##### Table of Contents



As
filed with the Securities and Exchange Commission on June 29, 2007
   SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended: December 31, 2006
 Commission file number: 000-51490
 CONTAX PARTICIPAÇÕES S.A.
  Contax Holding Company
(Translation of Registrants Name into English)
    
    The Federative Republic of Brazil
(Jurisdiction of Incorporation or Organization)
 
 Rua do Passeio 56, 16o andar (parte)
20021-290 Rio de Janeiro  RJ  Brazil
 
   Title of Each Class
    
    Name of Each Exchange on Which RegisteredPreferred Shares, without par value (preferred shares)
    
    BovespaCommon Shares, without par value (common shares)
    
    Bovespa
 None
 
  242,798,700 preferred shares
 121,345,917 common shares
 o þ
 o þ
 þ o
  o o þ
 o þ
 o þ




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##### Table of Contents



TABLE OF CONTENTS
  
 PagePRESENTATION OF INFORMATION
    
    
    1FORWARD-LOOKING INFORMATION
    
    
    3PART I
    
    
    4Item 1. Identity of Directors, Senior Management and Advisers
    
    
    4Item 2. Offer Statistics and Expected Timetable
    
    
    4Item 3. Key Information
    
    
    4Item 4. Information on the Company
    
    
    25Item 4A. Unresolved Staff Comments
    
    
    47Item 5. Operating and Financial Review and Prospects
    
    
    47Item 6. Directors, Senior Management and Employees
    
    
    65Item 7. Major Shareholders and Related Party Transactions
    
    
    75Item 8. Financial Information
    
    
    79Item 9. The Offer and Listing
    
    
    84Item 10. Additional Information
    
    
    89Item 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    113Item 12. Description of Securities Other Than Equity Securities
    
    
    114PART II
    
    
    114Item 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    114Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    114Item 15. Controls and Procedures
    
    
    114Item 16. [Reserved]
    
    
    116Item 16A. Audit Committee Financial Expert
    
    
    116Item 16B. Code of Ethics
    
    
    116Item 16C. Principal Accountant Fees and Services
    
    
    116Item 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    117Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    118PART III
    
    
    120Item 17. Financial Statements
    
    
    120Item 18. Financial Statements
    
    
    120Item 19. Exhibits
    
    
    120EX-1.2: AMENDMENT TO THE BY-LAWS OF CONTAX HOLDINGEX-1.3: AMENDMENT TO THE BY-LAWS OF CONTAX HOLDINGEX-1.4: AMENDMENT TO THE BY-LAWS OF CONTAX HOLDINGEX-1.5: CONSOLIDATED VERSION OF THE BY-LAWS OF CONTAX HOLDINGEX-4.4: THIRD AMENDMENT TO THE SERVICES AGREEMENTEX-4.9: AMENDMENT TO THE CONTACT CENTER SERVICE AGREEMENTEX-4.10: AMENDMENT TO THE CONTACT CENTER SERVICES AGREEMENTEX-4.11: AMENDMENT TO THE CONTACT CENTER SERVICE AGREEMENTEX-4.12: AMENDMENT TO THE CONTACT CENTER SERVICE AGREEMENTEX-12.1: CERTIFICATIONEX-12.2: CERTIFICATIONEX-13.1: CERTIFICATIONS
 i




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PRESENTATION OF INFORMATION
 sociedade por ações
   real reais
 reais reais reais
  1




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Comissão de Valores
Mobiliários
   2




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FORWARD-LOOKING INFORMATION
  
    
    the growth in the Brazilian outsourcing contact center sector; and
    
    the performance of the Brazilian economy in general.
  
    
    our future operations performance;
    
    the demand for our services;
    
    competitive factors in the sector in which we compete;
    
    changes in the regulatory framework for our clients in the telecommunications, utilities
and financial sectors in Brazil;
    
    changes in labor law and tax requirements;
    
    economic, business and political conditions in Brazil and in the international markets,
including governmental changes and restrictions on the ability to transfer capital across
borders; and
    
    the impact of fluctuations in the price of our shares.
 
 3




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##### Table of Contents



PART I
 
 Item 1. Identity of Directors, Senior Management and Advisers
  
 Item 2. Offer Statistics and Expected Timetable
  
 Item 3. Key Information
 Selected Financial Data
 reais reais
 Selected Financial Data
 Year ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands of reais, except per share data)Statement of Operations DataNet operating revenue from services rendered
    
    
    1,218,583
    
    
    
    1,044,787
    
    
    
    654,616
    
    
    
    410,690
    
    
    
    211,660Cost of services rendered
    
    
    (1,037,353
    )
    
    
    (855,907
    )
    
    
    (574,071
    )
    
    
    (334,751
    )
    
    
    (181,161
    )Gross profit
    
    
    181,230
    
    
    
    188,880
    
    
    
    80,545
    
    
    
    75,939
    
    
    
    30,499Operating expenses
    
    
    (83,800
    )
    
    
    (71,840
    )
    
    
    (47,845
    )
    
    
    (31,234
    )
    
    
    (21,444
    )Operating income
    
    
    97,430
    
    
    
    117,040
    
    
    
    32,700
    
    
    
    44,705
    
    
    
    9,055
 4




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Year ended December 31,2006
    
    2005
    
    2004
    
    2003
    
    2002(in thousands of reais, except per share data)Financial income (expenses) net
    
    
    18,405
    
    
    
    14,352
    
    
    
    (4,662
    )
    
    
    (2,141
    )
    
    
    (6,923
    )Income from continuing operations*
    
    
    77,681
    
    
    
    81,240
    
    
    
    16,470
    
    
    
    61,240
    
    
    
    1,336Loss from discontinued operations*
    
    
    
    
    
    
    
    
    
    
    (9,667
    )
    
    
    (59,336
    )
    
    
    (68,089
    )Net income (loss) and comprehensive income (loss) for the
year
    
    
    77,681
    
    
    
    81,240
    
    
    
    6,803
    
    
    
    1,904
    
    
    
    (66,753
    )Earnings (Loss) per Share (inreais)**Income from continuing operations
Common shares  basic and diluted
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16
    
    
    
    Preferred shares  basic and diluted
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04
    
    
    
    0.16
    
    
    
    Net income (loss) Common shares -
basic and diluted (i)
    
    
    0.21
    
    
    
    0.21
    
    
    
    
    
    
    
    
    
    
    
    (0.18
    )Preferred
shares  basic and diluted (i)
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.03
    
    
    
    0.01
    
    
    
    (0.17
    )Weighted average common shares
outstanding  basic and diluted
    
    
    125,286,067
    
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917
    
    
    
    127,373,917Weighted average preferred shares
outstanding  basic and diluted
    
    
    250,644,625
    
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800
    
    
    
    254,747,800Balance Sheet DataCash and cash equivalents
    
    
    231,299
    
    
    
    229,488
    
    
    
    85,152
    
    
    
    33,268
    
    
    
    4,366Property and equipment, net
    
    
    309,727
    
    
    
    265,379
    
    
    
    182,936
    
    
    
    105,492
    
    
    
    225,690Total assets
    
    
    683,275
    
    
    
    620,466
    
    
    
    406,052
    
    
    
    326,333
    
    
    
    282,829Current liabilities
    
    
    234,458
    
    
    
    203,080
    
    
    
    111,289
    
    
    
    197,047
    
    
    
    47,273Long-term liabilities
    
    
    77,295
    
    
    
    56,831
    
    
    
    14,089
    
    
    
    3,093
    
    
    
    226,877Shareholders equity
    
    
    371,522
    
    
    
    360,555
    
    
    
    280,674
    
    
    
    126,193
    
    
    
    4,129Total liabilities and shareholders equity
    
    
    683,275
    
    
    
    620,466
    
    
    
    406,052
    
    
    
    326,333
    
    
    
    282,829Cash Flow DataOperating activities (continuing
operations*)
    
    
    139,257
    
    
    
    219,889
    
    
    
    71,387
    
    
    
    88,272
    
    
    
    18,019Operating activities (discontinued
operations*)
    
    
    
    
    
    
    
    
    
    
    (30,945
    )
    
    
    (26,449
    )
    
    
    (6,449
    )Financing activities
    
    
    (70,544
    )
    
    
    (5,297
    )
    
    
    109,336
    
    
    
    4,406
    
    
    
    53,861Investing activities (continuing
operations*)
    
    
    (66,902
    )
    
    
    (87,467
    )
    
    
    (97,894
    )
    
    
    (42,224
    )
    
    
    (59,139
    )Investing activities (discontinued
operations*)
    
    
    
    
    
    
    17,211
    
    
    
    
    
    
    
    4,895
    
    
    
    (5,238
    )
 (i)
    
    Previously reported net income EPS amounts for
the year ended December 31, 2004 where 0.02 and 0.02 for common
and preferred shares, respectively.
 5




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*
    
    Discontinued operations relate to data center activities. See Note 18 to our
Consolidated and Combined Financial Statements.**
    
    The computation of earnings per share for the years ended December 31, 2005, 2004, 2003 and
2002 is based on the number of shares outstanding of Contax Holding on the date of the
spin-off, as described in Note 3 to our Consolidated and Combined Financial Statements. Exchange Rates
 reais reais real
 Banco Central do Brasil
 6




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PM 315 Conselho Monetário Nacional  CMN
 reais
 AveragePeriod
    
    Period-end
    
    for period
    
    High
    
    Low2002
    
    
    3.5333
    
    
    
    2.9309
    
    
    
    3.9552
    
    
    
    2.27092003
    
    
    2.8892
    
    
    
    3.0715
    
    
    
    3.6623
    
    
    
    2.82192004
    
    
    2.6544
    
    
    
    2.9259
    
    
    
    3.2051
    
    
    
    2.65442005
    
    
    2.3407
    
    
    
    2.4125
    
    
    
    2.7621
    
    
    
    2.16332006
    
    
    2.1380
    
    
    
    2.1771
    
    
    
    2.3711
    
    
    
    2.0586January 2007
    
    
    2.1247
    
    
    
    2.1385
    
    
    
    2.1556
    
    
    
    2.1247February 2007
    
    
    2.1182
    
    
    
    2.0963
    
    
    
    2.1182
    
    
    
    2.0766March 2007
    
    
    2.0504
    
    
    
    2.0887
    
    
    
    2.1388
    
    
    
    2.0504
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AveragePeriod
    
    Period-end
    
    for period
    
    High
    
    LowApril 2007
    
    
    2.0339
    
    
    
    2.032
    
    
    
    2.0478
    
    
    
    2.0231May 2007
    
    
    1.9281
    
    
    
    1.9808
    
    
    
    2.0301
    
    
    
    1.9281June 2007 (through June 22nd )
    
    
    1.9334
    
    
    
    1.9299
    
    
    
    1.9638
    
    
    
    1.9047
 
 *  Average of the rates on each day in the period.Source:
    
    Central Bank of Brazil. nd
 Risk Factors
  8




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Risks Relating to Our Business
 A large portion of our revenues originates from a limited number of clients, and the loss of one or
more of these clients could significantly impact our financial condition.
 
   If the trend toward outsourcing of contact center services were reversed, the growth rate of our
business could be reduced.
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Increases in the use of automated customer services could reduce the demand for our services.
  Our ability to recruit, motivate and retain qualified management and operators could affect the
quality of our services, which could impact our ability to attract new clients and retain existing
ones.
  10




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Our inability to pass through cost increases could seriously harm our profit margins.
  Our operating results may be harmed if we are unable to maximize our contact center capacity
utilization.
     11




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If our clients are not successful, the amount of business they outsource may be diminished and
could result in lower revenues for us.
   The failure to keep our technology up to date may prevent us from remaining competitive.
   Interruption of our contact center services could have a material adverse effect on our financial
condition and results of operations.
  12




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Breaches of our contact center service contracts could expose us to significant monetary penalties.
    13




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We may be unable to achieve the same performance levels we have been experiencing with our
performance-based compensation contracts.
  We may be responsible for labor liabilities which could have an adverse effect on our
profitability.
  14




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Our business is highly competitive and our failure to effectively compete could result in the loss
of clients or decreased profitability.
   Telemar Participações holds the majority of our voting shares and there may be circumstances in
which its interests differ from or conflict with the interests of our other shareholders.
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We may be liable for fraudulent activities or misappropriation of our clients information by our
employees or third parties.
  Risks Relating to Brazil
 The Brazilian government has exercised, and continues to exercise, significant influence over the
Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could
adversely impact our business, operations and the market price of our shares and ADSs.
  
    
    devaluations and other currency fluctuations;
    
    inflation rates;
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
    
    interest rates;
    
    liquidity of domestic capital and lending markets;
    
    energy shortages;
    
    exchange controls and restrictions on remittances abroad (such as those that were briefly
imposed in 1989 and early 1990);
    
    monetary policy;
    
    tax policy; and
    
    other political, diplomatic, social and economic developments in or affecting Brazil.
   Inflation and certain government measures to curb inflation may have adverse effects on the
Brazilian economy, the Brazilian securities market, our business and operations and the market
price of the shares.
 17




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real Índice Geral de Preços-Mercado Fundação Getúlio Vargas Índice Geral de Preços
- Disponibilidade Interna Índice Nacional de Preços ao Consumidor Ampliado Instituto Brasileiro de Geografia e Estatística
  Changes in Brazilian labor law may negatively affect us.
 Consolidação das Leis do Trabalho
  18




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Regulatory proposals, such as the creation of a do not call list, could restrict our contact center services.
  Exchange rate instability may adversely affect our financial condition.
 real real real real
 real real
 19




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We may be unable to convert reais into U.S. dollars to make dividend distributions to our ADS holders.
 reais
 Economic and market conditions in other emerging market countries may adversely affect the
Brazilian economy and, therefore, the market value of our common shares and ADSs and our ability to
access the capital markets.
  Risks Relating to the ADSs and the Preferred Shares
 You may not be able to sell the ADSs or preferred shares at the price or time you desire because an
active or liquid market for the ADSs or the preferred shares will not likely develop.
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The relative volatility and illiquidity of the Brazilian securities markets may substantially limit
your ability to sell the preferred shares underlying the ADSs at the price and time you desire.
  Holders of preferred shares and ADSs have limited voting rights.
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Holders of ADSs are not entitled to attend shareholders meetings and may only vote through the
Depositary.
  Holders of ADSs may have fewer and less well-defined shareholders rights than shareholders of U.S.
public companies.
    Holders of ADSs or preferred shares may not receive any dividends.
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Exchange controls and restrictions on remittances abroad may adversely affect holders of ADSs.
 reais reais
 Dividends received by United States individuals will not be qualified dividend income eligible
for a 15% tax rate.
  23




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If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit
foreign currency abroad and certain Brazilian tax advantages.
   Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to the disposition
of the ADSs or preferred shares.
  24




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Holders of ADSs may be unable to exercise preemptive rights with respect to our shares.
  Holders of ADSs may face difficulties in serving process on or enforcing judgments against us and
other persons.
  
