1 MESSAGE FROM MANAGEMENT

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1 annual report MESSAGE FROM MANAGEMENT The year 2009 was emblematic and extremely challenging for Oi. Following the acquisition of Brasil Telecom at the start of January, we ended the year with both companies operations virtually integrated. The creation of the largest integrated telecommunications company in Brazil, controlled by Brazilian shareholders and managed by just one team offering several services under one brand in the whole of Brazil, is a large accomplishment. The effort to start 2010 as a completely structured company, through quick and necessary adjustments to operations and the administration, in addition to the consolidation of the best commercial practices, proves that the decision was right. We concentrated the top management in Rio de Janeiro, implementing a single and integrated organizational model for all operations, independent of the existing ownership structure. In engineering and network management, the activities linked to conception, planning and operations are completely integrated in the Engineering and Operations Department, provided that the company started to count on a nationwide network. Also, the company implemented a uniform model for internal plant services, which will be carried out by one supplier in Regions I and III of the PGO-General Licensing Plan. These two initiatives, coupled with the consolidation of the existing Network Management Centers, make for an integrated vision and management of the company s networks, aiming to provide better services, as far as the availability of platforms and the production of voice and data services are concerned, and to reduce spending on maintaining these networks. We implemented in Region II one single model for sales and service on all commercial channels at Oi, just like we did in Regions I and III. The retail area was restructured and is now focused on the so-called small-scale retail, with exclusive distributors to expand distribution and make sales channels more efficient. Following the launch of the Oi brand in Region II in May, we started mobile service offers with the Oi Ligador plan, migrating all sales in the prepaid segment to the sim card alone strategy. In the first month, this offer brought more than one million new customers in Region II. We continued to standardize the offers and in June we launched the post-paid plans Oi Controle and Oi Conta. In October, we started to sell Oi Fixo and Oi Velox. We intend to start offering the convergent service Oi Conta Total in the first half of In July we launched the Pay TV service with the Direct To Home (DTH) technology without an extensive marketing investment and using the existing sales force. At the end of the fiscal year we had reached 174 thousand customers, thus proving the potential demand for this service. Several steps in the ownership integration of Oi companies were concluded: (a) in June, Voluntary Tender Offers were conducted in compliance with the law (b) in July, several intermediary holding companies were incorporated, simplifying the existing ownership structure (c) in September, BrTP-Brasil Telecom Participações was incorporated by its subsidiary, BrT Brasil Telecom, and all the shareholders of that company had their stock exchanged for BrT shares. We had planned to have all the incorporations concluded at the end of the year, with only the last step in the incorporation of Coari Participações into TMAR to be left for the start of However, during the registration of the incorporation of BrT stock by Coari (the penultimate step in the intended integration) with the U.S. capital markets regulating agencies, new demands whose compliance would take additional time and postpone the consolidation of the stocks of BrT and TMAR were formulated. Also, at the end of the year, significant changes at BrT were identified (about R$ 1.2 billion more than that informed in April of the year). This led us to interrupt the final two steps in the stock integration in order not to harm TMAR shareholders and, indirectly, those of TNL, and to assess the need to propose the revision of the exchange ratios announced in April 2008, which will be submitted to BrT s non-controlling shareholders. As soon as this step is overcome, we expect to conclude the incorporations so that every BrT shareholder becomes a TMAR shareholder. It is important to note that this halt in the integration process did not prevent us from seizing all the synergies that were estimated when we acquired BrT. Simultaneously, we continued to expand the operations in São Paulo, where we reached 5.3 million customers in just over one year. The Capex, which exceeded R$ 40 billion in the last 11 years for the expansion of our networks and the improvement and diversity of the products we offer, led to the spectacular growth of our customer base, which surpassed 60 million. The acquisition of Brasil Telecom was the last and most relevant movement in the consolidation of Oi as a nationwide player, creating the operational bases for new technological leaps, future expansion and to thriftily take broadband service to most brazilians, eventually in a partnership with the Brazilian Government. The services that we currently offer to the Brazilian navy in Antarctica add to those already in place at border outposts for the army. The possibility of utilizing satellites for the introduction of the L band to control air traffic and for national defense, places Oi as the strategic supplier to the three armed forces, making Brazil potentially independent in telecommunication services. 1

2 2 The plan, which started in 2008 and is slated to end in 2010, aims to take broadband services to more than 5,600 cities, and exceeds by far the current coverage of four thousand in the mobile segment that is, more than 1,500 cities will have broadband, while mobile services will not yet be available- proving Oi s unwavering commitment to reach all national frontiers with broadband internet access. In addition, the commitment to take free broadband service to all public schools, thus to more than 54 million students, adds Oi to the universe of public policies, given the introduction of new technologies and, under the coordination of the Education Ministry, radically changes education and the quality of teaching in Brazil, with obvious and significant consequences for future generations. Looking into the near future, in 2010 our strategy will be focused on recovering yields and operating margins which were harmed by non-recurring costs and expenses, mainly linked to the integration with BrT- seeking to expand the customer base as rationally and economically as possible. The competitive environment will remain tight in virtually all services, also with the entry of cash-rich international carriers, and by new consolidation in the Brazilian markets. Thus, we will be even more focused on increasing our share in the mobile market in São Paulo and in Region II, which is still considered too small by our management. The main investments needed for the performance of our platforms were intensified in the past two years, especially to meet regulatory demands and to expand broadband and mobile services. In 2010 we will invest in a selective manner, focusing on increasing transmission capacity of our mobile and broadband platforms, on expanding corporate services, and on maintaining and improving our networks. Investments linked to contractual obligations will also be made. Our main challenge will be to generate as much cash as possible in order to reduce net debt, which reached about R$ 22.0 billion at the end of To this end, the organization will continue to cut spending by improving operating efficiency or activities not directly linked to Oi s core operations. Meanwhile, our Social Responsibility actions span the whole country, following the incorporation of the States that were previously covered by Brasil Telecom. This made 2009 a watershed for Oi Futuro. Reasserting its commitment to the country s social development and to the democratization of access to knowledge, Oi Futuro expanded its programs in education, culture and sports. For the second consecutive year, Oi is a member of the Corporate Sustainability Index at BM&FBovespa. Our permanence in the index results from the evolution and continuation of sustainability actions promoted by several areas. It also stems from the strengthening of this theme within the company s strategy, capping actions related to risk management and internal controls, which aim to minimize the potential environmental impact from energy consumption and energy efficiency in general, water consumption, waste sorting, disposal of batteries, among others. Oi has been a member of the United Nations Global Compact since August 2009, an initiative that reinforces the adoption of fundamental and internationally-accepted values in human rights, labor relations, the environment and anticorruption, and confirms the philosophy already adopted in the company s business. In 2009, the Company had R$29,881 million in consolidated net revenue. However, due to several non-recurring costs, most of which directly linked to the integration with BrT, as well as other costs that did not exist in 2008, coupled with a high volume of financial expenses, the net result was negative by R$ 436 million. During the fiscal year, TNL paid dividends in the amount of R$1,992 million, which accounted for about R$ 5.21 per stock. We would like to thank our shareholders, customers, suppliers and public agencies for the support and trust, which distinguished our company during the whole year. We would like to thank particularly our employees for the effort, commitment, dedication and personal effort in order to make Oi Brazil s best company in telecommunications services. Luiz Eduardo Falco Pires Corrêa CEO José Mauro Mettrau Carneiro da Cunha President of the Board of Directors

