UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010 Commission file number 0-28860 NET SERVIÇOS DE COMUNICAÇÃO S.A. (Exact name of Registrant as specified in its charter) Net Communications Services Inc.(Translation of Registrant’s name into English)

   The Federative Republic of Brazil(Jurisdiction of incorporation or organization)
 Rua Verbo Divino, 1356 São Paulo-SP-04719-002Brazil(Address of principal executive offices)  José Antonio Guaraldi Felix Telephone: +55-11-2111-2785 Fax: +55-11-2111-2780 E-mail: ri@netservicos.com.br Rua Verbo Divino, 1356 São Paulo-SP-04719-002Brazil (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Title of each class

   Name of each exchange on which registeredAmerican Depositary Shares, evidenced by American Depositary Receipts, each representing one preferred share, no par value

   Nasdaq Global MarketPreferred shares, no par value

   Nasdaq Global Market*
 *Not for trading but only in connection with the registration of the American Depositary Shares. Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 114,459,685Common Shares, as of December 31, 2010228,503,916Preferred Shares, as of December 31, 2010 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YESXNO If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. YESNOX Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YESXNO Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESXNO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Act. LARGE ACCELERATED FILERXACCELERATED FILERNON-ACCELERATED FILER Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: [  ] U.S. GAAP [x] International Financial Reporting Standards as issued by International Accounting Standards Board  NETC Annual Report 2010 – Form 20-F


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[  ] Other If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ITEM 17ITEM 18 If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESNOX  NETC Annual Report 2010 – Form 20-F


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Table of ContentsPagePart IITEM 1.

   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

   3ITEM 2.

   OFFER STATISTICS AND EXPECTED TIMETABLE

   3ITEM 3.

   KEY INFORMATION

   3Selected Financial Data

   3Risk Factors

   6ITEM 4.

   INFORMATION ON THE COMPANY

   19Business Overview

   19Strategy

   

   21History and Development of the Company

   23Our Services

   24Operations

   27Network Technology

   27Customer Care

   29Sales and Marketing

   29The Social Responsibility Project

   30Competition

   30Licenses

   32Description of Property

   32Regulation

   33Legal Proceedings

   40Organizational Structure

   47ITEM 4A.

   UNRESOLVED STAFF COMMENTS

   49ITEM 5.

   OPERATING AND FINANCIAL REVIEW AND PROSPECTS

   49Overview

   50Acquisitions

   51Critical Accounting Polices

   52Financial Statement Presentation

   53Results of Operations

   57Liquidity and Capital Resources

   63Brazilian Economic Environment

   70ITEM 6.

   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

   74Directors and Board Practices

   74Executive Officers and Senior Managers

   78Indemnification

   79Compensation of Directors and Principal Executive Officers

   79 . 79  i NETC Annual Report 2010 – Form 20-F


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Directors’ Service Contracts

   79Employees

   79Share Ownership

   79Variable Compensation Plan and Long-Term Incentive Plan

   80Pension, Retirement and Similar Benefits

   80ITEM 7.

   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

   81Major Shareholders

   81Shareholders’ Agreements

   82Related Party Transactions

   84ITEM 8.

   FINANCIAL INFORMATION

   88ITEM 9.

   THE OFFER AND LISTING

   89General

   

   89Trading Markets

   90ITEM 10.

   ADDITIONAL INFORMATION

   98Memorandum and Articles of Association

   98Material Contracts

   105Exchange Controls

   106Dividend Policy

   107Taxation

   111Documents on Display

   114ITEM 11.

   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET**RISK**

   116ITEM 12.

   DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

   117Part IIITEM 13.

   DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

   120ITEM 14.

   MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY**HOLDERS AND USE OF PROCEEDS**

   120ITEM 15.

   CONTROLS AND PROCEDURES

   120Disclosure Controls and Procedures

   120Management’s Annual Report on Internal Control over Financial Reporting

   120Changes in Internal Control Over Financial Reporting

   121ITEM 16A.

   AUDIT COMMITTEE FINANCIAL EXPERT

   121ITEM 16B.

