declared the Registration Statement effective
  on March 16, 1999 and the ADSs were traded on the NYSE under the symbol EMT
  as of that date pursuant to Rule 12a-5 of the Rules and Regulations of the Exchange
  Act. Rule 12a-5 provides under certain limited circumstances a temporary exemption
  from the requirement of Section 12(a) of the Exchange Act that securities traded
  on a national securities exchange (such as the NYSE) be registered under Section
  12.

The
  table below sets forth for the periods indicated the high and low sales prices
  for our ADSs as reported on the New York Stock Exchange.

|                                                  | U.S.
      dollars per ADS |    
|------------------------------------------------- | -------------------------- | ---
|                                                  |                           
|High                                              |                            | Low
|                                                  |                            |    
|November 16, 1998 through
      December 31, 1998 | 18.44                      |    
|January 1, 1999 through
      December 31, 1999   | 27.38                      |    
|January 1, 2000 through
      December 31, 2000   | 31.00                      |    
|January 1, 2001 through
      December 31, 2001   | 17.63                      |    
|January 1, 2002 through
      December 31, 2002   | 4.88                       |    
|                                                  |                            |    
|January 1, 2001 through
      March 31, 2001      | 17.63                      |    
|April 1, 2001 through
      June 30, 2001         | 10.92                      |    
|July 1, 2001 through September
      30, 2001     | 7.55                       |    
|October 1, 2001 through
      December 31, 2001   | 4.90                       |    

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|                                                 | U.S.
        dollars per ADS |    
|------------------------------------------------ | ---------------------------- | ---
|                                                 |                             
|High                                             |                              | Low
|                                                 |                              |    
|January 1, 2002 through
      March 31, 2002     | 4.88                         |    
|April 1, 2002 through
      June 30, 2002        | 3.41                         |    
|July 1, 2002 through September
      30, 2002    | 1.00                         |    
|October 1, 2002 through
      December 31, 2002  | 1.30                         |    
|                                                 |                              |    
|January 1, 2003 through
      January 31, 2003   | 1.49                         |    
|February 1, 2003 through
      February 28, 2003 | 1.05                         |    
|March 1, 2003 through
      March 31, 2003       | 1.03                         |    
|April 1, 2003 through
      April 30, 2003       | 1.65                         |    
|May 1, 2003 through May
      31, 2003           | 1.87                         |    
|June 1, 2003 through June
      23, 2003         | 11.08                        |    

On
  June 16, 2003 we implemented a ratio change of our ADSs solely to comply with
  the minimum share price (US$1.00) requirement for maintaining its ADS listing
  on the New York Stock Exchange. The ratio change is in the proportion of 1 ADS
  equal to 5,000 preferred shares. There is no change in the underlying preferred
  shares.

|B. | Plan
      of Distribution
|-- | --------------------------
|   |                           
|   | Not applicable.           
|   |                           
|C. | Markets                   

Trading
  on the Brazilian Stock Exchanges

The
  São Paulo Stock Exchange is a not-for-profit entity owned by its member
  brokerage firms. Trading on the São Paulo Exchange is limited to member
  brokerage firms and a limited number of authorized non-members. The São
  Paulo Stock Exchange has two open trading sessions each day, from 10:30 a.m.
  to 1:30 p.m. and from 2:30 p.m. to 5:30 p.m. Market makers exist on the São
  Paulo Stock Exchange but are only authorized to make markets in options for
  stock indices which are traded on the São Paulo Exchange and to engage
  in transactions on META (Mercado
  de Empresas Teleassistidas)
  an electronic trading system operating at the São Paulo Stock Exchange
  and permitting trading in the securities of companies registered for that purpose.
  These companies must appoint the market makers authorized to deal in their securities.
  There are no specialists or market makers for our shares on the São Paulo
  Stock Exchange. The Brazilian securities commission known as CVM and the São
  Paulo StockExchange
  have discretionary authority to suspend trading in shares of a particular issuer
  under certain circumstances. Trading in securities listed on the São
  Paulo Stock Exchange may be effected off the Exchange under certain circumstances,
  although such trading is very limited.

Settlement
  of transactions is effected three business days after the trade date without
  adjustment of the purchase price for inflation. Payment for shares is made through
  the facilities of separate clearinghouses for each exchange, which maintain
  accounts for member brokerage firms. The seller is ordinarily required to deliver
  the shares to the exchange on the second business day following the trade date.
  The clearinghouse for the São Paulo Stock Exchange is theCâmara
  Brasileira de Liquidação e Custódia S.A.,which is owned by members of the Exchange.

As
  of December 31, 2002, the aggregate market capitalization of the 399 companies
  listed on the São Paulo Stock Exchange was approximately US$124.0 billion.
  Although all the outstanding shares of a listed company may trade on São
  Paulo Stock Exchange, in most cases less than half of the listed shares are
  actually available for trading by the public, the remainder being held by small
  groups of controlling persons who rarely trade their shares. Even though the
  Brazilian equity market is Latin Americas largest in terms of market capitalization,
  it is relatively small and illiquid compared to major world markets. In 2002,
  the daily trading volumes on the São Paulo Exchange averaged approximately
  US$197.9 million. In 2002, the five most actively traded issues represented
  approximately 34.2% of the total trading in the cash market on the São
  Paulo Stock Exchange.

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Trading
  on Brazilian stock exchanges by non-residents of Brazil is subject to certain
  limitations under Brazilian foreign investment legislation.

Regulation
  of Brazilian Securities Markets

The
  Brazilian securities markets are regulated by the CVM, which has authority over
  stock exchanges and the securities markets generally and by the Central Bank
  of Brazil, which has, among other powers, licensing authority over brokerage
  firms and regulates foreign investment and foreign exchange transactions. Law
  No. 6,385 dated December 7, 1976, as amended, or the Brazilian Securities Law
  and Brazilian corporate law, govern the Brazilian securities market.

Under
  Brazilian corporate law, a company is either public, a companhia
  aberta, or
  private, a companhia
  fechada. All
  public companies are registered with the CVM and are subject to reporting requirements.
  A company registered with the CVM may have its securities traded either on the
  Brazilian stock exchanges or in the Brazilian over-the-counter market. The shares
  of a public company may also be traded privately, subject to certain limitations.
  To be listed on the Brazilian stock exchanges, a company must apply for registration
  with the CVM and the stock exchange where its head office is located. Once this
  stock exchange has admitted a company for listing and the CVM has accepted its
  registration as a public company, its securities may be traded on all other
  Brazilian stock exchanges.

Trading
  in securities on the Brazilian stock exchanges may be suspended at the request
  of a company in anticipation of a material announcement. Trading may also be
  suspended on the initiative of a Brazilian stock exchange or the CVM, due to,
  among other reasons, a belief that a company has provided inadequate information
  regarding a material event or has provided inadequate responses to inquiries
  by the CVM or the relevant stock exchange.

Brazilian
  securities law provides for, among other things, disclosure requirements, restrictions
  on insider trading and price manipulation, and protection of minority shareholders.
  However, the Brazilian securities markets are not as highly regulated and supervised
  as the U.S. securities markets or markets in certain other jurisdictions.

|D. | Selling
      Stockholders 
|-- | ---------------------------
|   |                            
|   | Not applicable.            
|   |                            
|E. | Dilution                   
|   |                            
|   | Not applicable.            
|   |                            
|F. | Expenses
      of the Issue
|   |                            
|   | Not applicable.            

ITEM 10.     ADDITIONAL
  INFORMATION

|A. | Share
      Capital                         
|-- | --------------------------------------------
|   |                                             
|   | Not applicable.                             
|   |                                             
|B. | Memorandum
      and Articles of Association

We
  are registered before the Junta
  Comercial do Rio de Janeiro, JUCERJ, under No. 3330026237-7. According
  to Section 2 of our by-laws, our main corporate purpose is to exercise control
  of Empresa Brasileira de Telecomunicações S.A.Embratel, and
  its subsidiaries. There are no provisions in our by-laws with respect to (1)
  a directors power to vote on proposals in which the director is materially
  interested, (2) a directors power to vote in favor of compensation for
  him or herself in the absence of an independent quorum, (3) age limits for retirement
  of directors, (4) required shareholding for officer (diretor)
  qualification, (5) anti-takeover mechanisms or other

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procedures designed to delay,
  defer or prevent changes in our control, or (6) disclosure of share ownership.
  However, Brazilian corporate law requires that a director (conselheiro)
  of a corporation (sociedade
  anônima) own
  shares in that corporation.

Our
  issuance of commercial paper, and our incurrence of certain material obligations,
  shall be preceded by approval from our board of directors, according to the
  provisions set forth in Section 17 of our by-laws.

Our
  capital share is comprised of preferred shares and ordinary shares, all without
  par value. At December 31, 2002 and 2001, there were 210,029,997,060 preferred
  shares and 124,369,030,532 ordinary shares. Our share capital may be increased
  by resolution of the board of directors, up to the limit authorized by our by-laws.
  Any increase in the authorized capital must be approved by shareholders
  vote.

Our
  preferred shares are non-voting, except under limited circumstances, and are
  entitled to a preferred, non-cumulative dividend, and stand in a senior level
  compared to our ordinary shares in the case of liquidation. Under Brazilian
  corporate law, the total number of non-voting shares and shares with limited
  voting rights, may not exceed 50% of the total number of shares of a company.
  However, such proportion shall not be applied to companies already listed before
  October 2001, which are entitled to keep the 2/3 (two thirds) non-voting share
  ratio, inclusive in future share issuances.

Our
  controlling shareholders elected the members of our board of directors. Board
  members, even if elected by one specific shareholder, have fiduciary duties
  towards us and all of their respective shareholders.

Voting
  Rights

Each
  of our ordinary shares entitles the holder to one vote at our shareholders
  meetings. Our preferred shares do not entitle the holder to vote at such shareholders
  meetings, except under specific circumstances, as set forth below. Ordinarily,
  holders of our preferred shares are only entitled to attend and to discuss,
  but not to vote on, the issues discussed at our shareholders meetings.

One
  of the three members of our fiscal committee, and his or her substitute, are
  elected by a majority vote of the holders of our preferred shares. Such election
  is held at the annual ordinary shareholders meeting, by the then present
  holders of preferred shares, for the positions available at our fiscal committee.

Brazilian
  corporate law provides that certain non-voting shares, such as our preferred
  shares, are entitled to voting rights in the event a company fails for three
  consecutive fiscal years to pay the dividend to which such non-voting shares
  are entitled. In this case, the voting rights of these shares shall extend until
  the date in which the payment of the accrued and unpaid dividend is made.

Our
  preferred shares are entitled to full voting rights with respect to:

| |  | the approval
      of any long-term contract between us and our affiliates, on the one hand,
      and any controlling shareholder, or an affiliate of that controlling shareholder,
      on the other hand;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                              
| |  | resolutions
      modifying certain provisions of our by-laws; and                                                                                                                                           
| |   |                                                                                                                                                                                                              
| |  | any resolution
      submitted to the shareholders meeting for the delisting of our shares
      or during our liquidation.                                                                                 
| |   |                                                                                                                                                                                                              

Any
  change in the preference, benefits, conditions of redemption and amortization
  of our preferred shares, or the creation of a class of shares having priority
  or preference over our preferred shares, would require the approval of holders
  of a majority of our outstanding preferred shares at a special meeting of holders
  of our preferred shares. Such a meeting would be called by publication of a
  notice in two Brazilian official gazettes, at least thirty days prior to the
  meeting, but would not generally require any other form of notice.

In
  any circumstances in which holders of our preferred shares are entitled to vote,
  each of our preferred shares will entitle the holder to one vote.

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Preemptive
  Rights

Each
  of our shareholders has a general preemptive right to subscribe for shares of
  the same class in any capital increase, in an amount sufficient to keep the
  same proportional participation of each shareholder in our total capital. We
  shall observe a minimum period of 30 days following the publication of the capital
  increase notice for the exercise of preemptive rights by our shareholders. The
  right of participation in capital increases is assignable and negotiable under
  Brazilian corporate law.

However,
  a shareholders meeting is authorized to eliminate preemptive rights or
  to reduce the 30-day period for the exercise of such preemptive rights with
  respect to the issuance of new shares, debentures and warrants convertible into
  new shares up to the limit of the authorized capital, provided that the distribution
  of these securities is effected:

| |  | on a stock exchange;                                                                                                        
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                             
| |  | in a public offering;                                                                                                       
| |   |                                                                                                                             
| |  | through an exchange of
      shares in a public offering, with the purpose of acquiring control of another
      company; or
| |   |                                                                                                                             
| |  | through the use of certain
      tax incentives.                                                                            

In
  the event of a capital increase, which would maintain or increase the proportion
  of capital represented by our preferred shares, holders of our ADSs, or of our
  preferred shares, would have preemptive rights to subscribe only to our newly
  issued preferred shares. In the event of a capital increase, which would reduce
  the proportion of capital represented by our preferred shares, holders of our
  ADSs, or of our preferred shares, would have preemptive rights to subscribe
  to our preferred shares, in proportion to their shareholdings and to our ordinary
  shares only to the extent necessary to prevent dilution of their interest in
  our capital.

Preemptive
  rights to purchase shares may not be offered to U.S. holders of our ADSs unless
  a registration statement under the Securities Act of 1933, or the Securities
  Act, is effective with respect to the shares underlying those rights, or an
  exemption from the registration requirements of the Securities Act is available.
  Consequently, if you are a holder of our ADSs, who is a U.S. person or is located
  in the United States, you may be restricted in your ability to participate in
  the exercise of preemptive rights.

Right
  of Redemption

Subject
  to the right of a dissenting shareholder to seek redemption upon a decision
  made at a shareholders meeting by shareholders representing over 50% of
  the voting shares, our ordinary and preferred shares are not redeemable:

| |  | to change the preference
      of our preferred shares or to create a class of shares having priority or
      preference over our preferred shares;                                                                                                                                                                                                                       
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | to reduce our mandatory
      distribution of dividends;                                                                                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | to change our corporate
      purposes;                                                                                                                                                                                                                                                                                                                                    
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | to merge or consolidate
      with another company or to participate in other economic groups, (i) if
      certain liquidity standards provided in Brazilian corporate law are not
      met and (ii) if the controlling shareholder, the controlling company or
      other companies under its control hold less than the half of the type or
      class of shares; and
| |   |                                                                                                                                                                                                                                                                                                                                                                            
| |  | split off of the Company,
      if such split off will result in a (i) change of the corporate purposes,
      except when the split off assets are transferred to a company in which the
      main activity coincides with the one being split off, (ii) reduction of
      mandatory dividends or (iii) participation in economic groups.                               

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| | The
      right to redemption lapses 30 days after either:
| | ----------------------------------------------------------
| |                                                           
| |                                                          
| |                                                           
| |                                                          

We
  would be entitled to reconsider any action giving rise to redemption rights
  within 10 days following the expiration of those rights if the redemption of
  shares of dissenting shareholders would jeopardize our financial stability.

Unless
  otherwise provided in our by-laws, our shares are redeemable at their book value,
  determined on the basis of the last annual balance sheet approved by the shareholders.
  If the shareholders meeting giving rise to redemption rights occurs more
  than 60 days after the date of the last annual balance sheet, a shareholder
  may demand its shares to be valued on the basis of a new balance sheet, which
  shall be dated no more than 60 days prior to such shareholders meeting.

Form
  and Transfer

Our
  shares are maintained in book-entry form with a transfer agent, Banco Itaú
  S.A. The transfer of our shares is made in accordance with the applicable provision
  of Brazilian corporate law, which provides that a transfer of shares is effected
  by an entry made by the transfer agent on its books, debiting the share account
  of the seller and crediting the share account of the purchaser. In order to
  conduct the transfer of shares, the transfer agent shall be given a written
  order of the seller, or judicial authorization or order, in an appropriate document,
  which shall remain in the possession of the transfer agent. Our preferred shares
  underlying our ADSs are registered on the transfer agents records in the
  name of Banco Itaú S.A.

Transfers
  of shares by a foreign investor, in general, are subject to the same rules applicable
  to Brazilian individuals. In case the foreign investment in our shares is directly
  registered with the Central Bank of Brazil, according to the Brazilian capital
  market foreign investment regulations, the foreign investor should also seek
  amendment of the foreign investment certificate of registration, in the case
  of exercising the shareholders preemptive rights. The amendment to the
  foreign investment certificate of registration is typically conducted by the
  foreign investors local agent to reflect the ownership of the newly issued
  shares.

The
  São Paulo Stock Exchange operates a central clearing system. In order
  to have our shares under the São Paulo clearing systems, our shares shall
  be deposited in custody with the relevant stock exchange, through a Brazilian
  institution duly authorized to operate by the Central Bank of Brazil and having
  a clearing account with the relevant stock exchange. The fact that such shares
  are put under custody of the relevant stock exchange shall be reflected in our
  shareholders register. Each participating shareholder will, in such case,
  be registered in the register of our beneficial shareholders, maintained by
  the relevant stock exchange, and shall obtain substantially the same information
  provided to the registered shareholders.

C.  Material Contracts

We
  have entered into a management agreement with WorldCom, effective August 4,
  1998, pursuant to which WorldCom provides us with advice regarding our management,
  operations and business. See Major Shareholders and Related Party Transactions
   Related Party Transactions above.

D.  Exchange Controls
  and Other Limitations Affecting Security Holders

There
  are no restrictions on ownership of our preferred shares or common shares by
  individuals or legal entities domiciled
  outside Brazil.

Until
  we were privatized, we were subject to provisions of Brazilian corporate law
  applicable to mixed-capital companies. These provisions ceased to
  apply after we were privatized. As a mixed-capital company, we were
  not subject to bankruptcy and the federal government was contingently liable
  for our obligations for so long as

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our assets were encumbered
  and attached. However, substantial limitations applied to the attachment or
  sale of assets of our operating subsidiaries that were used to provide telecommunications
  services pursuant to our Concession. Similarly, the sale of shares representing
  voting control of operating subsidiaries providing public telecommunications
  services was subject to government authorization. The sale of preferred shares
  of operating subsidiaries, or of assets not used to provide telecommunications
  services, was not subject to these restrictions.

The
  right to convert dividend payments and proceeds from the sale of shares into
  foreign currency and to remit such amounts outside Brazil is subject to restrictions
  under foreign investment legislation which generally requires, among other things,
  that the relevant investments have been registered with the Central Bank of
  Brazil. Such restrictions on the remittance of foreign capital abroad may hinder
  or prevent Banco Itaú S.A., or the Custodian, as custodian for the preferred
  shares represented by ADSs, or holders who have exchanged ADRs for preferred
  shares from converting dividends, distributions or the proceeds from any sale
  of such preferred shares, as the case may be, into U.S. dollars and remitting
  such U.S. dollars abroad. Holders of ADSs could be adversely affected by delays
  in, or refusal to grant any, required government approval for conversions of
  Brazilian currency payments and remittances abroad of the preferred shares underlying
  the ADSs.

Under
  Annex IV to Resolution No. 1,289 of the National Monetary Council, as amended,
  known as the Annex IV Regulations, qualified foreign investors, which principally
  include foreign financial institutions, insurance companies, pension and investment
  funds, charitable foreign institutions and other institutions, that:

| |  | seek to invest in financial
      markets;                                                                                                                                                                                                                                                                                               
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                          
| |  | meet certain minimum
      capital and other requirements registered with the CVM; and                                                                                                                                                                                                                                                   
| |   |                                                                                                                                                                                                                                                                                                                                          
| |  | act through authorized
      custody accounts managed by local agents may buy and sell shares on Brazilian
      stock exchanges without obtaining separate Certificates of Registration
      for each transaction. Investors under the Annex IV Regulations are also
      entitled to favorable tax treatment. See TaxationBrazil.

Resolution
  2,689 superseded the Annex IV Regulations on March 31, 2000. The new rules under
  Resolution 2,689 effectively give foreign investors access to almost all financial
  assets and transactions available in the Brazilian financial and capital markets,
  subject to certain requirements. Some of the requirements include:

| |  | securities owned by foreign
      investors must be registered by a custodian, clearinghouse, or depository
      authorized by the CVM or the Brazilian Central Bank;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                       
| |  | trading of securities
      by foreign investors is restricted to transactions on a stock exchange or
      an over-the-counter market authorized by the CVM;         
| |   |                                                                                                                                                                       
| |  | the foreign investor must
      appoint a representative in Brazil;                                                                                                   
| |   |                                                                                                                                                                       
| |  | the foreign investor must
      maintain documentation in a prescribed form; and                                                                                      
| |   |                                                                                                                                                                       
| |  | the foreign investor must
      be registered by the CVM, and the Central Bank of Brazil must record inflow
      of the foreign investors funds.                    

Resolution
  2,689 defines foreign investors as all individuals, legal persons, funds and
  other collective investment entities domiciled or headquartered outside Brazil.
  See TaxationBrazil.

Resolution
  No. 1,927 of the National Monetary Council, which is the restated and amended
  Annex V to Resolution No. 1,289 of the National Monetary Council, known as the
  Annex V Regulations, provides for the issuance of depositary receipts in foreign
  markets in respect of shares of Brazilian issuers. The ADS program has been
  approved under the Annex V Regulations by the Central Bank of Brazil and the
  CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale
  of ADSs by ADR holders outside Brazil are free of Brazilian foreign investment
  controls and holders of the ADSs will be entitled to favorable tax treatment.
  See TaxationBrazil.

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A
  Certificate of Registration has been issued in the name of the Depositary with
  respect to the ADSs and is maintained by the Custodian on behalf of the Depositary.
  Pursuant to the Certificate of Registration, the Custodian and the Depositary
  are able to convert dividends and other distributions with respect to the preferred
  shares represented by ADSs into foreign currency and remit the proceeds outside
  Brazil. In the event that a holder of ADSs exchanges such ADSs for preferred
  shares, such holder will be entitled to continue to rely on the Depositarys
  Certificate of Registration for five business days after such exchange, following
  which such holder must seek to obtain its own Certificate of Registration with
  the Central Bank of Brazil. Thereafter, any holder of preferred shares may not
  be able to convert into foreign currency and remit outside Brazil the proceeds
  from the disposition of, or distributions with respect to, such preferred shares,
  unless such holder:

| |  | qualifies under the Annex
      IV Regulations; or                                                                                                                                    
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                       
| |  | obtains its own Certificate
      of Registration, and in this case, it will be subject to less favorable
      Brazilian tax treatment than a holder of ADSs. See TaxationBrazil.

Under
  current Brazilian legislation, the federal government may impose temporary restrictions
  on remittances of foreign capital abroad in the event of a serious imbalance
  or an anticipated serious imbalance of Brazils balance of payments. For
  approximately six months in 1989 and early 1990, the federal government froze
  all dividend and capital repatriations held by the Central Bank of Brazil that
  were owed to foreign equity investors in order to conserve Brazils foreign
  currency reserves. These amounts were subsequently released in accordance with
  federal government directives.

E.  Taxation

The
  following summary contains a description of the principal Brazilian income tax
  consequences of the acquisition, ownership and disposition of preferred shares
  or ADSs, but it does not purport to be a comprehensive description of all the
  tax considerations that may be relevant to a decision to purchase preferred
  shares or ADSs. The summary is based upon the tax laws of Brazil and regulations
  thereunder as in effect on the date hereof, which are subject to change. This
  summary is also based upon the representations of the Depositary and on the
  assumption that each obligation in the Deposit Agreement relating to the ADRs
  and any related documents will be performed in accordance with its terms. PROSPECTIVE
  PURCHASERS OF PREFERRED SHARES OR ADSs SHOULD CONSULT THEIR OWN TAX ADVISORS
  AS TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
  PREFERRED SHARES OR ADSs.

Although
  there is at present no income tax treaty between Brazil and the United States,
  the tax authorities of the two countries have had discussions that may culminate
  in such a treaty. No assurance can be given, however, as to whether or when
  a treaty will enter into force or how it will affect the U.S. holders of preferred
  shares or ADSs. PROSPECTIVE HOLDERS OF PREFERRED SHARES OR ADSs SHOULD CONSULT
  THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP
  AND DISPOSITION OF THE PREFERRED SHARES OR ADSs IN THEIR PARTICULAR CIRCUMSTANCES.

Brazil

The
  following discussion summarizes the principal Brazilian tax consequences of
  the acquisition, ownership and disposition of preferred shares or ADSs by a
  holder that is not domiciled in Brazil for purposes of Brazilian taxation and,
  in the case of a holder of preferred shares, that has registered its investment
  in preferred shares with the Central Bank of Brazil as a U.S. dollar investment
  (in each case, a non-Brazilian holder). It is based on Brazilian
  law as currently in effect. Any change in such law may change the consequences
  described below. The following discussion summarizes the principal tax consequences
  applicable under current Brazilian law to non-Brazilian holders of preferred
  shares or ADSs; it does not specifically address all of the Brazilian tax considerations
  applicable to any particular non-Brazilian holder, and each non-Brazilian holder
  should consult his or her own tax advisor concerning the Brazilian tax consequences
  of an investment in preferred shares or ADSs.

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Taxation
  of Dividends

Dividends,
  including dividends paid in kind (1) to the Depositary in respect of the preferred
  shares underlying the ADSs or (2) to a non-Brazilian holder in respect of preferred
  shares will generally not be subject to Brazilian withholding tax in the case
  of distributions of profits earned as of January 1, 1996.

Brazil
  has entered into tax treaties with several countries. However, there is currently
  no tax treaty between the United States and Brazil. The only Brazilian tax treaty
  now in effect that, if certain conditions are met, would reduce the generally
  applicable rate of the withholding tax on dividends (if they were taxable) below
  15% is the treaty with Japan, which would reduce such rate to 12.5% under the
  circumstances stated in such treaty.

Taxation
  of Gains

Gains
  realized outside Brazil by a non-Brazilian holder on the disposition of ADSs
  to another non-Brazilian holder are normally not subject to Brazilian tax.

The
  deposit or withdrawal of preferred shares in exchange for the ADSs is not subject
  to Brazilian tax, unless the amount previously registered as a foreign investment
  in preferred shares is lower than (1) the average price of a preferred share
  on such date, or (2) if no preferred shares were traded on that date, the average
  price of stock on the Brazilian stock exchange on which the greatest number
  of preferred shares were traded in the fifteen trading sessions immediately
  preceding such deposit. In that case, the difference between such average price
  and the amount previously registered as a foreign investment in preferred shares
  will be the amount subject to Brazilian tax. On receipt of the underlying preferred
  shares, a non-Brazilian holder who qualifies under the Annex IV Regulations
  will be entitled to register the U.S. dollar value of such shares with the Central
  Bank of Brazil as described below under Registered Capital.

Non-Brazilian
  holders are normally not subject to tax in Brazil on gains realized on sales
  of preferred shares that occur abroad or on the proceeds of a redemption of,
  or a liquidating distribution with respect to, preferred shares. As a general
  rule, non-Brazilian holders are subject to a withholding tax imposed at a rate
  of 20% on gains realized on sales or exchanges of preferred shares that occur
  in Brazil or with a resident of Brazil outside of a Brazilian stock exchange.

Non-Brazilian
  holders are generally subject to a 20% withholding tax on gains realized on
  sales or exchanges in Brazil of preferred shares that occur on a Brazilian stock
  exchange, unless the sales are:

| |  | made by a non-Brazilian
      holder within five business days of the withdrawal of the preferred shares
      in exchange for ADSs, and the proceeds thereof are remitted abroad within
      such five-day period;                                        
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                             
| |  | made under the Annex IV
      Regulations by certain qualified non-Brazilian institutional holders who
      register with the CVM; or                                                                                                                      
| |   |                                                                                                                                                                                                                                                             
| |  | made by investors under
      Resolution 2,689. Gains realized from transactions on a Brazilian stock
      exchange by certain qualified non-Brazilian investors under the Annex IV
      Regulations or Resolution 2,689 are not subject to Brazilian tax.

However,
  pursuant to Law No. 9,959 enacted on January 27, 2000, preferential tax treatment
  of ADSs, Annex IV transactions and foreign investors under Resolution 2,689
  is not applicable to transactions occurring on or after January 1, 2000, if
  the non-Brazilian holder of ADSs or preferred shares resides in a tax haven
  (defined as a jurisdiction that does not impose any income tax or which imposes
  income tax at a rate lower than 20%).

The
  gain realized is the difference between the amount in Brazilian currency realized
  on the sale or exchange and the acquisition cost, measured in Brazilian currency
  without any adjustment for inflation, of the shares sold. The gain realized
  as a result of a transaction with respect to shares registered as an investment
  with the Central Bank of Brazil (and not subject to the Annex IV Regulations)
  will be calculated based on the foreign currency amount registered with the
  Central Bank of Brazil. There can be no assurance that the current preferential
  treatment for holders of ADSs and non-Brazilian holders of preferred shares
  under the Annex IV Regulations and Resolution

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2,689 will not be changed.
  Reductions in the tax rate provided for by Brazils tax treaties do not
  apply to tax on gains realized on sales or exchanges of preferred shares.

Any
  exercise of preemptive rights relating to the preferred shares or ADSs will
  not be subject to Brazilian taxation. Any gain on the sale or assignment of
  preemptive rights relating to the preferred shares by the Depositary on behalf
  of holders of ADSs will be subject to the same rules of taxation applicable
  to the sale or assignment of preferred shares.

Distributions
  of Dividends

In
  accordance with Law No. 9,249, dated December 26, 1995, Brazilian corporations
  may make payments to shareholders characterized as distributions of interest
  on capital (Juros
  sobre o Capital Próprio).
  Such interest is limited to the federal governments long-term interest
  rate, or the TJLP, as determined by the Central Bank of Brazil on a quarterly
  basis, and cannot exceed the greater of (1) 50% of net income (before taking
  such distribution and any deductions for income taxes into account) for the
  period in respect of which the payment is made or (2) 50% of retained earnings.