3 2 ECONOMIC SCENARIO As the financial market crisis spread and the world economy slowed down, the start of 2009 could be difficult for the Brazilian economy. Amid this scenario and following a strong slowdown in the fourth quarter of 2008, the Brazilian government created several incentives to spur labor-intensive sectors such as vehicles, civil construction and durable consumer goods. Measures such as tax reduction or exemption, as well as the concession of personal credit via government banks were the center of this policy. In addition, the Central Bank started to cut the benchmark interest rate in January. The total reduction amounted to 500 basis points, hitting 8.75% in July and remaining at this level until the end of Therefore, following the lowest level seen at the end of the first quarter of 2009, the Gross Domestic Product started to rebound, sparked by the services segment and, in the industrial segment, by sectors linked to the domestic demand. The perspectives for 2010, however, already point to the GDP growing 5.0%-6.0%. It is also expected that in a bid to keep inflation in check, the Central Bank may resume a more restrictive monetary policy, raising the benchmark rate. In 2009, Brazil s economic growth despite fears in the large, developed economies, the subsequent fall in the Brazil risk, and the maintenance of high real interest rates according to international standards, resulted in strong capital flows into Brazil, keeping the local currency appreciated.

4 3 THE TELECOMMUNICATIONS SECTOR 4 Total telecommunication service users in Brazil amounted to approximately million in 2009, equaling 41.7 million fixed lines, million mobile users and 11.4 million broadband internet users. The 12.5% growth, which equals 25 million users, is relevant compared to 2008 and represents the second fastest growth in the sector s history, fueled by extensive net additions in the mobile segment, although the pace of expansion was slower (20.0% or 33.7 million users in 2008). In March 2009, number portability was concluded in the entire country in the fixed and mobile segments. In 2009, these users totaled 3.4 million, of whom 1 million were in the fixed segment and 2.4 million were in the mobile segment, or 2.5% and 1.4% of the respective totals. The low significance of these ratios confirms our initial expectations. Wireline Services The wireline services market in Brazil ended 2009 with 41.7 million lines in service, in a 1.3% increase over the previous year. This segment has been ripe for years, with just marginal growth. The concession holders for wireline services accounted for 80% of total users in December 2009 from 84% at the end of 2008, demonstrating that the expansion was registered by the new, authorized entrants. Wireless Services With 174 million users in 2009, thus accounting for 90.6% of the population, the mobile market in Brazil remains the fifth largest in the world. The 15.5% growth this year, though slower than in 2008, was enough to keep Brazil among the fastest-growing countries worldwide. Net additions numbered 23.3 million Mobile Market Market in Brazil in Brazil users, which despite being less than in 2008 (29.7 million), they were the second-largest in the sector s history. The prepaid segment rose 17.0%, which compares with 8.8% for post-paid users, and accounts for 82.5% of the total mobile users, remaining the main driver for growth in the year (89.5% of all additions versus 84.8% in 2008). Two important trends, which were already present at the end of 2008, were consolidated in 2009: growth in mobile broadband users: with almost 4.7 million additions in 2009, third-generation users numbered 6.8 million at the end of the year. Of this total, about 2.8 million accounted for mini-modems and the remainder for 3G users through mobile handsets via data plans. It seems to us that this is a permanent trend in Brazil, proving the potential market linked to a revenue source largely untapped in the country vis a vis the international market (data revenues). the increase in participation in Regions II and III in the total additions in the country: Region I has historically accounted for the largest share of net additions in the country. However, this has been changing as Oi expands its coverage toward new regions. In fact, the launch of the Oi portfolio in new markets stimulates them. Therefore, Region I, which accounted for an average of 55.5% of net additions in 2006/07, fell to 48.4% in 2008 and represented an even smaller share of net additions in 2009, at 47.1%. Following the launch of Oi in Region III, it started to record a larger share of net additions in 2008 and 2009, respectively 29.1% and 28.2% versus an average 22.7% in the two previous years. The launch of Oi offers in Region II also became relevant for total net additions in the country, jumping from 20.1% (average in 2006/08) to 24.7% in ,2 99,9 121,0 150,6 173,9 20,6 13, ,6 23,3 65,6 86,2 99, ,6 Net adds Previous base Million subscribers

