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Telemar Norte Leste S.A. Interim Financial Statements for the Quarters Ended September 30, 2010 and 2009 and Independent Accountants Review Report

(Convenience Translation into English from the Original Previously Issued in Portuguese)

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(Convenience Translation into English from the Original Previously Issued in Portuguese)

INDEPENDENT ACCOUNTANTS’ REVIEW REPORT To the Shareholders and Board of Directors of Telemar Norte Leste S.A. Rio de Janeiro, RJ 1. We have reviewed the accounting information included in the accompanying interim financial

statements (company and consolidated) of Telemar Norte Leste S.A. and subsidiaries for the quarter ended September 30, 2010, consisting of the balance sheets and the related statements of income, cash flows and changes in shareholders’ equity and related notes, prepared under the responsibility of its Management.

2. Our review was conducted in accordance with specific standards established by the Brazilian

Institute of Independent Auditors (IBRACON), together with the Brazilian Federal Accounting Council (CFC), and consisted, principally, of: (a) inquiries of and discussions with certain officials of the Company and its subsidiaries who have responsibility for accounting, financial and operating matters about the main criteria adopted in the preparation of the interim financial statements; and (b) review of the information and subsequent events that had or might have material effects on the financial position and results of operations of the Company and its subsidiaries.

3. Based on our review, we are not aware of any material modifications that should be made to

the accounting information included in the interim financial statements referred to above for them to be in conformity with standards established by the Brazilian Securities and Exchange Commission (CVM), specifically applicable to the preparation of the interim financial statements.

4. As mentioned in note 2 to the financial statements, CVM approved in 2009 several

Pronouncements, Interpretations and Technical Instructions issued by the Accounting Pronouncements Committee (CPC), effective for 2010, which introduced changes to Brazilian accounting practices. As permitted by CVM Resolution 603/09, the Company’s management elected to present its interim financial statements (ITR) under the accounting practices adopted in Brazil until December 31, 2009, i.e., it has not applied the accounting standards effective beginning 2010. As required by this Resolution, the Company disclosed in note 2 to the financial statements this fact and a description of the main changes expected to impact its financial statements at yearend and an estimate of the possible effects on shareholders’ equity and net income.

5. The accompanying interim financial statements have been translated into English for the

convenience of readers outside Brazil

Rio de Janeiro, October 28, 2010 DELOITTE TOUCHE TOHMATSU Marco Antonio Brandão Simurro Auditores Independentes Engagement Partner

FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/2010

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01.01- IDENTIFICATION

1 - CVM CODE 2 - COMPANY NAME 3 - Taxpayer Identification Number (CNPJ)

01132-0 TELEMAR NORTE LESTE S/A 33.000.118/0001-79 4 - State Registration Number (NIRE)

33300152580

01.02 – HEAD OFFICE

1 - FULL ADDRESS 2 - DISTRICT

Rua General Polidoro, 99 Botafogo

3 - POSTAL CODE 4 - CITY 5 - STATE

22280-004 Rio de Janeiro RJ

6 – AREA CODE 7 - TELEPHONE 8 - TELEPHONE 9 - TELEPHONE 10 - TELEX

021 3131-1208

11 – AREA CODE 12 - FAX 13 - FAX 14 - FAX

021 3131-1155

15 - E-MAIL

[email protected]

01.03 - INVESTOR RELATIONS OFFICER (Company Mail Address)

1 – NAME 2 - FULL ADDRESS

Alex Waldemar Zornig Rua Humberto de Campos, 425 - 8º andar

3 - DISTRICT 4 - POSTAL CODE 3 - CITY 6 - STATE

Leblon 22430-190 Rio de Janeiro RJ

7 - AREA CODE 8 - TELEPHONE 9 - TELEPHONE 10 - TELEPHONE 11 - AREA CODE 12 - FAX

021 3131-1123 021 3131-1155

13 - E-MAIL

[email protected] 01.04 - GENERAL INFORMATION/INDEPENDENT AUDITOR

CURRENT YEAR CURRENT QUARTER PRIOR QUARTER

1 - BEGINNING 2 - END 3 - NUMBER 4 - BEGINNING 5 - END 6 - NUMBER 7 - BEGINNING 8 - END

01/01/2010 31/12/2010 3 01/07/2010 9/30/2010 2 01/04/2010 6/30/2010

9 - INDEPENDENT AUDITOR 10 - CVM CODE

Deloitte Touche Tohmatsu Auditores Independentes 00385-9

11- ENGAGEMENT PARTNER 12- TAXPAYER IDENTIFICATION NUMBER OF ENGAGEMENT PARTNER

Marco Antonio Brandão Simurro 755,400.708-44

01.05 - CAPITAL BREAKDOWN

Number of shares (thousands) 1- Current quarter

9/30/2010 2 - Prior quarter

6/30/2010 3 - Same quarter, prior year

9/30/2009

Paid-in capital

1 - Common 107,063 107,063 107,063

2 - Preferred 131,768 131,551 131,551

3 - Total 238,831 238,614 238,614

Treasury shares

4 – Common

5 – Preferred 223 223 223

6 – Total 223 223 223


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01.06 - COMPANY CHARACTERISTICS

1 - TYPE OF COMPANY 2 - SITUATION 3 - NATURE OF SHARE CONTROL

4 - ACTIVITY CODE

Commercial, industrial and other Operating Local Private 1130 - Telecommunications

5 - MAIN ACTIVITY 6 - TYPE OF CONSOLIDATION 7 - TYPE OF AUDITORS’ REPORT Exploitation of telecommunications services

Total Unqualified

01.07 - COMPANIES NOT INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS 1 - ITEM 2 - Taxpayer Identification Number (CNPJ) 3 - COMPANY NAME

01.08 - PROCEEDS IN CASH APPROVED AND/OR PAID DURING AND AFTER THE QUARTER 1 – ITEM 2 - EVENT 3 - APPROVAL 4 - TYPE 5 - PAYMENT 6 - TYPE OF

SHARE 7 - AMOUNT PER SHARE

01.09 - SUBSCRIBED CAPITAL AND CHANGES IN CURRENT YEAR

1 - ITEM 2 - CHANGE DATE

3 - CAPITAL AMOUNT (thousands of reais)

4 - CHANGE AMOUNT (thousands of reais)

5 - CHANGE ORIGIN

7 - NUMBER OF SHARES ISSUED(thousands)

8 - SHARE PRICE ON ISSUE DATE(Reais)

01.10 - INVESTOR RELATIONS OFFICER

1 - DATE 2 - SIGNATURE


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1 - CVM CODE

01132-0

2 - COMPANY NAME

TELEMAR NORTE LESTE S/A 3 - Taxpayer Identification Number (CNPJ)

33.000.118/0001-79

02.01 - BALANCE SHEETS - ASSETS (In thousands of Brazilian reais - R$)

1 - CODE 2 - LINE ITEM 3 – 9/30/2010 4 - 6/30/2010

1 TOTAL ASSETS 43,370,909 43,863,804

1.01 CURRENT ASSETS 9,058,569 10,002,598

1.01.01 AVAILABLE FUNDS 3,236,071 3,584,874

1.01.01.01 CASH AND CASH EQUIVALENTS 3,236,071 3,584,874

1.01.02 RECEIVABLES 2,974,290 3,141,143

1.01.02.01 TRADE RECEIVABLES 2,974,290 3,141,143

1.01.03 INVENTORIES 21,845 23,509

1.01.04 OTHER 2,826,363 3,253,072

1.01.04.01 DEFERRED AND RECOVERABLE TAXES 552,433 580,658

1.01.04.02 FINANCIAL INVESTMENTS 1,399,473 1,839,293

1.01.04.03 DUE FROM RELATED PARTIES 1,204 2,704

1.01.04.04 ADVANCES TO EMPLOYEES 20,351 21,996

1.01.04.05 ADVANCES TO SUPPLIERS 174,588 160,892

1.01.04.06 PREPAID EXPENSES 156,463 177,192

1.01.04.07 DEPOSITS AND COURT BLOCKED AMOUNTS 490,393 442,203

1.01.04.08 OTHER ASSETS 31,458 28,134

1.02 NONCURRENT ASSETS 34,312,340 33,861,206

1.02.01 LONG-TERM RECEIVABLES 2,626,617 2,684,654

1.02.01.01 SUNDRY RECEIVABLES 1,498,484 1,513,137

1.02.01.01.01 DEFERRED AND RECOVERABLE TAXES 1,498,484 1,513,137

1.02.01.02 DUE FROM RELATED PARTIES 43,246 41,685

1.02.01.02.01 ADVANCES FOR FUTURE CAPITAL INCREASE 40,000 40,000

1.02.01.02.02 OTHER DUE FROM RELATED PARTIES 3,246 1,685

1.02.01.03 OTHER 1,084,887 1,129,832

1.02.01.03.01 DEPOSITS AND COURT BLOCKED AMOUNTS 863,244 905,976

1.02.01.03.02 TAX INCENTIVES 54,459 54,459

1.02.01.03.03 PREPAID EXPENSES 148,457 154,715

1.02.01.03.04 FINANCIAL INVESTMENTS 5,327 5,172

1.02.01.03.05 OTHER ASSETS 13,400 9,510

1.02.02 INVESTMENTS 23,221,910 22,637,070

1.02.02.01 IN SUBSIDIARIES 23,069,671 22,471,573

1.02.02.02 IN SUBSIDIARIES - GOODWILL/NEGATIVE GOODWILL 110,635 123,893

1.02.02.03 OTHER INVESTMENTS 41,604 41,604

1.02.03 PROPERTY, PLANT AND EQUIPMENT 7,999,403 8,086,050

1.02.04 INTANGIBLE ASSETS 464,410 453,432

1.02.05 DEFERRED CHARGES 0 0


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1 – CVM CODE

01132-0

2 – COMPANY NAME

TELEMAR NORTE LESTE S/A 3 – Taxpayer Identification Number (CNPJ)

33.000.118/0001-79

02.02 - BALANCE SHEETS – LIABILITIES (In thousands of Brazilian reais - R$)

1 – CODE 2 – LINE ITEM 3 – 9/30/2010 4- 6/30/2010

2 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 43,370,909 43,863,804

2.01 CURRENT LIABILITIES 8,309,061 11,873,357

2.01.01 BORROWINGS AND FINANCING 5,565,426 9,133,134

2.01.02 TRADE PAYABLES 1,236,196 1,308,171

2.01.03 TAXES AND FEES 520,784 508,007

2.01.03.01 PAYABLE AND DEFERRED TAXES 385,285 372,471

2.01.03.02 TAX INSTALLMENT PLAN 135,499 135,536

2.01.04 DIVIDENDS AND INTEREST ON CAPITAL 116,032 116,225

2.01.04.01 THIRD PARTIES 116,032 116,225

2.01.05 RESERVE FOR CONTINGENT LIABILITIES 394,273 447,986

2.01.06 OTHER 476,350 359,834

2.01.06.01 PAYROLL, RELATED TAXES AND BENEFITS 263,327 190,400

2.01.06.02 CONSIGNMENT TO THIRD PARTIES 18,470 16,612

2.01.06.03 PERMITS AND CONCESSIONS PAYABLE 73,425 50,289

2.01.06.04 OTHER OBLIGATIONS 121,128 102,533

2.02 NONCURRENT LIABILITIES 23,942,594 21,421,400

2.02.01 LONG-TERM LIABILITIES 23,942,594 21,421,400

2.02.01.01 BORROWINGS AND FINANCING 18,034,987 15,701,792

2.02.01.02 DUE TO RELATED PARTIES 3,749,815 3,617,623

2.02.01.02.01 DEBENTURES TO RELATED PARTIES 3,749,815 3,617,623

2.02.01.02.02 OTHER DUE FROM RELATED PARTIES 0 0

2.02.01.03 RESERVE FOR CONTINGENT LIABILITIES 1,382,122 1,354,591

2.02.01.04 OTHER 775,670 747,394

2.02.01.04.01 PAYABLE AND DEFERRED TAXES 385,283 351,402

2.02.01.04.02 TAX INSTALLMENT PLAN 354,080 360,424

2.02.01.04.03 OTHER OBLIGATIONS 36,307 35,568

2.03 SHAREHOLDERS’ EQUITY 11,119,254 10,569,047

2.03.01 CAPITAL 7,434,429 7,434,429

2.03.02 CAPITAL RESERVES 2,018,361 2,017,048

2.03.03 EARNINGS RESERVES 0 0

2.03.04 TREASURY SHARES (17,366) (17,366)

2.03.05 RETAINED EARNINGS/(ACCUMULATED LOSSES) 1,683,830 1,134,936


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1 - CVM CODE

01132-0

2 - COMPANY NAME


33.000.118/0001-79

03.01 - STATEMENTS OF OPERATIONS (In thousands of Brazilian reais - R$)

1 – CODE 2 – LINE ITEM 3 - 4 - 5 - 6 - From 7/1/2010

to 9/30/2010 From 1/1/2010 to 9/30/2010

From 7/1/2009 to 9/30/2009

From 1/1/2009 to 9/30/2009

3.01 GROSS REVENUE FROM SALES AND/OR SERVICES 4,716,489 14,413,344 5,091,132 15,159,452

3.02 DEDUCTIONS FROM GROSS REVENUE (1,391,147) (4,313,646) (1,540,391) (4,596,094)

3.03 NET REVENUE FROM SALES AND/OR SERVICES 3,325,342 10,099,698 3,550,741 10,563,358

3.04 COST OF SALES AND SERVICES (1,939,134) (5,842,013) (2,269,515) (6,601,476)

3.05 GROSS PROFIT 1,386,208 4,257,685 1,281,226 3,961,882

3.06 OPERATING (EXPENSES)/INCOME (846,903) (2,631,343) (1,288,592) (4,148,241)

3.06.01 SELLING EXPENSES (463,724) (1,375,038) (472,338) (1,463,152)

3.06.02 GENERAL AND ADMINISTRATIVE EXPENSES (267,773) (735,141) (310,824) (931,356)

3.06.03 FINANCIAL EXPENSES, NET (601,128) (1,715,141) (550,761) (1,666,995)

3.06.03.01 FINANCIAL INCOME 194,684 626,016 176,386 594,904

3.06.03.02 FINANCIAL EXPENSES (795,812) (2,341,157) (727,147) (2,261,899)

3.06.04 OTHER OPERATING INCOME 139,627 422,083 148,775 425,956

3.06.05 OTHER OPERATING EXPENSES (250,243) (672,588) (359,641) (774,618)

3.06.06 EQUITY IN SUBSIDIARIES 596,338 1,444,482 256,197 261,924

3.07 INCOME (LOSS) FROM OPERATIONS 539,305 1,626,342 (7,366) (186,359)

3.08 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION (2,048) (224) 24,587 6,836

3.09 DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION 11,408 54,049 48,530 70,015

3.10 NON-CONTROLLING INTERESTS 0 0 0 0

3.11 NET INCOME/(LOSS) 548,665 1,680,167 65,751 (109,508)

NUMBER OF SHARES, EX-TREASURY (THOUSAND) 238,608 238,608 238,391 238,391

EARNINGS/(LOSS) PER SHARE (R$) 2.29944 7.04154 0.27581 (0.45936)


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1 - CVM CODE

01132-0

2 - COMPANY NAME


33.000.118/0001-79

05.01 - STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (COMPANY) FOR THE PERIOD 07/01/2010 to 09/30/10

(In thousands of Brazilian reais - R$)

Capital Capital reserves

Revaluation reserves

Earnings reserves

Retained earnings

Equity adjustments

Total shareholders'

Equity

5.01 Open balance 7,434,429 2,017,048 - (17,366) 1,134,936 - 10,569,047

5.02 Prior year adjustments - - - - - - -

5.03 Adjusted balance 7,434,429 2,017,048 - (17,366) 1,134,936 - 10,569,047

5.04 Net income for the period - - - - 548,665 - 548,665

5.05 Destinations - - - - - - -

5.05.01 Dividends - - - - - - -

5.05.02 Interest on capital - - - - - - -

5.05.03 Other destinations - - - - - - -

5.06 Realization of profit reserves - - - - - - -

5.07 Equity adjustments - - - - - - -

5.07.01 Adjustments of securities - - - - - - -

5.07.02 Cumulative translation adjustments - - - - - - -

5.07.03 Business combination adjustments - - - - - - -

5.08 Increase / decrease in capital - - - - - - -

5.09 Constitution / realization of capital reserves - 1,313 - - 229 - 1,542

5.1 Tresury shares - - - - - - -

5.11 Other capital transaction - - - - - - -

5.12 Other - - - - - - -

5.13 Ending balance 7,434,429 2,018,361 - (17,366) 1,683,830 - 11,119,254


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05.02 - STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (COMPANY) FOR THE PERIOD 01/01/2010 to 09/30/10

(In thousands of Brazilian reais - R$)

Capital Capital reserves

Revaluation reserves

Earnings reserves

Retained earnings

Equity adjustments

Total shareholders' Equity

5.01 Open balance 7,434,429 2,011,550 - (17,366) - - 9,428,613

5.02 Prior year adjustments - - - - - - -

5.03 Adjusted balance 7,434,429 2,011,550 - (17,366) - - 9,428,613

5.04 Net income for the period - - - - 1,680,167 - 1,680,167

5.05 Destinations - - - - - - -

5.05.01 Dividends - - - - - - -

5.05.02 Interest on capital - - - - - - -

5.05.03 Other destinations - - - - - - -

5.06 Realization of profit reserves - - - - - - -

5.07 Equity adjustments - - - - - - -

5.07.01 Adjustments of securities - - - - - - -

5.07.02 Cumulative translation adjustments - - - - - - -

5.07.03 Business combination adjustments - - - - - - -

5.08 Increase / decrease in capital - - - - - - -

5.09 Constitution / realization of capital reserves - 6,811 - - 719 - 7,530

5.1 Tresury shares - - - - - - -

5.11 Other capital transaction - - - - - - -

5.12 Other - - - - 2,944 - 2,944

5.12.01 Expired dividends - - - - 2,944 - 2,944

5.13 Ending balance 7,434,429 2,018,361 - (17,366) 1,683,830 - 11,119,254

FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporti ng date - 9/30/2010

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1 - CVM CODE

01132-0

2 - COMPANY NAME


33.000.118/0001-79

05.01 - STATEMENTS OF CASH FLOWS (In thousands of Brazilian reais - R$)


to 9/30/2010 From 1/1/2010 to 9/30/2010

From 7/1/2009 to 9/30/2009

From 1/1/2009 to 9/30/2009

4.01 NET CASH PROVIDED BY OPERATING ACTIVITIES 655,222 1,798,868 (1,276,733) 316,129

4.01.01 CASH PROVIDED BY OPERATING ACTIVITIES 1,039,218 3,822,516 1,251,519 3,976,152

4.01.01.01 PROFIT (LOSS) BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 539,305 1,626,342 (7,366) (186,359)

4.01.01.02 FINANCIAL CHARGES AND INCOME 471,705 1,905,298 540,350 1,721,195

4.01.01.03 DEPRECIATION AND AMORTIZATION 324,522 957,355 497,785 1,500,646

4.01.01.04 LOSSES ON TRADE RECEIVABLES 108,247 309,196 105,721 401,438

4.01.01.05 RESERVE FOR CONTINGENT LIABILITIES 60,809 167,745 105,705 366,294

4.01.01.08 EQUITY IN SUBSIDIARIES (596,338) (1,444,482) (256,197) (261,924)

4.01.01.09 LOSS ON THE RECOGNITION OF PERMANENT ASSETS 1,946 5,465 2,132 11,250

4.01.01.10 ALLOWANCE FOR LOSSES ON INVESTMENTS AND OTHER PROVISIONS/(REVERSAL) - - 148,232 148,232

4.01.01.12 INTEREST AND INFLATION ADJUSTMENT ON INTERCOMPANY LOANS (1,578) (5,423) (10,454) (20,255)

4.01.01.13 INFLATION ADJUSTMENT OF RESERVE FOR CONTINGENT LIABILITIES 44,445 111,377 81,130 226,977

4.01.01.14 INFLATION ADJUSTMENT OF DIVIDENDS AND INTEREST ON CAPITAL

(1) (1) 6,103 9,849

4.01.01.15 INFLATION ADJUSTMENT OF TAXES IN INSTALLMENTS 5,200 20,800 4,642 2,142

4.01.01.16 ACCRUED CONCESSION FEE 23,136 73,425 - -

4.01.01.17 EMPLOYEE AND MANAGEMENT PROFIT SHARING 63,593 129,773 30,015 40,937

4.01.01.18 OTHER (5,773) (34,354) 3,721 15,730

4.01.02 CHANGES IN ASSETS AND LIABILITIES 307,572 252,601 138,207 (569,252)

4.01.02.01 ACCOUNTS RECEIVABLE 57,960 (53,477) (164,316) (567,961)

4.01.02.02 PREPAID EXPENSES 26,987 (3,250) 44,271 (36,694)

4.01.02.03 INVENTORIES 1,664 6,813 573 (1,893)

4.01.02.04 TAXES 175,319 401,549 211,063 369,285

4.01.02.05 TRADE PAYABLES 79,826 344,908 161,663 147,494

4.01.02.07 PAYROLL, RELATED TAXES AND BENEFITS 9,334 (35,466) 8,455 (70,033)

4.01.02.08 PERMITS AND CONCESSIONS PAYABLE - - - (116,603)

4.01.02.09 TAX INSTALLMENT PLAN (11,581) (72,533) (30,042) (90,830)

4.01.02.10 RESERVE FOR CONTINGENT LIABILITIES (38,883) (265,464) (30,341) (174,688)

4.01.02.11 OTHER ASSETS AND LIABILITIES 6,946 (70,479) (63,119) (27,329)

4.01.03 OTHER (691,568) (2,276,249) (2,666,459) (3,090,771)

4.01.03.01 FINANCIAL CHARGES PAID (662,251) (2,191,181) (2,652,559) (2,977,040)

4.01.03.02 INCOME TAX AND SOCIAL CONTRIBUTION PAID - COMPANY - (8,247) - (28,524)

4.01.03.03 INCOME TAX AND SOCIAL CONTRIBUTION PAID – THIRD PARTIES (27,494) (84,196) (28,138) (99,445)

4.01.03.04 DIVIDENDS AND INTEREST ON CAPITAL RECEIVED (1,823) 7,375 14,238 14,238

4.02 NET CASH USED IN INVESTING ACTIVITIES 96,453 (1,447,688) (619,925) (11,774,006)

4.02.01 FINANCIAL INVESTMENTS 508,851 (178,740) 103,816 (634,964)

4.02.02 DUE FROM RELATED PARTIES (1,681) 41,510 (12,900) (136,704)

4.02.03 PURCHASE OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS (323,757) (1,151,766) (533,036) (1,586,277)

4.02.05 INCREASE (DECREASE) IN PERMANENT INVESTMENTS 7,261 4,160 7,193 (9,077,662)

FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporti ng date - 9/30/2010

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4.02.06 DEPOSITS AND COURT BLOCKED AMOUNTS (94,221) (162,852) (184,998) (338,399)

4.03 NET CASH PROVIDED BY FINANCING ACTIVITIES (1,100,478) 295,045 1,266,344 6,860,400

4.03.01 BORROWINGS 3,891,464 7,418,246 163,934 7,581,577

4.03.02 REPAYMENT OF PRINCIPAL OF BORROWINGS, FINANCING AND DEBENTURES (4,991,750) (7,122,276) 1,102,698 (719,561)

4.03.04 DIVIDENDS AND INTEREST ON CAPITAL PAID IN THE PERIOD (192) (925) (288) (1,616)

4.04 FOREIGN EXCHANGE ON CASH AND EQUIVALENTS - - - -

4.05 CASH FLOWS FOR THE PERIOD (348,803) 646,225 (630,314) (4,597,477)

4.05.01 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 3,584,874 2,589,846 3,852,328 7,819,491

4.05.02 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 3,236,071 3,236,071 3,222,014 3,222,014

(Convenience Translation into English from the Original Previously Issued in Portuguese) FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Repor ting Date - 9/30/2010

01132-0 – TELEMAR NORTE LESTE S/A 33.000.118/0001-79

06.01 - NOTES TO THE INTERIM FINANCIAL STATEMENTS

(Amounts in thousands of Brazilian reais - R$, unless otherwise stated)

1 OPERATIONS

Telemar Norte Leste S.A. (the “Company” or “TMAR”) is a subsidiary of Tele Norte Leste Participações S.A. (“TNL”), which at September 30, 2010 holds 81.85% of TMAR’s total capital and 97.35% of its voting capital. TMAR is the leading provider of fixed-line telephone services in its operation area: Region I, comprising the states of Rio de Janeiro, Minas Gerais, Espírito Santo, Bahia, Sergipe, Alagoas, Pernambuco, Paraíba, Rio Grande do Norte, Ceará, Piauí, Maranhão, Pará, Amazonas, Roraima, and Amapá (except for this region’s Sector 3, including 57 municipalities of the Triângulo Mineiro, Minas Gerais, and Alto Paranaíba, also in Minas Gerais, where CTBC - Companhia de Telecomunicações do Brasil Central operates). These services are provided under concessions granted by Agência Nacional de Telecomunicações - ANATEL (National Telecommunications Agency), the regulator of the Brazilian telecommunications industry.TMAR also holds an ANATEL concession to provide domestic long-distance telecom services in the same region. Up to July 20, 2002 this service was provided solely to complete calls originated and terminated within its area of operation. Beginning that date, TMAR also provides the service for calls originated within Region I (except Sector 3) and terminated within other regions in Brazil, in view of the early compliance with the obligations set out in the General Universal Service Targets Plan (“PGMU”) on December 31, 2003. On December 22, 2005, TMAR entered into new concession agreements, effective from January 1, 2006 to December 31, 2025, under which the Concessionaire shall pay every two-year period to the National Telecommunications Agency (“ANATEL”) an amount equivalent to 2% of prior year’s net revenue from telecommunications services. Concurrently, the new PGMU and the General Quality Targets Plan (“PGMQ”) set new universal service targets. On July 9, 2007, the Federal Official Gazette (“DOU”) published amendments to the concession agreements that provide for the transfer from TNL PCS S.A. to TMAR of the permits to operate two types of Switched Fixed Telephone Services (“STFC”) nationwide as: (i) local long-distance carrier (“LDN”): in Region II, Region III and Sector 3 of Region I; and (ii) international long-distance carrier (“LDN”). The prevailing concession agreements, for local and long-distance services, are effective beginning January 1, 2006 through until December 31, 2025. (a) Main direct subsidiaries Coari Participações S.A. (“Coari”) Coari, a wholly-owned subsidiary of TMAR, acquired in December 2003, is engaged in holding equity interests in other business and professional entities, in Brazil or abroad, either as partner or shareholders. This company startup was on April 25, 2008, when it acquired the 100% of the

FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Repor ting Date - 9/30/2010



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shares in Copart 1 Participações S.A. ("Copart 1") and Copart 2 Participações S.A. ("Copart 2") for the purpose of acquiring the shares in Invitel, Brasil Telecom Participações S.A. ("BrT Part") and Brasil Telecom S.A. (See Note 1 (e) for further disclosures.) Subsequently, on May 30, 2008, Coari acquired Copart 3 Participações S.A. (“Copart 3”). Tele Norte Celular Participações S.A. (“TNCP”) TNCP is a publicly-held corporation, listed on the São Paulo Stock Exchange (BOVESPA), acquired by TMAR on April 3, 2008, which holds 99.7% of its total capital, and is engaged in holding interests in other business and professional entities, in Brazil or abroad, either as partner or shareholder. Copart 4 Participações S.A. (“Copart 4”) A wholly-owned subsidiary established on June 18, 2010, for a finite period of 12 years, which is engaged in the provision of real estate management and lease services, and the assignment of any type of rights, including on properties, which it can rent or cede related rights to use, in whole or in part, i.e., take all necessary actions to ensure the best use of said properties, including their maintenance, repair and improvement. Copart 4 startup was on August 6, 2010, as disclosed in Note 19 (e). (b) Main indirect subsidiaries TNL PCS S.A. (“Oi”) Oi is a subsidiary of TNCP, which holds 100% of its total and voting capital at September 30, 2010. (See Note 1 (d) - Corporate restructuring) Oi was created to take part in ANATEL’s bidding 001/2000, where it was granted at permit to provide Personal Mobile Services (“SMP”) in Region I of the General Concession Plan (“PGO”). On March 12, 2001, Oi received from ANATEL a permit, for an indefinite period, to provide SMP services, linked to the right to use radiofrequencies during a 15 year-period, renewed for another 15 years, under which Oi shall pay every two-year period to the ANATEL an amount equivalent to 2% of prior year’s SMP net revenue, provided all permit terms and conditions are fulfilled. The permit to operate SMP, using the related radiofrequencies, became effective, for regulatory purposes, on June 26, 2002, when Oi began its commercial operations. Beginning November 30, 2005, with the merger of Pegasus Telecom S.A., Oi started to provide multimedia communication services (“SCM”) in Regions I, II and III of the PGO.

ANATEL Act 68982 of December 5, 2007, published in the DOU on December 6, 2007, which, in light of the partial confirmation of the result of the of ANATEL bidding process 001/2007001/2007/SPV, grants Oi a permit to provide SMP and use radiofrequencies in the state of São Paulo and increase the radiofrequency band in the states of Region I of the PGA: Amazonas, Amapá, Pará, Maranhão, Roraima, Bahia, Espírito Santo, Sergipe, Alagoas, Paraíba, Piauí, Rio de Janeiro, Minas Gerais, Pernambuco, Ceará, and Rio Grande do Norte, for the remaining period of the radiofrequency use permit, linked to the permit for provision of SMP, Permit PVCP/SPV 001/2001-ANATEL, renewable for 15 years for a consideration.




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On December 31, 2007, the DOU published the Permit and Grant Notice, of December 27, 2007, which authorizes Oi to use third generation (3G) band radiofrequencies to operate SMP services in the areas of Regions I and II of the PGA, as winner of Bid 002/2007/SVP-ANATEL. As published in the DOU of April 30, 2008, on April 29, 2008, the regulator signed the permits granting Oi the right to use 3G radiofrequencies to provide SMP services in Regions I and III of the PGA (except for the municipalities Altinópólis, Aramina, Batatais, Brodósqui, Buritizal, Cajuru, Cássia dos Coqueiros, Colômbia, Franca, Guairá, Guará, Ipuã, Ituverava, Jardinópolis, Miguelópolis, Morro Agudo, Nuporanga, Orlândia, Ribeirão Corrente, Sales de Oliveira, Santa Cruz da Esperança, Santo Antônio da Alegria, and São Joaquim da Barra) during a 15-year period, from the date of publication, renewable for another 15 years, for a consideration. On January 3, 2007, the DOU published the Permit and Grant Notice, of December 28, 2007, which authorizes Oi to use second generation (2G) band radiofrequencies to operate SMP services in the São Paulo State inland, as winner of Bid 001/2007/SPV–ANATEL. On September 8, 2008, the regulator signed new grant arrangements granting Oi the right to use radiofrequency blocks in the 2G (GSM) bands, to provide SMP services in the São Paulo State inland, service areas II and III, during a 15 year-period, renewable for another 15 years, for a consideration.

On October 16, 2008, the DOU published an ANATEL Act authorizing the operation of nationwide DHT (Direct-to-home) television and audio distribution services, via satellite subscription, at all country, during a 15 year-period, renewable for another 15 years, from the date of publication. Paggo Empreendimentos S.A. (“Paggo”) Paggo, a wholly-owned subsidiary of Oi, acquired on December 17, 2007, is the controlling shareholder of two companies: Paggo Acquirer Gestão de Meios de Pagamentos Ltda. (“Paggo Acquirer”) and Paggo Administradora de Crédito Ltda. (“Paggo Administradora”).

• Paggo Acquirer is engaged in: (i) the accreditation and management of payments of sales outlet and service provider chains part of credit systems, using such credit systems or any other means of payment available; (ii) the capture, transmission, processing, guarantee, and settlement of transactions conducted by the accredited merchants; and (iii) supplying the necessary technology and equipment for the proper operation of the credit systems; and

• Paggo Administradora is engaged in: (i) the analysis of master file data, accreditation

and approval of customers clients that opted to joint credit systems; (ii) coordinating the relationships between all the parties of the credit systems, accredited networks, outlets, service providers, financial institutions, and other participants; (iii) control and updating master file data and providing information on the transactions conducted using the credit systems; and (iv) providing management services for credit or other payment systems, including the capture, transmission, processing, guarantee, and settlement of transactions.




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According to a material fact disclosed to the market on September 29, 2010, Oi entered into a Business Partnership Agreement with Banco do Brasil S.A. and an Investment Agreement with Cielo S.A. Please refer to Note 29(b) for further disclosures on these transactions. (c) Main direct and indirect subsidiaries of Coari Brasil Telecom S.A. (“BrT”) BrT was a subsidiary of BrT Part until the date the latter was liquidated through its downstream merger in September 30, 2009. (See Note 1 (f) for further disclosures.) At September 30, 2010, BrT is a subsidiary of Coari, which holds 79.63% of its voting capital and 48.20% of total capital. BrT is a concessionaire engaged in the provision of STFC services in Region II of the PGO, covering the Brazilian States of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Tocantins, Goiás, Paraná, Santa Catarina and Rio Grande do Sul, and the Federal District. BrT provides STFC services in this area since July 1998, operating as a local and intraregional long-distance carrier. Beginning January 2004, BrT also provides domestic and international long-distance telecom services in all Regions. Local services started to be provided outside Region II in January 2005. The prevailing concession agreements, for local and long-distance services, came into effect on January 1, 2006 and are effective until December 31, 2025. 14 Brasil Telecom Celular S.A. (“BrT Celular”) A wholly-owned subsidiary of BrT, operates since the since the fourth quarter of 2004 in the provision of SMP services, under a permit to operate in Region II of the PGO. BrT Serviços de Internet S.A. (“BrTI”) A wholly-owned subsidiary of BrT that holds the control of the following companies:

• iG companies

The iG companies comprise iG Participações S.A. (“iG Part”) and Internet Group do Brasil S.A. (“iG Brasil”). iG Brasil operates as a dialup and broadband internet service provider. It also provides value added services targeted to the home and corporate markets, including the Internet connection accelerator. In addition, iG also sells advertising space on its portal. Brasil Telecom Cabos Submarinos Ltda. (“BrT CS”) A wholly-owned subsidiary of BrT, BrT CS operates, together with own subsidiaries, through a system of submarine optical fiber cables, with connection points in the United States, Bermuda, Venezuela and Brazil, allowing data traffic through integrated service packages, offered to local and international corporate customers.




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BrT CS holds the total capital stock of Brasil Telecom Subsea Cable Systems (Bermuda) Ltd. (“BrT SCS Bermuda”), which, in turn, holds the total shares in Brasil Telecom of America Inc. (“BrT of America”) and Brasil Telecom de Venezuela, S.A. (“BrT Venezuela”). The registration of Brasil Telecom de Colombia, Empresa Unipersonal (“BrT Colombia”), which is a wholly-owned subsidiary of BrT SCS Bermuda, was obtained on December 23, 2008. On June 30, 2010, BrT Colombia obtained a regulatory permit to start providing telecommunications services. At the end of the reporting period, BrT Colombia was dormant. Brasil Telecom Comunicação Multimídia Ltda. (“BrT M ultimídia”)

BrT Multimídia is a service provider of a private telecommunications network through local optical fiber digital networks in São Paulo, Rio de Janeiro and Belo Horizonte, and a long distance network connecting these major metropolitan business centers. It operates nationwide through commercial agreements with other telecom companies to offer services to other regions in Brazil. It also has web solution centers in São Paulo, Brasília, Curitiba, Porto Alegre, Rio de Janeiro and Fortaleza, which offer co-location, hosting and other value-added services. BrT holds 90.46% of the capital stock of BrT Multimídia, and BrTI holds the remaining 9.54% interest. Brasil Telecom Call Center S.A. (“BrT Call Center”) BrT Call Center is a wholly-owned subsidiary of BrT engaged in the provision of call center services for third parties, including customer service, outbound and inbound telemarketing, training, support, consulting services and related activities. BrT Call Center’s startup was in November 2007 by providing call center services for BrT and its subsidiaries that require this type of service. Previously, call center services were outsourced. BrT Card Serviços Financeiros Ltda. (“BrT Card”)

A wholly-owned subsidiary of the Company engaged in the provision of management, control and advisory services for the development and sale of financial products and services. At September 30, 2010, BrT Card had only highly liquid short-term investments of the proceeds from the payment of capital, and had not yet started its operations.

Copart 5 Participações S.A. (“Copart 5”) Copart 5 is a BrT subsidiary established on June 18, 2010, for a finite period of 12 years, which is engaged in the provision of real estate management and lease services, and the assignment of any type of rights, including on properties, which it can rent or cede related rights to use, in whole or in part, i.e., take all necessary actions to ensure the best use of said properties, including their maintenance, repair and improvement. Copart 5 startup was on August 6, 2010, as disclosed in Note 19 (e).




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d) Corporate restructuring of TNCP On May 5, 2008, TMAR initiated the corporate restructuring process, as approved by its Board of Directors, by filing with the Brazilian Securities and Exchange Commission (“CVM”) a registration request of takeover bids for its outstanding common shares, and subsequently requesting the registration of takeover bids for the preferred shares in its subsidiaries TNCP and Amazônia Celular S.A. (“Amazônia”). As a result of the purchases made under the mandatory and voluntary Takeover Bids (“OPAs”), since January 16, 2009 TMAR holds 2,467,689 common shares and 4,147,288 preferred shares in TNCP, as well as 80,868 common shares and 971,791 preferred shares of Amazônia, representing 98.7% of TNCP’s total capital and 17.9% in Amazônia’s total capital. This restructuring aimed at optimizing the control structure through company downsizing, concentration of similar activities and streamlining of cross-shareholdings. On March 9, 2009, the management of TMAR implemented a corporate restructuring aimed at consolidating the assets related to the operations of Amazônia with the assets used in the operations of Oi, and subsequently handing over to ANATEL the permits for the use of certain radiofrequencies. The corporate restructuring was as follows: (i) Merger of Amazônia shares with and into TNCP, so that Amazônia became a wholly-

owned subsidiary of TNCP, as a result of which Amazônia shareholders received 354,886 common shares and 1,430,859 preferred shares in TNCP, issued for this special purpose, in exchange for the 151,159 common shares and 270,798 preferred shares in Amazonia which remained outstanding after the takeover bids, and resulted in a capital increase of R$32,884. Each common share in Amazônia corresponds to 1.529505 common shares in TNCP and each preferred share in Amazônia, regardless of its class, corresponds to 1.151515 preferred shares in TNCP.