Distributions
  of interest on capital (Juros
  sobre o Capital Próprio)
  paid to shareholders who are either Brazilian residents or non-Brazilian residents,
  including holders of ADSs, are subject to Brazilian withholding tax at the rate
  of 15% (except for interest due to the federal government, which is exempt from
  tax withholding, and interest due to non-Brazilian holders of ADSs or preferred
  shares who reside in a tax haven as defined above) and we shall be able to deduct
  such amount for purposes of the Corporate Income Tax, or IRPJ, and Social Contribution
  on Profit, or CSLL, (both of which are levied on our profits) as long as the
  payment of a distribution of interest is approved in our annual shareholders
  meeting. The amount of distributions of interest on capital will be determined
  by our board of directors. No assurance can be given that our board of directors
  will not determine that future distributions of profits will be made by means
  of interest on capital instead of by means of dividends. Under Brazilian law
  and regulations, the amount paid to shareholders as interest on capital (net
  of any withholding tax) may be treated as payment in lieu of or as part of the
  Mandatory Dividend and Preferred Dividend. In addition, any Brazilian corporation
  distributing interest on capital is obligated to distribute to shareholders
  an amount sufficient to ensure that the net amount received (after payment of
  withholding taxes) is at least equal to the Mandatory Dividend.

Distributions
  of interest on capital in respect of the preferred shares, including to holders
  of ADSs, may be converted into U.S. dollars and remitted outside of Brazil to
  U.S. holders, subject to relevant exchange restrictions.

Beneficiaries
  Domiciled in Tax Havens or Low Tax Jurisdictions

Law
  No. 9,779, dated January 19, 1999, states that with limited exceptions, any
  income derived from operations by a beneficiary that resides or is domiciled
  in a country considered to be a tax haven is subject to income tax to be withheld
  by the source at a rate of 25%. Accordingly, if the distribution of interest
  attributed to shareholders equity is made to a beneficiary so residing
  or domiciled, the applicable income tax rate will be 25% instead of 15%. Currently,
  capital gains are not subject to the 25% tax, even if the beneficiary resides
  in a tax haven. Pursuant to Law No. 9,959, non-Brazilian holders of ADSs or
  preferred shares who reside in tax havens are also excluded, as of January 1,
  2000, from the tax incentives granted to Annex IV investors, holders of ADSs
  and investors under Resolution No. 2,689, and will be subject to the same tax
  treatment applicable to other non-Brazilian holders.

Other
  Brazilian Taxes

There
  are no Brazilian inheritance, gift or succession taxes applicable to the ownership,
  transfer or disposition of preferred shares or ADSs by a non-Brazilian holder
  except for gift and inheritance taxes which are levied by some States in Brazil
  on gifts made or inheritances bestowed by individuals or entities not resident
  or domiciled in Brazil or in the relevant State to individuals or entities that
  are resident or domiciled within such State in Brazil.

There
  are no Brazilian stamp, issue, registration, or similar taxes or duties payable
  by holders of preferred shares or ADSs.

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Pursuant
  to Decree 2,219, dated May 2, 1997, a financial transaction tax, or the IOF,
  may be imposed on the conversion into Brazilian currency of the proceeds of
  a foreign investment in Brazil (including investments in preferred shares and
  ADSs and investments made under the Annex IV Regulations) and may also be imposed
  upon the conversion of Brazilian currency into foreign currency (e.g., for purposes
  of paying dividends and interest). The IOF tax rate is currently 0%. Although
  the Minister of Finance has the legal power to increase the rate to a maximum
  of 25%, any such increase will be applicable only to transactions occurring
  after such increase becomes effective.

On
  January 24, 1997, a temporary tax was enacted. TheContribuição
  Provisória sobre Movimentação Financeira,
  or the CPMF Tax, was created by Constitutional Amendment No. 12 of August 16,
  1996 and regulated by Law No. 9,311 of October 24, 1996, at a rate of 0.2%.
  CPMF is levied on debits on bank accounts. CPMF is now levied at a 0.38% rate.

The
  CPMF Tax will not affect non-resident investors, unless the investor has a bank
  account in Brazil.

Transactions
  made through a stock market are exempt of CPMF. The responsibility for the collection
  of the CPMF Tax lies with the financial institution that carries out the relevant
  financial transaction. Additionally, when the non-Brazilian holder transfers
  the proceeds from the sale or assignment of preferred shares by an exchange
  transaction, the CPMF Tax is levied on the amount to be remitted abroad in BrazilianReais.

Registered
  Capital

The
  amount of an investment in preferred shares held by a non-Brazilian holder who
  qualifies under the Annex IV Regulations and obtains registration with the CVM,
  or by the Depositary representing such holder, is eligible for registration
  with the Central Bank of Brazil; such registration (the amount so registered
  is referred to as Registered Capital) allows the remittance outside
  Brazil of foreign currency, converted at the Commercial Market Rate, acquired
  with the proceeds of distributions on, and amounts realized with respect to,
  disposition of preferred shares. The Registered Capital for each preferred share
  purchased in the form of an ADS, or purchased in Brazil, and deposited with
  the Depositary in exchange for an ADS, will be equal to its purchase price (in
  U.S. dollars). The Registered Capital for a preferred share that is withdrawn
  upon surrender of an ADS will be the U.S. dollar equivalent of (1) the average
  price of the preferred share on the Brazilian stock exchange on which the greatest
  number of preferred shares was sold on the day of withdrawal, or (2) if no preferred
  shares were sold on that day, the average price on the Brazilian stock exchange
  on which the greatest number of preferred shares was sold in the fifteen trading
  sessions immediately preceding such withdrawal. The U.S. dollar value of the
  preferred shares is determined on the basis of the average Commercial Market
  Rates quoted by the Central Bank of Brazil on such date (or, if the average
  price of preferred shares is determined under clause (2) of the preceding sentence,
  the average of such average quoted rates on the same fifteen dates used to determine
  the average price of the preferred shares).

A
  non-Brazilian holder of preferred shares may experience delays in effecting
  such registration, which may delay remittances abroad. Such a delay may adversely
  affect the amount, in U.S. dollars, received by the non-Brazilian holder.

United States

The
  following is a description of material United States federal income tax consequences
  of the ownership and disposition of the preferred shares or ADSs by U.S. Holders,
  as defined below. This summary is based on the Internal Revenue Code of 1986,
  as amended to the date hereof, referred to in this annual report as the Code,
  final, temporary and proposed Treasury Regulations, administrative pronouncements
  and judicial interpretations thereof, all of which are subject to change (possibly
  with retroactive effect). It is also based in part on representations by the
  Depositary and assumes that each obligation under the Deposit Agreement and
  any related agreement will be performed in accordance with its terms. This discussion
  deals only with preferred shares and ADSs held as capital assets for tax purposes.
  It does not discuss all of the tax consequences that may be relevant to a holder
  in light of the holders particular circumstances or to holders subject
  to special rules, such as certain financial institutions, insurance companies,
  tax-exempt entities, dealers and traders in securities or foreign currencies,
  investors liable for the alternative minimum tax, persons holding preferred
  shares or ADSs as part of a hedge, straddle or conversion transaction, partnerships
  or other entities classified as partnerships for U.S. federal income tax purposes,
  persons

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whose functional currency is
  not the U.S. dollar or persons who actually or constructively own (directly
  or indirectly) more than 10% of any class of our stock. Holders of preferred
  shares or ADSs should consult their own tax advisors with regard to the application
  of the United States federal income tax laws to their particular situations
  as well as any tax consequences arising under the laws of any states or local
  or foreign taxing jurisdiction.

As
  used herein, the term U.S. Holder means a beneficial owner of preferred
  shares or ADSs that is, for United States federal income tax purposes, (i) a
  citizen or resident of the United States, (ii) a corporation, or other entity
  treated as a corporation, organized under the laws of the United States or of
  any political subdivision thereof, or (iii) an estate or trust, the income of
  which is subject to United States federal income taxation regardless of its
  source.

For
  U.S. federal income tax purposes, a U.S. Holder of an ADS will be treated as
  the owner of the shares underlying the ADS. Accordingly, no gain or loss will
  be recognized if you exchange ADSs for the underlying shares represented by
  those ADSs.

The
  U.S. Treasury has expressed concerns that parties to whom ADSs are released
  may be taking actions that are inconsistent with the claiming of foreign tax
  credits for United States holders of ADSs. Accordingly, the analysis of the
  creditability of Brazilian taxes described below could be affected by future
  actions that may be taken by the U.S. Treasury.

Taxation
  of Dividends

Distributions
  (including the amount of any Brazilian taxes withheld therefrom by the paying
  agent) received with respect to the preferred shares or ADSs will constitute
  foreign source dividends includible as ordinary income for U.S. federal income
  tax purposes to the extent such distributions are made from our current or accumulated
  earnings and profits, as determined in accordance with U.S. federal income tax
  principles. Under recently enacted legislation, dividends received by non-corporate
  U.S. Holders on preferred shares or ADSs may be subject to U.S. federal income
  tax at lower rates than other types of ordinary income if certain conditions
  are met. U.S. Holders should consult their own tax advisors regarding the implications
  of this new legislation in their particular circumstances. The amount of the
  dividend will not be eligible for the dividends received deduction generally
  allowed to U.S. corporations under the Code. Such dividends will constitute
  passive income for foreign tax credit purposes. To the extent, if any, that
  the amount of any distribution exceeds our current or accumulated earnings and
  profits as so computed, it will first reduce the U.S. Holders tax basis
  in its preferred shares or ADSs to the extent thereof, and to the extent in
  excess of the holders tax basis, will be treated as capital gain.

The
  amount of a distribution paid inReaiswill be measured by reference to the exchange rate for convertingReaisinto U.S. dollars in effect on the date the distribution is received by the
  Depositary, or by a U.S. Holder, in the case of a holder of preferred shares,
  regardless of whether the payment is in fact converted into U.S. dollars. If
  the Depositary (or U.S. Holder, in the case of a holder of preferred shares),
  does not convert suchReaisinto U.S. dollars on the date it receives them, it is possible that the U.S.
  Holder will recognize foreign currency loss or gain, which would be ordinary
  loss or gain, when theReaisare converted into U.S. dollars. The amount of any distribution of property
  other than cash will be the fair market value of such property on the date of
  distribution.

Subject
  to certain limitations and restrictions, Brazilian taxes withheld from dividend
  distributions will be eligible for credit against the U.S. Holders federal
  income taxes. Instead of claiming a credit, you may, at your election, deduct
  such Brazilian taxes in computing your taxable income, subject to generally
  applicable limitations under U.S. law. You should consult your own tax advisers
  to determine whether you are subject to any special rules that limit your ability
  to make effective use of foreign tax credits.

Sale
  or Disposition of Preferred Shares or ADSs

For
  U.S. federal income tax purposes, gain or loss you realize on the sale or other
  disposition of preferred shares or ADSs will be capital gain or loss, and will
  be long-term capital gain or loss if you held the preferred shares or ADSs for
  more than one year. The amount of gain or loss will be equal to the difference
  between your tax basis in the preferred shares or ADSs disposed of and the amount
  realized on the disposition. The gain or loss generally will be treated as U.S.
  source income or loss for foreign tax credit purposes. Consequently, in the
  case of a disposition of

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preferred shares in Brazil
  (which, unlike a disposition of ADSs, would be taxable in Brazil), the U.S.
  Holder might not be able to use the foreign tax credit for Brazilian tax imposed
  on gain.

Passive
  Foreign Investment Company Rules

It
  is our belief that we will not be considered a passive foreign investment
  company, or PFIC, for United States federal income tax purposes for 2002
  or in the foreseeable future. However, since PFIC status depends upon the composition
  of a companys income and assets and the market value of its assets from
  time to time, there can be no assurance that we will not be considered a PFIC
  for any other taxable year. If we were treated as a PFIC for any taxable year
  during which a U.S. Holder held an ADS or preferred share, certain adverse consequences
  could apply to the U.S. Holder.

If
  we are treated as a PFIC for any taxable year, gain recognized by such U.S.
  Holder on a sale or other disposition of the ADS or preferred share would be
  allocated ratably over the U.S. Holders holding period for the ADS or
  preferred share. The amounts allocated to the taxable year of the sale or other
  exchange and to any year before we became a PFIC would be taxed as ordinary
  income. The amount allocated to each other taxable year would be subject to
  tax at the highest rate in effect for individuals or corporations, as appropriate,
  and an interest charge would be imposed on the amount allocated to such taxable
  year. Further, any distribution in respect of ADSs or preferred shares in excess
  of 125% of the average of the annual distributions on ADSs or preferred shares
  received by the U.S. Holder during the preceding three years or the U.S. Holders
  holding period, whichever is shorter, would be subject to taxation as described
  above. Certain elections may be available (including a mark to mark election)
  to United States persons that may ameliorate the adverse consequences resulting
  from PFIC status.

Information
  and Backup Withholding

Payment
  of dividends and sales proceeds that are made within the United States or through
  certain U.S.-related financial intermediaries generally are subject to information
  reporting and backup withholding unless (i) you are a corporation or other exempt
  recipient or (ii) you provide a correct taxpayer identification number and certify
  that no loss of exemption from backup withholding has occurred.

The
  amount of any backup withholding from a payment to you will be allowed as a
  credit against your United States federal income tax liability and may entitle
  you to a refund, provided that the required information is furnished to the
  Internal Revenue Service.

|F.  Dividends
      and Paying Agents
|-------------------------------------
|                                     
|                                     
|                                     
|G.  Statement
      by Experts       
|                                     
|                                     
|                                     
|H.Documents
      on Display         

We
  are subject to the information requirements of the Exchange Act, except that
  as a foreign issuer, we are not subject to the proxy rules or the short-swing
  profit disclosure rules of the Exchange Act. In accordance with these statutory
  requirements, we file or furnish reports and other information with the SEC.
  Reports and other information filed or furnished by us with the SEC may be inspected
  and copied at the public reference facilities maintained by the SEC at Room
  1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SECs
  Regional Offices at 233 Broadway, New York, NY 10279 and Northwestern Atrium
  Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies
  of such material may be obtained by mail from the Public Reference Section of
  the SEC, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
  Such reports and other information may also be inspected at the offices of the
  New York Stock Exchange, 11 Wall Street, New York, New York 10005, on which
  our ADSs are listed.

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In
  addition, the SEC maintains a Web site that contains information filed electronically
  with the SEC, which can be accessed over the Internet at http://www.sec.gov.

I.  Subsidiary
  Information

Not
  applicable.

ITEM 11.  QUANTITATIVE
  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We
  are exposed to market risk from changes in both foreign currency exchange rates
  and interest rates. We are exposed to foreign currency exchange rate risk because
  certain of our costs are denominated in currencies (primarily the U.S. dollar
  and Japanese Yen) other than those in which we earn revenues (primarily thereal).

Similarly,
  we are subject to market risk from changes in interest rates which may affect
  the cost of our financing. As discussed in note 25 to our consolidated financial
  statements, we use derivative instruments to manage risks and reduce our exposure
  resulting from fluctuations in currency exchange rates. However, we do not cover
  entirely our exposure to the currency exchange rate fluctuation risks through
  the use of such derivative instruments.

There can be no assurance that we will continue using such instruments in the
  future to manage these risks.

Foreign
  Currency Swap Agreements

Our
  subsidiary Embratel has loans denominated in foreign currency (mainly in U.S.
  dollars and Japanese Yen) and with variable rates of interest. Accordingly,
  it is exposed to market risk from changes in foreign currency exchange rates
  and interest rates. Embratel manages risk arising from fluctuations in foreign
  currency exchange rates, which affect the amount of BrazilianReaisnecessary to pay the foreign currency-denominated obligations, by using derivative
  financial instruments, primarily currency swaps.

While
  such instruments may reduce Embratels foreign currency exchange risks,
  they do not eliminate them. Credit risk exposure is managed by restricting the
  counter-parts on such derivative instruments to major financial institutions
  with high credit quality. Therefore, the risk of non-performance by the counter-parts
  is considered not to be significant. Embratel does not hold or issue financial
  instruments for trading purposes.

Our
  policy is to enter into derivative contracts to cover all new debt with maturity
  of less than three years. At December 31, 2002, Embratel had outstanding currency
  swap contracts in the notional amount of R$1,492.8 million (R$1,692.1 million
  in 2001) with maturities ranging January 15, 2003 through August 13, 2004, to
  reduce the impact on its obligations of devaluations of the Brazilianreal.
  Under the terms of these swap arrangements, Embratel is required to pay the
  counter-parts the amounts, if any, by which the variation of the CDI rate (the
  interest rate applicable to inter-bank certificates in Brazil) on the notional
  value exceeds the variation of the foreign currency exchange rate for the same
  period. Otherwise, we are entitled to receive the difference from the counterparties.
  The gains and losses attributable to these instruments resulting from changes
  in rates are accrued and recognized as an adjustment to interest income or expense
  in the period in which the change occurs.

The
  following tables present the forward currency swap transactions that we had
  outstanding as of December 31, 2002 and 2001:

|As of
      December 31, 2002 (in thousands ofReais):
|-----------------------------------------------------
|                                                     
|Date
      of contracts                              
|                                                     
|May 8, 2001 to 
         June 3, 2002                
|July 16,2001 to 
         June 7, 2002               
|                                                     
|Total                                                
|                                                     

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|As of
      December 31, 2001 (in thousands of Reais):
|------------------------------------------------------
|                                                      
|Date
      of contracts                               
|                                                      
|February 12, 2001 to 
         July 13, 2001          
|June 5, 2001 toDecember
        27, 2001              
|                                                      
|Total                                                 
|                                                      

| 
|-
|*

Exchange
  Rate Risk

In
  2002, we consolidated our financial risk management processes and adopted the
  RiskMetrics Parametrical Value at Risk, or the VaR, system (a J.P. Morgan Chase
  system used worldwide and adapted to the methodology of the Brazilian Central
  Bank). We seek to limit value at risk of exchange rate fluctuations to 5% of
  shareholders equity. Our policy is to protect against movements against
  variations in exchange rates for all foreign-denominated debt with a maturity
  of less than three years (market conditions permitting) through the use of currency
  swaps and other hedging strategies. Through this policy, we seek to balance
  the need for preserving cash and protecting against the negative effect of significant
  variations in exchange rates.

In
  2002, the Brazilianrealwas devalued 52.27%
  with respect to the U.S. dollar and 68.16% with respect to the Japanese Yen.
  On December 31, 2002 we marked-to-market our currency swap positions and the
  value of our U.S. dollar and Japanese Yen torealswap positions were
  R$106,079 thousand and R$217,455 thousand, respectively, which we recognized
  as adjustments to interest income. As of December 31, 2002, the VaR system calculated
  the value at risk with respect to foreign-denominated debt for which we have
  not entered into currency swaps or other risk-management strategies as R$323,932
  thousand; which is equivalent to 7 .03% of shareholders equity. Of this
  amount, 91% and 9%, is attributable to risk in U.S. dollar and Japanese Yen-denominated
  debt, respectively.

We
  have exchange rate exposure with respect to the U.S. dollar and Japanese Yen
  and, to a lesser extent, to the Euro. As of December 31, 2002, our net indebtedness
  (taking into account the hedge effect) in foreign currency was R$4,855.5 million,
  which included R$2,642.0 million denominated in U.S. dollars, and R$2,213.5
  million indexed to other foreign currencies such as the Euro and Japanese Yen.

The
  potential immediate loss to us that would result from a hypothetical 20% change
  in foreign currency exchange rates based on this position would be approximately
  R$276.5 million, considering the offsetting effect of our derivative hedging
  instruments. In addition, if such a change were to be sustained, our cost of
  financing would increase in proportion to the change. This sensitivity analysis
  assumes an unfavorable 20% fluctuation in all of the exchange rates affecting
  all the foreign currencies in which the indebtedness described above are denominated
  and does not take into account the offsetting effect of such a change on our
  foreign-currency denominated revenues (principally payments from international
  operators). Since consistently and simultaneously unfavorable movements in all
  relevant exchange rates are unlikely, this assumption may overstate the impact
  of exchange rate fluctuations on our results of operati ons. In 2001, therealdevalued against the U.S. dollar by 18.67%. In 2002, therealdevalued against the U.S. dollar by 52.27%. We entered into certain foreign
  currency hedging transactions starting in the

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second half of 2000 and continue
  to use foreign currency hedging transactions. In 2002, we reduced our foreign-currency
  denominated debt by US$218 million.

Interest
  Rate Risk

As
  of December 31, 2002, we had, in all currencies, R$4,891.9 million in loans
  and financings outstanding, of which R$1,969.5 million bore interest at fixed
  interest rates, and R$2,922.4 million bore interest at floating rates (primarily
  LIBOR-based). The potential loss that we would have suffered over one year resulting
  from a hypothetical, instantaneous and unfavorable change of 100 basis points
  in the interest rates applicable to our indebtedness on December 31, 2002 would
  be R$29.3 million. Similarly, an increase of 100 basis points in the CDI rate,
  would increase the hedged portion of our indebtedness by R$2.6 million. We invest
  our excess liquidity (R$325.9 million as of December 31, 2002) mainly in short-term
  instruments denominated in BrazilianReais(and approximately R$293.2 million in U.S. dollar denominated instruments).
  The potential loss that we would have over one year resulting from a hypothetical,
  instantaneous and unfavorable change of 100 basis points in the interest rates
  applicable to financial assets on December 31, 2001 would be approximately R$16.6
  million. This loss is only applicable to financial liabilities as our short-term
  investments are under post-fixed interest rates. The sensitivity analyses above
  are based on the assumption of an unfavorable 100 basis point movement of the
  interest rates applicable to each homogenous category of financial liabilities
  and sustained over a period of one year. A homogenous category is defined according
  to the currency in which financial liabilities are denominated and assumes the
  same interest rate movement within each homogenous category (e.g., U.S. dollars).
  As a result, our interest rate risk sensitivity model may overstate the impact
  of interest rate fluctuations for such financial instruments, as consistently
  unfavorable movements of all interest rates are unlikely.

ITEM 12.   DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY SECURITIES

Not
  applicable.

PART II

ITEM
  13.   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

We
  were party to certain credit agreements that contained covenants restricting,
  among other things, the ability of Telebrás to dispose of all or a substantial
  part of its assets or to cease to control a company that was an operating subsidiary
  of the Telebrás System and the ability of the federal government to dispose
  of its controlling interest in the Telebrás System. The Breakup of Telebrás
  on May 22, 1998, the privatization of the New Holding Companies on July 29,
  1998 and the announced liquidation of Telebrás constituted events of
  default under such credit agreements. In 2000, these credit agreements were
  renegotiated, and we are no longer in default with respect to any indebtedness.

ITEM
  14.   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
  AND USE OF PROCEEDS

Not
  applicable.

ITEM
  15.   CONTROLS AND PROCEDURES

Within
  90 days prior to the date of this report, the company, under the supervision
  and with the participation of the companys management, including the Chief
  Executive Officer and the Chief Financial Officer, performed an evaluation of
  the effectiveness of the companys disclosure controls and procedures.
  Based on this evaluation, the companys Chief Executive Officer and Chief
  Financial Officer concluded that the companys disclosure controls and
  procedures are effective for gathering, analyzing and disclosing the information
  the Company is required to disclose in the reports it files under the Securities
  Exchange Act of 1934, within the time periods specified in the SECs rules
  and forms. The companys management necessarily applied its judgment in
  assessing the costs and benefits of such controls and procedures, which by their
  nature can provide only reasonable assurance regarding managements control
  objectives.

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There
  have been no significant changes in the companys internal controls or
  other factors that could significantly affect internal controls subsequent to
  the date of their evaluation.

ITEM 16.   RESERVED

PART III

ITEM
  17.   FINANCIAL STATEMENTS

We have responded to Item 18
  in lieu of responding to this Item.

ITEM
  18. FINANCIAL STATEMENTS

Reference
  is made to pages F-1 through F-72. The following financial statements are filed
  as part of this Form 20-F:

ITEM
  19.   EXHIBITS

|1.1  | By-laws of Embratel Participações
      S.A. (Portuguese)         
|---- | ------------------------------------------------------------------
|1.2  | By-laws of Embratel Participações
      S.A. (English translation)
|4.1  | Management Agreement                                              
|8.1  | Subsidiaries of Embratel
      Participações S.A.                 
|12.1 | Section 906 Certification                                         

TECHNICAL
  GLOSSARY

The
  following explanations are not intended as technical definitions, but rather,
  included to assist the general reader in understanding certain terms used in
  this Annual Report.

Access
  charge: Amount paid
  per minute charged by network operators for the use of their network by other
  network operators. Also known as an interconnection charge or network
  usage charge.

Access
  gates: The points
  of interface between the network equipment (either dedicated or switched) and
  the transmission media that connect network equipment to the end user. The quantity
  of service is directly related to the quantity of network access gates.

Advanced
  Voice:Categories
  of special services dedicated to business users with special purposes, such
  as toll-free, 0300.

AMPS
  (Advanced Mobile Phone Service):
  An analog cellular telephone service standard utilizing the 850 MHZ band, in
  use in North America, parts of South America, Australia and various other areas.

Analog:
  A mode of transmission or switching that is not digital, e.g., the representation
  of voice, video or other modulated electrical audio signals that are not in
  digital form.

Analog
  network: A network
  using analog technology with circuit switching, capable of connecting one user
  with all the users, but with limited transmission capacity.

ATM
  (Asynchronous Transfer Mode):
  A broadband switching technology that permits the use of one network for different
  kinds of information (e.g., voice, data and video).

Automatic
  international roaming:
  A service which permits a subscriber to use his or her cellular phone on a foreign
  cellular operators network. The subscriber may receive calls made to the
  subscribers regular cellular number (such calls are automatically
  passed to the foreign operators network).

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Band
  A Operator: A former
  Telebrás cellular operating subsidiary that has been granted a concession
  to provide cellular telecommunications services in a particular area within
  a radio spectrum frequency range referred to by Anatel as Band A.

Band
  B Operator: A cellular
  operator that has been granted a concession to provide cellular telecommunications
  services in a particular area within a radio spectrum frequency range referred
  to by Anatel as Band B.

Broadband
  services: Services
  characterized by a transmission speed of 2 Mbit/s or more. According to international
  standards, these services are divided into two categories: (1) interactive services,
  including video-telephone/video-conferencing (both point-to-point and multipoint);
  video-monitoring; interconnection of local networks; file transfer; CAD; high-speed
  fax; e-mail for moving images or mixed documents; broadband videotext; video
  on demand; retrieval of sound programs or fixed and moving images; and (2) broadcast
  services, such as sound programs, television programs (including high-definition
  TV and pay TV) and selective document acquisition.

CATV
  (Cable television):
  Cable or fiber-based distribution of TV programs.

CDMA
  (Code Division Multiple Access):
  A standard of digital cellular technology.

Cell:
  The geographic area covered by a single base station in a cellular mobile phone
  system.

Cellular
  service: A mobile
  telephone service provided by means of a network of interconnected low-powered
  base stations, each of which covers one small geographic cell within the total
  cellular system service area.

Digital:
  A mode of representing a physical variable such as speech using digits 0 and
  1 only. The digits are transmitted in binary form as a series of pulses. Digital
  networks allow for higher capacity and higher flexibility through the use of
  computer-related technology for the transmission and manipulation of telephone
  calls. Digital systems offer lower noise interference and can incorporate encryption
  as a protection from external interference.

Digital
  penetration: The
  substitution of equipment capable of transmitting digital signals for equipment
  limited to analog transmission.

Frame
  relay: A data transmission
  service using fast protocols based on direct use of transmission lines.

Internet:
  A collection of interconnected networks spanning the entire world, including
  university, corporate, government and research networks from around the globe.
  These networks all use the IP (Internet Protocol) for communications protocol.

ISDN
  (Integrated Services Digital Network):
  A system in which several services (e.g., speech and data) may be simultaneously
  transmitted end-to-end in digital form.

Leased
  high-speed data communication:
  The digital exchange of information at speeds exceeding 64 Kbps transmitted
  through mediums that are leased to users for their exclusive use.

Local
  loop: The system
  used to connect the subscriber to the nearest switch. It generally consists
  of a pair of copper wires, but may also employ fiber-optic circuits, microwave
  links or other technologies.

Manual
  international roaming:
  A service that permits a subscriber to use his or her cellular phone on a foreign
  cellular operators network. The subscriber may only receive calls made
  to a temporary number issued to the subscriber by the foreign operator for use
  while roaming.

Microcells:
  A small cell covered by a low-power base station. Microcells can cover small
  areas such as a single building.

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Network
  usage charge: Amount
  paid per minute charged by network operators for the use of their network by
  other network operators. Also known as an access charge or interconnection
  charge.

Optical
  fiber: A transmission
  medium which permits extremely high capacities. It consists of a thin strand
  of glass that provides a pathway along which waves of light can travel for telecommunications
  purposes.

Packet-switched
  data communication services:
  Data services based on parceling or breaking the data stream into packets and
  switching the individual packets. Information transmitted is segmented into
  cells of a standardized length, which are then transmitted independently of
  one another, allowing maximization of available capacity and usage of a single
  transmission path for multiple communications. The cells are then reassembled
  upon reaching their destination.

PBX
  (Private Branch Exchange):
  Telephone switchboard for private use, but linked to the national telephone
  network.

Penetration:
  The measurement of the take-up of services. As of any date, the penetration
  is calculated by dividing the number of subscribers by the population to which
  the service is available and multiplying the quotient by 100.

Private
  leased circuits:
  Voice, data or image transmission mediums leased to users for their exclusive
  use.

PSTN
  (Public Switched Telephone Network):
  The public telephone network that delivers basic telephone service and, in certain
  circumstances, more advanced services.

Repeaters:
  A device that amplifies an input signal for retransmission.

Roaming:
  A function that enables cellular subscribers to use their cellular phone on
  networks of operators other than the one with which they signed their initial
  contract.

Satellite
  services: Satellites
  are used, among other things, for links with countries that cannot be reached
  by cable or to provide an alternative to cable and to form closed user networks.

SDH
  (Synchronous Digital Hierarchy):
  A hierarchical set of digital transport structures, standardized for the transport
  of suitably adapted payloads over physical transmission networks.

Sectorization:
  The process of dividing cells into sectors by using directional antennae at
  the base station. Sectorization reduces co-channel interference, which permits
  smaller cells and increases network capacity.

Switch:
  These are used to set up and route telephone calls either to the number called
  or to the next switch along the path. They may also record information for billing
  and control purposes.

TDMA
  (Time Division Multiple Access):
  A standard of digital cellular technology.

Universal
  service: The obligation
  to supply basic service to all users throughout the national territory at reasonable
  prices.

Value
  Added Services: Value
  Added Services provide additional functionality to the basic transmission services
  offered by a telecommunications network.

VSAT:
  Very Small Aperture Terminal is a relatively small satellite antenna, typically
  1.5 to 3.0 meters in diameter, used for transmitting and receiving one channel
  of data communication.