5 annual report 2009 Fixed Broadband The market for fixed broadband ended December 2009 with 11.4 million users, having grown 13.8%, or by 1.4 million new users, compared to December Such an expansion was slower than the average in the past three years, of 26.3% or 1.9 million new users in the year. The presence in 19.8% of homes remains low, thus constituting a large market potential. About 51.1% of the net additions in fixed broadband occurred through the ADSL technology (61.6% in 2008), the main broadband technology offered by Oi. It must be stressed that part of the growth slowdown seen in the fixed broadband market probably stems from competition in mobile broadband rising considerably in Pay TV In 2009, the user base for Pay TV services grew about as much as in 2008, when it expanded faster than the average seen in previous years. In 2009, Pay TV users numbered 7.5 million, growing 18.2% in the year, faster than the annual average in the three-year period of 2005/07, of 10.4%. This increase was once again boosted by growth in packages directed to the lower-income tiers of the Brazilianpopulation, where there is pent-up demand. About 13.0% of all Brazilian homes use our service, which proves the immense potential in this market. DTH (Direct to Home) technology accounted for 59.8% of new users, followed by cable technology, with 43.8%. It must be highlighted that the new entrants in this market, including Oi, utilize this technology. Regulatory Framework In 2009, the regulatory framework did not undergo significant changes, following a hectic year in The main subjects on the 2009 regulatory agenda involved: The complete introduction of number portability: portability, which started in September 2008 and was phased in through March 2009, was introduced in the fixed and mobile segments. As expected and based on the number of requests and numbers carried, portability represented an enormous cost to the companies due to the complex investments, without meaningful results for consumers. General Target Plan for Universal Access (PGMU in Portuguese): In the first half of 2009, a public consultation was conducted on the new General Target Plan for Universal Access, which is slated for January In it, Anatel attempts to introduce new obligations related to the installation of public telephones, the doubling of backhaul capacity and the installation of an additional, large-capacity backhaul in new locations. As compensation, the Agency suggested a reduction in the density of public phones from 6/1000 to 4.5/1000. However, according to the operators, this compensation does not make up for the costs linked to the proposed obligations. Given that the Agency cannot, according to the Telecommunications Law, impose new targets without signaling the respective funding sources, Oi, the other concession holders and Abrafix made detailed contributions to demonstrate that the proposal is infeasible. Concession Contracts: In the first half of 2009, Anatel made a public consultation on the new version of the Commutated Fixed Telephone Service concession contracts, to be in force from January The text does not propose significant changes. Simultaneously, the new General Target Plan for Quality, for the wireline segment, was also in public consultation. It will be in force on the same date. In Anatel s proposal, the main innovation is the introduction of a subjective evaluation of rendered services, through opinion polls. Destination of the 2.5GHz frequency: The new destination of the 2.5 GHz was placed in public consultation. It is presently assigned to the Pay TV service via MMDS, which reserves most of the band to SMP from 2012 through As a result, the sub-layer that was sent to MMDS companies would be reduced because of a greater necessity by the Personal Mobile Service, given its growth and technological advance to 4G. Public Notice for H Band: At the end of 2009, Anatel placed in public consultation the proposed Public Notice for the H band, the last available band for the third generation in the mobile segment. The text proposed by the Agency sets the rules that, when associated with the legislation currently in force, prohibits the participation of the current Personal Mobile Service providers. Virtual Mobile Operators (MVNO): Also at the end of 2009, Anatel placed in public consultation the rules for the virtual mobile operators in Brazil. Regulations of the General Plan for Universal Access: In keeping with the Decree 6424/2008, relating to the change to universal access targets, Anatel placed in public consultation the current General Plan for Universal Access regulation, which details how revenues and expenses linked to the target change are accounted for. 5

6 4 PROFILE OF THE COMPANY 6 TNL, through its subsidiaries such as Telemar Norte Leste (TMAR), TNL PCS (Oi Mobile) and Brasil Telecom (BRTO), offers several convergent products that include traditional services in the fixed and mobile segments, data transmission, broadband internet access, internet provider and other services for residences, users at small, medium or large corporations, governmental agencies and other telecommunication companies. It is the main provider of telecommunication services in Brazil, the largest company by consolidated gross revenue and the number one in fixed lines in service in South America. TMAR holds the concession to operate fixed services in 16 States in the North, Northeast and Southeast regions, and BRTO holds the concession for fixed services in the Federal District, and in nine States in the Southern, Center-Western and Northern regions. Following the acquisition of BrTO, Oi began to operate nationwide in the mobile segment and in data transmission, with a unified portfolio in all the concession regions. The offer of services in the whole of Brazil entitles the company to the necessary scale to compete on an equal footing with international rivals present in Brazil. As a pioneer and the only integrated operator in Brazil, Oi believes that the capacity to develop converging offers is an important competitive advantage to retain customers. In 2009, Oi started to operate the undersea transmission network of Globenet (a wholly-owned subsidiary of BrTO) that connects Brazil, Venezuela, Bermudas and the United States. The networks of the companies Globenet and Metrored add to Oi s data backbone, making it the largest and most far-reaching data coverage in Brazil. There are more than 176 thousand km, distributed in 23.3 thousand km of international backbone (Globenet), 32.6 thousand km of national backbone and thousand km of State and metropolitan networks. In addition to the traditional telecommunication services, Oi offers Pay TV and broadband internet through the subsidiary Way TV to residential, commercial and corporate customers in the cities of Belo Horizonte, Poços de Caldas, Uberlândia and Barbacena, in the State of Minas Gerais. Through Way-TV, Oi became the first quadruple play company in Brazil, offering integrated service in fixed and mobile segments, broadband and cable TV. In November 2008, Anatel authorized Oi to sell Pay TV services in the whole of Brazil, using the DTH satellite technology. The launch of this service took place in July 2009, initially in cities in the State of Rio de Janeiro, and later expanded to Minas Gerais, Santa Catarina, Paraná and Rio Grande do Sul. The company ended 2009 with 61.9 million Revenue Generating Units (RGUs). Oi s image depicts a lifestyle linked to innovation, boldness, reliability and intelligence. The It s that simple motto summarizes the company s identity. The company s objective is to offer the most modern possibilities in telecommunications and to meet and exceed the demands of customers and those of the market. For the second consecutive year, Oi is part of the Corporate Sustainability Index (ISE in Portuguese) of Bovespa, reflecting the company s commitment to social responsibility and the adoption of sustainable management practices. TNL and BrTO are traded on BM&FBovespa and on NYSE, while TMAR is only available on BM&FBovespa.

