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

Transcription

1 (Convenience Translation into English from the Original Previously Issued in Portuguese) Brasil Telecom S.A. Interim Financial Statements for the Quarters Ended September 30, 2010 and 2009 and Independent Accountants Review Report

2 (Convenience Translation into English from the Original Previously Issued in Portuguese) INDEPENDENT ACCOUNTANTS REVIEW REPORT To the Shareholders and Board of Directors of Brasil Telecom S.A. Rio de Janeiro, RJ 1. We have reviewed the accounting information included in the accompanying interim financial statements (company and consolidated) of Brasil Telecom 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, performance report 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 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 Auditores Independentes Marco Antonio Brandão Simurro Engagement Partner

3 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE 2 COMPANY NAME 3 - National Register of Legal Entities (CNPJ) 4 State Registration Number (NIRE) HEAD OFFICE 1 FULL ADDRESS 2 DISTRICT RUA GENERAL POLIDORO, 99-5º ANDAR - PARTE BOTAFOGO 3 POSTAL CODE 4 - CITY 5 - STATE RIO DE JANEIRO RJ 6 AREA CODE 7 - TELEPHONE 8 TELEPHONE 9 TELEPHONE 10 TELEX AREA CODE 12 - FAX 13 - FAX 14 - FAX invest@oi.net.br 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 5 CITY 6 STATE Leblon Rio de Janeiro RJ 7 AREA CODE 8 TELEPHONE 9 TELEPHONE 10 TELEPHONE 11 AREA CODE 12 - FAX alex.zornig@oi.net.br 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/ /12/ /1/2010 9/30/ /04/2010 6/30/ INDEPENDENT AUDITOR 10 - CVM CODE Deloitte Touche Tohmatsu Auditores Independentes ENGAGEMENT PARTNER 12- TAXPAYER IDENTIFICATION NUMBER OF ENGAGEMENT PARTNER Marco Antonio Brandão Simurro CAPITAL BREAKDOWN Number of shares (units) 1- Current quarter 9/30/ Prior quarter 6/30/ Same quarter, prior year 9/30/2009 Paid-in capital 1 - Common 203,423, ,423, ,423, Preferred 399,597, ,597, ,597, Total 603,020, ,020, ,020,546 Treasury shares 4 - Common Preferred 13,231,556 13,231,556 13,231, Total 13,231,556 13,231,556 13,231,556

4 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ COMPANY CHARACTERISTICS 3 - NATURE OF SHARE 4 - ACTIVITY CODE 1 - TYPE OF COMPANY 2 - STATUS CONTROL Commercial, industrial and other Operating Local Private Telecommunications 5 - MAIN ACTIVITY 6 - TYPE OF CONSOLIDATION 7 - TYPE OF AUDITORS REPORT Exploitation of telecommunications Total Unqualified services COMPANIES NOT INCLUDED IN THE CONSOLIDATED FINANCIAL STATEMENTS 1 - ITEM 2 - NATIONAL REGISTER OF LEGAL ENTITIES(CNPJ) 3 - COMPANY NAME 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 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) INVESTOR RELATIONS OFFICER 1 DATE 2 - SIGNATURE

5 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 - National Register of Legal Entities (CNPJ) / BALANCE SHEETS - ASSETS (In thousands of Brazilian reais - R$) 1 - CODE 2 LINE ITEM 3-9/30/ /30/ TOTAL ASSETS 21,865,565 21,543, CURRENT ASSETS 5,304,857 4,712, AVAILABLE FUNDS 2,024,494 1,384, CASH AND CASH EQUIVALENTS 2,024,494 1,384, RECEIVABLES 1,769,654 1,717, TRADE RECEIVABLES 1,769,654 1,717, INVENTORIES 7,171 7, OTHER 1,503,538 1,602, FINANCIAL INVESTMENTS 205, , DUE FROM RELATED PARTIES 575 1, DEFERRED AND RECOVERABLE TAXES 791, , ESCROW DEPOSITS 279, , PREPAID EXPENSES 29,599 42, ADVANCES TO SUPPLIERS 81, , OTHER ASSETS 116, , NONCURRENT ASSETS 16,560,708 16,830, LONG-TERM ASSETS 7,214,549 7,303, SUNDRY RECEIVABLES DUE FROM RELATED PARTIES 1,478,971 1,426, DIRECT AND INDIRECT ASSOCIATES OTHER RELATED PARTIES 1,478,971 1,426, OTHER 5,735,578 5,877, DEFERRED AND RECOVERABLE TAXES 3,571,305 3,817, ESCROW DEPOSITS 1,982,962 1,883, OTHER ASSETS 181, , INVESTMENTS 4,132,077 4,079, EQUITY IN SUBSIDIARIES 4,128,226 4,075, OTHER INVESTMENTS 3,851 3, PROPERTY, PLANT AND EQUIPMENT 4,765,392 4,957, INTANGIBLE ASSETS 448, , DEFERRED CHARGES 0 0