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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 and have
  duly caused this annual report to be signed on our behalf by the undersigned,
  thereunto duly authorized.

| | EMBRATEL
        PARTICIPAÇÕES S.A.
| | -----------------------------------
| |                                    
| | By:                                
| |                                    
| |                                    
| |                                    
| |                                    
| |                                    
| | By:                                
| |                                    
| |                                    
| |                                    
| |                                    

Dated:
  June 27, 2003.

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I,
  Jorge Luis Rodriguez, certify that:

1.  I
  have reviewed this annual report on Form 20-F of Embratel Participações
  S.A.;

2.  Based
  on my knowledge, this annual report does not contain any untrue statement of
  a material fact or omit tostate
  a material fact necessary to make the statements made, in light of the circumstances
  under which such statements were made, not misleading with respect to the period
  covered by this annual report;

3.  Based
  on my knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;

4.  The
  registrants other certifying officer and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a)  designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;

b)  evaluated
  the effectiveness of the registrants disclosure controls and procedures
  as of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and

c)  presented
  in this annual report our conclusions about the effectiveness of the disclosure
  controls and procedures based on our evaluation as of the Evaluation Date;

5.  The
  registrants other certifying officer and I have disclosed, based on our
  most recent evaluation, to the registrants auditors and the audit committee
  of registrants board of directors (or persons performing the equivalent
  function):

a)  all
  significant deficiencies in the design or operation of internal controls which
  could adversely affect the registrants ability to record, process, summarize
  and report financial data and have identified for the registrants auditors
  any material weaknesses in internal controls; and

b)  any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and

6.  The
  registrants other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

Dated:
  June 27, 2003.

| | By: | /s/
        Jorge Luis Rodriguez          
| | --- | ------------------------------------------
| |     |                                           
| |     | Name:   Jorge
        Luis Rodriguez      
| |     | Title:     Chief
        Executive Officer

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I,
  Norbert Glatt, certify that:

1. I
  have reviewed this annual report on Form 20-F of Embratel Participações
  S.A.;

2. Based
  on my knowledge, this annual report does not contain any untrue statement of
  a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3. Based
  on my knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;

4. The
  registrants other certifying officer and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed
  such disclosure controls and procedures to ensure that material information
  relating to the registrant, including its consolidated subsidiaries, is made
  known to us by others within those entities, particularly during the period
  in which this annual report is being prepared;

b) evaluated
  the effectiveness of the registrants disclosure controls and procedures
  as of a date within 90 days prior to the filing date of this annual report (the
  Evaluation Date); and

c) presented
  in this annual report our conclusions about the effectiveness of the disclosure
  controls and procedures based on our evaluation as of the Evaluation Date;

5. The
  registrants other certifying officer and I have disclosed, based on our
  most recent evaluation, to the registrants auditors and the audit committee
  of registrants board of directors (or persons performing the equivalent
  function):

a) all
  significant deficiencies in the design or operation of internal controls which
  could adversely affect the registrants ability to record, process, summarize
  and report financial data and have identified for the registrants auditors
  any material weaknesses in internal controls; and

b) any
  fraud, whether or not material, that involves management or other employees
  who have a significant role in the registrants internal controls; and

6. The
  registrants other certifying officer and I have indicated in this annual
  report whether or not there were significant changes in internal controls or
  in other factors that could significantly affect internal controls subsequent
  to the date of our most recent evaluation, including any corrective actions
  with regard to significant deficiencies and material weaknesses.

Dated:
  June 27, 2003.

| | By: | /s/
      Norbert Glatt
| | --- | -----------------------
| |     |                        
| |     | Name:                  
| |     | Title:                 

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002, 2001 AND 2000 CONTENTS

|Independent
      Auditors Report                               | F-2              
|---------------------------------------------------------------- | -----------------
|Consolidated
      Balances Sheets                               | F-3
      and F-4
|Consolidated
      Statements of Operations                      | F-5              
|Consolidated
      Statements of Changes in Shareholders' Equity | F-6              
|Consolidated
      Statements of Changes in Financial Position   | F-7
      and F-8
|Notes to
      the Consolidated Financial Statements             | F-9
      to F-70



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INDEPENDENT AUDITORS
  REPORT

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. (the Company) and subsidiaries as of December 31, 2002 and
  2001 and the consolidated statements of operations, changes in shareholders'
  equity and changes in financial position for each of the three years in the
  period ended December 31, 2002. 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.

We conducted our audits in accordance
  with auditing standards generally accepted in Brazil and in the United States
  of America. 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. An audit 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, 2002 and 2001, the results of their operations
  and the changes in their financial position, and in shareholders' equity for
  each of the three years in the period ended December 31, 2002 in conformity
  with accounting practices adopted in Brazil.

Accounting practices adopted
  in Brazil vary in certain respects from accounting principles generally accepted
  in the United States of America. Application of accounting principles generally
  accepted in the United States of America would have affected shareholders' equity
  as of December 31, 2002 and 2001 and the results of their operations for each
  of the three years in the period ended December 31, 2002, to the extent summarized
  in Note 29 of the consolidated financial statements.

DELOITTE TOUCHE TOHMATSU
  /s/ Deloitte Touche Tohmatsu

Rio de Janeiro, Brazil

March 17, 2003, except with
  respect to the matters discussed in Note 20.g. and Note 30.i., as to which the
  date is May 16, 2003 and to the matters discussed in Note 31, items a,
  b, c and d, as to which the dates are March
  24, 2003, March 31, 2003, June 6, 2003 and June 16, 2003, respectively.

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES

CONSOLIDATED
  BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001(In thousands of
  Brazilian reais)

A S S E T
  S

|                                     | **2002**   |  | **2001**   | 
|------------------------------------ | ---------- |  | ---------- | 
|                                     |            |  |            | 
|CURRENT ASSETS                       |            |  |            | 
|Cash
      and cash equivalents      | 886,991    |  | 652,153    | 
|Trade
      accounts receivable, net | 1,590,996  |  | 1,929,278  | 
|Deferred
      and recoverable taxes | 437,838    |  | 606,191    | 
|Other
      current assets           | 249,055    |  | 189,985    | 
|                                     |            |  |            | 
|Total
      current assets           | 3,164,880  |  | 3,377,607  | 
|                                     |            |  |            | 
|NON-CURRENT ASSETS                   |            |  |            | 
|Deferred
      and recoverable taxes | 1,185,636  |  | 490,604    | 
|Legal
      deposits                 | 270,011    |  | 341,562    | 
|Other
      non-current assets       | 40,385     |  | 66,865     | 
|                                     |            |  |            | 
|Total
      non-current assets       | 1,496,032  |  | 899,031    | 
|                                     |            |  |            | 
|PERMANENT ASSETS                     |            |  |            | 
|Investments                          | 267,042    |  | 169,627    | 
|Property,
      plant and equipment  | 7,795,867  |  | 7,849,429  | 
|Deferred
      assets  Goodwill     | 121,787    |  | 162,382    | 
|                                     |            |  |            | 
|Total
      permanent assets         | 8,184,696  |  | 8,181,438  | 
|                                     |            |  |            | 
|Total
      assets                   | 12,845,608 |  | 12,458,076 | 
|                                     |            |  |            | 

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

F-3

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES

CONSOLIDATED
  BALANCE SHEETS AS OF DECEMBER 31, 2002 AND 2001(In thousands of
  Brazilian reais)

LIABILITIES
  AND SHAREHOLDERS' EQUITY

|                                                 | 2002       |   | 2001       |  
|------------------------------------------------ | ---------- | - | ---------- | -
|                                                 |            |   |            |  
|CURRENT LIABILITIES                              |            |   |            |  
|Payroll
      and related accruals               | 118,075    |   | 99,202     |  
|Accounts
      payable and accrued expenses      | 1,680,690  |   | 1,569,123  |  
|Taxes
      and contributions                    | 252,284    |   | 450,308    |  
|Dividends
      and interest payable on capital  | 37,720     |   | 30,240     |  
|Loans
      and financing                        | 2,566,482  |   | 1,079,953  |  
|Provision
      for contingencies                | 53,378     |   | 33,573     |  
|Employees'
      profit sharing                  | 42,113     |   | 22,610     |  
|Actuarial
      liabilities  Telos              | 63,973     |   | 61,506     |  
|Related
      party liabilities                  | 96,671     |   | 39,091     |  
|Other
      current liabilities                  | 121,457    |   | 112,258    |  
|                                                 |            |   |            |  
|Total
      current liabilities                  | 5,032,843  |   | 3,497,864  |  
|                                                 |            |   |            |  
|NON-CURRENT LIABILITIES                          |            |   |            |  
|Loans
      and financing                        | 2,325,453  |   | 2,648,157  |  
|Actuarial
      liabilities  Telos              | 338,982    |   | 358,343    |  
|Taxes
      and contributions                    | 55,557     |   | 229,462    |  
|Sundry
      credits                             | 27,008     |   | 915        |  
|                                                 |            |   |            |  
|Total
      non-current liabilities              | 2,747,000  |   | 3,236,877  |  
|                                                 |            |   |            |  
|DEFERRED INCOME                                  | 121,889    |   | 132,038    |  
|                                                 |            |   |            |  
|MINORITY INTEREST                                | 224,083    |   | 244,625    |  
|                                                 |            |   |            |  
|SHAREHOLDERS' EQUITY                             |            |   |            |  
|Capital
      share  paid-in capital            | 2,273,913  |   | 2,273,913  |  
|Income
      reserves                            | 1,912,113  |   | 1,912,113  |  
|Treasury
      shares                            | (41,635    | ) | (41,101    | )
|Retained
      earnings                          | 575,402    |   | 1,201,747  |  
|                                                 |            |   |            |  
|Total
      shareholders' equity                 | 4,719,793  |   | 5,346,672  |  
|                                                 |            |   |            |  
|Total
      liabilities and shareholders' equity | 12,845,608 |   | 12,458,076 |  
|                                                 |            |   |            |  

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

F-4

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES

CONSOLIDATED
  STATEMENTS OF OPERATIONS

FOR THE YEARS
  ENDED DECEMBER 31, 2002, 2001 AND 2000(In thousands of
  Brazilian reais, except net income (loss) per thousands shares)

|                                                           | 2002        |   | 2001        |   | 2000        |  
|---------------------------------------------------------- | ----------- | - | ----------- | - | ----------- | -
|                                                           |             |   |             |   |             |  
|GROSS OPERATING REVENUE:                                   |             |   |             |   |             |  
|Telecommunications
      services                          | 9,217,872   |   | 10,052,001  |   | 8,954,688   |  
|Gross
      revenue deductions                             | (2,110,794  | ) | (2,591,045  | ) | (2,240,180  | )
|                                                           |             |   |             |   |             |  
|Net
      operating revenue                                | 7,107,078   |   | 7,460,956   |   | 6,714,508   |  
|Cost
      of services                                     | (4,736,435  | ) | (4,954,802  | ) | (4,399,267  | )
|                                                           |             |   |             |   |             |  
|Gross
      profit                                         | 2,370,643   |   | 2,506,154   |   | 2,315,241   |  
|                                                           |             |   |             |   |             |  
|OPERATING INCOME EXPENSES                                  |             |   |             |   |             |  
|Selling
      expenses                                     | (1,076,085  | ) | (1,579,596  | ) | (795,470    | )
|General
      and administrative expenses                  | (1,109,119  | ) | (987,958    | ) | (697,487    | )
|Other
      operating income (expenses), net               | 30,529      |   | (2,951      | ) | (12,250     | )
|                                                           |             |   |             |   |             |  
|Total                                                      | (2,154,675  | ) | (2,570,505  | ) | (1,505,207  | )
|                                                           |             |   |             |   |             |  
|OPERATING INCOME (LOSS)
      BEFORE INTEREST              | 215,968     |   | (64,351     | ) | 810,034     |  
|Interest
      expense, net                                | (1,457,015  | ) | (629,980    | ) | (188,316    | )
|                                                           |             |   |             |   |             |  
|OPERATING INCOME (LOSS)                                    | (1,241,047  | ) | (694,331    | ) | 621,718     |  
|Extraordinary
      non-operating income ILL              | 198,131     |   | -           |   | -           |  
|Non-operating
      income (expense)                       | 10,989      |   | (75,902     | ) | 111,224     |  
|                                                           |             |   |             |   |             |  
|INCOME (LOSS) BEFORE INCOME
      TAXES                    |             |   |             |   |             |  
|AND
      MINORITY INTEREST                                | (1,031,927  | ) | (770,233    | ) | 732,942     |  
|Income
      tax and social contribution benefit (expense) | 414,196     |   | 222,088     |   | (145,312    | )
|Minority
      interest                                    | (8,611      | ) | (5,526      | ) | (10,540     | )
|                                                           |             |   |             |   |             |  
|NET INCOME (LOSS)                                          | (626,342    | ) | (553,671    | ) | 577,090     |  
|                                                           |             |   |             |   |             |  
|TOTAL OUTSTANDING SHARES
      (IN THOUSANDS)              | 332,629,361 |   | 332,932,361 |   | 332,919,028 |  
|                                                           |             |   |             |   |             |  
|NET INCOME (LOSS) PER THOUSAND
      SHARES (IN REAIS)     | (1.88       | ) | (1.66       | ) | 1.73        |  
|                                                           |             |   |             |   |             |  

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 CHANGES IN SHAREHOLDERS' EQUITY

FOR THE
  YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000(In thousands
  of Brazilian reais)

|                                                                                                       |                     |  | Income
      reserves                   |                       |                         |       |         |   |           |  
|------------------------------------------------------------------------------------------------------ | ------------------- |  | --------------------------------------- | --------------------- | ----------------------- | ----- | ------- | - | --------- | -
|                                                                                                       |                     | 
|Capital
      Share                                                                                    | Legal
      reserve |  | Unrealized
      Earnings
      Reserve | Treasury
      shares | Retained
      Earnings | Total
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|BALANCES AS OF JANUARY
      1, 2000                                                                   | 2,134,427           |  | 161,600                                 |                       | 1,928,325               |       | (39,888 | ) | 1,533,595 |  
|Repurchase of shares                                                                                   | -                   |  | -                                       |                       | -                       |       | (5,047  | ) | -         |  
|Sales of shares                                                                                        | -                   |  | -                                       |                       | -                       |       | 3,460   |   | (622      | )
|Income reserve realization                                                                             | -                   |  | -                                       |                       | (206,703                | )     | -       |   | 206,703   |  
|Net income                                                                                             | -                   |  | -                                       |                       | -                       |       | -       |   | 577,090   |  
|Amounts
        recorded directly in shareholders equity by Embratel                                  | -                   |  | -                                       |                       | -                       |       | -       |   | 740       |  
|Appropriation of profits
                                                                             |                     |  |                                         |                       |                         |       |         |   |           |  
|Transfer
      to legal reserve                                                                        | -                   |  | 28,891                                  |                       | -                       |       | -       |   | (28,891   | )
|Interest
      on capital                                                                              | -                   |  | -                                       |                       | -                       |       | -       |   | (150,665  | )
|Proposed
      dividends                                                                               | -                   |  | -                                       |                       | -                       |       | -       |   | (60,845   | )
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|BALANCES AS OF DECEMBER
      31, 2000                                                                 | 2,134,427           |  | 190,491                                 |                       | 1,721,622               |       | (41,475 | ) | 2,077,105 |  
|Prior
        period adjustment  Medical Assistance Plan (CVM Deliberation No.
        371)  Note 22 | -                   |  | -                                       |                       | -                       |       | -       |   | (191,050  | )
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|Adjusted Balances as of
      December 31, 2000                                                        | 2,134,427           |  | 190,491                                 |                       | 1,721,622               |       | (41,475 | ) | 1,886,055 |  
|Transfer of retained earnings
      to capital                                                         | 139,486             |  | -                                       |                       | -                       |       | -       |   | (139,486  | )
|Repurchase of shares                                                                                   | -                   |  | -                                       |                       | -                       |       | -       |   | (65       | )
|Sales of shares                                                                                        | -                   |  | -                                       |                       | -                       |       | 374     |   | -         |  
|Recognition
        of the effects of the merger with Star One  Note
        13                       | -                   |  | -                                       |                       | -                       |       | -       |   | 8,914     |  
|Net loss                                                                                               | -                   |  | -                                       |                       | -                       |       | -       |   | (553,671  | )
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|BALANCES AS OF DECEMBER
      31, 2001                                                                 | 2,273,913           |  | 190,491                                 |                       | 1,721,622               |       | (41,101 | ) | 1,201,747 |  
|Repurchase of shares                                                                                   | -                   |  | -                                       |                       | -                       |       | (534    | ) | -         |  
|Other                                                                                                  | -                   |  | -                                       |                       | -                       |       | -       |   | (3        | )
|Net loss                                                                                               | -                   |  | -                                       |                       | -                       |       | -       |   | (626,342  | )
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|BALANCES AS OF DECEMBER
      31, 2002                                                                 | 2,273,913           |  | 190,491                                 |                       | 1,721,622               |       | (41,635 | ) | 575,402   |  
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  
|                                                                                                       |                     |  | 1,912,113                               |                       |                         |       |         |   |           |  
|                                                                                                       |                     |  |                                         |                       |                         |       |         |   |           |  

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



F-6

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES

CONSOLIDATED
  STATEMENTS OF CHANGES IN FINANCIAL POSITION

FOR THE YEARS
  ENDED DECEMBER 31, 2002, 2001 AND 2000(In thousands of Brazilian
  reais)

|                                                                      |           |   |           |   |           |  
|--------------------------------------------------------------------- | --------- | - | --------- | - | --------- | -
|                                                                      | 2002      |   | 2001      |   | 2000      |  
|                                                                      |           |   |           |   |           |  
|                                                                      |           |   |           |   |           |  
|SOURCE OF RESOURCES:                                                  |           |   |           |   |           |  
|From
      operations-                                                |           |   |           |   |           |  
|Net
      income (loss)                                               | (626,342  | ) | (553,671  | ) | 577,090   |  
|Expenses
      (revenues) not affecting working capital-              |           |   |           |   |           |  
|Minority
      interest                                               | 8,611     |   | 5,526     |   | 10,540    |  
|Depreciation                                                          | 1,075,128 |   | 998,368   |   | 856,804   |  
|Provision
      for probable investment losses                        | -         |   | -         |   | 75        |  
|Amortization                                                          | 67,040    |   | 63,263    |   | -         |  
|Monetary
      and foreign currency exchange variations and other     |           |   |           |   |           |  
|charges
      on non-current liabilities                              | 1,458,740 |   | 236,279   |   | 146,925   |  
|Monetary
      and foreign currency exchange variations and other     |           |   |           |   |           |  
|revenues
      from non-current assets                                | -         |   | 120       |   | (1,033    | )
|Foreign
      currency exchange variation on investments              | (97,317   | ) | (26,983   | ) | 10        |  
|Realization
      of deferred income                                  | (19,132   | ) | (26,767   | ) | (3,670    | )
|Loss
      on disposal of property, plant and equipment               | 5,887     |   | 76,398    |   | 44,801    |  
|Results
      from long-term derivative contracts                     | (228,536  | ) | 142,556   |   | -         |  
|Long-term
      deferred income tax and social contribution           | (696,869  | ) | (168,590  | ) | (80,884   | )
|Actuarial
      liabilities update  Medical Health Care Plan         | (16,736   | ) | -         |   | -         |  
|Other
      operating revenues                                        | (26,445   | ) | (22,667   | ) | -         |  
|                                                                      |           |   |           |   |           |  
|                                                                      | 904,029   |   | 723,832   |   | 1,550,658 |  
|From
      third parties-                                             |           |   |           |   |           |  
|Increase
      in non-current liabilities-                            |           |   |           |   |           |  
|Taxes
      and contributions                                         | 861       |   | 61,844    |   | 125,882   |  
|Loans
      and financing                                             | 722,585   |   | 1,712,118 |   | 555,084   |  
|Actuarial
      liabilities  Medical Assistance Plan Telos (Note 22) | -         |   | 193,424   |   | -         |  
|Other
      liabilities                                               | 26,093    |   | -         |   | 1,417     |  
|Donations
      and grants for investments                            | -         |   | -         |   | 749       |  
|Transfer
      from non-current to current assets                     | 44,075    |   | 273,778   |   | 109,894   |  
|Effect
      of the merger of Star One                                | -         |   | 8,914     |   | -         |  
|Effect
      of the merger of Star One  minority interests (Note 13) | -         |   | 27,221    |   | -         |  
|Decrease
      in legal deposits                                      | 181,220   |   | -         |   |           |  
|Proceeds
      from sale of property, plant and equipment             | 5,766     |   | 7,938     |   | 9,611     |  
|Increase
      in deferred income                                     | 8,983     |   | 48,178    |   | 3,576     |  
|Proceeds
      from sales of shares                                   | -         |   | 374       |   | 2,838     |  
|Subscription
      of capital of subsidiary by new partner            | -         |   | -         |   | 133,309   |  
|Other                                                                 | 1,479     |   | -         |   | -         |  
|                                                                      |           |   |           |   |           |  
|Total
      sources of funds                                          | 1,895,091 |   | 3,057,621 |   | 2,493,018 |  
|                                                                      |           |   |           |   |           |  

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|                                                     | 2002       |   | 2001      |   | 2000      | 
|---------------------------------------------------- | ---------- | - | --------- | - | --------- | 
|                                                     |            |   |           |   |           | 
|APPLICATIONS OF FUNDS:                               |            |   |           |   |           | 
|Increase
      in non-current assets                 | 125,427    |   | 436,944   |   | 231,773   | 
|Decrease
      in non-current liabilities-           |            |   |           |   |           | 
|Taxes
      and contributions                        | 173,122    |   | -         |   | -         | 
|Additions
      to investments                       | 98         |   | 17,270    |   | 210,593   | 
|Additions
      to property, plant and equipment     | 1,034,700  |   | 1,465,008 |   | 1,420,187 | 
|Proposed
      dividends and interest on capital     | 23,728     |   | -         |   | 214,170   | 
|Effect
      of capital increase in                  |            |   |           |   |           | 
|Star
      One  minority interest                   | 5,425      |   | -         |   | -         | 
|Repurchase
      of shares                           | 534        |   | 65        |   | 5,047     | 
|Prior
      year adjustment (Note 22)                | -          |   | 191,050   |   | -         | 
|Transfer
      of non-current to current liabilities | 2,279,763  |   | 855,065   |   | 279,151   | 
|Other                                                | -          |   | -         |   | 1,916     | 
|                                                     |            |   |           |   |           | 
|Total
      uses of funds                            | 3,642,797  |   | 2,965,402 |   | 2,362,837 | 
|                                                     |            |   |           |   |           | 
|INCREASE (DECREASE) IN
      NET WORKING CAPITAL     | (1,747,706 | ) | 92,219    |   | 130,181   | 
|                                                     |            |   |           |   |           | 
|                                                    
|VARIATIONS
        OF NET WORKING CAPITAL:          
|                                                     |            |   |           |   |           | 
|CURRENT ASSETS:                                      |            |   |           |   |           | 
|At beginning
      of the year                       | 3,377,607  |   | 3,399,485 |   | 2,213,880 | 
|At end
      of the year                             | 3,164,880  |   | 3,377,607 |   | 3,399,485 | 
|                                                     |            |   |           |   |           | 
|                                                     | (212,727   | ) | (21,878   | ) | 1,185,605 | 
|                                                     |            |   |           |   |           | 
|CURRENT LIABILITIES:                                 |            |   |           |   |           | 
|At beginning
      of the year                       | 3,497,864  |   | 3,611,961 |   | 2,556,537 | 
|At end
      of the year                             | 5,032,843  |   | 3,497,864 |   | 3,611,961 | 
|                                                     |            |   |           |   |           | 
|                                                     | 1,534,979  |   | (114,097  | ) | 1,055,424 | 
|                                                     |            |   |           |   |           | 
|INCREASE (DECREASE) IN
      NET WORKING CAPITAL     | (1,747,706 | ) | 92,219    |   | 130,181   | 
|                                                     |            |   |           |   |           | 

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

F-8

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EMBRATEL
  PARTICIPAÇÕES S.A. AND SUBSIDIARIES

NOTES TO
  THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS
  ENDED DECEMBER 31, 2002, 2001 AND 2000 (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. Although the Holding Company was not formed until May
  22, 1998, the spin-off was effective using balances as of February 28, 1998,
  and including all income and expense for the period from January 1, 1998 through
  February 28, 1998, except for the effect of minor cash allocations from Telebrás
  at February 28, 1998 (Note 26).

On November 1, 2000, Empresa
  Brasileira de Telecomunicações S.A. - 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,
  the Holding Company 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, renewable for a 15-year term.

b.  Business and Regulatory Environment

Embratel Participações
  S.A., through its subsidiary, Empresa Brasileira de Telecomunicações
  S.A. - Embratel (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 and may be renewed for an additional term of 20 years, subject
  to a renewal fee.

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.

The terms of this interconnection
  agreement, particularly pricing and technical requirements, affect Embratels
  results of operations, its competitive environment and its capital expenditure
  policies. The interconnection agreement also provides for a supplemental per-minute
  charge called Parcela Adicional de Transição ("PAT") that supplements
  the network usage charge. The PAT was effective until June 30, 2001. It was
  charged at rates which varied between regions and was intended to neutralize
  the impact of the new structure on the combined net income of the operating
  companies within each of the new fixed-line regions. Under the current regulatory
  framework, all telecommunications services providers must provide interconnection
  services on a non-discriminatory basis. Subject to certain requirements, providers
  are free

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to negotiate the terms of interconnection
  but, in the event the parties fail to reach an agreement, Anatel will establish
  the final terms.

Under the General Plan of Concessions
  and Authorizations, the fixed-line companies and the Holding Company were prohibited
  from offering certain basic fixed-line telecommunications services until they
  fulfilled certain specified obligations.

Effective July 3, 1999, in connection
  with the introduction of a new national dialing numbering system that allows
  telephone users to choose an operator, (i) Embratel is authorized to compete
  with regional fixed-line companies by providing full intra-regional long-distance
  service, including calls between local calling areas and (ii) other fixed-line
  companies are also able to compete with Embratel in the intra-region segment.

On January 23, 2000, a holder
  of a license to provide services to the inter-regional, intra-regional and international
  long-distance markets began to offer its services.

On August 15, 2002, Embratel
  was granted an undefined term of authorization by Anatel to operate Switched
  Fixed Telephony Services (STFC) for local services in areas equivalent
  to Regions I, II and III of the General Grant Plan (Plano Geral de Outorgas),
  which represents the authorization to operate in 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 Sao 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).

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

c.Working
  capital deficiency

For the years ended December
  31, 2002 and 2001, the Company incurred net losses and at December 31, 2002
  the Company has a working capital deficiency of R$1,867,963. Managements
  plans to meet working capital requirements and return the Company to profitability
  are as follows:

|a) | Completion of the restructuring
      of the short-term portion of a portion of the Companys debt with financial
      institutions (Note 20);                                                    
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                    
|b) | Implementation of policies
      and procedures to improve collectibility of accounts receivables, thus improving
      cash flow and reducing costs associated with high bad debt rates (Note 12);
|   |                                                                                                                                                                                                    
|c) | Launching of operations
      in the local telephony market as of December 2002 (Note 1); and                                                                                                      
|   |                                                                                                                                                                                                    
|d) | Continuing efforts to reduce
      operational costs.                                                                                                                                              

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2.   PRESENTATION
  OF THE CONSOLIDATED FINANCIAL STATEMENTS

a.  Basis
  of Presentation

Until December 31, 1995, publicly-traded
  companies in Brazil were required to prepare financial statements pursuant to
  two methods: (i) the corporate law method, which is used for all legal purposes,
  including the basis for determining income taxes and the calculation of mandatory
  minimum dividends; and (ii) the constant currency method, to present supplementary
  price-level adjusted financial statements, pursuant to standards prescribed
  by the Brazilian Securities Commission (CVM).

a.1.)  The
    Corporate Law Method


The corporate law method provided
  a simplified methodology for accounting for the effects of inflation until December
  31, 1995. It consisted of restating permanent assets (property, plant and equipment,
  investments and deferred charges) and shareholders equity accounts using
  indices mandated by the Federal Government. The net effect of this restatement
  process was credited or charged to the statement of income in a single caption,
  usually entitled Monetary Correction Adjustments or Inflation
  Adjustments.

a.2.)  The
    Constant Currency Method


The Brazilian Institute of Independent
  Accountants (IBRACON) and the Federal Accounting Counsel (CFC)
  required inflation indexing (Constant Currency Method) of financial statements
  prepared in accordance with the accounting principles generally accepted in
  Brazil (Brazilian GAAP) when the inflationary effect for the year
  is significant. Under the Constant Currency Method, all historical Brazilian
  real amounts in the financial statements and notes thereto were expressed in
  constant purchasing power as of the latest balance sheet date, in accordance
  with standards prescribed by the CVM for publicly-traded entities.

Change
    in Presentation of Financial Statements


In accordance with the discussion
  paper issued by International Practices Task Force of the American Institute
  of Certified Public Accountants (AICPA), Brazilian companies as
  of 2000 were allowed to prepare financial statements in accordance with Brazilian
  corporate law as the primary basis of accounting in filing with the U.S. Securities
  and Exchange Commission. Previously, presentation in accordance with Brazilian
  GAAP, which included restatement to constant purchasing power, was mandatory.

For local reporting purposes,
  the Company prepared its consolidated financial statements in accordance with
  Brazilian corporate law, standards applicable to concessionaires of public telecommunications
  services, and accounting standards and procedures established by the CVM, which
  includes monetary restatement of permanent assets and shareholders equity
  through December 31, 1995. In order to conform the financial statements for
  the use of its shareholders in the United States to the same basis used in the
  primary market in Brazil, effective from January 1, 2000, the management of
  Embratel Participações S.A. elected to change the presentation of
  its financial statements from Brazilian GAAP to Brazilian corporate law.

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b.  Accounting
  for Reorganization of Entities

The formation of the Holding
  Company has been accounted for as a reorganization of entities under common
  control on a historical cost basis (Note 26).

c.  Principles
  of Consolidation

For consolidation purposes,
  inter-company balances and transactions were eliminated, including such items
  as inter-company investments, unrealized profits, and, where applicable, equity
  adjustments, inter-company income and expense accounts and inter-company balances
  under short and long-term assets and liabilities. The inter-company investments
  were eliminated against the respective inter-company shareholders equity.
  Minority interests in the results and in the shareholders' equity of the consolidated
  subsidiaries were also separately reported.