7 5 COMPANY S STRATEGY AND NEW BUSINESSES 7 The initiatives of TNL-controlled companies aim to reach and maintain the market and generate revenue for its shareholders. These initiatives reflect the management s position, which is marked by agility, simplicity and objectivity. In order to maintain market leadership, boost competitiveness and improve financial performance to create value for shareholders and stakeholders, Oi s general strategy includes: Focus on convergence: Oi consolidates its market differential by offering bundles for fixed and mobile services, broadband and Pay TV. Convergence is a strong instrument to retain customers and bolster sales. It also guarantees important synergies that reduce operating costs at the company. Expansion of the customer base and broadband services: as an important growth lever and an essential element in the future of integrated communication services, broadband internet is one of the main instruments in our strategy. In order to boost growth, Oi keeps investing in the expansion of fixed and mobile broadband networks, in addition to ratcheting up the supply of high-speed internet and the evolution towards new technologies. New businesses and markets: Innovation and continuous growth of new businesses is an essential part of Oi s strategy. Expand operations into new businesses based on our existing platforms and act in segments that complement our services are key to ensure the organization s growth. The company monitors opportunities in new business in telecommunications and in related sectors such as internet and IT, which complement the company s business in order to boost new revenue sources and strengthen its position in the global telecommunications scenario. Explore growth opportunities as a profit-oriented mobile operator with nationwide coverage: differentiation by way of convergence and innovative offers remains the main strategy to consolidate market leadership in this segment. Oi s new position as a mobile operator with a nationwide coverage, the expansion of offers into Region II and the success in Region III will continue to ensure growth. The advantages brought by convergence and the innovative offers that focus on services, and not on handset sales, will remain as important differentials to increase profit. The company will keep exploring value-added services and new products through its customer base, furthering the expansion of revenue and profitability. Boost efficiency and cost control, while maintaining quality: the initiatives to enhance internal processes, with the subsequent optimization of costs and resource allocation, are part of our strategy to increase operational efficiency and scale gains. Improving the quality of the services offered to customers will remain the company s strategic priority.

8 6 HIGHLIGHTS OF THE YEAR Acquisition of Brasil Telecom Participações (BrTP), the controlling holding of Brasil Telecom (BrTO); Launch of the Oi brand in Region II of the PGO and the unification of the Oi portfolio nationwide; Unification of the center of voice and data control network for the mobile segment, as well as integration of this service s platform, unifying Oi s offers; Implementation of a single model for sales and services in the covered regions; Unification and centralization of the Network Management Centers of Oi and BrTO in just seven months; Unification of the management model for internal plant operation and implementation of a new operational philosophy; Implementation of a severe internal program to obtain cost synergies at both companies, contemplating countless fronts; Launch of Pay TV services through DTH (Direct-to-Home) technology in Rio de Janeiro, Minas Gerais and in the south of the country; Start of Ultra Broadband services with the implementation and offer of access as fast as 20 Mbps in six Region I cities and in five cities in Region II, in addition to the supply of 100 Mbps service in three Region I cities and five cities in Region II; Reasserting its commitment to the country s social development and the democratizing of knowledge, Oi Futuro expanded its programs in education, culture and sports, with investments of R$80 million. 8

9 7 INTEGRATION PROCESS WITH BRASIL TELECOM 9 Following the acquisition of Brasil Telecom in January 2009, the integration of both companies activities started. Many actions were created: Engineering and Networks The integration resulted in a challenge for the operations area, because we began to have a network that covered the entire country, with thousands of network-related elements and two centers for operations management: one in Rio de Janeiro and another in Florianopolis. We identified the need to unify the Network Management Centers, adopt the best practices present at each company and to quickly seize the identified synergy gains. This work was forecast to be executed throughout 2009, whose impacts would persist until December Given the urgency of this change, this project was concluded ahead of schedule in July Since then, Oi has just one Network Management Center in Rio de Janeiro, with improved results. This work was executed under the guideline not to reengineer any process and to quickly apply to the new structure the best existing processes, systems and management mechanisms in each center. Meanwhile, the management model for the internal plant was unified and a new operations philosophy was implemented, with a strong control on network interventions and the attribution of greater management responsibility to the regional areas. The results are already consistent with the improvements in quality and customer perception. To ensure network quality with nationwide coverage, it was necessary to have organization, automation and very well prepared professionals. The operation is structured to avoid problems and for a precise monitoring, fast diagnosis and treatment (minimizing impact on customers) and competence in addressing faults. Brand, Offers and Channels Launch of the Oi brand in Region II: In January 2009, Oi started a strategic evaluation of all its brands. As a result, it decided to work under just one brand, and to migrate all BrTO assets to Oi. From January through March 2009, all the expressions of the Brasil Telecom brand were mapped and in April the migration process started. In less than a month, about 10 thousand public telephones, 80 Brasil Telecom-owned stores and kiosks, more than 700 authorized stores and about one thousand retail counters were migrated. Also, every call center operator and field technician was trained and had their service routines altered. Last, extensive work on internal communication and marketing was carried out to inform and involve the employees in the integration project. Many marketing campaigns were conducted since January to support this migration and the launch of the Oi brand in the Brasil Telecom region. These campaigns conveyed Oi-brand messages such as freedom and simplicity. Portfolio Integration In May, Oi entered in Region II offering the Oi Ligador prepaid plan, migrating 100% of sales to sim card sales. This offer made Oi add one million customers in the launch month. In the third quarter, the new portfolio accounted for 100% of the mobile service sales. In 2009, Oi had 26.9% of all net additions in the region, approximately 7 percentage points higher than the prior year. Oi also launched in June the Oi Controle and Oi Conta plans, bringing the concept of penalty-free plans already in place in other regions. In the second half, new portfolios in fixed services were phased in: Velox (fixed ADSL and 3G) for residences. The new portfolio is based on the pillars already tested in other Regions such as new penalty-free plans, both in Velox ADSL and in 3G. The 3G plan also incorporated the concept of tasting the plan within the eu posso position, where the customer can sample the plan free for two months. Unification of the Channel Strategies Regarding channels, just one operating model for sales and service was implemented for the whole company. In the retail market, the distribution model in Region II was restructured and now focuses on small-scale retail (newsstands, pharmacies, etc.) with exclusive distributors, ensuring greater efficiency for the channel. This action was followed by the expansion of virtual recharge through the launch of Oi PDV. In the large-scale retail channel (retail networks with regional and nationwide coverage), where products are offered through salesclerks, unblocking-related actions were intensified, generating a greater flow of people to shops. As far as post-sales and regulatory services are concerned, we are investing in the development of a specific channel, Oi Atende, which already exists in Region I. As the new portfolio for wireline services is launched, a doorto-door sales channel was structured in order to attract lowerincome customers. Oi-owned stores are on the way to adopting Oi s franchise model to standardize sales channels, improve sales performance and customer relationship. New franchises are also being opened to increase coverage. In the authorized agents network, the stores and procedures were changed and the channel s focus was redirected to post-