 Item 4. Information on the Company
 History and Organizational Structure
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sociedade por ações
 sociedade por ações
     26




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27




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Overview
     Industry Overview
  28




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Associação Brasileira das Relações Empresa Cliente
 29




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
    
    Increasing importance for companies to retain and enhance customer relationships;
    
    Increasing need for companies to focus on core competencies rather than non-revenue producing activities;
    
    Rapid changes in technology requiring personnel with specialized technical expertise and
continued investment in new contact center equipment and services;
    
    Increasing need to integrate and manage complex systems incorporating a variety of
hardware and software systems spanning a number of technology generations; and
    
    Extensive and ongoing training requirements.
  
    
    Increase in telephony penetration.Prior to Brazils privatization of state-owned
telecommunications companies in 1998, telephony penetration in Brazil was very low, limiting
the use of contact centers as an effective way to deliver customer service on a broad basis.
Today, a larger portion of the Brazilian population can access customer services in general
through different communication channels, including both mobile and fixed-line terminals.
According to the Brazilian telecommunications regulatory agency (Agência Nacional de
Telecomunicações), or Anatel, total wireline and wireless penetration grew from 42.8 million
in 1999 to 151 million in 2006.
    
    Expansion of contact center-intensive service sectors due to economic stabilization and
privatization.In the mid-1990s, Brazil implemented successful economic reforms which
created a stable macro-economic environment, spurring the growth of financial services and,
consequently, the consumer base of these companies. Brazil concurrently privatized large
state-owned service providers in the telecommunications, electric, water and gas sectors,
which brought about large investments and a rapid growth in customers.
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
    
    Pressure to reduce costs.Pricing pressures from competition and shareholder demands for
higher returns have forced Brazilian companies to streamline personnel, through
restructuring and outsourcing, and make other cost reductions, including reducing
face-to-face customer services.
   Our Strategy
   31




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Customer service:
 Debt collection
 Telemarketing
  Human resources
 32




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Operational model:
 IT systems
 Commercial model:
  Competition
   33




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
    
    Atento.Atento is a part of the Spanish group Telefonica, which in Brazil controls a
large fixed-line operator (Telesp), an Internet provider (Terra) and, together with Portugal
Telecom, Brazils leading mobile operator (Vivo). Atento has operated in the Brazilian
market since 1999. After acquiring several companies in the sector, they became one of the
largest contact center services providers in Brazil. Two of Atentos major clients are
Telefônica and Unibanco.
    
    Teleperformance.Teleperformance is a French company that operates in approximately 36
countries. In 2004, Teleperformance increased its Brazilian operations by merging with
Companhia Brasileira de Contact Center, after which Teleperformance became one of the
largest contact center service providers in Brazil. Two of Teleperformances major clients
are Brasil Telecom group (one of Brazils largest
telecommunications operators and comparable
to Telemar in size and breadth of services) and Gol (one of Brazils largest airlines).
 34




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
    
    ACS.Controlled by Algar Group, a diversified Brazilian conglomerate, ACS was founded in
1999 with headquarters located in Uberlândia in the state of Minas Gerais. We believe ACSs
two main clients are CTBC (a telecom operator in Uberlândia that is part of the Algar Group)
and American Express Brazil.
    
    Brasil Center.Brasil Center is part of the Mexican group Telmex, which now controls
Embratel (one of Brazils largest telecommunications operators in long distance and data
services), and Claro (a subsidiary of America Movil and one of
Brazils largest mobile operators). To date, Brazil Center has not actively pursued the contact center services
market outside their controlling group.
    
    Dedic.Dedic is part of the Portuguese group Portugal Telecom which controls, jointly
with Telefonica, Brazils largest mobile operator Vivo. Dedic primarily services, directly
or indirectly, Portugal Telecoms subsidiaries in Brazil.
 Our Business
     35




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
    
    Customer Care. Our customer care services range from simple customer assistance, such as
providing information about products and services, to more complex requests, such as: (i)
initial troubleshooting of interrupted services, (ii) handling billing inquiries, and (iii)
activating new services and/or monitoring the installation of the required equipment at the
customers site.
    
    Telemarketing. This service is primarily focused on outbound client acquisition,
up-selling and cross-selling of our clients products and services. Our telemarketing
services include prospect identification, campaign management and data mining. We also
provide inbound telemarketing services, which are executed in coordination with our clients
marketing campaigns. We are also implementing aggressive cross-selling sales strategies to
monetize each inbound customer service contact.
    
    Technical Support. We provide comprehensive technical product support for our clients
customers. For example, we handle troubleshooting calls of consumer products, respond to
software and hardware problems, provide support for ISPs dial-up and broadband customers,
and manage corporate IT help desks. For such services, we employ qualified personnel with
specialized technical training in dedicated teams.
    
    Retention.We provide our clients with customer retention services, whether by persuading
their end-customers not to cancel a service or by observing customer behavior and taking
preventive measures to avoid cancellation requests. We collaborate with our clients in order
to develop new scripts as well as new retention offers to improve the results of such
activities.
    
    Debt Collection. We design debt collection strategies together with our clients to
maximize results, while emphasizing customer retention. We participate from the early stages
of developing our clients collection strategy to the actual execution of the strategy,
using database filters (systems that prioritize contacts and determine the type of service
each customer will receive), predictive dialers and other automatic contact tools, such as
voice mail and text messages typically sent to wireless handheld devices, in order to
maximize the likelihood of customer contact and behavior models that enable us to categorize
customers risk and identify the most efficient techniques of interacting with customers. In
order to enhance our performance, we launch pilot programs to test the statistical
efficiency of specific tools and strategies.
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Year ended December 31,Services
    
    2006
    
    2005
    
    2004Customer Care
    
    
    54.0
    %
    
    
    57.7
    %
    
    
    64.2
    %Telemarketing
    
    
    12.3
    %
    
    
    11.9
    %
    
    
    10.6
    %Technical Support
    
    
    2.3
    %
    
    
    2.7
    %
    
    
    2.3
    %Retention
    
    
    3.9
    %
    
    
    3.6
    %
    
    
    3.8
    %Debt Collection
    
    
    15.3
    %
    
    
    13.2
    %
    
    
    11.8
    %Other
    
    
    12.3
    %
    
    
    10.9
    %
    
    
    7.3
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Markets and Clients
  
    
    Telecommunications. We provide a full range of contact center services to Oi/Telemar, our
largest client. Oi/Telemars operations include fixed line terminals, long-distance
services, mobile services, as well as broadband and corporate voice and data services. In
addition to traditional customer care services, we deliver extensive client retention and
debt collection services for Oi/Telemars retail and corporate customers. Because we have a
strong relationship with Telemar and because other telecom groups control their own contact
center companies, we have not actively pursued other opportunities in this sector.
    
    Financial Services.New financial products and service offerings have expanded our
opportunities in this sector. We provide a broad range of services to the credit card,
retail bank and insurance segments, as well as to consumer credit companies. This sector
continues to grow in importance for us since many financial institutions have in-house
operations that fit into our strategy of focusing on clients with high volume and highly
complex services.
    
    Utilities.There are several large companies in Brazil in the power, water and sewage,
and gas distribution segments. Currently, we provide services to a few power distribution
companies in the Southeast and Northeast regions of Brazil. We intend to continue to expand
our activities in this sector and our success could be enhanced if there is further
privatization in the water and sewage segment.
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
    
    Internet. We have developed specific end-to-end services for Internet service providers,
or ISPs, by servicing iG, Brazils largest ISP, and, more recently, Oi/Telemars new ISP
subsidiary. We are particularly interested in providing customer acquisition, retention and
technical support services to the growing number of broadband Internet access providers.
   Year ended December 31,Sector
    
    2006
    
    2005
    
    2004Telecommunications
    
    
    57.6
    %
    
    
    64.5
    %
    
    
    64.5
    %Financial Services
    
    
    31.5
    %
    
    
    27.4
    %
    
    
    27.6
    %Utilities
    
    
    1.9
    %
    
    
    1.5
    %
    
    
    1.4
    %Internet
    
    
    1.2
    %
    
    
    1.1
    %
    
    
    0.8
    %Other
    
    
    7.9
    %
    
    
    5.6
    %
    
    
    5.7
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Client Contracts
   38




---



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39




---



##### Table of Contents



Result Variance and Seasonality
    Human Resource Management
 40




---



##### Table of Contents



Facilities
   41




---



##### Table of Contents



Sites
    
    State
    
    # Work Stations
    
    # Employees
    
    Sq. Meters
    
    ExpirationPasseio*
    
    RJ
    
    
    4,116
    
    
    
    6,732
    
    
    
    24,924
    
    
    Sept. 30, 2010Niterói
    
    RJ
    
    
    1,327
    
    
    
    3,660
    
    
    
    13,624
    
    
    Dec. 31, 2009Makenzie
    
    RJ
    
    
    1,220
    
    
    
    3,211
    
    
    
    10,077
    
    
    Dec. 31, 2009Mauá**
    
    RJ
    
    
    830
    
    
    
    1,936
    
    
    
    9,702
    
    
    Feb. 28, 2013Antartica
    
    SP
    
    
    2,607
    
    
    
    5,854
    
    
    
    27,723
    
    
    May 31, 2009Paulista
    
    SP
    
    
    2,547
    
    
    
    5,645
    
    
    
    17,574
    
    
    Dec. 31, 2010Prado
    
    MG
    
    
    2,206
    
    
    
    4,720
    
    
    
    11,998
    
    
    Dec. 31, 2009Nova Lima
    
    MG
    
    
    237
    
    
    
    444
    
    
    
    977
    
    
    May 14, 2007C. da Pólvora
    
    BA
    
    
    1,266
    
    
    
    3,229
    
    
    
    7,757
    
    
    Dec. 31, 2009Comércio
    
    BA
    
    
    1,165
    
    
    
    2,918
    
    
    
    11,000
    
    
    March 31, 2009Borges de Mello
    
    CE
    
    
    2,166
    
    
    
    4,829
    
    
    
    15,246
    
    
    Dec. 31, 2010Príncipe***
    
    PE
    
    
    557
    
    
    
    1,143
    
    
    
    3,805
    
    
    Dec. 31, 2009Porto Alegre
    
    RS
    
    
    258
    
    
    
    664
    
    
    
    1,290
    
    
    Sept. 17, 2007
 42




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##### Table of Contents



Sites
    
    State
    
    # Work Stations
    
    # Employees
    
    Sq. Meters
    
    ExpirationDistrito Federal
    
    DF
    
    
    81
    
    
    
    128
    
    
    
    320
    
    
    May 14, 2007Contorno****
    
    MG
    
    
    730
    
    
    
    1,671
    
    
    
    7,290
    
    
    July 30, 2010Conquista***
    
    PE
    
    
    764
    
    
    
    1,688
    
    
    
    9,256
    
    
    June 26, 2011Rubens Meireles*****
    
    SP
    
    
    276
    
    
    
    552
    
    
    
    2,752
    
    
    July 2,2011Augusta *****
    
    SP
    
    
    54
    
    
    
    108
    
    
    
    2,863
    
    
    May 31, 2011Total
    
    
    
    
    
    
    22,407
    
    
    
    49,132
    
    
    