The consolidated financial statements
  include the financial statements of Embratel Participações S.A.
  and its directly and indirectly owned subsidiaries, as follows:

|                                                             | Voting
      capital stock | 
|------------------------------------------------------------ | -------------------------- | 
|                                                             |                            | 
|                                                             | Direct
      and/or        | 
|                                                             | indirect
      share (%)   | 
|                                                             |                            | 
|                                                             | 2002                       | 
|                                                             |                            | 
|                                                             |                            | 
|Empresa Brasileira de Telecomunicações
      S.A.  Embratel | 98.8                       | 
|BrasilCenter Comunicações
      Ltda.                        | 100.0                      | 
|Embratel Americas, Inc.                                      | 100.0                      | 
|Star One S.A.                                                | 80.0                       | 
|Ponape Telecomunicações
      Ltda.                          | 100.0                      | 
|Palau Telecomunicações
      Ltda.                           | 100.0                      | 
|Embratel Clearinghouse
      Ltda.                           | 100.0                      | 
|Embratel Internacional
      S.A.                            | 100.0                      | 
|Embratel Uruguay S.A.(1)                                     | 100.0                      | 
|Gollum Investments, Inc.(2)                                  | 100.0                      | 
|Embratel Soluções
      Ltda.(3)                             | -                          | 

|    |                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On April 18,
      2002, the subsidiary Embratel acquired Embratel Uruguay S.A., located in
      Montevideo, Uruguay, for the purpose of exploring and rendering telecommunications
      services.
|(2) | On December
      16, 2002, the subsidiary Embratel incorporated Gollum Investments, Inc.,
      located in Delaware, USA, for the purpose of investing and/or for controlling
      investments.   
|(3) | Embratel Soluções
      Ltda. ceased its operations in April 2002.                                                                                                                                  

d.  Reclassifications

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

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3.   SUMMARY
  OF SIGNIFICANT ACCOUNTING PRACTICES

a.  Cash
  and Cash Equivalents

Cash and cash equivalents refer
  to highly liquid temporary investments with maturity of 90 days or less when
  purchased. Cash equivalents are stated at cost plus accrued interest, when applicable,
  which approximates market value.

Marketable securities represent
  bank certificates of deposit with maturities in excess of 90 days and government
  bonds and are recorded at their market value, which is equal to cost plus accrued
  interest. However, despite having these maturities, the Company may redeem the
  certificates of deposit at any time without penalty or loss of interest. Consequently,
  these instruments are classified as cash equivalents.

b.  Trade
  Accounts Receivable, Net

Trade accounts receivable, net
  represents 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 long-distance 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. An allowance for doubtful accounts is recognized as from the first day
  after maturity and is gradually increased to reflect any deterioration in recoverability
  with the aging of receivables. The balance of the allowance for doubtful accounts
  as of December 31, 2002 and 2001 refers substantially to provisions for amounts
  over 120 days past due on voice services.

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 differences are detailed in Note
  8.

d.  Investments

Investments principally represent
  holdings in satellite companies Intelsat, Inmarsat and New Skies, expressed
  in U.S. dollars, and are recorded at acquisition cost, adjusted for foreign
  currency exchange gains or losses and net of provisions for probable losses
  when applicable.

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

e.  Property,
  Plant and Equipment

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Property, plant and equipment
  are recorded at 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 15.

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 15, 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  goodwill

Goodwill is the excess of the
  acquisition cost of AcessoNet Ltda. over the book value of the net assets acquired.
  Goodwill is being amortized over a five-year period, on a straight-line basis,
  and is periodically evaluated for impairment based on estimates of future profits.

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
  on net income 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, as described in Notes 10, 13 and 19, based on the assumption
  of its future realization.

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i.  Loans
  and Financing

Principal and interest payable
  are updated based on exchange or monetary variation and accrued interest as
  of the balance sheet date, according to the terms of each agreement.

j.  Provision
  for Contingencies

The provision for contingencies
  is updated through the closing dates of the financial statements for losses,
  according to the nature of each contingency. The basis and nature of the provisions
  are described in Note 21.

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 voice services
  are recognized when services are provided, measured primarily by the minutes
  of traffic processed, after deducting an estimate for billing errors or disputes.
  Revenues from international services also include revenues earned under bilateral
  agreements between Embratel and overseas telecommunications companies. These
  agreements govern tariffs paid by the Company to the foreign entities for the
  use of their facilities in connecting international calls billed outside Brazil.
  Revenues from international calls are recognized monthly, as they are made,
  net of the costs of services rendered by overseas telecommunications companies.

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.  Interest
  Income (Expense)

This represents interest and
  exchange and monetary variations resulting from financial applications and loans
  and financing obtained, which are recognized on an accrual basis.

n.  Research
  and Development

Research and development costs
  are charged to expense as incurred and are recorded as general and administrative
  expenses. Pursuant to a three-year contract signed in May 1998 between Telebrás
  and Embratel, we made contributions to the research and development center (CPqD)
  operated by Telebrás. Total research and development costs were R$13,900
  and R$22,100 in 2001 and 2000, respectively. The

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contract ended in 2001, and
  no contributions were made in 2002.

o.   Actuarial
  Liabilities - Telos

Embratel and Star One sponsor
  a separate entity that provides pensions and other post-retirement benefits
  for their employees (Note 22). Pension and other post-retirement benefit expenses
  for the year are recorded on an accrual basis. Contributions for the deferred
  benefit plan and medical assistance plan are actuarially determined.

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 recorded employees profit sharing as operating
  expenses in the statements of income for the year ended December 31, 2002. For
  comparative purposes, the prior periods have been reclassified.

q.   Net
  Income (loss) per Thousand Shares

Net income (loss) per thousand
  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 Brazilian corporate law requires management
  to make 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.

s.   Minority
  Interest

Minority interest refers to
  the minority shareholder interests in the Embratel and Star One subsidiaries.

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4.   NET OPERATING
  REVENUE

|                                     | **2002**  |  | **2001**  |  | **2000**  | 
|------------------------------------ | --------- |  | --------- |  | --------- | 
|                                     |           |  |           |  |           | 
|Voice-                               |           |  |           |  |           | 
|Domestic
      long-distance         | 4,356,796 |  | 4,555,279 |  | 3,921,377 | 
|International
      long-distance(1) | 666,714   |  | 857,072   |  | 971,921   | 
|                                     |           |  |           |  |           | 
|                                     | 5,023,510 |  | 5,412,351 |  | 4,893,298 | 
|                                     |           |  |           |  |           | 
|Data & Internet-                     |           |  |           |  |           | 
|Corporative
      and other          | 1,756,507 |  | 1,691,099 |  | 1,389,703 | 
|Telecommunications
      companies   | 75,932    |  | 123,630   |  | 215,860   | 
|                                     |           |  |           |  |           | 
|                                     | 1,832,439 |  | 1,814,729 |  | 1,605,563 | 
|                                     |           |  |           |  |           | 
|Other services                       | 251,129   |  | 233,876   |  | 215,647   | 
|                                     |           |  |           |  |           | 
|Total                                | 7,107,078 |  | 7,460,956 |  | 6,714,508 | 
|                                     |           |  |           |  |           | 
|                                     |           |  |           |  |           | 

|(1) | Net of the amounts payable
      to foreign entities, in the amount of R$264,552, R$274,125 and R$223,717
      in 2002, 2001 and 2000, respectively.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

Embratel receives 100% of the
  revenues from fixed-line, inter-regional long-distance calls, intra-regional
  long-distance calls and international calls that it carries and pays certain
  per minute interconnection charges to the regional fixed-line companies for
  connection to and use of their networks.

For the years ended December
  31, 2002, 2001 and 2000, no single customer represented over 10% of total gross
  operating revenues.

5.   COST OF
  SERVICES

|                              | **2002**   |   | **2001**   |   | **2000**   |  
|----------------------------- | ---------- | - | ---------- | - | ---------- | -
|                              |            |   |            |   |            |  
|Interconnection/facilities(1) | (3,274,291 | ) | (3,567,487 | ) | (3,210,104 | )
|Depreciation                  | (981,351   | ) | (929,201   | ) | (797,510   | )
|Personnel                     | (228,045   | ) | (229,972   | ) | (217,233   | )
|Third-party services(2)       | (204,281   | ) | (161,124   | ) | (136,150   | )
|Other                         | (48,467    | ) | (67,018    | ) | (38,270    | )
|                              |            |   |            |   |            |  
|Total                         | (4,736,435 | ) | (4,954,802 | ) | (4,399,267 | )
|                              |            |   |            |   |            |  
|                              |            |   |            |   |            |  

|(1) | Embratel pays an interconnection
      fee when it accesses end customers via the network of another fixed-line
      telecommunications company. Interconnection fees principally relate to the
      connection between local exchanges and end customers. Until June 30, 2001,
      the Company paid a supplemental per minute charge for such interconnection,
      the Parcela Adicional de Transição (PAT).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|(2) | Refers substantially to
      the maintenance of telecommunications equipment and public services (utilities).                                                                                                                                                                                                                                                                                                     

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6.   SELLING
  EXPENSES

|                                      | **2002**   |   | **2001**   |   | **2000** |  
|------------------------------------- | ---------- | - | ---------- | - | -------- | -
|                                      |            |   |            |   |          |  
|Allowance for doubtful
      accounts | (627,136   | ) | (1,155,498 | ) | (362,878 | )
|Personnel                             | (246,668   | ) | (227,495   | ) | (197,869 | )
|Third-party services(1)               | (188,331   | ) | (176,643   | ) | (221,167 | )
|Depreciation and amortization         | (3,484     | ) | (2,882     | ) | (898     | )
|Other                                 | (10,466    | ) | (17,078    | ) | (12,658  | )
|                                      |            |   |            |   |          |  
|Total                                 | (1,076,085 | ) | (1,579,596 | ) | (795,470 | )
|                                      |            |   |            |   |          |  
|                                      |            |   |            |   |          |  

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



7.   GENERAL
  AND ADMINISTRATIVE EXPENSES

|                                          | **2002**   |   | **2001** |   | **2000** |  
|----------------------------------------- | ---------- | - | -------- | - | -------- | -
|                                          |            |   |          |   |          |  
|Third-party services(1)                   | (548,853   | ) | (442,127 | ) | (283,257 | )
|Taxes                                     | (163,521   | ) | (180,700 | ) | (97,477  | )
|Depreciation and amortization             | (157,333   | ) | (129,548 | ) | (58,396  | )
|Personnel                                 | (134,514   | ) | (162,749 | ) | (128,282 | )
|Management Fee  WorldCom
      (Note 23) | (36,232    | ) | (37,969  | ) | (67,367  | )
|Employees ́ profit
      sharing           | (31,302    | ) | (18,156  | ) | (36,775  | )
|Other                                     | (37,364    | ) | (16,709  | ) | (25,933  | )
|                                          |            |   |          |   |          |  
|Total                                     | (1,109,119 | ) | (987,958 | ) | (697,487 | )
|                                          |            |   |          |   |          |  
|                                          |            |   |          |   |          |  

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



8.   INTEREST
  EXPENSE, NET

|                                                      | **2002**   |   | **2001** |   | **2000** |  
|----------------------------------------------------- | ---------- | - | -------- | - | -------- | -
|                                                      |            |   |          |   |          |  
|Financial income-                                     |            |   |          |   |          |  
|Interest
      on temporary investments               | 181,622    |   | 92,021   |   | 148,959  |  
|Monetary
      variation  credit                     | 396        |   | 260      |   | 2,618    |  
|Foreign
      currency exchange variation  credit(1) | 337,175    |   | 100,176  |   | 51,529   |  
|                                                      |            |   |          |   |          |  
|                                                      | 519,193    |   | 192,457  |   | 203,106  |  
|                                                      |            |   |          |   |          |  
|                                                      |            |   |          |   |          |  
|Financial expenses-                                   |            |   |          |   |          |  
|Interest
      charges                                | (346,390   | ) | (273,343 | ) | (179,008 | )
|Monetary
      variation  charge                     | (41,652    | ) | (41,710  | ) | (38,622  | )
|Foreign
      currency exchange variation  charge(1) | (1,588,166 | ) | (507,384 | ) | (173,792 | )
|                                                      |            |   |          |   |          |  
|                                                      | (1,976,208 | ) | (822,437 | ) | (391,422 | )
|                                                      |            |   |          |   |          |  
|Total                                                 | (1,457,015 | ) | (629,980 | ) | (188,316 | )
|                                                      |            |   |          |   |          |  
|                                                      |            |   |          |   |          |  

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|(1) | In 2002, 2001 and 2000,
      the Brazilian real devalued by 52.27%, 18.67% and 9%, respectively, against
      the U.S. dollar, resulting in foreign currency exchange variation expenses
      in the amount of R$1,588,166, R$507,384 and R$173,792, respectively, which
      include gains/(losses) on derivative contracts, in the amount of R$703,474,
      R$(80,747) and R$1,429 in 2002, 2001 and 2000, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.   NON-OPERATING
  INCOME (EXPENSES)

|                                                    | 2002    |   | 2001    |   | 2000    |  
|--------------------------------------------------- | ------- | - | ------- | - | ------- | -
|                                                    |         |   |         |   |         |  
|                                                    |         |   |         |   |         |  
|Revenues-                                           |         |   |         |   |         |  
|Proceeds
      from sale of permanent assets        | 5,766   |   | 7,938   |   | 9,611   |  
|Income
      from long-term investments(2)          | 6,888   |   | 40      |   | 10,391  |  
|Rent
      of infrastructure to third parties       | 14,495  |   | 10,354  |   | 1,376   |  
|Gain
      on sale of interest in Star One(1)       | -       |   | -       |   | 132,225 |  
|Other                                               | 3,193   |   | 6,135   |   | 47,868  |  
|Expenses-                                           |         |   |         |   |         |  
|Write-off
      of permanent assets                 | (11,653 | ) | (84,336 | ) | (54,412 | )
|Sponsorship/cultural
      incentives (Rouanet Law) | (6,899  | ) | (11,491 | ) | (11,988 | )
|Other                                               | (801    | ) | (4,542  | ) | (23,847 | )
|                                                    |         |   |         |   |         |  
|Total                                               | 10,989  |   | (75,902 | ) | 111,224 |  
|                                                    |         |   |         |   |         |  

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | On November
      1, 2000, Embratel incorporated Star One, a new company created to offer
      broadband satellite services, by contributing its Brazilian satellite rights
      and obligations. At this same date, a new partner Société
      Européene des Satellites S.A. acquired 19.99% of the Star One's capital
      for R$265,534, with options to acquire additional shares within a two-year
      period, which expired on November 1, 2002 without being exercised. As a
      result of this transaction, Embratel recorded a gain of R$132,225 in the
      year ended December 31, 2000.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|(2) | Income from
      long-term investments includes income from the Company's interest in the
      international satellite operations of Intelsat, Inmarsat and New Skies.
      These operations are owned by the users of the services and allocate revenues
      over expenses to their members, based on their rates of utilization of the
      services, with the objective of meeting a target rate of return.                                                                                                                                                                                        

10.  INCOME TAX AND
  SOCIAL CONTRIBUTION BENEFIT (EXPENSE)

The Company and its subsidiaries
  are subject to corporate income tax (IRPJ) and social contribution on profits
  (CSSL) on their actual profit, and have chosen to pay such taxes based on monthly
  estimates. As provided in current tax legislation, the monthly estimated payment
  is suspended or reduced when the amounts originated from such criteria are higher
  than 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 shown as a deduction from the taxes payable (see Note 19).

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 period. The
  losses carried forward have no expiration date. On December 31, 2002, Embratels
  tax losses and negative basis for calculation of social contribution are as
  follows:

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|                                                             | 2002      | 
|------------------------------------------------------------ | --------- | 
|                                                             |           | 
|                                                             |           | 
|Tax losses                                                   | 1,079,118 | 
|Negative basis for calculations
      of social contribution | 949,040   | 
|                                                             |           | 

The composition of deferred
  tax assets and liabilities, based on temporary differences, is described in
  Notes 13 and 19, respectively.

a.
  Income Tax and Social Contribution

The income tax and social contribution
  expense is comprised of the current expense for the year, computed in accordance
  with current tax legislation, and of the 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 for the years
  ended December 31, 2002, 2001 and 2000 totaled R$437,327, R$244,572 and R$199,850,
  respectively (consolidated), and was 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 13).

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

|                                                                   | 2002    |   | 2001    |   | 2000     |  
|------------------------------------------------------------------ | ------- | - | ------- | - | -------- | -
|                                                                   |         |   |         |   |          |  
|                                                                   |         |   |         |   |          |  
|Current                                                            |         |   |         |   |          |  
|Social
      contribution                                          | (6,123  | ) | (4,877  | ) | (80,231  | )
|Income
      tax                                                   | (17,008 | ) | (17,607 | ) | (264,931 | )
|                                                                   |         |   |         |   |          |  
|Total
      current expense                                        | (23,131 | ) | (22,484 | ) | (345,162 | )
|                                                                   |         |   |         |   |          |  
|                                                                   |         |   |         |   |          |  
|Deferred                                                           |         |   |         |   |          |  
|Social
      contribution                                          | 115,696 |   | 66,410  |   | 55,266   |  
|Income
      tax                                                   | 321,631 |   | 178,162 |   | 144,584  |  
|                                                                   |         |   |         |   |          |  
|Total
      deferred benefit                                       | 437,327 |   | 244,572 |   | 199,850  |  
|                                                                   |         |   |         |   |          |  
|                                                                   |         |   |         |   |          |  
|Social contribution 
      benefit (expense) current and deferred | 109,573 |   | 61,533  |   | (24,965  | )
|Income tax  benefit
      (expense) current and deferred          | 304,623 |   | 160,555 |   | (120,347 | )
|                                                                   |         |   |         |   |          |  
|Total                                                              | 414,196 |   | 222,088 |   | (145,312 | )
|                                                                   |         |   |         |   |          |  

The current income tax and social
  contribution charge, reported in the statements of income of 2002 and 2001,
  arises substantially from Star One.

b. Reconciliation
  of Tax Credit (Charges) 
              with
  Nominal 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 the following rates:

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|2000                           |    |  
|------------------------------ | -- | -
|January
      1  January 31   | 12 | %
|February
      1  December 31 | 9  | %
|2001                           | 9  | %
|2002                           | 9  | %

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:

|                                                               | 2002       |   | 2001     |   | 2000     |  
|-------------------------------------------------------------- | ---------- | - | -------- | - | -------- | -
|                                                               |            |   |          |   |          |  
|                                                               |            |   |          |   |          |  
|Net income (loss) before
      taxes and minority interest     | (1,031,927 | ) | (770,233 | ) | 732,942  |  
|                                                               |            |   |          |   |          |  
|Social contribution benefit
      (expense) at statutory rates | 92,873     |   | 69,321   |   | (69,373  | )
|Permanent additions and
      deductions-                      |            |   |          |   |          |  
|Change
      of rates                                          | -          |   | -        |   | (5,138   | )
|Tax benefit on amortization
      of goodwill from merger of   |            |   |          |   |          |  
|SES Participações
      S.A. (Note 13)                         | (2,380     | ) | (2,380   | ) | -        |  
|Tax credit
      on foreign income                             | -          |   | 2,261    |   | 31,572   |  
|Non-deductible
      finance charges                           | 4,981      |   | (4,981   | ) | 603      |  
|Favorable
      decision on ILL lawsuit                        | 12,961     |   | -        |   | -        |  
|Interest
      on capital                                      | 793        |   | 587      |   | 14,483   |  
|Other                                                          | 345        |   | (3,275   | ) | 2,888    |  
|                                                               |            |   |          |   |          |  
|Social
      contribution benefit (expense)                    | 109,573    |   | 61,533   |   | (24,965  | )
|                                                               |            |   |          |   |          |  
|                                                               |            |   |          |   |          |  
|Income tax benefit (expense)
      at statutory rates (25%)    | 257,982    |   | 192,558  |   | (183,235 | )
|Permanent additions and
      deductions-                      |            |   |          |   |          |  
|Non-taxable
      gain on sale of interest in subsidiary       |            |   |          |   |          |  
|(Note
      9)                                                 | -          |   | -        |   | 33,056   |  
|Income
      tax benefit on amortization of goodwill from      |            |   |          |   |          |  
|merger
      of SES Participações S.A. (Note 13)               | (6,611     | ) | (6,611   | ) | -        |  
|Non-deductible
      finance charges                           | 13,837     |   | (13,837  | ) | 1,676    |  
|Favorable
      decision on ILL lawsuit                        | 36,002     |   | -        |   | -        |  
|Interest
      on capital                                      | 2,203      |   | 1,630    |   | 38,254   |  
|Other                                                          | 1,210      |   | (13,185  | ) | (10,098  | )
|                                                               |            |   |          |   |          |  
|Corporate
      income tax credit (charge) on                  |            |   |          |   |          |  
|statements
      of operations                                 | 304,623    |   | 160,555  |   | (120,347 | )
|                                                               |            |   |          |   |          |  
|Total
      (corporate income tax + social contribution)       | 414,196    |   | 222,088  |   | (145,312 | )
|                                                               |            |   |          |   |          |  

Normative Instruction SRF (Brazilian
  Revenue Service) No. 38, of June 27, 1996, clarified the meaning of Article
  25 of Law No. 9,249/95, by permitting the non-inclusion in the CSLL calculation
  basis of the amounts reflecting the results of activities performed partly in
  Brazil and partly abroad. The resulting credit, originated for the payments
  made from 1996 to 1998, nominally amounting to R$115,291, was recognized as
  income, against social contribution expenses, as compensated with future social
  contribution charges (on a cash basis). During 1999, based on Article 66 of
  Law No. 8,383/91, the Company partially used its credits by offsetting the social
  contribution, in the amount of R$83,619, provided for in the period of the PIS
  and COFINS judicial litigation. In 2000, the monetarily restated balance of
  the credit, amounting to R$65,617, was offset against Social Contribution charges
  for the year, with the nominal amount of

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R$31,572 credited to social
  contribution expenses and the respective monetary variation of R$34,045 to financial
  income.

c.  Extraordinary
  Results - Recovery
              of Tax
  on Net 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, the Company
  regularly paid this tax in accordance with the provisions of tax legislation
  then in force. In 1996, 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, the Company 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 Supreme Court is no longer accepting appeals on this issue, the Company
  recorded the reversal of the related income tax liability in 2002 as extraordinary
  income as follows:

|                                                         | 2002   
|-------------------------------------------------------- | -------
|                                                         |        
|Reversal due to favorable
      decision on ILL suit     | 144,006
|Reversal of financial expense
       monetary variation | 54,125 
|                                                         |        
|Total                                                    | 198,131
|                                                         |        

11.  CASH AND CASH
  EQUIVALENTS

|                                                         | 2002    |  | 2001    | 
|-------------------------------------------------------- | ------- |  | ------- | 
|                                                         |         |  |         | 
|Cash                                                     | -       |  | 114     | 
|Bank accounts                                            | 267,839 |  | 292,818 | 
|                                                         |         |  |         | 
|Subtotal                                                 | 267,839 |  | 292,932 | 
|                                                         |         |  |         | 
|U.S. dollars short-term
      certificates of deposit(1) | 164,476 |  | 49,257  | 
|Marketable securities -                                  |         |  |         | 
|Funds
      abroad                                       | 128,686 |  | 87,100  | 
|Funds
      local                                        | 242,983 |  | 108,600 | 
|Bank
      Certificates of Deposit                       | 83,007  |  | 72,580  | 
|Private
      Bonds                                      | -       |  | 17,651  | 
|Government
      bonds                                   | -       |  | 24,033  | 
|                                                         |         |  |         | 
|Total                                                    | 886,991 |  | 652,153 | 
|                                                         |         |  |         | 

|    |                                                                                                                                                                                                                                           
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

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

12.  TRADE ACCOUNTS
  RECEIVABLES, NET

|                                                 | 2002       |   | 2001       |  
|------------------------------------------------ | ---------- | - | ---------- | -
|                                                 |            |   |            |  
|Voice
      services                             | 2,676,977  |   | 2,529,338  |  
|Data,
      telecom operators and other services | 585,377    |   | 596,490    |  
|Foreign
      administrators                     | 319,126    |   | 255,519    |  
|                                                 |            |   |            |  
|Subtotal                                         | 3,581,480  |   | 3,381,347  |  
|                                                 |            |   |            |  
|Allowance
      for doubtful accounts            | (1,990,484 | ) | (1,452,069 | )
|                                                 |            |   |            |  
|Total                                            | 1,590,996  |   | 1,929,278  |  
|                                                 |            |   |            |  

No single consumer accounted
  for more than 10% of total trade accounts receivable at December 31, 2002 and
  2001.

13.  DEFERRED AND
  RECOVERABLE TAXES

|                                                               | 2002      |  | 2001      | 
|-------------------------------------------------------------- | --------- |  | --------- | 
|                                                               |           |  |           | 
|Deferred tax
      assets-                                     |           |  |           | 
|Provision
      for write-off of property, plant and equipment | 17,732    |  | 43,708    | 
|Tax
      losses                                               | 269,779   |  | 28,419    | 
|Negative
      basis for calculation of social contribution    | 85,414    |  | 216       | 
|Allowance
      for doubtful accounts                          | 676,765   |  | 493,703   | 
|Tax
      credit on merger of SES Participações S.A.(1)        | 26,974    |  | 35,965    | 
|COFINS/PIS
       temporarily non-deductible                  | 30,402    |  | 89,263    | 
|Other
      deferred taxes (provisions)                        | 145,444   |  | 132,900   | 
|Withholding income tax
      (IRRF)                            | 75,012    |  | 52,410    | 
|Recoverable income tax/social
      contribution               | 15,133    |  | 22,473    | 
|Value-added goods and services
      tax  ICMS                | 262,564   |  | 176,923   | 
|Other                                                          | 18,255    |  | 20,815    | 
|                                                               |           |  |           | 
|Total                                                          | 1,623,474 |  | 1,096,795 | 
|                                                               |           |  |           | 
|Current                                                        | 437,838   |  | 606,191   | 
|                                                               |           |  |           | 
|Non-current                                                    | 1,185,636 |  | 490,604   | 
|                                                               |           |  |           | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | As part of the agreement
      for the sale of a minority shareholding in Star One S.A., in January 2001,
      SES Participações Ltda. (the Brazilian subsidiary of the new
      minority shareholder) was merged into Star One S.A. Deferred income tax
      and social contribution credits (Assets), amounting to R$26,974 as of December
      31, 2002 (R$35,965 as of December 31, 2001), resulting from that merger,
      were recognized in Star One S.A.'s financial statements as a deferred asset,
      with a corresponding credit to a special reserve for goodwill in the shareholders
      equity of the referred subsidiary, as promulgated by Article 6 of CVM Instruction
      No. 319/99.

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

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| | a. | Tax losses
      and negative basis 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 Star One, over a five-year period.              
| |    |                                                                                                                                                                 
| | c. | Other temporary
      differences: realization will occur with the payment of accrued provisions
      and the actual write-off of underlying doubtful accounts.

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, 2002 will be realized by the Company.

14.  INVESTMENTS

|                                  | Ownership |   | 2002    |  | Ownership |   | 2001    | 
|--------------------------------- | --------- | - | ------- |  | --------- | - | ------- | 
|                                  |           |   |         |  |           |   |         | 
|Other investments 
      at cost |           |   |         |  |           |   |         | 
|Satellite
      companies         |           |   |         |  |           |   |         | 
|Intelsat                          | 2.346101  | % | 169,428 |  | 2.346101  | % | 103,964 | 
|Inmarsat                          | 1.992840  | % | 45,119  |  | 1.992840  | % | 29,631  | 
|New
      Skies                   | 2.104549  | % | 47,671  |  | 2.104549  | % | 31,306  | 
|Other                             |           |   | 4,824   |  |           |   | 4,726   | 
|                                  |           |   |         |  |           |   |         | 
|Total                             |           |   | 267,042 |  |           |   | 169,627 | 
|                                  |           |   |         |  |           |   |         | 

The interests in satellite
  companies are denominated in U.S. dollars and translated to local currency as
  described in Note 3.d.

15.  PROPERTY, PLANT
  AND EQUIPMENT

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

|                                | 2002       |  | 2001         |  
|------------------------------- | ---------- |  | ------------ | -
|                                |            |  |              |  
|                                |            |  | Accumulated  |  
|                                | Cost(4)    |  | depreciation |  
|                                |            |  |              |  
|Construction in progress        | 815,705    |  | -            |  
|Switching equipment             | 1,995,640  |  | (705,486     | )
|Transmission equipment(1)       | 7,727,919  |  | (3,731,000   | )
|Buildings and ducts             | 1,279,754  |  | (645,887     | )
|Land                            | 189,869    |  | -            |  
|Other assets                    |            |  |              |  
|General
      use(2)            | 584,650    |  | (374,640     | )
|Intangible(3)                   | 723,413    |  | (263,776     | )
|Telecom
      infrastructure(5) | 614,256    |  | (414,550     | )
|                                |            |  |              |  
|Total                           | 13,931,206 |  | (6,135,339   | )
|                                |            |  |              |  

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|(1) | Transmission and other
      equipment include aerial, underground and building cables, private automatic
      exchanges and power equipment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                               
|(2) | Vehicles, IT infrastructure
      furniture and fixtures.                                                                                     
|    |                                                                                                                                               
|(3) | Mainly software licenses
      and rights of way.                                                                                             
|    |                                                                                                                                               
|(4) | Cost refers to acquisition
      or construction, monetarily restated through December 31, 1995.                                              
|    |                                                                                                                                               
|(5) | Telecommunications support
      towers, leasehold improvements and energy and climatization 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
  acquired through financial leasing

In the first quarter of 2002,
  the Company decided to start capitalizing the assets acquired through financial
  leasing contracts and to treat the corresponding obligations as liabilities.
  Therefore, on the date of the adoption of this practice, the accumulated cost
  of the leased assets was identified, the related accumulated depreciation calculated
  according to the estimated useful life of the assets and the amount of the corresponding
  liabilities were determined and recorded. The adoption of this practice has
  not significantly impacted the financial statements. As of December 31, 2002,
  the amount registered in property, plant and equipment was R$56,412 (net of
  depreciation). The referred obligation was registered in accounts payable and
  accrued expenses, amounting to R$80,175.

a.3.)  Assets
  pledged as a guarantee

As of December 31, 2002, the
  Company had real estate and other fixed assets amounting to R$416,627 that were
  listed and/or designated as guarantees in judicial claims.

b.  Depreciation

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

|                                       | %                    | 
|-------------------------------------- | -------------------- | 
|                                       |                      | 
|                                       |                      | 
|Automatic switching equipment          | 7.69                 | 
|Transmission and other
      equipment | 10.00 to
      20.00 | 
|Buildings and underground
      ducts  | 4.00                 | 
|Other assets                           | 5.00 to
      20.00  | 

The average depreciation rate
  for the year ended December 31, 2002 is 8.94% (10.29% and 9.46% for the years
  ended December 31, 2001 and 2000, respectively) and the balance of fully depreciated
  assets amounts to R$1,701,506 (R$1,451,197 on December 31, 2001).