10 paid plans, given that prepaid sales are being absorbed by the small-scale retail. The channels that service the corporate market are being migrated toward a new business model, in order to act in a more differentiated and focused form by customer profile. As a result, a greater coverage is ensured through the increase in the number of salespeople, in addition to the standardization of market service, expanding the relationship with customers. Operating Expenses: Even before it obtained previous consent from Anatel for the acquisition of BrTO, the company started to work on an action plan, based on public information, along with a group of consultants. The plan started to be carried out on the day that followed the acquisition. The main guideline was to apply to the integrated companies the best management practices that existed at each company, in a bid to quickly obtain cost synergies. More than 30 initiatives aimed at cost efficiency were implemented, of which we highlight: 10 administrative restructuring, done in three steps during the year, as well as the review of all benefits; review of the logistics model; renegotiation of supplier contracts; reduction of the costs of products sold following the unification of the strategies for the mobile market; utilization of the internal infrastructure in cases where interconnection was handled by other telecom companies;

11 8 OPERATING PERFORMANCE 11 Tele Norte Leste Participações-controlled companies ended 2009 with 21,293 thousand fixed lines in service ( Oi Fixo ), 36,112 thousand customers in the mobile segment ( Oi Móvel ), 4,211 thousand broadband internet users ( Oi Velox ) and 234 thousand video users ( Oi TV ), including users via cable and DTH technology (launched in October), totaling 61,850 thousand Revenue Generating Units (RGUs). In 2009, Oi added 5,907 thousand RGUs, or +10.6% compared to 2008, influenced mainly by net additions in the mobile sector and by broadband and video services. Wireless Segment: The mobile segment expanded by 6,117 thousand users in 2009 to end the year with 36,112 thousand users. The 20.4% increase from 2008 represents growth above the national average (15.5%) for another year. Of the total net additions, 3,355 thousand users (55%) were in Region III (São Paulo), where operations started at the end of October 2008, and 1,548 (25%) thousand were in Region II, where in May the company started to integrate the portfolio with that of Oi, launching the Oi Ligador offer. The prepaid user base reached 30,327 thousand at the end of the year (84.0% of the total). This is still the growth driver for the mobile segment, accounting for 84% of net additions in The post-paid segment reached 4,323 thousand users at the end of 2009, adding 848 thousand users in the period, and making up 12.0% of the company s total users (11.6% in 2008). Users in the controle plan totaled 1,462 thousand users in December 09, 10.8% above 2008 and equaling 4.0% of the base. With 388 thousand new users, the convergent product Oi Conta Total rose 36.6% in the year, ending 2009 with 1,449 thousand customers. These users account for 38% of the postpaid base in Region I, the area where the product is presently available. Even with a strategy that was more focused on profitability in Region I from the second half, Oi Mobile maintained its market leadership in the region, with a 28% share. In 2009, the company s growth came mainly from Region II, following the integration of the portfolios of Oi and BrT, and from Region III, which is still in start-up mode. In Region II and III, we ended the year with 16% and 12% market share, respectively, compared with 14% and 5% in Oi Móvel Clients OI Móvel CLIENTS dec/07 dec/08 dec/09 20,247 29,995 17% Post paid Pre paid thousand subscribers 16% *2007 e 2008 pró-forma Broadband (Fixed + Mobile): The Oi Velox customer base rose by 10.2% in 2009 (390 thousand new users). Of the total fixed users, 50 thousand are Oi TV cable users and the remaining 4,161 thousand utilize ADSL technology. This product is strategic for the company and represented 19.8% of all lines in service in 2009 (17.1% in 2008). It is worth mentioning that throughout 2009, Oi ended the convergent service that was available in Region II (Pluri) and disconnected some of these plans, thus affecting the number of broadband users in that region. The mobile broadband service (3G), including users via minimodems, ended the year with 469 thousand users, in a 297% growth in the year. The company extends this service to complement the fixed broadband service. 16% BROADBAND CLIENTS (WIRELINE AND WIRELESS) 36,112 Broadband Clients (wireline and wireless) dec/07 dec/08 dec/09 3,086 3,939 3% 10% 4,680 wireless wireline thousand subscribers *2007 e 2008 pró-forma

12 Wireline Services: The performance of the company s lines in fixed services was hit by some voluntary disconnections in Region II. During the year, competition remained stiff, mainly due to the aggressive campaigns undertaken by the mobile operators, which encompassed promotions for on-net traffic with tariffs similar to those for fixed services. Amid this scenario, Oi kept the strategy of selling alternative plans, aiming to retain customers. These plans rose 19.7% compared to 2008, and make up 59.6% of all fixed lines in service or 83.7% of residential lines in service. Also with the aim of defending the fixed line base, in the third quarter of 2009 we started selling a new Pay TV service using Direct-to-Home (DTH) technology, which entitles fixed-line clients to discounts. Video Oi TV TV subscribers numbered 234 thousand, up by 173 thousand in 2009, of whom 60 thousand were cable TV subscribers and 174 thousand were DTH subscribers. Following the July launch in Rio de Janeiro, the product was taken to four additional States (Minas Gerais, Rio Grande do Sul, Paraná and Santa Catarina). Oi expects to expand the service gradually to the whole of Brazil, and plans to offer Oi TV in the entire country by the end of