    178,178
 
 *
    
    Includes both contact center operations and our headquarters.**
    
    In June 2006, the contract with the Assembléia site expired, and the contact center operation
was transferred to a new site called Maua, which became operational in the middle of 2006.***
    
    The Boa Vista site was built in 2003 to be a back office center for fixed-line service. As it
became obsolete, and as we built new contacts centers in Pernambuco, this site was shut down
and the operation was transferred to other sites such as Principe and Conquista, which became
operational in September 2006. Conquista was built with state-of-art technology and
infrastructure, has a 900 workstation capacity and already handles significant operations.****
    
    In March 2006, the Contorno site also became operational with installed capacity of around
1,000 workstations, and it has absorbed some of the telemarketing services previously
provided at the Prado site.*****
    
    The sites Rubens Meireles and Augusta commenced operations in November and December,
2006. Information Technology
   43




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##### Table of Contents



obi
 
    
    the Information Technology Infrastructure Library (ITIL) , a framework of best
practice approaches intended to facilitate the delivery of high quality IT services. ITIL
outlines an extensive set of management procedures intended to support businesses in
achieving both quality and value, in a financial sense, in IT operations. These procedures
are supplier independent and have been developed to provide guidance across the IT
infrastructure, development, and operations.;
    
    the PMBOK, published by the Project Management Institute (PMI) and widely
accepted to be the standard in project management. The PMBOK documents information and
practices applicable to any type of project, not just IT related projects; and
    
    the Capability Maturity Model (CMM), a process improvement approach based on a
process model that can assess organizations against a scale of five process maturity
levels. Each level ranks the organization
 44




---



##### Table of Contents



according to its standardization of processes in the subject area being assessed, and the
subject areas can be as diverse as software engineering, systems engineering, project
management, risk management, system acquisition, IT services and personnel management.
 Capital Expenditures
  Year ended December 31,2006
    
    2005
    
    2004(in thousands of reais)Telecommunications and IT systems
    
    
    64,035
    
    
    
    75,564
    
    
    
    58,888Leasehold
improvements
    
    
    36,549
    
    
    
    37,392
    
    
    
    16,283Furniture and fixtures
    
    
    5,510
    
    
    
    8,552
    
    
    
    20,949Other
    
    
    2,764
    
    
    
    7,188
    
    
    
    6,550Total capital expenditures
    
    
    108,858
    
    
    
    128,696
    
    
    
    102,670
  Sales and Marketing
  45




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Insurance
   46




---



##### Table of Contents



Coverage Type
    
    Amount CoveredProperty damage
    
    R$64,160 thousandBusiness interruption
    
    R$52,310 thousandGeneral liability
    
    R$5,000 thousandDirectors and Officers liability
    
    U.S.$60,000 thousand
 Intellectual Property
 Instituto Nacional de
Propriedade Intelectual
 Núcleo de Informação e Coordenação do Ponto BR 
NIC.br
 
 Item 4A. Unresolved Staff Comments
  
 Item 5. Operating and Financial Review and Prospects
  47




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##### Table of Contents



Executive Overview
    
    
    the acquisition or loss of a major client;
    
    fluctuations in demand for our services;
    
    our ability to pass through to our clients increases in costs;
    
    our ability to efficiently manage our workforce productivity; and
    
    success or failure with respect to our performance-based services.
 Acquisition or Loss of a Major Client
  48




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##### Table of Contents



Fluctuations in Demand for Our Services
  Our Ability to Pass Through to Our Clients Increases in Total Costs
   Our Ability to Efficiently Manage Our Workforce Productivity
   49




---



##### Table of Contents



Success or Failure with Respect to Our Performance-Based Services
  Key Events in 2006
 Volume of operations
   50




---



##### Table of Contents



Share buyback programs
    Internal Controls
   51




---



##### Table of Contents



Critical Accounting Policies and Estimates
   
    
    revenue recognition;
    
    depreciation of property and equipment;
    
    payroll and related accruals;
    
    contingencies; and
    
    deferred and recoverable income tax and social contribution.
 Revenue Recognition
  52




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##### Table of Contents



Depreciation of Property and Equipment
   Payroll and Related Accruals
 décimo terceiro salário
  53




---



##### Table of Contents



Contingencies
   Labor Claims
 Tax Claims Instituto Nacional de
Seguridade Social
 54




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##### Table of Contents



Deferred and Recoverable Income Tax and Social Contribution
   Results of Operations
 Results of Operations for the Year ended December 31, 2006 compared with the Year ended December
31, 2005
 Period over
    
    Results as aPeriod over
    
    period
    
    percentage of net salesYear
    
    period
    
    percentage
    
    for the year endedended December 31,
    
    change
    
    change
    
    December 31,Favorable
    
    Favorable2006
    
    2005
    
    (unfavorable)
    
    (unfavorable)
    
    2006
    
    2005(in thousands of reais)Net operating revenues
of services rendered
    
    
    1,218,583
    
    
    
    1,044,787
    
    
    
    173,796
    
    
    
    17
    %
    
    
    100
    %
    
    
    100
    %Cost of services rendered
    
    
    (1,037,353
    )
    
    
    (855,907
    )
    
    
    (181,446
    )
    
    
    21
    %
    
    
    -85
    %
    
    
    -82
    %Selling, general and
administrative expenses
    
    
    (72,379
    )
    
    
    (59,742
    )
    
    
    (12,637
    )
    
    
    21
    %
    
    
    -6
    %
    
    
    -6
    %Other operating expenses, net
    
    
    (11,421
    )
    
    
    (12,098
    )
    
    
    677
    
    
    
    -6
    %
    
    
    -1
    %
    
    
    -1
    %Operating income (loss)
    
    
    97,430
    
    
    
    117,040
    
    
    
    (19,610
    )
    
    
    -17
    %
    
    
    8
    %
    
    
    11
    %Net financial income
(expenses)
    
    
    18,405
    
    
    
    14,352
    
    
    
    4,053
    
    
    
    28
    %
    
    
    2
    %
    
    
    1
    %
 55




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##### Table of Contents



Period over
    
    Results as aPeriod over
    
    period
    
    percentage of net salesYear
    
    period
    
    percentage
    
    for the year endedended December 31,
    
    change
    
    change
    
    December 31,Favorable
    
    Favorable2006
    
    2005
    
    (unfavorable)
    
    (unfavorable)
    
    2006
    
    2005(in thousands of reais)Non-operating income
(expenses), net
    
    
    0
    
    
    
    235
    
    
    
    (235
    )
    
    
    -100
    %
    
    
    0
    %
    
    
    0
    %Income tax and social
contribution benefit
    
    
    (38,154
    )
    
    
    (50,387
    )
    
    
    12,233
    
    
    
    -24
    %
    
    
    -3
    %
    
    
    -5
    %Net income
    
    
    77,681
    
    
    
    81,240
    
    
    
    (3,559
    )
    
    
    -4
    %
    
    
    6
    %
    
    
    8
    %
 Net Operating Revenues of Services Rendered
     56




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Cost of Services Rendered
      Selling, General and Administrative Expenses
  57




---



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Other Net Operating Expenses
  Net Financial Income (Expenses)
  Net Non-operating Income (Expenses)
  Income Tax and Social Contribution Benefit
  Net Income
  58




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##### Table of Contents



Results of Operations for the Year ended December 31, 2005 compared with the Year ended December 31, 2004
 Continuing Operations
 Period over
    
    Results as aPeriod over
    
    period
    
    percentage of net salesYear
    
    period
    
    percentage
    
    for the year endedended December 31,
    
    change
    
    change
    
    December 31,Favorable
    
    Favorable2005
    
    2004
    
    (unfavorable)
    
    (unfavorable)
    
    2005
    
    2004(in thousands of reais)Net operating revenues
of services rendered
    
    
    1,044,787
    
    
    
    654,616
    
    
    
    390,171
    
    
    
    60
    
    
    
    100
    
    
    
    100Cost of services rendered
    
    
    (855,907
    )
    
    
    (574,071
    )
    
    
    (281,836
    )
    
    
    (49
    )
    
    
    (82
    )
    
    
    (88
    )Selling, general and
administrative expenses
    
    
    (59,742
    )
    
    
    (46,790
    )
    
    
    (12,952
    )
    
    
    (28
    )
    
    
    (6
    )
    
    
    (7
    )Other operating expenses, net
    
    
    (12,098
    )
    
    
    (1,055
    )
    
    
    (11,043
    )
    
    
    (1,047
    )
    
    
    (1
    )
    
    
    Operating income (loss)
    
    
    117,040
    
    
    
    32,700
    
    
    
    84,340
    
    
    
    258
    
    
    
    (11
    )
    
    
    5Net financial income
(expenses)
    
    
    14,352
    
    
    
    (4,662
    )
    
    
    19,014
    
    
    
    408
    
    
    
    1
    
    
    
    (1
    )Non-operating income
(expenses), net
    
    
    235
    
    
    
    
    
    
    
    235
    
    
    
    
    
    
    
    
    
    
    
    Income tax and social
contribution benefit
    
    
    (50,387
    )
    
    
    (11,568
    )
    
    
    (38,819
    )
    
    
    336
    
    
    
    (5
    )
    
    
    (2
    )Net income
    
    
    81,240
    
    
    
    16,470
    
    
    
    64,770
    
    
    
    393
    
    
    
    8
    
    
    
    3
 Net Operating Revenues of Services Rendered
  59




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Cost of Services Rendered
    Selling, General and Administrative Expenses
  60




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Other Operating Expenses, Net
  Net Financial Income (Expenses)
  Non-operating Income (Expenses), Net
  Income Tax and Social Contribution Benefit
  Net Income
  61




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Liquidity and Capital Resources
  
    
    Net cash flows from operating activities decreased R$80,632 thousand, representing a
reduction of 36.7%, from R$219,889 thousand in 2005 to R$139,257 thousand in 2006. This
decrease in 2006 was related primarily to reduction of R$3,559 thousand in net income, and
other three non-recurring effects that occurred in 2005 and positively increased the
results only in that year: (i) the advance of receipts from our operations rendered to
clients in amount of R$19,316; (ii) the increase of R$19,739 thousand in current
liabilities payable to suppliers due to negotiations for extension of maturity dates; and
(iii) the tax income benefit of R$12,368 thousand related to the adjustment of fair value
of the building of the discontinued operation, previously recorded in the amount of
R$36,375 thousand, but only sold in 2005 to TMAR, in which period the benefit impacted the
cash flow.
    
    Net cash flows used in investing activities decreased R$3,354 thousand, representing a
reduction of 4.8%, from R$70,256 thousand in 2005 to R$66,902 thousand in 2006. This
reduction must be analyzed without taking into account the non-recurring effect caused by
the sale of assets from discontinued operations in amount of R$17,211 thousand, sold to
TMAR in January of 2005, totalizing R$20,565 thousand of reduction. That being said, the
major reason for such decrease was a more discrete expansion of our operations than that
verified in the previous year. Our operations continue to require capital expenditures
mainly for capacity expansion due to business growth, as well as for technology upgrades
and the replacement of obsolete assets.
    
    Net cash flows from financing activities decreased R$65,247 thousand, representing a
reduction of 1,232% from R$(5,297) thousand in 2005 to R$(70,554) thousand in 2006. The
main reasons for such decrease in our net cash flows are explained by the share buyback
program that consumed R$41,394 thousand in 2006. Moreover, we also increased the amount of
our dividend distributions by R$11,571 when compared to 2005, from R$1,359 to R$12,930. In
addition, there was an increase of payments due to long-term liabilities in an amount of
R$12,282 thousand related to the payment installments of property and equipment financed by
financial institutions to support a part of our operational growth. At our Annual
Shareholders Meeting held in April 2006, our shareholders approved the payment of R$11,888
thousand in dividends with respect to our fiscal year ended December 31, 2006, which were
paid out to our
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##### Table of Contents



shareholders in April 2007. We do not have any debt obligations or indebtedness in the form
of guaranteed or unguaranteed, secured or unsecured, or indirect contingent, indebtedness.
  Contractual Obligations at December 31, 2006
 Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    1 year
    
    1-3 years
    
    3-5 years
    
    5 years(in thousands ofreais)Capital (finance) lease
    
    
    65,213
    
    
    
    21,091
    
    
    
    34,310
    
    
    
    9,812
    
    
    
    Operating lease (facilities)*
    
    
    80,712
    
    
    
    23,138
    
    
    
    42,230
    
    
    
    14,183
    
    
    
    1,161Total
    
    
    145,925
    
    
    
    44,229
    
    
    
    76,540
    
    
    
    23,995
    
    
    
    1,161
 
 *
    
    Most of our facilities lease agreements can be terminated before their expiration, with one
to six months prior notice, subject to a penalty equivalent to three times the monthly rent.  Recent Developments
 The corporate restructuring plan announced in 2006 by our controlling shareholder Telemar
Participações was not implemented.
  63




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Public tender offer announced in April 2007
 Taxa Referencial-TR edital
 Stock Option Plan
  BNDES Agreement
  Accelerated Depreciation
  64