The share exchange ratio observed the existing types of shares, based on the following: (i) for common shares, the prices paid in TNCP and Amazônia mandatory takeover bids, conducted on January 16, 2009, of R$87.61 and R$134.00 per share, respectively; and (ii) for preferred shares, the prices paid in TNCP and Amazônia voluntary takeover bids, conducted on August 19 and October 22, 2008, of R$33.00 and R$38.00 per share, respectively. The use of takeover bid prices as a basis to set the exchange ratios was supported by the huge participation of the companies’ non-controlling shareholders in the mandatory and voluntary takeovers.

(ii) TMAR increased its equity interest in TNCP through a capital payment in the form of the

assignment of almost 100% of its investment in Oi. In this procedure, 56,464,204 common shares and 112,928,407 preferred shares in TNCP were issued, and the full amount involved was of R$8,673,466, which corresponds to the carrying amount of the investment in Oi.




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As a result of merger of Amazônia shares and the capital payment of controlling shareholder TMAR, TNCP’s capital increased by R$8,706,350, to R$8,791,201, represented by 59,311,566 common shares and 118,568,472 preferred shares, resulting in the following shareholding structure:

Registered common shares %

Registered preferred

shares % Total %

TMAR 59,055,488 99.57 118,193,342 99.68 177,248,830 99.65

Outstanding shares 256,078 0.43 375,130 0.32 631,208 0.35

Total shares 59,311,566 100.00 118,568,472 100.00 177,880,038 100.00 (iii) The radiofrequencies granted to Amazônia were handed over to ANATEL, thus

terminating its SMP permit. (iv) Merger of Amazônia with and into Oi, where each common share or preferred share in

Amazônia, regardless of its class, corresponds to 15.686583 common shares in Oi. Oi issued 92,363,839 registered common shares without par value.

As a result of the merger of Amazônia, Oi’s capital stock increased by R$131,301, to R$9,743,805, represented by 6,193,577,065 common shares. The issued shares were paid in by absorbing Amazônia’s shareholders’ equity, where TNCP holds 100% of Oi’s shares. e) Acquisition of control of Brasil Telecom Participações S.A. In May and June 2008, Copart 1 and Copart 2 conducted successive acquisitions of preferred shares in BrT Part and BrT, respectively. The acquisitions conducted by Copart 1 totaled 55,819,400 BrT Part preferred shares (BRTP4), amounting to R$1,425,133, which represented 24.3% of BrT Part’s preferred shares and 15.4% of its total stock. The acquisitions conducted by Copart 2 totaled 45,590,300 BrT preferred shares (BRTO4), amounting to R$897,775, which represented 14.6% of BrT’s preferred shares and 8.3% of its total stock. On July 22, 2008, a voluntary takeover bid was conducted by Copart 1 and Copart 2 to acquire one third of the preferred shares in BrT Part and BrT. Copart 1 acquired 20,826,442 BrT Part preferred shares (BRTP4) for R$30.47 per share, totaling R$634,582, and Copart 2 acquired 13,366,365 BrT preferred shares (BRTO4) for R$23.42 per share, totaling R$313,040. As a result of the acquisitions made under the voluntary takeover bids, TMAR became the indirect holder of 58,956,665 BrT preferred shares and 76,645,842 BrT Part preferred shares, representing 18.9% of total preferred shares and 10.5% of capital stock of BrT, and 33.3% of total preferred shares and 21.11% of capital stock of BrT Part, respectively. On December 31, 2008, the subsidiaries Copart 1 and Copart 2 did not have any significant influence over the investments held in BrT Part and BrT, respectively. On January 8, 2009, TMAR, through its indirect subsidiary Copart 1, acquired the share control of BrT Part and, consequently, of BrT, through an overall payment of R$5,371,099, equivalent to a price of R$77.04 per common share in BrT Part. The amount paid is equivalent to the price agreed under the Share Purchase and Sale Agreement adjusted using the average daily rate of the interbank deposit rate (CDI), less Invitel’s net debt, amounting to R$998,053, and adjusted for dividends declared between January 1, 2008 and the closing date.




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The takeover of BrT by TMAR basically consisted of the acquisition of 100% of the shares in Invitel S.A., which holds 100% of the shares in Solpart, previous direct controlling shareholder of BrT Part. The acquisition above was accounted for by TMAR at the fair values of the identifiable assets and liabilities on acquisition date, January 8, 2009, including intangible assets and contingent liabilities. On June 23, 2009, takeover bids (“OPAs”) of the common shares in BrT Part and BrT were conducted, duly registered with the CVM pursuant to the Mandatory OPA registration requirements. The takeover bids assured the payment to non-controlling shareholders of a minimum price equal to 80% of the price paid for the control block shares, of R$61.63 for BrT Part’s shares and R$57.76 for BrT’s shares, adjusted for the declared dividends and using the average daily CDI from January 1, 2008 until the bid settlement date, resulting in the amounts of R$64.71 and R$60.64, respectively. Copart 1 acquired 40,452,227 common shares in BrT Part, thus becoming the holder, directly and indirectly through its control of Invitel, of 54.45% of the total capital and 90.68% of the voting capital of BrT Part, and Copart 2 acquired 630,872 common shares in BrT, thus becoming the holder of 10.62% of the total capital and 0.25% of the voting capital of BrT Part. The identifiable assets and liabilities, including the contingent liabilities of BrT, were recognized in the consolidated financial statements proportionately to the interest held at their fair values on acquisition date. The table below shows, taking into consideration the amounts paid for the acquisition of Invitel’s control, and in the voluntary and mandatory takeover bids of BrT Part and BrT, the amount paid for BrT operations, and the adjustments to the fair values of asset acquired and liabilities assumed upon the acquisition of these operations, which contemplate the effects arising from the new fair value estimate for the aforementioned contingencies:

On acquisition of Invitel and voluntary

OPAs (40.02%) 1/8/2009

Increase in interest to 47.64% on

mandatory OPAs 6/23/2009

Total paid to former shareholders 8,641,629 2,655,920

Transaction costs 1,884 917

Gross amount paid 8,643,513 2,656,837

BrT’s shareholders’ equity 6,240,952 5,326,867

Total equity interest acquired 2,497,584 405,907

Proportionate adjustments to fair value, net:

Property, plant and equipment 1,818,656 349,316 Intangible assets (STFC exploitation permit) 4,605,859 1,774,560

Reserve for contingent liabilities (812,447) (143,604)

Allowance for doubtful accounts (17,661)

Adjusted interest in BrT’s equity 8,091,991 2,386,179

Adjusted interest in Invitel’s equity (less indirect interest in BrT)

551,522

270,658

Goodwill




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The Company engaged a specialized firm to help calculating the fair values stated above. f) Corporate restructuring - BrT The Company completed the first phase and started the second phase of the corporate restructuring process of indirect subsidiaries BrT Part and BrT to streamline the control structure and draw on the synergies between activities to increase operating efficiency. On December 19, 2008, ANATEL issued Act 7828, whereby the Executive Board granted prior approval for the subsequent corporate acts regarding the merger of the companies or the merger of the shares in the companies Invitel, Solpart and BrT Part with an into TMAR. According to the Material Fact disclosed on July 15, 2009 and the amendment to this Material Fact issued on July 21, 2009, and the Material Fact disclosed on August 12, 2009, the phase I and Stage 2 of phase 2 of the corporate restructuring were completed on July 31 and September 30, 2009, respectively, and consisted of a series of mergers, carried out pursuant to Articles 230 and 252 of the Brazilian Corporate Law, by TMAR’s subsidiaries, as described below.

(i) Merger of Invitel by its subsidiary Solpart, with absorption of the equity of Invitel by Solpart and the resulting liquidation of Invitel on July 31, 2009.

The net assets of Invitel merged by Solpart totaled R$384,309 and did not result in an increase of Solpart’s capital. The amount was fully recorded in a capital reserve, as set out in Article 200 of the Brazilian Corporate Law. As a result of the merger of Invitel, 0.0005583097 Solpart common shares were attributed to each Invitel common share and 0.0020717787 Solpart preferred shares were attributed to each Invitel preferred share (share exchange ratio). Invitel’s treasury shares were canceled with the merger. Solpart did not have any treasury shares.

(ii) Merger of Solpart with and into its parent Copart 1, with absorption of the equity of

Solpart by Copart 1 and the resulting liquidation of Solpart on July 31, 2009.

The net assets of Solpart merged by Copart 1 totaled R$23,900 and did not result in an increase of Copart 1’s capital. The amount was fully recorded in a capital reserve, as set out in Article 200 of the Brazilian Corporate Law.

(iii) Merger of Copart 1 with and into BrT Part, through the absorption of the equity of

Copart 1 by BrT Part, through which Coari, holder of 100% of the shares in Copart 1, received BrT Part shares in exchange for its shares in Copart 1, which was liquidated on July 31, 2009.

The net assets of Copart 1 merged by BrT Part totaled R$3,973,694 and did not result in an increase of BrT Part’s capital. The amount was fully recorded in a capital reserve, as set out in Article 200 of the Brazilian Corporate Law.




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As a result of the merger of Copart 1, 0.0109674283 BrT Part common shares were attributed to each Copart 1common share and 0.00691600894 BrT Part preferred shares were attributed to each Copart 1 preferred share (share exchange ratio). BrT Part held 1,480,800 common shares in treasury, which have been held in treasury.

(iv) Merger of Copart 2 with and into BrT, through the absorption of the equity of Copart 2 by BrT, through which Coari, holder of 100% of the shares in Copart 2, received BrT shares in exchange for its shares in Copart 2, which was liquidated on July 31, 2009.

The net assets of Copart 2 merged by BrT totaled R$369,165, and did not result in an increase of BrT’s capital. The amount was fully recorded in a capital reserve, as set out in Article 200 of the Brazilian Corporate Law. As a result of the merger of Copart 2, 0.0005041618 BrT common shares were attributed to each Copart 2 common share and 0.0471152627 BrT preferred shares were attributed to each Copart 2 preferred share (share exchange ratio). Copart 2 did not have treasury shares. BrT held 13,231,556 preferred shares in treasury, which have been held in treasury.

(v) Merger of BrT Part with and into BrT, with absorption of BrT Part’s equity, as a result of which Coari, holder of 54.45% of BrT Part shares and 10.62% of BrT shares, received 231,077,513 shares, of which 161,359,129 are common shares and 69,718,384 are preferred shares, in exchange for its shares in BrT Part, liquidated on September 30, 2009. As a result, Coari holds 48.20% of BrT capital stock.

The net assets of BrT Part merged by BrT totaled R$5,535,332, and resulted in an increase of BrT’s capital by R$260,301, of which R$1,413,592 was recorded as a capital reserve and R$3,861,439 was allocated to the special goodwill reserve, pursuant to CVM Instruction 319/1999.

The capital increase is represented by the issue of 201,143,307 common shares and 209,155,151 preferred shares in BrT, which were fully attributed to BrT Part shareholders. As a result, BrT capital’s increased to R$3,731,059, represented by 203,423,176 common shares and 399,597,370 preferred shares.

As a result of the merger of BrT Part, 1.2190981 BrT common shares were attributed to each BrT Part common share and 0.1720066 common shares and 0.9096173 BrT preferred shares were attributed to each BrT Part preferred share (share exchange ratio). BrT Part held 1,480,800 common shares in treasury, which have been held in treasury. BrT held 13,231,556 preferred shares in treasury, which have been held in treasury.

All appraisals of the equities and net assets of the merged companies have been conducted by a specialized firm, in compliance with Articles 226 and 227 of the Brazilian Corporate Law, based on their carrying amounts as at May 31, 2009, adjusted by corporate events that occurred from this date through the mergers’ dates (July 31 and September 30, 2009) and the most




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material subsequent events. The tables below present the balance sheets of the merged companies: Balance sheet - Invitel 5/31/2009 Current assets 91,324 Noncurrent assets 137 Investments 1,402,447 Intangible assets 292,916 Total assets 1,786,824 Current liabilities 68 Shareholders’ equity 1,786,756 Total liabilities 1,786,824 Balance sheet – Solpart 5/31/2009 Current assets 105,808 Noncurrent assets 138 Investments 990,258 Intangible assets 690,835 Total assets 1,787,039 Current liabilities 282 Shareholders’ equity 1,786,757 Total liabilities 1,787,039

Balance sheet - Copart 1 5/31/2009 Current assets 121,782 Noncurrent assets 138 Investments 2,817,374 Intangible assets 3,861,438 Total assets 6,800,732 Current liabilities 9,664 Shareholders’ equity 6,791,068 Total liabilities 6,800,732

Balance sheet – Copart 2 5/31/2009 Current assets 7,258 Investments 559,390 Intangible assets 366,788 Total assets 933,436 Current liabilities 4,880 Noncurrent liabilities 1 Shareholders’ equity 928,555 Total liabilities 933,436




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Changes in equity from May 31, 2009 to July 31, 2009 were accounted for at the merging companies. Balance sheet – BrT Part 5/31/2009 Current assets 584,415 Noncurrent assets 1,495,722 Investments 7,345,051 Property, plant and equipment 455 Total assets 9,425,643 Current liabilities 330,789 Noncurrent liabilities 11,512 Shareholders’ equity 9,083,342 Total liabilities 9,425,643 Changes in equity from May 31, 2009 to September 30, 2009 were accounted for at BrT (merging company) and total R$82,637. As required by Law 6404/76 (Brazilian Corporate Law), the mergers have been submitted to and approved by the shareholders of Invitel, Solpart, Copart 1, BrT Part, Copart 2, BrT and Coari, at the Shareholders’ Meetings of said companies held on July 31, 2009 and September 30, 2009. The shareholding structure of BrT at September 30, 2009 was follows: Shareholding structure - BrT

Shareholder Common shares % Preferred

shares % Total % Coari 161,990,001 79.63 128,675,049 32.20 290,665,050 48.20

Minorities 41,433,175 20.37 257,690,765 64.49 299,123,940 49.60

Treasury shares 13,231,556 3.31 13,231,556 2.20

Total 203,423,176 100.00 399,597,370 100.00 603,020,546 100.00 The goodwill originally recorded by Copart 1 and merged by BrT Part, in the total nominal amount of R$8,235,520, arises partly on the merger of Solpart by Copart 1 and partly on the merger of Invitel by Solpart, and relates to the acquisition of 100% of the shares in Invitel and 35.52% of the shares in BrT Part. Recorded goodwill is based on the appreciation of the property, plant and equipment items and the Switched Fixed Telephony Services (STFC) concession of BrT, and was allocated to these line items in the Company’s consolidated financial statements. As a result of the merger of Copart 1 by BrT Part and the subsequent merger of BrT Part by BrT, goodwill will be amortized for accounting purposes by BrT, pursuant to the prevailing tax and accounting laws, and will generate tax credits. The goodwill originally recorded by Copart 2 and merged by BrT, totaling R$737,664, arises on the acquisition of 10.62% of the shares in BrT and is based on the appreciation of the property, plant and equipment and the STFC concession right of BrT, and was allocated to these line items in the Company’s consolidated financial statements. As a result of the merger of Copart 2 by BrT, goodwill will be amortized in for accounting purposes by BrT, pursuant to the prevailing tax and accounting laws, and will generate tax credits.




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Note that, for the calculation of the net asset sued in the downstream mergers of Copart 1 and Copart 2 with and into BrT Part and BrT, respectively, Copart 1 and Copart 2 recorded R$4,072,381 and R$340,522 as provisions for equity integrity maintenance of its merged companies, respectively. The recognized provisions reduce goodwill amounts based on the STFC concession of BrT to the amount of the related tax benefit arising from its amortization, as required by Article 6, Paragraph 1 (a), of CVM Instruction 319/1999. As a result of the corporate restructuring, subsidiary Coari became the holder of the direct investment in BrT, recalculated the equity in the gains or losses on this investee, and recomposed goodwill arising on this investment, which is partly based on the appreciation of property, plant and equipment and partly on the STFC concession, in its individual financial statements. After the completion of Stage 2 of Phase 2, the corporate structure is as follows:

Corporate Structure before the merger of BrT Part

Corporate Structure after the merger of BrT Part

Caption: ON - Registered common shares; PN - Registered preferred shares

On September 2, 2009, the SEC declared effective the Registration Statement of the shares issued by BrT for the purpose of merger of BrT Part shares, pursuant to the U.S. Securities Act of 1933. As disclosed by the Company in the Material Fact dated August 12, 2009, as part of corporate restructuring process, the Supervisory Boards and the Boards of Director of Coari and BrT and approved the Stage 3 of Phase 2 of the corporate restructuring on September 25, 2009, which provides for the merger of BrT shares by Coari, a corporation, direct subsidiary of the Company, so that BrT became a wholly-owned subsidiary of Coari; however, because of the events disclosed in the Material Fact published on January 14, 2010, the process is on standby. On March 25, 2010 and April 22, 2010, the Boards of Directors of the Company and BrT examined and approved, respectively, the proposal for new share exchange ratios of 0.3955 common share in the Company for each common share in BrT and 0.2191 class C preferred

BrT

Coari

TMAR

ON: 100.00% PN: 100.00%

Total: 100.00%

ON: 79,63% PN: 32,20%

Total: 48,20%

TNL

ON: 97.35% PN: 69.37%

Total: 81,93%

BrT Part

BrT

Coari

TMAR

ON: 100.00% PN: 100.00%

Total: 100.00%

ON: 90.68% PN: 33.33%

Total: 54.45%

ON: 99.09% PN: 38.83%

Total: 65.64%

ON: 0.25% PN: 18.94%

Total: 10.62 %

Merger of BrT Part by BrT

ON: 97.35% PN: 69.37%

Total: 81.93%

TNL




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share in the Company for each preferred share in BrT. At the Extraordinary Shareholders’ Meeting of BrT held June 16, 2010, the non-controlling holders of common and preferred shares in BrT did not approve the proposed new ratios for the exchange of BrT for TMAR shares, which would be applicable to the last stage of the corporate restructuring. The corporate streamlining as proposed and disclosed in a Material Fact dated April 25, 2008, was suspended for an indefinite period of time.

g) Corporate restructurings of the BrT Group internet companies In order to prepare the Company for the coming requirements of Brazilian law on the participation of foreign capital in internet companies, on June 30, 2010 management conducted a restructuring of the Group’s internet companies, whether operating or holding companies, which comprised the merger by iG Part of the following companies: iG Cayman and Nova Tarrafa Inc., as shown below:

The Company’s management engaged a specialized consulting firm to issue a report contemplating the carrying amounts and the fair values of the involved net assets, on which the share exchange ratios are based, using the book values as of May 31, 2010 of the companies merged as a result of the corporate restructuring. As a result of the downstream merger of iG Cayman with and into iG Part, the equity of iG Cayman was absorbed by iG Part and iG Cayman was liquidated on June 30, 2010. The negative net assets of iG Cayman merged by iG Part totaled R$2,785, resulting in a decrease of iG Part’s capital, without reduction of the number of common shares that were attributed to the shareholders of iG Cayman.

As a result of the merger of iG Cayman, 2.00399169 iG Part common shares were attributed to each iG Cayman common share (share exchange ratio).

iG Cayman held common shares in treasury, which were canceled with the merger. iG Part did not have treasury shares.




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As a result of the merger of Nova Tarrafa Inc. with and into iG Part, the equity of Nova Tarrafa Inc. was absorbed by iG Part and Nova Tarrafa Inc. was liquidated on June 30, 2010. The net assets of Nova Tarrafa Inc. merged by iG Part totaled R$322, and resulted in an increase of iG Part’s capital.

As a result of the merger of Nova Tarrafa Inc., 125.12660374 iG Part common shares were attributed to each Nova Tarrafa Inc. common share (share exchange ratio).

Nova Tarrafa Inc. and iG Part did not have treasury shares. h) Industrial Alliance between Portugal Telecom and the Oi Group On July 28, 2010, AG Telecom Participações S.A. (“AG”) and LF Tel S.A. (“LF”), shareholders part of the control group of Telemar Participações S.A., with TmarPart, TNL, and TMAR as intervening parties, entered into with Portugal Telecom, SGPS, S.A. (“Portugal Telecom”) a Term Sheet with the objective of establishing the principal terms that will serve as a framework for the negotiation of a potential industrial alliance between Portugal Telecom and TmarPart and its subsidiaries (the “OI Companies”). Among other provisions, the Term Sheet prescribes: (i) The acquisition by Portugal Telecom of direct equity interest in TmarPart amounting to

10% of its capital;

(ii) Proposal for a capital increase, of up to R$4.24 billion, which will be subscribed by Portugal Telecom and other shareholders of TmarPart, and through which Portugal Telecom will acquire a 10% equity interest in TmarPart;

(iii) Proposal for a capital increase, by approximately R$12 billion, comprising the issuance of

common and preferred shares, at the price of R$38.5462 per common share and R$28.2634 per preferred share, set according to the share quotation on the São Paulo Mercantile and Stock Exchange (“BM&FBovespa”) on the 60 days prior to this date, to be subscribed by TmarPart and other shareholders of TNL that exercise their preemptive rights;

(iv) Proposal for the increase of TMAR’s capital, by approximately R$12 billion, comprising

the issuance of common and preferred shares, at the price of R$63.7038 per common share and R$50.7010 per preferred share, set according to the share quotation on the BM&FBovespa on the 60 days prior to this date, to be subscribed by TNL and other TMAR shareholders that exercise their preemptive rights; and

(v) Portugal Telecom will subscribe for shares in the capital increases of TNL and TMAR up

to the amount of R$3.733 billion, in accordance with the available unsubscribed shares and potential assignments of preemptive rights that may occur.

The main additional aspects of the term sheet are described in the Material Fact publicly disclosed on July 28, 2010. To date, the negotiations of these term sheet are still in progress.




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2 PRESENTATION OF THE INTERIM FINANCIAL STATEMENTS AN D CONSOLIDATION BASIS

Interim Financial Statements Preparation Basis

The Interim Financial Statements have been prepared and are presented in accordance with Brazilian accounting practices, provisions of Brazilian Corporate Law and standards issued CVM, and contemplate the changes introduced by Law 11638/07 and Law 11941/09. With the enactment of Law 11638/07, which was designed to update the Brazilian Corporate Law, so as to enable the convergence of Brazilian accounting practices with the International Financial Reporting Standards (IFRSs), new accounting standards and technical pronouncements have been issued by the Accounting Pronouncements Committee (CPC), in conformity with such international accounting standards. In the context of the updating of Brazilian Corporate Law, the second stage of the convergence of the Brazilian accounting practices to the IFRSs was completed in 2009 with the enactment accounting pronouncements (CPCs) 15-40 (except for CPC 34), interpretations and instructions by the Accounting Pronouncements Committee (CPC), which were ratified by the CVM through its resolutions. These resolutions became effective on the date they were published in the Federal Official Gazette (“DOU”), with mandatory application for annual reporting periods ending on or after December 2010 and the 2009 financial statements to be disclosed for comparative purposes together with the 2010 financial statements. However, the CVM has postponed, through Resolution 603/2009 (as amended by Resolution 626/2010), which provides for presentation of interim financial statements for fiscal year 2010 and early adoption of accounting practices to become effective 2010 onwards, to December 2010 the mandatory application of the Pronouncements, Interpretations and Instructions issued by the CPC and edited and approved by the CVM in 2009. Given the complexity of the issues and the amount of required analyses, the Company’s management continues assessing the potential effects of the Pronouncements, Interpretations and Instructions issued by the CPC and approved by the CVM related to the second stage of the convergence of the Brazilian accounting practices and the IFRSs, which may have an impact on the Company’ s interim financial statements for the quarters ended March 31, June 30 and September 30, 2010, on the financial statements for the year ending December 31, 2010, and the same periods of the prior year. In the context of said assessment process, by the end of the nine-month period ended September 30, 2010, the Company’s management identified the following main issues related principally to the business combination accounting practice: (a) Accounting practice for the valuation of non-controlling interests in the acquisition

of BrT’s control Effect related to the future adoption of the accounting practice for the valuation of non-controlling interests, held in the capital of subsidiary BrT and BrT Part, based on the quotations of these companies’ shares on a stock exchange, on the date of acquisition of the former’s control. The adoption of said practice, pursuant to CPC 15 Business Combination and




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Accounting Interpretation (ICPC) 09 Individual Financial Statements, Separate Financial Statements, Consolidated Financial Statements and Application of the Equity Method of Accounting, should have a positive effect of approximately R$6.5 billion on shareholders’ equity as at December 31, 2009 and on the statements of operations (Company and consolidated) for the year then ended and in subsequent periods, which derives mainly from the difference between the fair values of the identifiable assets acquired and identifiable liabilities assumed on the acquisition of said share control and the trading price of the shares held by non-controlling shareholders, based on the shares’ quotation at the acquisition date. The fair values of net assets are substantially related to the value of the fixed telephony segment, which, by nature, represents a long-term investment whose fair value, therefore, was less exposed to the effects of the international crisis on the control acquisition date. However, the quoted prices of BrT and BrT Part shares were adversely impacted by the international crisis at that moment. On January 8, 2009, control acquisition date, BrT and BrT Part preferred shares had declined by 34 and 36 percent, respectively, as compared to their peak in 2008. In the context of the calculation of the effect referred to in the previous paragraph, the Company’s management revisited its estimates of the fair values of the assets acquired and the liabilities assumed. Therefore, management revised the procedures used to measure the relevant amounts recognized at the acquisition date: (i) fair values of the identifiable assets acquired and the identifiable liabilities assumed; (ii) non-controlling interests at the acquisition date; (iii) equity interests previously held in the acquired company; and (iv) the consideration transferred, to ensure that all the information available on the acquisition date was appropriately considered to account for the business combination and the acquired investment. No additional information was identified by management as a result of said revision that could change the fair values of the assets acquired and the liabilities assumed in connection with this acquisition. The identification of and the conclusion on the accounting practice option for the valuation of non-controlling interests, allowed by these pronouncements, were recently obtained. (b) Measurement and recognition of interests prior to the acquisition of BrT’s

control The Company held, through its subsidiaries, a percentage interest in but not the control of BrT. Under CPC 38 Financial Instruments: Recognition and Measurement, such interests should be measured at fair value. Accordingly, the Company estimates that in the opening balance sheet as at January 1, 2009, the amount recorded related to the investments in BrT Part and BrT should be reduced by approximately R$1.1 billion (added value), as a balancing item to a specific line item of shareholders’ equity. Subsequently, on January 8, 2009 and as disclosed in note 1 (e), the Company (through its subsidiaries) acquired the control of BrT. Under CPC 15 Business Combinations, in a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognize the resulting gain or loss, if any, in profit or loss for the period/year. Thus, the estimated loss of approximately R$1.1 billion should be transferred from the specific line item of shareholders’ equity to profit or loss for the year ended December 31, 2009. (c) Accounting for the business combination - acquisition of BrT As a result of the recognition of the business combination related to this acquisition and the corresponding full recognition of the assets acquired, currently carried proportionately to the




29

interest acquired, annual amortization and depreciation should increase by an amount not yet measured. (d) Non-controlling interests Pursuant to CPC 26 Presentation of Financial Statements, non-controlling interests (minorities) shall be separately stated in consolidated shareholders’ equity. (e) Acquisitions after control was obtained Pursuant to CPC 36 and ICPC 09, the acquisitions of shares from non-controlling shareholders in situations where the acquirer already held the controlling interest of the investee should not impact the original effect of the business combination, and should be accounted for as a capital transaction, directly in shareholders’ equity. (f) Accounting for proposed dividends ICPC 08 Accounting for Proposed Dividend Payments (CVM Resolution 601/2009): some impact is expected since ICPC 08 prescribes that mandatory minimum dividends, which effectively quantify as a legal obligation, must be stated in the Company´s liabilities. However, dividends proposed by the management bodies to the Shareholders’ Meeting that exceed the mandatory minimum dividends, if applicable, shall be stated in a separate line item of shareholders’ equity, such as ‘Proposed additional dividend’, until the final decision to be made by the shareholders. Under current accounting practices, such amount would be recognized as a liability when proposed by management. (g) Escrow deposits Pursuant to CPC 26 Presentation of Financial Statements, an entity shall not offset assets and liabilities or income and expenses, unless required or permitted by a specific pronouncement, interpretation or instruction. The amounts of escrow deposits that offset contingent liabilities shall be recognized in assets. (h) Deferred taxes Pursuant to CPC 26 Presentation of Financial Statements, when an entity presents current and noncurrent assets, and current and noncurrent liabilities, as separate classifications, it shall not classify deferred tax assets (liabilities) as current assets (liabilities). These amounts are still subject to revision and improvement, and represent management’s best estimate on this date, considering the current stage of the Company’s and its subsidiaries’ operations. The users of these interim financial statements cannot consider that the process of measuring the impacts of the aforementioned convergence process is in any way completed or that they should represent adjustments to the balances and transactions reported by the Company and its subsidiaries in 2009 and 2010. Accordingly, the interim financial statements for the quarter ended September 30, 2010 have been prepared and are being presented in conformity with the accounting standards in effect until December 31, 2009 (phase one pronouncements, interpretations and instructions). The other CPCs and ICPCs that may be applicable to the Company and its subsidiaries, in view of their operations, are as follows:




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CPC Title 16(R1) Inventories 18 Investments in Associates and Subsidiaries 21 Interim Financial Reporting 22 Operating Segments 23 Accounting Policies, Changes in Accounting Estimates and Errors 24 Events after the Balance Sheet Date 25 Provisions, Contingent Assets and Contingent Liabilities 26 Presentation of Financial Statements 27 Property, Plant and Equipment 30 Revenue 32 Taxes on Income 33 Employee Benefits 36(R1) Consolidated Financial Statements 37 First-time Adoption of International Financial Reporting Standards 38 Financial Instruments: Recognition and Measurement 39 Financial Instruments: Presentation 40 Financial Instruments: Disclosure 43 First-time adoption of Technical Pronouncements CPC 15 to 40

ICPC Title 04 Scope of Technical Pronouncement CPC 10 Share-based Payment 05 Technical Pronouncement CPC 10 Share-based Payment – Treasury and

Group Share Transactions 09 Individual, Separate and Consolidated Financial Statements and Application of

the Equity Method 10 Clarifications of Technical Pronouncements CPC 27 - Property, Plant and

Equipment and CPC 28 - Investment Property 12 Changes in Liabilities due to Decommissioning, Restoration, and Similar

Liabilities Consolidation basis Consolidation was prepared in accordance with CVM Instruction 247/1996 and contemplates the financial statements of the Company’s direct and indirect subsidiaries. The main consolidation procedures are as follows: • Addition of assets, liabilities, income and expense accounts according to their accounting

substance; • Elimination of intercompany balances, and material income and expenses, between the

consolidated companies. • Elimination of investments and corresponding equity interests in subsidiaries; • Separate disclosure of non-controlling interests in shareholders’ equity and profit or loss for

the period; and




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• Consolidation of exclusive investment funds (Note 9). As described in note 1(e), the Company acquired, through indirect subsidiaries, the share control of BrT and conducted the voluntary and mandatory takeover bids for the acquisition of non-controlling interests. The Company recorded these transactions in the consolidated financial statements, as described below. Since share control was acquired, identifiable assets, liabilities and contingent liabilities were recognized at their fair values, estimated on control acquisition date, proportionately to the acquired equity interests. The transaction cost was measured as the total of:

• The fair values, on acquisition date, of assets acquired and liabilities assumed, in exchange for the control of the acquiree.

• Total expenses directly attributable to the transaction.

The transaction cost was allocated proportionately to the Company’s interest in the fair values of the identifiable assets and liabilities acquired. Non-controlling interests in the acquiree’s assets and liabilities, stated in the consolidated interim financial statements, was calculated based on their carrying amounts. Adoption of CPC 02(R1) The Effects of Changes in Foreign Exchange Rates and Translation of Financial Statements (a) Functional and reporting currency The Company and its subsidiaries operate as telecommunications carriers in the Brazil and are engaged in related telecom industry activities (see Note 1), and the currency used in their operations is the Brazilian real (R$). To define the functional currency, management considered the currency that influences:

• the sale price of its products and services; • the costs of services and sales; • the cash flows for trade receivables and trade payments; and • interest, investments and borrowings.

Accordingly, the Company and its subsidiaries’ functional currency is the Brazilian real (R$), which is also the presentation currency of these interim financial statements. (b) Transactions and balances




32

Foreign currency-denominated transactions are translated into the functional currency using the exchange rate prevailing on the transaction date. Foreign exchange differences from translation are recognized in the statement of operations. (c) Group companies The Company has investments in companies headquartered abroad, none of which in hyperinflationary economies, and with functional currency other than the Brazilian real (R$). (d) Non-monetary items indexed to a foreign currency The Company and its subsidiaries do not have non-monetary items indexed to a foreign currency (other than the functional and presentation currency). 3 SIGNIFICANT ACCOUNTING PRACTICES The most significant accounting practices adopted in the preparation of these interim financial statements are as follows: (a) Cash and cash equivalents

Comprise cash and imprest cash fund, banks, and highly liquid short-term investments (usually maturing within less than three months), immediately convertible into a known cash amount, and subject to an immaterial risk of change in value, which are stated at fair value at the end of the reporting period, which does not exceed their market value, and their classification is determined as shown in item (b) below. (b) Financial investments Classified according to their purpose as: (i) trading; (ii) held-to-maturity; and (iii) available-for-sale securities. Trading securities are measured at fair value and their effects are recognized in profit or loss. Held-to-maturity securities are measured at cost plus income earned, less the allowance for adjustment to probable recoverable amount, when applicable. Available-for-sale securities are measured at fair value and their effects are recognized in valuation adjustments to equity, when applicable. (c) Accounts receivable Subsidiaries’ receivables from users of the telecommunications services are stated at the tariff or service amount on the date they were provided and do not differ from their fair values. These receivables include receivables from services provided and not billed by the end of the reporting period, whose amount is calculated based on the metering made on the end of the reporting period or by estimate considering historic performance. Relevant taxes are also calculated and accounted for on an accrual basis. Receivables from sales of handsets and accessories are stated at the sales prices and recorded when the products are delivered and accepted by the customers.




33

Charges on overdue bills are recognized when the bill of the first billing cycle subsequent to the payment of the overdue bill is issued. (d) Allowance for doubtful accounts

Recognized for the purpose of recognizing losses on receivables, considering the actions taken to limit services provided to customers with overdue bills, from the date when receivables become past due for more than 60 days, increasing progressively, as follows:

Past-due receivables Accrued loss % 1 to 60 days Nihil 61 to 90 days 40 91 to 120 days 60 121 to 150 days 80 151 to 180 days 100 After 181 days past due, receivables and the related allowance for doubtful accounts are derecognized. (e) Inventories Inventories are segregated and classified as described below: • Maintenance material inventories classified in current assets in accordance with the period

in which they will be used are stated at average cost, not exceeding replacement cost; • Inventories for expansion, classified in property, plant and equipment, are stated at average

cost and are used to expand the telephone plant; and • Inventories of merchandise for resale classified in current assets are stated at average cost

and are basically represented by handsets and accessories. Adjustments to net realizable value are recognized for handsets and accessories purchased for amounts that exceed their sales prices. Impairment losses are recognized for obsolete inventories.

(f) Investments Investments in subsidiaries are stated under the equity method of accounting, plus unamortized goodwill, provided that they are supported in the appreciation of assets. Other investments, basically investment grants, are stated at cost of acquisition, less an allowance for write-down to realizable value, when applicable.