   CODE OF ETHICS

   121ITEM 16C.

   PRINCIPAL ACCOUNTANT FEES AND SERVICES

   121



ii


NETC Annual Report 2010 – Form 20-F




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ITEM 16D.

   EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT**COMMITTEES**

   122ITEM 16E.

   PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND**AFFILIATED PURCHASERS.**

   122ITEM 16F.

   CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT.

   122ITEM 16G.

   **CORPORATE GOVERNANCE.**

   122Part IIIITEM 17.

   FINANCIAL STATEMENTS

   123ITEM 18.

   FINANCIAL STATEMENTS

   123ITEM 19.

   EXHIBITS

   124
  . 124  iii NETC Annual Report 2010 – Form 20-F


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Table of Contents
 Certain References and Information In this Form 20-F, references to “Net Serviços,” “Net,” “we,” “us” and “our” are to Net Serviços de Comunicação S.A. and, unless the context requires otherwise, include the consolidated subsidiaries of Net Serviços de Comunicação S.A. References to our “ADSs” are to our American Depositary Shares, each of which represents one of our preferred shares. All references in this Form 20-F to “reais,” “real” or “R$” are to Brazilian reais, and all references to “U.S. dollars,” “$” or “US$” are to United States dollars. Unless otherwise specified, certain amounts stated in this Form 20-F in U.S. dollars have been translated, for the convenience of the reader, from reais at the rate in effect on December 31, 2010 of R$1.6662 per US$1.00. These translations should not be construed as a representation that reais could have been converted into U.S. dollars at that rate on that date or on any other date. On June 1st, 2011, the rate of exchange was R$1.5878 per US$1.00. See “Exchange Rate Information.” Unless otherwise specified and other than with respect to historical financial statement information, we present all operating statistics and subscriber information concerning Net Serviços as of December 31, 2010. Forward-Looking Statements This Form 20-F contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are intended to enhance your ability to assess our future financial performance. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results and other developments, and contain words such as “may,” “might,” “should,” “intend,” “expect,” “anticipate,” “plan” and similar expressions. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, our actual results could be materially different from the beliefs we express in our forward-looking statements. The following factors, among others, may have such an impact: competition from other cable operating systems and other service providers and industry consolidation; failure to keep pace with developments in technology; our inability to charge customers for equipments costs related to multiples outlets; increases in churn rates; increases in programming costs; substantial additional expenses on our network; piracy of our pay-television services; inability to renew licenses; dependence on third parties including suppliers and vendors; interference with our ability to provide our services; increases in use of bandwidth-intensive Internet-based services; government regulations and changes therein; factors pertaining to the Internet access portion of our business; unfavorable outcome in legal proceedings arising out of the regular course of our business; substantial additional taxes on our network; interests of our current major shareholders that may differ from yours; dependence on key members of senior management and any difficulty in hiring new managers; difficulties in integrating companies we acquire; the impact of any weakening of global and Brazilian economic conditions; Brazilian political and economic conditions and interventions by the Brazilian government and changes in exchange rates, inflation, interest rates and performance of financial markets; developments in, and the perception of risk in, other countries and emerging market economies; restrictions on the movement of capital out of Brazil; limited liquidity of the trading market for ADSs in the U.S; fewer and less well defined shareholders’ rights related to our ADSs than comparable securities of an U.S. issuer; difficulties inproceedings with respect to your interests as a shareholder; risk of losing the ability to remit foreign currency abroad and unfavorable tax treatment if you exchange your ADSs for preferred shares; difficulty in exercising certain rights related to our ADSs including preemptive rights; no dividend entitlement; and holdings of preferred shares and ADSs subject to dilution.  1 NETC Annual Report 2010 – Form 20-F


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Table of Contents



Developments in any of these areas, which are more fully, described elsewhere in this Form 20‐F and which descriptions are incorporated into this section by reference, could cause our results to differ materially from results that have been or may be projected by us or on our behalf. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We caution that the foregoing list of factors is not exclusive. We urge you not to unduly rely on forward-looking statements contained in this Form 20-F. Exchange Rate Information The information set forth below with respect to exchange rates is based on the official selling rate of the Central Bank of Brazil, or the Central Bank. Low