6 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 - National Register of Legal Entities (CNPJ) / BALANCE SHEETS SHAREHOLDERS EQUITY (In thousands of Brazilian reais - R$) 1 CODE 2 - LINE ITEM 3-9/30/ /30/ TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 21,865,565 21,543, CURRENT LIABILITIES 4,473,444 4,555, BORROWINGS AND FINANCING 1,150,191 1,225, TRADE PAYABLES 1,077,985 1,143, TAXES AND FEES 629, , PAYABLE AND DEFERRED TAXES 599, , TAX INSTALLMENT PLAN 29,930 29, DIVIDENDS PAYABLE 76, , PROVISIONS 324, , RESERVE FOR CONTINGENT LIABILITIES 264, , PENSION FUND RESERVES 59,988 33, DUE TO RELATED PARTIES 550, , OTHER 664, , PAYROLL, RELATED TAXES AND BENEFITS 50,964 47, CONSIGNMENTS TO THIRD PARTIES 142, , PROFIT SHARING 46,136 22, PERMITS AND CONCESSIONS PAYABLE 42,263 27, ADVANCES FROM CUSTOMERS 18,866 14, OTHER PAYABLES 364, , NONCURRENT LIABILITIES 5,325,568 5,356, LONG-TERM LIABILITIES 5,325,568 5,356, BORROWINGS AND FINANCING 2,735,981 2,419, PROVISIONS 1,814,783 2,203, RESERVE FOR CONTINGENT LIABILITIES 1,239,197 1,628, PENSION FUND RESERVES 575, , DUE TO RELATED PARTIES OTHER 774, , PAYABLE AND DEFERRED TAXES 390, , TAX INSTALLMENT PLAN 358, , ADVANCES FROM CUSTOMERS 9,080 29, OTHER PAYABLES 17,406 19,453

7 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 - National Register of Legal Entities (CNPJ) / BALANCE SHEETS LIABILITIES (In thousands of Brazilian reais - R$) 1 - CODE 2 - LINE ITEM 3-9/30/ /30/ SHAREHOLDERS EQUITY 12,066,553 11,631, CAPITAL 3,731,059 3,731, CAPITAL RESERVES 6,980,315 6,980, SHARE SUBSCRIPTION PREMIUM 309, , SPECIAL FOR GOODWILL ON MERGER 5,644,196 5,644, GOVT. ASSISTANCE AND INVESTMENT GRANTS 123, , INTEREST ON WORKS IN PROGRESS 745, , SPECIAL INFLATION ADJUSTMENT LAW 8200/ ,287 31, OTHER CAPITAL RESERVES 126, , EARNINGS RESERVES 383, , LEGAL 383, , RETAINED EARNINGS/(ACCUMULATED LOSSES) 971, ,987