13 9 FINANCIAL PERFORMANCE OPERATING and Financial Summary TNL Consolidated Pro forma 2009 Operating indicators Users RGU**(thousand) 31,724 40,406 55,943 61,850 Wireline service 14,222 13,939 22,066 21,293 Wireless service 15,984 24,390 29,995 36,112 Broadband service 1,518 2,016 3,821 4,211 Oi TV **RGU: Revenue Generation Unit 13 Financial Information Gross revenue (R$ million) 25,153 27,197 43,962 45,708 Net revenue (R$ million) 17,584 18,736 29,947 29,881 EBITDA (R$ million) 6,517 6,068 10,011 7,315 EBITDA recurring (R$ million) 6,348 6,451 10,249 9,864 EBIT (R$ million) 3,899 3,249 5,099 1,609 Net income (R$ million) 2,318 1,154 1, Shareholder s equity (R$ million) 10,658 9,591-7,994 Gross debt (R$ million) 9,442 20,245 24,702 29,918 Net debt (R$ million) 2,733 9,506 12,351 21,889 Capex (R$ million) 2,328 4,643 7,322 5,108 Financial indicators Earnings per share (R$) Book value per share (R$) EBITDA margin (%) 37.1% 32.4% 33.4% 24.5% EBITDA margin recurring (%) 36.1% 34.4% 34.2% 33.0% Net margin (%) 13.2% 6.2% 3.6% -1.5% Return on shareholder s equity (%) 23.6% 11.4% - - Consolidated gross revenue amounted to R$45,708 million in 2009 from R$43,962 million in 2008 (+4.0%). For another year, the increase occurred due to the expansion of mobile services and data communication services, which together already account for 40.9% of consolidated gross revenue in the year. Consolidated net revenue totaled R$29,881 million, stable compared to Gross revenue from wireline services rose 1% in In this segment, revenue from data services was 17.9% higher compared to In the year, revenue from data service, additional services and advanced voice were the main growth levers for fixed segment revenue, compensating for the revenue shortfall in the remaining traditional services. The wireless segment was another source of growth as revenue rose 16.5% in the year (R$1,401 million). The highlights of 2009 were: Subscription revenue (+26.0%) given the growth in the average user base in the post-paid segment, combined with greater minute packages; Higher revenues from outgoing calls (+7.5%) resulted also from the expansion of the average customer base; Remuneration for network use rose 13% in the year as a result of a higher average user base, mainly in Regions II and III. It must be noted that this revenue also benefits from higher traffic because of the addition of calls to fixed operators in the bonus offered by mobile service companies. Therefore, the user utilizes the credits on calls to other mobile companies. Value-Added Data Services revenue rose 73% in the year as a result of the increase in SMS volume and data subscription by 3G customers.

14 14 Wireless service revenue accounted for 21.6% of the total consolidated gross revenue (19.3% in 2008) and represented 80% of annual growth for the total consolidated revenue. Operating expenses (ex. depreciation/amortization) totaled R$22,567 million. The R$2,631 million year-on-year increase (+13.2%) results mainly from: Personnel expenses (+9.4%): non-recurring expenses in the restructuring process for the integration of Oi and BrT, as well as the program to encourage the retirement of employees who have worked at the company for more than 20 years; Third-Party Services (+9.2%): higher spending on call center, especially due to the startup in São Paulo, the redistribution of call center positions and the compliance of services with the new law for the sector. Higher spending on plant maintenance and sales commissions related mostly to the operations in São Paulo must also be noted; Cos of SMP handsets and others (+19.6%): amortization of deferred subsidies on post-paid plans, partially offset by lower spending on headset sales because of the strategy of selling sim cards without handsets in Region II, in a bid to reduce the acquisition cost for customers; Provision for bad debts (+12.2%): increase due to the standardization of accounting practices at TMAR and BrTO. In 2009, non-recurring costs amounted to R$906 million and are classified as follows: Spending on Oi-BRT tie up; Expenses related to the amortization of deferred subsidies on post-paid handsets (non-cash); Other non-recurring expenses (written-down assets and deposits in court, PAES and others). It is important to stress that the accounting practices used during the consolidation made it necessary for TNL Consolidated to reflect the effect from minority interest on the contingency provision carried out at Brasil Telecom throughout This produced an accounting impact that did not affect the company s cash or net result. This generated additional nonrecurring expenses that amounted to 1.6 billion reais. In 2009, consolidated recurring Ebitda amounted to R$ 9,864 million. Recurring margin in the year equaled 33.0%, in a 1.2 percentage point reduction from The 2009 EBITDA was also hit by additional recurring costs related to mobile operations in São Paulo and the standardization of accounting practices at Oi and BRT. Without this impact, 2009 EBITDA would have been stable compared to the recurring EBITDA in The company ended the year with a negative net result of R$436 million, basically as a result of: Lower EBITDA due to the impact of non-recurring effects mentioned earlier; Increase in depreciation and amortization stemming from the start of the amortization of goodwill from the acquisition of BrT; Higher net financial expenses because of a greater average debt volume; Temporary fiscal distortion during the year, given that the amortized premium relating to the acquisition of BrT could not be compensated for through taxes during much of the year. Result of the Subsidiaries TMAR, TNL PCS and BrTO Consolidated net revenue at TMAR was stable in 2009, while recurring EBITDA in 2009 equaled R$9,921 million, which represented a 33.3% recurring margin. Net was negative by R$595 million; TNL PCS (Oi Mobile) reached in 2009 an EBITDA of R$ 1,756 million, amounting to 3.4% growth in the year. This figure includes non-recurring items that had a negative impact on EBITDA in the amount of R$ 223 million due to the end of the deferral of handset subsidies, in addition to the operations in São Paulo, which are still at the beginning stage. TNL PCS had net earnings of R$541 million in the year (-11.5%). In 2009, net revenue at BrTO reached R$ 10,879 million (-6.1%). Recurring EBITDA amounted to R$4,047 million, with a recurring margin of 37.2%. Net income was negative by R$1,142 million;

15 annual report 2009 Result of the Subsidiaries TMAR, TNL PCS and BrTO Pro forma 2009 TMAR Consolidated Net Revenue (R$ million) 17,572 18,665 29,877 29,812 EBITDA (R$ million) 6,542 6,109 10,052 7,371 EBITDA margin 37.2% 32.7% 33.6% 24.7% EBITDA recurring (R$ million) 6,373 6,492 10,290 9,921 EBITDA margin recurring (R$ million) 36.3% 34.8% 34.4% 33.3% Net Income (R$ million) 2,889 1,521 1, BRTO Consolidated Net Revenue (R$ million) 11,059 11,581 10,879 EBITDA (R$ million) 3,786 4, EBITDA margin 34.2% 35.0% 6.5% EBITDA recurring (R$ million) - 3,912 4,047 EBITDA margin recurring (R$ million) % 37.2% Net Income (R$ million) 484 1,030-1,143 Oi MOBILE (TNL PCS) Net Revenue (R$ million) 4,195 5,208 7,169 EBITDA (R$ million) 1,155 1,698 1,756 EBITDA margin 27.5% 32.6% 24.5% Net Income (R$ million)