(g) Property, plant and equipment Property, plant and equipment are stated at cost of purchase or construction, less accumulated depreciation. Historical costs include expenses directly attributable to the acquisition of assets. Financial charges on obligations financing assets and construction works in progress are capitalized. The balances stated in the consolidated financial statements include the fair values of Invitel’s identifiable assets and liabilities acquired on January 8, 2009, calculated




34

proportionately to the equity interest acquired by TNL, as commented in Note 2, Consolidation basis. Subsequent costs are added to the carrying amount of the asset only when these assets generate future economic benefits and can be reliably measured. Maintenance and repair costs are recorded in profit or loss for the period when they are incurred, and they are capitalized when they represent an increase in installed capacity or the useful lives of assets. Assets under finance leases are recorded in property, plant and equipment, as prescribed by CVM Resolution 554/2008, at the lower of fair value or the present value of the minimum lease payments, from the commencement of the agreement. Depreciation is calculated on a straight-line basis, based on the estimated useful lives of the assets, which are annually reviewed by the Company. (h) Intangible assets

Stated at cost, less accumulated amortization and an allowance for impairment losses, when applicable. Consist basically of licenses (regulatory permits for the use of radiofrequencies and the provision of Personal Mobile Services), software licenses, and goodwill arising on the acquisition of investments, calculated based on expected future economic benefits. The balances stated in the consolidated financial statements include the fair values of Invitel’s identifiable assets liabilities acquired and assumed on January 8, 2009, calculated proportionately to the equity interest acquired by TNL, as commented in Note 2, Consolidation basis. Amortization of is calculated on a straight-line basis and considers, in the case of: (i) permit terms––the effective term of the permit; and (ii) software––a maximum period of five years. Goodwill calculated based on expected future earnings is not amortized beginning 2009. (i) Deferred charges Consist of preoperating expenses incurred through December 31, 2008 and are stated at cost. Amortization is calculated under the straight-line method over the expected recovery period, which does not exceed ten years. Even though Law 11638/2007 did not change deferred charges, Resolution 553/2008, which approves CPC 04 Intangible Assets, restricts the recognition of deferred charges, which is confirmed by Law 11941/2009 that discontinues this line item. However, in view of the option granted by Resolution 565/2008, which approves CPC 13 First-time Adoption of Law 11638/2007 and Law 11941/2009, as of December 31, 2008, TMAR and its subsidiaries existing on this date elected to maintain this line item until it is fully amortized. (j) Impairment of long-lived assets Assets are tested for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset or group of assets might be impaired. Long-lived assets may be identified as assets with indefinite useful lives and assets subject to depreciation




35

and amortization (property, plant and equipment and intangible assets). Impairment losses, if any, are recognized in the amount by which the carrying amount of an asset exceeds its recoverable value. Recoverable value is the higher of fair value less cost to sell and the value in use. In order to be tested for impairment, assets are grouped into the smallest identifiable group for which there are cash generating units (CGUs), and projections are made based on discounted cash flows, supported by expectations on the Company's operations in its various business segments. The CGUs are the company’s operating segments as they are the smallest separable cash generating units. Net Present Value (NPV) projections for the CGUs are prepared taking into consideration the following assumptions: • Entity-related inputs: evidence of obsolescence or damage, discontinuation plans,

performance reports, etc. • Outside inputs: market prices of the assets, technologic environment, market environment,

economic environment, regulatory environment, legal environment, interest rates, return rates on investments, market value of Company shares, etc.

Said projections support the recovery of assets with indefinite useful lives. Additionally, Company tests did not show any evidences of impairment that would result in the realization of projections for assets with finite useful lives. (k) Discount to present value The Company values its financial assets and financial liabilities to identify instances of applicability of the discount to present value. Generally, when applicable, the discount rate used is the average return rate on investments for financial assets or interest charged on Company borrowings for financial liabilities. The balancing item is the asset or liability that has originated the financial instrument, when applicable, and the deemed borrowings costs are allocated to the Company’s profits or loss according to the rate used in the calculation. The Company believes that none of the assets and liabilities recorded at September 30 and June 30, 2010 is subject to the discount to present value, due to the following: (i) their nature; (ii) short-term realization of certain balances and transactions; (iii) absence of monetary assets and monetary liabilities with observable or unobservable interest. Financial instruments measured at the amortized costs are adjusted for inflation using relevant contractual indices. (l) Impairment of financial assets The Company assesses at the end of the quarter, whether there is objective evidence that financial assets or a group of financial assets is impaired. A financial asset or group of financial assets is considered impaired when there is objective evidence, as a result of one or more events that occurred after the initial recognition of the asset, that the estimated future cash flows have been impacted.




36

(m) Borrowings and financing Stated at amortized cost, plus inflation adjustment of foreign exchange differences and interest incurred through the end of the reporting period. Transaction costs incurred are measured at amortized cost and recognized in liabilities, as a reduction to the balance of borrowings and financing, and are expensed over the relevant agreement term. The Company and its subsidiaries do not use hedge accounting. (n) Derivatives The Company contracts derivatives to mitigate exposure to market risks arising from changes in exchange rates on foreign currency-denominated debts and, therefore, are classified in line account ‘Borrowings and financing’. Derivatives are initially recognized at cost at the inception of the derivative contract and are subsequently measured at fair value. Changes in the fair value of any of these derivatives are recorded directly in the statement of operations. (o) Reserve for contingent liabilities The reserve for contingent liabilities is recorded for contingent risks assessed by management and the in-house and outside legal counsel as probable losses, based on the estimated costs of ongoing lawsuits.

(p) Employee benefits • Pension plans: private pension plans and other postretirement benefits sponsored by the

Company and its subsidiaries for the benefit of their employees are administered by two foundations. Contributions are determined based on actuarial calculations, when applicable, and charged to profit or loss on the accrual basis.

The Company and its subsidiaries have defined contribution and defined benefits plans.

In the defined contribution plan, the sponsor makes fixed contributions to a fund managed by a separate entity. The contributions are recognized as employee benefit expenses as incurred. The sponsor does not have the legal or constructive obligation of making additional contributions, should the fund lack sufficient assets to pay all employees the benefits related to the services provided in the current period and prior periods.

The defined benefit plan recognizes gains and losses under the corridor approach. The defined benefit is annually calculated by independent actuaries, who use the projected unit credit method. The present value of the defined benefit is determined by discounting the estimated future cash outflows, using the projected inflation rate plus long-term interest. The obligation recognized in the balance sheet as regards the defined benefit pension plans




37

presenting a deficit, corresponds to the present value of the benefits defined at the balance sheet date, less the fair value of the plan’s assets.

Stock option plan - The Company and its subsidiaries offer its officers preferred and common stock option plans. These options are priced at fair value on the grant date of the plans, are recognized in profit or loss under the straight-line method over the option vesting period and are equity settled. Accumulated balances at the balance sheet date are recognized in shareholders’ equity, according to the criteria set out in CVM Resolution 562/2008.

Subsidiary BrT had a stock option plan, granted to officers and employees. These options were partially settled in the year ended December 31, 2009 due to the change in share control.

• Employee profit sharing - the that accrual includes the employee profit sharing plan is accounted for on the accrual basis and involves all eligible employees, proportionately to the period of time worked in the year, according to the Plan’s rules. The amount, which is paid by April of the year subsequent to the year profit sharing is accrued, is determined based on the target program established with the employees’ unions, under a collective bargaining agreement, pursuant to Law 10101/00 and the bylaws.

(q) Use of estimates The preparation of interim financial statements requires the use of estimates to record certain assets, liabilities and other transactions. The interim financial statements include, therefore, estimates and assumptions related to the useful lives of property, plant and equipment, the recoverable value of long-lived assets, the reserve for contingent liabilities, the determination of the provisions for income taxes, the fair value measurement of financial assets and financial liabilities, and the calculation of the employee benefits. Actual results may differ from these estimates. (r) Revenue recognition Revenue refers basically to the amount of the payments received or receivable from sales of services in the regular course of the Company’s and its subsidiaries’ activities, written down to the fair value of the services to be provided in rewards of the Oi Pontos customer loyalty program, which are recognized when points are redeemed or when they expire (24 months after the billing that originated the points). Revenue is stated at the gross amount, less approximate taxes, returns and discounts. Revenue is recognized when it can be reliably measured, it is probable that future economic benefits will be transferred to the Company, the transaction costs incurred can be measured, the risks and rewards have been substantially transferred to the buyer, and certain specific criteria of each of the Company's activities have been met. Service revenue is recognized when services are provided. Local and long distance calls are charged based on time measurement according to the legislation in effect. The services charged based on monthly fixed amounts are calculated and recorded on a straight-line basis.




38

Prepaid services are recognized as advances from customers and recognized in revenue as they are used by the customers. Revenue from sales of payphone cards - Public Use Telephony (“TUP”), handhelds and accessories is recognized when these items are delivered and accepted by the customers. Discounts on services provided and sales of cell phones and accessories are taken into consideration in the recognition of the related revenue. Revenues involving transactions with multiple elements are identified in relation to each one of their components and the recognition criteria are applied on a case-by-case basis. Revenue is not recognized when there is significant uncertainty as to its realization. (s) Expense recognition

Expenses are recognized on the accrual basis, considering their relation with revenue realization. Prepaid expenses related to future years are deferred. (t) Financial income and expenses Financial income refers basically to income on financial investments, interest on past-due receivables, and gains on derivatives, carried on the accrual basis. Financial expenses refer basically to interest and inflation adjustment and exchange differences on borrowings, debentures, derivatives and other financial transactions, calculated and recorded on the accrual basis. Pursuant to corporate provisions, interest on capital to be attributed to mandatory minimum dividends is accounted for as ‘Financial expenses’ and reversed to ‘Retained earnings’, as in substance it consists of distribution of earnings. To avoid impacting financial ratios and allow the comparability between presented reporting periods, the reversals are being presented in line item ‘Financial expenses’, thus annulling its impacts. (u) Current and deferred income tax and social contribution on net income Income tax and social contribution on net income are recorded on the accrual basis. Said taxes attributed to temporary differences and tax loss carryforwards are recorded in assets or liabilities, as applicable, only under the assumption of future realization or payment. The Company prepares technical studies that consider the future generation of taxable income, according to management expectations, considering the continuity of the companies as going concerns. Future earnings are compared to the nominal amount of recoverable tax credits over a period limited to ten years and reduce the deferred tax assets as it is identified that the generation of future taxable income sufficient for the partial or total utilization of deferred taxes is less than probable. The technical studies are updated annually and the tax credits are adjusted based on the results of these reviews. (v) Government grants and government assistance Recognized in profit or loss for the year as a reduction to related expenses.




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(w) Earnings (loss) per share Earnings (loss) per share are calculated based on the amount of outstanding shares at the end of the reporting period. Outstanding shares are represented by the total shares issued, less the shares held in treasury. 4 OPERATING REVENUE

Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009 Fixed telephone service Local service: Subscriptions 5,028,312 5,105,650 8,302,552 8,271,408 Local traffic 763,797 959,053 1,204,287 1,489,315 Fixed to mobile calls (VC1) 1,826,030 2,053,716 3,011,083 3,429,502 Collect calls 1,569 2,663 2,136 4,961 Hookup fees 86,441 71,549 122,489 80,322 Other income 308 379 1,830 380 Long-distance service: Intra-sector calls 958,284 1,290,613 1,492,195 2,060,117 Inter-sector calls 261,316 260,284 483,216 426,011 Interregional calls 946,802 661,155 1,317,506 1,005,717 International calls 33,054 39,290 52,194 62,541 Fixed to mobile calls (VC2 and VC3) 590,258 649,296 943,534 1,094,776 Payphone cards 220,010 429,640 403,830 735,147 Advanced voice services (basically 0500/0800) 158,825

139,653 246,204

232,169

Additional services 409,660 445,919 754,939 741,128 11,284,666 12,108,860 18,337,995 19,633,494 Mobile telephone service Subscriptions 1,937,863 1,664,673 Originated calls 3,027,782 2,680,036 Sales of handsets and accessories 153,600 271,731 Domestic roaming 39,029 44,012 International roaming 55,076 47,576 Additional services 1,133,655 762,542 6,347,005 5,470,570 Consideration for use of fixed-line grid Fixed to fixed calls 315,240 317,932 428,759 462,990 Fixed to mobile calls 358,752 333,189 274,905 191,978 673,992 651,121 703,664 654,968

Consideration for use of mobile network Fixed to mobile calls 434,071 376,068

Mobile to mobile calls 1,456,362 1,324,801

1,890,433 1,700,869 Data communication services ADSL ("Velox") 1,257,314 1,151,231 3,882,564 3,510,755 Transmission ("EILD") 454,238 471,898 719,412 668,484 Dedicated-line services (SLD) 109,482 114,319 393,883 441,485 IP services 319,857 253,267 999,630 739,140 Package switching and frame relay 148,867 165,126 271,425 311,161 Other 163,477 242,464 690,530 723,301 2,453,235 2,398,305 6,957,444 6,394,326 Other services 1,451 1,166 210,416 96,112




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Gross operating revenue 14,413,344 15,159,452 34,446,957 33,950,339 Deductions from gross revenue Taxes (3,852,701) (4,132,268) (8,107,617) (8,392,867) Other deductions (460,945) (463,826) (4,204,921) (3,267,757) (4,313,646) (4,596,094) (12,312,538) (11,660,624) Net operating revenue 10,099,698 10,563,358 22,134,419 22,289,715

5 COST OF SALES AND SERVICES AND OPERATING EXPENSES

Cost of sales and services

Company

Consolidated

9/30/2010 9/30/2009 9/30/2010 9/30/2009

Interconnection (3,079,880 ) (2,933,198 ) (3,778,087 ) (3,924,294 ) Depreciation and amortization (818,177 ) (1,336,785 ) (3,072,411 ) (3,764,740 ) Grid maintenance service (917,917 ) (1,140,525 ) (1,575,381 ) (1,804,138 ) Leases and insurance (444,007 ) (504,973 ) (1,091,755 ) (1,023,044 ) FISTEL fee (17,381 ) (17,444 ) (535,922 ) (449,990 ) Outside services (254,127 ) (254,829 ) (492,564 ) (467,112 ) Personnel (138,322 ) (220,841 ) (432,507 ) (570,067 ) Supplies (91,629 ) (144,323 ) (174,613 ) (300,019 ) Cost of handsets and other (122,613 ) (464,022 ) Concession Agreement Extension Fee -

ANATEL

(73,425 ) (53,654 ) (114,788 ) (115,604 ) Other costs (7,148 ) 5,096 (47,879 ) (21,573 ) (5,842,013 ) (6,601,476 ) (11,438,520 ) (12,904,603 )

Selling expenses Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009

Outside services (783,207 ) (788,729 ) (2,047,672 ) (1,794,323 ) Allowance for doubtful accounts (309,196 ) (401,438 ) (800,315 ) (1,058,116 ) Advertising and publicity (99,220 ) (99,145 ) (372,532 ) (416,565 ) Personnel (145,327 ) (148,032 ) (263,647 ) (332,499 ) Depreciation and amortization (6,772 ) (12,674 ) (21,143 ) (28,876 ) Supplies (67 ) (196 ) (9,861 ) (12,519 ) Leases and insurance (491 ) (173 ) (2,052 ) (9,772 ) Other expenses (30,758 ) (12,765 ) (80,241 ) (94,525 ) (1,375,038 ) (1,463,152 ) (3,597,463 ) (3,747,195 )




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General and administrative expenses Company 2007 - Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009

Outside services (453,631 ) (545,957 ) (1,005,207 ) (1,170,507 ) Personnel (149,135 ) (201,006 ) (486,749 ) (544,569 ) Depreciation and amortization (57,904 ) (111,355 ) (264,936 ) (388,139 ) Leases and insurance (38,138 ) (37,079 ) (41,519 ) (149,311 ) Supplies (7,089 ) (5,995 ) (10,162 ) (8,507 ) Other expenses (29,244 ) (29,964 ) (41,150 ) (54,029 ) (735,141 ) (931,356 ) (1,849,723 ) (2,315,062 )

6 OTHER OPERATING INCOME (EXPENSES), NET Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009 Other operating income

Recovered expenses 146,139 102,886 255,455 211,488 Infrastructure leases 116,150 133,185 240,267 260,942 Fines on overdue bills 103,835 103,981 193,067 185,015 Technical and administrative services 49,622 40,286 88,112 75,315 Gain on sale of permanent assets 3,797 24,022 42,748 73,736 Reversal of allowance for losses on discontinued assets 9,368 20,440 Bonuses received 805 7,506 Other income 2,540 21,596 35,103 59,891

422,083 425,956 864,925 894,333 Other operating expenses

Taxes (194,183 ) (187,879 ) (556,524 ) (561,841 ) Reserve for contingent liabilities (reversals) (155,591 ) (208,677 ) (494,891 ) (2,000,773 ) Employee profit sharing (129,773 ) (40,937 ) (242,861 ) (97,809 ) Amortization of deferred charges (64,663 ) (64,956 ) Loss on sale of permanent assets (5,465 ) (11,250 ) (51,756 ) (78,900 )

Collection costs (58,762 ) (23,505 ) (46,205 ) (57,836 ) Discounts granted (35,967 ) (28,718 ) (39,353 ) (29,300 ) Fine collection costs (3,924 ) (8,387 ) (17,353 ) (25,838 ) Share-based compensation (7,528 ) (15,710 ) (10,113 ) (21,129 ) Amortization of goodwill paid on acquisition of Oi and TNCP (74,502 ) (39,832 ) Allowance for losses on investments and other provisions (148,232 ) (151,958 ) Pension fund reserves (9,223 ) (31,457 ) Other expenses (6,893 ) (61,491 ) (51,768 ) (57,947 )

(672,588 ) (774,618 ) (1,584,710 ) (3,179,744 ) (250,505 ) (348,662 ) (719,785 ) (2,285,411 )




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7 FINANCIAL INCOME (EXPENSES)

Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009

Financial income Income from financial investments 291,227 303,631 626,242 584,747 Interest and inflation gains on other assets 208,670 204,785 549,989 466,484 Recovery of expenses 92,018 106,751 Financial discounts obtained 19,144 63,046 31,831 79,982 Interest and inflation adjustment on intercompany loans 5,423 20,255 2,496 42,577 Other 9,534 3,187 16,089 53,101

626,016 594,904 1,333,398 1,226,891 Financial expenses

Interest on intercompany borrowings (1,062,128 ) (1,205,075 ) (1,396,017 ) (1,504,838 ) Interest on debentures (489,469 ) (307,137 ) (489,469 ) (307,137 ) Interest and inflation losses on other liabilities (32,637 ) (24,441 ) (347,903 ) (351,345 ) Inflation adjustment of reserve for contingent liabilities (111,377 ) (226,977 ) (306,401 ) (391,165 ) Derivative transactions (202,073 ) (1,089,680 ) (208,758 ) (1,190,914 ) Withholding income tax (IRRF) on financial transactions and

charges (99,765 ) (130,078 ) (150,726 ) (141,315 ) Interest and commissions on intercompany borrowings (395,401 ) (320,446 ) (59,895 ) (106,991 ) Interest on taxes in installments – tax installment plan (20,800 ) (2,142 ) (54,493 ) (1,819 ) Tax on financial transactions (IOF) and taxes on revenue

(PIS/COFINS) on financial incomes (17,422 ) (14,012 ) (20,388 ) (23,691 ) Inflation adjustment and exchange differences on third-party

borrowings 98,294 1,063,679 94,890 1,201,833 Other (8,379 ) (5,590 ) (25,583 ) (68,425 )

(2,341,157 ) (2,261,899 ) (2,964,743 ) (2,885,807 ) (1,715,141 ) (1,666,995 ) (1,631,345 ) (1,658,916 )




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8 CURRENT AND DEFERRED INCOME TAX AND SOCIAL CONTRIBU TION ON NET INCOME

Taxes on income encompass the income tax and the social contribution on net income. The income tax rate is 25% and the social contribution rate is 9%, generating aggregate taxation of 34%.

The provision for income tax and social contribution is broken down as follows: Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009 Current taxes Income tax and social contribution (224) 6,836 (490,098) (604,846) Deferred taxes 54,049 70,015 (259,338) 546,270 Total 53,825 76,851 (749,436) (58,576)

Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009 Income before taxes and profit sharing 1,626,342 (186,359) 2,913,063 (622,628) Income of companies not subject to income tax and social contribution calculation (2,035)

Total taxed income 1,626,342 (186,359) 2,911,028 (622,628) Income tax and social contribution on taxed income (10% + 15% + 9% = 34%) (552,956) 63,362 (989,750) 211,694

Tax effects on permanent deductions (additions) (30,960) (82,421) (40,501) (249,112) Equity in subsidiaries 491,421 89,075 5,461 (372) Tax incentives (basically, operating profit) (i) 559 116,490 31,162 Utilization of tax loss carryforwards 25,289 Unrecognized deferred tax assets (41,285) (51,948) Recognized deferred tax assets 120,841 127,438 Other 24,920 6,835 47,422 Income tax and social contribution effect on statement of operations 53,825 76,851 (749,436) (58,576)

Effective rate 3.31% 41.24% 25.74% 9.41%

(i) Refers to the operating profit recognized in profit or loss pursuant to Law 11638/2007. This

tax benefit is granted under an Incentive-granting Report issued by the Northeast Development Authority (SUDENE), after the compliance with all requirements made by this agency; however, said report does not make any additional requirements whose noncompliance would result in the loss of the tax benefit before December 2013.

The interim financial statements for the nine-month period ended September 30, 2010 have been prepared taking into account management’s best estimates regarding the tax treatment and contemplate the criteria set out in the Transitional Tax Regime.




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9 CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (a) Cash and cash equivalents

Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 Cash and banks 41,047 48,662 116,788 187,721 Cash equivalents 3,195,024 3,536,212 8,941,185 7,760,507 3,236,071 3,584,874 9,057,973 7,948,228

Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 Exclusive investment funds 1,623,789 2,772,973 5,930,136 6,097,865 Bank certificates of deposit (CDBs) 1,449,721 639,826 2,800,551 1,437,362 Repurchase agreements 29,292 28,701 29,865 40,068 Other 92,222 94,712 180,633 185,212 Cash equivalents 3,195,024 3,536,212 8,941,185 7,760,507

(b) Financial investments Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 Exclusive investment funds 993,719 1,442,162 1,924,010 2,369,642 Government securities 96,281 94,072 96,281 94,072 Private securities 314,800 308,231 318,351 311,696 Financial investments 1,404,800 1,844,465 2,338,642 2,775,410 Current 1,399,473 1,839,293 2,329,764 2,766,773 Noncurrent 5,327 5,172 8,878 8,637 c) Breakdown of the exclusive investment funds portfolios

All investment funds in which TMAR and its subsidiaries invest their funds are exclusive investment funds of the group, in which, as at September 30, 2010, TMAR holds approximately 32% (46% at June 30, 2010), Oi 31% (21% at June 30, 2010), BrT 20% (17% at June 30, 2010), and the other subsidiaries 12% (9% at June 30, 2010), totaling 95% (93% at June 30, 2010), of the funds’ units in the consolidated financial statements of TMAR.




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The portfolios of the exclusive funds included the securities shown in the table below, which presents the consolidated balances of the funds: Consolidated balances of exclusive

investment funds 9/30/2010 6/30/2010

Repurchase agreements 5,298,471 5,374,323 Bank certificates of deposit (CDBs) 843,177 1,046,922 Time deposits 84,840 303,207 Private securities 3,968 3,726 Government securities 2,117 3,209 Other 2,505 4,183

Securities classified in as cash equivalents 6,235,078 6,735,570

Government securities 1,653,019 2,074,003 Private securities 53,184 65,230 Bonds 222,010 235,974 Time deposits 116,969

Securities classified in financial investments 2,045,182 2,375,207 Exclusive investment funds 8,280,260 9,110,777

The Company has directly or indirectly financial investments in exclusive investment funds in Brazil and abroad, for the purpose of obtaining a return on its cash, benchmarked to CDI in Brazil and LIBOR abroad. 10 TRADE RECEIVABLES


Billed services 2,559,786 2,751,862 4,769,813 4,839,767 Unbilled services 660,997 646,455 1,882,017 1,788,896 Handsets and accessories sold 250,358 251,629 Allowance for doubtful accounts (246,493 ) (257,174 ) (975,479 ) (1,003,870 )

2,974,290 3,141,143 5,926,709 5,876,422




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The aging list of trade receivables is as follows:

Company 9/30/2010 % 6/30/2010 %

Unbilled 660,997 20.5 646,455 19.0 Current 1,254,016 38.9 1,282,479 37.7 Receivables from other carriers 551,072 17.1 630,486 18.6 Past-due up to 30 days 386,780 12.0 439,382 12.9 Past-due from 31 to 60 days 116,451 3.6 136,144 4.0 Past-due from 61 to 90 days 66,850 2.1 79,096 2.3 Over 90 days past-due 184,617 5.8 184,275 5.5

3,220,783 100 3,398,317 100.0

Consolidated 9/30/2010 % 6/30/2010 %

Unbilled 1,882,017 27.3 1,788,896 26.0 Current 2,364,087 34.3 2,382,254 34.6 Receivables from other carriers 785,027 11.4 707,309 10.3 Past-due up to 30 days 839,971 12.2 902,777 13.1 Past-due from 31 to 60 days 275,459 4.0 307,605 4.5 Past-due from 61 to 90 days 175,880 2.5 195,268 2.8 Over 90 days past-due 579,747 8.3 596,183 8.7

6,902,188 100 6,880,292 100.0

11 TRADE RECEIVABLES - NONCURRENT

Consolidated 9/30/2010 6/30/2010 Amounts for offset – TCSPREV pension plan (i) 148,966 144,974 Receivables - Barramar S.A. (ii) 57,813 58,925 Allowance for doubtful accounts – Barramar S.A. (ii) (57,813) (58,925 ) Other 4,927 13,505 153,893 158,479

(i) BrT recognized an asset related to sponsor’s excess contributions and the related surplus

of the TCSPREV private pension plan. The assets recognized are used to offset future employer contributions.

(ii) The amount receivable from Barramar S.A. refers to amounts recorded in the long-term

assets of Companhia AIX de Participações (“AIX”), a jointly-controlled entity, proportionately to TMAR’s interest in AIX (50%). Due to the bankruptcy of Barramar S.A., declared by the 5th São Paulo State Private Law Court, in the trial session held on March 24, 2004, AIX is taking reasonable legal efforts to have its receivables recognized by the court and calculate the operating assets included in the insolvent estate due to its interest in the Refibra consortium.




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At September 30, 2009, the Company’s management recognized an allowance for doubtful accounts corresponding to all receivables from Barramar S.A., due to uncertainties regarding their recoverability. The amount is recognized in ‘Other operating expenses’ and ‘Allowance for losses on investments and other provisions’.

12 DEFERRED AND RECOVERABLE TAXES Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 Recoverable State VAT (ICMS) (i) 468,593 476,444 1,247,511 1,334,533 Income tax on temporary additions (ii) 841,737 835,697 2,233,845 2,360,404 Income tax on tax losses (ii) 154,271 153,782 1,024,745 1,069,141 Social contribution on temporary additions (ii) 243,243 246,836 709,773 766,354 Social contribution on tax loss carryforwards (ii) 112,743 104,377 435,863 447,206 Recoverable income tax (iii) 57,396 127,682 542,320 573,650 Withholding income taxes (IRRF) 131,620 110,026 227,337 196,599 Recoverable social contribution (iii) 8,523 8,053 191,315 145,709 Other recoverable taxes 32,791 30,898 164,373 165,902 2,050,917 2,093,795 6,777,082 7,059,498

Current 552,433 580,658 2,393,006 2,367,649 Noncurrent 1,498,484 1,513,137 4,384,076 4,691,849

(i) Recoverable State VAT (ICMS) arises mostly from credits claimed on purchases of

property, plant and equipment, which can be offset against ICMS payable within 48 months, pursuant to Supplementary Law 102/2000.

(ii) The Company and its subsidiaries recognize deferred tax credits arising from tax loss

carryforwards and temporary differences. According to a technical study approved by the Company’s management bodies, submitted to the Supervisory Board for approval, taxable income to be generated over the next ten years, discounted to present value, will be sufficient to realize these tax credits as shown in the table below. The Company and its subsidiaries offset their tax loss carryforwards against taxable income up to a limit of 30% per year, pursuant to the prevailing tax law.

Company Consolidated Up to December 31: 2010 77,447 2011 2,919 570,656 2012 81,886 512,155 2013 172,694 514,240 2014 150,124 455,719 2015-2017 563,786 1,331,834 2018-2020 380,585 922,967 2021 and subsequent years 19,208 1,351,994 4,404,226




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The expected recovery of R$19,208 (consolidated) beginning 2021 refers to reserve to cover the actuarial deficit of pension funds of subsidiary BrT, whose obligation is being financially settled in accordance with a maximum remaining period of 11 years and 3 months, in line with the period set by the Pension Plan Authority (“SPC”). Despite the deadline set by the SPC and in accordance with the estimated future taxable income, BrT is in a position to fully offset the deferred taxes within a period lower than ten years, should it elect to fully accelerate the repayment of the debt. As at September 30, 2010, only part of tax credits on tax loss carryforwards or tax credits on temporary differences has been recognized by the direct and indirect subsidiaries that do not have a history of profitability and or do not expect to generate sufficient taxable income over the next ten years. Unrecognized tax credits total R$270,075 (R$269,900 at June 30, 2010).

(iii) Refer to payments made, calculated based on legal estimates, which will be offset against

future tax liabilities. 13 PREPAID EXPENSES Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 FISTEL fee (i) 6,388 12,181 246,051 416,694 FATL fee (ii) 165,747 171,463 182,755 188,961 Publicity, advertising and sponsorships 81,590 72,121 124,846 132,224 Post rental 10,190 18,470 41,440 51,469 Subsidies for handsets (iii) 35,054 47,717 DTH subsidy 25,652 35,113 Taxes and fees 12,371 15,869 21,601 25,100 Insurance 5,397 5,859 8,281 10,689 Financial charges 2,985 2,985 Other 23,237 32,959 45,750 55,209 304,920 331,907 731,430 966,161

Current 156,463 177,192 522,276 736,600 Noncurrent 148,457 154,715 209,154 229,561 (i) The Telecommunications Inspection Fund (“FISTEL”) fees, paid on the activation of

mobile service customers, are recorded as prepaid expenses and amortized over the average customer retention period, which management estimates at 24 months. Additionally, the payments made in accordance with the applicable Law as FISTEL maintenance fee, are also recorded as prepaid expenses and accounted for on a monthly basis over the year.

(ii) On October 29, 2007, a contribution of R$260,000 was made to FATL - Fundação

Atlântico de Seguridade Social. This amount, calculated by the FATL’s actuaries, is intended to conform its financial statements to the changes in actuarial assumptions to better reflect the new economic scenario of declining interest rates, and conform the mortality and disability tables of the FATL’s pension plans. The amount is accounted




49

for by the sponsors (TMAR, Oi and Oi Internet) over a period of approximately ten years, the estimated average remaining length of service of employees covered by the plan.

(iii) The subsidies for postpaid plans’ handsets, for corporate segment, are considered

prepaid expenses since they refer to efforts to include customers in the subscriber base, for a minimum contractual retention period. These amounts are amortized over a twelve-month period as these contracts provide for reimbursement in the event of churning or migration to a prepaid plan before the contractual retention period is completed. The subsidy for prepaid plans’ customers is not deferred since these plans do not provide for the payment of a penalty in the event of churning.

14 DEPOSITS AND COURT BLOCKED AMOUNTS


Civil 497,881 480,785 4,978,954 4,925,665 Tax expenses 908,949 894,526 1,683,726 1,650,684 Labor 659,413 623,469 1,288,686 1,218,453 Legal blocking 206,408 211,787 216,808 221,313 2,272,651 2,210,567 8,168,174 8,016,115 Decrease due to reclassifications to: Reserve for contingent liabilities (512,297) (472,713) (3,471,474) (3,462,954) Payable and deferred taxes (406,717) (389,675) (909,879) (877,709) 1,353,637 1,348,179 3,786,821 3,675,452

Current 490,393 442,203 816,704 771,323 Noncurrent 863,244 905,976 2,970,117 2,904,129

Escrow deposits linked to the reserve for contingent liabilities are stated as a reduction to such reserve (see Notes 21 and 23). As set forth by relevant legislation, escrow deposits are adjusted for inflation.

15 INVESTMENTS

Company Consolidated

9/30/2010 6/30/2010 9/30/2010 6/30/2010 Investments accounted for under the cost method 32,679 32,679 40,477 40,480

Investments accounted for under the equity method

23,127,484 22,530,498 Goodwill paid on acquisition of Oi, net (i) 110,635 123,893 Tax incentives, net of allowances for losses (ii) 8,676 8,676 6,216 6,216 Allowance for investment losses (iii) (57,813) (58,925 ) Other investments 249 249 368 368

23,221,910 22,637,070 47,061 47,064




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(i) Refers to goodwill paid by the Company, net of amortization, on the acquisition of Oi on May 30, 2003. The goodwill at its original amount of R$499,994 is based upon on the appreciation of property, plant and equipment, supported by an appraisal report prepared by a specialized firm. Goodwill is amortized over nine years and five months, corresponding to the useful lives of the assets.

(ii) Refers to investment grants under the Northeast Investment Fund (“FINOR”) and the Espírito Santo State Economic Recovery Fund (“FUNRES”).

(iii) At September 30, 2009, the Company’s management recorded an allowance for loss of

the recoverable value on its interest in a joint venture, AIX, in an amount equivalent to the receivables from Barramar S.A. (Note 11). The amount is recognized in ‘Other operating expenses’ and ‘Allowance for losses on investments and other provisions’.

Main data related to equity interests carried under the equity method: Company

Subsidiaries

Shareholders’ equity (deficit)

Net income (loss)

Dividends

and interest on capital

Thousand of Equity interest - %

shares private equity Total capital

Voting capital Common Preferred

Coari 12,164,921 45,939

161,990 128,675

100

100

AIX (ii) 123,665 18,070

2,676 298,563

50 50

TNCP (i) 10,850,412 1,360,853

59,056 118,193

99.66 99.57

Oi Internet 76,238 37,608

188,903 100 100

Serede 2,220 (3,415)

27 3,000

100 100

Calais (iii) (877) (874)

11,265 22,531

100 100

Company

Provision for shareholders' deficit

Equity in subsidiaries Investment value

Subsidiaries 9/30/2010 9/30/2009 9/30/2010 6/30/2010 9/30/2010 6/30/2010

Oi 13,309

Coari 45,938 (118,286) 12,164,921 12,094,357

Amazônia (i) (2,368)

AIX (ii) 9,035 18,352 70,867 71,588

TNCP (i) 1,356,190 376,856 10,813,238 10,308,227

Oi Internet 37,608 (26,654) 76,238 52,358

Serede (3,415) 777 2,220 3,968

Calais (iii) (874) (62) (877) (229)

1,444,482 261,924 23,127,484 22,530,498 (877) (229)

(i) On March 9, 2009, TMAR implemented a corporate restructuring that changed

ownership structure of its investments in such companies (Oi, TNCP and Amazônia), as described in Note 1 (d) Corporate Restructuring.




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(ii) AIX is engaged in the provision of pipes for the installation of optical fiber along the main highways in the state of São Paulo.

Assets and liabilities components, as well as income and expenses, of AIX were added to the interim financial statements proportionately to the 50% interest held by the Company in this subsidiary’s equity.

(iii) As set out in Article 12 of CVM Instruction 247/1996, an entity is required to recognize

a provision in current liabilities to cover the shareholders' deficit of its subsidiaries. Changes in the Company’s investments are mainly due to the equity in the earnings (losses) of subsidiaries. 16 PROPERTY, PLANT AND EQUIPMENT Company

9/30/2010 6/30/2010 Annual depreciation

rate (average) (*) ( %)

Cost Accumulated depreciation Net Net

Transmission and other equipment

23,930,212 (19,840,530) 4,089,682 4,123,926 11

Infrastructure 5,412,072 (3,733,617) 1,678,455 1,674,129 7.66

Works in progress 857,847 857,847 981,630

Buildings 2,168,112 (1,527,300) 640,812 648,243 7.25 Automatic switching

equipment

9,779,817 (9,237,215) 542,602 512,439 12.78

Other assets 3,246,051 (3,056,046) 190,005 145,683 13.33 45,394,111 (37,394,708) 7,999,403 8,086,050

Consolidated

9/30/2010 6/30/2010 Annual depreciation

rate (average) (*) ( %)

Cost Accumulated depreciation Net Net

Transmission and other equipment

44,913,073 (34,854,950) 10,058,123 10,093,217 10.92

Infrastructure 12,335,147 (8,303,424) 4,031,723 4,065,619 8.02 Automatic switching

equipment

14,833,657 (12,330,262) 2,503,395 2,520,190 11.23

Works in progress 1,814,468 1,814,468 2,141,054

Buildings 3,650,285 (2,244,680) 1,405,605 1,434,946 7.3

Other assets 10,918,075 (9,750,932) 1,167,143 1,142,188 12.35 88,464,705 (67,484,248) 20,980,457 21,397,214

(*) Takes into consideration the new useful lives of the assets, as described below in ‘Additional disclosures’.




52

Company Consolidated Balance at Dec 31, 2009 8,269,965 22,560,606 Additions 347,667 834,479 Transfer 17,865 (229,220) Residual amount written off (22,250) (94,044) Depreciation (527,197) (1,674,607) Balance at Jun 30, 2010 8,086,050 21,397,214 Additions 236,379 536,581 Transfer (48,066) (125,571) Residual amount written off (870) (11,136) Depreciation (274,090) (816,631) Balance at Sep 30, 2010 7,999,403 20,980,457

Additional disclosures

Pursuant to ANATEL’s concession agreements, all property, plant and equipment items capitalized by TMAR and BrT that are indispensable for the provision of the services granted under said agreements are considered returnable assets and are part of the concession’s cost. These assets are handed over to ANATEL upon the termination of the concession agreements that are not renewed.

At September 30, 2010, the residual balance of the Company returnable assets is R$5,011,925 (R$4,956,891 at June 30, 2010), and of subsidiary BrT is R$3,480,603 (R$3,598,402 at June 30, 2010), and consist of assets and installations in progress, switching and transmission equipment, payphones, outside network equipment, power equipment, and systems and operation support equipment. In December 2009, the Company’s and its subsidiaries’ Board of Directors approved the appraisal report on the useful lives of property, plant and equipment. This appraisal resulted in a change in the estimated useful lives of the assets, which was reflected through a reduction of R$912,090 in depreciation expenses for the nine-month period ended September 30, 2010, when compared to the same period of 2009. The Company and its subsidiaries estimate a reduction in depreciation expenses for the annual reporting period ending December 31, 2010 by approximately R$R$1.1 billion. However, at subsidiary BrT, the change in the useful lives of property, plant and equipment has been made since September 30, 2009 and is consistent with the appraisal report, issued by a specialized firm, which verifies the fair values of the assets acquired and liabilities assumed on the acquisition of BrT Part control, impacting BrT’s financial statements beginning October 1, 2009. In the nine-month period ended September 30, 2010, financial charges and transaction costs capitalized as works in progress totaled R$68,569 (Company) and R$156,028 (on a consolidated basis). The impairment test of property, plant and equipment items conducted in the year ended December 31, 2008 indicated that an allowance of R$21,318 should be recognized for impairment losses on automatic switching and transmission equipment related to Amazônia’s




53

TDMA network, corresponding to the mobile services CGU, mainly due to the corporate restructuring referred to in Note 1 (d). Operating leases The monthly installments of leases that do not transfer substantially all the risks and rewards incidental to ownership to the lessee are expensed over the lease term (see ‘leases and Insurance’ in Note 5), and total R$3,386 (R$2,329 at September 30, 2009), Company. All operating leases of the Company and its subsidiaries are cancellable.