8 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 National Register of Legal Entities (CNPJ) / STATEMENTS OF OPERATIONS (In thousands of Brazilian reais - R$) 1 CODE 2 LINE ITEM 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/ GROSS REVENUE FROM SALES AND SERVICES 3,701,291 11,358,902 3,834,322 11,341, DEDUCTIONS FROM GROSS REVENUE (1,633,997) (4,999,403) (1,533,882) (4,539,867) 3.03 NET REVENUE FROM SALES AND SERVICES 2,067,294 6,359,499 2,300,440 6,802, COST OF SALES AND SERVICES (1,084,620) (3,367,193) (1,234,595) (3,672,572) 3.05 GROSS PROFIT 982,674 2,992,306 1,065,845 3,129, OPERATING (EXPENSES)/INCOME (400,518) (1,750,708) (673,631) (5,002,135) SELLING EXPENSES (183,459) (636,708) (210,508) (824,862) GENERAL AND ADMINISTRATIVE EXPENSES (325,397) (874,538) (250,048) (717,109) FINANCIAL INCOME (EXPENSES), NET 11,792 (119,129) (99,788) (246,667) FINANCIAL INCOME 218, ,247 (38,320) 268, FINANCIAL EXPENSES (207,169) (655,376) (61,468) (515,542) OTHER OPERATING INCOME 85, ,869 82, , OTHER OPERATING EXPENSES (43,067) (534,512) (215,442) (3,474,887) EQUITY IN SUBSIDIARIES 54, ,310 20,013 (41,088) 3.07 OPERATING INCOME (EXPENSES) 582,156 1,241, ,214 (1,872,628) PROVISION FOR INCOME TAX AND SOCIAL CONTRIBUTION DEFERRED INCOME TAX AND SOCIAL CONTRIBUTION 47,281 (74,324) (110,793) (358,228) (222,120) (222,970) (22,108) 972, NET INCOME (LOSS) 407, , ,313 (1,258,096) NUMBER OF SHARES, EX-TREASURY (THOUSAND) 589, , , ,789 EARNINGS (LOSS) PER SHARE ( )

9 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 National Register of Legal Entities (CNPJ) / 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 3,731,059 6,980, , ,987-11,631, PRIOR YEAR ADJUSTMENTS ADJUSTED BALANCE 3,731,059 6,980, , ,987-11,631, NET INCOME FOR THE PERIOD 5.05 DESTINATIONS DIVIDENDS INTEREST ON CAPITAL OTHER DESTINATIONS 5.06 REALIZATION OF PROFIT RESERVES 5.07 EQUITY ADJUSTMENTS ADJUSTMENTS OF SECURITIES CUMULATIVE TRANSLATION ADJUSTMENTS BUSINESS COMBINATION ADJUSTMENTS 5.08 INCREASE / DECREASE IN CAPITAL CONSTITUTION / REALIZATION OF CAPITAL 5.09 RESERVES 5.10 TRESURY SHARES 5.11 OTHER CAPITAL TRANSACTION 5.12 OTHER EXPIRED DIVIDENDS , , ,348-27, ,348-27, ENDING BALANCE 3,731,059 6,980, , ,652-12,066,553

10 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ 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 3,731,059 6,980, , ,094, PRIOR YEAR ADJUSTMENTS ADJUSTED BALANCE 3,731,059 6,980, , ,094, NET INCOME FOR THE PERIOD 5.05 DESTINATIONS DIVIDENDS INTEREST ON CAPITAL OTHER DESTINATIONS 5.06 REALIZATION OF PROFIT RESERVES 5.07 EQUITY ADJUSTMENTS ADJUSTMENTS OF SECURITIES CUMULATIVE TRANSLATION ADJUSTMENTS BUSINESS COMBINATION ADJUSTMENTS 5.08 INCREASE / DECREASE IN CAPITAL CONSTITUTION / REALIZATION OF CAPITAL 5.09 RESERVES 5.10 TRESURY SHARES 5.11 OTHER CAPITAL TRANSACTION 5.12 OTHER EXPIRED DIVIDENDS , , ,348-27, ,348-27, ENDING BALANCE 3,731,059 6,980, , ,652-12,066,553