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##### Table of Contents



Item 6. Directors, Senior Management and Employees
 Conselho de Administração Diretoria
 Board of Directors
   (i)
    
    holders of preferred shares representing at least 10% of the total capital stock of a
company may appoint one member to the Board of Directors and its respective alternate;(ii)
    
    holders of common shares representing at least 15% of the total common shares with
voting rights may appoint one member to the Board of Directors and its respective
alternate; and(iii)
    
    if items (i) and (ii) above do not occur, holders of common shares and holders of
preferred shares representing together more than 10% of the total capital of a company may
jointly appoint one member to the Board of Directors and its respective alternate.
  voto múltiplo
 65




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##### Table of Contents



Name
    
    PositionRonaldo Iabrudi dos Santos Pereira
    
    ChairmanSergio Bernstein
    
    DirectorOtávio Marques de Azevedo
    
    DirectorFabio Schvartsman
    
    DirectorLuiz Eduardo Falco Pires Corrêa
    
    DirectorEduardo Klingelhoefer de Sá
    
    DirectorJosé Luís Prola Salinas
    
    DirectorIsabel S. Ramos Kemmelmeier
    
    DirectorSergio Mamede Rosa do Nascimento
    
    Director
  Ronaldo Iabrudi dos Santos Pereira.
 66




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##### Table of Contents



Sergio Bernstein. Universidade Federal do Rio de Janeiro
 Otávio Marques de Azevedo.
 Fabio Schvartsman.
 67




---



##### Table of Contents



Luiz Eduardo Falco Pires Corrêa.
 Eduardo Klingelhoefer de Sá.
 José Luís Prola Salinas.
 Isabel S. Ramos Kemmelmeier.
 Sergio Mamede Rosa do Nascimento.
 68




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##### Table of Contents



Executive Officers
   Name
    
    PositionFrancis James Leahy Meaney
    
    President (CEO)Michel Neves Sarkis
    
    Chief Financial Officer (CFO)/Investor Relations OfficerRosangela Maria de Oliveira Lutti
    
    OfficerJosé Luiz Cardoso Albano
    
    Officer
 Francis James Leahy Meaney
 Michel Neves Sarkis
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##### Table of Contents



José Luiz Cardoso Albano
 Rosangela Maria de Oliveira Lutti st
 Fiscal Council ( Conselho Fiscal )
 Conselho Fiscal
 70




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##### Table of Contents



Name
    
    PositionAparecido Carlos Correia Galdino
    
    Regular MemberRicardo Scalzo
    
    Regular MemberItamaury Teles de Oliveira
    
    Regular MemberAllan Kardec de Melo Ferreira
    
    Regular MemberMarcio Luciano Mancini
    
    Regular Member
 Aparecido Carlos Correia Galdino.
 71




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##### Table of Contents



.
 Ricardo Scalzo. Universidade Federal do Rio de Janeiro
 Allan Kardec de Melo Ferreira. Pontifícia Universidade Católica de Minas Gerais
 Itamaury Teles de Oliveira Universidade Federal de Minas Gerais (UFMG) Faculdade
Milton Campos UFMG/CEPEAD latu
senso Universidade do Distrito Federal UFMG Fundação Dom Cabral).
 Marcio Luciano Mancini
 72




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##### Table of Contents



Compensation of Directors, Executive Officers and Fiscal Council Members
  Share Ownership
   Employees
  City/State
    
    Employees
    
    TraineesRio de Janeiro/RJ
    
    
    11,879
    
    
    
    75Niterói/RJ
    
    
    3,660
    
    
    
    14São Paulo/SP
    
    
    12,159
    
    
    
    43Salvador/BA
    
    
    6,147
    
    
    
    50Recife/PE
    
    
    2,831
    
    
    
    5Fortaleza/CE
    
    
    4,829
    
    
    
    54Belo Horizonte/MG
    
    
    6,835
    
    
    
    22Porto Alegre/RS
    
    
    664
    
    
    
    2Brasília/DF
    
    
    128
    
    
    
    Total
    
    
    49,132
    
    
    
    265
 73




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##### Table of Contents



Federação Interestadual
dos Trabalhadores em Telecomunicações Federação Nacional de Telecomunicações
   Employee Benefits
  Career and Salary Plan
  74




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Outsourcing
  Workplace Health and Safety
 Programa de Controle Médico de Saúde Ocupacional Programa de Prevenção de Riscos Ambientais Comissão
Interna de Prevenção de Acidentes
 
 Item 7. Major Shareholders and Related Party Transactions
 Major Shareholders
   75




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Number of
    
    Percentage ofcommon
    
    outstandingShareholders
    
    shares owned
    
    common sharesTelemar Participações S.A.
    
    
    68,504,197
    
    
    
    56.39Caixa de Previdência dos Funcionários do Banco do Brasil  PREVI
    
    
    6,754,850
    
    
    
    5.56Total
    
    
    75,259,047
    
    
    
    61.95
  Number of
    
    Percentage ofcommon
    
    outstandingTelemar Participações shareholder
    
    shares owned
    
    common sharesBNDES Participações S.A.  BNDESPar
    
    
    858,225,280
    
    
    
    25.000Fiago Participações S.A.
    
    
    683,147,324
    
    
    
    19.900Lexpart Participações S.A.
    
    
    352,730,590
    
    
    
    10.275L.F. Tel S.A.
    
    
    352,730,590
    
    
    
    10.275Asseca Participações S.A.
    
    
    352,730,590
    
    
    
    10.275AG Telecom Participações S.A.
    
    
    352,730,590
    
    
    
    10.275Alutrens Participações
    
    
    343,290,112
    
    
    
    10,000Fundação Atlântico de Seguridade Social
    
    
    137,316.044
    
    
    
    4.000Total
    
    
    3,432,901,120
    
    
    
    100.000
 Telemar Participações Shareholders Agreements
   76




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Holders of ADSs
  Related Party Transactions
  Telemar/Contax Contracts
 77




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##### Table of Contents



Facilities Lease Agreements
 78




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##### Table of Contents



Sale of TNext Building
  Transactions with our Board of Directors or Executive Officers
   
 Item 8. Financial Information
 Consolidated Statements and Other Financial Information
  Legal Proceedings
 79




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##### Table of Contents



General
  At December 31,2006
    
    2005
    
    2004(in thousands of reais)NatureLabor
    
    
    22,989
    **
    
    
    24,001
    *
    
    
    8,576
    *Tax
    
    
    5,793
    
    
    
    4,852
    
    
    
    1,966Civil
    
    
    117
    
    
    
    64
    
    
    
    314Total
    
    
    28,899
    
    
    
    28,917
    
    
    
    10,856
 
 *
    
    The numbers at December 31, 2005 and 2004 include R$7,020 thousand of provisions related to
former Inovação employees made during the year 2004and the number at December 31, 2005 also
includes R$6,067 thousand of provisions related to former Tmar employees made during the year
2005.**
    
    The number at December 31, 2006 includes part of R$6,575 thousand of provisions related to
former Tmar employees made during the year 2006. Labor
 Judicial
 Ministério Público
do Trabalho
  80




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##### Table of Contents



As of December 31,2006(in thousands of reais)Types of risk*Probable
    
    
    22,990Possible/Remote
    
    
    108,397Total
    
    
    131,387
 
 *
    
    The types of risk have been determined by our management, based on the opinion of external
legal counsel and existing legal precedents.  
 Administrative Proceedings
  81




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##### Table of Contents



menores aprendizes
 Termo de Ajuste de Conduta
 Tax
 Service Tax (ISS)  Municipality of Niterói
  82




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##### Table of Contents



Civil Litigation
   Policy on Dividend Distribution
  83




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##### Table of Contents



Significant Changes
  
 Item 9. The Offer and Listing
 Information Regarding the Price History of the Stock to Be Offered or Listed
   Reais perPreferred SharesHigh
    
    Low20063rd Quarter
    
    
    1.95
    
    
    
    1.604th Quarter
    
    
    2.13
    
    
    
    1.7220071st Quarter
    
    
    2.07
    
    
    
    1.84January
    
    
    1.98
    
    
    
    1.84February
    
    
    2.07
    
    
    
    1.90March
    
    
    1.95
    
    
    
    1.85April
    
    
    2.04
    
    
    
    1.89May
    
    
    2.25
    
    
    
    2.01June (through 22nd , 2007)
    
    
    2.22
    
    
    
    2.32
 
 Source: Bloomberg 84




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##### Table of Contents



nd
 U.S. dollars per ADSHigh
    
    Low20063rd Quarter
    
    
    0.87
    
    
    
    0.704th Quarter
    
    
    0.94
    
    
    
    0.7520071st Quarter
    
    
    0.94
    
    
    
    0.81January
    
    
    0.88
    
    
    
    0.81February
    
    
    0.85
    
    
    
    0.94March
    
    
    0.89
    
    
    
    0.83April
    
    
    0.97
    
    
    
    0.88May
    
    
    1.10
    
    
    
    0.94June (through 22nd, 2007)
    
    
    1.05
    
    
    
    1.15
 
 Source: The Bank of New York ADR Inform Trading on the Brazilian Stock Exchanges
   85




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##### Table of Contents



Sistema de Negociação Assistida por Computador Sistema Electrônico de Negociação Nacional
   Companhia Brasileira de Liquidação e Custódia S.A.
  86




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Regulation of the Brazilian Securities Market
  companhia aberta companhia fechada
 87




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Disclosure Requirements
   
    
    establish the concept of a material fact that gives rise to reporting requirements.
Material facts include decisions made by the controlling shareholders, resolutions of the
general shareholders meeting of
 88




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##### Table of Contents



shareholders and of management of the company, or any other
facts related to the companys business (whether occurring within the company or otherwise
somehow related thereto) that may influence the price of its publicly traded securities, or
the decision of investors to trade such securities or to exercise any of such securities
underlying rights;
    
    specify examples of facts that are considered to be material, which include, among others,
the execution of shareholders agreements providing for the transfer of control, the entry or
withdrawal of shareholders that maintain any managing, financial, technological or
administrative function with or contribution to the company, and any corporate restructuring
undertaken among related companies;
    
    require the Officer of Investor Relations, controlling shareholders, other Officers,
Directors, members of the Fiscal Council and other advisory boards to disclose material
facts;
    
    require simultaneous disclosure of material facts to all markets in which the corporations
securities are admitted for trading;
    
    require the acquirer of a controlling stake in a corporation to publish material facts,
including its intentions as to whether or not to de-list the corporations shares, within one
year;
    
    establish rules regarding disclosure requirements in the acquisition and disposal of a
material stockholding stake; and
    
    forbid the use of insider information.
 
 Item 10. Additional Information
 Memorandum and Articles of Association
  Organization
 89




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##### Table of Contents



Junta Comercial
  Qualification of Directors
  Allocation of Net Income and Distribution of Dividends
  
    
    5% to a legal reserve, not to exceed 20% of the paid-in capital of Contax;
    
    at least 25% of adjusted net income against payment of dividends. As required by Brazilian
corporate law, such amount will be increased if required to satisfy payment of dividends of
preferred shares; and
    
    respecting the entry in the reserve for profits to be realized, the remaining net income
should be allocated in the reserve for expansion for working capital purposes. The total
amount registered in the reserve for expansion together with the amount enrolled in profit
reserves is limited to the total amount recorded as paid-in capital.
  90




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Shareholders Meetings
   Valor
Econômico Diário Oficial do Estado do Rio de Janeiro
    91




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##### Table of Contents



Voting Rights
    
    
    the creation of preferred shares or the increase of an existing class of shares without
preserving their proportion with other classes of shares, except as already authorized by our
by-laws;
    
    a change of a preference, privilege or redemption or amortization provision of any class of
preferred shares; and
    
    the creation of a new class of preferred shares that has a preference, privilege or
redemption or amortization provision which is superior to those of existing preferred shares.
   92




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
    
    a reduction of the mandatory dividend set forth in our by-laws;
    
    the approval of a merger, spin-off or consolidation;
    
    our participation in a group of companies, or grupo de sociedades, the management of which
is coordinated through contractual relationships and equity ownership, as defined under
Brazilian corporate law;
    
    a change in our business purpose;
    
    the creation of founders shares (partes beneficiárias);
    
    the cessation of our liquidation process; and
    
    approval of our dissolution.
  
    
    amend the by-laws, including changing the rights of holders of common shares;
    
    elect or dismiss members of the Board of Directors or Fiscal Council, if in operation;
    
    review the yearly accounts prepared by management and accept or reject managements
financial statements, and decide on the allocation of: (i) net profits for payment of the
mandatory dividend, and (ii) funds to the various reserve accounts;
    
    authorize the issuance of debentures and founders shares (partes beneficiárias), except
that the Board of Directors is empowered to approve the issuance of simple debentures that
are not convertible into shares and have no real guarantee;
    
    suspend the rights of shareholders who have not fulfilled their obligations as imposed by
law or by the by-laws;
    
    accept or reject the valuation of assets contributed by a shareholder in consideration for
issuance of capital stock;
    
    pass resolutions authorizing: (i) the reorganization of our legal form; (ii) our merger,
spin-off, dissolution or liquidation; and (iii) the election or dismissal of liquidators and
the inspection of their accounts; and
 93