17 INTANGIBLE ASSETS

Company

Annual amortization

rate (average) (%)

9/30/2010 6/30/2010

Cost Cumulative

amortization Net Net

Software licenses 1,349,042 (1,135,092) 213,950 190,753 20 Goodwill paid on acquisition of TNCP/Amazônia 323,679 (91,020) 232,659 244,219 10

Right of way 22,020 (11,456) 10,564 11,063 20

Other 98,472 (91,235) 7,237 7,397 4-20

1,793,213 (1,328,803) 464,410 453,432

Consolidated

Annual amortization

rate (average) (%)

9/30/2010 6/30/2010

Cost Cumulative

amortization Net Net

Goodwill paid 584,496 (431,557) 152,939 152,928

BrT STFC concession (i) 8,034,114 (1,031,965) 7,002,149 7,116,936 5.88

Oi and BrT permits 3,659,589 (1,303,680) 2,355,909 2,425,792 7-14

Software licenses 5,118,224 (3,947,843) 1,170,381 1,117,515 20

Other 352,155 (203,193) 148,962 139,523 4-20

17,748,578 (6,918,238) 10,830,340 10,952,694

(i) Refers to the goodwill paid on acquisition of control of BrT, and the portion of merged

goodwill arising on the corporate restructuring undertaken throughout 2009, as described in Note 1 (e) and (f).




54


Balance at Dec 31, 2009

528,056

11,227,007 Additions 3,538 Transfers 4,464 277,904 Residual amount written off (8) Amortization (79,088) (555,747)

Balance at Jun 30, 2010 453,432

10,952,694 Additions 70 60,691 Transfers 48,066 128,460 Amortization (37,158) (311,505)

Balance at Sep 30, 2010

464,410

10,830,340

Goodwill The Company and its subsidiaries record goodwill arising on the acquisition of investments, supported by the expected future earnings of the businesses acquired, which are based on 10-year projection prepared by specialized firms. In September 2009, goodwill recorded upon the acquisition of the investments was tested for impairment and no losses were determined, as shown in the table below:

Cash Generating Unit (CGU) Asset balance at 9/30/2009

Goodwill allocated to

CGU Impairment test

base Value in use Internet provider - Region II 74,063 73,142 147,206 849,384 Means of payment 66,436 72,422 138,858 431,897 Multimedia - Region II (*) 229,792 7,351 237,143 370,291 152,915 523,207 1,281,281

(*) Not tested for impairment due to the immateriality of goodwill and the lack of indications

that the asset might be impaired. Regulatory permits

Concession/permit Execution

date Termination Acquisition

cost Oi’s Region 1 radiofrequencies and SMP (2G) 3/13/2001 3/13/2016 1,102,007 Oi’s Region 1 radiofrequencies and SMP (2G) 7/11/2003 3/13/2016 66,096 Oi’s Region 1 radiofrequencies and SMP (2G) 1/22/2004 3/13/2016 45,218 Oi’s Region 3 radiofrequencies and SMP (2G) 4/29/2008 12/11/2022 131,106 Oi’s Region 1 radiofrequencies and SMP (3G) 4/29/2008 3/13/2016 867,018 Oi Region 3 - inland - radiofrequencies and SMP (2G) 9/8/2008 12/7/2022 126,820 Transaction costs capitalized in Oi’s permits 98,904 Adjustment to fair value of Oi’s permits (i) 323,679 Discount to present value of Oi’s Region 3 2G radiofrequencies (11,625) BrT’s Region 2 radiofrequencies and SMP (2G) 2/18/2002 12/17/2017 191,502




55

BrT’s Region 2 radiofrequencies and SMP (2G) 5/3/2004 12/22/2017 28,624 BrT’s Region 2 radiofrequencies and SMP (3G) 4/29/2008 4/30/2023 488,235 Transaction costs capitalized in BrT’s permits 81,523 Other permits 120,482

Total 3,659,589

(i) In December 2009, the goodwill arising on the acquisition of TNCP shares by the

Company, as described in Note 1 (b) and (d), which was supported on expected future earnings, began to be based on the permits acquired through former subsidiary Amazônia and started to be amortized again over the remaining period of the permits (until March 2016).

Addition disclosures

In December 2009, the Company’s and its subsidiaries’ Board of Directors approved the appraisal report on the useful lives of intangible assets. The results of this appraisal did not change the useful lives of intangible assets. The impairment test of intangible assets conducted in the year ended December 31, 2008 indicated that an allowance of R$15,249 should be recognized for impairment losses on Amazônia’s software related to the mobile services CGU, mainly due to the corporate restructuring referred to in Note 1 (d).

18 DEFERRED CHARGES These amounts correspond to expenses incurred by certain subsidiaries during their preoperating stage being amortized based on economic feasibility studies prepared by third parties. The amortization period is estimated at ten years for Oi Internet and Oi, and five years for Paggo. Consolidated Oi Oi Internet Paggo Total Cost of gross deferred charges Balance at Jan 1 and Sep 30, 2010 740,781 4,000 2,442 747,223 Cumulative amortization Balance at Jan 1, 2010 (496,977) (2,000) (1,302) (500,279) Amortization expenses (63,995) (300) (368) (64,663) Balance at Sep 30, 2010 (560,972) (2,300) (1,670) (564,942)

Net deferred charges Balance at Jan 1, 2010 243,804 2,000 1,140 246,944 Balance at Jun 30, 2010 201,140 1,800 895 203,835 Balance at Sep 30, 2010 179,809 1,700 772 182,281 Annual amortization rate (average) 10% 10% 20%




56

19 BORROWINGS AND FINANCING (Includes debentures)


9/30/2010 6/30/2010 9/30/2010 6/30/2010

Financings 16,118,758 17,076,511 20,787,914 21,494,839

Accrued interest and other on financing 260,840 465,840 300,392 501,787

Debentures 9,868,819 9,868,819 7,842,417 7,842,417

Accrued interest on debentures 1,201,546 970,444 607,697 470,322

Leases 492 1,432 2,237 4,503

Derivatives 501,748 352,223 570,253 484,850

Transaction costs (601,975) (282,720) (629,529) (300,906)

27,350,228 28,452,549 29,481,381 30,497,812

Current 5,565,426 9,133,134 6,912,402 10,532,688

Noncurrent 21,784,802 19,319,415 22,568,979 19,965,124

Borrowings and financing by nature


9/30/2010 6/30/2010 9/30/2010 6/30/2010 Maturity TIR %

BNDES 2,899,393 3,049,634 6,184,401 6,526,702

Local currency 2,895,714 3,042,828 6,164,499 6,495,399

Jan 2011-Dec 2018

10.01% Basket of currencies,

including US dollar 3,679 6,806 19,902 31,303

Jan 2011-Apr 2011

2.50%

Financial institutions 13,480,205 14,492,717 14,903,905 15,469,924

Local currency 7,067,810 9,779,369 8,101,871 10,287,213 Dec 2010-Dec 2033 10.59%

Foreign currency 6,412,395 4,713,348 6,802,034 5,182,711 Jan 2011-Oct 2020 3.19%

Public debentures 7,320,550 7,221,640 8,450,114 8,312,739

Mar 2011-Jul 2021

14.21%

Derivatives 501,748 352,223 570,253 484,850

Apr 2010-Aug 2019

Private debentures 3,749,815 3,617,623

Dec 2013

Leases 492 1,432 2,237 4,503 Feb 2011-Mar 2012 14.31%

Subtotal 27,952,203 28,735,269 30,110,910 30,798,718

Transaction costs (601,975) (282,720) (629,529) (300,906)

27,350,228 28,452,549 29,481,381 30,497,812




57

Transaction costs by nature Company Consolidated

9/30/2010 6/30/2010 9/30/2010 6/30/2010

BNDES

Local currency 758 855 5,337 5,640

Basket of currencies, including US dollar 27 48 27 48

Financial institutions

Local currency 145,425 128,819 160,945 133,809

Foreign currency 428,112 120,558 433,979 127,236

Public debentures 27,653 32,440 29,241 34,173

601,975 282,720 629,529 300,906

Current 102,517 72,493 107,503 77,187

Noncurrent 499,458 210,227 522,026 223,719

Breakdown of the debt by currency/index


9/30/2010 6/30/2010 9/30/2010 6/30/2010

CDI 17,758,693 20,236,756 15,670,379 17,713,303

US dollar 5,714,086 3,960,109 6,059,914 4,340,895

TJLP 2,655,004 2,802,119 5,869,016 6,199,941

Brazilian reais (R$) 326,895 334,910 885,537 897,505

Japanese yen 698,309 753,240 742,120 841,815

Derivatives 501,748 352,223 570,253 484,850

IPCA 293,789 289,106 293,789 289,106

UMBNDES - BNDES basket of currencies 3,679 6,806 19,902 31,303

Borrowing costs (601,975) (282,720) (629,529) (300,906)

27,350,228 28,452,549 29,481,381 30,497,812 Caption: BNDES - National Bank for Economic and Social Development; CDI - certificates of interbank deposit rate; TJLP - Long-term Interest Rate;

IPCA - extended consumer price index

(a) Description of main borrowings and financings Local currency-denominated financing In December 2009, TMAR, Oi, BrT and BrT Celular entered into financing agreements with the BNDES, totaling R$4,403 million, to finance the expansion and upgrading of network quality, and the fulfillment of the regulatory obligations scheduled for the period 2009-2011.These agreements are divided into 2 subloans: (i) subloan A, bearing interest equivalent to TJLP plus 3.95% per year; and (ii) subloan B, bearing interest consisting of a fixed rate of 4.50% per year. A total disbursement of R$1,500 million was made in December 2009 related to these credit facilities, and in June 2010 there was a disbursement of R$562 million (of which R$220 million to the Company and R$342 million to Oi). Interest is being paid on a quarterly basis until December 2011 and will be due on a monthly basis from June 2012 to May 2018. Principal is repayable in 84 monthly installments, from January 2012 to December 2018.




58

In November 2009, TMAR entered into a R$2,000 million credit facility with Caixa Econômica Federal. Interest on this financing is payable on a quarterly basis from February 2010 to November 2011, and will be due on a monthly basis from December 2011 to November 2014. Principal is repayable in 36 monthly installments, from December 2011 until maturity in November 2014. Interest is equivalent to 117.5% of CDI per year. In February 2009, Oi entered into a credit facility with Banco do Nordeste (“BNB”) totaling R$370 million, to finance the expansion and upgrading of the mobile network and implement a 3G network. In May, August and November 2009, BNB disbursed R$149 million, R$149 million and R$71 million, respectively. The outstanding balance is adjusted by a fixed rate of 10% per year, less a performance bonus of 15%. Interest is being paid on a quarterly basis until February 2011 and will be due on a monthly basis from March 2011 to February 2019. Principal will be repayable monthly, commencing March 2011. In August 2008, the Company issued R$3,600 million in promissory notes, an amount used in the future acquisition of the control of BrT Part and BrT and other actions disclosed in the Material Fact released on April 25, 2008. This issue was underwritten by the banks: Banco Itaú BBA S.A. (leading underwriter), Banco Santander S.A., Banco Bradesco BBI S.A., and Banco ABN AMRO Real S.A. The engaged underwriters were: Banco Safra de Investimento S.A., ING Bank N.V., Banco do Nordeste do Brasil S.A., Banco Alfa de Investimento S.A., and Banco de Tokyo-Mitsubishi UFJ Brasil S.A. A total of 144 promissory notes were issued in a single series, in the nominal amount of R$25 million each. The transaction was entered into for a two-year period, with a one-year grace period for interest payment and two-year grace period for the repayment of principal. This transaction was settled in August 2010. In May 2008, TMAR raised R$4,300 million with Banco do Brasil, for the acquisition of an equity interest in BrT Part and BrT and other actions as disclosed in the Company´s Material Fact released on April 25, 2008. Interest are payable semiannually, from May 2010 to May 2016. The principal will be repaid in seven annual installments, commencing May 2010. This transaction bears interest equivalent to CDI plus 1.30% per year. In February 2008, BrT Celular entered into a credit facility with the BNDES totaling R$259 million with actual borrowings of R$259 million, to be used in the refurbishment of the mobile telephone network and increase traffic capacity, by implementing new services that will improve service quality to users. This financing bears interest pegged to TJLP, plus 3.52% per year. Interest was payable on a quarterly basis until September 2010 and will became payable monthly from October 2010 to September 2017. This financing will be repaid in 84 monthly installments, starting October 2010 until September 15, 2017. In November 2006, the Company entered into a credit facility with the BNDES to finance the expansion and technological upgrading of its fixed-line grid, scheduled for the period 2006 to 2008. This agreement is divided into two subloans: (i) subloan A is intended specifically for the purchase of domestic equipment and related services and totals R$1,771 million; and (ii) subloan B is intended for the purchase of telecommunications equipment that comply with the Basic Production Process (PPB), and totals R$200 million. Principal will bear the following changes: (i) subloan A, interest of 4.50% per year above TJLP; and (ii) subloan B, interest of 2.50% per year above TJLP. Interest was paid on a quarterly basis until June 2009 and is due on monthly basis from July 2009 to June 2014. Principal is repayable in 60 monthly installments, commencing July 2009.




59

In November 2006 BrT entered into a credit facility with the BNDES of R$2,004 million, with actual borrowings of R$2,055 million, which bears interest equivalent to the TJLP plus 4.3% per year. Interest was paid on a quarterly basis until May 2009 and is due on monthly basis from June 2009 to May 2014. This financing is repayable in 60 monthly installments, from June 2009 to May 15, 2014. Foreign currency-denominated financing In September 2010, the Company issued senior notes totaling US$1,000 million (equivalent to R$1,707 million), used to extend its debt profile and reduce the cost of the debt for the Company, as well as for corporate purposes in general. This transaction bears interest of 5.5% per year, and matures in October 2020. Interest is payable semiannually in April and October, from April 2011 until maturity. After the issuance, the Company initiated an offering for the exchange of the senior notes issued in April 2009, totaling US$750 million (R$1,661 million), and bearing interest of 9.5% per year and maturing in 2019, for additionally issued senior notes, according to the exchange offering agreement. In October 2010, the exchange offering was closed with the issuance of an additional amount of US$787 million in senior notes. The senior note exchange ratio contemplated the market price of the senior notes in 2009 and an additional premium to those that accepted the initial stage of the offering. As a result, senior notes issued in September 2010 total US$1,787 million, and the balance of senior notes issued in April 2009 remained in US$142 million. In April 2010, TMAR entered into a credit facility agreement with Crédit Agricole, intermediated by the ONDD - Office National Du Ducroire, as export credit agency, totaling US$220 million, in two tranches of US$110 million. The first disbursement of US$46 million (R$80 million) related to the first tranche was made in July 2010. The first tranche bears semiannual interest payable from August 2010 to August 2019, and principal is repayable in 17 semiannual installments, commencing in August 2011. The second tranche bears semiannual interest payable from August 2011 to August 2020, and principal is repayable in 17 semiannual installments, commencing in August 2012. This credit facility is subject to LIBOR plus spread of 1.40% per year. In March 2010, the Company entered into a credit facility with Cisco Systems Capital totaling US$50 million to finance part of the investments in the current year. The amounts disbursed were US$30 million (R$53 million) in April 2010 and US$20 million (R$38 million) in May 2010. This transaction bears interest of 5% per year. Interest is payable semiannually, from September 2010 to September 2015, and principal is repayable in ten semiannual installments, commencing March 2011. In October 2009, the Company entered into a credit facility with China Development Bank Corporation totaling US$500 million. The amounts disbursed were US$57 million (R$104 million) in February 2010 and US$37 million (R$69 million) in May 2010. Interest is payable semiannually, from April 2010 to October 2016, and principal is repayable in eleven installments, commencing April 2011. This credit facility is subject to LIBOR plus spread of 2.5% per year. In August 2009, the Company entered into a credit facility with the Finnish Export Credit, totaling US$500 million. The amounts disbursed were US$208 million (R$378 million) in February 2010 and US$27 million (R$51 million) in May 2010. Interest is payable




60

semiannually, from February 2010 to August 2016, and principal is repayable in 17 installments, commencing August 2011. This credit facility is subject to LIBOR plus spread of 1.70% per year. In May 2009, the Company entered into a credit facility with Cisco Systems Capital totaling US$50 million to finance part of the investments in the current year. The amounts disbursed were US$26 million (R$52 million) in June 2009 and US$24 million (R$41 million) in November 2009. This transaction bears interest of 5% per year. Interest is payable semiannually, from November 2009 to November 2014, and principal is repayable in ten semiannual installments, commencing May 2010. After the issuance, the Company initiated an offering for the exchange of the senior notes issued in April 2009, totaling US$750 million (R$1,661 million), bearing interest of 9.5% per year and maturing in 2019, for additionally issued senior notes, according to the exchange offering agreement. In October 2010, the exchange offering was closed with the issuance of an additional amount of US$787 million in senior notes. The senior note exchange ratio contemplated the market price of the senior notes in 2009 and an additional premium to those that accepted the initial stage of the offering. As a result, senior notes issued in September 2010 total US$1,787 million, and the balance of senior notes issued in April 2009 remained in US$142 million. In February 2009, the Company entered into a credit facility with the China Development Bank Corporation totaling US$300 million to finance part of the investments in the current year. Disbursements will be made as investments are made throughout the year, and to date were as follows: US$68 million (R$153 million) in March 2009, US$121 million (R$236 million) in June 2009, US$38 million (R$74 million) in July 2009, and US$23 million (R$42 million) in February 2010 and US$29 million (R$54 million) in May 2010. This transaction bears interest equivalent to LIBOR plus 2.50% per year. Interest is payable semiannually, from April 2009 to October 2015, with a final payment in February 2016, and principal is repayable in 11 semiannual installments, from April 2011 to October 2015, with a final payment in February 2016. In June 2008, the Company entered into a credit facility with the Finnish Export Credit totaling US$300 million to finance part of the investments in that year. The amounts disbursed were US$87 million (R$140 million) in August 2008, US$105 million (R$258 million) in December 2008, US$63 million (R$117 million) in August 2009, and US$45 million (R$76 million) in October 2009. This transaction bears interest equivalent to LIBOR plus 1.07% per year. Interest is payable semiannually, from December 2008 to December 2018, and principal is repayable in 17 semiannual installments, commencing May 2010. (b) Debentures Public debentures The Extraordinary Shareholders’ Meetings held on November 30, 2009 and March 9, 2010 and the Board of Directors’ Meeting held on March 11, 2010 approved the public issuance, by TMAR, of simple, nonconvertible, unsecured debentures totaling R$2,250 million, in two series of 225,000 debentures, with face value of R$10,000.00. The issuance date was April 15, 2009 and placement was made in May 2010, totaling R$2,000 million. Series one of 175,397 debentures matures on April 15, 2014 and yields interest equivalent to CDI plus 1.20% per year, with semiannual interest payments and principal repayment on final maturity. Series two of




61

24,603 debentures matures on April 15, 2020 and yields interest equivalent to IPCA + 7.98%, with annual payments of interest on principal and repayment principal on final maturity. The Extraordinary Shareholders’ Meeting held on March 23, 2009, approved the public issuance, by TMAR of simple, nonconvertible, unsecured debentures totaling up to R$3,000 million. The issuance date was April 6, 2009 and placement was made in May 2009, totaling R$2,572 million (of which R$965 million for series one and R$1,607 million for series two). The maturity of series one debentures is within two years, one month and 24 days, and of series two debentures is within three years from the issuance date, and pay interest equivalent to 115% per year and 120% of CDI per year, respectively. The interest of both series is payable together along with principal on the maturity date. The Extraordinary Shareholders’ Meeting held on March 7, 2006 approved the public issuance, by TMAR of 216,000 simples, nonconvertible debentures, in two series, with face value of R$10, totaling R$2,160 million, whose issuance date is March 1, 2006 and the placement date was March 27, 2006. The maturity of series one debentures is within five years, and of series two debentures is within seven years from the issuance date, and pay interest equivalent to CDI and CDI plus spread of 0.55%, respectively. Interest is payable semiannually. On June 1, 2006, BrT conducted its fourth public issuance of 108,000 nonconvertible debentures with face value of R$10 each, totaling R$1,080 million. The repayment term is seven years, maturing on June 1, 2013. These debentures pay interest equivalent to the compound interbank (DI) rate plus a spread of 3.5% per year, payable semiannually. Amortization, which shall indistinctly consider all debentures, will occur annually commencing June 1, 2011, in three installments of 33.3%, 33.3%, and 33.4% of the face value, respectively. The debentures issued by the Company and its subsidiaries do not contain a renegotiation clause. Private debentures The Extraordinary Shareholders´ Meeting held on December 9, 2008, approved the private issuance by TMAR of 35,000 simple, nonconvertible debentures, in a single series, with face value of R$100, totaling R$3,500 million, with a subscription period of up to three years. The proceeds from this issuance were used for corporate purposes of the Company. The indenture was executed on December 11, 2008 and subscription was made by parent TNL, totaling R$1,500 million, on the same date. However, subsidiary Oi acquired all debentures subscribed by TNL, of which R$1,000 million in February 2009, R$100 million in July 2009, and R$400 million in January 2010. On February 17, 2009, BrT Part subscribed R$1,200 million and on March 12, 2009 BrT Celular subscribed R$300 million. The maturity of these debentures is December 11, 2013, with no interim amortization. Debentures pay interest equivalent to CDI plus 4.0% per year and interest amounting to R$346,485 million was recorded in noncurrent liabilities as at September 30, 2010 (R$214,294 million at June 30, 2010). The subscription made by BrT Part was transferred to BrT in view of the merger of BrT Part with and into BrT, described in Note 1 (f). The debentures issued by the Company and its subsidiaries do not contain a renegotiation clause. (c) Collaterals




62

BNDES financing is collateralized by TMAR, Oi, BrT and BrT Celular receivables, and guarantees controlling shareholder and the companies sureties, amounting to R$6,168,178. Banco do Nordeste do Brasil S.A. loans are collateralized by TMAR and Oi receivables and TNL and TMAR sureties, amounting to R$469,978. Certain BrT and BrT Celular borrowings and financing were collateralized by receivables from the provision of fixed telephony services and BrT and BrT Part sureties. After the merger of BrT Part with and into BrT, the sureties provided by the latter were replaced, with the creditors’ approval, by TNL sureties. The provision of sureties by TNL was duly approved by the company’s Board of Directors. The debentures issued by BrT had unsecured guarantees, through a surety granted by BrT Part. Under the indenture, BrT Part, as intervening guarantor, committed to guarantee and pay all the obligations assumed by its subsidiary with the debentureholders. After the merger of BrT Part with and into BrT, the holders of 5th issue debentures approved the substitution of BrT Part by TNL as guarantor. The guarantee provided by TNL was duly approved by the company’s Board of Directors. (d) Leases

The obligations arising from finance leases are payable within periods ranging from 36 to 60 months and are recorded by their present value. Financial charges, which basically refer to CDI fluctuation, are recorded in the profit or loss over the lease term. The present value of the minimum future lease payments are distributed as follows:

Consolidated

9/30/2010

6/30/2010

Up to 1 year 2,237

3,767

More than 1 and up to 5 years 736

2,237

4,503

(e) Certificates of Real Estate Receivables (CRIs). On August 10, 2010, the Company and BrT—its indirect subsidiary—transferred, through a capital payment, the ownership of 162 returnable properties to Copart 4 and 101 returnable assets to Copart 5, respectively, whose residual value totals R$385,507 (carrying amount). The capital of Copart 4 and Copart 5 was paid in based on an appraisal report of the assets at carrying amount, prepared by a specialized firm. The Company and BrT entered into twelve-year agreements for the lease of the assets transferred to its subsidiaries and, at the end of the agreement, the ownership of the properties with return to the Company and BrT. Copart 4 and Copart 5 assigned the receivables generated under the lease agreements to BSCS - Brazillian Securities Companhia de Securitização, which issued Certificates of Real Estate Receivables (CRIs) backed by these receivables. Under these agreements, the Company and




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BrT agree to pay the rentals to BSCS. The CRIs were purchased by several Brazilian financial institutions. Copart 4 and Copart 5 receiver future rentals in advance, totaling R$1,584,518 on a consolidated basis, net of transaction costs (R$33,297). As it was received in advance, this amount was recorded as a debt maturing within 12 years. The all in cost of the transaction is 102% of CDI. Copart 4 and Copart 5 assets and liabilities are consolidated in the balances of the financial statements of their parents—TMAR and BrT—and the main risks and rewards incidental to this transaction remain with the parent companies. Long-term debts mature as follows:


9/30/2010 6/30/2010 9/30/2010 6/30/2010

2011 529,154 720,257 664,395 1,028,291 2012 4,473,999 4,092,296 5,639,534 5,200,147 2013 6,651,119 6,423,676 4,064,224 3,914,914 2014 3,803,169 3,719,560 4,689,128 4,576,906 2015 1,158,860 1,094,246 1,429,890 1,318,914 2016 and thereafter 5,168,501 3,269,380 6,081,808 3,925,952

21,784,802 19,319,415 22,568,979 19,965,124

Transaction costs will be expensed on subsequent years, as follows: Scheduled allocation of transaction costs to profit or loss


9/30/2010 6/30/2010 9/30/2010 6/30/2010

2011 24,688 31,250 25,717 32,948

2012 79,132 46,664 83,379 50,078

2013 70,219 37,119 74,280 40,267

2014 66,985 33,495 69,422 34,950

2015 59,324 28,325 61,280 29,244

2016 and thereafter 199,110 33,374 207,948 36,232

499,458 210,227 522,026 223,719

(f) Covenants The financing agreement with the BNDES and other financial institutions, and the issuance of debentures by the Company, Oi, BrT and BrT Celular require compliance with financial ratios. Financial ratios of BNDES agreement are calculated semiannually, in June and December. Other financial ratios are calculated on a quarterly basis. All ratios, except for the ratio described below, had been complied with at the end of the reporting period.




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At September 30, 2010, the Company was not compliant with the debt service coverage ratio covenant, as required by the JBIC agreement. However, on July 28, 2010, the JBIC granted a waiver for nonobservance with said ratio at June 30, 2010 and September 30, 2010. The Company estimates that at December 31, 2010 it will not comply with the Debt Service coverage covenant, as required by the JBIC agreement. Therefore, the Company has already initiated the process of requesting the change of this ratio during the agreement period. However, there is no guarantee that this request will be accepted. If the creditor does not grant a waiver for the possible future noncompliance with this covenant, the Company intends to exercise its right to prepay the debt. The Company believes that said prepayment would avoid the enforcement of the cross-default or cross-acceleration covenants of other debt agreements. The adjusted balance of this installment at September 30, 2010 is R$598,396, classified in current liabilities. 20 PERMITS AND CONCESSIONS PAYABLE Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010

SMP (i) 1,976,441 1,948,287 STFC concessions (ii) 73,425 50,289 115,688 77,588 Other permits (iii) 3,478 7,805 73,425 50,289 2,095,607 2,033,680 Current 73,425 50,289 486,729 449,442 Noncurrent 1,608,878 1,584,238

Correspond to the amounts payable to ANATEL for the radiofrequency grants and the permits to provide the SMP services, and STFC service concessions, obtained at public auctions. (i) The regulatory permits for the use of 3G band radiofrequencies to provide SMP services

in Regions I, II and III of the PGA were entered into by Oi and BrT Celular on April 29, 2008, and required a total investment of R$867,018 and R$488,235, respectively. These companies disbursed 10% of the amount offered upon the execution of the relevant agreements. The outstanding balance is adjusted using the Telecommunications Service Index (“IST”) plus interests of 1% per month, as set forth in the bid notices, with final maturities in 2016 and 2015, respectively.

The terms and conditions of the SMP permits granted to Oi and BrT Celular by ANATEL in 2003 and 2004, and 2002 and 2004, respectively, provide for a total payment of R$331,433. These permits refer to the operation of SMP services during a fifteen-year period in the same operation area where the companies have a concession for the provision of fixed telephone services. Of the amount contracted, 10% was paid on execution date and the remaining balance was fully recognized in the subsidiaries’ liabilities, to be amortized in equal, consecutive annual installments, with maturities scheduled from 2011 (one installment), 2010 (one installment), and 2011 to 2012 (two installments), respectively, depending on the fiscal years the agreements were executed. The debit balance is adjusted using the General Price Index - Domestic Supply (IGP-DI) fluctuation, plus 1% per month.




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The regulatory permits for the use of 2G (GSM) radiofrequencies to provide SMP services in São Paulo and increase bandwidth in certain states within Region I of the PGA (Amazonas, Amapá, Pará, Maranhão, Roraima, Bahia, Espírito Santo, Sergipe, Alagoas, Paraíba, Piauí, and Rio Grande do Norte) were executed on December 7, 2007 by Oi, and required a total investment of R$131,106. On December 7, 2007, Oi disbursed 10% of the amount offered, and paid the remaining 90%, free from adjustment for inflation, on September 2008, pursuant to the rules set forth in bid notice.

(ii) The STFC concession refers to the accrual recognized by the Company on the accrual

basis, by applying a 1% rate on revenue, less taxes. Under the concession agreement in effect, the payment to ANATEL matures every two years, in April of odd years, and is equivalent to 2 percent of the net revenue for the prior year.

(iii) The amount of other permits belongs to BrT Multimídia and relates to the permit

granted for use of radiofrequency blocks associated to the operation of multimedia communication services. The contracted amount was R$9,110, adjusted using the IGP-DI plus 1% per month. This obligation will be settled in three equal, consecutive annual installments, always in May.

The payment schedule is as follows:

Company Consolidated Up to December 31: 2010 97,921 2011 73,425 474,655 2012 328,327 2013 298,676 2014 298,676 2015 298,676 2016 298,676 73,425 2,095,607

21 PAYABLE AND DEFERRED TAXES Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 State VAT (ICMS) 213,306 203,515 907,005 896,053 ICMS - Arrangement 69/1998 113,723 122,327 131,323 156,928 Taxes on revenues (PIS and COFINS) 350,481 306,864 868,366 759,703 Income tax payable 35,770 34,562 391,794 316,305 Social contribution payable 840 157,763 124,671 Deferred income tax and social contribution – Law

8200/1991 9,094

9,202

12,821

12,928

Other 47,354 47,403 190,131 172,808 770,568 723,873 2,659,203 2,439,396

Current 385,285 372,471 1,812,872 1,669,671

Noncurrent 385,283 351,402 846,331 769,725




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Taxes are stated net of escrow deposits of R$406,717 (R$389,675 at June 30, 2010), Company, and R$909,879 (R$877,709 at June 30, 2010) on a consolidated basis. 22 TAX INSTALLMENT PLAN PAES – REFIS II

TMAR, Oi and iG Brasil joined the Tax Debt Refinancing Program (“PAES”) – Special Tax Installment Plan—also now as REFIS II—governed by Law 10684/2003, where they enrolled a substantial portion of their debts to the National Treasury and the National Social Security Institute (“INSS”) overdue on February 28, 2003. As prescribed by Article 7 of said Law, entities are required to make regular payment of PAES installments, and may be excluded from the plan if they fail to make payments on due date in three consecutive months or six alternating months, whichever occurs first.

In the nine-month period ended September 30, 2010, payments settled without any delays totaled R$59,938 (R$59,938 at June 30, 2010), Company, and R$60,319 (R$60,191 at June 30, 2010) on a consolidated basis, in conformity with the regulation set out in CVM Instruction 346/2000, which addresses payment regularity as essential condition for maintaining entitlement to the terms and conditions provided for by the installment plan. The Federal Revenue Service (“RFB”) and the National Treasury Attorney General’s Office (PGFN) unduly included several TMAR and Oi debts in the PAES; as a result, the consolidated amount of the taxes in installment is higher than the amount enrolled by these companies. TMAR and Oi opted for challenging in court the differences noted by RFB. In the case of Oi, the tax installments have already been settled, and only TMAR’s debts challenged in courts remain unsettled. With the enactment of a new tax installment plan, under Law 11941/2009, the balance of the taxes in installments of subsidiary iG Brasil was transferred, as shown below, and only TMAR remains enrolled with PAES, for payment in 120 monthly installments. Tax installment program created by Law 11941/09

TMAR and several of its subsidiaries joined the New Federal Tax Installment Plan, governed by

Law 11941/2009, where they included part of their debts to the National Treasury and the INSS overdue until November 30, 2008. Under Article 1, V, Par. 9 of Law 11941/09, entities are required to regularly pay the installments of the new tax installment plan, and may be excluded from the plan if they have more than three installments outstanding, consecutive or not, or one installment, after having paid the others.




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Under this plan taxes are payable in 180 monthly installments. As provided for by the relevant Law and the regulatory administrative rules, the entities that joined the plan are required to pay the minimum monthly installment, as the final amount will only be set after the consolidation of debts by the Federal Revenue Service. The applications to the tax installment plan were filed from November 11 to November 30, 2009. With the enrollment, the escrow deposits related to the lawsuits transferred to the new plan will be converted, pursuant to the applicable law, into Federal Government revenue. Subsidiaries BrT and iG Brasil elected to transfer the balances of the prior installment plans (REFIS and PAES) to the new installment plan. As required by Law 11941/2009, these companies reset the related debts to the amounts owed prior the former installment plans, and subsequently applied the reduction rates set forth by the new law.

Taxes in installments are broken down as follows: Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 PAES 332,162 342,565 340,216 350,714 Law 11941/09 tax installment plans 157,417 153,395 582,513 567,706 489,579 495,960 922,729 918,420 Current 135,499 135,536 168,675 167,996 Noncurrent 354,080 360,424 754,054 750,424




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The amounts of PAES and the new tax installment plan created by Law 11941/2009, broken down into principal, fine and interest are as follows: 9/30/2010 6/30/2010 Principal Fines Interest Total Total COFINS 356,994 32,062 116,950 506,006 500,968 Income tax 91,999 10,791 40,469 143,259 37,901 Tax on banking transactions (CPMF) 50,465 5,150

15,095 70,710

39,227

PIS 54,429 4,104 18,645 77,178 70,738 Social contribution 24,889 3,331 11,359 39,579 9,894 INSS-SAT 15,538 4,556 17,619 37,713 72,267 Tax on financial transactions (IOF) 6,471 647 2,500 9,618 142,098

Other 16,486 2,467 19,713 38,666 45,327 617,271 63,108 242,350 922,729 918,420

PAES amounts are adjusted for inflation using the TJLP fluctuation, and those of the New Installment Plan are adjusted using the SELIC (Brazil’s base rate), and R$20,800 (R$2,142 at September 30, 2009), Company, and R$54,493 (R$1,819 at September 30, 2009), on a consolidated basis, were recognized as ‘Financial expenses’ for the nine-month period ended September 30, 2010 (see Note 7). The payment schedule is as follows:

Company Consolidated Up to December 31: 2010 33,875 42,169 2011 135,499 168,675 2012 32,639 65,849 2013 32,639 65,849 2014 32,639 65,849 2015-2017 97,915 197,547 2018-2020 97,915 197,547 2021-2023 26,458 115,295 2024 and subsequent years 3,949 489,579 922,729




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23 RESERVE FOR CONTINGENT LIABILITIES

(a) Broken down as follows:

Company Consolidated 9/30/2010 6/30/2010 9/30/2010 6/30/2010 Tax (see (d) (1)) (i) ICMS 234,630 226,147 592,983 832,373 (ii) FUNTTEL 105,420 99,762 105,420 99,762 (iii) Service tax (ISS) 63,778 62,109 74,030 74,185 (iv) Tax on net income (ILL) 54,099 52,748 54,099 52,748 (v) INSS (joint liability, fees, and

severance pay) 13,609 13,271 14,185 13,832

(vii) Other lawsuits 18,588 17,928 29,373 29,698 Related escrow deposits (*) (49,611) (48,228) (117,887) (95,090) 440,513 423,737 752,203 1,007,508 Labor (see (d) (2)) (i) Overtime 378,265 390,663 596,266 595,421 (ii) Salary differences 174,497 175,203 296,414 295,938 (iii) Sundry premiums 87,136 90,231 200,243 199,171 (iv) Indemnities 106,099 105,155 167,333 164,653 (v) Severance pay 28,678 29,415 112,792 113,887 (vii) Supplementary retirement benefits 46,285 45,684 91,848 89,295 (vii) Joint liability 4,500 4,892 84,163 80,235 (vii) Tenure/reinstatement 76,848 77,912 (ix) Severance Pay Fund (FGTS) 7,491 7,550 39,559 39,129 (x) Labor fines 22,841 25,040 26,933 28,226 (xi) Lawyers/expert fees 10,633 11,223 13,889 14,242 (xii) Employment relationship 2,641 2,507 4,575 4,343 (xii) Other lawsuits 25,682 24,942 89,052 84,349 Related escrow deposits (*) (462,686) (424,485) (885,788) (832,282) 432,062 488,020 914,127 954,519 Civil (see (d) (3)) (i) Corporate 2,712,625 2,821,391 (ii) ANATEL estimates 306,781 302,693 473,596 471,878 (iii) ANATEL fines 246,969 235,602 329,456 308,394 (iv) Small claims courts 35,670 42,086 180,836 182,522 (v) Other lawsuits 314,400 310,439 622,088 722,736 Related escrow deposits (*) (2,467,799) (2,535,582) 903,820 890,820 1,850,802 1,971,339 1,776,395 1,802,577 3,517,132 3,933,366 Current 394,273 447,986 742,176 803,234 Noncurrent 1,382,122 1,354,591 2,774,956 3,130,132 (*) Pursuant to CVM Resolution 489/2005. In compliance with the relevant Law, the reserve for contingent liabilities is adjusted for inflation on a monthly basis.