11 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ CVM CODE COMPANY NAME BRASIL TELECOM S.A. 3 National Register of Legal Entities (CNPJ) / STATEMENTS OF CASH FLOWS (In thousands of Brazilian reais - R$) 1 CODE 2 LINE ITEM From From From From 7/1/2010 1/1/2010 7/1/2009 1/1/ NET CASH PROVIDED BY OPERATING ACTIVITIES CASH FLOWS FROM OPERATING ACTIVITIES PROFIT (LOSS) BEFORE INCOME TAX AND SOCIAL CONTRIBUTION to 9/30/2010 to 9/30/2010 to 9/30/2009 to 9/30/ ,790 2,304, ,768 1,777, ,291 2,837, ,116 3,086, ,156 1,241, ,214 (1,872,628) DEPRECIATION AND AMORTIZATION 319, , ,550 1,022, LOSSES ON TRADE RECEIVABLES 31, ,989 62, , RESERVE FOR CONTINGENT LIABILITIES (57,268) 279,469 46,612 3,182, PENSION FUND RESERVES 9,223 9,223 15,342 31, LOSS ON DERECOGNITION OF PERMANENT ASSETS 6,241 13,192 11,269 17, EQUITY IN SUBSIDIARIES (54,422) (176,310) (20,013) 41, INFLATION ADJUSTMENT OF TAXES IN INSTALLMENTS 9,811 28, INFLATION ADJUSTMENT OF DUE FROM RELATED PARTIES (52,269) (138,063) (912) (912) INFLATION ADJUSTMENT OF RESERVE FOR CONTINGENT LIABILITIES 42, ,193 70, , ACCRUED CONCESSION FEE 14,964 42, EMPLOYEE AND MANAGEMENT PROFIT SHARING 23,534 50,985 13,712 26, FINANCIAL CHARGES AND INCOME (109,366) 127,417 (27,469) 118, OTHER - 4, CHANGES IN EQUITY (93,142) (218,330) 85,811 (407,911) TRADE RECEIVABLES (83,223) (204,265) (171,210) (373,154) INVENTORIES 707 (4,891) (451) 2, PAYROLL, RELATED TAXES AND BENEFITS 3,963 5,690 21,694 (3,937) TRADE PAYABLES (79,191) (77,164) 84,912 80, TAXES 202, , , , PERMITS AND CONCESSIONS PAYABLE (65,578) RESERVE FOR CONTINGENT LIABILITIES (168,290) (362,202) (89,005) (206,955) PENSION FUND RESERVES (34,171) (104,517) (36,322) (148,306) TAX INSTALLMENT PLAN (15) (43) (45) (45) OTHER ASSETS AND LIABILITIES 64,198 44,934 54,463 (50,953) CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (89,359) (314,959) (305,159) (900,918) FINANCIAL CHARGES PAID (69,384) (262,625) (152,151) (511,031) INCOME TAX AND SOCIAL CONTRIBUTION PAID - COMPANY (487) (487) (132,988) (335,857) INCOME TAX AND SOCIAL CONTRIBUTION PAID - THIRD PARTIES (19,488) (51,847) (20,020) (54,030) 4.02 NET CASH USED IN INVESTING ACTIVITIES (209,965) (793,672) (306,295) (1,343,457)

12 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting date - 9/30/ FINANCIAL INVESTMENTS (3,842) (75,480) (11,554) 91, DUE FROM RELATED PARTIES 1,193 29,838 (20,271) (20,271) ESCROW DEPOSITS (146,180) (570,568) (357,795) (1,072,220) PROCEEDS FROM SALE OF PERMANENT ASSETS 145 1,782 2,026 3, INVESTMENT IN PERMANENT ASSETS (61,281) (179,244) (197,058) (624,083) CASH AND CASH EQUIVALENTS BY MERGER BRT PART 4.03 NET CASH PROVIDED BY FINANCING ACTIVITIES DIVIDENDS AND INTEREST ON CAPITAL PAID IN THE PERIOD , , ,909 (192,231) (482,073) (584,796) (248) (1,159) (266,978) (267,272) BORROWINGS 510, , , REPAYMENT OF THE PRINCIPAL OF BORROWINGS, FINANCING AND DEBENTURES (244,370) (703,568) (218,667) (633,853) SHARE BUYBACK - - 3,572 3, CASH AND CASH EQUIVALENTS CASH FLOWS FOR THE PERIOD CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 639,734 1,318,658 (107,600) (150,983) 1,384, , , , CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 2,024,494 2,024, , ,995