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##### Table of Contents




    
    authorize our management to file for bankruptcy or request concordata(a reorganization
process similar to Chapter 11 proceedings under U.S. bankruptcy law).
 Interested Party Transactions
   Withdrawal Rights
    94




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##### Table of Contents




    
    the creation of preferred shares or an increase of an existing class of shares without
preserving their proportion with other classes of shares, except as already authorized in our
by-laws;
    
    a change in the preferences, privileges, or redemption or amortization provisions of any
class of preferred shares; or
    
    the creation of a new class of preferred shares that has a preference, privilege, or
redemption or amortization provision that is superior to those of existing preferred shares.
  
    
    a reduction of the mandatory dividend set forth in our by-laws;
    
    the approval of our consolidation or merger into another company;
    
    our participation in a grupo de sociedades;
    
    a change in our business purpose;
    
    our spin-off, if such spin-off implies (a) a change in our business purpose (except if the
spun-off assets revert to a company whose main purpose is the same as ours), (b) a reduction
of the mandatory dividend set forth in our by-laws, or (c) our participation in a grupo de
sociedades; or
    
    the acquisition of control of another company at a price which exceeds certain limits set
forth in Brazilian corporate law.
 grupo de sociedades
 95




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fato relevante
   Liquidation Procedures
  96




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##### Table of Contents



Form and Transfer of Securities
    Transfer of Control
   Amendments
 97




---



##### Table of Contents



Disclosure of Shareholder Ownership
  Material Contracts
    98




---



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Exchange Controls and Other Limitations Affecting Shareholders
    99




---



##### Table of Contents




    
    appoint at least one representative in Brazil with powers to take action relating to the foreign investment;
    
    complete the appropriate foreign investor registration forms;
    
    obtain registration as a foreign investor with the CVM; and
    
    register their foreign investment with the Brazilian Central Bank.
    100




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Registered Capital
  101




---



##### Table of Contents



Taxation
   Brazilian Tax Considerations
  102




---



##### Table of Contents



Taxation of Dividends
  Distribution of Interest on Capital
    103




---



##### Table of Contents



Taxation of Gains Outside Brazil
   Taxation of Gains in Brazil
  104




---



##### Table of Contents



105




---



##### Table of Contents



Other Brazilian Taxes
    106




---



##### Table of Contents



Material United States Federal Income Tax Considerations
   107




---



##### Table of Contents



U.S. Holders
   Treatment of ADSs
  108




---



##### Table of Contents



Receipt of distributions
      109




---



##### Table of Contents



Sale, exchange or other taxable disposition of preferred shares
  110




---



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Passive Foreign Investment Company (PFIC) rules
    111




---



##### Table of Contents



Non-U.S. Holders
     Information reporting and backup withholding
  112




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##### Table of Contents



HOLDERS OF PREFERRED SHARES OR ADSS SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY
CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF PREFERRED SHARES OR ADSS ARISING UNDER THE LAWS OF
ANY OTHER TAXING JURISDICTION.
 Documents On Display
  
 Item 11. Quantitative and Qualitative Disclosures About Market Risk
  113




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##### Table of Contents



real
 
 Item 12. Description of Securities Other Than Equity Securities
  
 PART II
 
 Item 13. Defaults, Dividend Arrearages and Delinquencies
  
 Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
  
 Item 15. Controls and Procedures
 Disclosure Controls and Procedures
  114




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##### Table of Contents



Managements Annual Report on Internal Control over Financial Reporting
    Changes in Internal Controls
 115




---



##### Table of Contents



Item 16. [Reserved]
 
 Item 16A. Audit Committee Financial Expert
 Conselho Fiscal
 
 Item 16B. Code of Ethics
  
 Item 16C. Principal Accountant Fees and Services
  116




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##### Table of Contents



Total Fees2006
    
    
    2005(in thousands of reais)Audit Fees(1)
    
    
    385
    
    
    
    260Audit-Related Fees(2)
    
    
    810
    
    
    
    267All Other Fees(3)
    
    
    
    
    
    
    240
 
 (1)
    
    Audit Fees for the years ended December 31, 2006 and 2005 consist of fees billed for
professional services rendered for the audits and reviews of the consolidated financial
statements of the Company and other services normally provided in connection with statutory
and regulatory filings.(2)
    
    Audit-Related Fees for the years ended December 31, 2006 and 2005 consist of fees billed for
assurance and related services that are traditionally performed by independent accountants
that are reasonably related to the performance of the audit or review of the Companys
financial statements. These services include consulting in connection with accounting and
reporting standards and services related to internal control reviews.(3)
    
    All Other Fees include advisory fees for the year ended December 31, 2005 billed for advisory
services rendered during the Companys registration process with the SEC in 2005 as a result
of the Companys spin-off to the shareholders of TNL. Pre-approval of policies and procedures
  
 Item 16D. Exemptions from the Listing Standards for Audit Committees
  117




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Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
     118




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Total Number of Shares
    
    Maximum Number ofPurchased as Part of
    
    Shares That May Yet BeTotal Number of Shares
    
    Average Price
    
    Publicly Announced
    
    Purchased Under thePurchased
    
    Paid Per Share
    
    Programs
    
    ProgramsPeriods in 2006
    
    Preferred
    
    Common
    
    Preferred
    
    Common
    
    Preferred
    
    Common
    
    Preferred
    
    CommonJan 1 to 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Feb 1 to 28
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mar 1 to 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Apr 1 to 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    May 1 to 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    June 1 to 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    July 1 to 31
    
    
    916,800
    
    
    
    464,700
    
    
    
    1.83
    
    
    
    3.28
    
    
    
    916,800
    
    
    
    464,700
    
    
    
    10,857,144
    
    
    
    5,422,272Aug 1 to 31
    
    
    3,530,200
    
    
    
    2,287,000
    
    
    
    1.76
    
    
    
    3.25
    
    
    
    3,530,200
    
    
    
    2,287,000
    
    
    
    7,326,944
    
    
    
    3,135,272Sept 1 to 30
    
    
    3,930,400
    
    
    
    1,284,700
    
    
    
    1.86
    
    
    
    3.25
    
    
    
    3,930,400
    
    
    
    1,284,700
    
    
    
    3,396,544
    
    
    
    1,850,572Oct  1 to 31
    
    
    3,396,500
    
    
    
    1,850,300
    
    
    
    1.87
    
    
    
    3.23
    
    
    
    3,396,500
    
    
    
    1,850,300
    
    
    
    44
    
    
    
    22Nov 1 to 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dec 1 to 31
    
    
    175,200
    
    
    
    141,300
    
    
    
    1.93
    
    
    
    3.12
    
    
    
    175,200
    
    
    
    141,300
    
    
    
    23,882,994
    
    
    
    5,157,002Total
    
    
    11,949,100
    
    
    
    6,028,000
    
    
    
    1,83
    
    
    
    3,24
    
    
    
    11,949,100
    
    
    
    6,028,000
    
    
    
    23,882,994
    
    
    
    5,157,002
 119




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##### Table of Contents



Total Number of Shares
    
    Maximum Number ofPurchased as Part of a
    
    Shares That May Yet BeTotal Number of Shares
    
    Average Price
    
    Publicly Announced
    
    Purchased Under thePurchased
    
    Paid Per Share
    
    Programs
    
    ProgramsPeriods in 2007
    
    Preferred
    
    Common
    
    Preferred
    
    Common
    
    Preferred
    
    Common
    
    Preferred
    
    CommonJan 1 to 31
    
    
    3,931,500
    
    
    
    4,608,900
    
    
    
    1.89
    
    
    
    3.05
    
    
    
    3,931,500
    
    
    
    4,608,900
    
    
    
    19,951,494
    
    
    
    548,102Feb 1 to 28
    
    
    6,363,000
    
    
    
    548,100
    
    
    
    2.00
    
    
    
    2.98
    
    
    
    6,363,000
    
    
    
    548,100
    
    
    
    13,588,494
    
    
    
    2Mar 1 to 31
    
    
    13,588,490
    
    
    
    
    
    
    
    1.89
    
    
    
    
    
    
    
    13,588,490
    
    
    
    
    
    
    
    4
    
    
    
    2Apr 1 to 30
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    2May 1 to 31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    2June 1 to 22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4
    
    
    
    2Total
    
    
    23,882,990
    
    
    
    5,157,00
    
    
    
    1.92
    
    
    
    3.04
    
    
    
    23,882,990
    
    
    
    5,157,00
    
    
    
    4
    
    
    
    2
 PART III
 
 Item 17. Financial Statements
  
 Item 18. Financial Statements
  
 Item 19. Exhibits
 120




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##### Table of Contents



No.
    
    Description1.1
    
    By-laws of Contax Holding as of November 30, 2004. (Incorporated by reference to
Exhibit 1.1 to the Companys Registration Statement on Form 20-F filed on August 10,
2005.)1.2.
    
    Amendment to the By-laws of Contax Holding as of August 17, 2005. (Filed herewith.)1.3.
    
    Amendment to the By-laws of Contax Holding as of March 10, 2006. (Filed herewith.)1.4.
    
    Amendment to the By-laws of Contax Holding as of November 28, 2006. (Filed herewith.)1.5.
    
    Consolidated version (for reference only) of the By-laws of Contax Holding
reflecting items 1.1 through 1.4 above. (Filed herewith.)2.1
    
    Deposit Agreement, dated as of August 12, 2005 among Contax Holding, The Bank of New
York, as Depositary, and Owners and Beneficial Owners of American Depositary
Receipts issued thereunder. (Incorporated by reference to Exhibit 2.1 to the
Companys Annual Report on Form 20-F filed on June 29, 2006.)4.1
    
    Services Agreement, dated November 30, 2004, among Telemar Norte Leste S.A, TNL PCS
S.A. and TNL Contax S.A. (Incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form 20-F filed on August 10, 2005.)4.2
    
    First Amendment, dated December 29, 2004, to the Services Agreement between Telemar
Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A. dated November 30,
2004.(Incorporated by reference to Exhibit 4.6 to the Companys Annual Report on
Form 20-F filed on June 29, 2006.)4.3
    
    Second Amendment, dated October 18, 2005, to the Services Agreement between Telemar
Norte Leste S.A., TNL PCS S.A. and TNL Contax S.A. dated November 30, 2004.
(Incorporated by reference to Exhibit 4.7 to the Companys Annual Report on Form
20-F filed on June 29, 2006.)4.4
    
    Third Amendment, dated May 1, 2007, to the Services Agreement between Telemar Norte
Leste S.A., TNL PCS S.A. and TNL Contax S.A. dated November 30, 2004. (Filed
herewith.)4.5
    
    Contact Center Services Agreement, dated April 1, 2004, between Orbitall Serviços e
Processamento de Informações Comerciais LTDA. and Inovação Contact Center Serviços
de Contatos Telefônicos Ltda. (Incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form 20-F filed on August 10, 2005.)4.6
    
    Amendment to Services Agreement, dated May 28, 2004, between Orbitall Serviços e
Processamento de Informações Comerciais LTDA. and Inovação Contact Center Serviços
de Contatos Telefônicos Ltda. (Incorporated by reference to Exhibit 4.3 to the
Companys Registration Statement on Form 20-F filed on August 10, 2005.)
 121




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##### Table of Contents



No.
    
    Description4.7
    
    Amendment to the Contact Center Service Agreement, dated September 27, 2004, between
Orbitall Serviços e Processamento de Informações Comerciais LTDA. and TNL Contax
S.A. (Incorporated by reference to Exhibit 4.4 to the Companys Registration
Statement on Form 20-F filed on August 10, 2005.)4.8
    
    Amendment to Temporary Service Agreement and Other Matters, dated September 27,
2004, between Orbitall Serviços e Processamento de Informações Comerciais LTDA. and
TNL Contax S.A. (Incorporated by reference to Exhibit 4.5 to the Companys
Registration Statement on Form 20-F filed on August 10, 2005.)4.9
    
    Amendment, dated October 1, 2004, to the Contact Center Service Agreement between
Orbitall Serviços e Processamento de Informações Comerciais LTDA. and TNL Contax
S.A.(Filed herewith.)4.10
    
    Amendment, dated April 1, 2005, to the Contact Center Service Agreement between
Orbitall Serviços e Processamento de Informações Comerciais LTDA. and TNL Contax
S.A. (Filed herewith.)4.11
    
    Amendment, dated May 10, 2006, to the Contact Center Service Agreement between
Orbitall Serviços e Processamento de Informações Comerciais S.A. and TNL Contax S.A.
(Filed herewith.)4.12
    
    Amendment, dated December 29, 2006, to the Contact Center Service Agreement between
Orbitall Serviços e Processamento de Informações Comerciais S.A. and TNL Contax S.A.
(Filed herewith.)8.1
    
    List of Subsidiaries. (Incorporated by reference to Exhibit 8.1 to the Companys
Registration Statement on Form 20-F filed on June 29, 2006.)11.1
    
    Code of Ethics of Contax Holding. (Incorporated by reference to Exhibit 11.1 to the
Companys Registration Statement on Form 20-F filed on August 10, 2005.)12.1
    
    Certification of the Chief Executive Officer of the Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith).12.2
    
    Certification of the Chief Financial Officer of the Company, pursuant to Section 302
of the Sarbanes-Oxley Act of 2002. (Filed herewith).13.1
    
    Certifications of the Chief Executive Officer and the Chief Financial Officer of the
Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (Furnished
herewith).
 122




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SIGNATURES
  CONTAX PARTICIPAÇÕES S.A.By:
    /s/ Francis James Leahy MeaneyName:
    Francis James Leahy MeaneyTitle:
    Chief Executive Officer  123




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##### Table of Contents



Contax
Participações S.A.
 Consolidated
and Combined Financial
Statements at December 31, 2006 and 2005
and Report of Independent Registered
Public Accounting Firm
 124




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##### Table of Contents



Contax Participações S.A.
  Table of contents
 Report of Independent Registered Public Accounting Firm
    
    F-1Consolidated Balance Sheets, Dec. 31, 2006 and 2005
    
    F-2Consolidated and Combined Statements of Operations, Dec. 31, 2006, 2005 and 2004
    
    F-3Consolidated and Combined Statements of Cash Flows, Dec. 31, 2006, 2005 and 2004
    
    F-4Consolidated
and Combined Statement of Changes in Shareholders Equity, Dec.
31, 2006, 2005 and 2004
    
    F-5Notes to the Consolidated Financial Statements
    
    F-6
 125




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/s/ PricewaterhouseCoopers
 F-1




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##### Table of Contents



Contax Participações S.A.
 