   

   High

   

   Average(1)

   

   Period-end(Reais per US$1.00)Year2006

   2.0586

   

   2.3711

   

   2.1679

   

   2.13802007

   1.7325

   

   2.1556

   

   1.9300

   

   1.77132008

   1.5593

   

   2.5004

   

   1.8335

   

   2.33702009

   1.7024

   

   2.4218

   

   1.9905

   

   1.74122010

   1.6554

   

   1.8811

   

   1.7589

   

   1.66622011 (through June 1st)

   1.5654

   

   1.6912

   

   1.6367

   

   1.5878   Low

   

   High(Reais per US$1.00)MonthNovember 2010

   1.6801

   

   1.7336December 2010

   1.6662

   

   1.7117January 2011

   1.6510

   

   1.6912February 2011

   1.6612

   

   1.6776March 2011

   1.6287

   

   1.6757April 2011

   1.5654

   

   1.6194May 2011

   1.5747

   

   1.6339June 2011 (through June 1st)

   1.5878

   

   1.5878   Source: Central Bank (1)   Calculated by using the average of the exchange rates on the last day of each month during the relevant period.  2 NETC Annual Report 2010 – Form 20-F


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Table of Contents
 Fluctuations in the exchange rate between the real and the U.S. dollar will affect the U.S. dollar equivalent of the real-denominated prices of our shares and, as a result, will affect the market prices of our ADSs in the United States. Part I ITEM 1.          IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS. Not applicable. ITEM 2.          OFFER STATISTICS AND EXPECTED TIMETABLE. Not applicable. ITEM 3.          KEY INFORMATION. Selected Financial Data  The Company has adopted International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) for the first time in its consolidated financial statements for the year ended December 31, 2009, which included the comparative consolidated financial statements for December 31, 2008 and, for the balance sheet, January 1, 2008, which was the transition date to IFRS. Therefore, we present in this section financial and operating data derived from our audited consolidated financial statements as of and for the years ended December 2010, 2009 and 2008 and as of January 1, 2008 (date of transition to IFRS). The selected audited consolidated financial data presented in accordance with IFRS set forth below should be read in conjunction with, and are qualified in their entirety by reference to, “Item 5. Operating and Financial Review and Prospects” and our audited consolidated financial statements and notes thereto included elsewhere in this Form 20-F. On October 11, 2006, we acquired a minority invest in Vivax Ltda., formerly Vivax S.A., or Vivax, and on June 11, 2007, we acquired the remaining outstanding shares of Vivax, which became a wholly owned subsidiary of our company. The financial results of Vivax have been consolidated with our audited consolidated financial statements beginning on June 1, 2007. On December 29, 2008, we acquired the control of 614 Telecomunicações Ltda., 614 TVP João Pessoa S.A. and 614 TVT Maceió S.A., jointly referred to as “BIGTV”, and BIGTV became a wholly owned subsidiary of our company. The financial results of BIGTV have been included in our audited consolidated financial statements beginning on December 29, 2008. On November 29, 2009, Vivax and BIGTV were merged into Net. On June 30, 2009, we acquired the control of ESC 90 Telecomunicações Ltda., or ESC 90, and ESC 90 became a wholly owned subsidiary of our Company. The financial results of ESC 90 have been included in our audited consolidated financial statements beginning on June 30, 2009. On July 31, 2010, Esc 90 was merged into Net.   3 NETC Annual Report 2010 – Form 20-F


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Table of Contents
 STATEMENT OF COMPREHENSIVE INCOME DATA Year Ended December 31,2010

   

   2010

   

   2009

   

   2008(Convenience translation to US$ in thousands, except share amounts)

   (R$ in thousands, except per share and share amounts)Gross sales revenue (1)

   

   US$    4,262,146

   

   R$ 7,101,588

   

   R$ 6,070,401

   

   R$ 4,852,755Taxes on sales, discounts and cancellations (2)

   

   (1,017,836)

   

   (1,695,919)

   

   (1,457,012)

   