13 (Convenience Translation into English from the Original Previously Issued in Portuguese) FEDERAL PUBLIC SERVICE 1. OPERATIONS (Amounts in thousands of Brazilian reais - R$, unless otherwise stated) BRASIL TELECOM S.A. (the Company or BrT ) is an utility services concessionaire engaged in the provision of Switched Fixed Telephony Services ( STFC ) and has operated, since July 1998, in Region II of the General Concession Plan ( PGO ), covering the Brazilian states of Acre, Rondônia, Mato Grosso, Mato Grosso do Sul, Goiás, Tocantins, Paraná, Santa Catarina and Rio Grande do Sul, and the Federal District, in the provision of STFC as a local and intraregional longdistance carrier. Since January 2004, the Company also provides domestic and international longdistance services in all Regions and local services outside Region II started to be provided in January The Company s business, the services it offers, and the tariffs it charges are regulated by ANATEL Agência Nacional de Telecomunicações (National Telecommunications Agency ( ANATEL )). The concession agreements in effect, on local and long-distance services, came into effect on January 1, 2006 and are effective until December 31, Additional information on these agreements is provided in note 23 (h). The Company is registered with the Brazilian Securities and Exchange Commission ( CVM ) and the U.S. Securities and Exchange Commission ( SEC ). Its shares are traded on the São Paulo Stock Exchange ( Bovespa ), and its American Depositary Receipts ( ADRs ) are traded on the New York Stock Exchange ( NYSE ). Beginning September 30, 2009, BrT s control is held directly by Coari Participações S.A. ( Coari ), which holds 79.63% of the voting capital and 48.20% of the total capital of BrT. Up to this date, BrT was a subsidiary of Brasil Telecom Participações S.A. ( BrT Part ), a company incorporated in May 22, 1998 as a result of the privatization of the Telebrás System. The corporate restructuring that resulted in the transfer of the direct control of BrT to Coari is described in specific comments in this note see item b and results from the acquisition of BrT by Telemar Norte Leste S.A. ( TMAR ) which, on January 8, 2009, acquired through its indirect subsidiary Copart 1 Participações S.A. ( Copart 1 ), the share control of BrT Part and BrT. The change in the share control of BrT to TMAR consisted of the acquisition of 100% of the shares of Invitel S.A. ( Invitel ), which at the time held 99.99% of the shares of Solpart Participações S.A. ( Solpart ), which was the holder of 51.41% of the voting capital and 18.93% of the total capital of BrT Part. The Share Purchase and Sale Agreement (the Agreement ), entered into on April 25, 2008, was disclosed through a Material Fact Notice by the companies involved issued on the same date, and new material fact notices were issued on events or facts inherent to the Agreement.

14 (a) Main direct and indirect subsidiaries of BrT 14 Brasil Telecom Celular S.A. ( BrT Celular ) Wholly-owned subsidiary that has operated since the fourth quarter of 2004 in the provision of Personal Mobile Services ( SMP ) under a permit to operate in Region II of the PGO. BrT Serviços de Internet S.A. ( BrTI ) Wholly-owned subsidiary 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 ) 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. 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 of 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, 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 Multimídia ) BrT holds 90.46% of the capital stock of BrT Multimídia, and BrTI holds the remaining 9.54% interest. 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 telecommunications 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.

15 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 to BrT and its subsidiaries that require this type of service. Previously, call center services were outsourced. BrT Card Serviços Financeiros Ltda. ( BrT Card ) 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 ) 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 the 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 17. (b) Corporate restructuring The purpose of the corporate restructuring was to optimize the control structure, streamline crossshareholdings and use the synergy between activities, enhancing operational efficiency. On December 19, 2008, ANATEL, regulator of the Brazilian telecommunications industry, 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 of the companies Invitel, Solpart and BrT Part with and into TMAR. In accordance with 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, by TMAR s subsidiaries, as described below. (i) (ii) 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, 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.

16 (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 of Copart 1, received BrT Part shares in exchange for its shares of Copart 1, which was liquidated on July 31, (iv) Merger of Copart 2 by the Company, with absorption of the equity of Copart 2 by the Company, through which Coari, holder of all the shares of Copart 2, received Company shares in substitution for its Copart 2 shares, which was terminated on July 31, The net assets of Copart 2 merged by the Company totaled R$369,165, without resulting in a capital increase of the Company; the amount was fully recorded under a capital reserve, as set out in Article 200 of the Brazilian. As a result of the merger of Copart 2, Company common shares were attributed for each Copart 2 common share and Company preferred shares were attributed for each Copart 2 preferred share. The 13,231,556 Company own preferred shares held in treasury have been kept 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 of BrT Part, liquidated on September 30, As a result, Coari now 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 of 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, BrT common shares were attributed to each BrT Part common share and common shares and 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 kept in treasury. The 13,231,556 Company own preferred shares held in treasury have been kept 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, based on their carrying amounts as of May 31, 2009, adjusted by corporate events that occurred from this date through the mergers dates (July 31, 2009 and September 30, 2009) and the most significant subsequent events. The tables below present the balance sheets of the companies merged by the Company:

17 Balance sheet Copart 2 31/05/2009 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 Balance sheet BrT Part 31/05/2009 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. Pursuant to Law 6404/76 (Brazilian ), the mergers have been submitted to and approved by the shareholders of Invitel, Solpart, Copart 1, BrT Part, Copart 2, Coari and the Company, at the Shareholders Meetings of said companies held on July 31, 2009 and September 30, The shareholding structure of BrT at September 30, 2009 was follows: Shareholding structure BrT Shareholder Common % Preferred % Total % Coari 161,990, ,675, ,665, Minorities 41,433, ,690, ,123, Treasury shares 13,231, ,231, Total 203,423, ,597, ,020, The goodwill originally recorded by Copart 1 and merged by BrT Part, in the total nominal amount of R$8,235,520, arises partly from the merger of Solpart by Copart 1 and partly from the merger of Invitel by Solpart, and relates to the acquisition of 100% of the shares of Invitel and 35.52% of the shares of BrT Part. Recorded goodwill is based on the appreciation of property, plant and equipment and the STFC concession right of the Company. As a result of the merger of Copart 1 by BrT Part and the subsequent merger of BrT Part by BrT, goodwill started to be amortized for

18 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 the Company, in the amount of R$737,664, arises from the acquisition of 10.62% of the shares of the Company and is based on the appreciation of the property, plant and equipment and the STFC concession right of the Company. As a result of the merger of Copart 2 by BrT Part and the subsequent merger of BrT Part by BrT, goodwill started to be amortized for accounting purposes by BrT, pursuant to the prevailing tax and accounting laws, and will generate tax credits. 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. After the completion of Stage 2 of Phase 2, the corporate structure is as follows: Corporate Structure before the merger of BrT Part BrT Part Corporate Structure after the merger of BrT Part TNL TMAR Coari BrT Part ON: 97.35% PN: 69.37% Total: 81.93% ON: % PN: % Total: % ON: 90.68% PN: 33.33% Total: 54.45% ON: 0.25% PN: 18.94% Total: % TNL TMAR Coari ON: 97.35% PN: 69.37% Total: 81.93% ON: % PN: % Total: % ON: 79.63% PN: 32.20% Total: 48.20% Merger of BrT Part by BrT ON: 99.09% PN: 38.83% Total: 65.64% BrT BrT 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.

19 COMMERCIAL, INDUSTRIAL AND OTHER COMPANIES Reporting Date - 9/30/2010 As disclosed by TMAR in the Material Fact dated August 12, 2009, as part of corporate restructuring process, the Supervisory Boards and the Boards of Directors 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 TMAR, so that BrT becomes a wholly-owned subsidiary of TMAR; 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 TMAR and BrT, respectively, examined and approved the proposal for new share exchange ratios adjusted to reflect the changes in the reserve for contingent liabilities (civil lawsuits) of BrT. The new share exchange ratios are common share of TMAR for each common share of BrT and class C preferred share of TMAR for each preferred share of BrT. At the Extraordinary Shareholders Meeting of BrT held June 16, 2010, the non-controlling holders of common and preferred shares of 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. (c) Corporate restructuring 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 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 merged and merging companies 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.

20 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, 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. 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, The net assets of Nova Tarrafa Inc. merged by ig Part totaled R$322, and resulted in an increase in ig Part s capital. As a result of the merger of Nova Tarrafa Inc., 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. (d) 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. ( TmarPart ), with TmarPart, TNL, and TMAR (indirect controlling shareholders of the Company) as intervening parties, entered into with Portugal Telecom, SGPS, S.A. ( Portugal Telecom ) a Term Sheet with the objective of establishing the main 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 ). Management does not expect any material impacts on the Company s operations. To date, the negotiations of this term sheet are still in progress. 2. PRESENTATION OF THE INTERIM FINANCIAL STATEMENTS AND 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 and standards of the 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, 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.