 Consolidated Balance Sheets
 December 31, 2006 and 2005

(Expressed in thousands of Brazilian Reais)
 As of December 31,2006
    
    
    2005Current assetsCash and cash equivalents
    
    
    231,299
    
    
    
    229,488Trade accounts receivable, netRelated parties
    
    
    8,244
    
    
    
    1,217Unrelated parties
    
    
    45,624
    
    
    
    31,626Deferred taxes
    
    
    12,176
    
    
    
    13,736Recoverable taxes
    
    
    33,887
    
    
    
    32,021Prepaid expenses
    
    
    2,248
    
    
    
    2,764Others
    
    
    2,167
    
    
    
    1,357Total current assets
    
    
    335,645
    
    
    
    312,209Property and equipment, net
    
    
    265,593
    
    
    
    228,643Intagible
    
    
    44,134
    
    
    
    36,736309,727
    
    
    
    265,379Other assetsDeferred taxes
    
    
    19,903
    
    
    
    25,880Judicial deposits
    
    
    7,938
    
    
    
    3,784Receivable from Orbitall
    
    
    
    
    
    
    7,020Receivable from Telemar
    
    
    6,570
    
    
    
    6,067Receivable from Other
    
    
    2,751Other non-current assets
    
    
    741
    
    
    
    127Total other assets
    
    
    37,903
    
    
    
    42,878Total assets
    
    
    683,275
    
    
    
    620,466Current liabilitiesSuppliers
    
    
    47,761
    
    
    
    52,787Payroll and related accruals
    
    
    112,382
    
    
    
    101,267Taxes other than on income
    
    
    10,471
    
    
    
    9,448Taxes on income
    
    
    29,088
    
    
    
    27,231Dividends payable
    
    
    12,390Current-portion of capital lease obligations
    
    
    21,091
    
    
    
    11,625Other current liabilities
    
    
    1,275
    
    
    
    722Total current liabilities
    
    
    234,458
    
    
    
    203,080Long-term liabilitiesProvisions for contingencies
    
    
    28,899
    
    
    
    28,917Capital lease obligations
    
    
    44,122
    
    
    
    27,914Deferred tax
    
    
    1,529Taxes other than on income
    
    
    2,745Total long-term liabilities
    
    
    77,295
    
    
    
    56,831Shareholders equityPreferred
shares  242,832,600 issued, non-par-value shares
(2005 - 254,747,800)
    
    
    149,249
    
    
    
    149,249Common
shares  121,312,017 issued, non-par-value shares
(2005 - 127,373,917)
    
    
    74,624
    
    
    
    74,624Treasury stock
    
    
    (780
    )Additional paid-in capital
    
    
    9,386
    
    
    
    50,000Appropriated retained earnings
    
    
    136,076
    
    
    
    73,250Unappropriated retained earnings
    
    
    2,967
    
    
    
    13,432Total shareholders equity
    
    
    371,522
    
    
    
    360,555Total liabilities and shareholders equity
    
    
    683,275
    
    
    
    620,466
 The accompanying notes are an integral part of these financial statements.
 F-2




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##### Table of Contents



Contax Participações S.A.
 
 Consolidated and Combined Statements of Operations
 December 31, 2006, 2005 and 2004
 (Expressed in thousands of Brazilian Reais)
 Years ended December 31,2006
    
    
    2005
    
    
    2004Net operating revenue from services rendered
    
    
    1,218,583
    
    
    
    1,044,787
    
    
    
    654,616Cost of services rendered
    
    
    (1,037,353
    )
    
    
    (855,907
    )
    
    
    (574,071
    )Gross profit
    
    
    181,230
    
    
    
    188,880
    
    
    
    80,545Operating income (expenses)Selling, general and administrative
    
    
    (72,379
    )
    
    
    (59,742
    )
    
    
    (46,790
    )Other operating expenses, net
    
    
    (11,421
    )
    
    
    (12,098
    )
    
    
    (1,055
    )Operating income
    
    
    97,430
    
    
    
    117,040
    
    
    
    32,700Financial income (expenses), net
    
    
    18,405
    
    
    
    14,352
    
    
    
    (4,662
    )Non-operating income, net
    
    
    
    
    
    
    235Income from continuing operations before
income tax and social contribution
    
    
    115,835
    
    
    
    131,627
    
    
    
    28,038Income tax and social contribution benefit (provision)
    
    
    (38,154
    )
    
    
    (50,387
    )
    
    
    (11,568
    )Income from continuing operations
    
    
    77,681
    
    
    
    81,240
    
    
    
    16,470Discontinued operations (Note 16)Loss from operations of discontinued components
    
    
    
    
    
    
    
    
    
    
    (14,647
    )Income tax benefit
    
    
    
    
    
    
    
    
    
    
    4,980Loss on discontinued operations
    
    
    
    
    
    
    
    
    
    
    (9,667
    )Net income and comprehensive income for the year
    
    
    77,681
    
    
    
    81,240
    
    
    
    6,803Earnings per shares (in reais)Common shares  Basic and DilutedIncome from continuing operations
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04Net income for the year
    
    
    0.21
    
    
    
    0.21
    
    
    
    Weighted average common shares outstanding
    
    
    125,286,067
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred shares  Basic and DilutedIncome from continuing operations
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04Net income for the year
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.03Weighted average preferred shares outstanding
    
    
    250,644,625
    
    
    
    254,747,800
    
    
    
    254,747,800
 The accompanying notes are an integral part of these financial statements.
 F-3




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##### Table of Contents



Contax Participações S.A.
 
 Consolidated and Combined Statements of Cash Flows
 Years ended December 31, 2006, 2005 and 2004
 (Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Year ended December 31,2006
    
    
    2005
    
    
    2004Operating activities:Net income for the year
    
    
    77,681
    
    
    
    81,240
    
    
    
    6,803Adjustments to reconcile net income to cash provided by
operating activities:Depreciation and amortization
    
    
    64,448
    
    
    
    45,846
    
    
    
    25,347Discontinued operation
    
    
    
    
    
    
    
    
    
    
    9,667Contingencies and other provisions
    
    
    (2,625
    )
    
    
    18,061
    
    
    
    1,011Loss on permanent asset disposal
    
    
    
    
    
    
    (235
    )Deferred tax asset, net
    
    
    7,537
    
    
    
    23,155
    
    
    
    (5,913
    )(Increase) decrease in accounts receivable
    
    
    (21,025
    )
    
    
    6,196
    
    
    
    (13,120
    )(Increase) decrease in other current assets
    
    
    (2,160
    )
    
    
    (25,496
    )
    
    
    (774
    )(Increase) in other non-current assets
    
    
    (1,002
    )
    
    
    (8,701
    )
    
    
    (830
    )Increase in payroll and related accruals
    
    
    11,115
    
    
    
    36,484
    
    
    
    23,075Increase in accounts payable and accrued expenses
    
    
    (5,026
    )
    
    
    2,642
    
    
    
    11,602Increase (decrease) in other current liabilities
    
    
    553
    
    
    
    18,302
    
    
    
    (510
    )Increase (decrease) in accrued interest
    
    
    2,607
    
    
    
    (343
    )
    
    
    7,574Increase (decrease) in recoverable taxes
    
    
    7,154
    
    
    
    22,738
    
    
    
    7,455Net cash provided by continuing operating activities
    
    
    139,257
    
    
    
    219,889
    
    
    
    71,387Cash used by discontinued operation
    
    
    
    
    
    
    
    
    
    
    (30,945
    )Net cash provided by operating activities
    
    
    139,257
    
    
    
    219,889
    
    
    
    40,442Investing activities:Capital expenditure for property and equipment
    
    
    (66,964
    )
    
    
    (88,109
    )
    
    
    (97,894
    )Capital expenditure for discontinued operationProceeds of disposal of property and equipment
    
    
    62
    
    
    
    642Proceeds of disposal of property and equipment
discontinued operation
    
    
    
    
    
    
    17,211Cash used in investing activities
    
    
    (66,902
    )
    
    
    (70,256
    )
    
    
    (97,894
    )Financing activities:Treasury stock purchases
    
    
    (41,394
    )Payments of long-term obligation (leases)
    
    
    (16,220
    )
    
    
    (3,938
    )
    
    
    (189
    )Intercompany loans obtained
    
    
    
    
    
    
    
    
    
    
    19,525Payment of dividends
    
    
    (12,930
    )
    
    
    (1,359
    )Capital increases
    
    
    
    
    
    
    
    
    
    
    90,000Net cash provided by financing activities
    
    
    (70,544
    )
    
    
    (5,297
    )
    
    
    109,336Increase in cash and cash equivalents
    
    
    1,811
    
    
    
    144,336
    
    
    
    51,884Cash and cash equivalents at beginning of year
    
    
    229,488
    
    
    
    85,152
    
    
    
    33,268Cash and cash equivalents at end of year
    
    
    231,299
    
    
    
    229,488
    
    
    
    85,152Supplemental cash flow information:Income tax and social contribution paid
    
    
    27,999
    
    
    
    27,230
    
    
    
    6,372Interest paid
    
    
    296
    
    
    
    389
    
    
    
    22,804Non-cash transations:Intercompany loan paid with current assets from
discontinued operations (account receivable)
    
    
    
    
    
    
    
    
    
    
    (76,468
    )Capitalization of intercompany loans
    
    
    
    
    
    
    
    
    
    
    57,678Property and
equipment purchased with capital leases
    
    
    41,894
    
    
    
    40,587
    
    
    
    4,776
 The accompanying notes are an integral part of these financial statements.
 F-4




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##### Table of Contents



Contax Participações S.A.
 
 Consolidated and
Combined Statement of Changes in Shareholders Equity
 Years ended December 31, 2006, 2005 and 2004
 (Expressed in thousands of Brazilian Reais, unless otherwise stated)
 RetainedNumber of shares outstanding
    
    
    Paid-in Capital
    
    
    Treasury
    
    
    Appropriated
    
    
    EarningsPreffered
    
    
    Common
    
    
    Additional
    
    
    Shares
    
    
    Retained
    
    
    (AccumulatedPreffered
    
    
    Common
    
    
    Total
    
    
    Shares
    
    
    Shares
    
    
    Paid-in Capital
    
    
    Purchases
    
    
    Earnings
    
    
    losses)
    
    
    TotalAt December 31, 2003
    
    
    10,999,989
    
    
    
    5,500,014
    
    
    
    16,500,003
    
    
    
    162,877
    
    
    
    81,438
    
    
    
    
    
    
    
    
    
    
    
    46
    
    
    
    (118,168
    )
    
    
    126,193Elimination for combined
financial statements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (162,767
    )
    
    
    (81,383
    )
    
    
    
    
    
    
    
    
    
    
    (46
    )
    
    
    118,166
    
    
    
    (126,030
    )Paid-in capital increase
    
    
    242,202,329
    
    
    
    121,101,145
    
    
    
    363,303,474
    
    
    
    149,139
    
    
    
    74,569
    
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273,708Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,803
    
    
    
    6,803Appropriation of net income to:Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    377
    
    
    
    (377
    )Unrealized earnings reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,636
    
    
    
    (5,636
    )At December 31, 2004
    
    
    253,202,318
    
    
    
    126,601,159
    
    
    
    379,803,477
    
    
    
    149,249
    
    
    
    74,624
    
    
    
    50,000
    
    
    
    
    
    
    
    6,013
    
    
    
    788
    
    
    
    280,674Split of shares
    
    
    1,545,482
    
    
    
    772,758
    
    
    
    2,318,240Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,240
    
    
    
    81,240Statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57,477
    
    
    
    (57,477
    )
    
    
    Appropriation of net income to:Dividends approved
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,359
    )
    
    
    (1,359
    )Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,033
    
    
    
    (4,033
    )Unrealized earnings reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,727
    
    
    
    (5,727
    )At December 31, 2005
    
    
    254,747,800
    
    
    
    127,373,917
    
    
    
    382,121,717
    
    
    
    149,249
    
    
    
    74,624
    
    
    
    50,000
    
    
    
    
    
    
    
    73,250
    
    
    
    13,432
    
    
    
    360,555Treasury shares purchases
    
    
    (11,949,100
    )
    
    
    (6,028,000
    )
    
    
    (17,977,100
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (41,394
    )
    
    
    
    
    
    
    
    
    
    
    (41,394
    )Cancellation of shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,614
    )
    
    
    40,614Dividends approved
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,432
    )
    
    
    (13,432
    )Dividends proposed from
Unrealized Earnings Reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
    (7,050
    )
    

    
    
    
    
    
    (7,050
    )Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77,681
    
    
    
    77,681Statutory reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,234
    
    
    
    (53,234
    )
    
    
    Appropriation of net income to:Dividends proposed
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,838
    )
    
    
    (4,838
    )Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,736
    
    
    
    (3,736
    )Unrealized earnings reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,906
    
    
    
    (12,906
    )At December 31, 2006
    
    
    242,798,700
    
    
    
    121,345,917
    
    
    
    364,144,617
    
    
    
    149,249
    
    
    
    74,624
    
    
    
    9,386
    
    
    
    (780
    )
    
    
    136,076
    
    
    
    2,967
    
    
    
    371,522
 The accompanying notes are an integral part of these financial statements.
 F-5




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##### Table of Contents



Contax Participações S.A.
 