(b) Breakdown by type of contingency and risk (consolidated)




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9/30/2010

Tax Labor Civil Total Probable (i) 752,203 914,127 1,850,802 3,517,132 Possible 12,177,058 2,382,543 1,384,832 15,944,433 Remote 2,400,852 1,329,418 1,265,210 4,995,480

15,330,113 4,626,088 4,500,844 24,457,045

6/30/2010

Tax Labor Civil Total Probable (i) 1,007,508 954,519 1,971,339 3,933,366 Possible 11,917,887 2,129,746 1,290,812 15,338,445 Remote 2,320,401 1,294,570 1,263,577 4,878,548

15,245,796 4,378,835 4,525,728 24,150,359

(i) Less escrow deposits (c) Summary of changes in the balance of the reserve for contingent liabilities

Company Tax Labor Civil Total At December 31, 2009 421,944 644,686 875,442 1,942,072 Additions, less reversals 36,579 15,640 54,717 106,936 Write-offs due to payment/termination (48,361) (125,156) (53,063) (226,580) Inflation adjustment (Note 7) 14,852 38,356 13,724 66,932

Related escrow deposits, less reversals

(1,277) (85,506) (86,783)

At June 30, 2010 423,737 488,020 890,820 1,802,577 Additions, less reversals 17,285 13,770 29,754 60,809 Write-offs due to payment/termination (11,727) (56,069) (24,056) (91,852) Inflation adjustment (Note 7) 12,601 24,542 7,302 44,445

Related escrow deposits, less reversals

(1,383) (38,201) (39,584)

Balances at September 30, 2010 440,513 432,062 903,820 1,776,395




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Consolidated Tax Labor Civil Total At December 31, 2009 980,048 1,057,208 1,930,318 3,967,574 Additions, less reversals (i) 28,610 96,555 355,317 480,482 Write-offs due to payment/termination (64,999) (179,670) (210,236) (454,905) Inflation adjustment (Note 7) 68,136 86,086 58,765 212,987

Related escrow deposits, less reversals (4,287) (105,660) (162,825) (272,772) At June 30, 2010 1,007,508 954,519 1,971,339 3,933,366 Additions, less reversals (i) (109,827) 47,743 88,647 26,563 Write-offs due to payment/termination (140,038) (86,346) (301,307) (527,691) Inflation adjustment (Note 7) 17,357 51,717 24,340 93,414

Related escrow deposits, less reversals (22,797) (53,506) 67,783 (8,520) Balances at September 30, 2010 752,203 914,127 1,850,802 3,517,132

(i) Total additions, less reversals, amounting to R$507,045 (R$2,192,557 at June 30, 2009),

consist of the expenses on the reserve for contingent liabilities, amounting to R$494,891 (R$2,000,773 at June 30, 2009) (see Note 6), and by the amounts detailed in the table below, totaling R$12,154 (R$191,784 at June 30, 2009).

The accrued amount related to the Telecommunications Technology Development Fund

(“FUNTTEL”) is recorded in this tax expense account, as shown below:


Other operating expenses:

COFINS on ICMS (95,460) (95,460) Broadcasting (2,336) (36,503) PIS on ICMS (20,683) (20,683) FUNTTEL (12,154) (14,282) (12,154) (14,282) FUST (23,903) (23,903) ICMS credit on electricity (953) (953)

(12,154) (157,617) (12,154) (191,784)

(d) Reserve for probable unfavorable outcomes (consolidated)

(1) Tax: (i) ICMS - Refers to the reserve considered sufficient by management to cover the various

tax assessments related to: (a) levy of ICMS and not ISS on certain revenue; (b) claim and offset of credits on the purchase of goods and other inputs, including those necessary for network maintenance; and (c) tax assessments related to alleged noncompliance with accessory obligations

The current management’s and its current legal counsel’s assessment of discussions on ICMS credits taken by BrT, whose validity or legality is challenged by state tax authorities, changed the contingent risk estimate to probable. This change in estimate




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resulted in an increase in the reserves for contingent tax liabilities of subsidiary BrT, as of March 31, 2009, y R$387,124 (R$255,534, net of taxes). The change in the balance of tax contingencies (ICMS debts) was due to: (i) an unappealable favorable administrative court decision, in the State of Mato Grosso, on an administrative proceeding challenging the claim of ICMS credits on the purchase of electricity; and (ii) payment, under a debt waiver, of ICMS debts on services billed and other issues in the State of Rio Grande do Sul, which resulted in the reversal of R$302 million from the reserve recognized for such debts.

(ii) FUNTTEL - This reserve refers to the change in the Universal Telecom Service Fund (“FUST”) fee calculation methodology, under ANATEL Abstract 7 (which no longer allows the deduction of Industrial Exploitation of Dedicated Lines (“EILD”) and interconnection charges from the calculation basis, applied retrospectively).

(iii) ISS – TMAR and BrT have reserves for tax assessments challenged because of the levy

of ISS in several services, such as, equipment leases, value added, and technical and administrative.

(iv) ILL - TMAR offset the ILL paid up to calendar 1992 based on Federal Supreme Court

(“STF”) decisions that declare the unconstitutionality of this tax. However, even though there is case law on the matter, a reserve is maintained as there is no final decision of the criteria for the adjustments of these credits.

(v) INSS – Reserve related basically to probable losses on lawsuits discussing joint liability

and indemnities. (vii) Other lawsuits - Refer basically to reserves to cover Real Estate Tax (“IPTU”)

assessments, amounting to R$10,462 (R$10,462 at June 30, 2010) and several tax assessments related to income tax and social contribution charges, amounting to R$1,531 (R$1,173 at June 30, 2010).

(2) Labor: (i) Overtime – Lawsuits claiming the payment of overtime, for time allegedly worked after

regular working hours. (ii) Salary differences – Basically represents by amounts arising from salary

equalization/reclassification salary differences, claimed by employees who allegedly receive a lower compensation that coworkers holding a similar position, linked to other requirements provided for by the applicable law.

(iii) Sundry premiums – Reflect, basically, the expected unfavorable outcome in lawsuits on

the mandatory payment of hazardous duty premium to employees working under conditions classified as hazardous, mainly next to high-voltage installations.

(iv) Indemnities – Refer to reimbursement or compensation claims for damages suffered

while employed by the company, for several reasons, such as: occupational accidents, temporary tenure, pain and suffering, reimbursement of payroll deductions, daycare allowance, and productivity bonuses according to collective bargaining agreement.




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(v) Severance pay – Amounts due to plaintiffs arising from the termination of employment contract, such as vacation pay (proportional/vested), thirteenth salary FGTS fine, etc., and the increase in this pay proportionally to other amounts claimed that allegedly should be included in the calculation of severance pay.

(vii) Supplementary retirement benefits – Claims related to differences allegedly due in the

pension benefit of former employees, proportionally to other claimed amounts granted by courts and not initially considered in the calculation of the pension benefit.

(vii) Joint liability – Lawsuits filed by former personnel of outsourced companies claiming

joint liability of the service receiver for amounts due and not paid by outsourced companies, usually as a result of the discontinuation of such companies’ activities.

(vii) Tenure/reinstatement – claim due to alleged noncompliance with an employee’s special

condition which prohibited termination of the employment contract without cause; (ix) FGTS – Lawsuits related to differences owed on the deposits in the claimant’s FGTS, and

also differences arising from understated inflation used to adjust FGTS balances due to losses generated by government economic plans in the 80’s and 90’s, and the resulting difference in the payment of the fine equivalent to 40% of the FGTS balance, charged in case of dismissal without cause.

(x) Labor fines – Amounts arising from delays or nonpayment of certain amounts provided

for by the employment contract, within the deadlines set out in prevailing legislation and collective bargaining agreements.

(ix) Lawyers/expert fees – Installments paid to the plaintiffs’ lawyers and-appointed court

experts, when expert evidence in necessary during the fact-finding stage. (xii) Employment relationship – Lawsuits filed by former employees of outsourced companies

claiming the recognition of an employment relationship with the Company or its subsidiaries alleging an illegal outsourcing and/or the existence of elements that evidence such relationship, such as direct subordination.

(ix) Other lawsuits – Refer to different litigation including rehiring, profit sharing,

qualification of certain allowances as compensation, etc. After the acquisition of BrT’s control by TMAR, on January 8, 2009, BrT changed its criterion to determine the likelihood of a probable unfavorable outcome in labor lawsuits to align it with the criterion used by TMAR, which takes into consideration the merits of the ongoing lawsuits. As a result of these changes, in the first half of 2009 BrT increased its reserve for contingent labor liabilities by R$334,136 (R$220,529, net of taxes). (3) Civil: (i) Corporate – Financial Interest Agreements – these agreements are governed by

Administrative Rules 415/1972, 1181/1974, 1361/1976, 881/1990, 86/1991, and 1028/1996. Subscribers held a financial interest in the concessionaire after paying in a certain amount, initially recorded as capitalizable funds and subsequently recorded in the company’s shareholders' equity, after a capital increase was approved by the




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Shareholders' Meeting, thus generating the issuance of shares. The lawsuits filed against the former CRT, a company merged by BrT, challenge the way shares were granted to subscribers based on said financial interest agreements.

BrT used to recognize a reserve for the risk of unfavorable outcome in these lawsuits based on certain legal doctrine. In the first half of 2009, however, decisions issued by appellate courts led BrT to revisit the amount accrued and the risk classification of the relevant lawsuits. BrT, considering obviously the peculiarities of each decision and based on the assessment made by its legal department and outside legal counsel, changed its estimate on the likelihood of an unfavorable outcome from possible to probable. In 2009, BrT’s management, based on the opinions of its legal department and outside legal counsel, revised the measurement criteria of the reserve related to the financial interest agreements. Said revision contemplated additional considerations regarding the dates and the arguments of the final and unappealable decisions on ongoing lawsuits, as well as the use of statistical criteria to estimate the amount of the reserve for those lawsuits. As a result of this calculation improvement, the reserve amount was increased by R$2.3 billion in the six-month period ended June 30, 2009 (R$1.5 billion net of tax effects). Such lawsuits are at various levels: Lower Courts, Appellate Court, and Superior Court of Justice. These considerations remain valid as at September 30, 2010.

(ii) ANATEL estimates – Refer basically to alleged noncompliance with PGMU and PGMQ obligations.

(iii) ANATEL fines – Refer basically to fines resulting from inspection procedures of noncompliance with obligations (“PADOs”) of the PGMQ and the Quality Indicators Regulation (“RIQ”).

(iv) Small claims courts – Claims filed by customers whose individual compensation amounts

do not exceed the equivalent of forty minimum wages. (v) Other lawsuits – Refer to several of ongoing lawsuits discussing contract terminations;

compensation claimed by former suppliers and building contractors, in lawsuits filed by equipment vendors against Company subsidiaries, revision of contractual terms and conditions due to changes introduced by a plan to stabilize the economy, and litigation mainly involving discussions on the breach of contracts, to which management and its legal counsel attribute a probable likelihood of an unfavorable outcome, etc.

(e) Possible unfavorable outcomes (unaccrued) The Company and its subsidiaries are also parties to several lawsuits in which the likelihood of an unfavorable outcome is classified as possible, in the opinion of their legal counsel, and for which no reserve for contingent liabilities has been recognized. The main contingencies classified with possible likelihood of an unfavorable outcome, according to the Company´s management’s opinion, based on its legal counsel’s assessment, are summarized below: Tax: ICMS – Tax assessments amounting approximately to R$4,689,090 (R$4,642,804 at June 30, 2010). These tax assessments included two main matters: ICMS levied on certain revenue from




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services already subject to ISS or which are not part of the ICMS tax base, and utilization of ICMS credits on the purchase of goods and other inputs necessary for network maintenance; City taxes – Tax assessments related to taxes levied by City authorities, including mainly the taxes levied on equipment lease, wake-up call services, and other communication services. The total amount involved is approximately R$2,230,704 (R$2,097,519 at June 30, 2010), which are not accrued because the legal counsel in charge consider the likelihood of an unfavorable outcome possible since these activities do not qualify under the ISS service list or are already subject to ICMS. Also, in the last quarter of 2001, the STF decided, thus strengthening the defense arguments, that ISS should not be levied on the lease of equipment, whereas a substantial portion of the assessed tax refers to this type of revenue. INSS – Lawsuits amounting approximately to R$1,789,272 (R$1,786,302 at June 30, 2010), mainly related to joint liability, applicable percentage of Occupational Accident Insurance (“SAT”), and amounts subject to social security contribution. These include a lawsuit filed by TMAR challenging the levy of social security contribution—July 2005 Tax Debt Assessment Notices (“NFLDs”)—on profit sharing, paid pursuant to Law 10101 and Article 7 of the 1988 Federal Constitution, as such amounts should not be included in these contribution’s tax base. The amount related to this assessment is R$383,432 (R$373,856 at June 30, 2010). Federal taxes – Federal tax assessments, mainly related to alleged undue offset and voluntary past-due debt payment, and disallowing previous calculations, amounting approximately to R$3,326,651 (R$3,253,452 at June 30, 2010. The Company’s management, based on the opinion of its legal counsel, considers that the likelihood of a favorable outcome in these lawsuits is possible and, therefore, no reserve was recognized for potential losses. We list below of other collections made by federal authorities: (i) PIS and COFINS – Undue disallowances - On June 30, 2006, TMAR received a tax

assessment from the SRF amounting to R$896,400 (R$874,012 as of June 30, 2010), related to several disallowances of deductions from the PIS and COFINS taxable bases because tax auditors did not consider the information contained in the amended Declaration of Federal Tax Debits and Credits (“DCTF”) to calculate the amounts due, and inaccuracies in the comparative schedules (PIS and COFINS calculated vs. DCTF) prepared by tax auditors. The Company gathered the documentation supporting its own correct calculations and payments and, based on the opinion of its legal counsel, considers that the likelihood of an unfavorable outcome is possible.

While a partially favorable decision was obtained in the lower court, which is still provisional and decreases the tax assessment by approximately R$509,610 (R$496,882 at June 30, 2010), the Company filed an appeal against the unfavorable portion of the decision. As decrease is based on the verification of the errors made, the Company’s legal counsel believes that a favorable outcome regarding the remaining portion of R$386,791 is possible.

(ii) Fine – IRRF on Intercompany loan – Tax assessment of December 2007 – Tax authorities

fined the Company R$225,007, historic amount (R$219,387 at June 30, 2010) for not having withholding income tax due (calendar 2002 and 2003) on the income arising from loan agreements entered into with parent TNL.




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The Company obtained a partially favorable decision in the lower court, which reduced the tax assessment to R$87,025 (R$84,851 at June 30, 2010) and, after filing an appeal, awaits the decision of the administrative court of tax appeals, maintaining R$137,982 as possible loss. The Company’s legal counsel believes there are strong arguments for the defense of its interest, since in addition to part of the amounts having already lapsed and the risk of loss is remote, said withholding was waived by Article 77, II, of Law 8981/1995, which was revoked only by Law 10833/2003.

Labor: Refer to several lawsuits claiming, but not limited to, the payment of salary differences, overtime, hazardous duty premium, and joint liability, which total approximately R$2,382,543 (R$2,129,746 at June 30, 2010). Civil: Refer to lawsuits for which no court decision has been made, and are mainly related, but not limited to, network expansion plans, compensation for pain and suffering and material damages, collection lawsuits, and bidding processes. These lawsuits total approximately R$1,384,832 (R$1,290,812 at June 30, 2010). This total is based exclusively on the amounts claimed by the plaintiffs (which are typically higher than the actual claim case), and to date there has been no final court decision. In September 2004, the Federal Public Prosecution Office and the Rio de Janeiro State Public Prosecution Office filed a civil suit against TNL, TMAR, Oi and the Federal Government requesting the annulment of the transfer of the share control in Oi to TMAR, and the payment of compensation for pain and suffering and material damages allegedly inflicted to the non-controlling shareholders and the financial market. TNL and TMAR filed their defense arguments and await the lower court decision. The sales of Oi’s share control to TMAR is also challenged in an administrative proceeding filed by the CVM to determine whether there were any irregularities in the transaction, and two other lawsuits filed by two non-controlling shareholders. In July 2009, a class civil action was filed against TMAR by the Federal Government, the Federal Public Prosecution Office, the Federal District and Territories Public Prosecution Office, customer protection bodies and several State Consumer Protection Agencies (PROCONs) seeking compensation for alleged collective pain and suffering caused by noncompliance of the rules to establish general Customer Service (“SAC”) standards. TMAR filed its defense arguments on September 16, 2009, and waits the lower court decision. f) Contingent assets Below are the tax lawsuits filed by BrT to claim refund of taxes paid. PIS/COFINS – Tax lawsuit challenging the enforcement of Law 9718/98, which increased the PIS and COFINS tax base. The Law covered the period from February 1999 to November 2002 for PIS and from February 1999 to January 2004 for COFINS. In November 2005, the Federal Supreme Court (STF) concluded the judgment of certain lawsuits on the same matter and considered the increase in the tax base introduced by said Law unconstitutional. Part of the lawsuits filed by the Company and the STFC concessionaires from Region II of the Concession Plan, merged by BrT in February 2000 became final and unappealable in 2006 as regards the




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increase in PIS and COFINS tax base. BrT awaits the judgments of the lawsuits filed by the other merged companies, whose likelihood of a favorable outcome in future filing of appeals is regarded as probable. The amount attributed to these lawsuits, representing unrecognized contingent assets, is R$20,213 (R$20,003 at June 30, 2010). g) Guarantees The Company has a bank guarantee letter and guarantee insurance granted by several financial institutions and insurers to guarantee commitments arising from lawsuits, contractual obligations, and biddings with the ANATEL. Total amount of contracted guarantees, effective at September 30, 2010, corresponds to R$3,151,600 (R$2,905,432 at June 30, 2010), Company, and R$6,239,007 (R$5,995,733 at June 30, 2010), on a consolidated basis. The commission charges on these contracts are based on market rates. 24 SHAREHOLDERS’ EQUITY

(a) Capital The Company is authorized to increase its capital, according to a resolution of the Board of Directors, up to the cap of 700 million common or preferred shares, without the obligation to preserve the proportion between these two types of shares, within the legal limit of 2/3 for the issuance of new nonvoting preferred shares. Within the authorized capital limit, the Board of Directors may decide on the grant of stock options and cancel the preemptive right on the issuance of shares, or convertible debentures or founder shares. At the Extraordinary Board of Directors’ Meeting held on May 28, 2010, the Board approved a capital increase, without the issuance of new shares, using the reinvestment tax incentive, based on operating profit, amounting to R$15,440. At the Extraordinary Board of Directors’ Meeting held on June 24, 2010, the Board approved a capital increase in TMAR. This capital increase was subscribed on July 15, 2010, with issuance of 216,632 Class A preferred shares with par value of R$52.12, based on market prices, totaling R$11,291, which will be paid in with the amounts received from FINOR certificates held by the Company. The Company’s expects to complete this process by the end of 2010. At September 30, 2010, capital is R$7,434,429.




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Company’s capital is represented by: Number of shares (in thousands) 9/30/2010 % 6/30/2010 % Common shares 107,063 44.9 107,063 44.9 Class A preferred shares 130,704 54.7 130,487 54.7 Class B preferred shares 1,064 0.4 1,064 0.4 238,831 100.0 238,614 100.0 Treasury shares (223) (223) Total outstanding shares 238,608 238,391

(b) Treasury shares On January 7, 2008, the Board of Directors approved the reinstatement of the share buyback plan for cancellation or into treasury, during a period of 365 days from the date of this resolution, and a cap of 284,000 common shares, 2,616,000 Class A preferred shares and 106,000 class B preferred shares, which correspond, for each class and type of share, to less than 10% of the outstanding shares. Up to December 31, 2008, 223,000 class A preferred shares had been bought back. The Extraordinary Shareholders’ Meeting held on January 4, 2008 approved the conversion of 47,000 class B preferred shares in the Company into 47,000 class A preferred shares, pursuant to a notice to shareholders published on June 21, 2007. The Extraordinary Shareholders’ Meeting held on January 4, 2008 approved the cancellation of all treasury shares as of December 31, 2007, consisting of 2,929,000 class A preferred shares, 1,000 class B preferred shares, and 124,000 common shares, as a balancing item of ‘Investment reserve’. Treasury shares were bought back with funds from capital reserves. The position of treasury shares is as follows: Preferred

shares

Amount(1) Balance at Dec 31, 2009 and Jun 30, 2010 223 17,366 Shares sold Balance at September 30, 2010 223 17,366

(1) Equivalent to the cost of shares sold

Historic cost on purchase of treasury shares (R$ per share) 9/30/2010 6/30/2010 Weighted average 77.76 77.76 Minimum 76.50 76.50 Maximum 78.96 78.96

Unit cost considers all share buyback programs. Fair value of treasury shares




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The fair value of treasury shares at the end of the reporting period was as follows: 9/30/2010 6/30/2010 Number of preferred shares held in treasury 223.5 223.5 Quotation per share on BOVESPA (R$) 44.90 49.00 Fair value 10,035 10,952

The table below shows the deduction of the amount of treasury shares from the reserves used in the buyback: Capital reserve 9/30/2010 6/30/2010 Reserves account balance 2,018,361 2,017,048 Treasury shares (17,366) (17,366) Balance, net of treasury shares 2,000,995 1,999,682

(c) Capital reserves

Share subscription premium reserve Represents the issue price of new shares exceeding the nominal amount of the portion allocated to capital. Reverse for government assistance and investment grants

The balance refers mainly to tax incentive investments—FINAM, FINOR, FUNRES—and operating profit (the last one until December 31, 2007). Under the incentive-granting reports, issued by an extrajudicial administrator of the former Northeast Development Authority (“SUDENE”), as appointed by Administrative Rule 370/2002, the Company was granted a tax benefit consisting of a reduction in income tax on operating profit for 10 of its 16 branches. The benefits granted are calculated at the following rates: For telephone plant maintenance activities: • 25% from January 2004 to December 31, 2008; and • 12.5% from January 2009 to December 31, 2013. For telephone plant expansion activities, benefits are calculated at 75%, effective until December 31, 2010. The calculation base for this benefit is net income before income tax adjusted for equity in gains and losses from equity in subsidiaries and other applicable income, in conformity with Law 7959/1989. Beginning fiscal 2008, the operating profit is recorded in the earnings reserve, in conformity with Law 11638/2007. Stock option reserve




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Corresponds to the fair value of the options on the common and preferred stock of parent company TNL, granted to the beneficiaries of the Stock Option Plan, allocated on a straight-line basis over the vesting period. In the nine-month period ended September 30, 2010, the amount of R$1,540 was recognized in this reserve. The information on the Stock Option Plan, the assumptions used to determine the fair value of the options, and the amounts recorded in the Company’s profit or loss for the period are detailed in Note 26. Reserve for interest on works in progress Corresponds to the contra account to excess interest calculated monthly at the rate of 12% per year charged on the balances of works in progress, in conformity with Administrative Rule 21/1994 and Administrative Rule 3/1994 of the Ministry of Communications. Interest charged at the rate of 12% per year that exceeded the cost of borrowings to finance works in progress was recorded in this capital reserve. This interest was calculated by the Company until December 31, 1999. Special reserve - Law 8200/1991 Reserve recognized due to the special inflation adjustments of permanent assets, the purpose of which was the offset of distortions in inflation adjustment indices prior to 1991. The reserve is realized based on the depreciation of the underlying property, plant and equipment items. (d) Earnings reserves Legal reserve

Under Article 193 of Brazilian Corporate Law, the Company must allocate 5% of its net income for the year to a legal reserve, up to the limit of 20% of capital. This allocation is optional when the legal reserve plus the capital reserves exceeds 30% of capital. The legal reserve can be used for capital increase purposes or for absorbing losses, but cannot be distributed as dividends. Investment reserve

The investment reserve is intended to retain funds in the Company to meet its own or its subsidiaries’ capital budget. The funds were used in the expansion of the fixed telephony plant, in connection with the universal service targets set by ANATEL, and in investments in the mobile telephony plant.

Tax incentive reserve Pursuant to Article 195-A of Law 11638/2007, the Company’s Shareholders’ Meeting can, as proposed by management bodies, allocate to the tax incentive reserve the portion of net income arising from government assistance and investment grants, which can be deducted from calculation base of the proposed dividends. In the year ended December 31, 2008, after approval of CPC 07 Accounting for Government Grants and Disclosure of Government Assistance, under CVM Resolution 555/2008, the operating profit tax benefit amount started to be allocated to this reserve. (e) Shareholder rights, dividends and interest on capital




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Pursuant to its bylaws, the Company must annually distribute minimum dividends of 25% of net income, adjusted in accordance with Article 202 of the Corporations Law. Nonvoting, class B preferred shares have priority in capital reimbursement without premium and in dividend payment, and are entitled to receive fixed, noncumulative dividends of 10% per year, proportionally to the interest in capital. The amounts remaining after the payment of mandatory minimum dividends are allocated to the holders of voting, common shares and class A preferred shares. Class A preferred shares are entitled to dividends 10% higher than dividends paid on common shares and are nonvoting. The Bylaws also provide for the payment of interest on capital to the shareholders. Interest on capital is deductible from income tax and social contribution, limited to the average TJLP for the relevant period, applied on shareholders’ equity at the end of the previous year, and cannot exceed the higher of (i) 50% of net income (before this distribution and any income tax deductions) for the period the amount is reported, or (ii) 50% of the of retained earnings plus earnings reserves. The amount paid or designated as interest on capital is considered to be part of the distribution of mandatory dividends. Therefore, under the Brazilian Corporate Law, the Company is required to distribute to its shareholders an amount sufficient to ensure that the net amount received, after payment of withholding tax, is at least equal to the minimum mandatory dividend. In compliance with the provisions of the Brazilian Corporate Law and in accordance with the Company’s bylaws, the adjusted net income is equivalent to the net income for the year, adjusted to reflect the allocations to/from: (i) the legal reserve; (ii) the reserve for contingent liabilities; and (iii) the realization of unrealized earnings. At the Annual Shareholders’ Meeting held on April 16, 2010, the shareholders approved the financial statements for the year ended December 31, 2009 that reports a loss of R$594,827, which after the expiration of dividends and interest on capital of R$19,741 and the realization of the Law 8200/1991 reserve of R$1,120, amounted to R$573,966, fully absorbed as follows: (i) R$7 from the investment reserve; (ii) R$40,290 from the tax incentive reserve; (iii) R$327,423 from the legal reserve, and (iv) R$206,246 from reserve for interest on works in progress. 25 DERIVATIVES AND RISK ANALYSIS Financial Risk Management The Company’s activities expose it to several financial risks, such as: market risk (including currency fluctuation risks, interest rate risk on fair value and cash flows, and price risk), credit risk and liquidity risk. The Company uses derivatives to hedge against certain risk exposures. Risk management is carried out by the Company's treasury officer, in accordance with the policies approved by management. On October 1, 2009, the Board of Directors approved Oi’s Financial Risk Management Policy (the “Policy”), which documents the management of exposures to market risk factors generated by financial transactions of the Oi Group companies. Under the Policy, market risks are identified based on the features of financial transactions contracted and to be contracted during the year. Several scenarios are then simulated for each of the risk factors using statistical models, used as basis to measure the impacts the on Oi Group´s financial income (expenses). Based on such analysis, the executive committee agrees on an annual basis with the Board of Directors the Risk Guidelines to be followed in each fiscal year. The Risk Guideline is




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equivalent to the worst expected impact on financial income (expenses) of the Group’s net income, with 95% of level of confidence. To ensure a proper risk management, according to the Risk Guideline, the treasury can contract hedging instruments, including derivative transactions such as swaps, currency forwards and options. The Company and its subsidiaries do not use derivatives for other purposes. With the approval of the Policy, the Financial Risk Management Committee was created, consisting of the CEO, the CFO, the Technology and Strategy Development Officers, and the Controller of the Oi Group. This Committee meets on a monthly basis to oversee compliance with the Policy. Every six months, the Executive Committee submits to the Board of Directors Policy follow-up reports. According to their nature, financial instruments may involve known or unknown risks, and it is important to assess to the best judgment the potential of these risks. Thus, there may be risks with or without guarantees depending on circumstantial or legal aspects. (a) Fair value of financial instruments The Company and its subsidiaries have measured their financial assets and financial liabilities at their market or actual realizable values (fair value) using available market inputs and valuation techniques appropriate for each situation. The interpretation of market inputs for the selection of such techniques requires considerable judgment and the preparation of estimates to obtain an amount considered appropriate for each situation. Accordingly, the estimates presented may not necessarily be indicative of the amounts that could be obtained in an active market. The use of different assumptions for the calculation of the fair value may have a material impact on the amounts obtained. The method used for calculation of the fair value of the swap and NDF derivatives was the use of future cash flows linked to each instrument contracted, discounted at market rates prevailing at the end of the reporting period. The method used for calculation of the fair value of derivatives to account for option premiums used the Black-Scholes method. The fair value of securities traded in active markets is equivalent to the amount of the last closing quotation available at the end of the reporting period multiplied by the number of outstanding securities. The fair values of contracts where the current contractual terms and conditions are similar to those originally contracted or for which there are no quotation or contracting benchmarks are equal to their carrying amounts.




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The main asset and liability financial instruments are as follows: 9/30/2010 Company Consolidated Accounting

measurement Carrying amount Fair value

Carrying amount Fair value

Assets Cash and cash equivalents Fair value 3,236,071 3,236,071 9,057,973 9,057,973 Financial investments Fair value 1,404,800 1,404,800 2,338,642 2,338,642 Accounts receivable Amortized cost 2,974,290 2,974,290 5,926,709 5,926,709 Liabilities Trade payables Amortized cost 1,236,196 1,236,196 3,117,211 3,117,211 Borrowings and financing Borrowings and financing Amortized cost 15,805,768 15,898,747 20,490,255 20,587,675 Debentures Amortized cost 11,042,712 11,312,816 8,420,873 8,727,348 Derivatives Fair value 501,748 501,748 570,253 570,253 Dividends/interest on capital Amortized cost 116,032 116,032 192,426 192,426 Permits and concessions payable Amortized cost 73,425 73,425 2,095,607 2,095,607 Shareholders’ equity Capital reserve - stock options Fair value 87,981 87,981 87,981 87,981 Treasury shares Amortized cost (17,366 ) (10,035 ) (17,366 ) (10,035 )

6/30/2010 Company Consolidated Accounting

measurement Carrying amount Fair value

Carrying amount Fair value

Assets Cash and cash equivalents Fair value 3,584,874 3,584,874 7,948,228 7,948,228 Financial investments Fair value 1,844,465 1,844,465 2,775,410 2,775,410 Accounts receivable Amortized cost 3,141,143 3,141,143 5,876,422 5,876,422 Liabilities Trade payables Amortized cost 1,308,171 1,308,171 3,117,119 3,117,119 Borrowings and financing Borrowings and financing Amortized cost 17,293,503 17,575,083 21,734,396 22,284,034 Debentures Amortized cost 10,806,823 11,069,955 8,278,566 8,316,918 Derivatives Fair value 352,223 352,223 484,850 484,850 Dividends/interest on capital Amortized cost 116,225 116,225 220,188 220,188 Permits and concessions payable Amortized cost 50,289 50,289 2,033,680 2,033,680 Shareholders’ equity Capital reserve – stock options Fair value 86,439 86,439 86,439 86,439 Treasury shares Amortized cost (17,366 ) (10,952 ) (17,366 ) (10,952 )

We concluded that the discount to present value of assets and liabilities measured under the amortized not cost method does not apply, based on the valuation made for this purpose, for the following main reasons:

• Trade receivables: near-term maturity of bills. • Trade payables: all obligations are due to be settled in the short term.

• Borrowings and financing: all transactions are adjusted for inflation using contractual

indices.

• Permits and concessions payable: all obligations arising from permits are adjusted for inflation based on contractual indices.




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(b) Currency risk Assets Cash equivalents and financial investments in local currency are maintained in investment funds exclusively managed for the Company and its subsidiaries, and investments in its own portfolio. The risk associated to these assets arises from the possible exchange rate fluctuations that may reduce the balance of these assets. The assets subject to this risk represent approximately 6.1% of our total cash and cash equivalents and financial investments. These assets are presented in the balance sheet as follows: Consolidated 9/30/2010 Carrying amount Fair value Assets Cash equivalents 8,941,185 8,941,185 Financial investments 2,338,642 2,338,642 Liabilities The Company and its subsidiaries have foreign currency-denominated loans and financing. The risk associated with these liabilities is related to the possibility of fluctuations in foreign exchange rates that could increase the balance of such liabilities. Loans exposed to this risk represent approximately 23.1% (17.2% at June 30, 2010) of total liabilities from borrowings and financing, less the foreign exchange hedging transactions contracted. In order to minimize this type of risk, the Company has been entering into foreign exchange hedging contracts with financial institutions. Out of the debt denominated in foreign currency and the basket of currencies of the BNDES, 87.20% (75.1% at June 30, 2010) is hedged by foreign exchange swaps and foreign currency-denominated financial investments. The unrealized gains or losses on hedging transactions, consisting of currency swaps, are recorded in the statement of operations as gains or losses, based on the status of each instrument. At September 30, 2010 and 2009, the amounts shown below were recorded as gain/(loss) on derivatives (see Note 7):


9/30/2010 9/30/2009 9/30/2010 9/30/2009

Gain(+)/loss(-) on currency swaps (189,012) (955,079) (195,495 ) (1,050,733 )

Currency forwards and options (215,547) (215,547 )

Foreign currency financial investments 28 87,978 28 82,398

(188,984) (1,082,648 ) (195,467 ) (1,183,882 )




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Derivatives are summarized as follows: Company

Notional amount

Fair value

Index Maturity Amounts receivable/

(payable)

9/30/2010 6/30/2010 9/30/2010 6/30/2010 US$/R$ cross currency swaps

Long position

US$+ 6M US$ Libor + 1.07%

to 6.05% Oct 2010-Aug 2019 3,534,032 3,645,298 3,102,441 3,234,417

Short position

CDI-1.5% to 110% of CDI

Oct 2010-Aug 2019 (3,534,032 ) (3,645,298 ) (3,544,089 ) (3,553,732 )

Net value (441,648 ) (319,315 )

Yen/R$ cross currency swaps

Long position Yen+ 6M Yen Libor+ 0.48%

Sep 2017 267,235 286,323 257,497 277,039

Short position 96.25% of CDI

Sep 2017 (267,235 ) (286,323 ) (264,659 ) (289,646 )

Net amount (7,162 ) (12,607 ) Consolidated

Notional amount

Fair value

Index Maturity Amounts receivable/

(payable)

9/30/2010 6/30/2010 9/30/2010 6/30/2010 US$/R$ cross currency swaps

Long position

US$+ 6M US$ Libor + 1.07% to

6.05% Oct 2010-Aug 2019 3,534,032 3,645,298 3,102,441 3,234,648

Short position

CDI-1.5% to 110% of CDI

Oct 2010-Aug 2019 (3,534,032 ) (3,645,298 ) (3,544,089 ) (3,553,964 )

Net amount (441,648 ) (319,316 )

Yen/R$ cross currency swaps

Long position

Yen+ 6M Yen Libor+ 0.48% to

1.92% Mar 2011-Sep 2017 321,346 395,551 301,236 365,420

Short position

93.20% to 97.00% of CDI

Mar 2011-Sep 2017 (321,346 ) (395,551 ) (376,903 ) (510,653 )

Net amount (75,667 ) (145,233 )

In order to ensure the compliance of financial obligations of certain swap transactions, the Company main assign securities as collateral to its counterparts. At the end of the nine-month period ended September 30, 2010, these collaterals totaled R$38.9 million, represented by private securities (CDBs). US$/R$ cross currency swaps




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TMAR entered into currency swap (plain vanilla) to hedge its US dollar-denominated debt payments against exchange fluctuations. Under these contracts, the Company holds a long position in US dollars plus a fixed interest rate or in US dollars plus US LIBOR and a fixed interest rate, and a short position pegged to CDI fluctuation. The main risk of loss in the long position of these instruments is, therefore, the fluctuation of the US dollar exchange rate; however, such losses would be fully offset by the US dollar-denominated debt’s maturities. Yen/R$ cross currency swaps TMAR and its subsidiaries entered into currency swap (plain vanilla) to hedge their yen-denominated debt payments against exchange fluctuations. Under these contracts, the Company holds a long position in yen plus a fixed interest rate or in yen plus Japanese LIBOR and a fixed interest rate, and a short position pegged to CDI fluctuation for all agreements. The most significant risk of loss in the long position of these instruments is, therefore, the fluctuation of the yen exchange rate; however, such losses would be fully offset by the yen-denominated debt’s maturities. NDF derivatives are summarized as follows:

Company and

consolidated

Notional amount

Fair value

Index

Forward Maturity Amounts receivable/

(payable)

9/30/2010 6/30/2010 9/30/2010 6/30/2010

US$/R$ NDFs

Short position US$ 1.705 to

1.8065 Oct 2010-Jan

2011 2,213,754 (33,364 )

US$/R$ non-deliverable forwards (NDFs) TMAR entered into future dollar purchase transactions using non-deliverable forwards to hedge against a depreciation of the Brazilian real in relation to the US dollar, in light of the Company’s current exposure to the US dollar, not considering such contracts. The main strategy for these contracts is to set the foreign exchange rate for the contract period at a fixed amount, thus mitigating the risk of fluctuations unfavorable to TMAR.




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Currency risk sensitivity analysis At the end of the nine-month period ended September 30, 2010, management estimated the depreciation scenarios of the Brazilian real in relation to other currencies, based on the close US dollar exchange rate (PTAX selling rate) for the period. The rate used for the probable scenario was the US dollar exchange rate prevailing at September 30, 2010. The probable rate was then depreciated by 25% and 50% and used as benchmark for the possible and remote scenarios, respectively.