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

In 2002, Star One S.A. signed
  an agreement for the construction of the satellite C-1. The cost
  of the project is approximately US$126,105, and, according to the original 32-month
  schedule, will be completed in 2005. Based on the agreement, on December 31,
  2002, the amount of R$115,973 related to the payment of 15% of the total costs
  estimated for the project, plus other building costs incurred until that date,
  was recorded under the heading Construction in Progress.

In November 2002, Star One and
  the contractor agreed to revise the technical specifications of satellite C-1,
  in order to optimize the benefits of this investment. While the final revisions
  to the specifications are being made, the contractor will work only on the items
  not affected by possible changes. The final proposal for the revised specifications,
  including any contractual changes, is expected by the end of the first semester
  of 2003.

The original agreement provides
  that if the construction of satellite C-1 is cancelled, the subsidiary Star
  One would be obliged to reimburse the contractor and its sub-contracted parties
  the costs incurred until the date of cancellation, plus 5% of that amount, after
  subtracting the payments made.

16.  DEFERRED ASSETS

|                                            | 2002    |   | 2001    |  
|------------------------------------------- | ------- | - | ------- | -
|                                            |         |   |         |  
|                                            |         |   |         |  
|Goodwill on acquisition
      of subsidiary | 202,978 |   | 202,978 |  
|Accumulated amortization                    | (81,191 | ) | (40,596 | )
|                                            |         |   |         |  
|Net book
      value                        | 121,787 |   | 162,382 |  
|                                            |         |   |         |  

On July 23, 2001, AcessoNet
  Ltda. was merged into Embratel. As required by CVM Instruction No. 319/99 for
  cases when goodwill paid is economically supported by forecasted future profits,
  Embratel transferred the goodwill paid upon the acquisition of AcessoNet, in
  December 2000, to a specific account in deferred charges. This goodwill is being
  amortized over a five-year period on a straight-line basis. Based on those forecasted
  future profits, no impairment adjustment has been recognized up to December
  31, 2002.

17.  PAYROLL AND RELATED
  ACCRUALS

|                                      | 2002    |  | 2001   | 
|------------------------------------- | ------- |  | ------ | 
|                                      |         |  |        | 
|                                      |         |  |        | 
|Wages and salaries                    | 3,207   |  | 2,881  | 
|Accrued social security
      charges | 68,110  |  | 59,843 | 
|Accrued benefits                      | 46,758  |  | 36,478 | 
|                                      |         |  |        | 
|Total                                 | 118,075 |  | 99,202 | 
|                                      |         |  |        | 

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18.  ACCOUNTS PAYABLE
  AND ACCRUED EXPENSES

|                                    | 2002      |  | 2001      | 
|----------------------------------- | --------- |  | --------- | 
|                                    |           |  |           | 
|                                    |           |  |           | 
|Suppliers                           | 1,238,376 |  | 1,188,446 | 
|International operators             | 326,306   |  | 275,235   | 
|Consignment for third parties/other | 116,008   |  | 105,442   | 
|                                    |           |  |           | 
|Total                               | 1,680,690 |  | 1,569,123 | 
|                                    |           |  |           | 

19.  TAXES AND CONTRIBUTIONS

|                                                    | 2002    |   | 2001    | 
|--------------------------------------------------- | ------- | - | ------- | 
|                                                    |         |   |         | 
|                                                    |         |   |         | 
|Indirect taxes -                                    |         |   |         | 
|ICMS
      (value-added tax)                        | 57,479  |   | 104,372 | 
|PIS/COFINS
      (social/finance contributions)     | 26,583  |   | 30,008  | 
|PIS/Pasep
      - in suspension                     | 114,263 |   | 94,176  | 
|COFINS
       judicial deposit in court            |         |   |         | 
|(increase
      of tax rate from 2% to 3%)(1)       | 12,801  |   | 186,565 | 
|ISS (municipal
      service tax)                   | 7,786   |   | 8,107   | 
|Other                                               | 19,113  |   | 9,882   | 
|                                                    |         |   |         | 
|Income taxes -                                      |         |   |         | 
|Withholding
      income tax on interest on capital | 29,213  |   | 22,601  | 
|Income
      tax in suspension - Federal            |         |   |         | 
|Senate
      Resolution No. 82/92(2)                | -       |   | 179,612 | 
|Income
      tax  estimate                         | 306     |   | -       | 
|Social
      contribution  estimate                | (10     | ) | -       | 
|                                                    |         |   |         | 
|Deferred taxes  liabilities-                       |         |   |         | 
|Law No.
      8,200/91  supplementary              |         |   |         | 
|monetary
      restatement                          | 40,307  |   | 44,447  | 
|                                                    |         |   |         | 
|Total                                               | 307,841 |   | 679,770 | 
|                                                    |         |   |         | 
|Current                                             | 252,284 |   | 450,308 | 
|                                                    |         |   |         | 
|Noncurrent                                          | 55,557  |   | 229,462 | 
|                                                    |         |   |         | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In 1999, Embratel
      challenged Law No. 9,718/99 which increased: (a) the taxable revenues for
      calculation of PIS and COFINS, including financial income and exchange variation
      and (b) the COFINS rate from 2% to 3%. During this process, Embratel continued
      to accrue the total amount of the tax liability and made judicial deposits
      for the period from August 1999 through April 2001. In May 2001, the Company
      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 judicial deposits.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(2) | As described
      in Note 10.c., Embratel has obtained an injunction enabling it to offset
      the ILL tax against income taxes payable from May 1999 to July 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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20.  LOANS AND FINANCING

|                    | 2002      |  | 2001      | 
|------------------- | --------- |  | --------- | 
|                    |           |  |           | 
|Loans and financing | 4,756,245 |  | 3,666,558 | 
|Accrued interest    | 135,690   |  | 61,552    | 
|                    |           |  |           | 
|Total               | 4,891,935 |  | 3,728,110 | 
|                    |           |  |           | 
|Current             | 2,566,482 |  | 1,079,953 | 
|                    |           |  |           | 
|Non-current         | 2,325,453 |  | 2,648,157 | 
|                    |           |  |           | 

There were no unused commitments
  for long-term financing as of December 31, 2002 and 2001.

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 launching of B1, B2, B3, and B4 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 5.71% to 11.20% per annum and variable interest
  rates ranging from 0.25% to 3.30% per annum over Libor. The Libor rate at December
  31, 2002 was 1.38% per annum (1.98% per annum in 2001).

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 25.b.), as described below:

|                                 | 2002      |  | %     |  | Average
      cost of debt              |  | Maturity               
|-------------------------------- | --------- |  | ----- |  | --------------------------------------- |  | -----------------------
|                                 |           |  |       |  |                                         |  |                        
|Current-                         |           |  |       |  |                                         |  |                        
|Portion
      of debt under swap | 1,599,623 |  | 62.3  |  | 99.11%
      CDI p.a.                   |  | From
      January to  
|                                 |           |  |       |  |                                         |  | December
      2003    
|Remaining
      debt             | 966,859   |  | 37.7  |  | 7.26% p.a.
      in foreign currency(i) |  | From January
      to  
|                                 |           |  |       |  |                                         |  | December
      2003    
|                                 |           |  |       |  |                                         |  |                        
|Total
      short-term debt      | 2,566,482 |  | 100.0 |  |                                         |  |                        
|                                 |           |  |       |  |                                         |  |                        
|Non-current-                     |           |  |       |  |                                         |  |                        
|Portion
      of debt under swap | 246,894   |  | 10.6  |  | 94.85% CDI
      p.a.                   |  | From February
      to 
|                                 |           |  |       |  |                                         |  | August 2004            
|Remaining
      debt             | 2,078,559 |  | 89.4  |  | 7.89% p.a.
      in foreign currency(i) |  | From January
      2004
|                                 |           |  |       |  |                                         |  | to September
      2010
|                                 |           |  |       |  |                                         |  |                        
|Total
      long-term debt       | 2,325,453 |  | 100.0 |  |                                         |  |                        
|                                 |           |  |       |  |                                         |  |                        
|Total-                           |           |  |       |  |                                         |  |                        
|Portion
      of debt under swap | 1,846,517 |  | 37.7  |  |                                         |  |                        
|Remaining
      debt             | 3,045,418 |  | 62.3  |  |                                         |  |                        
|                                 |           |  |       |  |                                         |  |                        
|Total
      debt(ii)             | 4,891,935 |  | 100.0 |  |                                         |  |                        
|                                 |           |  |       |  |                                         |  |                        

|     |                                                                                                                                                                                                                        
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  | Various interest rates
      in different currencies expressed in U.S. Dollar equivalents as if all loans
      were U.S. dollar denominated. The breakdown of debt by currency appears
      in item c of this note.
|     |                                                                                                                                                                                                                        
|(ii) | Net of receivable balance
      originated from hedge contracts - R$499,359 on December 31, 2002.                                                                                                                      

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The Company's policy is to seek
  to protect all new debt with maturities of less than three years against exchange
  variation. This policy seeks to achieve a balance between preserving cash and
  protecting results from significant variations on exchange rates.

The suppliers' financing is
  foreign currency denominated and refers to purchases of materials and equipment
  used to enhance domestic and international telecommunications services.

In March 2003, the Company
  renegotiated part of its loans with some banking institutions. Therefore, the
  original agreements with those institutions were redefined, as regards to repayment
  schedules, guarantees, breakdown by currency and interest rates, as described
  in item g below.

a.  Model/Objective

|                                   | 2002      |  | 2001      | 
|---------------------------------- | --------- |  | --------- | 
|                                   |           |  |           | 
|Local currency-                    |           |  |           | 
|Permanent assets
      financing - |           |  |           | 
|Financial
      institutions       | 34,724    |  | 34,498    | 
|Suppliers                          | 1,686     |  | -         | 
|                                   |           |  |           | 
|Total
      in local currency      | 36,410    |  | 34,498    | 
|                                   |           |  |           | 
|Foreign currency-                  |           |  |           | 
|Working capital                    | 2,766,877 |  | 2,163,423 | 
|Permanent assets
      financing - |           |  |           | 
|Financial
      institutions       | 2,081,534 |  | 1,496,603 | 
|Suppliers                          | 7,114     |  | 33,586    | 
|                                   |           |  |           | 
|Total
      in foreign currency    | 4,855,525 |  | 3,693,612 | 
|                                   |           |  |           | 

b.  Repayment
  Schedule

Non-current debt as of December
  31, 2002 is scheduled to be repaid as follows:

|Year           |  |           | 
|-------------- |  | --------- | 
|               |  |           | 
|2004           |  | 1,087,891 | 
|2005           |  | 544,333   | 
|2006           |  | 329,214   | 
|2007           |  | 203,689   | 
|2008 and after |  | 160,326   | 
|               |  |           | 
|Total          |  | 2,325,453 | 
|               |  |           | 

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c.  Currency
  Analysis

Total debt is denominated in
  the following currencies:

|Updated
      by                             |  | 2002     |                                             | 2001      |       
|-------------------------------------------- |  | -------- | ------------------------------------------- | --------- | ------
|                                             | 
|Exchange rate 
      as ofDecember 31(in R$) |  | Amount   | Exchange rate
      as ofDecember 31(in R$) |           | Amount
|                                             |  |          |                                             |          
|Real                                         |  | -        |                                             | 36,410    |       
|U.S. Dollar                                  |  | 3.533300 |                                             | 2,642,030 |       
|French Franc                                 |  | 0.568215 |                                             | 251,474   |       
|German Mark                                  |  | 1.905716 |                                             | 16,246    |       
|Japanese Yen                                 |  | 0.029839 |                                             | 1,945,775 |       
|                                             |  |          |                                             |           |       
|Total                                        |  |          |                                             | 4,891,935 |       
|                                             |  |          |                                             |           |       

d.  Collateral
  and Guarantees

The Company has issued promissory
  notes of R$4,891,935 as of December 31, 2002 (R$3,728,110 as of December 31,
  2001) with respect to outstanding loans. These notes are not secured by tangible
  assets, but are instruments, which may permit claims on assets. Such claims
  are enforceable by court permission in the event of the Companys bankruptcy
  or failure to repay debt or interest.

e.  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.
  The Company's outstanding debt which contains such provisions amounts to R$3,789,642
  as of December 31, 2002.

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 the new
  subsidiary (Star One) during the remaining term of agreements.

f.  Financial
  agreement for the construction of satellite  Star One

On April 19, 2002, Star One
  entered into a financial agreement with BNP Paribas in order to finance 85%
  of the C1 satellite construction costs and 100% of the insurance premium to
  be paid to COFACE ("Compagnie Française d'Assurance pour le Commerce
  Extérieur"). The total amount is equivalent to US$122,337, with

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a 36 month grace period and
  14 equal and consecutive semi-annual installments, resulting in a 9.5 year contract.
  During the grace period, the interest rate will equal the sum of the six-month
  LIBOR plus a margin of 0.75% per annum and during the repayment period, 5.96%
  per annum, to be recorded on a straight-line basis.

The original agreement provides
  the following guarantee clauses:

|f.1.) |  | during the entire term
      of the agreement, the subsidiary Star One pledges to keep deposits, in the
      creditors services accounts, in an amount in Brazilian reais equivalent
      to 6 months of the above mentioned loan in U.S. dollars, and to issue a
      promissory note in favor of BNP Paribas, in the outstanding balance of principal
      and interest in U.S. dollars. The promissory note has attributable characteristics
      according to the French Laws. It is a legal instrument that can be executed
      judicially with the purpose of reinforcing guarantees offered to creditors,
      and represents a commitment to pay the cited amounts, in cases where Star
      One delays contractually scheduled payments;
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|f.2.) |  | in the event of unavailability
      of the above mentioned guarantee, there is the guarantee of part of the
      accounts receivable originated from the 10-year term agreement signed between
      subsidiaries Embratel and Star One for the rent of transponders; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|f.3.) |  | in the event of unavailability
      of guarantees f.1. and f.2., Embratel, the controlling
      shareholder of Star One, is unconditionally responsible for paying the principal.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

During the term of the agreement,
  the subsidiary Embratel pledges to hold not less than 51% of the total shares
  with voting rights of Star One.

As of December 31, 2002 the
  Company had not received any amount related to this agreement. As mentioned
  in Note 15, the terms of the original agreement for the construction of the
  satellite are being renegotiated with the contractor for changes in technical
  specifications, in order to optimize the performance of satellite C-1. Consequently,
  the building of the satellite and the related financing were postponed in relation
  to the initial schedule, in order to adjust the terms of the original agreement.

g.  Renegotiation
  of debt

In March and April 2003, the
  Company reached a financing agreement with certain creditors to renegotiate
  foreign currency debt maturing in 2003 and 2004. The total amount financed under
  the agreement is US$881 million (R$3,113 million) corresponding to debt maturing
  in 2003 and the first half of 2004. The interest rates negotiated under the
  financing agreement are LIBOR plus 4% per annum for foreign currency debt and
  CDI plus 4% for Brazilian reais debt.

Following are the principle
  terms of the financing agreement:

| | Bullet
      loans in the principal amount of US$758 million (R$2,678.2 million). The
      repayment schedule for each bullet loan is as follows:
|- | --------------------------------------------------------------------------------------------------------------------------------------------------
|  | (1)                                                                                                                                               
|  | (2)                                                                                                                                               

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| | (3) | the remaining 50 percent
      to be repaid by a balloon payment due 2 years after the original maturity
      date of the applicable bullet loan.                                
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     |                                                                                                                                                                                   
| |    | Current interest rates
      will remain effective until the original maturity date of each loan, and
      the negotiated interest rates will apply to the debt after such date. 
| |     |                                                                                                                                                                                   
| |    | Creditors were given the
      choice of converting the original currency of the debt into other currency,
      including Reais, to be effective from the original maturity date.

Amortizing loan in the principal
  amount of US$123.9 million (R$437.8 million). For the existing amortizing loans,
  all repayments due between January 2003 and June 30, 2004 will be extended.
  The amounts being extended will be repaid equally over the remaining installments
  due after June 30, 2004. The negotiated interest rates will apply to the loan
  amounts being extended.

The established main guarantees,
  which were also extended to all banking institutions with outstanding loan agreements
  on the renegotiation date with pari-passu right of participation
  in guarantees, include part of the receivables from corporate customers of the
  subsidiary Embratel, as well as shares and dividends of the subsidiary.

The subsidiary Embratel is bound
  by financial covenants to the creditor banking institutions, on account of the
  renegotiated agreements, with respect to the following items: the level of debt,
  minimum earnings before financial result, income taxes, depreciation and amortization
  (EBITDA), and limits for capital expenditures, among other requirements.

21.  PROVISION FOR
  CONTINGENCIES

In the normal course of business,
  the Company is a 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 discussed below involves complex issues, the characteristics of
  which are unique either to the Company itself or to the telecommunications industry.
  These issues arise from different interpretations of the laws in effect, which
  are not yet covered by consolidated jurisprudence.

It should also be noted that
  most of the issues discussed below result from procedures in use 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, Embratel's management believes
  that the outcome of a significant portion of present and future claims will
  be favorable to the Company.

Contingencies that have been
  evaluated as probable losses are accrued in the financial statements, as follows:

|                                                 |  | 2002   |  | 2001   | 
|------------------------------------------------ |  | ------ |  | ------ | 
|                                                 |  |        |  |        | 
|Commercial disputes with
      third parties (a) |  | 17,268 |  | 11,340 | 
|Labor claims (b)                                 |  | 29,610 |  | 22,233 | 
|Other judicial claims (f)                        |  | 6,500  |  | -      | 
|                                                 |  |        |  |        | 
|Total                                            |  | 53,378 |  | 33,573 | 
|                                                 |  |        |  |        | 

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a.  Commercial
  Dispute with Third Parties

Embratel was notified of the
  decision reached in an arbitration case by the International Court of Arbitration
   ICA, Paris, France, where Embratel and another company were disputing
  credits and rights deriving from alleged contractual infringements. As of December
  31, 2002 and 2001, the Company maintained a provision amounting to R$17,268
  and R$11,340, respectively, representing an estimate of the probable loss related
  to this dispute.

b.  Labor
  Claims

The provision for loss on labor
  claims amounted to R$29,610 on December 31, 2002 (R$22,233 on December 31, 2001).
  Such amount represents managements estimate, based on legal advice of
  probable loss on numerous suits filed by current and former employees.

As of December 31, 2002, the
  Company had unaccrued labor contingencies, in the amount of, approximately,
  R$27,697 (R$28,839 on December 31, 2001) related to those claims for which its
  legal counsel evaluated the probability of loss as possible and consequently,
  no loss provision was recorded.

b.1.)  INSS
    (Brazilian Social Security Institute)


On September 5, 2001, Embratel
  became aware of an 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
  amount of the INSS assessment is R$55,000. Having exhausted appeals at the administrative
  levels, the Company immediately filed a court appeal seeking to eliminate this
  assessment. Based on this initial appeal, more than 70% of the credit is currently
  in suspension, without any requirement for a deposit or guarantee, by force
  of early relief granted by the Court. The amount of R$22,930, which was not
  covered by the initial appeal, is currently deposited in court, in an interest-bearing
  account. In light of the good possibility of success on the judicial appeal
  and in view of analyses conducted internally and by the Companys Legal
  Counsel, which have identified a series of mistakes in the calculations of the
  claims made by INSS, no loss provision was recorded relating to this assessment.

c.  Tax
  Contingencies

c.1.)
    Withholding Income Tax on Remittances to Foreign Telecommunications Companies


Embratel regularly makes payments
  to foreign telecommunications companies to complete international calls that
  originate in Brazil and terminate in a foreign country (outbound traffic). The
  Brazilian tax law generally requires Brazilian recipients of services from foreign
  companies to withhold income tax from payments to such foreign companies for
  such services.

However, the Company has never
  withheld Brazilian income tax from such payments, based on the International
  Telecommunications Convention of Nairobi, Kenya (Nairobi Treaty), dated November
  6, 1982, which is in force in Brazil, having been approved by Decree Law No.
  55, of October 4, 1989, ratified by a

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Presidential letter dated January
  21, 1990, and promulgated by Presidential Decree No. 70, of March 26, 1991.
  As a result, Embratel is required to comply with the Administrative Regulation
  of the International Telecommunication Union (ITU), of which Brazil
  is a member. Accordingly, management believes that Embratel is under no obligation
  to withhold income tax on the remittances abroad to telephone operators for
  payment of international calls originating from Brazil, as established in the
  International Telecommunications Regulations approved in Melbourne, Australia,
  on December 9, 1988.

Hence, on February 8, 1999,
  the Company submitted a formal consultation on the matter to the Brazilian Income
  Tax authorities. In their response dated September 3, 1999, the tax authorities
  claimed that the exemption from the withholding income tax on remittances abroad
  is applicable only as of October 19, 1998, based on Decree No. 2,962/99, which
  approved the Constitution and Convention of the ITU. In their reply, the tax
  authorities also recognized that the withholding income tax on remittances made
  by the Company to foreign telecommunications operators should comply with Article
  7 of the OECD Model. These guidelines are followed by Brazil for bilateral treaties
  on avoidance of double taxation, wherever doing so does not result in breaches
  of specific treaties or of additional protocol. In October 2000, responding
  to a request from the Ministry of Communications, the Federal Attorney General's
  Office issued an expert opinion against the applicability of the Melbourne Treaty.
  More recently, in August 2002, the Federal Revenue Agency (SRF),
  responding to a consultation made by another tax payer, reiterated its opinion
  on the non-remittance of income tax on outbound traffic.

Upon the aforementioned opinion
  of the SRF, providing that the non remittance of the withholding income tax
  would be valid only after October 19, 1998, on December 23, 1999, the Company
  was assessed by the SRF in the amount of R$410,697 for not withholding income
  tax on payments made from December 1994 to October 1998. Such taxation did not
  take into consideration the analysis of bilateral double taxation treaties,
  which was specifically mentioned in the income tax authorities' response to
  the formal consultation made.

Accordingly, the Company challenged
  this assessment and submitted its administrative defense, due to the errors
  presented in the assessment (basis for the calculation of the assessment), and
  also questioned the applicability of the tax assessment, seeking to obtain a
  favorable decision from the court.

Regarding the administrative
  defense, on September 10, 2002, the SRF issued a decision, which is still to
  be reviewed at the second administrative level, reducing the assessment to R$12,975,
  due to errors in the amounts presented in the assessment, as well as the exclusion
  of payments made to countries supported by bilateral double taxation treaties,
  according to the decision given by the SRF in response to the formal consultation
  made. On September 30, 2002, the Company made the administrative deposit in
  the amount of R$35,532 (including interests and fine), with a reduction of 30%
  relating to a judicial fine, pending a final review of this matter.

Regarding the court claim filed
  with the 14thFederal Court of Rio de Janeiro on January 14, 2002, a decision was issued which
  revoked the writ of mandamus. However, a fiduciary bank guarantee was presented
  and the payment of the credit will remain in suspension until the final decision
  is made. The Company is currently challenging that sentence.

On December 23, 2002, the Company
  was notified of a decision by the SRF, which modifies their previous interpretation
  on this matter, indicating that withholding income tax is applicable to payments
  to foreign companies for outbound traffic from the date of the payment. In view
  of legal precedent that contradicts this new interpretation by the SRF, the
  Company has challenged this decision at the administrative level.

Based on the opinion of the
  Company's management and legal counsel, which considers that the possibility
  of loss is remote, no loss provision was recorded with respect to this dispute.

c.2.)  Income
    Tax on Inbound International Income


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Based on its legal advisors'
  opinion, Embratel believes that the foreign operating income from telecommunications
  services (inbound traffic) is not subject to taxation, inasmuch as Law No. 9,249
  of December 26, 1995, did not revoke the exemption established by specific legislation.

In connection with this matter,
  in late March 1999, the SRF assessed the Company in the amount of R$287,239
  for failing to pay the related income tax for the years 1996 and 1997. In late
  April 1999, Embratel filed an administrative defense against this assessment.
  On October 24, 2002, the first administrative level issued a decision, which
  maintained the assessment. The Company will appeal this decision before the
  Taxpayers' Council.

On June 17, 1999, Embratel was
  further assessed for nonpayment of income tax on net foreign source income for
  a part of the year 1998 amounting to R$64,396. Embratel filed an administrative
  defense contesting this assessment, but it was maintained at the administrative
  level. The Company requested a writ of mandamus, which was later revoked on
  September 25, 2002. The Company filed suit to challenge this decision, and on
  December 12, 2002, the Court suspended payment, pending a final decision.

The Company has been paying
  income tax on the net foreign source income since 1998 until the tax dispute
  is solved.

The Company's management and
  its legal counsel consider that the probability of loss in this case is only
  reasonably possible and consequently no loss provision was recorded.

c.3.)  ICMS
    for Services Provided


Until the introduction of Complementary
  Law No. 87 of September 13, 1996 (Official Gazette of September 16, 1996), the
  Local Telecommunication Operating Companies invoiced and collected State Value
  Added Tax ("ICMS") on Fixed Line Telecommunication Services, on a reduced basis
  equivalent to an effective rate of 13%, in accordance with ICMS Convention No.
  27 of March 29, 1994.

After the above mentioned Complementary
  Law went into effect on September 16, 1996, the telecommunications operating
  companies of the Telebrás System were instructed by Telebrás to
  no longer invoice and collect such tax on international outbound telephone traffic.

Currently, certain state tax
  authorities impose fines on local telecommunications carriers for non-payment
  of ICMS related to international traffic.

Embratel received a number of
  fines for non-payment of ICMS for services provided, including international
  services and others, also considered by the Company as partially or entirely
  exempt or non-taxable. Based on the facts currently available, the Company's
  management, jointly with its legal counsel, considered the probability of loss
  on this issue to be remote. The fines that may lead to losses, according to
  the legal counsel, represent a total of approximately R$351,000 as of December
  31, 2002 (R$290,000 as of December 31, 2001). As a result of this evaluation,
  no provision was recorded in the financial statements.

In July 2002, Star One was assessed
  by the ICMS (Value Added Tax) tax authorities, in the state of Rio de Janeiro,
  in the amount of R$236,000. These assessments refer to the ICMS tax on the rental
  of transponders and on broadband Internet services. Star One believes that there
  is no ICMS obligation on the referred services. In addition, the assessments
  were made considering the total amount of revenues in the trial balance. The
  tax authorities did not consider a number of factors that would reduce the tax
  base, even if the ICMS were levied on such activities. Star One filed an administrative
  defense against these assessments and a decision is still pending. In view of
  the nature of those services, the Company believes

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that it can prevail in its arguments.
  Based on the interpretation of the Companys management and legal counsel,
  who consider the possibility of loss to be possible, no loss provision was recorded
  in the financial statements with respect to this dispute.

Meanwhile, the Company is participating
  in efforts to demonstrate the detrimental economic effects of any such tax being
  charged on the mentioned services, as well as the indispensability of establishing
  a tax system more appropriate to the sector.

c.4.)  PIS/COFINS
    Taxes


On August 21, 2001, Embratel
  received two tax claims from the SRF, totaling R$501,000, including fines and
  interest for prior years' PIS/COFINS taxes.

The first claim, in the amount
  of R$159,000, is related to PIS charges prior to 1995, which were offset according
  to Complementary Law No. 7/70. In similar cases, the Taxpayers' Council, and
  more recently the Federal Court of Justice (STJ), in a decision of its First
  Section, were favorable to the offset made by the Company. The Company filed
  an administrative defense against this assessment in the first administrative
  level, but the decision by the SRF branch in Rio de Janeiro maintained the assessment.
  Therefore, the Company appealed this decision before the Taxpayers’ Council
  in August 2002.

The second claim, in the amount
  of R$342,000, is related to COFINS exemption on the exportation of telecommunications
  services for revenues through the end of 1999. Embratel believes that these
  revenues were exempt, based on legal opinions on the legislation in effect at
  that time. As disclosed in prior periods, there were substantial mistakes in
  the calculations of the tax auditor. As of July 26, 2002, the decision at the
  first administrative level confirmed the Company's understanding in relation
  to those mistakes, thus the fine was reduced by R$220,000. In view of this event,
  the actual remaining amount is R$122,000. The Company is challenging this decision
  to a higher administrative level. Additionally, contradictory arguments were
  made in support of the claim, which reflect the lack of basis for the assessment.
  They have strengthened the Company's legal defense, making it likely that the
  entire case will be dismissed.

Based on the facts and arguments
  provided, and also on the opinion of its legal counsel, the Company's management
  evaluated the probability of loss related to these assessments as remote. Accordingly,
  no loss provision was recorded.

d.  Other
  Taxes

The determination of the manner
  in which Federal, State and Municipal taxes apply to the operations of the Company
  is subject to several interpretations due to the unique nature of such operations.
  Management believes that its interpretation of the Company's tax obligations
  is substantially in compliance with the current legislation. Accordingly, any
  changes in the tax treatment of these operations will result in new legislation
  or interpretative rulings on the part of the tax authorities.

e.  Contingencies
  Related to Anatel and The
               State
  Government of São Paulo

As a result of the inconveniences
  placed on 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 related to the period when the
  carriers implemented the change in dialing codes.

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The Company filed suit contesting
  the validity of the fine and on April 24, 2001, despite the favorable opinion
  from the prosecutor's office, the lower court decision was announced, ordering
  the Company to pay the fine, but favoring the Company's request for lowering
  the amount from R$55,000 to R$50,000. The Company appealed to the Court contesting
  this decision and obtained a preliminary judicial injunction, which may guarantee
  the non-payment of the fine while discussing this matter at the second court
  level.