 Notes to the
Consolidated and Combined Financial Statements
 at December 31, 2006 and
2005
 (Expressed in thousands of Brazilian Reais, unless otherwise stated)
 1. Description of Business
 (a) Operations
    (b) TNL Contax
  2. Summary of Significant Accounting Policies
 (a) Basis of presentation
  The accompanying notes are an integral part of these financial statements.
 F-6




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
    (b) Fair value of financial instruments
  (c) Concentration of credit risks
   (d) Use of estimates
 The accompanying notes are an integral part of these financial statements.
 F-7




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
  (e) Cash and cash equivalents
  (f) Revenue recognition
  (g) Costs and expenses
  (h) Financial income and expenses
  (i) Property and equipment
 The accompanying notes are an integral part of these financial statements.
 F-8




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
   (j) Provisions for contingencies
  (k) Income tax and social contribution
   (l) Payroll and related accruals
   (m) Leasings
 The accompanying notes are an integral part of these financial statements.
 F-9




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
   (n) Other current liabilities
  (o) Statements
of cash flows
  3. Earnings per share
   The accompanying notes are an integral part of these financial statements.
 F-10




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
     The accompanying notes are an integral part of these financial statements.
 F-11




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 As of December 31,2006
    
    
    2005
    
    
    2004Net income for the year
    
    
    77,681
    
    
    
    81,240
    
    
    
    6,803Less preferred shares dividends
    
    
    (4,838
    )
    
    
    (8,955
    )
    
    
    (6,803
    )Less common shares dividends
    
    
    
    
    
    
    (4,478
    )Remaining net income (loss) to be equallyallocated to preferred shares
    
    
    46,954
    
    
    
    40,727allocated to common shares
    
    
    25,889
    
    
    
    27,080Weighted average number of shares outstanding:Common
    
    
    125,286,067
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred
    
    
    250,644,625
    
    
    
    254,747,800
    
    
    
    254,747,800Basic and diluted earnings per share:Common (i)
    
    
    0.21
    
    
    
    0.21
    
    
    
    Preferred (i)
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.03
 Continuing operations
 As of December 31,2006
    
    
    2005
    
    
    2004Income from continuing operations for the year
    
    
    77,681
    
    
    
    81,240
    
    
    
    16,470Less preferred shares dividends
    
    
    (4,838
    )
    
    
    (8,955
    )
    
    
    (8,955
    )Less common shares dividends
    
    
    
    
    
    
    (4,478
    )
    
    
    (4,478
    )Remaining net income (loss) to be equallyallocated to preferred shares
    
    
    46,954
    
    
    
    40,727
    
    
    
    2,025allocated to common shares
    
    
    25,889
    
    
    
    27,080
    
    
    
    1,012Weighted average number of shares outstanding:Common
    
    
    125,286,067
    
    
    
    127,373,917
    
    
    
    127,373,917Preferred
    
    
    250,644,625
    
    
    
    254,747,800
    
    
    
    254,747,800Basic and diluted earnings per share from
continuing operations:Common
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04Preferred
    
    
    0.21
    
    
    
    0.21
    
    
    
    0.04
 (i)

Previously reported net income EPS amounts for the year ended December 31, 2004 of 0.02 and 0.02 for common and preferred shares,
respectively, were adjusted to the amounts presented in the table above. 4. Recently issued accounting pronouncements
  The accompanying notes are an integral part of these financial statements.
 F-12




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2004 and 2003
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
   The accompanying notes are an integral part of these financial statements.
 F-13




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 5. Cost of Services Rendered and Operating Expenses
 Year ended December 31, 2006Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    786,712
    
    
    
    34,799
    
    
    
    821,511Third party services (ii)
    
    
    133,384
    
    
    
    27,366
    
    
    
    160,750Depreciation (iii)
    
    
    59,529
    
    
    
    4,919
    
    
    
    64,448Facilities (iv)
    
    
    45,579
    
    
    
    3,513
    
    
    
    49,092Other costs and expenses
    
    
    12,149
    
    
    
    1,782
    
    
    
    13,931Total
    
    
    1,037,353
    
    
    
    72,379
    
    
    
    1,109,732
 Year ended December 31, 2005Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    670,998
    
    
    
    28,771
    
    
    
    699,769Third party services (ii)
    
    
    93,055
    
    
    
    24,038
    
    
    
    117,093Depreciation (iii)
    
    
    41,907
    
    
    
    3,939
    
    
    
    45,846Facilities (iv)
    
    
    39,385
    
    
    
    1,354
    
    
    
    40,739Other costs and expenses
    
    
    10,562
    
    
    
    1,640
    
    
    
    12,202Total
    
    
    855,907
    
    
    
    59,742
    
    
    
    915,649
 The accompanying notes are an integral part of these financial statements.
 F-14




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Year ended December 31, 2004Selling,generalCost of
    
    
    andservices
    
    
    adminis-rendered
    
    
    trative
    
    
    TotalPersonnel (i)
    
    
    464,893
    
    
    
    25,846
    
    
    
    490,739Third party services (ii)
    
    
    59,180
    
    
    
    13,782
    
    
    
    72,962Depreciation (iii)
    
    
    22,241
    
    
    
    3,106
    
    
    
    25,347Facilities (iv)
    
    
    16,610
    
    
    
    1,347
    
    
    
    17,957Other costs and expenses
    
    
    11,147
    
    
    
    2,709
    
    
    
    13,856Total
    
    
    574,071
    
    
    
    46,790
    
    
    
    620,861
 
 (i)
    
    Personel cost was affected by the increase in services rendered and the 2005 collective
bargaining agreement, which adjusted salaries by 5% as from January 2006.(ii)
    
    Third party services considered as Costs of services rendered refer mainly to data
processing and workstation maintenance, while third-party services considered Selling,
general and administrative refer to expenses with consulting, traveling, legal counsel and
others.(iii)
    
    The increase in depreciation costs results mainly from the acquisition of equipments, due to
the expansion of the operations, installments of new workstations and new sites.(iv)
    
    Facilities expenses include mainly amounts which are being paid for the rental of properties
and contact center operating infrastructure. 6. Other operating income (expenses), net
 The accompanying notes are an integral part of these financial statements.
 F-15




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Years ended December 31,2006
    
    
    2005
    
    
    2004Provision for contingencies (Note 15)
    
    
    (8,413
    )
    
    
    (10,908
    )
    
    
    (613
    )Other, net (i)
    
    
    (3,008
    )
    
    
    (1,190
    )
    
    
    (442
    )Total
    
    
    (11,421
    )
    
    
    (12,098
    )
    
    
    (1,055
    )
 
 (i)
    
    Other, net refers, mainly, to IPTU  Municipal Real Estate Tax from the leased buildings. The accompanying notes are an integral part of these financial statements.
 F-16




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 7. Financial income (expenses), net
 Years ended December 31,2006
    
    
    2005
    
    
    2004Financial incomeInterest on securities
    
    
    25,523
    
    
    
    21,569
    
    
    
    864Other
    
    
    1,018
    
    
    
    108
    
    
    
    3826,541
    
    
    
    21,677
    
    
    
    902Financial expensesBank
charges, including CPMF (i)
    
    
    (5,332
    )
    
    
    (5,341
    )
    
    
    (2,605
    )Other (ii)
    
    
    (2,804
    )
    
    
    (1,984
    )
    
    
    (2,959
    )(8,136
    )
    
    
    (7,325
    )
    
    
    (5,564
    )18,405
    
    
    
    14,352
    
    
    
    (4,662
    )
 
 (i)

CPMF, or provisory contribution
over financial movements, is a contribution paid by individuals
and companies over withdrawals from bank and financial investment
accounts.(ii)
    
    Other expenses refers, mainly  taxes on financial operations; monetary variation on
contingencies and interest on short-term liabilities and leasing obligations. 8. Income tax and social contribution
   The accompanying notes are an integral part of these financial statements.
 F-17




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Years ended December 31,2006
    
    
    2005
    
    
    2004Income from continuing operations before
tax and social contribution
    
    
    115,836
    
    
    
    131,627
    
    
    
    28,038Federal income tax and social contribution expense at
statutory enacted rates
    
    
    (39,384
    )
    
    
    (44,753
    )
    
    
    (9,534
    )Adjustments to derive effective tax rate:Tax effects on permanent differences
    
    
    1,230
    
    
    
    (5,634
    )
    
    
    (2,034
    )Income tax and social contribution
tax benefit (provision)
    
    
    (38,154
    )
    
    
    (50,387
    )
    
    
    (11,568
    )Tax credit generated by discontinued operations
    
    
    
    
    
    
    
    
    
    
    4,980(38,154
    )
    
    
    (50,387
    )
    
    
    (6,588
    )
  2006
    
    
    2005Deferred taxes relative to temporary differencesProvision for contingencies
    
    
    7,592
    
    
    
    5,382Profit sharing
    
    
    3,060
    
    
    
    1,152Tax loss carryforwards
    
    
    21,427
    
    
    
    33,08232,079
    
    
    
    39,616Current deferred tax assets
    
    
    12,176
    
    
    
    13,736Lon-term deferred tax assets
    
    
    19,903
    
    
    
    25,880
 9. Cash and cash equivalents
 The accompanying notes are an integral part of these financial statements.
 F-18




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Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 As of December 31,2006
    
    
    2005Cash and banks accounts (i)
    
    
    65,235
    
    
    
    75,539Certificate of deposits (ii)
    
    
    166,064
    
    
    
    153,949231,299
    
    
    
    229,488
 
 (i)
    
    The amounts are kept in a current account, as the Company has accounts payable due on the
first days of each month, relating to the payment of suppliers, taxes and payroll.(ii)
    
    In general, these financial investments are indexed by the Brazilian Interbank Certificate of
Deposit (CDI) rate, with daily liquidity and maturity after one month from the date of
issuance. 10. Deferred taxes
 As os December 31,2006
    
    
    2005Short
    
    
    Long
    
    
    Short
    
    
    Longterm
    
    
    term
    
    
    term
    
    
    termIncome tax on temporary differences
    
    
    2,257
    
    
    
    5,582
    
    
    
    854
    
    
    
    3,983Social Contribution on temporary differences
    
    
    810
    
    
    
    2,010
    
    
    
    305
    
    
    
    1,425Income tax
on tax loss carryforwards
    
    
    6,327
    
    
    
    9,414
    
    
    
    9,248
    
    
    
    15,044Social
Contribution on tax loss carryforwards
    
    
    2,782
    
    
    
    2,897
    
    
    
    3,329
    
    
    
    5,42812,176
    
    
    
    19,903
    
    
    
    13,736
    
    
    
    25,880
 The accompanying notes are an integral part of these financial statements.
 F-19




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 11. Recoverable taxes
 As of December 31,2006
    
    
    2005Income tax recoverable (i)
    
    
    19,546
    
    
    
    18,254Social contribution recoverable (i)
    
    
    7,210
    
    
    
    6,719Withholding taxes
    
    
    5,634
    
    
    
    5,243Contributions to the National Social Security Institute
    
    
    440
    
    
    
    1,248Other
    
    
    1,057
    
    
    
    55733,887
    
    
    
    32,021
 
 (i)
    