21 In the context of the updating of Brazilian, the second stage of the convergence of the Brazilian accounting practices to the IFRSs was completed in 2009 with the enactment accounting pronouncements (CPCs) (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, 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, has postponed to December 2010 the mandatory application of the Pronouncements, Interpretations and Instructions issued by the CPC and edited and approved by the CVM in 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: (a) Treatment of corporate restructuring As described in Note 1 (b), in light of the corporate restructuring process and in accordance with CVM Instruction 319/1999, as of July 31, September 30, 2009, the Company recorded as a result of the merger of the net assets of its parents the following amounts as contra entries to the capital reserve in shareholders' equity: Net assets Balance at 9/30/2010 Asset appreciation: Property, plant and equipment 1,954,912 1,287,004 Intangible assets permit (*) 6,686,216 6,210,222 Provision for equity maintenance CVM Inst. 319/1999 (*) (4,412,903) (4,098,624) 4,228,225 3,398,602 (*) For the purposes of presentation of the interim financial statements, these amounts have been reclassified to line item Deferred and recoverable taxes (Note 12).

22 Pursuant to the new accounting pronouncements (CPCs), and in particular Technical Interpretation (ICPC) 09, 44 (b) and 45, in the case of corporate restructurings where a subsidiary (in this, case BrT) merges its direct parent and the parent company is only an entity without operations (in this case, the other entities described in Note 1(b)) and, therefore, not considered in substance the acquirer (pursuant to CPC 15 Business Combinations, especially Appendix B, chapter Identifying an acquirer, beginning paragraph B13), the balance of goodwill must be fully derecognized at the time of the merger, through a provision directly charged to the acquiree s shareholders' equity. When applicable and when there is evidence of the actual economic benefits to be earned as a result of the goodwill paid, such as a probable future decrease in taxation, deferred income tax and social contribution assets must be recognized provided that the recognition criteria set out in CPC 32 Income Taxes are met on the temporary difference generated when goodwill is derecognized, and provided that in the future, and according to the applicable tax regulations, such goodwill can be deductible for tax purposes. From an accounting standpoint and in view of the level of presentation of the individual financial statements of the acquiree, the change of controlling shareholders should not entail setting a new accounting basis for the acquiree s assets and liabilities or accounting for intangible assets previously nonexistent, and thus such new measurement basis is only applicable to the financial statements (individual and consolidated) of the acquirer. Accordingly, had we adopted said accounting pronouncement as of September 30, 2010, shareholders' equity would be written down by approximately R$849 million and net income would be written up by approximately R$286 million. (b) 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 is made by the shareholders. Under current accounting practices, such amount would be recognized as a liability when proposed by management. 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 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). (c) Non-controlling interests Pursuant to CPC 26 Presentation of Financial Statements, non-controlling interests shall be separately stated in consolidated shareholders equity.

23 (d) 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. (e) 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). The other CPCs and ICPCs that may be applicable to the Company and its subsidiaries, in view of their operations, are as follows: 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 Reporting Period 25 Provisions, Contingent Assets and Contingent Liabilities 26 Presentation of Financial Statements 27 Property, plant and equipment 30 Revenue 32 Income Taxes 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

24 Consolidation basis The Company s and its subsidiaries maintain consistent accounting practices. Consolidation was prepared in accordance with CVM Instruction 247/1996 and includes 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 the consolidated companies; Separate disclosure of non-controlling interests in shareholders equity and profit or loss for the period; and Consolidation of exclusive investment funds (Note 9). Adoption of Technical Pronouncement 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$). To define the functional currency, management considered the currency that influences: the sale price of its products and services; the costs of services and sales; the cash flows for trade receivables and trade payables; and interest, investments and borrowings. Accordingly, the Company and its subsidiaries functional currency is the Brazilian real (R$), which is also the reporting currency of these interim financial statements. b) Transactions and balances

25 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$).

26 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 reporting 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 securities; (ii) held-to-maturity; and (iii) available-for-sale. Trading securities are measured at fair value and their effects are recognized in income. Held-tomaturity investments are measured at cost plus income earned, less the allowance for adjustment to recoverable amount, when applicable. Available-for-sale investments are measured at fair value and their effects are recognized in valuation adjustments to equity, when applicable. (c) Accounts receivable 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. Charges on overdue bills are recognized when the bill of the first billing cycle subsequent to the payment of the overdue bill is issued.