Based on the same facts, the
  State of São Paulo and the Consumer Protection Foundation (Procon) filed
  a public civil action in the 14th Court of Public Finances of the State of São
  Paulo. On March 30, 2000, a lower court decision was announced, ordering the
  Company and the local carrier to pay a fine of R$30,000 and to reimburse the
  users of telephone services in the State of São Paulo for the phone calls
  made from July 3 to 12, 1999. The Company filed an appeal against this decision
  and is currently awaiting the outcome.

The Company's management and
  its legal counsel consider that the probability of loss in these cases is reasonably
  possible and consequently, no loss provision was recorded.

f.  Other
  judicial claims

Embratel is a defendant in two
  judicial claims against the Company for payment of indemnities for alleged unsettled
  contractual charges.

Considering the current status
  of the lawsuits and the arguments presented by legal counsel, the Company evaluates
  the probability of loss in such claims as probable and has recorded a loss provision
  in the amount of R$6,500 in the financial statements.

Embratel is also a defendant
  in two judicial claims against the Company for payment of amounts arising from
  interconnection agreements with two local operators, which totaled approximately
  R$520,200. This amount relates to disputed amounts from 2000.

Regarding the lawsuit filed
  in Rio de Janeiro, the current disputed amounts are now being deposited in court.
  The Company has already deposited the total of R$34,436 from August to November
  of 2002. In the judicial claim filed by the other local operator, the Court
  has yet to evaluate the request to force the Company to pay the currently disputed
  amounts, and the only deposit made was R$47,315 concerning the invoices which
  were due last October.

Considering the terms of the
  agreements and legal arguments that support the Companys position, as
  well as the counter-claims that the Company has filed against these companies,
  and also considering the initial phase of both claims, the Company and its legal
  counsel evaluate the probability of loss in these cases as possible, thus no
  provision was recorded in the financial statements.

22.  ACTUARIAL LIABILITIES
  - TELOS

Embratel sponsors a defined
  contribution plan, a defined benefit plan and a post-retirement medical assistance
  plan, all managed by theFundação
  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.

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The rate of contribution for
  the defined benefits plan for 2002, 2001 and 2000 was 19.8% of the salary of
  the active participants in this plan (34 participants on December 31, 2002).

Subsequent to the privatization,
  the Company created a defined contributions plan through Telos, which was reviewed
  and approved by the Brazilian Federal Government on 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, also considering lifetime income for the participants
  or beneficiaries.

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 the subsidiary 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 contributions plan. The
  unamortized balance of the liability is increased monthly at the rate of remuneration
  of Telos assets when the statement was signed, subject to a minimum increase
  based on IGP-DI plus 6% p.a. As of December
  31, 2002, the outstanding balance payable to Telos amounts to R$189,098 (R$226,425
  on December 31, 2001).

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

CVM Deliberation No. 371, on
  December 13, 2000, which approved the IBRACON pronouncement on accounting for
  employee benefits, established new accounting guidelines for recording and disclosing
  the effects of employee benefit plans. These new guidelines required obligations
  related to all post-retirement benefits to be recognized in the financial statements.
  Consequently, on December 31, 2001, the Company recorded a liability in the
  amount of R$191,050 against shareholders equity, as a prior period adjustment,
  as defined in the referred legislation.

Reconciliation of Assets and
  Liabilities to be Recognized in 
  Financial Statements as of December 31, 2002:

|                                                           | **Defined** |      | **Defined**      |      |                     |  
|---------------------------------------------------------- | ----------- | ---- | ---------------- | ---- | ------------------- | -
|                                                           | **benefit** |      | **contribution** |      | **Health**          |  
|                                                           | **plan**    |      | **plan**         |      | **care
      plan** |  
|                                                           |             |      |                  |      |                     |  
|Actuarial liabilities -
      present value                | (894,115    | )    | (939,699         | )    | (278,607            | )
|Fair value of the plan
      assets                        | 952,427     |      | 830,527          |      | 58,103              |  
|                                                           |             |      |                  |      |                     |  
|Present value of liabilities
      in excess               |             |      |                  |      |                     |  
|of
      fair value of plan assets                         | 58,312      |      | (109,172         | )    | (220,504            | )
|Actuarial (gains) or losses
      unrecognized             | 4,046       |      | (50,005          | )(2) | 6,647               |  
|Actuarial assets unrecognized
      by subsidiary Embratel | (62,358     | )(1) | (29,921          | )(3) | -                   |  
|                                                           |             |      |                  |      |                     |  
|Net actuarial liabilities                                  | -           |      | (189,098         | )(3) | (213,857            | )
|                                                           |             |      |                  |      |                     |  
|                                                           |             |      |                  |      |                     |  



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|(1) | Actuarial
      assets are not recognized for the following reasons: (a) there is no forecast
      for reduction of future contributions; and (b) there are no assurances that
      this surplus will be maintained over the coming years.                                                                                                                                                                                                                                                        
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(2) | Represents
      gains recorded related to the non-payment of interest and fines on income
      tax related to the period from January 1, 1997 through August 31, 2001,
      as provided by Normative Instruction No. 126 of the SRF, issued on January
      25, 2002, and Provisional Measure No. 2,222, issued on September 4, 2001.
      The aforementioned gains are being deferred, in conformity with paragraphs
      53 and 54 of CVM Deliberation No. 371, issued on December 13, 2000.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(3) | Unrecognized
      actuarial assets by the agreement signed on September 1, 1999 (statement
      of recognition, acknowledgement of debt, acceptance and amortization of
      actuarial insufficiency). According to the statement, Embratel is committed
      to pay the amount stipulated in up to 20 years. The statement does not foresee
      the revision of the liability in an eventual future actuarial insufficiency.                                                                 

Main actuarial assumptions for
  2002 and 2001 used at balance sheet date:

|      |                                                                      |                                            
|----- | -------------------------------------------------------------------- | -------------------------------------------
|(i)   | Discount rate
      for present value of actuarial liabilities       | Inflation + 6.0% p.a. =
      11.3% p.a.   
|(ii)  | Expected rate of returns
      for 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.    
|(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 + 5.54% p.a.(2)=
      10.6% p.a.
|      |                                                                      |                                            

|(1) | The wage
        and benefits capacity factor aims to reflect the monetary loss of the
        amounts verified on the date of evaluation, considering the periodicity
        and indexes used to recover losses due to inflation.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                    
|(2) | Decreasing
      to Inflation + 2.70% p.a. after 44 years.                                                                                                                                                                         

b.  Other
  assumptions:

|(i)   | Table of general
      mortality rate       | UP-94 with 4
      years of severity       
|----- | ------------------------------------------- | -------------------------------------------
|(ii)  | Table of mortality
      rate of disability | IAPB-57                                    
|(iii) | Table of entry
      into disability        | Mercer table
      of entry into disability
|(iv)  | Turnover                                    | Not used                                   

Statement of changes in actuarial
  liabilities:

|                                                            | **2002** |   | **2001** |   | **2000** |  
|----------------------------------------------------------- | -------- | - | -------- | - | -------- | -
|                                                            |          |   |          |   |          |  
|Beginning balance                                           | 419,849  |   | 272,828  |   | 318,889  |  
|                                                            |          |   |          |   |          |  
|Plus  Interest and
      updating of actuarial obligations | 58,548   |   | 42,405   |   | 38,437   |  
|Plus - Actuarial liabilities
      arising from CVM         |          |   |          |   |          |  
|Deliberation
      No. 371 (medical health care plan)       | -        |   | 193,424  |   | -        |  
|Less  Payments made
      during the year                  | (75,442  | ) | (88,808  | ) | (84,498  | )
|                                                            |          |   |          |   |          |  
|Actuarial liabilities                                       | 402,955  |   | 419,849  |   | 272,828  |  
|                                                            |          |   |          |   |          |  
|Current                                                     | 63,973   |   | 61,506   |   | 61,725   |  
|                                                            |          |   |          |   |          |  
|Non-current                                                 | 338,982  |   | 358,343  |   | 211,103  |  
|                                                            |          |   |          |   |          |  



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|Actuarial liabilities breakdown:                         |         |  |         |  |         | 
|-------------------------------------------------------- | ------- |  | ------- |  | ------- | 
|                                                         |         |  |         |  |         | 
|Defined contributions plan
      (unsecured liabilities) | 189,098 |  | 226,425 |  | 272,828 | 
|Medical assistance plan                                  | 213,857 |  | 193,424 |  | -       | 
|                                                         |         |  |         |  |         | 
|Total                                                    | 402,955 |  | 419,849 |  | 272,828 | 
|                                                         |         |  |         |  |         | 

23.  TRANSACTIONS
  WITH RELATED PARTIES

After privatization, the major
  transactions with related parties were entered into with WorldCom, under normal
  market conditions for these types of operations. Balances receivable and payable
  as of December 31, 2002 and 2001, resulting from such transactions, are as follows:

|                                            | 2002    |   | 2001    |   |         |  
|------------------------------------------- | ------- | - | ------- | - | ------- | -
|                                            |         |   |         |   |         |  
|ASSETS:                                     |         |   |         |   |         |  
|Current
      -                             |         |   |         |   |         |  
|Foreign
      telecommunications operators  |         |   |         |   |         |  
|(telephony
      traffic) -                 |         |   |         |   |         |  
|WorldCom                                    | 86,379  |   | 61,254  |   |         |  
|                                            |         |   |         |   |         |  
|LIABILITIES:                                |         |   |         |   |         |  
|Current-                                    |         |   |         |   |         |  
|Foreign
      telecommunications operators  |         |   |         |   |         |  
|(telephony
      traffic) -                 |         |   |         |   |         |  
|WorldCom                                    | 66,050  |   | 44,018  |   |         |  
|Proceda                                     | 167     |   | 1,300   |   |         |  
|Other
      telecom companies               | 1,980   |   | 615     |   |         |  
|Management
      fee  WorldCom             | 92,871  |   | 38,244  |   |         |  
|Other
      liabilities  WorldCom          | 3,800   |   | 847     |   |         |  
|                                            |         |   |         |   |         |  
|                                            | 2002    |   | 2001    |   | 2000    |  
|                                            |         |   |         |   |         |  
|INCOME
      STATEMENT:                     |         |   |         |   |         |  
|Net
      operating revenues -              |         |   |         |   |         |  
|International
      traffic WorldCom        | 128,760 |   | 135,616 |   | 152,448 |  
|                                            |         |   |         |   |         |  
|Cost
      of services -                    |         |   |         |   |         |  
|International
      traffic WorldCom        | (85,623 | ) | (74,460 | ) | (48,496 | )
|Proceda                                     | (14,505 | ) | (5,623  | ) | -       |  
|Other                                       | (4,044  | ) | (1,570  | ) | -       |  
|                                            |         |   |         |   |         |  
|General
      and administrative expenses-  |         |   |         |   |         |  
|Management
      fee  WorldCom             | (36,232 | ) | (37,969 | ) | (67,367 | )
|Other
      WorldCom                        | -       |   | (847    | ) | -       |  
|                                            |         |   |         |   |         |  
|Interest
      income -                     |         |   |         |   |         |  
|Loan
       Proceda                        | -       |   | -       |   | 1,759   |  
|                                            |         |   |         |   |         |  
|Interest
      on capital expense  Startel | -       |   | -       |   | (29,148 | )
|                                            |         |   |         |   |         |  
|Financial
      expenses -                  |         |   |         |   |         |  
|Management
      fee exchange variation     | (18,395 | ) | (1,454  | ) | -       |  

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The Company and WorldCom, through
  one of WorldCom's affiliates, entered into a Management Agreement as of August
  4, 1998, which was approved by the shareholders of the Company, pursuant to
  which WorldCom will provide advice regarding the management, operations and
  business of the Company. Under the agreement, the Company has to pay WorldCom
  as compensation for its management services in 1999 and 2000, an amount equal
  to one percent of the Company's annual net revenue during each such year. The
  compensation for management services to be provided in 2001 and 2002 is one
  half percent of the Company's annual net revenue in each such year. For 2003,
  the compensation for management services to be provided is two tenths of one
  percent of the Company's annual net revenue for such year. During 2002, 2001
  and 2000 the Company expensed R$36,232, R$37,969 and R$67,367, respectively,
  for management services fees pursuant to the Management Agreement.

24.  INSURANCE

a.  Embratel

On December 31, 2002, Embratel
  had insurance contracts with a total amount of risk equivalent to R$12,551,379
  and maximum indemnity limited to R$1,151,856 covering its equipment and that
  of third parties located on the subsidiary's premises, as well as business interruption.
  The assets and liabilities of material amounts and risks are covered by insurance
  in accordance with the concession contracts.

b.  Star
  One

All Earth Station Equipment
  is insured at its approximate replacement value. On December 31, 2002, the satellites
  were covered as described below (in local currency equivalent to U.S. Dollars
  on that date):

|          |  | Amount  |  | Net book | 
|--------- |  | ------- |  | -------- | 
|Satellite |  | insured |  | value    | 
|          |  |         |  |          | 
|B1        |  | 106,361 |  | -        | 
|B2        |  | 129,483 |  | 8,228    | 
|B3        |  | 286,713 |  | 68,382   | 
|B4        |  | 451,761 |  | 169,192  | 

25.  FINANCIAL INSTRUMENTS

a.  General
  Terms

Embratel carries out transactions
  with financial instruments 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 and marketable securities and loans.
  The management of such risks is conducted by means of operating strategies and
  determination of limits.

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b.  Derivatives
  - Currency

Embratel has loans denominated
  in foreign currency (mainly in U.S. dollars) and with variable rates of interest.
  Accordingly, it is exposed to market risk from changes in foreign-exchange rates
  and interest rates. Embratel manages risk arising from fluctuations in currency
  exchange rates, which affect the amount of Brazilian reais necessary to pay
  the foreign currency denominated obligations, by using derivative financial
  instruments, primarily currency swaps.

While such instruments reduce
  Embratels foreign-exchange risks, they do not eliminatethem. Credit risk
  exposure is managed by restricting the counterparts on such derivative instruments
  to major financial institutions with high credit quality. Therefore, the risk
  of nonperformance by the counterparts is considered to be negligible. Embratel
  does not hold or issue financial instruments for trading purposes.

As of December 31, 2002, Embratel
  had outstanding currency swap contracts in the notional amount of R$1,492,801
  (R$1,692,057 in 2001) to reduce the impact on its obligations of devaluations
  of the Brazilian real.

Under the terms of these swap
  arrangements, the Company is required to pay the counterparts the amounts, if
  any, by which the variation of the CDI rate (the interest rate applicable to
  interbank certificates in Brazil) on the notional value exceeds the variation
  of the foreign exchange rate for the same period. If the inverse occurs, the
  Company is entitled to receive the difference from the counterparts.

The Company does not account
  for any of its derivative instruments as hedges. Such instruments are recorded
  in the balance sheet either as an asset or liability measured at their settlement
  values through earnings as an adjustment to financial income or expense in the
  period in which the change occurs.

b.1.)  Foreign
    currency swap agreements


As mentioned above, the Company
  manages risk arising from fluctuations in currency exchange rates by using derivative
  financial instruments, primarily swap agreements with banks. The Companys
  policy is to hedge all new debt with maturity of less than three years (Note
  20). These operations are swaps between two variable rates: foreign currency
  x CDI (Interbank Deposit Certificate).

The contracts outstanding at
  December 31, 2002 can be summarized as follows (all amounts in thousands of
  Brazilian reais):

|Classes                 |                        |                        |                       |                          |  | Number
      of |  |           |  | Accounting
      balance | 
|----------------------- | ---------------------- | ---------------------- | --------------------- | ------------------------ |  | --------------- |  | --------- |  | ------------------------ | 
|(liability)
      as of
|Date
      of contracts | Expiration
      dates | contracts              | Notional
      amount | December
      31, 2002 
|                        |                        |                        |                       |                          |  |                 |  |           |  |                          | 
|JPY x CDI               |                        | May 8, 2001            |                       | January
      15, 2003   |  |                 |  |           |  |                          | 
|                        |                        | to June
      03, 2002 |                       | to June
      1, 2004    |  | 25              |  | 826,689   |  | 324,297                  | 
|                        |                        |                        |                       |                          |  |                 |  |           |  |                          | 
|USD x CDI               |                        | July 16,
      2001    |                       | January
      28, 2003   |  |                 |  |           |  |                          | 
|                        |                        | to June
      07, 2002 |                       | to August
      13, 2004 |  | 19              |  | 666,112   |  | 175,062                  | 
|                        |                        |                        |                       |                          |  |                 |  |           |  |                          | 
|                        |                        |                        |                       |                          |  | Total           |  | 1,492,801 |  | 499,359                  | 
|                        |                        |                        |                       |                          |  |                 |  |           |  |                          | 

Total gain/(loss) on swap agreements
  realized during years 2002, 2001 and 2000 were R$703,474, R$(80,747) and R$1,429,
  respectively.

c.  Criteria,
  Assumptions and Limitations of the Market Value Calculation

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Estimated market values of the
  Company's financial assets and liabilities are determined using available market
  information and appropriate valuation methodologies. However, considerable judgment
  was required in interpreting market data to produce the estimated market values.
  Accordingly, the estimates presented below are not necessarily indicative of
  the amounts that could be realized in a current market exchange. The use of
  different market assumptions and/or estimation methodologies may have a material
  effect on the estimated fair values.

The market value information
  estimates presented below are based on pertinent information available to management
  as of those dates. Although management is not aware of any factors that would
  significantly affect the estimated market value amounts, current estimates of
  market values may differ significantly from the amounts shown. Such amounts
  have not been comprehensively revalued for purpose of these financial statements
  since those dates.

Where no comparison of book
  versus market value is presented for a financial asset or liability line item
  in the schedule below, management believes that no significant difference in
  value exists.

The financial instruments, including
  short-term amounts, which are recorded at amounts different from market values,
  are shown below:

|                                     | As
        of December 31,
|------------------------------------ | --------------------------
|                                     |                           
|2002                                 |                           
|                                     |                           
|Book
      value                     |                           
|                                     |                           
|                                     |                           
|Deferred and recoverable
      taxes | 1,623,474                 
|Marketable securities                | 454,676                   
|                                     |                           
|Assets                               | 2,078,150                 
|                                     |                           
|                                     |                           
|Taxes and contributions              | 307,841                   
|Loans and financing                  | 5,391,294                 
|Swap/Hedge                           | (499,359                  
|                                     |                           
|Liabilities                          | 5,199,776                 
|                                     |                           

c.1.)  Cash
    and Cash Equivalents, Trade Accounts Receivable and Accounts Payable - Current


The book values approximate
  the market values because of the high turnover of these instruments.

c.2.)  Deferred
    and Recoverable Taxes/Taxes and Contributions


Market value was calculated
  by discounting future expected cash flows according to the TJLP (a Brazilian
  benchmark long-term interest rate).

c.3.)  Loans
    and Financing


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Interest rates that are currently
  available to the Company for the issuance of debt with similar terms and maturities
  were used to estimate market value.

26.  SHAREHOLDERS
  EQUITY

a.  Capital
  Share

The authorized capital on December
  31, 2002 and 2001 is comprised of 700 billion common or preferred shares. The
  subscribed and fully paid-in capital stock amounts to R$2,273,913 as of December
  31, 2002 and 2001. It is comprised of 334,399,028 thousand shares without par
  value, held (in batches of one thousand shares) as follows: 124,369,031 thousand
  common shares and 210,029,997 thousand preferred shares. The book value per
  share (batches of one thousand shares, expressed in reais) as of December 31,
  2002 and 2001, amounts to R$14.11 and R$15.99, respectively.

As of June 29, 2001, Startel
  Participações Ltda., which held 19.3% of the Companys capital
  share, transferred 2,350,575 common shares (in thousands of shares) to a new
  shareholder, New Startel Participações Ltda., which now holds 0.7%
  of the Companys capital stock.

The capital share of the holding
  company is comprised of preferred shares and common shares, all without par
  value. At December 31, 2001 and 2000, there were, respectively, 208,563,330
  thousand and208,549,997
  thousand outstanding preferred shares (net of 1,466,667 thousand and 1,480,000
  thousand preferred shares held in treasury, respectively) and 124,369,031 thousand
  outstanding common shares.

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.

The preferred shares are non-voting,
  except under certain limited circumstances, and are entitled to a preferential
  non-cumulative dividend of 6% per annum on the amount resulting from the division
  of the subscribed capital (corporate law), by the number of shares of the Holding
  Company, and priority in relation to the common shares in the event of liquidation
  of the Holding Company.

Under Brazilian corporate law,
  the number of non-voting shares, such as the preferred shares, may not exceed
  two-thirds of the total number of shares.

b.  Income
  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
  deficits.

b.2)  Unrealized
    Earnings Reserve


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This reserve apparently originated
  from the Telebrás spin-off (Note 1), and results from net gains on the
  monetary restatement of the balance sheet and from the equity pick up of investments.
  The reserve is realized when dividends are received from the subsidiaries, or
  to complement minimum dividends due to preferred shareholders.

Since Law No. 10,303/01 became
  effective, the Unrealized Earnings Reserve has been constituted by the amount
  of the statutory dividend, calculated according to the terms foreseen in Article
  202 of the referred Law and the Companys by-laws, which exceeds the net
  earnings for the period. Therefore, the amounts constituted from the issuance
  of Law No. 10,303/01 now represent the postponed dividend itself, instead of
  its base for realization.

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 amount will compose the base for calculation
  of dividends.

c.  Dividends
  and Interest on Capital

The preferred shares are non-voting,
  except under certain limited circumstances. They are entitled to (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 (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 Company.

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.

Under Brazilian corporate law,
  amounts available for dividend distribution are limited to the balance of retained
  earnings reported in accordance with corporate law accounting. As of December
  31, 2002, retained earnings of the Holding Company amounted to R$575,402 (R$1,201,747
  as of December 31, 2001).

On December 31, 2000, the Holding
  Company credited interest on capital to its shareholders as an integral part
  of the dividends according to Article 9 of Law No. 9,249/95 and management's
  proposal, subject to approval at the Shareholders' General Meeting.

For this proposal of dividends
  payable on December 31, 2000 in the form of interest on capital, the Holding
  Company applied the following calculation used for common and preferred shares,
  as follows:

|                              |  | Shares    | 
|----------------------------- |  | --------- | 
|                              |  |           | 
|                              |  | Common    | 
|                              |  |           | 
|Amount of subscribed capital  |  | 2,134,427 | 
|                              |  |           | 
|Share participation(%)        |  | 37.3571   | 
|Capital                       |  | 797,361   | 
|Minimum statutory dividend(%) |  | 6         | 
|                              |  |           | 
|Minimum dividends             |  | 47,842    | 
|                              |  |           | 

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|                                                                                            |             |   |             |  
|------------------------------------------------------------------------------------------- | ----------- | - | ----------- | -
|Interest on capital                                                                         | 56,284      |   | 94,381      |  
|Income tax at source at
      the rate of 15%                                               | (8,442      | ) | (14,157     | )
|                                                                                            |             |   |             |  
|Interest on capital, net
      of income tax at source                                      | 47,842      |   | 80,224      |  
|                                                                                            |             |   |             |  
|Interest on capital, net
      of income tax at source -  per thousand
      shares (reais) | 0.384675002 |   | 0.384675002 |  
|                                                                                            |             |   |             |  

In addition to interest on capital,
  on December 31, 2000, management proposed the distribution of dividends in the
  amount of R$60,845, approved at the Shareholders' General Meeting, as follows:

|                                               | Shares      |          
|---------------------------------------------- | ----------- | ---------
|                                               |             |          
|Common                                         |             | Preferred
|                                               |             |          
|Proposed dividends                             | 22,730      |          
|                                               |             |          
|Proposed dividends 
      per thousand shares | 0.182760825 |          
|                                               |             |          

The adjusted net profit is as
  follows:

|                                                            | 2000    |  
|----------------------------------------------------------- | ------- | -
|                                                            |         |  
|                                                            |         |  
|Holding Company net income
      for the year               | 577,830 |  
|Appropriation to legal
      reserve                        | (28,891 | )
|Reversal of unrealized
      earnings reserve               | 206,703 |  
|                                                            |         |  
|Adjusted net income 
      dividend calculation basis      | 755,642 |  
|                                                            |         |  
|Proposed dividends                                          | 60,845  |  
|Interest on capital, net
      of income tax at source      |         |  
|at the
      rate of 15%                                    | 128,066 |  
|                                                            |         |  
|Total
      of dividends and interest on capital, net       | 188,911 |  
|                                                            |         |  
|Percentage of dividends
      and interest on capital, net, |         |  
|on
      the calculation basis                              | 25.0    |  
|                                                            |         |  

The Company's management proposed
  the following appropriation of net income for the year 2000  R$577,830
  or R$1.73 per thousand shares.

|                        | 2000    | 
|----------------------- | ------- | 
|                        |         | 
|For legal reserve - 5%  | 28,891  | 
|For dividends           | 60,845  | 
|For interest on capital | 150,665 | 
|                        |         | 

For the years ended December
  31, 2002 and 2001, the Companys adjusted result, the basis for distribution
  of dividends, was negative.

d.  Treasury
  Shares

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As of December 31, 2002, the
  Holding Company held 1,769,667 thousand of its own preferred shares in treasury
  (1,466,667 thousand of preferred shares on December 31, 2001), at a weighted
  average cost of R$23.53 per thousand shares (R$28.02 on December 31, 2001).
  During 2002, there were no sales of treasury shares.

The market value per lot of
  1,000 preferred shares at the end of 2002, expressed in reais, was R$3.74.

e.  Stock
  Option Plan

The stock option plan was approved
  at the Shareholders General Meeting held on December 17, 1998 and is regulated
  by the Management Commission on stock option plan, within the limits of its
  authority. The plan grants directors and employees the option of acquiring preferred
  shares at market value on the grant date in the proportion of 25% in each annual
  period, the first being after an eight-month period from the date the option
  was granted, and the other every January after 2003. The options must be exercised
  within 10 years of the grant date. Until the third quarter of 2001, the market
  value at grant date was restated by the General Market Price Index (IGP-M) until
  the exercise date, with exercise proportional to 33.33% in each base-period,
  after one year as from the grant date, also within the limit of 10 years.

The acquired shares will maintain
  all of the rights pertaining to the shares of equal class and type, including
  dividends. The summarized information on the plan is as follows:

|Number of preferred share
      purchase options (thousands of shares) - |            |  
|------------------------------------------------------------------------ | ---------- | -
|Open
      options as of January 1, 2000                                 | 1,762,667  |  
|Options
      offered in 2000                                            | 2,048,265  |  
|Options
      exercised in 2000                                          | (122,700   | )
|Options
      sold in 2000                                               | (4,800     | )
|Options
      cancelled in 2000                                          | (130,000   | )
|                                                                         |            |  
|Open
      options as of December 31, 2000                               | 3,553,432  |  
|                                                                         |            |  
|Options
      offered in 2001                                            | 6,264,711  |  
|Options
      sold in 2001                                               | (13,333    | )
|Options
      cancelled in 2001                                          | (3,540,099 | )
|                                                                         |            |  
|Open
      options as of December 31, 2001                               | 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  |  
|                                                                         |            |  
|Weighted average exercise
      price of the purchase options            |            |  
|on
      December 31, 2002 (per thousand shares, expressed in reais)     | 5.44       |  
|                                                                         |            |  

f.  Retained
  Earnings

Retained earnings were destined
  to permanent investments of the Company, duly documented in a budgetary appraisal
  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. Such retention
  will be deliberated at the Shareholders General Meeting.

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In March 28, 2001, the Company's
  management used retained earnings for a capital increase amounting to R$139,486,
  enough to comply with Article 199 of Law No. 6,604/76, which states that whenever
  income reserves and retained earnings amounts exceed the capital stock amount,
  the shareholders should deliberate on the application of such excess, which
  may be used to increase capital or be distributed as dividends.

| | g. | Reconciliation
      of Shareholders' Equity and 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 loss for the period and the consolidated
  net loss is as follows:

|                                                          | 2002     |   | 2001     |   | 2000    |  
|--------------------------------------------------------- | -------- | - | -------- | - | ------- | -
|                                                          |          |   |          |   |         |  
|Holding Company                                           | (626,345 | ) | (544,757 | ) | 577,830 |  
|                                                          |          |   |          |   |         |  
|Recognition of the effects
      from the merging process |          |   |          |   |         |  
|which
      occurred in Star One (Note 13)                | -        |   | (8,914   | ) | -       |  
|Recognition of the effects
      of other subsidiaries    |          |   |          |   |         |  
|in
      Embratel                                         | 3        |   | -        |   | (740    | )
|                                                          |          |   |          |   |         |  
|Consolidated                                              | (626,342 | ) | (553,671 | ) | 577,090 |  
|                                                          |          |   |          |   |         |  

27.  COMMITMENTS WITH
  ANATEL (UNAUDITED)

The table below shows the quality,
  demand and traffic commitments established in the commitment protocol for 2003
  and the status of Embratels compliance with these commitments on December
  31, 2002.

|Indicator                                                            |  | Situation
      on
      December 31,
      2002 |   | Goal
      established
      by
      Anatel for
      2003 |  
|-------------------------------------------------------------------- |  | ------------------------------------------------ | - | ----------------------------------------------------------- | -
|                                                                     |  |                                                  |   |                                                             |  
|Rates of domestic long
      distance calls, completed in each peak  |  |                                                  |   |                                                             |  
|period
      of fixed telephone switching services -                 |  |                                                  |   |                                                             |  
|Morning                                                              |  | 68.2                                             | % | 65.0                                                        | %
|Afternoon                                                            |  | 70.2                                             | % | 65.0                                                        | %
|Night                                                                |  | 63.0                                             | % | 65.0                                                        | %
|Rates of completed calls
      for services with telephone customer  |  |                                                  |   |                                                             |  
|service
      up to 10 seconds in each peak period of the fixed      |  |                                                  |   |                                                             |  
|telephone
      switching service -                                  |  |                                                  |   |                                                             |  
|Morning                                                              |  | 95.0                                             | % | 93.0                                                        | %
|Afternoon                                                            |  | 93.9                                             | % | 93.0                                                        | %
|Night                                                                |  | 95.9                                             | % | 93.0                                                        | %
|Requests for repair of
      public telephone sets, for 100          |  |                                                  |   |                                                             |  
|telephones
      in operation, per month                             |  | 20                                               |   | 12                                                          |  
|Number of accounts with
      complaints of errors for each thousand |  | 0.78                                             |   | 3                                                           |  
|Quantity of public telephones
      in operation in the service      |  |                                                  |   |                                                             |  
|concession
      area                                                |  | 1,241                                            |   | (*                                                          | )

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|(*) | There is no fixed goal
      for this indicator in the regulations.
|--- | -------------------------------------------------------------------

Concerning the authorization
  obtained by Embratel for operating Switched Fixed Telephony Services for local
  areas (Note 1), Anatel has not yet defined neither parameters and quality indicators
  related to that service, nor dates for such commitments to be valid thereafter.

|28. | 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 INSS and those
  who were entitled to retire, proportionally or integrally, through 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.

|29. | SUMMARY OF THE DIFFERENCESBETWEEN ACCOUNTING
      PRACTICES IN ACCORDANCE WITH BRAZILIAN CORPORATE LAW AND U.S. GAAP
|--- | ---------------------------------------------------------------------------------------------------------------------

The Company's accounting policies
  comply with Brazilian corporate law. 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
  Brazilian corporate law, interest was capitalized separately and amortized over
  a period different from the useful lives of the related assets. Also, until
  December 31, 1998, under Brazilian corporate law 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 and that part which relates to interest on third-party loans was credited
  to interest expense based on actual interest costs with the balance relating
  to its own capital being credited to capital reserves. As of 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 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 monetary gains on local currency borrowings and foreign
  exchange gains and losses on foreign currency borrowings.