    Recoverable income tax and social contribution relate to advance payments made throughout
the year to be compensated with income tax and social contribution payable upon filling of the
Companys tax return. 12. Property and equipment, net
 As of December 31,2006
    
    
    2005AnnualAccumulated
    
    
    
    
    
    
    
    
    
    
    depreciationCost
    
    
    depreciation
    
    
    Net
    
    
    Net
    
    
    rate (%)Telecom and IT systems (i)
    
    
    221,669
    
    
    
    (95,358
    )
    
    
    126,311
    
    
    
    111,543
    
    
    
    20Improvements on third
party assets (ii)
    
    
    123,445
    
    
    
    (23,224
    )
    
    
    100,221
    
    
    
    75,575
    
    
    
    10Furniture and fixtures
    
    
    34,722
    
    
    
    (9,554
    )
    
    
    25,168
    
    
    
    25,603
    
    
    
    10Construction in progress
    
    
    877
    
    
    
    
    
    
    
    877
    
    
    
    3,853Other
    
    
    17,204
    
    
    
    (4,188
    )
    
    
    13,016
    
    
    
    12,069
    
    
    
    10Intangible
Software
    
    
    73,117
    
    
    
    (28,983
    )
    
    
    44,134
    
    
    
    36,736
    
    
    
    20Total
    
    
    471,034
    
    
    
    (161,308
    )
    
    
    309,727
    
    
    
    265,379
 The accompanying notes are an integral part of these financial statements.
 F-20




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 
 (i)
    
    The increases which took place in 2006 are related to the increase in the amount of customer
workstations in the São Paulo, Pernambuco and Rio de Janeiro sites, associated with the
expansion of the Companys activities.(ii)
    
    The leasing contracts related to these assets vary from 5 to 8 years and the Company has the
ability, at its option, to extend these contracts by the same periods.  13. Taxes other than on income
 Consolidated2006
    
    
    2005Short
    
    
    Long
    
    
    Shortterm
    
    
    term
    
    
    termServices Tax  ISS
    
    
    5,523
    
    
    
    
    
    
    
    5,235Social Security Financing (COFINS)
    
    
    4,170
    
    
    
    
    
    
    
    4,213INSS- Installments
    
    
    768
    
    
    
    2,745Other
    
    
    1010,471
    
    
    
    2,745
    
    
    
    9,448
 14. Taxes on income
 2006
    
    
    2005Income tax payable
    
    
    21,249
    
    
    
    19,810Social contribution payable
    
    
    7,839
    
    
    
    7,421Total
    
    
    29,088
    
    
    
    27,231
 The accompanying notes are an integral part of these financial statements.
 F-21




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 15. Commitments and Contingencies
 (a) Contingencies
 As of December 312006
    
    
    2005TaxServices Tax  ISS
    
    
    671Accrued Severance Pay  FGTS (i)
    
    
    
    
    
    
    940Contributions to the National Social Security Institute  INSS (ii)
    
    
    5,122
    
    
    
    3,9125,793
    
    
    
    4,852LaborOrbitall (iii)
    
    
    
    
    
    
    7,020Other (iv)
    
    
    22,989
    
    
    
    16,98122,989
    
    
    
    24,001Civil
    
    
    117
    
    
    
    64Total
    
    
    28,899
    
    
    
    28,917
  
 (i)
    
    Contingency provision reversed as the risk no longer exists.(ii)
    
    Provision to regulate contributions to SENAC and SEBRAE entities, in the payments made to
INSS (National Institute of Social Security), accordingly to the FPAS (Pension and Social
Assistance Fund) table.(iii)
    
    This contingency was recorded as a counter entry to Receivable credits, based on the
purchase and sale contract of quotas of Inovação Contact Center Serviços de Contatos
Telefônicos Ltda. signed by Orbitall Serviços e Processamento de Informações Comerciais Ltda.,
and TNL Contax, Orbitall would remain fully liable for any labor claims whose dates precede
the date of the acquisition of Inovação by TNL Contax (April 1, 2004). Since the labor
lawsuits are being agreed with Orbitall, the Companys management believes that is not
necessary to maintain the record of the operation in assets and liabilities accounts.(iv)
    
    Pursuant to the services agreement executed by Telemar and TNL Contax, it was defined that
labor claims, arising from the migration of work agreements shall be incumbent upon Telemar,
which amount has been recorded as a counter entry to Receivable Credits. The amount of labor
claims under Telemars responsibility represents R$4,840 thousand. The labor claims filed
against TNL CONTAX by employees and former employees amount to R$18,149 thousand. The accompanying notes are an integral part of these financial statements.
 F-22




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
   (b) Commitments
 Leasing
  F-23




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 Liability balancesInception
    
    Maturity
    
    Number of
    
    Assets balance
    
    Current part of long-term
    
    Long-term
    
    Payments for the yearLessor
    
    date
    
    date
    
    installments
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005
    
    2006
    
    2005HP Financial
    
    20/12/2004
 29/09/2005
    
    a 20/11/2007
a 29/08/2008
    
    
    36
    
    
    
    6,553
    
    
    
    8,584
    
    
    
    3,724
    
    
    
    3,890
    
    
    
    970
    
    
    
    4,694
    
    
    
    3,890
    
    
    
    2,945IBM Leasing
    
    01/07/2005
 29/07/2005
    
    a 01/06/2008
a 29/06/2008
    
    
    36
    
    
    
    460
    
    
    
    591
    
    
    
    237
    
    
    
    237
    
    
    
    118
    
    
    
    355
    
    
    
    237
    
    
    
    118HP Financial
    
    29/10/2005
 27/04/2006
    
    a 29/09/2009
a 27/03/2010
    
    
    48
    
    
    
    15,233
    
    
    
    15,246
    
    
    
    4,744
    
    
    
    3,548
    
    
    
    9,625
    
    
    
    11,698
    
    
    
    4,246
    
    
    
    360CIT
    
    11/27/2005
    
    10/27/2009
    
    
    48
    
    
    
    11,144
    
    
    
    3,593
    
    
    
    3,272
    
    
    
    937
    
    
    
    7,416
    
    
    
    2,655
    
    
    
    2,245
    
    
    
    156DIBENS (UBB)
    
    9/23/2005
    
    11/3/2010
    
    
    48
    
    
    
    11,275
    
    
    
    10,768
    
    
    
    3,490
    
    
    
    2,824
    
    
    
    6,611
    
    
    
    7,944
    
    
    
    3,330
    
    
    
    528IBM Leasing
    
    25/01/2006
    
    25/12/2009
    
    
    48
    
    
    
    606
    
    
    
    757
    
    
    
    189
    
    
    
    189
    
    
    
    378
    
    
    
    568
    
    
    
    189HP Financial
    
    1/12/2006
 24/9/2006
    
    a 5/11/2011
a 23/9/2011
    
    
    60
    
    
    
    16,398
    
    
    
    
    
    
    
    3,663
    
    
    
    
    
    
    
    12,736
    
    
    
    
    
    
    
    1,915IBM Leasing
    
    6/28/2006
    
    10/24/2011
    
    
    60
    
    
    
    8,040
    
    
    
    
    
    
    
    1,772
    
    
    
    
    
    
    
    6,268
    
    
    
    
    
    
    
    82269,709
    
    
    
    39,539
    
    
    
    21,091
    
    
    
    11,625
    
    
    
    44,122
    
    
    
    27,914
    
    
    
    16,874
    
    
    
    4,107
 Payments due by periodLess than
    
    
    
    
    
    
    
    
    
    
    More thanContractual obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(in thousands ofreais)Capital (finance) lease
    
    
    65,213
    
    
    
    21,091
    
    
    
    34,310
    
    
    
    9,812
    
    
    
    Operating lease (facilities)
    
    
    80,712
    
    
    
    23,138
    
    
    
    42,230
    
    
    
    14,183
    
    
    
    1,161Total
    
    
    145,925
    
    
    
    44,229
    
    
    
    76,540
    
    
    
    23,995
    
    
    
    1,161
 The accompanying notes are an integral part of these financial statements.
 F-24




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 16. Shareholders equity
 (a) Share capital
        F-25




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (b) Additional paid-in capital
  (c) Dividends
     The accompanying notes are an integral part of these financial statements.
 F-26




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
  (d) Appropriated retained earnings
  Unrealized
    
    
    Statutory
    
    
    LegalEarnings Reserve
    
    
    Reserve
    
    
    Reserve
    
    
    TotalAt December 31, 2004
    
    
    5,636
    
    
    
    
    
    
    
    377
    
    
    
    6,013Appropriation from retained earnings
    
    
    5,727
    
    
    
    57,477
    
    
    
    4,033
    
    
    
    67,237At December 31, 2005
    
    
    11,363
    
    
    
    57,477
    
    
    
    4,410
    
    
    
    73,250Proposed dividends from retained earnings
    
    
    (7,050
    )Appropriation from retained earnings
    
    
    12,906
    
    
    
    53,234
    
    
    
    3,736
    
    
    
    69,876At December 31, 2006
    
    
    17,219
    
    
    
    110,711
    
    
    
    8,146
    
    
    
    136,076
  
 
 
 17. Transactions with related parties
  F-27




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 2006BrasilBrasil CAP
    
    
    VeículosCapitali-
    
    
    Companhia
    
    
    TelemarTMAR
    
    
    Oi
    
    
    zações S.A.
    
    
    de Seguros
    
    
    Internet
    
    
    TotalAssetsAccounts receivable
    
    
    7,430
    
    
    
    
    
    
    
    274
    
    
    
    540
    
    
    
    
    
    
    
    8,244LiabilitiesSuppliers
    
    
    1,807
    
    
    
    131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,938RevenuesRevenues from services
rendered
    
    
    605,750
    
    
    
    152,284
    
    
    
    3,241
    
    
    
    5,805
    
    
    
    7,657
    
    
    
    774,737Costs and expensesCosts of services rendered
    
    
    (26,547
    )
    
    
    (2,344
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,891
    )
 2005BrasilBrasil CAP
    
    
    VeículosCapitali-
    
    
    Companhia
    
    
    TelemarTMAR
    
    
    Oi
    
    
    zações S.A.
    
    
    de Seguros
    
    
    Internet
    
    
    TotalAssetsAccounts receivable
    
    
    426
    
    
    
    
    
    
    
    243
    
    
    
    548
    
    
    
    
    
    
    
    1,217LiabilitiesSuppliers
    
    
    1,647
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,779RevenuesRevenues from services
rendered
    
    
    572,378
    
    
    
    96,276
    
    
    
    2,699
    
    
    
    4,481
    
    
    
    5,331
    
    
    
    681,165Costs and expensesCosts of services rendered
    
    
    (7,016
    )
    
    
    (1,866
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,882
    )
 The accompanying notes are an integral part of these financial statements.
 F-28




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 2004BrasilPegasus
    
    
    Brasil CAP
    
    
    VeículosTelecom
    
    
    Capitali-
    
    
    CompanhiaTMAR
    
    
    Oi
    
    
    S.A.
    
    
    zações S.A.
    
    
    de Seguros
    
    
    TotalAssetsAccounts receivable
    
    
    5,021
    
    
    
    2,018
    
    
    
    
    
    
    
    257
    
    
    
    867
    
    
    
    8,163LiabilitiesSuppliers
    
    
    1,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,182RevenuesRevenues from services
rendered
    
    
    352,221
    
    
    
    68,493
    
    
    
    
    
    
    
    2,361
    
    
    
    3,980
    
    
    
    427,055Costs and expensesCosts of services rendered
    
    
    (4,028
    )
    
    
    
    
    
    
    (472
    )
    
    
    
    
    
    
    
    
    
    
    (4,500
    )
  The accompanying notes are an integral part of these financial statements.
 F-29




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 18. Discontinued operations
     December 31,2004Net operating revenueCost of servicesGross profitOperating expenses
    
    
    (4.984
    )Operating loss before interest
    
    
    (4.984
    )Financial result, net
    
    
    (9.663
    )Loss before income tax and social contribution
    
    
    (14.647
    )Income tax and social contribution benefit
    
    
    4.980Loss for the year
    
    
    (9.667
    )
 19. Risk management
 (a) Estimates
 The accompanying notes are an integral part of these financial statements.
 F-30




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
  The accompanying notes are an integral part of these financial statements.
 F-31




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 (b) Financial instruments
  (c) Cash and cash equivalents, accounts receivables, other assets and accounts payable
  (d) Credit risk
  %
   20. Insurance
   The accompanying notes are an integral part of these financial statements.
 F-32




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 AmountsInsurance lines
    
    insuredD&O Management Civil Liability
    
    
    128,232Fire  Permanent assets
    
    
    64,160Loss of income
    
    
    52,310Comprehensive general liability
    
    
    5,000
 The accompanying notes are an integral part of these financial statements.
 F-33




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##### Table of Contents



Contax Participações S.A.
Notes to the Consolidated and Combined Financial Statements
at December 31, 2006 and 2005
(Expressed in thousands of Brazilian Reais, unless otherwise stated)
 21. Subsequent events
 a) Useful lives of IT equipment and furniture
  b) BNDES Agreement
  The accompanying notes are an integral part of these financial statements.
 F-34