16 10 CAPITAL EXPENDITURE CAPITAL EXPENDITURE Pro forma 2009 Change Year (%) Wireline Services (R$ Million) 1,760 2,015 3,550 2, Expansion and Quality (R$ Million) ,483 1, Data / Communic. Syst. / Other (R$ Million) 1,244 1,255 2,067 1, Wireless Services (R$ Million) 568 2,628 3,772 2, Expansion and Quality (R$ Million) 437 1,634 2,290 2, G / 3G Authorizations (R$ Million) , TOTAL (R$ Million) 2,328 4,643 7,322 5, In 2009, consolidated capital expenditure totaled R$ 5,108 million, in line with the initial budget, accounting for 17.1% of net revenue in the year (24.4% in 2008). This figure represents a 30.2% reduction from the prior year. However, capital expenditure in 2008 was hit by approximately R$2 billion due to the acquisition of 3G licenses and the improvement of the switching centers for the introduction of number portability. Capex in 2009 was mostly earmarked to the wireline segment (50.4%), mainly broadband. Operating Capital Expenditure The integration of TMAR and BrTO led to optimization synergies, service consolidation and a reduction in network-related investments. Wireline Services In 2009, the fixed lines and public telephones in service totaled more than 21 million terminals, which are supported by more than 5,600 commutation centers. The Commutated Fixed Telephone Service network at Oi covers 4,844 Brazilian cities, or approximately 77% of the population and 87% of the country s cities. During 2009 we worked on the integration of the commutation networks of TMAR and BrTO. Meanwhile, equipment featuring the NGN (Next Generation Network) technology was purchased mainly as a result of regulatory demands related to number portability, making up about 400 thousand users benefiting from higher efficiency with the utilization of an IP network-based infrastructure to carry and control calls, and the possibility to offer new convergent services. In 2009 Oi added the services Oi Conta Total, long distance plans, Oi Velox and Oi TV to its offers for customers in the fixed segment. Wireless Segment: After integrating the mobile networks, Oi started to have a nationwide coverage, offering voice and data services in the wi- reless segment in all the concession regions. This consolidation was important to standardize services and to integrate operations. In 2009, significant capital expenditure expanded the reach and capacity of the 2G and 3G networks in the whole of Brazil. At present, the mobile network covers Brazil s 26 States and the Federal District. The second generation mobile network (2G) spans 2,766 cities (49.7% of all cities in the country) through 11,577 2G Radio Base Stations. The third generation mobile network (3G) is available in 171 cities, 24 States and in the Federal District, via 4,124 3G Radio Base Stations, which provide broadband speeds of up to 14 Mbps. Oi unified the control center for voice and data, including network operation and management activities. The start of the integrated activities contributed to an increase in net additions of new users. As a result, the base for mobile terminals at Oi reached more than 35 million users in The service platforms were integrated to allow the unification of Oi s offers in every concession region. The new prepaid mobile plans were also added to a single services framework. The platforms for text messaging and multimedia were consolidated with a focus on reducing operating costs and improving service. Broadband In 2009, the xdsl networks of BrTO and TMAR were integrated to offer the Oi Velox service in the residential and corporate markets. The ADSL/ADSL2+ networks enabled the unification of offers and as a result Oi ended the year with an installed base of 3.1 million users in Region I and 2.5 million users in Region II for fixed broadband services up to 14 Mbps. Another gain from the unification was the offer of plans as fast as 8 Mbps and 14 Mbps at the new network plant for ADSL2+. In addition to the evolution of the xdsl network in 2009, the Ultra Broadband service was developed following the implementation and offer of VDSL2 at 20 Mbps in six cities in Region I and in five cities in Region II. To this end, the model for approaching broadband customers was changed by shortening the access network between the customer and the first active plant element, with the utilization of FTTN technology (Fiber-to-the-Node).

17 annual report 2009 Concerning ultra broadband services for up to 100 Mbps, the utilization of fiber optic for FTTH users (Fiber-to-Home) was developed in three Region I cities and five Region II cities. IP Network The backbone-ip integration consolidates Oi s capacity in offering unified and convergent services nationwide. The platform integration reduced costs and made operations more efficient, improving customer service and diversifying and customizing services. Oi s IP network is present in the whole of Brazil with nine highcapacity presence spots in the States of Bahia, Ceará, Minas Gerais, Pernambuco, Paraná, Rio de Janeiro, Rio Grande do Sul, São Paulo and Distrito Federal with 240 Gbps capacity for national traffic and 132 Gbps of international capacity. The integration and the increase in the IP backbone capacity lead to the introduction of larger, countrywide projects. The IP network is fundamental in traditional services (Internet access) as well as in corporate services and in monitoring market trends such as Ultra Broadband and IPTV. Transport Network The integration of the transport networks of Oi and Brasil Telecom resulted in a fiber optic network covering virtually all the national territory, in addition to connecting internationally to United States, Venezuela and Bermuda. There are more than 176,000 km distributed in an international backbone (Globenet): 23,340 km; national backbone: 32,584 km and Inter-State/Metropolitan Networks: 120,261 km. For this fiber optic plan, new transmission equipment was implemented at the main canters in Regions I, II and III through the Transportation Synergy Project, providing service connectivity in all of the company s covered areas. Also, we increased the level of availability with the creation of alternative routes for traffic, though connections between the networks of Brasil Telecom and Oi. Complementing the Optical Transport Network, Oi ended 2009 with a 1,973 MHz capacity for Satellite System service, providing the means of transport for the Northern region, in addition to services related to the General Target Plan for Universal Access. Currently, Oi s Transport Network has a great capacity and quality to handle traffic demanded by the services that the company offers. The network s core, which involves Rio de Janeiro, São Paulo, Belo Horizonte, Brasília and Curitiba, has an average capacity of 330 Gbps. with Telefónica for sharing the Head End structure in obtaining and feeding the signal via satellite, although Oi has its own exclusive content. During 2009 we also unified the central Head End for Oi s video platform (for several video distribution formats), including a video management center at Oi in Rio de Janeiro. In 2009, Oi started to integrate the mobile video platforms of Brasil Telecom in order to offer Oi TV in the 3G market. As a result, the integration of the programs began in order to offer this service across the entire area covered by the Company s 3G mobile plant. Investment in Research and Development Since its creation, Oi has differentiated itself through innovation. Innovation is in the DNA of Oi and its employees, always focused on new solutions and supplying real benefits to its customers, which translate into better results for the company and its shareholders. The company created an area to manage innovation and Research & Development, aiming to coordinate and foster the efforts and projects developed at the company. Based on the open innovation concept, Oi signed in 2009 agreements for cooperation and technology development with four research centers (PUC-RJ, CPqD Foundation, Certi Foundation and C.E.S.A.R) and with Braziliancompanies specializing in telecom equipment (Digitel and Padtec). Capital expenditure in Innovation and Research & Development in 2009 amounted to R$83.5 million. 17 Pay TV In 2009, the cable TV network plant (HFC) went digital in Belo Horizonte. This leads to savings in frequency, with the potential to offer new services using the same infrastructure. The replacement of the analog STB (Set Top Box) for digital ones will remain in This network has installed capacity for approximately 350 thousand homes passed. During the year, Oi s TV service was launched using DTH technology, including satellite channels. This access uses the Amazonas 2 satellite for nationwide coverage that could become continent-wide. The video is distributed in a partnership