During 2001, the Company did
  not have any financings directly linked to fixed assets and consequently, no
  interest was capitalized under Brazilian corporate law. During all years presented,
  amortization under

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Brazilian corporate law is higher
  than that under U.S. GAAP because, prior to 1999, a significant portion of interest
  capitalized under Brazilian corporate law related to amounts credited to capital
  reserves that was not capitalized for U.S. GAAP purposes.

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

|                                                                    | 2002     |   | 2001    |   | 2000    |  
|------------------------------------------------------------------- | -------- | - | ------- | - | ------- | -
|                                                                    |          |   |         |   |         |  
|Capitalized interest difference
      -                             |          |   |         |   |         |  
|U.S.
      GAAP capitalized interest -                              |          |   |         |   |         |  
|Interest
      capitalized during the year                          | 99,497   |   | 130,127 |   | 155,821 |  
|U.S.
      GAAP difference in accumulated                           |          |   |         |   |         |  
|capitalized
      interest on disposals                             | 8,583    |   | 25,953  |   | 21,707  |  
|                                                                    |          |   |         |   |         |  
|                                                                    | 108,080  |   | 156,080 |   | 177,528 |  
|                                                                    |          |   |         |   |         |  
|Less: Brazilian corporate
      law capitalized interest -          |          |   |         |   |         |  
|Interest
      capitalized during the period                        | (6,350   | ) | -       |   | (8,476  | )
|                                                                    |          |   |         |   |         |  
|U.S. GAAP adjustment                                                | 101,730  |   | 156,080 |   | 169,052 |  
|                                                                    |          |   |         |   |         |  
|Amortization of capitalized
      interest difference -             |          |   |         |   |         |  
|Amortization
      under Brazilian Corporate Law                    | 139,685  |   | 148,968 |   | 121,348 |  
|                                                                    |          |   |         |   |         |  
|Less:
      amortization under U.S. GAAP                            | (128,380 | ) | (56,491 | ) | (45,011 | )
|U.S.
      GAAP difference in accumulated amortization on disposals | (8,113   | ) | (23,019 | ) | (16,814 | )
|                                                                    |          |   |         |   |         |  
|                                                                    | (136,493 | ) | (79,510 | ) | (61,825 | )
|                                                                    |          |   |         |   |         |  
|U.S.
      GAAP adjustment                                          | 3,192    |   | 69,458  |   | 59,523  |  
|                                                                    |          |   |         |   |         |  

b.  Monetary
  Correction of 1996 and 1997

As mentioned in Note 2.a., under
  Brazilian corporate law, 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 applied during 1996 and 1997.

c.  Pension
  and Other Post-retirement Benefits

Under Brazilian corporate law,
  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

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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 Brazilian corporate law,
  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 22). 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
  22, for Brazilian corporate law 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 29.r. and 30.

d.  Items
  Posted Directly to Shareholders' Equity Accounts

Under Brazilian corporate law,
  certain items are posted directly to shareholders' equity accounts, which under
  U.S. GAAP, are posted to the income statement. Examples include capitalized
  interest, the effects of adjustments to tax rates 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 Brazilian corporate law,
  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. For all periods shown, each American Depositary Share (ADS)
  is equivalent to one thousand shares.

In February 1997, the Financial
  Accounting Standards Board issued SFAS No. 128, Earnings per Share.
  This statement is effective for 1997 and subsequent years, and provides computation,
  presentation and disclosure requirements for U.S. GAAP basic and diluted 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 Company's bylaws and participation
  rights in undistributed earnings.

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 no 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 Company's bylaws) (distributable net
  income) and the preferred shareholders'

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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 29.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 Companys common shares for all periods presented.

f.  Impairment
  of Long-lived Assets

For U.S. GAAP, effective January
  1, 1996 the Company adopted SFAS No. 121, Accounting for the Impairment
  of Long-lived Assets and for Long-lived Assets to Be Disposed Of. In accordance
  with this standard, 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.

In October 2001, the Financial
  Accounting Standards Board issued SFAS No. 144, Accounting for the Impairment
  or Disposal of Long-Lived Assets, or SFAS 144. SFAS 144 addresses financial
  accounting and reporting for the impairment or disposal of long-lived assets.
  SFAS 144 superseded SFAS No. 121, and the accounting and reporting provisions
  of Accounting Principles Board Opinion No. 30, Reporting the Results of
  Operations  Reporting the Effects of Disposal of a Segment of a Business,
  and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.
  SFAS 144 also amends Accounting Research Bulletin No. 51, "Consolidated Financial
  Statements," to eliminate the exception to consolidation for a subsidiary for
  which control is likely to be temporary. SFAS 144 requires that one accounting
  model be used for long-lived assets to be disposed of by sale, whether previously
  held and used or newly acquired. SFAS 144 also broadens the presentation of
  discontinued operations to include more disposal transactions. The adoption
  of SFAS 144 on January 1, 2002 had no effect on the Companys financial
  position, cash flows or results of operations.

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 Brazilian corporate law. However, in these financial
  statements, the level of disclosure has been expanded to comply with U.S. GAAP,
  and additional disclosures required by U.S. GAAP are presented in Note 30.

h.  Interest
  Income (Expense)

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

i.  Employees'
  Profit Sharing

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As a result of a Brazilian corporate
  law requirement, the Employees' Profit Sharing that was included as an appropriation
  of net income is now recorded as an operating expense for all periods presented.
  Consequently, there is no difference between Brazilian corporate law and U.S.
  GAAP on Employees' Profit Sharing.

j.  Retained
  Earnings

For Brazilian corporate law,
  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. As reported in Note 26.f. however, distributable retained
  earnings as of December 31, 2002 and 2001 do not include such amount.

k.  Stock
  Option Plan

As mentioned in Note 26.e.,
  the Company has maintained a stock option plan since December 17, 1998. The
  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 Company applies 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 deminimis and consequently,
  has not been reflected as a U.S. GAAP adjustment.

Additional information regarding
  options granted and outstanding is summarized in Note 26.e.

The following table summarizes
  information about the shares granted and outstanding at December 31, 2002 and
  2001:

|                        |    |                                            |  | 2002                                          |  |                                                |  |                                                  | 
|----------------------- | -- | ------------------------------------------ |  | --------------------------------------------- |  | ---------------------------------------------- |  | ------------------------------------------------ | 
|                        |    |                                            |  |                                               |  |                                                |  |                                                  | 
|                        |    |                                            |  | Options
      outstanding                     |  | Options
      exercisable                      | 
|                        |    |                                            |  |                                               |  |                                                |  |                                                  | 
|Date
      of Grant     |    | Range
      of
      Exercise
      Prices |  | Number
      Outstanding
      (in thousands) |  | Remaining
      Contractual
      life (years) |  | Weighted-average
      Exercise price
      (R$) | 
|                        |    |                                            |  |                                               |  |                                                |  |                                                  | 
|October 6,
      2001   | R$ | 6.50
       6.99                          |  | 5,746,099                                     |  | 8.76                                           |  | 6.51                                             | 
|October 30,
      2001  | R$ | 7.00 
      7.49                          |  | 11,500                                        |  | 8.76                                           |  | 7.17                                             | 
|December 10,
      2001 | R$ | 7.50 
      9.50                          |  | 29,500                                        |  | 8.76                                           |  | 9.44                                             | 
|June 30,
      2002     | R$ | 2.00 
      3.00                          |  | 2,097,330                                     |  | 9.76                                           |  | 2.21                                             | 
|                        |    |                                            |  |                                               |  |                                                |  |                                                  | 
|                        |    |                                            |  | 7,884,429                                     |  |                                                |  |                                                  | 
|                        |    |                                            |  |                                               |  |                                                |  |                                                  | 

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|                    |  |                                            |                   |                                               | 2001                      |                                                |                           |                                                  |     
|------------------- |  | ------------------------------------------ | ----------------- | --------------------------------------------- | ------------------------- | ---------------------------------------------- | ------------------------- | ------------------------------------------------ | ----
|                    |  |                                            |                   |                                               |                           |                                                |                           |                                                  |     
|                    |  |                                            |                   |                                               | Options
      outstanding |                                                | Options
      exercisable
|                    |  |                                            |                   |                                               |                           |                                                |                           |                                                  |     
|Date
      of Grant |  | Range
      of
      Exercise
      Prices |                   | Number
      Outstanding
      (in thousands) |                           | Remaining
      Contractual
      life (years) |                           | Weighted-average
      Exercise price
      (R$) |     
|                    |  |                                            |                   |                                               |                           |                                                |                           |                                                  |     
|October 6, 2001     |  | R$                                         | 6.50
       6.99 |                                               | 6,223,711                 |                                                | 9.76                      |                                                  | 6.51
|October 30, 2001    |  | R$                                         | 7.00 
      7.49 |                                               | 11,500                    |                                                | 9.76                      |                                                  | 7.17
|December 10, 2001   |  | R$                                         | 7.50
       9.50 |                                               | 29,500                    |                                                | 9.76                      |                                                  | 9.44
|                    |  |                                            |                   |                                               |                           |                                                |                           |                                                  |     
|                    |  |                                            |                   |                                               | 6,264,711                 |                                                |                           |                                                  |     
|                    |  |                                            |                   |                                               |                           |                                                |                           |                                                  |     

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.

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:

|                                    | 2002     |   | 2001     |   | 2000    | 
|----------------------------------- | -------- | - | -------- | - | ------- | 
|                                    |          |   |          |   |         | 
|U.S. GAAP net income (loss)
      - |          |   |          |   |         | 
|As
      reported                   | (690,898 | ) | (464,250 | ) | 658,669 | 
|Pro
      forma                     | (681,285 | ) | (471,914 | ) | 642,998 | 
|                                    |          |   |          |   |         | 
|Basic and diluted EPS -             |          |   |          |   |         | 
|As
      reported                   | (2.04    | ) | (1.39    | ) | 1.98    | 
|Pro
      forma                     | (2.05    | ) | (1.41    | ) | 1.93    | 
|                                    |          |   |          |   |         | 

The fair values of the options
  granted for the years ended December 31, 2002, 2001 and 2000 have been estimated
  at the date of grant using the Black-Scholes option-pricing model with the following
  weighted-average assumptions:

|                                             | 2002    |  | 2001    |  | 2000   
|-------------------------------------------- | ------- |  | ------- |  | -------
|                                             |         |  |         |  |        
|Expected volatility                          | 64.44%  |  | 65.24%  |  | 53%    
|Risk-free interest rate                      | 26.50%  |  | 13%     |  | 23%    
|Weighted-average grant
      date fair value | R$2.47  |  | R$7.41  |  | R$19.69
|Expected life                                | 5 years |  | 5 years |  | 5 years
|Dividend yield                               | 0%      |  | 0%      |  | 1.29%  
|                                             |         |  |         |  |        

l.  Goodwill

Under Brazilian corporate law
  and CVM Deliberation No. 319/99, the goodwill related to AcessoNet (see Note
  16), 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 is being amortized using the straight-line method over
  a period of five years. Under U.S. GAAP, this amount remains classified as goodwill
  and, prior to January 1, 2002, was amortized over the same period. On January
  1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible
  Assets, or SFAS 142. SFAS 142 addresses financial accounting and reporting
  for acquired goodwill and other intangible assets and

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supersedes APB Opinion 17, Intangible
  Assets. Pursuant to SFAS 142, goodwill is no longer amortized and is subject
  to a yearly impairment test. The adoption of SFAS 142 on January 1, 2002 did
  not have an impact on the Companys financial statements. For purposes
  of SFAS 142, the goodwill related to AcessoNet was allocated to the Telecommunications
  segment, which is considered to be a reporting unit. During the year ended December
  31, 2002, no impairment was recorded on the goodwill related to AcessoNet. The
  U.S. GAAP adjustment represents the reversal of amortization expense recorded
  under Brazilian corporate law during the year ended December 31, 2002.

m.  Installation
  revenues

Under Brazilian corporate law,
  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)

Brazilian corporate law 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.  Gross
  revenue deduction  (value added and other sales taxes)

Under Brazilian corporate law,
  these taxes are recorded in revenue net of the related tax expense. Under U.S.
  GAAP, these taxes are recorded gross as revenue and related cost of services
  and merchandise. Accordingly, this difference in accounting policy has no impact
  on net income (loss) or on shareholders equity for all periods presented.

p.  Accounting
  for Derivative Instruments  SFAS No. 133

As mentioned in Note 25, 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 Brazilian corporate law,
  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.

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During June 1998, the Financial
  Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
  Instruments and Hedging Activities, or SFAS 133. 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. The adoption
  of SFAS 133 on January 1, 2001, did not have a material impact on the Companys
  results of operations and financial position.

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 Brazilian corporate law and
  the fair market value of the derivative as of December 31, 2002.

q.  Provision
  for voluntary dismissal program

As described in Note 29, for
  Brazilian corporate law 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.

r.  Net
  Income (Loss) Reconciliation of the Differences Between U.S. GAAP and Brazilian
  Corporate Law

|                                                                           | 2002     |   | 2001     |   | 2000     |  
|-------------------------------------------------------------------------- | -------- | - | -------- | - | -------- | -
|                                                                           |          |   |          |   |          |  
|Income (loss) as reported
      under Brazilian corporate law              | (626,342 | ) | (553,671 | ) | 577,090  |  
|Add (deduct)-                                                              |          |   |          |   |          |  
|Different
      criteria for-                                              |          |   |          |   |          |  
|Monetary
        restatement of 1996 and 1997 (Note 29.b.)                 | (96,016  | ) | (99,125  | ) | (115,029 | )
|Capitalized
        interest (Note 30.a.)                                  | 101,730  |   | 156,080  |   | 169,052  |  
|Amortization
        of capitalized interest (Note 29.a.)                  | 3,192    |   | 69,458   |   | 59,523   |  
|                                                                           |          |   |          |   |          |  
|Pension
      and other post-retirement benefits
      (Note 29.c.)       |          |   |          |   |          |  
|SFAS
        No. 87 adjustment                                             | 29,959   |   | 23,515   |   | 25,985   |  
|SFAS
        No. 106 adjustment                                            | (3,124   | ) | (21,072  | ) | (17,737  | )
|Reversal
        of goodwill amortization (Note 29.l.)                     | 40,595   |   | -        |   | -        |  
|SFAS
        No. 133  fair value of swap contracts (Note 29.p.)           | (175,823 | ) | -        |   | -        |  
|Items
      posted directly to shareholders' equity accounts              |          |   |          |   |          |  
|Reversal
        of provision for voluntary dismissal program (Note 29.q.) | 20,000   |   | -        |   | -        |  
|Fiscal
        incentive investments/donations and grants                  | -        |   | -        |   | 740      |  
|Other                                                                      | 553      |   | (2,121   | ) | 107      |  
|Effect
        of merger of SES Participações into Star One                | -        |   | 8,914    |   | -        |  
|Deferred
        tax effect of the above adjustments                       | 26,837   |   | (45,156  | ) | (40,204  | )
|Effect
        of minority interest in the above adjustments               | 579      |   | (1,072   | ) | (858     | )
|                                                                           |          |   |          |   |          |  
|U.S. GAAP net income (loss)                                                | (677,860 | ) | (464,250 | ) | 658,669  |  
|                                                                           |          |   |          |   |          |  
|U.S. GAAP basic and diluted
      net income (loss) per thousand shares   |          |   |          |   |          |  
|Preferred                                                                  | (2.04    | ) | (1.39    | ) | 1.98     |  
|                                                                           |          |   |          |   |          |  
|Common                                                                     | (2.04    | ) | (1.39    | ) | 1.98     |  
|                                                                           |          |   |          |   |          |  

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s.  Net
  Income (loss) per Thousand Shares in Accordance with U.S. GAAP

|                                                    | 2002        |  | 2001        |  | 2000        | 
|--------------------------------------------------- | ----------- |  | ----------- |  | ----------- | 
|                                                    |             |  |             |  |             | 
|Weighted average number
      of shares             |             |  |             |  |             | 
|Outstanding
      (in lots of 1000 shares):         |             |  |             |  |             | 
|Weighted average common
      shares outstanding    | 124,369,031 |  | 124,369,031 |  | 124,369,031 | 
|Weighted average preferred
      shares outstanding | 208,411,830 |  | 208,562,219 |  | 208,548,130 | 
|                                                    |             |  |             |  |             | 

t.  Net
  Equity Reconciliation of the Differences Between U.S. GAAP and Brazilian Corporate
  Law

|                                                                         | 2002      |   | 2001      |  
|------------------------------------------------------------------------ | --------- | - | --------- | -
|                                                                         |           |   |           |  
|                                                                         |           |   |           |  
|Total shareholders' equity
      as reported                             | 4,719,793 |   | 5,346,672 |  
|Add (deduct)                                                            |           |   |           |  
|Different
      criteria for                                            |           |   |           |  
|Monetary
      restatement of 1996 and 1997 (Note 29.b.)                 | 268,058   |   | 364,074   |  
|Capitalized
      interest (Note 29.a.)                                  | (436,047  | ) | (537,777  | )
|Amortization
      of capitalized interest (Note 29.a.)                  | 702,177   |   | 698,985   |  
|                                                                         |           |   |           |  
|Reversal
      of proposed dividends                                     | -         |   | -         |  
|Pension
      and other post-retirement benefits (Note 29.c.)            |           |   |           |  
|SFAS
      No. 87 adjustment                                             | (53,788   | ) | (83,747   | )
|SFAS
      No. 106 adjustment                                            | 81,823    |   | 84,947    |  
|                                                                         |           |   |           |  
|Reversal
      of goodwill amortization (Note 29.l.)                     | 40,595    |   | -         |  
|SFAS
      No. 133  fair value of swap contracts (Note 29.p.)           | (175,823  | ) | -         |  
|Reversal
      of provision for voluntary dismissal program (Note 29.q.) | 20,000    |   | -         |  
|Other                                                                    | (1,528    | ) | (2,084    | )
|Deferred
      tax effects of the above adjustments                      | (86,502   | ) | (113,339  | )
|Effect
      of minority interest on the above adjustments               | (2,061    | ) | (2,640    | )
|                                                                         |           |   |           |  
|U.S. GAAP shareholders'
      equity                                     | 5,076,697 |   | 5,755,091 |  
|                                                                         |           |   |           |  

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The deferred tax effect of the
  U.S. GAAP adjustments above of R$(86,502) in 2002, R$(113,339) in 2001 and R$(68,182)
  in 2000 would substantially be classified as non-current on the balance sheet.

|                                                                                                                                                  | 2002       |   | 2001       |   | 2000       |  
|------------------------------------------------------------------------------------------------------------------------------------------------- | ---------- | - | ---------- | - | ---------- | -
|                                                                                                                                                  |            |  
|U.S. GAAP supplementary
      information-                                                                                                        |            |   |            |   |            |  
|Reconciliation
        of operating income (loss) under Brazilian                                                                                 |            |   |            |   |            |  
|Corporate
        law to operating income (loss) under U.S. GAAP                                                                                 |            |   |            |   |            |  
|Brazilian
        corporate law operating income                                                                                                  | (1,241,047 | ) | (694,331   | ) | 621,718    |  
|Monetary
        restatement of 1996 and 1997                                                                                                     | (96,016    | ) | (98,702    | ) | (105,422   | )
|Exclusion
        from U.S. GAAP operating income-                                                                                                |            |   |            |   |            |  
|Management
        fee                                                                                                                            | 36,232     |   | 37,969     |   | 67,367     |  
|Net
        interest income                                                                                                                       | 1,457,015  |   | 629,980    |   | 188,316    |  
|Inclusion
        in U.S. GAAP operating income-                                                                                                  |            |   |            |   |            |  
|Amortization
        of capitalized interest                                                                                                      | 11,305     |   | 92,477     |   | 76,337     |  
|Extraordinary
        income  ILL (Note 10.c.)                                                                                                   | 198,131    |   | -          |   | -          |  
|U.S. GAAP adjustments-                                                                                                                            |            |   |            |   |            |  
|SFAS No. 87 pension
      adjustment                                                                                                              | 29,959     |   | 23,515     |   | 25,985     |  
|SFAS
        No. 106 other post-retirement benefits adjustment                                                                                    | (23,557    | ) | (21,072    | ) | (17,737    | )
|Reversal
        of goodwill amortization (Note 29.l.)                                                                                           | 40,585     |   | -          |   | -          |  
|Reversal
        of provision for voluntary dismissal program (Note 29.q.)                                                                        | 20,000     |   | -          |   | -          |  
|Other                                                                                                                                             | 626        |   | 10,246     |   | 1,109      |  
|                                                                                                                                                  |            |   |            |   |            |  
|U.S. GAAP operating income
      (loss)                                                                                                           | 433,233    |   | (19,918    | ) | 857,673    |  
|                                                                                                                                                  |            |   |            |   |            |  
|Reconciliation of net revenue
      and cost of services under Brazilian corporate law to net revenue and cost
      of services under U.S. GAAP |            |   |            |   |            |  
|Net
        revenue under Brazilian corporate law                                                                                                 | 7,107,078  |   | 7,460,956  |   | 6,714,508  |  
|Gross
        revenue deduction  (value added and other sales taxes) (Note
        29.o.)                                                        | 2,110,794  |   | 2,591,045  |   | 2,240,180  |  
|Installation
        revenues (Note 29.m.)                                                                                                        | 5,222      |   | 3,067      |   | (25,997    | )
|                                                                                                                                                  |            |   |            |   |            |  
|Net
        revenue under U.S. GAAP                                                                                                               | 9,223,094  |   | 10,055,068 |   | 8,928,691  |  
|                                                                                                                                                  |            |   |            |   |            |  
|Cost
      of services under Brazilian corporate law                                                                                              | (4,736,435 | ) | (4,954,802 | ) | (4,399,267 | )
|Gross
      revenue deduction(value added and other sales taxes) (Note 29.o.)                                                                    | (2,110,794 | ) | (2,591,045 | ) | (2,240,180 | )
|                                                                                                                                                  |            |   |            |   |            |  
|Installation
      costs (Note 29.m.)                                                                                                             | (5,222     | ) | (3,067     | ) | 25,997     |  
|                                                                                                                                                  |            |   |            |   |            |  
|Cost
        of services under U.S. GAAP                                                                                                          | (6,852,451 | ) | (7,548,914 | ) | (6,613,450 | )
|                                                                                                                                                  |            |   |            |   |            |  
|Gross
        profit under U.S. GAAP                                                                                                              | 2,370,643  |   | 2,506,154  |   | 2,315,241  |  
|                                                                                                                                                  |            |   |            |   |            |  
|                                                                                                                                                  |            |   |            |   |            |  
|Total
        assets  under U.S. GAAP                                                                                                            | 13,858,778 |   | 13,119,401 |   | 12,251,542 |  
|                                                                                                                                                  |            |   |            |   |            |  
|Property,
        plant and equipment  under U.S. GAAP                                                                                           | 14,674,794 |   | 13,891,358 |   | 12,828,762 |  
|Accumulated
        depreciation  under U.S. GAAP                                                                                                | (6,351,876 | ) | (5,481,337 | ) | (4,965,843 | )
|                                                                                                                                                  |            |   |            |   |            |  
|Net
        property, plant and equipment  under U.S. GAAP                                                                                       | 8,322,918  |   | 8,410,021  |   | 7,862,919  |  
|                                                                                                                                                  |            |   |            |   |            |  

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| | u. | Statements of Changes in
      Total Shareholders' Equity in Accordance with U.S. GAAP for the Years Ended
      December 31, 2002, 2001 and 2000
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                  

|                                         | Total     |  
|---------------------------------------- | --------- | -
|                                        
|                                         |           |  
|Balances as of January
      1, 2000     | 5,787,147 |  
|Net
      income under U.S. GAAP         | 658,669   |  
|Dividends
      of 1999 approved in 2000 | (13,065   | )
|Interest
      on capital                | (150,665  | )
|Purchase
      of treasury shares        | (5,047    | )
|Sale
      of treasury shares            | 2,838     |  
|                                         |           |  
|Balances as of December
      31, 2000   | 6,279,877 |  
|Loss
      under U.S. GAAP               | (464,250  | )
|Dividends
      of 2000 approved in 2001 | (60,845   | )
|Sale
      of treasury shares            | 374       |  
|Repurchase
      of treasury shares      | (65       | )
|                                         |           |  
|Balances as of December
      31, 2001   | 5,755,091 |  
|Loss
      under U.S. GAAP               | (677,860  | )
|Repurchase
      of treasury shares      | (534      | )
|                                         |           |  
|Balances as of December
      31, 2002   | 5,076,697 |  
|                                         |           |  

|    |                                                   
|--- | --------------------------------------------------
|30. | ADDITIONAL
      DISCLOSURES REQUIRED BY U.S. GAAP
|    |                                                   
|    | a.                                                

|                                                             | 2002    |   | 2001    |  
|------------------------------------------------------------ | ------- | - | ------- | -
|                                                             |         |   |         |  
|                                                             |         |   |         |  
|Beginning balance - unfunded
      liability(*)              | 226,425 |   | 272,828 |  
|Plus  adjustments
      for percentage yield on plan assets | 38,115  |   | 42,405  |  
|Less  payments during
      the year                        | (75,442 | ) | (88,808 | )
|                                                             |         |   |         |  
|Ending balance                                               | 189,098 |   | 226,425 |  
|                                                             |         |   |         |  
|Total expense                                                |         |   |         |  
|Matching
      contribution plus risk benefits               | 20,108  |   | 21,643  |  
|                                                             |         |   |         |  
|Total                                                        | 20,108  |   | 21,643  |  
|                                                             |         |   |         |  



|(*) | The unfunded liability
      of R$226,425 as of January 1, 2002 represented the amount due to 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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| | 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.

| |  | Pension Benefits
| |  | ----------------



|                                                           | 2002     |   | 2001     |  
|---------------------------------------------------------- | -------- | - | -------- | -
|                                                           |         
|Change in benefit obligation                               |          |   |          |  
|Benefit
      obligation at beginning of year              | 744,374  |   | 692,322  |  
|Service
      cost                                         | 38       |   | 522      |  
|Interest
      cost                                        | 80,350   |   | 75,068   |  
|Plan
      participants contributions                     | 254      |   | 394      |  
|Actuarial
      loss                                       | 139,918  |   | 37,081   |  
|Benefits
      paid                                        | (70,819  | ) | (61,013  | )
|                                                           |          |   |          |  
|Benefit
      obligation at end of year                    | 894,115  |   | 744,374  |  
|                                                           |          |   |          |  
|Change in plan assets                                      |          |   |          |  
|Fair
      value of plan assets at beginning of year       | 782,230  |   | 697,715  |  
|Asset
      transfer from the defined contribution plan(*) | -        |   | -        |  
|Actual
      return on plan assets                         | 244,118  |   | 144,576  |  
|Employer
      contributions                               | 333      |   | 558      |  
|Plan
      participants contributions                     | 254      |   | 394      |  
|Benefits
      paid                                        | (70,819  | ) | (61,013  | )
|                                                           |          |   |          |  
|Fair
      value of plan assets at end of year             | 956,116  |   | 782,230  |  
|                                                           |          |   |          |  
|                                                           |          |   |          |  
|Funded status                                              | 62,001   |   | 37,856   |  
|Unrecognized
      net transition obligation               | 3,607    |   | 4,301    |  
|Unrecognized
      net actuarial (gain)                    | (119,396 | ) | (125,904 | )
|                                                           |          |   |          |  
|Accrued
      benefit cost                                 | (53,788  | ) | (83,747  | )
|                                                           |          |   |          |  

|                                                     |          |   |         |   |         |  
|---------------------------------------------------- | -------- | - | ------- | - | ------- | -
|                                                     | 2002     |   | 2001    |   | 2000    |  
|                                                     |          |  
|Components of net periodic
      benefit cost        |          |   |         |   |         |  
|Service
      cost                                   | 292      |   | 522     |   | 868     |  
|Interest
      cost                                  | 80,350   |   | 75,068  |   | 67,772  |  
|Expected
      return on plan assets                 | (108,303 | ) | (96,846 | ) | (89,848 | )
|Amortization
      of net transition obligation      | 693      |   | 693     |   | 693     |  
|Recognized
      net actuarial lgain                 | (2,384   | ) | (2,394  | ) | (4,604  | )
|Expected
      employee contribution                 | (274     | ) | -       |   | -       |  
|Actual
      Companys contributions during the year | (333     | ) | (558    | ) | (866    | )
|                                                     |          |   |         |   |         |  
|Net
      periodic benefit income                    | (29,959  | ) | (23,515 | ) | (25,985 | )
|                                                     |          |   |         |   |         |  
|                                                     |          |   |         |   |         |  
|Weighted-average assumptions
      as of December 31 |          |   |         |   |         |  
|Discount
      rate                                  | 6.00     | % | 6.00    | % | 6.00    | %
|Expected
      return on plan assets                 | 6.00     | % | 9.00    | % | 9.00    | %
|Rate
      of compensation increase                  | 0.00     | % | 0.00    | % | 0.00    | %

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

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|Other
      Post-retirement Benefits                            |          |   |          |  
|--------------------------------------------------------------- | -------- | - | -------- | -
|                                                                |          |   |          |  
|                                                                | 2002     |   | 2001     |  
|                                                                |          |   |          |  
|Change in benefit obligation                                    |          |   |          |  
|Benefit
      obligation at beginning of year                   | 246,665  |   | 225,443  |  
|Service
      cost                                              | 140      |   | 214      |  
|Interest
      cost                                             | 27,433   |   | 25,075   |  
|Actuarial
      loss                                            | 13,098   |   | 3,604    |  
|Benefits
      paid                                             | (8,147   | ) | (7,312   | )
|Administrative
      expenses                                   | (583     | ) | (359     | )
|                                                                |          |   |          |  
|Benefit
      obligation at end of year                         | 278,606  |   | 246,665  |  
|                                                                |          |   |          |  
|Change in plan assets                                           |          |   |          |  
|Fair
      value of plan assets at beginning of year            | 53,242   |   | 54,543   |  
|Actual
      return on plan assets                              | 13,547   |   | 6,303    |  
|Administrative
      expenses                                   | (583     | ) | (359     | )
|Employer
      contributions                                    | 44       |   | 66       |  
|Benefits
      paid                                             | (8,147   | ) | (7,312   | )
|                                                                |          |   |          |  
|Fair
      value of plan assets at end of year                  | 58,103   |   | 53,241   |  
|                                                                |          |   |          |  
|                                                                |          |   |          |  
|Funded status                                                   | (220,503 | ) | (193,424 | )
|Unrecognized
      net actuarial loss                           | 90,843   |   | 87,321   |  
|                                                                |          |   |          |  
|Accrued
      benefit cost                                      | (129,660 | ) | (106,103 | )
|Reversal
      of amount recorded under Brazilian corporate law | 211,483  |   | 191,050  |  
|                                                                |          |   |          |  
|Effect
      on shareholders equity                            | 81,823   |   | 84,947   |  
|                                                                |          |   |          |  

|                                                                |         |   |        |   |        |  
|--------------------------------------------------------------- | ------- | - | ------ | - | ------ | -
|                                                                |         |   |        |   |        |  
|                                                                | 2002    |   | 2001   |   | 2000   |  
|                                                                |         |   |        |   |        |  
|Components of net periodic
      benefit cost                   |         |   |        |   |        |  
|Service
      cost                                              | 139     |   | 214    |   | 315    |  
|Interest
      cost                                             | 27,433  |   | 25,075 |   | 21,692 |  
|Expected
      return on plan assets                            | (7,139  | ) | (7,348 | ) | (6,914 | )
|Recognized
      net actuarial loss                             | 3,168   |   | 3,195  |   | 2,745  |  
|Actual
      Companys contributions during the year            | (44     | ) | (64    | ) | (101   | )
|                                                                |         |   |        |   |        |  
|Net periodic
      benefit cost                                 | 23,557  |   | 21,072 |   | 17,737 |  
|                                                                |         |   |        |   |        |  
|Reversal
      of amount recorded under Brazilian corporate law | (20,433 | ) | -      |   | -      |  
|Effect
      on U.S. GAAP net income                            | 3,124   |   | 21,072 |   | 17,737 |  
|                                                                |         |   |        |   |        |  
|Weighted-average assumptions
      as of December 31            |         |   |        |   |        |  
|Discount
      rate                                             | 6.00    | % | 6.00   | % | 6.00   | %
|Expected
      return on plan assets                            | 6.00    | % | 9.00   | % | 9.00   | %

There was no unrecognized liability
  at transition.