Foreign exchange rate scenario Description Rate Depreciation Probable scenario

US dollar 1.6942 0% Japanese yen 0.0203 0% Currency basket 0.033457 0%

Possible scenario US dollar 2.11775 25% Japanese yen 0.025375 25% Currency basket 0.04182125 25%

Remote scenario US dollar 2.5413 50% Japanese yen 0.03045 50% Currency basket 0.0501855 50%

As of September 30, 2010, management estimated the future outflow for the payment of interest and principal of its debts pegged to foreign exchange rates based on interest rates prevailing at end of the reporting period and the exchange rates above, also assuming that all interest and principal payments would be made on the scheduled maturity dates. The impact of hypothetical depreciations of the Brazilian real in relation to other currencies can be measured by the difference in the future flows in the possible and remote scenarios compared to the probable scenario, where there is no estimate of depreciation. Such sensitivity analysis considers payment outflows in future dates. Thus, the sum of the amounts for each scenario is not equivalent to the fair value, or even the present value of liabilities.




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Future payment outflows: Company 9/30/2010

Description

Individual risk Up to 1

year

1 to 3 years 3 to 5

years Over 5

years

Total

Probable scenario

US dollar debts Dollar

appreciation 572,526 1,161,827 1,112,765 4,948,715 7,795,833

Derivatives (net position - US$) Dollar

depreciation (2,597,938) (724,936) (691,698) (1,677,250) (5,691,822)

Cash in US dollar (*) Dollar

depreciation (315,177) (315,177)

Yen debts

Yen appreciation 106,411 208,746 205,218 201,684 722,059

Derivatives (net position - yen)

Yen depreciation (40,460) (79,550) (78,361) (77,171) (275,542)

Currency basket debts Increase of

basket rate 3,734 3,734

Total pegged to exchange rate (2,270,904) 566,087 547,924 3,395,978 2,239,085

Possible scenario


appreciation 715,658 1,452,284 1,390,956 6,185,894 9,744,792


depreciation (3,247,423) (906,170) (864,623) (2,096,563) (7,114,779)


depreciation (393,971) (393,971)

Yen debts






Total pegged to exchange rate

(2,838,629) 707,609 684,905 4,244,972 2,798,857

Remote scenario


appreciation 858,789 1,742,741 1,669,148 7,423,073 11,693,751


depreciation (3,896,907) (1,087,404) (1,037,547) (2,515,875) (8,537,733)


depreciation (472,766) (472,766)

Yen debts

Yen appreciation 159,617 313,119 307,827 302,526 1,083,089






(3,406,356) 849,131

821,886

5,093,967

3,358,628

Impacts

Possible scenario - probable scenario (567,725) 141,522 136,981 848,994 559,772

US dollar (585,147) 109,223 105,266 817,866 447,208

Japanese yen 16,488 32,299 31,715 31,128 111,630

Currency basket 934 934

Remote scenario - probable scenario (1,135,452) 283,044 273,962 1,697,989 1,119,543

US dollar (1,170,295) 218,446 210,534 1,635,733 894,418

Japanese yen 32,976 64,598 63,428 62,256 223,258

Currency basket 1,867 1,867

(*) Cash in US dollar held for hedging purposes.




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Impact on fair value of liability instruments Company

Description Risk Balance at 9/30/2010

Probable scenario

US dollar debts Dollar appreciation 5,714,086

Derivatives (net position - US$) Dollar depreciation (5,239,444 )

Cash in US dollar (*) Dollar depreciation (315,177 )

Yen debts Yen appreciation 698,318

Derivatives (net position - yen) Yen depreciation (257,497 )

Currency basket debts Increase in basket rate 3,679

Total pegged to exchange rate 603,965

Possible scenario








Remote scenario




Yen debts Yen appreciation 1,047,477




Impacts

Possible scenario - probable scenario 150,993

US dollar 39,867

Japanese yen 110,206

Currency basket 920

Remote scenario - probable scenario 301,982

US dollar 79,732


Currency basket 1,840

(*) Cash in US dollar held for hedging purposes.




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Future payment outflows: Consolidated 9/30/2010

Description

Individual risk Up to 1

year

1 to 3 years

3 to 5 years Over 5

years

Total

Probable scenario


appreciation 610,679 1,235,212 1,469,820 4,948,715 8,264,426


depreciation (2,597,938) (724,936) (691,698 ) (1,677,250 ) (5,691,822)


depreciation (407,844) (407,844)

Yen debts



Yen depreciation (84,632) (79,550) (78,361 ) (77,171 ) (319,714)

Currency basket debts Increase in



(2,308,516) 639,472 904,979 3,395,978 2,631,913

Possible scenario


appreciation 763,349 1,544,015 1,837,275 6,185,894 10,330,533


depreciation (3,247,423) (906,170) (864,623 ) (2,096,563 ) (7,114,779)


depreciation (509,805) (509,805)

Yen debts







(2,885,645) 799,340 1,131,224 4,244,972 3,289,891

Remote scenario


appreciation 916,019 1,852,818 2,204,730 7,423,073 12,396,640


depreciation (3,896,907) (1,087,404) (1,037,547 ) (2,515,875 ) (8,537,733)


depreciation (611,766) (611,766))

Yen debts

Yen appreciation 226,203 313,119 307,827 302,526 1,149,675






(3,462,773) 959,208

1,357,468

5,093,967

3,947,870

Impacts

Possible scenario - probable scenario (577,129) 159,868 226,245 848,994 657,978

US dollar (598,776) 127,569 194,530 817,866 541,189

Japanese yen 16,543 32,299 31,715 31,128 111,685


Remote scenario - probable scenario (1,154,257) 319,736 452,489 1,697,989 1,315,957

US dollar (1,197,551) 255,138 389,061 1,635,733 1,082,381

Japanese yen 33,085 64,598 63,428 62,256 223,367


(*)Cash in US dollar held for hedging purposes.




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The fair value of liability instruments subject to currency risk would be impacted as follows in the estimated scenarios:

Impact on fair value of liability instruments Consolidated

Description Risk Balance at 9/30/2010

Probable scenario








Possible scenario







Total pegged to exchange rate 1,091,777

Remote scenario




Yen debts Yen appreciation 1,113,194



Total pegged to exchange rate 1,310,132

Impacts

Possible scenario - probable scenario 218,356

US dollar 103,157



Remote scenario - probable scenario 436,711

US dollar 206,313



(*)Cash in US dollar held for hedging purposes. (c) Interest rate risk




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Assets Cash equivalents and financial investments in local currency are maintained in financial investment funds exclusively managed for the Company and its subsidiaries, investments in own portfolio of private securities (fixed and floating rate CDBs) issued by prime financial institutions, Treasury bills (LFTs), repurchase commitments, etc. The interest rate risk linked to these assets arises from the possibility of fluctuations in these rates and consequent decrease in return on these assets. These assets are presented in the balance sheet as follows: Consolidated 9/30/2010 Carrying amount Fair value Assets Cash equivalents 8,941,185 8,941,185 Financial investments 2,338,642 2,338,642 Liabilities The Company and its subsidiaries have borrowings and financing subject to floating interest rates, based on the TJLP, IPCA or CDI, in case of Brazilian real-denominated debts, and on the LIBOR, in case of U.S. dollar-denominated debts, the Japanese LIBOR, in case of yen-denominated debts, and on the BNDES floating rates in the case of debts pegged to the BNDES currency basket rate. In order to reduce their exposure to LIBOR fluctuation, the Company and its subsidiaries have swap transactions that convert LIBOR rates into fixed rates and CDI plus an agreed spread. At September 30, 2010, approximately 83.7% (90.3% at June 30, 2010 %) of the incurred debt, less adjustment for derivatives transactions, was subject to floating interest rates. After the derivatives transactions, approximately 88.8% (95.3% at June 30, 2010) were subject to floating interest rates. The most material exposure of Company’s debts after the hedging transactions is to CDI. Therefore, a continued increase in this interest rate would have an adverse impact on future interest payments and hedging adjustments. However, as the Company’s cash is invested mainly in securities pegged to the CDI fluctuation, the net exposure to CDI of current liabilities does not constitute a material risk for the Company. At September 30, 2010, the Company recorded in ‘Gain/(loss) on hedging transactions’ (see Note 7) a loss of R$13,089 (loss of R$7,032 at September 30, 2009), Company, and a loss of R$13,291 (loss of R$7,032 at September 30, 2009), on consolidated basis, arising from interest rate swaps.




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Derivatives contracted to hedge against the debt’s floating interest rates are summarized as follows: Company and consolidated

Index Maturity Notional amount Fair value

9/30/2010 6/30/2010 9/30/2010 6/30/2010

US$ LIBOR/fixed rate swaps

Long position

US$ 3M LIBOR for US$ 6M

LIBOR + 2.50%Aug 2010-Feb 2016

434,193 532,867 433,576 529,901

Short position

US$+3.62% for

5.04%

Aug 2010-Feb 2016

(434,193 ) (532,867 ) (453,914) (551,124)

Net amount

(20,338) (21,223)

CDI/fixed rate swaps

Long position CDI + 0.55% Mar 2013 270,000 270,000 275,524 282,007

Short position 103.8% of CDI Mar 2013 (270,000 ) (270,000 ) (274,760 ) (281,085 )

Net amount

764 922

US$ LIBOR/fixed rate swaps The Company entered into interest rate swaps to hedge debt payments pegged to US dollar floating rates against exchange fluctuation. Under these contracts, the Company has a long position in US dollar LIBOR and a short position in a fixed rate. The risk of loss in the long position of these instruments is, therefore, the fluctuation of the US dollar LIBOR; however, such possible losses would be fully offset by maturities of US dollar-denominated debts pegged to LIBOR. CDI for spread + CDI swaps The Company entered into interest rate swaps to hedge payments of Brazilian-real denominated debentures pegged to CDI plus spread. Under such contract, the Company has a long position in CDI plus spread and a short position in a percentage of CDI. Interest rate risk sensitivity analysis The Company believes that the risk related to interest rate fluctuations arises from its liabilities pegged to the TJLP, the LIBOR (USD and JPY), and mainly the CDI. The risk is associated to an increase in those rates. At the end of the nine-month period ended September 30, 2010, management estimated the CDI, TJLP and US$ LIBOR fluctuation scenarios. The rates used for the probable scenario were the rates prevailing at September 30, 2010. These rates have been stressed by 25% and 50%, and used as benchmark for the possible and remote scenarios. Management did not conduct stress tests for JPY LIBOR because it considers the risk immaterial for sensitivity analysis purposes.




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Interest rate scenarios

Probable scenario Possible scenario Remote scenario

CDI TJLP 6M USD LIBOR CDI TJLP 6M USD

LIBOR CDI TJLP 6M USD LIBOR

10.61% 6.00% 0.46% 13,26% 7.50% 0.58% 15.92% 9.00% 0.69%

At September 30, 2010, management estimated a future outflow for the payment of interest and principal of its debts pegged to CDI, TJLP and LIBOR (USD) based on the interest rates above, also assuming that all interest and principal payments would be made on the scheduled maturity dates. The outflows for repayment Oi intragroup debts were not considered. The impact of hypothetical increases of interest rates can be measured by the difference in the future flows in the possible and remote scenarios compared to the probable scenario, where there is no estimate of increase. Such sensitivity analysis considers payment outflows in future dates. Thus, the aggregate of the amounts for each scenario is not equivalent to the fair value, or even the present value of these liabilities. The fair value of these liabilities, should the Company’s credit risk remain unchanged, would not be impacted in the event of fluctuations in interest rates, as the interest rates used to estimate future cash outflows would be the same which adjust such flows to present value. Additionally, the Company has cash equivalents and short-term investments in floating rate securities whose yield would also increase in the possible and remote scenarios, thus offsetting part of the impact of the increase of interest rates on debt payment outflows. However, as the estimated maturities are different from the maturities of financial liabilities, the impact of the scenarios on such assets has not been considered. The balances of cash equivalents and financial term investments are disclosed in Note 9.




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The table below shows the future interest payment outflows:

Company

9/30/2010

Description Individual risk Up to 1

year 1 to 3 years

3 to 5 years

Above 5 years Total

Probable scenario

CDI pegged debts CDI increase 1,275,777

2,158,633 622,956 71,025 4,128,391 Derivatives (net position - CDI) CDI increase 382,204 599,264 514,248 517,445 2,013,161

TJLP pegged debts TJLP increase 237,883 305,986 116,642 65,780 726,291 US LIBOR pegged debts US LIBOR increase 45,110 69,287 43,238 23,185 180,820

Derivatives (net position - LIBOR) Drop in US LIBOR (28,610 ) (52,132 ) (31,810 ) (16,193 ) (128,745 )

Debts pegged to yen LIBOR Yen LIBOR increase 6,678 9,281 5,752 2,219 23,930

Derivatives (net position - LIBOR) Drop in yen LIBOR (2,249 ) (3,127 ) (1,938 ) (747 ) (8,061 )

Total pegged to interest rates 1,916,793

3,087,192 1,269,088 662,714 6,935,787

Possible scenario




Derivatives (net position - LIBOR) Drop in US LIBOR (29,227 ) (54,773 ) (33,417 ) (17,066 ) (134,483 ) Debts pegged to yen LIBOR Yen LIBOR increase 6,956 10,159 6,296 2,429 25,840



3,702,822 1,567,436 852,002 8,285,396

Remote scenario




Derivatives (net position - LIBOR) Drop in US LIBOR (29,844 ) (57,413 ) (35,024 ) (17,939 ) (140,220 ) Debts pegged to yen LIBOR Yen LIBOR increase 7,233 11,037 6,841 2,638 27,749



4,315,275 1,866,514 1,044,259 9,632,314

Impacts Possible scenario – Probable scenario 246,343 615,630 298,348 189,288 1,349,609

CDI 240,230 572,835 261,293 142,277 1,216,635

TJLP 5,454 41,316 36,094 46,476 129,340

US LIBOR 474 895 599 396 2,364

YEN LIBOR 185 584 362 139 1,270

Remote scenario – probable scenario 489,473

1,228,083 597,426 381,545 2,696,527

CDI 477,273

1,141,819 521,861 283,608 2,424,561

TJLP 10,883 83,305 73,644 96,867 264,699

US LIBOR 948 1,791 1,197 792 4,728

YEN LIBOR 369 1,168 724 278 2,539




96

Consolidated

9/30/2010

Description Individual risk Up to 1 year 1 to 3 years 3 to 5 years Above 5

years Total

Probable scenario

CDI pegged debts CDI increase 1,426,027 2,309,689 622,956 71,025 4,429,697 Derivatives (net position - CDI) CDI increase 445,814 599,264 514,248 517,445 2,076,771

TJLP pegged debts TJLP increase 521,433 684,194 262,057 139,288 1,606,972

US LIBOR pegged debts US LIBOR increase 45,133 69,292 43,238 23,185 180,848

Derivatives (net position - LIBOR)

Drop in US LIBOR (28,610 ) (52,132 ) (31,810 ) (16,193 ) (128,745 )

Debts pegged to yen LIBOR

Yen LIBOR increase 7,278 9,281 5,752 2,219 24,530


Drop in yen LIBOR (2,249 ) (3,127 ) (1,938 ) (747 ) (8,061 )

Total pegged to interest rates 2,414,826 3,616,461 1,414,503 736,222 8,182,012

Possible scenario





Drop in US LIBOR (29,227 ) (54,773 ) (33,417 ) (17,066 ) (134,483 )




Drop in yen LIBOR (2,342 ) (3,421 ) (2,120 ) (818 ) (8,701 )

Total pegged to interest rates 2,687,095 4,308,962 1,760,776 979,624 9,736,457

Remote scenario





Drop in US LIBOR (29,844 ) (57,413 ) (35,024 ) (17,939 ) (140,220 )




Drop in yen LIBOR (2,435 ) (3,715 ) (2,303 ) (888 ) (9,341 )

Total pegged to interest rates 2,955,855 4,998,791 2,109,722 1,230,478 11,294,846

Impacts Possible scenario – Probable scenario 272,269 692,501 346,273 243,402 1,554,445

CDI 259,855 600,371 261,293 142,277 1,263,796

TJLP 11,754 90,651 84,019 100,590 287,014

US LIBOR 475 895 599 396 2,365

YEN LIBOR 185 584 362 139 1,270 Remote scenario 50% Probable scenario 541,029 1,382,330 695,219 494,256 3,112,834

CDI 516,257 1,196,569 521,861 283,608 2,518,295

TJLP 23,454 182,801 171,437 209,578 587,270

US LIBOR 949 1,792 1,197 792 4,730

YEN LIBOR 369 1,168 724 278 2,539

(d) Credit risk




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The concentration of credit risk related to trade accounts receivables is immaterial due to the diversification of its portfolio and the monitoring controls applied. Doubtful receivables are adequately covered by an allowance for potential losses. Transactions with financial institutions (financial investments and borrowings and financing) are made with prime entities, avoiding the risk of concentration. The credit risk of financial investments is assessed by setting caps for investment in the counterparts, taking into consideration the ratings released by the main international risk rating agencies of each one of such counterparts. (e) Liquidity risk The cash flows from operations and third-party financing are used to defray capital expenditures on the expansion and upgrading of the network, pay dividends, repay debts, and invest in new businesses. (f) Risk of acceleration of maturity of loans and financing Under some debt instruments of the Company and its subsidiaries, default events can trigger the accelerated maturity of other debts. The impossibility to incur in new debts might prevent such companies from investing in their business and incur in required or advisable capital expenditures, which would reduce future sales and adversely impact their profitability. Additionally, the funds necessary to meet the payment commitments of the loans taken can reduce the amount of funds available for capital expenditures. If the covenants set out in the agreement between the Company and JBIC are not met within the period ending September 31, 2010 and if JBIC does not grant a waiver for this nonobservance, the Company can exercise the right to prepay its debt. The Company believes that said prepayment would avoid the enforcement of the cross-default or cross-acceleration covenants of other debt agreements and financial instruments entered into by the Company and its subsidiaries they cross acceleration provisions, which entitled the creditors to accelerate the maturity of such agreement and financial instruments if the maturity of the credit facility granted under the agreements entered into by the Company with dos JBIC is accelerated. (g) Contingent liabilities Contingent liabilities are assessed according to the likelihood of disbursement, as probable, possible or remote. Contingent disbursements assessed as probable are recorded in liabilities. Details on these risks are presented in note 23. (h) Regulatory risk Regulatory risks are related to the STFC business, which is the most important operating segment in which the Company and its subsidiary BrT operate. Concession agreements The Company and its subsidiary BrT have entered into local and domestic long distance concession agreements with the ANATEL, effective from January 1, 2006 to December 31,




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2025. These concession agreements, which provide for reviews on a five-year basis, in general have a higher intervention level in the management of the business and several provisions protecting consumers’ interests, as perceived by the regulator. The main features are: (i) The price (fee) of the public service concession is defined as two percent of revenue net

of taxes, calculated every two years, starting 2006, which commenced on April 30, 2007. It will continue successively as prescribed until the termination of the concession. This calculation method corresponds to one percent for each fiscal year;

(ii) The setting of new universal service targets, in particular the implementation of

network infrastructure to interconnect high-capacity access networks; (iii) Possibility of the Regulator imposing alternative mandatory service offering plans; (iv) Introduction of Regulator’s right to intervene in and change the concessionaire’s

agreements with third parties; (v) Possibility that the parent company’s, the subsidiary’s, the associate’s and third parties’

assets be qualified as essential to the concession, as returnable assets; and (vi) The requirement that lead to the creation of a users’ board for each concession segment. Network usage tariffs are defined as a percentage public local and domestic long distance tariff until the effective implementation of cost model by service/modality, which should be developed in the current year, as prescribed by the General Regulation Updating Plan (“PGR”), effective beginning 2011. 26 EMPLOYEE BENEFITS (a) Pension Funds The Company and its subsidiaries sponsor retirement benefit plans (“pension funds”) for their employees, provided that they elect to be part of such plan, and current beneficiaries. The table below shows the existing pension plans as at September 30, 2010. This note should be read together with the relevant disclosures made in the financial statements for the annual reporting period ended December 31, 2009. Pension plan Sponsor Administrator PBS-A TMAR and BrT Sistel PAMA TMAR and BrT Sistel PBS-Telemar TMAR FATL TelemarPrev TMAR, Oi and Oi Internet FATL PBS-TNCP Oi Sistel

CELPREV Oi Sistel

TCSPREV

BrT, BrT Celular, VANT, BrT Multimídia, BrT CS, iG, and BrTI

FATL

BrTPREV BrT, BrT Celular, BrT Multimídia, BrT CS, iG, and BrTI FATL Fundador /Alternativo BrT, BrT Celular, BrT Multimídia, BrT CS, iG, and BrTI FATL

PAMEC BrT BrT




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Sistel – Fundação Sistel de Seguridade Social FATL – Fundação Atlântico de Seguridade Social For purposes of the pension plan described in this note, the Company can also be referred to as the “Sponsor”. On January 1, 2010, the pension plans that until then were administrated by Fundação 14 de Previdência Privada and Fundação BrTPREV were transferred to the administration of FATL. The sponsored plans are valued by independent actuaries at the end of the annual reporting period. For the year ended December 31, 2009, the actuarial valuations were performed by Mercer Human Resource Consulting Ltda. The Bylaws provide for the approval of the supplementary pension plan policy, and the joint liability attributed to the defined benefit plans is ruled by the agreements entered into with the pension fund entities, with the agreement of the Pension Plan Authority (SPC), as regards the specific plans. The sponsored defined benefit plans are closed to new participants because they are close-end pension funds. Participants’ and the sponsors’ contributions are defined in the funding plan. SPC is the official agency that approves and oversees said plans. For the plans that report an actuarial surplus, assets are recorded when there is an express authorization for offsetting them against future employer contributions. Pension fund reserves Refer to the recognition of the actuarial deficit of the defined benefit plans, as shown below: Consolidated 9/30/2010 6/30/2010 BrTPREV and Fundador/Alternativo plans 632,352 606,317 PAMEC Plan 3,222 3,050 635,574 609,367 Current 59,988 33,953 Noncurrent 575,586 575,414

Assets recorded to be offset against future employer contributions Assets recognized from the TCSPREV Plan related to: (i) sponsor contributions which participants that left the Plan are not entitled to redeem; and (ii) part of the Plan’s surplus attributed to the sponsor.




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These assets are recognized in line item ‘receivables’ (Note 11) and are used to offset future employer contributions. These assets are broken down as follows: Consolidated 9/30/2010 6/30/2010 TCSPREV Plan 148,966 144,974 148,966 144,974 Current Noncurrent 148,966 144,974

Features of the sponsored supplementary pension plans 1) SISTEL Sistel is a nonprofit, private welfare and pension-related entity, established in November 1977, which is engaged in creating private plans to grant benefits in the form of lump sums or annuities, supplementary or similar to the government retirement pensions, to the employees and their families who are linked to the sponsors of SISTEL. Plans (i) PBS-A Defined benefit plan jointly sponsored with other sponsors engaged in the provision of telecommunications services and offered to participants who held the status of beneficiaries on January 1, 2000. Contributions to the PBS-A are contingent on the determination of an accumulated deficit. As at December 31, 2009, date of the last actuarial valuation, the plan presented a surplus. (ii) PAMA Defined benefit retiree medical care plan and Special Coverage Plan (“PCE”), sponsored together with other sponsors engaged in the provision of telecommunications services and intended for participants who held the status of beneficiaries on January 31, 2000, the beneficiaries of the PBS-TCS Group, merged on December 31, 2001 by TCSPREV (plan currently administrated by FATL), and the beneficiaries of PBS’s defined benefit plans sponsored by other companies, together with SISTEL and other foundations. According to a legal and actuarial valuation, the Sponsor’s liability is exclusively limited to future contributions. From March to July 2004, December 2005 to April 2006, and June to November 2008, there was an incentive for the optional migration of PAMA retirees and survivor pensioners to the new coverage conditions (PCE). The option of participants for the migration resulted in their contribution to PAMA/PCE. The contributions to this plan correspond to 1.5 percent of the payroll of active participants linked to PBS plans, segregated and sponsored by the several sponsoring companies. In the case of BrT, the PBS-TCS was merged into the TCSPREV plan on December 31, 2001, and began to form an internal group of the plan. Due to the utilization of PAMA funds, the participants share




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a portion of its individual costs used in the plan. Contributions are also made by the retirees and pensioners who migrated to PAMA/PCE. For sponsors, the option of participants to migrate to PAMA/PCE does not change the employer dues of 1.5% previously mentioned. (iii) PBS-TNCP Defined benefit plan, which, in addition to the official pension supplementation benefit, grants medical care (PAMA) to retirees and their dependents, on shared-cost basis. Contributions to the PBS-TNCP and PAMA plans are set based on actuarial studies prepared by independent actuaries according to the regulations in force in Brazil. Funding is determined using the capitalization system and the contribution due by the sponsor is 13.5% of the payroll of its employees participating in the plan, of which 12% are used to fund the PBS-TNCP plan. The pension benefit is defined as the difference between 90% of average salary of the previous 36 months, adjusted for inflation up to the retirement date, and the retirement benefit paid by the INSS. PBS-TNCP has been closed to new participants since April 2004. (iv) CELPREV In 2004, Amazônia obtained from SPC the approval to create a new Pension Plan. The new plan, called Celprev Amazônia (“CELPREV”), was offered to the employees who did not participate of the PBS-TNCP plan, and to new employees hired by its subsidiary. The participants of the PBS-TNCP plan were offered the possibility and encouraged to migrate to the CELPREV plan. A participant can make three types of contributions to CELPREV: (i) basic regular contribution: percentage ranging from 0 to 2 percent of his/her contribution salary; (ii) additional regular contribution: percentage from 0 to 6 percent of the share of his/her contribution salary that exceeds one Standard Reference Unit of the Plan; and (iii) voluntary contribution: percentage of the contribution salary freely chosen by the participant. The sponsor can make four types of contributions: (i) basic regular contribution: contribution equal to the participant’s basic regular contribution, less the contributions made to fund sick pay and administrative expenses; (ii) additional regular contribution: equal to the participant’s additional regular contribution, less administrative expense; (iii) nonrecurring contribution: made voluntarily and with the frequency set by the sponsor; and (iv) special contribution: contribution intended exclusively for the sponsor’s employees who are not part of the PBS and who have joined the plan within 90 days from the effective date of CELPREV. 2) FATL FATL, closed, multiple sponsor, multiple plan pension fund, is a nonprofit, private pension-related entity, with financial and administrative independence, headquartered in Rio de Janeiro, State of Rio de Janeiro, engaged in the management and administration of pension benefit plans for the employees of its sponsors. The PBS-Telemar and TelemarPrev plans were implemented in September 2000 and are still being administrated by SISTEL. As permitted by Article 33 of Supplementary Law 109 of May




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29, 2001, SISTEL’s Governing Board filed in October 2004 a request for transfer of administration of the PBS-Telemar and TelemarPrev Plans to FATL. FATL was established by TMAR, and SPC authorized its startup on January 12, 2005. The transfer of the administration of the PBS-Telemar and TelemarPrev plans SISTEL to FATL was completed on February 28, 2005. The information and impacts for disclosure, required by the pronouncement issued by IBRACON that addresses the accounting of employee benefits, approved by CVM Resolution 371/2000, are as follows: Plans (i) PBS-Telemar The PBS-Telemar defined benefit plan, is closed to new participants since the creation of TelemarPrev, in September 2000, and approximately 96% of its former participants migrated to TelemarPrev. The contributions from active participants of the PBS-Telemar plan correspond to the sum of: (i) 0.5 to 1.5 percent of the contribution salary (according to the participant’s age); (ii) 1 percent of contribution salary that exceeds half of one Standard Unit; and (iii) 11 percent of the contribution salary that exceeds one Standard Unit. The sponsors’ contributions are equivalent to 9.5 percent of the payroll of active participants of the plan, of which 8 percent are allocated to the PBS-Telemar plan and 1.5 percent to PAMA and PAMA/PCE, this latter in the case of participants that migrated to the new plan. The plan is funded under the capitalization approach. (ii) TelemarPrev TMAR, Oi and Oi Internet sponsor TelemarPrev defined contribution plan, approved by the SPC in September 2000. The benefits ensured to participants under the plan are classified into: (i) risk benefits – supplements to official retirement benefits; and (ii) discretionary benefits - annuities. A participant’s regular contribution is comprised of two portions: (i) basic - equivalent to 2 percent of the contribution salary; and (ii) standard - equivalent to 3 percent of the positive difference between the total contribution salary and the social security contribution. Supplementary contributions from participants are optional and can be made in multiples of 0.5 percent of the contribution salary, for a period of not less than six months Supplementary nonrecurring contributions from participants are also optional and can exceed 5 percent of the contribution salary cap. The plan’s charter requires the parity between participants’ and sponsors’ contributions, up to the limit of 8 percent of the contribution salary, even though a sponsor is not required to match supplementary contributions made by participants. The plan is funded under the capitalization approach. (iii) TCSPREV




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Defined contribution and settled benefits plan established on February 2, 2000. On December 31, 2001, all sponsored pension plans were merged with and into SISTEL, and the SPC exceptionally and provisionally approved the document submitted to that Authority, in view of the need for revision of its charter. Thus, TCSPREV consists of defined contribution groups with settled and defined benefits. The plans added to the TCSPREV were PBS-TCS, PBT-BrT, BrT Administration Agreement, and the Unusual Contractual Relationship Term Sheet, where the terms and conditions set forth in the original plans were maintained.

On September 18, 2008, SPC/MPS Administrative Rule 2521/2008, of September 17, 2008,

which approves the new charter of the plan, was published in the Federal Official Gazette (DOU), confirming all the terms and conditions exceptionally and provisionally approved on December 31, 2001. The new charter also includes the amendments necessary to meet the current requirements of the supplementary pension plan law.

Beginning March 2003, the TCSPREV Plan was no longer offered to the sponsors’ new hires.

However, this plan started to be offered again in March 2005 to the defined contribution group. TCSPREV currently includes approximately 55.74% of the staff.

Contributions to this plan, by group of participants, are set based on actuarial studies prepared by independent actuaries according to the regulations in force in Brazil, using the capitalization approach to determine funding. Currently, contributions are made by the participants and the sponsor only for the internal groups PBS-TCS (defined benefit) and TCSPREV (defined contribution). In the TCSPREV group, the contributions are credited to the individual account of each participant, divided equally by the employee and the sponsor, and the basic contribution percentages range from 3 to 8 percent of the participant’s salary, depending on the participant’s age. Participants have the option to make supplementary contributions to the plan, which are not matched by the sponsor. In the PBS-TCS group, the sponsor’s contribution corresponds to 12 percent of the participants’ payroll, whereas the employee’s contribution varies according to his/her age, length of service and salary, and an entry fee may also be paid depending on the age at which he/she joins the plan. The sponsors are responsible for funding all administrative costs and risk benefits, except for self-sponsored participants and the deferral of benefits. The SPC authorized, through Administrative Rule 2792/2009, the transfer of the administration of the TCSPREV benefit plan to FATL, an entity sponsored by the Oi Group, the new controlling shareholder of the Company. (iv) PAMEC-BrT – Welfare plan administered by BrT Defined benefit plan intended to provide medical care to the retirees and survivor pensioners linked to the PBT-BrT Group – TCSPREV pension plan managed by FATL. The contributions for PAMEC-BrT were fully paid in July 1998, through a bullet payment. However, as this plan is now administrated by the Company, after the transfer of management by Fundação 14 in November 2007, there are no assets recognized to cover current expenses, and the actuarial obligation is fully recognized in BrT’s liabilities. (v) BrTPREV

Defined contribution and settled benefit plan, launched in October 2002, intended to grant pension plan benefits supplementary to benefits granted by the official social security system and which initially covered only employees of the Rio Grande do Sul Branch. This pension plan




104

started to be offered to new employees of the Company and its subsidiaries from March 2003 to February 2005, when its offering was suspended and it is closed to new participants. BrTPREV currently covers nearly 16.90% of the staff. Contributions to this plan are set based on actuarial studies prepared by independent actuaries according to the regulations in force in Brazil, using the capitalization approach to determine its funding. The contributions are credited to individual accounts of each participant, divided equally by the employee and the sponsor, and the basic contribution percentages range from 3 to 8 percent of the participant’s salary, depending on the participant’s age. Participants have the option to make supplementary contributions to the plan, which are not matched by the sponsor. The sponsors are responsible for funding all administrative costs and risk benefits, except for self-sponsored participants and the deferral of benefits. (vi) Fundador/Alternativo Defined benefit plans intended to grant pension benefits supplementary to the benefits of the official social security system, which is closed to new participants, originated from the merger of the Fundador-BrT plan by the Alternativo-BrT plan, pursuant to SPC Administrative Rule 2627/2008, thus forming a single plan, without changing the rules for the participants and beneficiaries, and which was renamed to Fundador/Alternativo plan. Currently this plan covers approximately 0.21% of the staff. The regular contribution made by the sponsor is matched by the regular contribution of the participant, whose rates vary according to age, length of service and salary. For participants linked to the rules of the former Alternativo-BrT Plan, contributions are limited to three times the INSS benefit cap and the participant also pays an entry fee, depending on the age at which he/she joins the plan. Actuarial deficit of the plans The unamortized mathematical reserve, corresponding to the current value of the supplementary Company contribution, as a result of the actuarial deficit of the plans administrated by FBrTPREV, have a settlement deadline of 20 years, beginning January 2002, according to SPC Circular 66/SPC/GAB/COA, of January 25, 2002. Eleven years remain to reach the deadline for full settlement. The SPC authorized, through Administrative Rule 2792/2009, the transfer of the administration of the Fundação BrTPREV benefit plan to FATL, an entity sponsored by the Oi Group, the new controlling shareholder of the Company. (b) Employee profit sharing The employee profit sharing plan was established in 1999 as a way to stimulate employees to meet individual and corporate goals, improving return to shareholders. The plan comes into effect when the following goals are met:

• Attainment of economic value added goals (earnings before interest, income tax, depreciation and amortization indicators, and economic value added indicators); and

• Operating, quality and market indicators.




105

At September 30, 2010, the Company and its subsidiaries recorded provisions based on the estimated attainment of these goals, totaling R$224,867 (R$107,657 at June 30, 2010). The differences between the accrued amounts and the amounts stated in the statements of operations refer to reversals or increases in prior years’ estimates, when the benefit is effectively paid. (c) Share-based payment plans (i) TNL’s stock option plan The Extraordinary General Shareholders’ Meeting held on April 11, 2007 approved the Stock Option Plan, disclosed on the Company’s website (www.oi.com.br/ri) and also available on CVM’s website (www.cvm.gov.br), which appoints the Board of Directors as plan manager, which can, at its discretion, assign the plan management to a committee consisting of three board members, are at least one director and two alternate directors. In the meeting held on April 12, 2007, the Board of Directors elected the members of the Stock Option Plan Management Committee and granted the committee the power to periodically establish the stock option plans. The beneficiaries of the 2007 Stock Option Plan are entitled to a total of up to 1.31 percent of TNL’s subscribed and paid-in capital stock, representing a reserve of 5,120,000 common shares (TNLP3). The program is offered to the TNL, TMAR and Oi officers. The grant price was based on the weighted average of the share quotation on the BOVESPA on the 30 days preceding the grant date, and it will be adjusted for inflation according to the IGP-M fluctuation. The meeting of the Stock Option Plan Management Committee, held on September 18, 2008, decided to amend the Stock Option Plan approved on April 12, 2007 to also grant the beneficiaries the option to purchase 2,713,000 TNL preferred shares (TNLP4), totaling 0.68 percent of the subscribed and paid-in capital stock, at the exercise price of R$27.31. These options may be exercised since grant date, contingent to the exercise of the common stock options. The other terms and conditions of the 2007 Stock Option Plan were not changed and remain effective.




106

The tables below summarize the transactions conducted with common and preferred shares up to September 30, 2010.

Common shares – TNLP3 In Brazilian reais

Number of shares (in

thousands) Price on

grant date

Grant price

9/30/2010 6/30/2010

Granted in April 2007 5,120 50.98 47.88 61.96 Options exercised (214 ) Options cancelled (1,629 )

Option vested at September 30, 2010 3,277

Preferred shares – TNLP4 In Brazilian reais


thousands) Price on

grant date

Grant price

9/30/2010 6/30/2010

Granted in September 2008 2,713 27.31 20.49 28.69 Options exercised (293 ) Options cancelled (665 )


In the nine-month period ended September 30, 2010, 15,269 common stock options and 93,566 preferred stock options (R$93,566 at June 30, 2010) had been exercised, settled through the transfer of TNL’s treasury shares to the plan beneficiaries. The table below shows the common and preferred stock options granted at September 30, 2010: Granted options Vested options Exercise price bracket at grant date


thousands)

Remaining period

(in months) Exercise price


thousands) Exercise

price

R$20.00-29.99 1,755 07 20.49 1,755 20.49 R$40.00-50.00 3,277 07 47.88 3,277 47.88




107

The options will vest as follows:

Grant date Adjusted exercise price

(in reais)

Options (in thousands

of shares) Grant date: Lot Vesting

date Exercise deadline

Common

4/12/2007 25% 4/12/2008 4/12/2012 47.88 740

25% 4/12/2009 4/12/2013 47.88 832 25% 4/12/2010 4/12/2014 47.88 846

25% 4/12/2011 4/12/2015 47.88 859

Grant date Adjusted exercise price

(in reais)

Options (in thousands

of shares) Grant date: Lot Vesting

date Exercise deadline

Preferred

9/18/2008 25% 9/18/2008 4/12/2012 20.49 390

25% 4/12/2009 4/12/2013 20.49 455 25% 4/12/2010 4/12/2014 20.49 455

25% 4/12/2011 4/12/2015 20.49 455 The fair value of the options granted was estimated on grant date based on the Black-Scholes option pricing model, using the following assumptions: 4/12/2007 9/18/2008

Lot 1 Lot 2 Lot 3 Lot 4 Lot 1 Lot 2 Lot 3 Lot 4

Backing asset 67.03 67.03 67.03 67.03 27.51 27.51 27.51 27.51

Exercise price 50.98 50.98 50.98 50.98 27.31 27.31 27.31 27.31 Expected volatility 54.10% 46.33% 44.36% 46.70% 0.00% 46.84% 41.08% 41.08%

Risk-free interest rate 2.43% 1.34% 0.97% 0.78% 0.00% 1.26% 0.85% 0.72%

Expected life (in years) 1 2 3 4 1 2 3

Dividends yield 11.54% 11.34% 11.19% 11.10% 0.00% 13.84% 14.79% 15.07% Fair value on grant date 24.22 28.93 33.07 37.43 0.20 4.77 7.99 10.75

In the nine-month period ended September 30, 2010, expenses of R$7,528 (R$15,710 at September 30, 2009), Company, and R$10,113 (R$21,129 at September 30, 2009), on a consolidated basis, were recognized as result of the exercise of TNLP3 and TNLP4 stock options. The balance of the ‘Stock option reserve’ in shareholders' equity at September 30, 2010 is R$87,981 (R$86,439 at June 30, 2010), Company and on a consolidated basis. Assuming that no other share-based payment agreements will be entered into, up to the end of the vesting period of the current agreements (April 11, 2011) the Company should record expenses of R$4,012 (Company) and R$6,896 (on a consolidated basis). (ii) Stock option plans assumed with the acquisition of BrT’s control Plan Approved on April 28, 2000 The rights vested through stock options agreements while this previously approved plan was effective remain valid and effective according to the respective terms agreed, and no new grants through this plan are allowed.