18 11 DEBT Consolidated net debt rose R$12,383 million in the period, ending the year at R$21,889 million. At the end of 2009, consolidated gross debt totaled R$ 29,918 million, or R$ 9,673 million higher than December Due to several currency hedge operations, just 0.8% of the total debt was exposed to foreign currency volatility. We highlight that our debt in foreign currencies falling due through March 2012 is covered by hedge contracts and cash investments in dollars. In the year, the effective cost of debt including hedge operations was 10.6% p.a. (107% of the CDI rate). In the period, the cost of debt in absolute terms was helped by the appreciation of the real against other currencies, which reduced the cost of debt still exposed to foreign currencies. The drop in interest rates in Brazil in 2009 has also been contributing positively to lower the effective cost of debt, provided that much of the debt was linked to floating rates. debt 18 Dec/07 Dec/08 Dec/09 Gross Debt Change Year Short Term 2,066 3,956 8, % 116.2% Long Term 7,376 16,288 21, % 31.2% Total Debt 9,442 20,245 29, % 47.8% Local Currency 5,291 15,918 24, % 50.3% Foreign Currency 2,826 3,818 4, % 18.0% Swap 1, , % 114.4% Cash (6,710) (10,739) (8,029) 26.8% -25.2% Net Debt 2,733 9,506 21, % 130.3%

19 12 CAPITAL MARKETS AND SHAREHOLDER STRUCTURE For the second consecutive year, Oi was included in the Corporate Sustainability Index of BM&FBovespa, which will be in force until November 30, In the 2009/2010 portfolio, 34 BMF&Bovespa-traded companies that stood out for their commitment to sustainable development were selected. Being once more part of this select group reasserts Oi s commitment to the adoption of the best Corporate Governance practices, a continuous process that is aimed at the company s sustained growth. Capital In 2009, the company s capital of R$5,448,730, was represented by million shares, of which million were ON common shares and million were PN preferred shares; SHAREHOLDER POSITION TNL - Tele Norte Leste Participações S.A. Shares Capital Treasury Controlling Shareholders Free Float Common 130,611,732 3,036,149 68,504,187 59,071,396 Preferred 261,223,463 6,275, ,947,737 Total 391,835,195 9,311,875 68,504, ,019, TMAR - Telemar Norte Leste S.A. Shares Capital Treasury Controlling Shareholders Free Float Common 107,063, ,227,873 2,835,220 Preferred A 130,487, , ,329,417 25,934,378 Preferred B 1,063, ,063,961 Total 238,614, , ,557,296 29,833,559 BRT Brasil Telecom S.A. Shares Capital Treasury Controlling Shareholders Free Float Common 203,423, ,990,001 41,433,176 Preferred 399,597,370 13,231, ,675, ,690,765 Total 603,020,546 13,231, ,665, ,123,941 Note: Position as December 31, 2009 Our Shares The vigorous fiscal and monetary stimulus from the main G10 governments boosted the global economic recovery. As the financial and capital markets were flush with liquidity and had low opportunity costs offered by the central banks of countries hit by the 2008 crisis, the Brazilian stock market became the favorite destination of foreign investors as far as emerging markets are concerned. As a result, the Ibovespa ended 2009 up by 82.7%. As a rebound in the domestic economy is expected, defensive plays were exchanged for actions aimed at faster growth, thus taking advantage of the recovery in economic growth. Amid this scenario, Oi s stock, which outpaced the Ibovespa in 2008, underperformed the index in Preferred and common shares at Tele Norte Leste, the holding company, ended the year at R$ 36.6 and R$ 44.7, gaining 33.4% and 23.6%, respectively. On the New York Stock Exchange (NYSE), the ADRs rose 83.9% and outperformed the preferred stock, or PNs, on the local market basically as a result of the dollar devaluing against the real by 25.5%. Investor Relations The Investor Relations (IR) area at Oi aims to develop and execute an adequate and consistent policy of information transparency and disclosure, in addition to fostering close relationships with analysts and investors, and being the main communication channel between the company and capital market agents, in Brazil and abroad.

20 Activities carried out by the IR area include meetings with national and international investors, meetings at the Association of Capital Market Analysts (Apimec in Portuguese) and participation in conferences and road shows in Brazil and abroad, as well as congresses for investment and capital markets professionals. In 2009 we highlight the participation in: 13 conferences and five road shows in Brazil and abroad, having gathered with 678 investors and analysts; Countless meetings with small groups of investors reached 277 participants as well as; six public meetings at Apimec in São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Fortaleza and Porto Alegre. Dividend Distribution and Interest on Capital The Administration of Tele Norte Leste Participações S.A. (TNLP) will submit to the Ordinary General Meeting, to take place in April, a proposal to pay R$1.2 billion as dividends, based on Profit Reserve, amounting to approximately R$3.13 per ON and PN share. 20