Medical assistance cost trend
  rates of increase were projected at annual rates excluding inflation ranging
  from 5.35% in 2002 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, 2002 by R$38,777/R$32,087
  and the aggregate of service and interest cost components by R$4,407/R$3,645.

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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.

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 37% of our employees
  are affiliated with state and/or municipal labor unions (Sindicato
  dosTrabalhadores
  das Empresas de Telecomunicação,known as Sinttel), which is associated with theFederação
  Nacional dos Trabalhadores em Empresas de Telecomunicações e Operadores
  de Mesas Telefônicas,
  known as Fenattel, or with theFederação
  Interestadual dos Trabalhadores em Empresas de Telecomunicações,
  known as Fittel, with which labor agreements are negotiated. Approximately 0.5%
  and 24% of the employees of BrasilCenter and Star One, respectively, are associated
  with labor unions. Labor agreements are negotiated for BrasilCenter employees
  with labor unions in each of five different states where the company operates,
  and for Star One employees, with the labor union of the state where Star Ones
  headquarters are located. We have not experienced a work stoppage that has had
  a material effect on our operations for many years, which reflects our good
  relations with our employees and the labor unions representing them. Our collective
  agreements, as well as Star One and BrasilCenters, have a two-year term.
  Some economic issues pertaining to those collective agreements are subject to
  revision after twelve months. Currently, all collective agreements of BrasilCenter
  are effective, and those of Embratel and Star One are being negotiated under
  normal conditions.

There is no concentration of
  available sources of labor, services, concessions or rights, other than those
  mentioned above, that could, if suddenly eliminated, severely impact the Company
  operations.

d.  Recently
  issued accounting pronouncements

In June 2001, the Financial
  Accounting Standards Board (FASB) issued Statement of Financial
  Accounting Standards No. 142, Goodwill and Other Intangible Assets,
  or SFAS 142. SFAS 142 addresses financial accounting and reporting for acquired
  goodwill and other intangible assets and supersedes APB Opinion 17, Intangible
  Assets. SFAS 142 also amends SFAS No. 121, "Accounting for the Impairment
  of Long Lived Assets and for Long-Lived Assets to Be Disposed Of," to exclude
  from its scope goodwill and intangible assets that are not amortized. SFAS 142
  addresses how intangible assets that are acquired individually or with a group
  of other assets (but not those acquired in a business combination) should be
  accounted for in financial statements upon their acquisition. This Statement
  also addresses how goodwill and other intangible assets should be accounted
  for after they have been initially recognized in the financial statements. The
  provisions of SFAS 142 are required to be applied starting with fiscal years
  beginning after December 15, 2001. Early application is permitted for entities
  with fiscal years beginning after March 15, 2001, provided that the first interim
  financial statements have not been issued. An exception to SFAS 142 application
  date is for goodwill and intangible assets acquired after June 30, 2001, which
  will be immediately subject of the non-amortization and amortization provisions
  of this statement. The adoption of SFAS 142 on January 1, 2002, did not have
  any impact on the Companys financial position, cash flows or results of
  operations.

In June 2001, the FASB issued
  Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
  Obligations," or SFAS 143, which is effective for years beginning after June
  15, 2002,

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which will be the Company's
  fiscal year 2003. SFAS 143 addresses legal obligations associated with the retirement
  of tangible long-lived assets that result from the acquisition, construction,
  development or normal operation of a long-lived asset. The standard requires
  that the fair value of a liability for an asset retirement obligation be recognized
  in the period in which it is incurred if a reasonable estimate of fair value
  can be made. The fair value of the liability is added to the carrying amount
  of the related asset and depreciated over the life of the asset. The liability
  is accrued each period through charges to operating expense. If the obligation
  is settled for other than the carrying amount of the liability, the Company
  will recognize a gain or loss on settlement. The Company has not yet determined
  what the effect of SFAS 143 will be on the earnings and financial position of
  the Company.

In August 2001, the FASB issued
  Statement of Financial Accounting Standards No. 144, Accounting for the
  Impairment or Disposal of Long-Lived Assets, or SFAS 144. SFAS 144 addresses
  financial accounting and reporting for the impairment or disposal of long-lived
  assets. SFAS 144 supersedes SFAS No. 121, Accounting for the Impairment
  of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and
  the accounting and reporting provisions of Accounting Principles Board Opinion
  No. 30, Reporting the Results of Operations - Reporting the Effects of
  Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
  Occurring Events and Transactions. SFAS 144 also amends Accounting Research
  Bulletin No. 51, "Consolidated Financial Statements," to eliminate the exception
  to consolidation for a subsidiary for which control is likely to be temporary.
  SFAS 144 requires that one accounting model be used for long-lived assets to
  be disposed of by sale, whether previously held and used or newly acquired.
  SFAS 144 also broadens the presentation of discontinued operations to include
  more disposal transactions. The adoption of SFAS 144 on January 1, 2002, did
  not have any impact on the Companys financial position, cash flows or
  results of operations.

In April 2002, the FASB issued
  Statement of Accounting Standards No. 145, Rescission of SFAS Nos. 4,
  44 and 64, Amendment of SFAS 13, and Technical Corrections as of April 2002,
  or SFAS 145. SFAS 145 rescinds SFAS No. 4, Reporting Gains and Losses
  from Extinguishment of Debt, SFAS No. 44, Accounting for Intangible
  Assets of Motor Carriers, and SFAS No. 64, Extinguishments of Debt
  made to satisfy Sinking-Fund requirements. As a result, gains and losses
  from extinguishment of debt will no longer be classified as extraordinary items
  unless they meet the criteria of unusual or infrequent as described in Accounting
  Principles Boards Opinion 30, Reporting the Results of Operations 
  Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
  Unusual and Infrequently Occurring Events and Transactions. In addition,
  SFAS 145 amends SFAS No. 13, Accounting for Leases, to eliminate
  an inconsistency between the required accounting for sale-leaseback transactions
  and the required accounting for certain lease modifications that have economic
  effects that are similar to sale-leaseback transactions. SFAS 145 also amends
  other existing authoritative pronouncements to make various technical corrections,
  clarify meanings, or describe their applicability under changed conditions.
  SFAS 145 is effective for fiscal years beginning after 15 May 2002. The Company
  is currently evaluating the impact that the adoption of SFAS 145 will have on
  its results of operations and financial position. However, the Company does
  not believe that the adoption of SFAS 145 will have a material impact on its
  results of operations and financial position.

In June 2002, the FASB issued
  Statement of Accounting Standards No. 146, Accounting for Costs Associated
  with Exit or Disposal Activities, or SFAS 146. SFAS 146 addresses financial
  accounting and reporting for costs associated with exit or disposal activities
  and nullifies Emerging Issues Task Force Issue No. 94-3, Liability Recognition
  for Certain Employee Termination Benefits and Other Costs to Exit an Activity
  (including Certain Costs Incurred in a Restructuring) (EITF 94-3).
  SFAS 146 eliminates the definition and requirements for recognition of exit
  costs in EITF 94-3. SFAS 146 requires that a liability for a cost associated
  with an exit or disposal activity be recognized when the liability is incurred.
  Under EITF 94-3, a liability for an exit cost as defined in EITF 94-3 was recognized
  at the date of an entitys commitment to an exit plan. SFAS 146 also concluded
  that an entitys commitment to a plan, by itself, does not create a present
  obligation to others that meets the definition of a liability. SFAS 146 also
  establishes that fair value is the objective for initial measurement of the
  liability. The requirements of SFAS 146 apply prospectively to

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activities initiated after
  December 31, 2002, and as such, we cannot reasonably estimate the impact of
  the adoption of these new rules until and unless they affect relevant activities
  in future periods.

In December 2002, the FASB issued
  Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
  Compensation-Transition and Disclosure," or SFAS 148. SFAS 148 amends Statement
  of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation,"
  or SFAS 123, and provides alternative methods of transition for a voluntary
  change to the fair value based method of accounting for stock-based employee
  compensation. SFAS 148 also amends the disclosure requirements of SFAS 123 to
  require more prominent and frequent disclosures in financial statements about
  the effects of stock-based compensation. The transition guidance and annual
  disclosure provisions of SFAS 148 are effective for financial statements issued
  for fiscal years ending after December 15, 2002. Adoption of SFAS 148 is not
  expected to materially impact the Companys financial position, cash flows
  or results of operations.

In November 2002, the FASB issued
  Interpretation Number 45, "Guarantor's Accounting and Disclosure Requirements
  for Guarantees, Including Indirect Guarantees of Indebtedness of Others," or
  FIN 45. This interpretation requires certain disclosures to be made by a guarantor
  in its interim and annual financial statements about its obligations under certain
  guarantees that it has issued. It also requires a guarantor to recognize, at
  the inception of a guarantee, a liability for the fair value of the obligation
  undertaken in issuing the guarantee. The disclosure requirements of FIN 45 are
  effective for interim and annual periods after December 15, 2002 and we have
  adopted those requirements for our financial statements. The initial recognition
  and initial measurement requirements of FIN 45 are effective prospectively for
  guarantees issued or modified after December 31, 2002. We are assessing, but
  at this point do not believe the adoption of the recognition and initial measurement
  requirements of FIN 45 will have a material impact on the Companys financial
  position, cash flows or results of operations.

At the September and October
  2002 meetings of the Emerging Issues Task Force (EITF), the Task Force reached
  a tentative conclusion on Issue No. 00-21, Revenue Arrangements with Multiple
  Deliverables, which outlines an approach to be used to determine when
  a revenue arrangement for multiple deliverables should be divided into separate
  units of accounting and, if separation is appropriate, how the arrangement consideration
  should be allocated to the identified accounting units. Specifically, in an
  arrangement with multiple deliverables, the delivered item(s) should be considered
  a separate unit of accounting if (1) the delivered item(s) has value to the
  customer on a standalone basis, (2) there is objective and reliable evidence
  of the fair value of the undelivered item(s) and (3) if the arrangement includes
  a general right of return, delivery or performance of the undelivered item(s)
  is considered probable and substantially in the control of the vendor. The arrangement
  consideration allocable to a delivered item(s) that does not qualify as a separate
  unit of accounting within the arrangement should be combined with the amount
  allocable to the other applicable undelivered item(s) within the arrangement.
  The appropriate recognition of revenue should then be determined for those combined
  deliverables as a single unit of accounting. The guidance in EITF 00-21 is effective
  prospectively for revenue arrangements entered into in fiscal years beginning
  after December 15, 2002. Alternatively, entities may elect to report the change
  in accounting as a cumulative-effect adjustment in accordance with Accounting
  Principles Board Opinion 20, Accounting Changes. We are currently
  evaluating the impact of EITF 00-21 on our financial statements. We currently
  cannot reasonably estimate the impact of adopting the new rule.

In January 2003, the FASB issued
  FASB Interpretation No. 46, Consolidation of Variable Interest Entities
  - an interpretation of ARB No. 51, or FIN 46. FIN 46 clarifies the application
  of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
  to certain entities in which equity investors do not have the characteristics
  of a controlling financial interest or do not have sufficient equity at risk
  for the entity to finance its activities without additional subordinated financial
  support from other parties. FIN 46 explains how to identify variable interests
  entities and how an enterprise assesses its interests in a variable interest
  entity to decide whether to consolidate that entity. It requires existing unconsolidated
  variable interest entities to be consolidated by their primary beneficiaries
  if the entities do not effectively disperse risks

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among parties involved. It also
  requires certain disclosures by the primary beneficiary of a variable interest
  entity and by an enterprise that holds significant variable interests in a variable
  interest entity where the enterprise is not the primary beneficiary. FIN 46
  is effective immediately to variable interest entities created afterJanuary 31, 2003 and to
  variable interest entities in which an enterprise obtains an interest after
  that date, and effective for the first fiscal year or interim period beginning
  after June 15, 2003 to variable interest entities in which an enterprise holds
  a variable interest that it acquired before February 1, 2003. FIN 46 requires
  an entity to disclose certain information regarding a variable interest entity,
  if when the Interpretation becomes effective, it is reasonably possible that
  an enterprise will consolidate or have to disclose information about that variable
  interest entity, regardless of the date on which the variable entity interest
  was created.

In May 2003 the FASB issued
  SFAS No. 150, Accounting for Certain Financial Instruments with
  Characteristics of both Liabilities
  and Equity, or SFAS 150. SFAS 150 modifies the accounting for certain
  financial instruments that, under previous guidance, issuers could account for
  as equity. The Statement requires that those instruments be classified as liabilities
  in statements of financial position. SFAS 150 affects an issuers accounting
  for three types of freestanding financial instruments, namely:

| | mandatorily redeemable
      shares, which the issuing company is obligated to buy back in exchange for
      cash or other assets.                                                                                                       
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | instruments, other than
      outstanding shares, that do or may require the issuer to buy back some of
      its shares in exchange for cash or other assets. These instruments include
      put options and forward purchase contracts.
| | obligations that can be
      settled with shares, the monetary value of which is fixed, tied solely or
      predominantly to a variable such as a market index, or varies inversely
      with the value of the issuers' shares.        

SFAS 150 does not apply to features
  embedded in financial instruments that are not derivatives in their entirety.
  In addition to its requirements for the classification and measurement of financial
  instruments within its scope, SFAS 150 also requires disclosures about alternative
  ways of settling those instruments and the capital structure of entities, all
  of whose shares are mandatorily redeemable. SFAS 150 is effective for financial
  instruments entered into or modified after May 31, 2003, and otherwise is effective
  at the beginning of the first interim period beginning after June 15, 2003.
  It is to be implemented by reporting the cumulative effect of a change in an
  accounting principle for financial instruments created before the issuance date
  of the Statement and still existing at the beginning of the interim period of
  adoption. Restatement
  is not permitted. The Company is currently evaluating the impact of SFAS 150
  on its financial position, results of operations and cash flows.

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

During 2001, the Company adopted
  SFAS No. 131 with respect to the information it presents about its operating
  segments. 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 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

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Companys chief operating
  decision-maker evaluates performance of the segments based on revenues and operating
  income.

The Company began to evaluate
  separate financial information for the Space segment in connection with the
  incorporation of Star One on November 1, 2000 (see Note 1). Segment information
  is being presented only for year 2001 because Star One commenced operations
  on November 1, 2000. Prior to this date, the satellite business was an integrated
  unit of Embratel's overall business operations, thus management had not analyzed
  this business on a stand-alone basis. As a result, it is not feasible to obtain
  separate financial information for Star One for the periods prior to November
  1, 2000.

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

|                                         |           |                         | **2002** |                  |           | 
|---------------------------------------- | --------- | ----------------------- | -------- | ---------------- | --------- | 
|                                         |           |                         |          |                 
|**Telecommunications
      Segment**     |           | **Space
      Segment** |          | **Consolidated**
|                                         |           |                         |          |                  |           | 
|Property, plant and equipment,
      net | 7,356,693 |                         | 439,174  |                  | 7,795,867 | 
|                                         |           |                         |          |                  |           | 



|                                         |                                  |  | 2001                |  |              | 
|---------------------------------------- | -------------------------------- |  | ------------------- |  | ------------ | 
|                                         |                                  |  |                     |  |              | 
|                                         | Telecommunications
      Segment |  | Space
      Segment |  | Consolidated | 
|                                         |                                  |  |                     |  |              | 
|Property, plant and equipment,
      net | 7,380,647                        |  | 467,766             |  | 7,849,429    | 
|                                         |                                  |  |                     |  |              | 



|                          | 2002                             |  
|------------------------- | -------------------------------- | -
|                          |                                  |  
|Income
        Statements | Telecommunications
      Segment |  
|                          |                                  |  
|Net revenue               | 6,916,475                        |  
|Cost of services          | (4,667,560                       | )
|                          |                                  |  
|Gross profit              | 2,248,915                        |  
|Operational expenses      | (2,095,488                       | )
|                          |                                  |  
|Operating income          | 153,427                          |  
|                          |                                  |  



|                          | 2001                             |  
|------------------------- | -------------------------------- | -
|                          |                                  |  
|Income
        Statements | Telecommunications
      Segment |  
|                          |                                  |  
|Net revenue               | 7,274,693                        |  
|Cost of services          | (4,864,261                       | )
|                          |                                  |  
|Gross profit              | 2,410,432                        |  
|Operational expenses      | (2,538,858                       | )
|                          |                                  |  
|Operating income (loss)   | (128,426                         | )
|                          |                                  |  

Capital expenditures made by
  Embratel and Star One amounted to R$862,323 and R$172,377, respectively, for
  the year ended December 31, 2002 (R$1,446,259 and R$18,749, respectively, for
  2001).

| | f. | Statements of Cash Flows
| | -- | ------------------------

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The following statements of
  cash flows are prepared on a Brazilian corporate law basis in accordance with
  the presentation requirements of SFAS No. 95, Statement of Cash Flows:

|                                                                      | 2002       |   | 2001       |   | 2000       |  
|--------------------------------------------------------------------- | ---------- | - | ---------- | - | ---------- | -
|                                                                      |            |   |            |   |            |  
|Cash provided by operations
      -                                   |            |   |            |   |            |  
|Net income
      (loss)                                               | (626,342   | ) | (553,671   | ) | 577,090    |  
|Adjustment
      to reconcile net income to cash provided             |            |   |            |   |            |  
|by
      operating activities -                                       |            |   |            |   |            |  
|Depreciation                                                          | 1,075,128  |   | 998,368    |   | 856,804    |  
|Amortization                                                          | 40,596     |   | 40,596     |   | -          |  
|Exchange
      and monetary gains/losses                              | 1,250,991  |   | 353,744    |   | 109,790    |  
|Minority
      interest                                               | 8,611      |   | 5,526      |   | 10,540     |  
|Net
      loss on permanent assets disposal                           | 11,653     |   | 84,336     |   | 54,412     |  
|Gain
      on sale of interest in subsidiary (Note 9)                 | -          |   | -          |   | (132,225   | )
|Increase
      in allowance for doubtful accounts                     | 538,416    |   | 901,133    |   | 412,596    |  
|Increase
      (decrease) in provision for contingencies              | 19,805     |   | 6,238      |   | (6,635     | )
|Effect
      of capital increase completed by Star One                | (5,425     | ) | -          |   | -          |  
|Increase
      in trade accounts receivable                           | (200,134   | ) | (377,176   | ) | (1,425,495 | )
|Increase
      in deferred and recoverable taxes                      | (526,679   | ) | (421,983   | ) | (192,582   | )
|Decrease
      (increase) in other accounts receivables               | (59,070    | ) | (73,019    | ) | 4,200      |  
|Decrease
      (increase) in legal deposits                           | 71,779     |   | (55,565    | ) | (132,870   | )
|Increase
      (decrease) in payroll and related accruals             | 18,873     |   | (1,719     | ) | 34,149     |  
|Increase
      in accounts payable and accrued expenses               | 111,567    |   | 164,039    |   | 168,524    |  
|Increase
      (decrease) in other current liabilities                | 134,194    |   | (45,188    | ) | (7,981     | )
|Increase
      (decrease) in income tax and other taxes               | (371,929   | ) | (198,989   | ) | 641,826    |  
|Increase
      (decrease) in deferred income                          | (10,149    | ) | 21,411     |   | (94        | )
|Increase
      (decrease) in pension plan liability                   | (14,997    | ) | 104,616    |   | (46,062    | )
|Increase
      (decrease) in other non-current assets and liabilities | 26,480     |   | (53,609    | ) | 8,253      |  
|Effect
      of the merger of Star One                                | -          |   | 8,914      |   | -          |  
|Effect
      of the merger of Star One  minority interests           | -          |   | 27,221     |   | -          |  
|Prior
      year adjustments  Medical Assistance Plan                | -          |   | (191,050   | ) | -          |  
|                                                                      |            |   |            |   |            |  
|                                                                      | 1,493,368  |   | 744,173    |   | 934,240    |  
|                                                                      |            |   |            |   |            |  
|Cash flow from investing
      activities -                           |            |   |            |   |            |  
|Additions
      to investments                                        | (98        | ) | (17,270    | ) | (210,593   | )
|Additions
      to fixed assets                                       | (1,034,700 | ) | (1,465,008 | ) | (1,420,187 | )
|Proceeds
      from sale of interest in subsidiary (Note 9)           | -          |   | -          |   | 265,534    |  
|                                                                      |            |   |            |   |            |  
|                                                                      | (1,034,798 | ) | (1,482,278 | ) | (1,365,246 | )
|                                                                      |            |   |            |   |            |  
|Cash flow from financing
      activities -                           |            |   |            |   |            |  
|Loans
      repaid                                                    | (1,520,818 | ) | (568,619   | ) | (578,165   | )
|New loans
      obtained                                              | 1,297,620  |   | 1,712,118  |   | 1,228,265  |  
|                                                                      |            |   |            |   |            |  
|Repurchase
      of shares                                            | (534       | ) | (65        | ) | (5,047     | )
|Sales
      of shares                                                 | -          |   | 374        |   | 2,838      |  
|Dividends
      paid                                                  | -          |   | (176,164   | ) | (151,675   | )
|                                                                      |            |   |            |   |            |  
|                                                                      | (223,732   | ) | 967,644    |   | 496,216    |  
|                                                                      |            |   |            |   |            |  
|Increase in cash and cash
      equivalents                           | 234,838    |   | 229,539    |   | 65,210     |  
|Cash and cash equivalents
      at beginning of year                  | 652,153    |   | 422,614    |   | 357,404    |  
|                                                                      |            |   |            |   |            |  
|Cash and cash equivalents
      at end of year                        | 886,991    |   | 652,153    |   | 422,614    |  
|                                                                      |            |   |            |   |            |  

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|                                                | 2002    |  | 2001    |  | 2000    | 
|----------------------------------------------- | ------- |  | ------- |  | ------- | 
|                                                |         |  |         |  |         | 
|Supplemental disclosure
      of cash paid for- |         |  |         |  |         | 
|Income
      and social contribution tax paid   | 6,412   |  | 90,671  |  | 79,296  | 
|Interest
      paid                             | 236,191 |  | 229,646 |  | 107,485 | 
|                                                |         |  |         |  |         | 

g.  Intangible
  assets

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

|                         | 2002          |                 | 2001          |  
|------------------------ | ------------- | --------------- | ------------- | -
|                         |              
|                         |               | Rights
      of |               |  
|Software                 | way
      and | Software        | way
      and
|Licenses                 | other         | Licenses        | other        
|                         |               |                 |               |  
|Gross                    | 374,958       |                 | 348,455       |  
|Accumulated amortization | (130,470      | )               | (133,306      | )
|                         |               |                 |               |  
|Net                      | 244,488       |                 | 215,149       |  
|                         |               |                 |               |  
|Amortization expense     | 55,483        |                 | 8,853         |  
|                         |               |                 |               |  
|Amortization period      | 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  | 
|---- | ------- | 
|     |         | 
|2003 | 111,414 | 
|2004 | 104,761 | 
|2005 | 83,032  | 
|2006 | 71,277  | 
|2007 | 39,971  | 
|     |         | 

h.  Goodwill
  and Other Intangible Assets  Adoption of SFAS 142:

|                                                  | 2002     |   | 2001     |   | 2000    | 
|------------------------------------------------- | -------- | - | -------- | - | ------- | 
|                                                  |          |   |          |   |         | 
|Reported net income (loss)                        | (677,860 | ) | (464,250 | ) | 658,669 | 
|Add back: Goodwill amortization
      (net of     |          |   |          |   |         | 
|deferred
      tax and minority interest effects) | -        |   | 26,464   |   | -       | 
|                                                  |          |   |          |   |         | 
|Adjusted net income (loss)                        | (677,860 | ) | (437,786 | ) | 658,669 | 
|                                                  |          |   |          |   |         | 

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|U.S. GAAP basic and diluted
      adjusted net income (loss) per thousand shares - |       |   |       |   |      |  | 
|---------------------------------------------------------------------------------- | ----- | - | ----- | - | ---- |  | 
|                                                                                   |       |   |       |   |      |  | 
|Reported
        net income (loss)  Preferred and Common                          | (2.04 | ) | (1.39 | ) | 1.98 |  | 
|                                                                                   |       |   |       |   |      |  | 
|Goodwill
        amortization  Preferred and Common                               | -     |   | 0.08  |   | -    |  | 
|                                                                                   |       |   |       |   |      |  | 
|Adjusted
        net income (loss)  Preferred and Common                          | (2.04 | ) | (1.31 | ) | 1.98 |  | 
|                                                                                   |       |   |       |   |      |  | 

(*)     Since
  this asset was acquired in December 27, 2000 (see Note 16), there is no amortization
  effect in 2000 year.

i.  Renegotiation
  of debt

As described in Note 20.g.,
  in March and April 2003, the Company 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 Company has not yet determined the amount of gain or loss
  on extinguishment that will be recognized during the year ended December 31,
  2003 for U.S. GAAP purposes. Under Brazilian corporate law, the renegotiation
  of debt is accounted for on a prospective basis and consequently, no gain or
  loss on extinguishment is recorded.

31.  SUBSEQUENT EVENTS

a.  Lawsuit
  to seek to break long-term contract

On March 24, 2003, the major
  customer that we obtained through the acquisition of AcessoNet Ltda. filed a
  lawsuit in which it sought to break its long-term contract with us. During the
  second quarter of 2003, the customer began disconnecting various circuits that
  were provided by us. If we are unsuccessful in enforcing the contract, it is
  likely that we will be required to write off the remaining unamortized balance
  of the goodwill related to AcessoNet in 2003. Data revenues from this customer
  has been approximately R$12 million per quarter. Goodwill related to AcessoNet
  was recorded as R$104.9 million net of amortization on May 31, 2003.

b.  IBM
  outsourcing contract

On March 31, 2003, we entered
  into an outsourcing contract with IBM Brasil for a term of ten (10) years. The
  contract amount is R$828 million payable over thirteen (13) installment payments.
  Under the contract IBM Brasil will provide Help Desk, Field Service, network,
  Intranet and Extranet technical support, software inventory distribution, and
  other technical and IT support services.

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c.  Share
  Purchase Agreement

On June 6, 2003, we signed the
  share purchase agreement to sell 100% of our participation in Intelsat Ltd.
  shares, in the amount of R$118.1 million, to be received, resulting in a non-operating
  loss of R$18.5 million. As to that date, the outstanding balance of Intelsat
  was R$136.6 million. Intelsat Ltd. is a company which provides satellite services
  located in Washington, D.C.

d.  ADS
  ratio change

On June 16, 2003 we implemented
  a ratio change of our American Depositary Shares (ADSs) solely to comply with
  the minimum share price (US$1.00) requirement for maintaining its ADS listing
  on the New York Stock Exchange. The ratio change is in the proportion of 1 ADS
  equal to 5,000 preferred shares. There is no change in the underlying preferred
  shares.



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