108

At the end of the nine-month period ended September 30, 2010, there were outstanding vested options, as described in the program below: Program B The options guaranteed by this plan are options settled in shares. The exercise price was set by the management committee based on the share market price on grant date and will be adjusted for inflation based on the IGP-M from the agreement execution date to payment date. The table below summarizes the transactions conducted with preferred shares up to September 30, 2010. In Brazilian reais Number of

shares (in thousands)

Price on grant date

Grant price

9/30/2010 6/30/2010

Balance at beginning of year 31,643 17.30 20.19 19.78

Options cancelled (2,419)


The table below shows the preferred stock options granted at September 30, 2010:

Granted options Vested options

Exercise price bracket at grant date

Number of shares (in thousands)

Remaining period

(in months) Exercise price

Number of shares (in thousands) Exercise price

R$10.00-19.99 29,224 24 20.19 29,224 20.19

The options will vest as follows:

Grant date Adjusted exercise

price (in reais)

Options (in

thousands of shares) Grant date: Lot

Vesting date

Exercise deadline

3ª

22/12/04 33% 22/12/2005 31/12/2011 20.19 9,741

33% 22/12/2006 31/12/2011 20.19 9,741 34% 22/12/2007 31/12/2011 20.19 9,742

The fair value of the options granted was estimated on grant date based on the Black-Scholes option pricing model, using the following assumptions: 21/12/2004

Backing asset 13.64Exercise price 17.30Expected volatility 38.2%Risk-free interest rate 8.4%Expected life (in years) 2Dividends yield 3.10%Fair value on grant date 2.76




109

The share-based payment agreements prescribed that options can only be equity settled and the fair values of the TNL’s and BrT’s shares are allocated on a straight line basis over the relevant vesting periods. The portions corresponding to TNL, TMAR, Oi and BrT beneficiaries are accounted for by these companies on profit or loss for the year as a balancing item of shareholders’ equity, as required by CVM Resolution 562/2008, which approves the CPC 10 Share-based Payment. Plan Approved on November 6, 2007 The Extraordinary General Shareholders’ Meeting held on November 6, 2007 approved a general plan that grants options to BrT’s officers and employees for the purchase of Performance Units (PUs). With the change in control on January 8, 2009 (Note 1(e)), the programs’ stock options were fully exercised. Program 1, totaling 2,817,324 PUs was settled for a total price of R$17,855. Program 2, regarding the grant of options on July 1, 2008, comprising 701,601 PUs was settled for a total price of R$4,446. 646,585 PUs of Program 2 were exercised, related to the grant made on July 1, 2007, settled through: (i) delivery of preferred shares held in treasury by the Company, for a total exercise price of R$3,572 and cost of R$2,487; and (ii) delivery of common and preferred shares in the parent company, for a total exercise price of R$13,733 and fair value of R$17,108, plus R$130. 27 RELATED–PARTY TRANSACTIONS –COMPANY Related-party transactions are carried out at prices and terms similar to those agreed with third parties and are summarized as follow: 9/30/2010 6/30/2010 Assets

Accounts receivable

TNL Contax 4,992 3,971 Oi 185,484 182,326 Oi Internet 16,532 14,245 BrT 6,562 12,697 Brt Celular 6,668 8,848 Way TV 1 1

220,239 222,088 Loans to subsidiaries Oi Internet 1 Coari 1,085 819 Serrede 1,538 802 Calais 623 63

3,246 1,685




110

Dividends receivable Serede 27 28 AIX 1,176 2,676

1,203 2,704

Advance for future capital increase TNCP 40,000 40,000

40,000 40,000 Other Oi 3,228 3,242

3,228 3,242

267,930 269,719

9/30/2010 6/30/2010 Liabilities

Trade payables

TNL 4,884 4,884 TNL Contax 9,296 9,779 Oi 45,720 32,777 Oi Internet 2,488 2,036 Serede (123) (240) Way TV 12,375 11,043 BrT 20 14,879 BrT CS 11,446 59,088 iG Brasil 5,477 2,547

91,583 136,793

Debentures Oi 1,904,563 1,837,422 BrT 1,478,971 1,426,834 BrT Celular 366,281 353,367

3,749,815 3,617,623

Other payables TNL 48,695 45,157

48,695 45,157 3,890,093 3,779,573




111

9/30/2010 9/30/2009 Revenue

Revenue from services provided

TNL Contax 20,881 22,366

Oi 204,295 270,754

Oi Internet 18,842 66,589

Serede 846 853

Way TV 202 2,744

Amazônia 617

BrT 23,260 23,818

BrT Celular 1,062 319

iG Brasil 4,268 5,930

BrT Multimídia 7,448

VANT 167

273,656 401,605

Financial income

Oi 4,745 18,608

Oi Internet 579 250

Coari 51 17

Calais 12 4

BrT 3 46

BrT Celular 5

Serede 32 22

TNCP 1 1,297

Solpart 6

5,423 20,255

279,079 421,860




112

9/30/2010 9/30/2009 Costs and expenses

Cost of services

TNL Contax (98,538) (124,506)

Oi (1,765,409) (1,419,817) Serede (25,240) (46,669)

AIX (9,374) (19,841)

Way TV (4,114) (4,079)

Amazônia (4,356)

BrT (89,803) (78,363)

BrT Celular (83,895) (39,839)

BrT CS (100,377) (32,154)

iG Brasil (10,061) (5,335)

BrT Multimídia (105) (1,034)

(2,186,916) (1,775,993)

Selling expenses

TNL Contax (449,339) (420,649)

Oi Internet (11,201) (13,351)

(460,540) (434,000)

Other operating expenses

Fundação Atlântico (24,380) (42,384)

TNL Contax (32,228) (20,017)

(56,608) (62,401)

Financial expenses

Oi (172,324) (90,187)

BrT (136,658)

BrT Celular (33,845) (22,458)

TNL (52,574) (105,777)

BrT Part (102,024)

(395,401) (320,446)

(3,099,465) (2,592,840)




113

(a) Credit facilities extended by the Company The purpose of the credit facilities extended by the Company to its subsidiaries is to provide them with working capital for their operating activities and the maturities of these borrowings can be renegotiated according to these companies’ projected cash flows. The disbursed amounts bear interest equivalent to 115% of CDI (115% of CDI at June 30, 2010). (b) Debentures On December 09, 2008, the Company conducted a private issuance of simple, nonconvertible debentures (see Note 19 (b)). (c) Financing agreements with the BNDES The Company entered into financing agreements with BNDES, controlling shareholder of BNDESPart, which holds 31.4% of the voting capital of Telemar Participações S.A., holding company of the Group, and parent of TNL. The balance due by the Company and its subsidiaries related to BNDES credit facilities at the end of the nine-month period ended September 30, 2010 was R$6,184,401 million (R$6,526,702 million at June 30, 2010), on a consolidated basis, and R$2,899,393 million (R$3,049,634 million at June 30, 2010), Company, and recorded financial expenses totaling R$426,791 (R$369,329 at September 30, 2009), on a consolidated basis, and R$212,533 (R$326,354 at September 30, 2009), Company. The information on the agreements entered into with the BNDES is described in Note 19. (d) Lease of transmission infrastructure

AIX provides services for TMAR consisting of the lease of transmission pipes for the traffic

originated with CSP 31 outside the Region I local network. At the end of the nine-month period ended September 30, 2010, these costs totaled R$18,474 (R$19,841 at September 30, 2009) and are classified as ‘Leases and insurance’.




114

Main transactions with related parties:

9/30/2010

Oi Oi

Internet TNL

Contax Serede BrT BrT

Celular BrT CS

Revenue

Service revenue EILD 13,066 Interconnection 187,957 22,059 Collection commissions 77 5,373 1,201 1,062 Lease of infrastructure, towers and 102 platform 3,121

Broadband access 13,470 204,221 18,843 23,260 1,062 Expenses

Cost of services

Pay for network use 1,746,856 (86,392) (81,701) EILD 9,900 (2,408) (100,377) Collection commissions 9 (1,003) (2,194)

WLL 8,644

Plant maintenance service (25,240)

1,765,409 (25,240) (89,803) (83,895) (100,377) Sales Call center (449,339) Sales support (32,228) Tele-collection (98,538) Sales commission (11,201) (11,201) (580,105)




115

9/30/2009

Oi Oi

Internet TNL

Contax Serede BrT BrT Cel BrT CS

Revenue Service revenue EILD 42,534 Interconnection 188,690 21,779 Collection commissions 8,783 5,461 524 319 Lease of infrastructure, towers and

102 platform 13,234

Broadband access 55,886 253,241 61,347 22,303 319 Expenses Cost of services Pay for network use (1,203,685 ) (39,990 ) (39,750 ) EILD (39,139 ) (319 ) (32,154 ) Collection commissions (25,633 ) (605 ) (269 ) Loyalty campaigns (3,699 ) WLL (66,252 ) Plant maintenance service (47,202 ) (1,338,408 ) (47,202 ) (40,914 ) (40,019 ) (32,154 ) Sales Call center (234,147 ) Sales support (17,548 ) Tele-collection (71,573 ) Sales commission (11,191 ) (11,191 ) (323,268 )

(e) Compensation of key management personnel The compensation of the officers responsible for planning, managing and controlling the Company's activities, including the compensation of the directors and executive officers, is as follows: Company Consolidated

9/30/2010 9/30/2009 9/30/2010 9/30/2009 Short-term benefits 5,892 7,986 22,281 23,051

Other long-term benefits 1,695 5,621 11,705 16,125

Share-based compensation (i) 5,214 9,402 7,528 12,629

12,801 23,009 41,514 51,805

(i) The stock option programs under BrT’s plan contained clauses that prescribed the acceleration of the vesting data in the event of a change in the direct or indirect share control. With the change in control on January 8, 2009 (Note 1(e)), the programs’ stock options were fully exercised. (See Note 26.) (f) Guarantees




116

The credits facilities extended by the BNDES are collateralized by Company receivables and TNL sureties. The Company recorded for the nine-month period ended September 30, 2010, as commission on TNL’s sureties, expenses amounting to R$43,393 (R$10,159 at September 30, 2010). TNL provided guarantees for Company’s lawsuits consisting of authorization to block part of its registered class A preferred shares in the Company. The Company pays TNL for this guarantee an amount equivalent to 1.5% per year of the amount guaranteed in such lawsuits. The Company recorded for the nine-month period ended September 30, 2010, as commission on the guarantee received, expenses amounting to R$4,992 (R$4,992 at September 30, 2010). Guarantees provided The Company is the guarantor of the credit facilities from BNDES and borrowings from BNB obtained by subsidiary Oi. In addition to the Company’s guarantee, the agreements are collateralized by Oi receivables. 28 INSURANCE

During the concession period, a concessionary has the obligation of maintaining the following insurance coverage, over the prescribed terms: “all risks” policy that covers property damages to all insurable assets belonging to the concession, insurance against economic losses to insure the continuity of services, and insurance guaranteeing payment of obligations related to the quality and universal services, as provided for by Clause XXIV of the Concession Agreements. The assets and responsibilities in material or high-risk amounts are insured. The Company and its subsidiaries maintain insurance coverage against property damages, loss of revenue arising from such damages (loss of profits), etc. Management understands that the amount insured is sufficient to assure the integrity of assets and the continuity of operations, and the compliance with the rules set out in the Concession Agreements. As at September 30, 2010, the insurance policies provide the following coverage, per risk and type of asset: Consolidated

Insurance line 9/30/2010 6/30/2010 Operational risks and loss of profits 800,000 800,000 Fire - inventories 100,000 100,000 Civil liability - third parties (i) 169,420 180,150 Concession warranty - TMAR 25,560 25,560 Concession warranty - BrT 7,480 7,480 Theft - inventories 20,000 20,000 General civil liability 15,000 15,000 Civil liability - automobile 3,000 3,000 (*) Based on the foreign exchange rate prevailing at September 30, 2010 (Ptax) - US$1/R$1.6942.




117

29 ADDITION DISCLOSURES (a) Corporate restructuring of Way TV On September 25, 2008, the Boards of Directors of TNL and TMAR approved the implementation of the corporate restructuring involving Way TV, for the purpose of: i) increasing operating efficiencies and draw on the synergies between the operations of Oi and of Way TV, and (ii) foster an increase in the offering of bundle services, in particular to create a quadruple play. The restructuring was contingent to ANATEL’s approval, which was granted on March 11, 2010, and published in the DOU of April 20, 2010. After received the go-forward from the ANATEL management resumed the corporate restructuring process, as previously disclosed to the market in a Material Fact dated September 25, 2008. The stages of the corporate restructuring provide for the sale to TNL PSC Participações, a wholly-owned subsidiary of TNL, to Oi, which was completed on October 1, 2010, and the subsequent mergers of TNL PSC Participações and Way TV with ad into Oi. The terms and conditions of the sale of TNL PCS Participações to Oi by TNL are based on market prices prevailing at August 31, 2008, and these amounts were submitted to ANATEL, which approved them. TNL recorded a gain on this transaction amounting to R$26,048 and Oi recorded a loss in the same amount. (b) Oi, Banco do Brasil and Cielo agreement According to a material fact disclosed to the market on September 29, 2010, Oi entered into a Business Partnership Agreement with Banco do Brasil S.A. and an Investment Agreement with Cielo S.A., described below: (i) TMAR, BrT, TNL PCS S.A. (“TNL PCS”), 14 Brasil Telecom Celular S.A., Paggo Administradora de Crédito Ltda. (“Paggo Administradora”), Way TV Belo Horizonte S.A. (collectively “Oi”) and Banco do Brasil S.A. entered into a Business Partnership Agreement (the “Partnership”) for the purpose of establishing a business partnership to issue co-branded credit cards and prepaid cards, and other traditional means of payment or means of payment that use the mobile payment technology for Oi’s current and future customer base. (ii) TNL PCS, Paggo Acquirer Gestão de Meios de Pagamento Ltda. (“Paggo Acquirer”, a TNL PCS subsidiary), Cielo, and CieloPar Participações Ltda. (“CieloPar”, a Cielo subsidiary) entered into an Investment Agreement to govern the interests of Paggo Acquirer and CieloPar in a new company called Paggo Soluções de Meios de Pagamento S.A. (“Paggo Soluções”). Paggo Acquirer and CieloPar will hold 50% each of the capital of Paggo Soluções. Paggo Soluções will engage in (a) the capture, transmission, processing and financial settlement of business transactions originated from or competed in mobile handsets, using mobile payment technology; and (b) will promote the accreditation of the current and new merchants with its acquisition network of transaction originated in mobile handsets, using the existing nationwide relationships of the Company and Paggo Acquirer. The transactions above will be submitted to Brazilian competition authorities—the Brazilian Antitrust Agency (“CADE”), the Department of Economic Law (“SDE”), and the Department of Economic Monitoring (“SEAE”)—within the relevant statutory deadlines.




118

The companies expected that such transaction will be implemented within approximately six months from the date of the agreement. (c) General Universal Service Targets Plan (“PGMU”)

On September 3, 2010, the ANATEL initiated a Public Consultation containing the proposed amendments to the PGMU, ended on September 22, 2010. The purpose of such amendments is to change PGMU’s backhaul and payphone network expansion requirements. The proposal prescribed the use of projections based on the growth of demand for these services. Management is assessing the effects of these changes and cannot provide assurance that, if adopted, these measures would not require material additional investments. 30 EVENTS AFTER THE BALANCE SHEET DATE (a) Issuance of Private Debentures The Company’s shareholders approved, at Extraordinary Shareholders’ Meeting held on October 20, 2010, the issuance of simple, subordinated, nonconvertible, unsecured debentures, in a single series, for private placement, amounting up to R$1.0 billion and maturing on September 8, 2022, that pay interest equivalent to 103% of the accumulated fluctuation of the average daily CDI rates. These debentures’ issuance date will be November 10, 2010. (b) Tariff Revision The new tariffs for local service (subscription and traffic) and long distance calls, approved by the ANATEL are effective from October 23, 2010. The revision cap of the service mix is 0.66% for TMAR and BrT, and takes into consideration the 4.56% fluctuation of the Telecommunications Service Index (“IST”) for the period June 2009-July 2010, and the application of an average 2009 and 2010 reduction ratio of 3.73% (Factor X). Local interconnection tariffs (TU-RL) were adjusted also by 0.66%, R$0.02852 at TMAR and R$0.03133 at BrT (net amounts). The credit for Payphones was adjusted by 0.41% to R$0.1230 (gross amount). Fixed-Mobile tariffs (VC1, VC2, VC3) and VU-M were not adjusted.


01132-0 – TELEMAR NORTE LESTE S/A 33.000.118/0001-79 07.01 - OTHER INFORMATION THE COMPANY CONSIDERS MAT ERIAL

Additional Disclosures Relating to the Statement of Cash Flows (a) Acquisition of the control of Invitel, BrT Part, and BrT As disclosed in Note 1 (e) – OPERATIONS, on January 8, 2009, TMAR acquired, through its indirect subsidiary Copart 1, the share control of Invitel and, consequently, of BrT. The amounts of the assets acquired and liabilities assumed on the acquisition of control are summarized as follows: Invitel

Cash and cash equivalents 2,760,840

Trade receivables 2,147,627

Escrow deposits 2,909,874

Deferred and recoverable taxes 3,737,029

Property, plant and equipment and intangible assets 11,898,251

Other assets 1,168,014

Borrowings and financing (5,842,205)

Trade payables (1,266,111)

Taxes payable (1,109,474)

Reserve for contingent liabilities (3,207,728)

Other payables (3,395,227)

Previous investments in the acquiree (1,663,164)

Non-controlling interests (3,703,871)

Price of the control acquisition 4,433,855

Subsidiary’s cash (2,760,840)

Cash flows from acquisition less Invitel’s cash 1,673,015

(b) Noncash transactions Changes between economic and financial investment (property, plant and equipment and intangible assets)

Company Consolidated 9/30/2010 9/30/2009 9/30/2010 9/30/2009 Changes between economic and financial

investment (property, plant and equipment and intangible assets)

(628,545 ) (321,599 ) (1,273,383 ) (1,366,893 )

FEDERAL PUBLIC SERVICE BRAZILIAN SECURITIES COMMISSION (CVM) INTERIM FINANCIAL STATEMENTS (ITR) Corporate Law COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Report ing date - 9/30/2010

1 - CVM CODE

01132-0

2 - COMPANY NAME


33.000.118/0001-79

02.01 - CONSOLIDATED BALANCE SHEETS – ASSETS (In thousands of Reais)

1 - CODE 2 - LINE ITEM 3 – 9/30/2010 4- 6/30/2010

1 TOTAL ASSETS 61,700,653 61,831,753

1.01 CURRENT ASSETS 21,830,498 21,147,808

1.01.01 AVAILABLE FUNDS 9,057,973 7,948,228

1.01.01.01 CASH AND CASH EQUIVALENTS 9,057,973 7,948,228

1.01.02 RECEIVABLES 5,926,709 5,876,422

1.01.02.01 TRADE RECEIVABLES 5,926,709 5,876,422

1.01.03 INVENTORIES 104,068 112,175

1.01.04 OTHER 6,741,748 7,210,983

1.01.04.01 DEFERRED AND RECOVERABLE TAXES 2,393,006 2,367,649

1.01.04.02 FINANCIAL INVESTMENTS 2,329,764 2,766,773

1.01.04.03 DUE FROM RELATED PARTIES 0 0

1.01.04.04 DIVIDENDS AND INTEREST ON CAPITAL 0 0

1.01.04.05 ADVANCES TO EMPLOYEES 42,014 41,848

1.01.04.06 ADVANCES TO SUPPLIERS 556,230 497,850

1.01.04.07 PREPAID EXPENSES 522,276 736,600

1.01.04.08 DEPOSITS AND COURT BLOCKED AMOUNTS 816,704 771,323

1.01.04.09 OTHER ASSETS 81,754 28,940

1.02 NONCURRENT ASSETS 39,870,155 40,683,945

1.02.01 LONG-TERM ASSETS 7,830,016 8,083,138

1.02.01.01 SUNDRY RECEIVABLES 4,537,969 4,850,328

1.02.01.01.01 DEFERRED AND RECOVERABLE TAXES 4,384,076 4,691,849

1.02.01.01.02 AMOUNTS RECEIVABLE 153,893 158,479

1.02.01.02 DUE FROM RELATED PARTIES 0 0

1.02.01.03 OTHER 3,292,047 3,232,810

1.02.01.03.01 DEPOSITS AND COURT BLOCKED AMOUNTS 2,970,117 2,904,129

1.02.01.03.02 TAX INCENTIVES 54,459 54,459

1.02.01.03.03 PREPAID EXPENSES 209,154 229,561

1.02.01.03.04 FINANCIAL INVESTMENTS 8,878 8,637

1.02.01.03.05 OTHER ASSETS 49,439 36,024

1.02.02 INVESTMENTS 47,061 47,064

1.02.02.01 IN SUBSIDIARIES 0 0

1.02.02.02 IN SUBSIDIARIES – GOODWILL/NEGATIVE GOODWILL 0 0

1.02.02.03 OTHER INVESTMENTS 47,061 47,064

1.02.03 PROPERTY, PLANT AND EQUIPMENT 20,980,457 21,397,214

1.02.04 INTANGIBLE ASSETS 10,830,340 10,952,694

1.02.05 DEFERRED CHARGES 182,281 203,835


1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

02.02 – CONSOLIDATED BALANCE SHEET – LIABILITIES (I n thousands of Reais)

1 – CODE 2 – LINE ITEM 3 – 9/30/2010 4- 6/30/2010

2 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY 61,700,653 61,831,753

2.01 CURRENT LIABILITIES 14,995,300 18,232,599

2.01.01 BORROWINGS AND FINANCING 6,912,402 10,532,688

2.01.02 TRADE PAYABLES 3,117,211 3,117,119

2.01.03 TAXES AND FEES 1,981,547 1,837,667

2.01.03.01 PAYABLE AND DEFERRED TAXES 1,812,872 1,669,671

2.01.03.02 TAX INSTALLMENT PLAN 168,675 167,996

2.01.04 DIVIDENDS AND INTEREST ON CAPITAL 192,426 220,188

2.01.04.01 RELATED PARTIES 0 0

2.01.04.02 THIRD PARTIES 192,426 220,188

2.01.05 PROVISIONS 802,164 837,187

2.01.05.01 RESERVE FOR CONTINGENT LIABILITIES 742,176 803,234

2.01.05.02 PENSION FUND RESERVES 59,988 33,953

2.01.06 OTHER 1,989,550 1,687,750

2.01.06.01 PAYROLL, RELATED TAXES AND BENEFITS 526,202 389,033

2.01.06.02 CONSIGNMENT TO THIRD PARTIES 33,650 33,414

2.01.06.03 PERMITS AND CONCESSIONS PAYABLE 486,729 449,442

2.01.06.04 ADVANCES FROM CUSTOMERS 106,761 71,031

2.01.06.05 UNEARNED REVENUES 541,190 484,414

2.01.06.06 OTHER PAYABLES 295,018 260,416

2.02 NONCURRENT LIABILITIES 29,428,705 27,094,859

2.02.01 LONG-TERM LIABILITIES 29,428,705 27,094,859

2.02.01.01 BORROWINGS AND FINANCING 22,568,979 19,965,124

2.02.01.02 DUE TO RELATED PARTIES 0 0

2.02.01.03 PROVISIONS 3,350,542 3,705,546

2.02.01.03.01 RESERVE FOR CONTINGENT LIABILITIES 2,774,956 3,130,132

2.02.01.03.02 PENSION FUND RESERVES 575,586 575,414

2.02.01.04 OTHER 3,509,184 3,424,189

2.02.01.04.01 PAYABLE AND DEFERRED TAXES 846,331 769,725

2.02.01.04.02 TAX INSTALLMENT PLAN 754,054 750,424

2.02.01.04.03 PERMITS AND CONCESSIONS PAYABLE 1,608,878 1,584,238

2.02.01.04.04 OTHER PAYABLES 299,921 319,802

2.03 NON-CONTROLLING INTERESTS 6,157,394 5,935,248

2.04 SHAREHOLDERS’ EQUITY 11,119,254 10,569,047

2.04.01 CAPITAL 7,434,429 7,434,429

2.04.02 CAPITAL RESERVES 2,018,361 2,017,048

2.04.03 EARNINGS RESERVES 0 0 2.04.04 TREASURY SHARES (17,366) (17,366)

2.04.05 RETAINED EARNINGS/(ACCUMULATED LOSSES) 1,683,830 1,134,936


1 – CVM CODE

01132-0

2 – COMPANY NAME


33.000.118/0001-79

03.01 - CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands of Brazilian reais - R$)


to 9/30/2010 From 1/1/2010 to 9/30/2010

From 7/1/2009 to 9/30/2009

From 1/1/2009 to 9/30/2009

3.01 GROSS REVENUE FROM SALES AND SERVICES 11,384,948 34,446,957 11,571,432 33,950,339

3.02 DEDUCTIONS FROM GROSS REVENUE (4,073,200) (12,312,538) (4,035,574) (11,660,624)

3.03 NET REVENUE FROM SALES AND SERVICES 7,311,748 22,134,419 7,535,858 22,289,715

3.04 COST OF SALES AND SERVICES (3,766,120) (11,438,520) (4,590,614) (12,904,603)

3.05 GROSS PROFIT 3,545,628 10,695,899 2,945,244 9,385,112

3.06 OPERATING (EXPENSES)/INCOME (2,443,443) (7,782,836) (2,554,463) (10,007,740)

3.06.01 SELLING EXPENSES (1,205,186) (3,597,463) (1,151,779) (3,747,195)

3.06.02 GENERAL AND ADMINISTRATIVE EXPENSES (643,742) (1,849,723) (814,218) (2,315,062)

3.06.03 FINANCIAL EXPENSES, NET (489,348) (1,631,345) (528,145) (1,658,916)

3.06.03.01 FINANCIAL INCOME 490,814 1,333,398 371,474 1,226,891

3.06.03.02 FINANCIAL EXPENSES (980,162) (2,964,743) (899,619) (2,885,807)

3.06.04 OTHER OPERATING INCOME 320,850 864,925 299,395 894,333

3.06.05 OTHER OPERATING EXPENSES (442,941) (1,584,710) (360,984) (3,179,744)

3.06.06 EQUITY IN SUBSIDIARIES 16,924 15,480 1,268 (1,156)

3.07 OPERATING INCOME (EXPENSES) 1,102,185 2,913,063 390,781 (622,628)

3.08 PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION (109,508) (490,098) (206,103) (604,846)

3.09 DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION (235,763) (259,338) 31,439 546,270

3.10 NON-CONTROLLING INTERESTS (208,249) (483,460) (150,365) 571,696

3.11 NET INCOME 548,665 1,680,167 65,752 (109,508)


04.01 - STATEMENTS OF CASH FLOWS CONSOLIDATED (In thousands of Brazilian reais - R$)


to 9/30/2010 From 1/1/2010 to 9/30/2010

From 7/1/2009 to 9/30/2009

From 1/1/2009 to 9/30/2009

4.01 NET CASH PROVIDED BY OPERATING ACTIVITIES 2,507,863 6,549,872 941,568 4,192,450

4.01.01 CASH PROVIDED BY OPERATING ACTIVITIES 3,228,845 10,156,057 3,065,715 9,228,028

4.01.01.01 PROFIT (LOSS) BEFORE INCOME TAX AND SOCIAL CONTRIBUTION 1,102,185 2,913,063 390,781 (622,628)

4.01.01.02 FINANCIAL CHARGES AND INCOME 426,671 1,789,805 329,353 1,631,815

4.01.01.03 DEPRECIATION AND AMORTIZATION 1,128,136 3,358,490 1,453,372 4,181,755

4.01.01.04 LOSSES ON TRADE RECEIVABLES 249,480 800,315 254,547 1,058,116

4.01.01.05 RESERVE FOR CONTINGENT LIABILITIES 26,563 507,045 186,493 2,192,557

4.01.01.06 PENSION FUND RESERVES 9,223 9,223 15,342 31,457

4.01.01.07 AMORTIZATION OF DEFERRED CHARGES 21,554 64,663 21,662 64,956

4.01.01.09 LOSS ON DERECOGNITION OF PERMANENT ASSETS 14,259 51,756 42,096 78,900

4.01.01.10 ALLOWANCE FOR LOSSES ON INVESTMENTS AND OTHER PROVISIONS/(REVERSAL) - - 151,958 151,958

4.01.01.11 ALLOWANCE FOR LOSSES ON DISCONTINUED ASSETS/(REVERSALS) (2,670) (9,368) (16,524) (20,440)

4.01.01.12 INTEREST AND INFLATION ADJUSTMENT ON INTERCOMPANY LOANS - (2,496) (12,090) (42,577)

4.01.01.13 INFLATION ADJUSTMENT OF RESERVE FOR CONTINGENT LIABILITIES 93,414 306,401 157,531 391,165

4.01.01.14 INFLATION ADJUSTMENT OF DIVIDENDS AND INTEREST ON CAPITAL - - 6,093 9,839

4.01.01.15 INFLATION ADJUSTMENT OF TAXES IN INSTALLMENTS 17,384 54,493 4,679 1,819

4.01.01.16 ACCRUED CONCESSION FEE 165,273 115,688 - -

4.01.01.17 EMPLOYEE AND MANAGEMENT PROFIT SHARING (6,528) 242,861 57,326 97,809

4.01.01.18 OTHER (16,099) (45,882) 23,096 21,527

4.01.02 CHANGES IN ASSETS AND LIABILITIES 264,210 (496,115) 1,073,310 (836,167)

4.01.02.01 ACCOUNTS RECEIVABLE (270,766) (739,519) (171,970) (1,053,393)

4.01.02.02 AMOUNTS RECEIVABLE 4,586 (9,976) 61,817 52,734

4.01.02.03 PREPAID EXPENSES 234,731 38,462 215,112 (3,776)

4.01.02.04 INVENTORIES 8,107 58,380 26,370 69,582

4.01.02.05 TAXES 437,053 981,887 835,331 847,039

4.01.02.06 TRADE PAYABLES 335,633 344,796 837,263 623,724

4.01.02.07 PERMITS AND CONCESSIONS PAYABLE (181,320) (57,301) (122,429) (248,842)

4.01.02.08 PAYROLL, RELATED TAXES AND BENEFITS 16,524 (76,324) 17,575 (84,347)

4.01.02.09 PENSION FUND RESERVES (34,171) (104,517) (36,323) (148,306)

4.01.02.10 TAX INSTALLMENT PLAN (13,075) (73,041) (37,956) (91,277)

4.01.02.11 RESERVE FOR CONTINGENT LIABILITIES (227,393) (682,299) (407,916) (599,968)

4.01.02.12 OTHER ASSETS AND LIABILITIES (45,699) (176,663) (143,564) (199,337)

4.01.03 OTHER (985,192) (3,110,070) (3,197,457) (4,199,411)

4.01.03.01 FINANCIAL CHARGES PAID (777,538) (2,570,061) (2,888,699) (3,480,449)

4.01.03.02 INCOME TAX AND SOCIAL CONTRIBUTION PAID - COMPANY (140,979) (339,996) (207,878) (462,149)

4.01.03.03 INCOME TAX AND SOCIAL CONTRIBUTION PAID – THIRD PARTIES (66,675) (200,013) (100,895) (256,828)

4.01.03.04 DIVIDENDS AND INTEREST ON CAPITAL RECEIVED - - 15 15

4.02 NET CASH USED IN INVESTING ACTIVITIES (480,511) (3,248,586) (1,165,124) (6,639,289)

4.02.01 FINANCIAL INVESTMENTS 535,675 (417,289) 275,096 789,265

4.02.02 DUE FROM RELATED PARTIES - 471,252 (20,348) 4,443

4.02.03 PURCHASE OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS (782,798) (2,550,786) (1,536,408) (4,427,343)


4.02.04 ACQUISITION OF CONTROL IN BRT PART LESS NET CASH INCLUDED IN ACQUISITION - - - (1,673,014)

4.02.05 INCREASE (DECREASE) IN PERMANENT INVESTMENTS 6,273 4,217 (61,277) (63,656)

4.02.06 DEPOSITS AND COURT BLOCKED AMOUNTS (239,661) (755,980) 177,813 (1,268,984)

4.03 NET CASH PROVIDED BY FINANCING ACTIVITIES (917,607) (47,382) (135,833) (496,566)

4.03.01 BORROWINGS 4,387,734 8,398,046 222,198 5,474,359

4.03.02 FINANCING AND DEBENTURES (5,304,903) (8,443,345) (114,648) (2,130,000)

4.03.03 ACQUISITION OF SUBSIDIARIES’ SHARES - - - (3,595,634)

4.03.04 DIVIDENDS AND INTEREST ON CAPITAL PAID IN THE PERIOD (438) (2,083) (243,383) (245,291)

4.04 FOREIGN EXCHANGE ON CASH AND EQUIVALENTS - - - -

4.05 CASH FLOWS FOR THE PERIOD 1,109,745 3,253,904 (359,389) (2,943,405)

4.05.01 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 7,948,228 5,804,069 6,021,899 8,605,915

4.05.02 CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 9,057,973 9,057,973 5,662,510 5,662,510


Commentary on the consolidated performance in 3Q10 - Telemar Norte Leste S.A.

This report contains the consolidated data of Telemar Norte Leste and its direct and indirect

subsidiaries as of September 30, 2010.

1) CONSOLIDATED OPERATING PERFORMANCE:

At the end of September 2010, Revenue Generating Units (RGUs) totaled 62.3 million, unchanged

compared with the prior quarter and 3.1% higher compared with 3Q09. It is again important to note

that the company’s priorities for 2010 are to increase profitability and reduce leverage. As a result, it

has been less aggressive in seeking market share at any cost during the year.

Wireline – Oi Fixed

In 3Q10, the base for fixed lines in service decreased by 1.7%, and by 4.8% year over year. Provided

that the reduction in fixed lines is a global trend, and aiming to protect the base, the company

continues to offer differentiated products such as Alternative Plans, Pay TV (via DTH) and Oi Conta

Total (bundle). We highlight that at the end of 3Q10 we started to offer Oi Conta Total in Region II.

Alternative plans ended the quarter with 12.9 million clients, in a 2.5% quarterly reduction and an

11.4% increase since 3Q09. At the end of 3Q10, such plans already accounted for 63.3% of all fixed

lines in service.

Broadband – fixed + mobile

At the end of September 2010, the number of fixed broadband users (Oi Velox) recorded a 4.4%

increase compared with the year-ago period, totaling 4,324 thousand users and accounting for 21.0%

of the fixed lines in service (20.5% in 2Q10).

The user base for the 3G service, which encompasses mini-modem users and mobile data plans,

increased by 73 thousand in the quarter (+13.1%) and 224 thousand from 3Q09 (+55.3%), reaching

629 thousand clients at the end of 3Q10: this total includes 462 thousand mini modem clients and 167

thousand mobile phone data packages.

Considering fixed and mobile users, the broadband user base grew 1.9% during the quarter and 8.9%

year over year.

Wireless – Oi Mobile

Net client additions to the mobile segment totaled 161 thousand in the quarter and 2,569 thousand

since 3Q09, reaching 37,387 thousand customers in 3Q10. Regions II and III were responsible for most

net additions.

The increase in the mobile base raised its participation in RGUs to 59.9% (57.5% in 3Q09).

In 3Q10, the client base with Oi Control rose again, totaling 1,856 thousand users, up 9.3% and 33.1%

in the quarter and in the year, respectively. Since the start of the year, the company has been


encouraging the sale of Oi Control pre, because it has post-paid features such as recurring revenue, as

the client authorizes a monthly charge to her credit card. Also, the post-paid client base rose 1.2%

from 2Q10 and 9.2% since 3Q09, ending 3Q10 with 4,569 thousand users. As a result, the post-paid

user base and Oi Control accounted for 17.2% of the total base in the mobile segment at the end of

3Q10 (16.7% in 2Q10), reflecting the company’s strategy of boosting earnings and focusing on high-

yield customers.

The base of pre-paid users numbered 30,962 thousand at the end of 3Q10, accounting for 82.8% of

the total base, in a 5.9% year-over-year growth.

The “Oi Conta Total” plan remained in line with the previous quarter, totaling 1,423 thousand clients,

which represents 39.5% of the base for post-paid clients in Region I. At the end of 3Q10, Oi launched

this product in Region II, hoping to see this plan resume its pace of growth in the coming quarters.

Video – Oi TV

At the end of September 2010, Pay TV using DTH technology was already offered in 10 states (Bahia,

Espírito Santo, Minas Gerais, Paraná, Rio de Janeiro, Rio Grande do Sul, Santa Catarina, Sergipe, Goiás

and Ceará).

The Pay TV subscription base ended the quarter with 227 thousand clients, adding 22 thousand

customers since the previous quarter and 177 thousand since 3Q09.

It must be noted that the company has focused its efforts on selling Oi TV to creditworthy clients

already subscribing to Oi’s fixed services, mainly in the C and D social classes.

Table 1 – Consolidated Operational Indicators

*Alternative plans include “Minutes Plan,” “Economia Plan,” “Digitrunk,” “Virtual PABX(Business Telephone System)” and others. **Includes Oi Conta Total Professional

3Q09 2Q10 3Q10 QoQ YoY

Wireline Services - "Oi Fixo"

(a) Lines in Service ('000) 21,442 20,759 20,410 -1.7% -4.8%

Residential 15,272 14,778 14,487 -2.0% -5.1%

Commercial 5,317 5,131 5,088 -0.8% -4.3%

Public Telephones 853 849 836 -1.5% -2.0%

Alternatives Plans ('000)* 11,609 13,252 12,927 -2.5% 11.4%

Proportion of Lines in Service (%) 54.1% 63.8% 63.3% -0.5 p.p. 9.2 p.p.

ARPU Fixed (R$) 58.4 55.2 55.3 0.2% -5.3%

Fixed Broadband Services - "Oi Velox"

(b) Fixed Broadband Subscribers ('000) 4,142 4,307 4,324 0.4% 4.4%

Proportion of Lines in Service (%) 19.1% 20.5% 21.0% 0.5 p.p. 1.9 p.p.

ARPU Fixed Broadband (R$) 43.8 42.6 43.8 2.8% 0.0%

Wireless Services - "Oi Móvel" 3Q09 1/0/1900 QoQ YoY

(c) Mobile Subscribers ('000) 34,818 37,226 37,387 0.4% 7.4%

Pre-Paid Plans 29,239 31,015 30,962 -0.2% 5.9%

Post-Paid Plans 4,185 4,514 4,569 1.2% 9.2%

Oi Control 1,394 1,698 1,856 9.3% 33.1%

Oi Conta Total ('000)** 1,448 1,421 1,423 0.1% -1.7%

3G Clients ('000) 405 556 629 13.1% 55.3%

Market Share Oi (%) - Brazil 21.0% 20.1% 19.5% -0.6 p.p. -1.5 p.p.

Proportion of Net Additions in Brazil (%) 13.6% 10.2% 2.5% -7.7 p.p. -11.1 p.p.

Monthly Churn rate (%) 3.8% 3.4% 4.1% 0.7 p.p. 0.3 p.p.

ARPU Mobile (R$) 22.2 22.4 22.9 2.2% 3.2%

Vídeo - "Oi TV"

(d) Pay TV Subscribers ('000) *** 113 265 280 5.7% 147.8%

RGU - Revenue Generating Unit (a+b+c+d)

(´000)60,515 62,557 62,401 -0.2% 3.1%


2) CONSOLIDATED FINANCIAL RESULTS:

2.1) Revenue:

Consolidated gross revenue fell by 1.4% in the quarter and 1.6% since 3Q09, totaling R$11,385 million

at the end of 3Q10. Consolidated net revenue hit R$7,312 million in 3Q10, having decreased compared

with 2Q10 and 3.0% lower compared with 3Q09.

The fall in revenue stems from less aggressiveness by the company in gaining market share due to its

goal of recording higher earnings in 2010.

Table 2 – Breakdown of Consolidated Gross Revenue

Wireline Services:

Gross revenue from wireline services was 2.2% lower than that recorded in 2Q10 and 5.6% compared

with the same period last year.

Revenue from network usage expanded 6.6% in the quarter and 3.0% year over year, partially

offsetting the decline in revenue from the fixed segment.

R$ million 3Q09 2Q10 3Q10 QoQ (%) YoY (%) 9M09 9M10 YoY (%)

Wireline 8,990 8,674 8,483 -2.2% -5.6% 26,683 25,999 -2.6%

Local (exc. - VC1) 3,279 3,229 3,160 -2.1% -3.6% 9,846 9,633 -2.2%

Local Fixed-to-Mobile (VC1) 1,149 991 1,001 1.0% -12.9% 3,430 3,011 -12.2%

Long Distance FF + PCS 1,192 1,068 1,062 -0.6% -10.9% 3,554 3,345 -5.9%

LD Fixed-to-Mobile (VC2/3) 367 309 299 -3.2% -18.5% 1,095 944 -13.8%

Network Usage 233 225 240 6.6% 3.0% 655 704 7.4%

Data 2,199 2,362 2,318 -1.9% 5.4% 6,394 6,957 8.8%

Public Phones 236 153 86 -44.1% -63.7% 735 404 -45.1%

Additional Services 250 257 247 -3.8% -1.4% 741 755 1.9%

Advanced Voice / Other 85 79 71 -10.9% -16.3% 232 246 6.0%

Wireless 2,548 2,805 2,831 0.9% 11.1% 7,171 8,237 14.9%

Services 2,466 2,741 2,798 2.1% 13.5% 6,900 8,084 17.2%

Subscriptions 589 660 669 1.5% 13.7% 1,665 1,938 16.4%

Outgoing Calls 932 1,020 1,060 3.9% 13.6% 2,680 3,028 13.0%

Domestic/Inter. Roaming 30 30 25 -15.2% -15.8% 92 94 2.7%

Network Usage 619 631 648 2.7% 4.8% 1,701 1,890 11.1%

Data / Value Added 296 401 395 -1.2% 33.5% 763 1,134 48.7%

Handset Sales 82 64 33 -48.4% -59.6% 272 154 -43.5%

Other Services* 33 64 71 10.8% 112.0% 96 210 118.9%

Wireline - Gross 8,990 8,674 8,483 -2.2% -5.6% 26,683 25,999 -2.6%

Wireless - Gross 2,548 2,805 2,831 0.9% 11.1% 7,171 8,237 14.9%

Other Services* - Gross 33 64 71 10.8% 112.0% 96 210 118.9%

Total Gross Revenue 11,571 11,543 11,385 -1.4% -1.6% 33,950 34,447 1.5%

Consolidated Net Revenue 7,536 7,377 7,312 -0.9% -3.0% 22,290 22,134 -0.7%


Local Service:

Fixed-to-Fixed:

Local (ex-

vc1)(subscription,

traffic,

installation fees)

Revenue from fixed-to-fixed local services dropped 2.1% in the quarter

and 3.6% since 3Q09, basically as a result of smaller traffic and a lower

base of fixed lines in service.

Fixed-to-Mobile:

(VC1)

Revenue from fixed-to-mobile service was up 1.0% in the quarter and

declined 12.9% compared with the same period a year earlier, basically as

a result of smaller traffic.

Long Distance Services FF + SMP + VC2 and VC3:

In 3Q10, revenue from long distance service dropped 1.2% in the quarter and 12.7% year over year.

This change resulted mainly from smaller traffic and a reduction in SMP service, due to stiffer

competition.

Remuneration for Network Usage:

Remuneration for fixed network usage rose 6.6% during the quarter and 3.0% compared with the

same period last year. The year-over-year jump is due to the inclusion of mobile-originated calls to

fixed telephones in the bonus offered by mobile operators. Also, settlement agreements with other

telecom operators had a positive impact on the quarterly performance.

Data Transmission Service:

Revenue from data transmission service fell 1.9% in the quarter and rose 5.4% year over year. The

quarterly change basically stems from a reduction in special projects, which included agreements with

the State Security Agency and the Education Agency in the State of Rio de Janeiro. The annual increase

is mostly due to a rise in corporate services, the expansion of the “Oi Velox” base, and EILD services

from new data transmission contracts in leased lines.

Wireless Segment:

Revenue in the wireless segment rose 0.9% in 3Q10 in the quarter and 11.1% year over year, totaling

R$2,831 million. This increase results from (a) higher subscription revenue (b) outgoing calls and (c)

network usage. The rise in revenue from data / value added also contributed positively to the

performance compared with the same period in 2009.

As a result of the expansion of the post-paid client base, the company saw subscription revenue rise

1.5% and 13.6% in the quarter and year over year, respectively.


Revenue from outgoing calls jumped 3.9% in the quarter and 13.6% compared with 3Q09, mainly due

to a positive contribution from the product “Oi Bonus Extra,” which encourages pre-paid clients to

increase their recharge with a minutes package that can be boosted five-fold to talk to another Oi

mobile or a fixed-line Oi. This product aims to bolster the ARPU of this customer.

In 3Q10, consolidated revenue from mobile network use increased 2.7%, and 4.8% compared with

3Q09. This change was influenced by the increase in the average client base in Regions I and III and

by the bonuses offered by mobile phone operators (on-net calls and calls to fixed lines), as the clients

have unused resources for off-net calls (to other mobile phones).

Revenue from data / value added fell 1.2% in the quarter and rose 33.5% year over year. The annual

rise results basically from the expansion of the 3G user base.

Reflecting the company’s strategy of focusing on higher-yielding clients, the ARPU in the mobile

segment reached R$22.9, in a 2.2% growth in the quarter and 3.2% since 3Q09.

2.2) Operating Expenses:

Operating expenses (excluding depreciation/amortization) totaled R$4,587 million in 3Q10, falling

2.2% in the quarter and 10.9% year over year.

Table 3 – Breakdown of Operating Expenses

*Other: sim card, mini modem, TV transmission equipment and mobile phone peripherals.

Interconnection:

The consolidated interconnection cost amounted to R$1,216 in 3Q10, virtually stable compared with

the previous quarter and 4.9% smaller since 3Q09. This performance was hit by a reduction in traffic

that originated on Oi Mobile’s network and ended on those of other carriers, mainly due to the

elevation in the number of on-net calls.

Personnel:

Spending on personnel was virtually stable in the quarter and decreased by 22.2% year over year,

totaling R$397 million in 3Q10. Large spending on workforce optimization in 2009, during the tie-up

with BrT, justify this performance.

Handset Costs and Others (COGS):

Handset costs and others (COGS) dropped 34.7% in the quarter and 73.3% since 3Q09.

Item - R$ million 3Q09 2Q10 3Q10 QoQ (%) YoY (%) 9M09 9M10 YoY (%)

Interconnection 1,278 1,208 1,216 0.7 -4.9 3,924 3,778 -3.7

Personnel 510 401 397 -1.0 -22.2 1,447 1,183 -18.2

Materials 108 59 59 0.0 -45.4 321 195 -39.3

Handset Costs/Other (COGS)* 120 49 32 -34.7 -73.3 464 123 -73.5

Third-Party Services 1,765 1,700 1,746 2.7 -1.1 5,236 5,121 -2.2

Marketing 135 118 132 11.9 -2.2 417 373 -10.6

Rent and Insurance 401 390 386 -1.0 -3.7 1,182 1,135 -4.0

Provision for Bad Debts 255 247 249 0.8 -2.4 1,058 800 -24.4

Other Operating Expenses (Revenue), Net 573 522 371 -28.9 -35.3 2,956 1,475 -50.1

TOTAL 5,146 4,692 4,587 -2.2 -10.9 17,006 14,182 -16.6


The decision of adopting in Region II the strategy of subsidizing post-paid handsets sold in the

corporate segment only, and the sale of just sim cards in the prepaid segment, have been reducing

COGS and, as a result, the acquisition cost for clients.

Third-Party Services:

Spending on third-party services shrank 1.1% compared with the same period last year and increased

2.7% in the quarter, reaching R$1,746 thousand in 3Q10. The year-over-year reduction basically

consists in lower spending on plant maintenance due to the synergy originated in the Oi-BrT tie up.

Compared with the previous quarter, there was an increase in consulting spending.

Marketing:

Spending on marketing decreased 2.2% compared with 3Q09 and rose 11.9% in the quarter, hitting

R$132 million in 3Q10. This quarterly increase basically stems from spending on the launch of the Oi

Conta Total product in Region II, as well as the strengthening of the brand in Region III.

Provision for Bad Debt:

The provision for bad debt did not change year over year and during the quarter, totaling R$249 million

in 3Q10. The allowance for bad debt makes up 2.2% of gross revenue in 3Q10 (2.1% in 2Q10 and

2.2% in 3Q09).

Other Operating Expenses (Income):

“Other expenses (income)” dropped in the quarter and year over year by 28.9% and 35.3%,

respectively, amounting to R$371 thousand in 3Q10.

The quarterly reduction stems from the company having won several civil and tax suits, leading to a

reversal of part of the provisions for contingencies. The year-over-year result also reflects written-off

assets, which in 3Q09 looked uncertain.

2.3) Other Items in the Consolidated Result:

EBITDA:

Table 4 – EBITDA and EBITDA Margin

*EBITDA and EBITDA margin in 3Q09 and 9M09 are recurring.

Consolidated EBITDA amounted to R$2,724 million in 3Q10, with a 37.3% margin, showing a 1.6%

increase from 3Q09 and 1.5% compared with 2Q10. The improvements in EBITDA and EBITDA margin

EBITDA (R$ Mn) 2,680 2,685 2,724 1.5% 1.6% 7,528 7,952 5.6%

EBITDA Margin (%) 35.6% 36.4% 37.3% 0.9 p.p. 1.7 p.p. 33.8% 35.9% 2.1 p.p.

EBITDA (R$ Mn) 1,003 796 992 24.6% -1.1% 2,954 2,655 -10.1%

EBITDA Margin (%) 35.7% 30.8% 39.1% 8.3 p.p. 3.4 p.p. 35.9% 34.2% -1.7 p.p.

9M10 YoY

YoY9M10

2Q10

9M09

9M09

YoY2Q10 3Q10

3Q10

QoQ3Q09

YoY3Q09 QoQ

9MQuarter

TMAR Consolidated

BrTO Consolidated


reflect the company’s strategy this year of boosting profitability and taking advantage of synergies

following the acquisition of BrT.

Net Financial Income (Expenses):

Net financial expenses shrank 11.3% since the previous quarter and 7.3% compared with the same

period in 2009, reaching R$489 million in 3Q10, reflecting a smaller net debt, in line with the

company’s strategy of deleveraging.

Table 5 – Net Financial Income (Expenses)

Depreciation/Amortization:

Consolidated spending on depreciation and amortization in 3Q10 was stable compared with 2Q10,

totaling R$1,149 million. Compared with 3Q09, there was a 22.0% reduction, stemming from a change

in the economic service life of the fixed assets after the acquisition of BrT. The appraisal was approved

in December 2009 by the Company’s Board of Directors, and its effect started to be reflected in the

results in 1Q10

Table 6 – Depreciation and Amortization

Net Earnings:

In 3Q10, the company posted net earnings of R$548 million, totaling R$1,680 million in the first nine

months of 2010, compared with a loss in the first nine months of 2009. It is worth mentioning that

such loss reflected non-recurring expenses mostly related to the Oi-BrT tie-up, which were essential to

help capture synergies throughout 2010. Compared with the previous quarter, the lower costs and the

improvement in net earnings influenced the result positively.

Table 7 – Net Earnings

R$ million 3Q09 2Q10 3Q10 9M09 9M10

Financial Income 372 448 491 1,227 1,333

Interest on financial investments 186 209 259 585 626Other financial income 186 239 232 642 707

Financial Expenses (900) (999) (980) (2,886) (2,965)

Interest on loans and financing (629) (597) (669) (1,887) (1,885)

Foreign exchange effect on loans and financing 4 (79) 32 (39) (114)

Other Financial Expenses (275) (322) (343) (960) (965)

Net Financial Income (Expenses) (528) (551) (489) (1,659) (1,631)

R$ million 3Q09 2Q10 3Q10 QoQ (%) YoY (%) 9M09 9M10YoY (%)

Fixed Line / Holding 1,070 853 845 -0.9 -21.0 3,093 2,540 -17.9Depreciation 850 649 608 -6.3 -28.5 2,566 1,895 -26.1Amortization 220 203 236 16.3 7.3 527 645 22.4

Mobile Business 403 289 304 5.2 -24.6 1,154 883 -23.5Depreciation 325 211 226 7.1 -30.5 919 647 -29.6License/Deferred Amortization 78 79 79 0.0 1.3 235 236 0.4

Total 1,473 1,142 1,149 0.6 -22.0 4,247 3,423 -19.4

Quarter 9M


3) DEBT AND CAPITAL EXPENDITURE:

3.1) Debt:

Gross debt totaled R$29,481 million in September 2010, R$1.0 billion lower than that recorded in the

previous quarter, mainly as a result of hefty loan repayments during the quarter, which exceeded

borrowings in the period. Regarding repaid debt, we highlight TMAR’s Promissory Notes: R$4.0 billion.

As for the company's borrowings, we underline the Securities Backed by Real Estate Receivables - CRI

(R$1.6 billion) by subsidiaries controlled by TMAR and BrT and the launch of a new Bond in the

international market (R$1.0 billion). Concerning the latter, we highlight its 5.5% coupon, which was 4

percentage points lower than the Bond issued by the company in April 2010 (9.5%). Also, the company

offered to holders of the April 2009 bond the possibility to exchange them for the new, 2010 bonds.

About 80% of the holders accepted the proposal. The balance of the new issuance, after the exchange,

stood at US$1.7 billion, and the balance for the April 2009 bonds amounted to US$142 million.

As a result, consolidated net debt ended the quarter at R$18,084 million, in a R$1.689 million reduction

since 2Q10.

Table 08 - Debt - TMAR Consolidated

Table 09 - Debt – BrTO Consolidated

Net Earnings (R$ Mn) 66 543 549 -110 1,680

Net Margin 0.9% 7.4% 7.5% -0.5% 7.6%

Earnings per Share (R$) 0.276 2.280 2.299 -0.459 7.042

Net Earnings (R$ Mn) 259 237 407 -1,258 944

Net Margin 9.2% 9.2% 16.0% -15.3% 12.2%

Earnings per Share (R$) 0.473 0.401 0.691 -2.297 1.601

9M

9M10

9M09 9M102Q10

2Q10 9M09

3Q09 3Q10TMAR Consolidated

BrTO Consolidated 3Q10

Quarter

3Q09

R$ million Sep-09 Jun-10 Sep-10% Gross Debt

Short Term 9,625 10,533 6,912 23.4%

Long Term 18,912 19,965 22,569 76.6%

Total Debt 28,537 30,498 29,481 100.0%

In Local Currency 23,352 24,926 22,556 76.5%

In Foreign Currency 4,317 5,087 6,355 21.6%

Swaps 868 485 570 1.9%

(-) Cash 7,009 10,724 11,397 38.7%

(=) Net Debt 21,528 19,774 18,084 61.3%


* Includes private debentures acquired from TMAR

3.2) Capital expenditure:

Consolidated capital expenditure amounted to R$598 million in 3Q10, totaling R$1.4 billion in the year

through September. Throughout the year the company has managed to optimize the combined mobile

and data networks of Oi and BrT, obtaining relevant synergies. The increase in capacity (physical

investment) becomes feasible even with a capital expenditure lower than that seen in 2009.

Investment in the fixed segment included projects in digital inclusion in schools, expanding the supply

of broadband (Velox) services and the offer of data packages to corporate clients.

Investment in the mobile segment was earmarked for continuing the expansion of coverage in all

regions.

Table 10 – Capital Expenditure

R$ million Sep-09 Jun-10 Sep-10% Gross Debt

Short Term 1,017 1,263 1,197 27.0%

Long Term 3,524 2,938 3,244 73.0%

Total Debt 4,541 4,201 4,441 100.0%

In Local Currency 3,866 3,581 3,972 89.4%

In Foreign Currency 489 487 400 9.0%

Swaps 186 133 69 1.6%

(-) Cash 3,262 4,662 5,470 123.2%

(=) Net Debt 1,279 -461 -1,029 23.2%

R$ million 3Q09 2Q10 3Q10 QoQ (%) YoY (%) 9M09 9M10 YoY (%)

Wireline 721 281 396 40.9 -45.1 1,701 912 -46.4

Growth & Quality 306 99 136 37.4 -55.6 746 316 -57.6

Data / Communic. Systems / Other 415 182 260 42.9 -37.3 955 595 -37.7

Wireless 620 166 202 21.7 -67.4 1,470 503 -65.8

Expansion and Quality 620 166 202 21.7 -67.4 1,471 503 -65.8

TOTAL 1,341 446 598 34.1 -55.4 3,172 1,414 -55.4

9MQuarter


4) FINANCIAL STATEMENTS

4.1 ) TELEMAR NORTE LESTE - TMAR Consolidated

R$ MILLION

Income Statement 3Q09 2Q10 3Q10 9M09 9M10

Wireline Services Revenues 8,990.4 8,673.7 8,483.4 26,682.8 25,999.1

Local Services 4,428.2 4,219.5 4,160.8 13,275.9 12,644.4

Subscription Charges 2,757.8 2,797.9 2,727.4 8,271.4 8,302.6

Local Traffic 488.7 387.8 392.3 1,489.3 1,204.3

Installation Fees 32.2 41.8 39.5 80.3 122.5

Collect Calls 1.6 0.7 0.6 5.0 2.1

Other Local Revenues (1.0) 0.7 0.4 0.4 1.8

Fixed-to-Mobile (VC1) 1,148.9 990.6 1,000.7 3,429.5 3,011.1

Long Distance 1,559.1 1,377.3 1,361.1 4,649.2 4,288.6

Intra-State 691.7 722.6 80.5 2,060.1 1,492.2

Inter-State 137.1 115.1 239.1 426.0 483.2

Inter-Regional 342.3 214.0 725.4 1,005.7 1,317.5

International 20.9 16.2 16.8 62.5 52.2

Fixed-to-Mobile (VC2 and VC3) 367.1 309.3 299.3 1,094.8 943.5

Advanced Voice 84.6 79.5 70.8 232.2 246.2

Public Telephones 236.0 153.4 85.7 735.1 403.8

Additional Services 250.4 256.6 246.9 741.1 755.0

Network Usage Remuneration 232.7 224.8 239.7 655.0 703.7

Data Transmission Services 2,199.3 2,362.5 2,318.3 6,394.3 6,957.4

Wireless Services Revenues 2,547.8 2,805.2 2,830.9 7,171.4 8,237.4

Subscription Charges 588.8 659.9 669.5 1,664.7 1,937.9

Outgoing Calls 932.4 1,019.8 1,059.6 2,680.0 3,027.8

Domestic/International Roaming 29.8 29.6 25.1 91.6 94.1

Network Usage Remuneration 618.6 631.1 648.2 1,700.9 1,890.4

Data / Value Added Services 296.2 400.5 395.5 762.5 1,133.6

Handset Sales 81.9 64.2 33.1 271.7 153.6

Other Services 33.3 63.7 70.6 96.1 210.4

Gross Operating Revenue 11,571.4 11,542.6 11,384.9 33,950.3 34,447.0

Taxes and Deductions (4,035.6) (4,165.3) (4,073.2) (11,660.6) (12,312.5)

Net Operating Revenue 7,535.9 7,377.3 7,311.7 22,289.7 22,134.4

Operating Expenses (5,145.7) (4,692.0) (4,587.3) (17,005.6) (14,182.2)

Cost of Services Provided (1,577.0) (1,427.7) (1,581.9) (4,751.5) (4,465.4)Cost of Goods Sold (120.0) (49.2) (32.0) (464.0) (122.6)

Interconnection Costs (1,278.0) (1,208.0) (1,216.1) (3,924.3) (3,778.1)

Selling Expenses (1,142.1) (1,178.6) (1,199.1) (3,718.3) (3,576.3)

General and Administrative Expenses (680.9) (580.9) (457.8) (1,926.9) (1,584.8)

Other Operting (Expenses) Revenue, net (347.7) (247.5) (100.4) (2,220.5) (655.0)

EBITDA 2,390.2 2,685.3 2,724.5 5,284.2 7,952.2

Margin % 31.7% 36.4% 37.3% 23.7% 35.9%

Depreciation and Amortization (1,472.5) (1,142.2) (1,149.8) (4,246.7) (3,423.3)

EBIT 917.7 1,543.1 1,574.6 1,037.4 4,528.9

Equity Accounting 1.3 (1.8) 16.9 (1.2) 15.5

Financial Expenses (899.6) (999.1) (980.2) (2,885.8) (2,964.7)

Financial Income 371.5 447.7 490.8 1,226.9 1,333.4

Income Before Tax and Social Contribution 390.8 989.9 1,102.1 (622.6) 2,913.1

Income Tax and Social Contribution (174.7) (324.8) (345.2) (58.6) (749.4)

Minority Interest (150.4) (121.6) (208.3) 571.7 (483.5)

Net Income 65.8 543.5 548.6 (109.5) 1,680.2

Margin % 0.9% 7.4% 7.5% -0.5% 7.6%

Outstanding Shares Thousand (exc.-treasury) 238,391 238,391 238,607 238,391 238,607

Income per share (R$) 0.276 2.280 2.299 (0.459) 7.042


4.1 ) TELEMAR NORTE LESTE - TMAR Consolidated (continued)

R$ MILLION

Balance Sheet 9/30/09 6/30/10 9/30/10

TOTAL ASSETS 59,512 61,832 61,701

Current 18,143 21,148 21,830

Cash 5,663 7,948 9,058

Financial investments 1,340 2,767 2,330

Accounts Receivable 6,151 5,876 5,927

Recoverable and Deferred Taxes 3,038 2,368 2,393

Inventories 138 112 104

Assets in Escrow 859 771 817

Other Current Assets 954 1,305 1,202

Non-Current Assets 41,369 40,684 39,870

Long Term 7,626 8,083 7,830


Financial investments 7 9 9

Assets in Escrow 2,332 2,904 2,970

Other 978 479 467

Investments 47 47 47

Property Plant and Equipment 21,903 21,397 20,980

Intagible Assets 11,524 10,953 10,830

Deferred 268 204 182

Balance Sheet 9/30/09 6/30/10 9/30/10

TOTAL LIABILITIES 59,512 61,832 61,701

Current 19,123 18,233 14,995

Suppliers 3,339 3,567 3,604

Loans and Financing 9,625 10,533 6,912

Payroll and Related Accruals 406 389 526

Pension fund Provision 82 34 60

Payable Taxes 2,243 1,838 1,982

Dividends Payable 1,631 220 192

Other Accounts Payable 1,797 1,653 1,719

Non-Current Liabilities 24,877 27,095 29,429

Long Term 24,877 27,095 29,429


Payable Taxes 499 1,520 1,600

Contingency Provisions 3,209 3,130 2,775

Pension fund Provision 608 575 576

Outstanding authorizations 1,563 1,584 1,609

Other Accounts Payable 86 320 300

Minority Interest 5,601 5,935 6,157

Shareholders' Equity 9,910 10,569 11,119

Capital Stock 7,434 7,434 7,434

Capital Reserve 2,214 2,017 2,018

Treasury shares (17) (17) (17)

Surplus Reserve 368 0 0

Retained Earnings (89) 1,135 1,684


4.2 ) TNL PCS– Oi

R$ MILLION


Wireless Services Revenues 2,542.7 2,801.6 2,899.9 6,938.1 8,362.4

Subscription 476.4 532.0 544.7 1,327.7 1,575.4

Outgoing Calls 773.7 850.3 891.7 2,176.3 2,557.6

Domestic/Internacional Roaming 26.7 26.2 26.2 81.4 85.7

Network Usage Remuneration 970.4 1,033.4 1,080.6 2,574.0 3,108.3

Data / Value Added 235.6 316.5 308.2 590.4 899.2

Other SMP Services 0.0 (0.0) 0.4 0.0 0.6

Handset Sales 60.0 43.2 48.2 188.3 135.6

LD/Advanced Voice Service/Network Revenues 95.4 158.6 142.6 302.6 439.9


Taxes and Deductions (753.1) (851.4) (873.7) (2,075.8) (2,523.6)



Cost of Services Provided (310.1) (368.4) (380.0) (999.8) (1,126.0)

Cost of Goods Sold (93.6) (34.6) (53.1) (353.8) (110.5)

Interconnection Costs (370.0) (384.6) (407.6) (1,091.3) (1,180.6)

Selling Expenses (393.6) (401.0) (387.4) (1,197.9) (1,158.4)

General and Administrative Expenses (111.4) (120.1) (120.2) (325.8) (348.1)

Other Operating (Expenses) Revenue, net 4.2 23.0 40.1 102.7 80.4

EBITDA 610.4 823.2 860.6 1,298.9 2,435.4

Margin % 32.4% 39.0% 39.7% 25.1% 38.8%

Depreciation and Amortization (267.6) (224.5) (238.8) (746.0) (684.3)

EBIT 342.8 598.7 621.8 552.8 1,751.1Equity Accounting (18.3) (23.9) (16.3) (82.6) (55.0)

Financial Expenses (26.4) (64.8) (74.3) (142.6) (206.7)

Financial Income 83.6 112.1 169.9 257.4 381.6

Income Before Tax and Social Contribution 381.7 622.1 701.0 585.2 1,871.0

Income Tax and Social Contribution (112.9) (179.4) (194.7) (194.0) (512.5)

Net Income 268.8 442.7 506.3 391.2 1,358.5

Margin % 14.3% 21.0% 23.3% 7.6% 21.6%

Balance Sheet 9/30/09 6/30/10 9/30/10

TOTAL ASSETS 13,080 14,919 15,522

Current 3,190 5,021 5,737Cash 988 1,901 2,630

Financial investments 226 469 471Accounts Receivable 917 1,185 1,178

Recoverable and Deferred Taxes 506 747 831

Inventories 69 62 59Other Current Assets 484 657 567


Long Term 2,759 2,467 2,452

Recoverable and Deferred Taxes 686 463 385Loans and Financing 1,922 1,849 1,919


Other 149 151 144

Investments 0 69 53Property Plant and Equipment 5,004 5,322 5,168

Intagible Assets 1,862 1,839 1,934Deferred Assets 265 201 180

Balance Sheet 9/30/09 6/30/10 9/30/10


Current Liabilities 1,774 2,164 2,299

Suppliers 725 1,130 1,102Loans and Financing 77 120 133

Payroll and Related Accruals 42 39 55Payable Taxes 349 475 590



Long Term 1,977 2,419 2,380

Loans and Financing 854 1,325 1,290Contingency Provisions 118 95 106

Payable Taxes 31 35 15Outstanding authorizations 891 940 947




4.3 ) BRASIL TELECOM – BRTO Consolidated

R$ MILLION


Wireline Services Revenues 3,959.9 3,921.9 3,818.2 11,709.3 11,692.4

Local Services 1,628.4 1,597.6 1,590.8 4,861.1 4,765.4

Long Distance 627.8 540.9 510.0 1,951.2 1,674.7

Advanced Voice 42.5 39.1 21.7 108.4 105.0

Public Telephones 104.4 77.4 35.0 305.5 189.8

Additional Services 107.2 114.3 112.3 286.7 336.9


Data Transmission Services 1,360.4 1,454.3 1,447.7 3,929.9 4,324.6

Other 5.4 5.3 5.1 18.0 15.8

Wireless Services Revenues 538.1 553.6 563.1 1,557.5 1,639.0

Subscription Charges 112.4 119.4 121.7 325.5 356.5

Outgoing Calls 159.1 157.6 171.4 489.4 476.2

Domestic/International Roaming 3.7 5.0 6.3 10.1 22.4


Data / Value Added Services 60.2 76.8 87.3 181.9 234.8

Handset Sales 22.0 21.0 14.4 83.4 47.4


Taxes and Deductions (1,691.5) (1,888.3) (1,842.9) (5,044.9) (5,568.1)



Cost of Services Provided (589.5) (511.1) (466.5) (1,714.7) (1,461.9)


Interconnection Costs (501.4) (460.5) (493.8) (1,511.8) (1,491.3)

Selling Expenses (240.9) (250.6) (218.5) (1,071.6) (739.9)


Other Operting (Expenses) Revenue, net (194.9) (205.0) (3.8) (3,313.4) (411.7)

EBITDA 1,003.3 795.9 991.7 (183.3) 2,655.0

Margin % 35.7% 30.8% 39.1% -2.2% 34.2%

Depreciation and Amortization (495.0) (415.1) (403.2) (1,487.4) (1,229.8)

EBIT 508.3 380.7 588.6 (1,670.7) 1,425.3



Income Before Tax and Social Contribution 410.0 333.1 606.9 (1,882.8) 1,336.6

Income Tax and Social Contribution (150.1) (96.3) (199.6) 626.6 (392.3)

Minority Interest (0.6) 0.0 0.0 (2.0) 0.0

Net Income 259.3 236.8 407.3 (1,258.1) 944.2

Margin % 9.2% 9.2% 16.0% -15.3% 12.2%

Outstanding Shares Thousand (exc.-treasury) 547,719 589,789 589,789 547,719 589,789

Income per share (R$) 0.473 0.401 0.691 (2.297) 1.601


4.3 ) BRASIL TELECOM – BRTO Consolidated (continued)

R$ MILLION

Balance Sheet 9/30/09 6/30/10 9/30/10

TOTAL ASSETS 22,481 23,143 23,482

Current 5,915 6,636 7,320

Cash 1,337 2,424 3,167


Accounts Receivable 2,175 1,995 2,040

Recoverable Taxes 1,480 1,140 1,099

Inventories 43 24 20

Other Current Assets 580 595 535

Non-Current Assets 16,566 16,507 16,162Long Term 7,998 8,568 8,490


Assets in Escrow 1,400 1,908 2,010

Other 1,796 1,974 2,042

Investments 5 5 5

Property Plant and Equipment 6,953 6,458 6,268

Intagible Assets 1,610 1,476 1,399

Balance Sheet 9/30/09 6/30/10 9/30/10


Current 4,410 4,646 4,610

Suppliers 1,344 1,373 1,252


Payroll and Related Accruals 123 100 108

Payable Taxes 772 787 793

Dividends Payable 105 104 76

Other Accounts Payable 1,048 1,019 1,184


Long Term 7,091 6,865 6,805


Payable and Deferred Taxes 656 772 846

Contingency Provisions 1,368 1,678 1,286

Outstanding authorizations 673 644 662


Minority Interest 0 0 0



4.4 ) 14 BRASIL TELECOM CELULAR – BRT Mobile

R$ MILLION


Wireless Services Revenues 650.2 659.6 678.9 1,886.6 1,977.5

Subscription 112.4 119.4 121.7 325.5 356.5

Outgoing Calls 160.6 158.7 172.4 493.9 478.8

Domestic/Internacional Roaming 3.7 5.0 6.3 10.1 22.4


Data / Value Added 60.2 76.8 87.3 181.9 234.8

Handset Sales 22.0 21.0 14.4 83.4 47.5

Gross Operating Revenue 650.2 659.6 678.9 1,886.6 1,977.5

Taxes and Deductions (154.2) (178.0) (198.3) (490.3) (540.2)

Net Operating Revenue 496.0 481.6 480.6 1,396.3 1,437.4

Operating Expenses (382.5) (407.7) (404.4) (1,201.3) (1,235.6)

Cost of Services Provided (89.8) (146.3) (128.3) (276.8) (396.4)


Interconnection Costs (150.4) (123.6) (145.5) (408.9) (428.3)

Selling Expenses (94.0) (86.7) (98.1) (384.0) (288.5)


Other Operating (Expenses) Revenue, net (9.0) 2.8 12.7 (1.1) 21.5

EBITDA 113.5 73.9 76.1 194.9 201.7

Margin % 22.9% 15.3% 15.8% 14.0% 14.0%

Depreciation and Amortization (134.8) (64.8) (65.5) (396.6) (198.4)

EBIT (21.3) 9.1 10.6 (201.7) 3.3



Income Before Tax and Social Contribution (10.5) 12.3 11.8 (137.7) 11.2

Income Tax and Social Contribution 3.6 (0.4) (5.9) 44.9 (24.6)

Net Income (6.9) 11.8 5.9 (92.8) (13.4)

Margin % -1.4% 2.5% 1.1% -6.6% -0.9%

Balance Sheet 9/30/09 6/30/10 9/30/10

TOTAL ASSETS 4,783 4,988 4,979

Current 1,745 1,849 1,857

Cash 23 491 472Financial investments 633 198 204Accounts Receivable 216 237 248Recoverable Taxes 175 167 155Inventories 40 16 13Other Current Assets 659 740 765


Long Term 1,123 1,158 1,167Property Plant and Equipment 1,017 1,162 1,172

Intagible Assets 898 819 783

Balanço Patrimonial 9/30/09 6/30/10 9/30/10


Current 707 787 779Suppliers 327 358 254Loans and Financing 8 37 46

Payroll and Related Accruals 7 6 9Payable Taxes 84 87 101Outstanding authorizations 93 105 108Other Accounts Payable 189 194 261


Long Term 1,095 1,293 1,287Loans and Financing 323 519 508Payable Taxes 53 81 91Contingency Provisions 18 23 21

Outstanding authorizations 669 640 662Other Accounts Payable 32 31 5



RELEVANT INFORMATION This report contains projections and/or estimates for future events. The projections herein were gathered in a substantial manner within the current outlook, based on ongoing projects and the respective estimates. The use of terms such as: "projects," "estimates," "anticipates," "forecasts," "plans," "waits," and other ones, aim to signal potential trends that, evidently, involve uncertainties and risks, whose future results may differ from current expectations. Oi cannot be held liable for operations or investment decisions taken based on such projections or estimates. This is unaudited data, and may differ from the final results.

-.-.-.-.-.-.-.-.-.-.-

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