   (1,162,346)Net sales

   

   3,244,310

   

   5,405,669

   

   4,613,389

   

   3,690,409Operating cost and expenses:Programming and other direct operating costs

   

   (1,548,206)

   

   (2,579,623)

   

   (2,274,916)

   

   (1,749,397)Selling, general and administrative expenses

   

   (752,033)

   

   (1,253,037)

   

   (1,035,867)

   

   (945,202)Depreciation and amortization

   

   (540,888)

   

   (901,225)

   

   (618,748)

   

   (493,368)Other expenses

   

   (8,237)

   

   (13,725)

   

   (60,389)

   

   (16,905)Total operating costs and expenses

   

   (2,849,364)

   

   (4,747,610)

   

   (3,989,920)

   

   (3,204,872)Operating profit

   

   394,946

   

   658,059

   

   623,469

   

   485,537Finance results:Finance expense

   

   (215,714)

   

   (359,422)

   

   (27,355)

   

   (432,462)Finance income

   

   101,641

   

   169,354

   

   92,779

   

   113,935Profit before income taxes and socialcontribution

   

   280,873

   

   467,991

   

   688,913

   

   167,010Income taxes and social contribution

   

   (96,531)

   

   (160,840)

   

   47,035

   

   (146,756)Profit

   

   US$       184,342

   

   R$    307,151

   

    ́R$  735,948

   

    ́R$    20,254Basic and diluted earnings per common share

   

   US$             0.50

   

   R$          0.84

   

    ́R$        2.01

   

    ́R$        0.06Basic and diluted earnings per preferred share

   

   US$             0.55

   

   R$          0.92

   

   R$        2.22

   

    ́R$        0.06Weighted average number of common shares outstanding

   

   114,459,685

   

   114,459,685

   

   114,301,508

   

   112,947,396Weighted average number of preferred shares outstanding

   

   228,503,916

   

   228,503,916

   

   228,187,562

   

   225,479,722OTHER FINANCIAL DATANet cash provided by operating activities

   

   US$       741,931

   

   R$ 1,236,205

   

   R$ 1,002,655

   

   R$ 1,291,643Net cash used in investing activities

   

   (748,413)

   

   (1,247,005)

   

   (1,184,624)

   

   (1,372,531)Net cash (used in) provided by financing activities

   

   (109,978)

   

   (183,245)

   

   460,694

   

   248,162
   4 NETC Annual Report 2010 – Form 20-F


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Table of Contents
  As of December 31,2010

   

   2010

   

   2009

   

   2008

   

   January1, 2008**(Convenience translation to** **US$ in thousands, except operating data)**

   

   (R$ in thousands, except operating data)BALANCE SHEET DATAAssets:Total current assets

   US$ 899,555

   

   R$ 1,498,838

   

   R$ 1,587,515

   

   R$ 1,022,679

   

   R$ 808,876Property, plant and equipment

   1,993,968

   

   3,322,350

   

   2,767,037

   

   2,237,681

   

   1,649,533Intangible assets

   1,491,982

   

   2,485,940

   

   2,523,168

   

   2,469,757

   

   2,080,631Prepaid rights for use

   292,466

   

   487,307

   

   659,842

   

   -

   

   -Deferred taxes

   337,548

   

   562,423

   

   643,936

   

   496,872

   

   564,157Other assets(3)

   110,663

   

   184,386

   

   152,293

   

   168,941

   

   221,951Total assets

   US$ 5,126,182

   

   R$ 8,541,244

   

   R$8,333,791

   

   R$ 6,395,930

   

   R$ 5,326,148Liabilities:Total current liabilities

   US$ 773,198

   

   R$ 1,288,303

   

   R$1,111,941

   

   R$ 918,074

   

   R$ 604,295Non-current debt

   1,244,380

   

   2,073,386

   

   2,113,329

   

   1,701,485

   

   1,094,412Deferred revenues

   367,417

   

   612,190

   

   782,279

   

   93,912

   

   41,520Other liabilities(4)

   451,746

   

   752,699

   

   818,727

   

   910,892

   

   834,608Total liabilities

   2,836,741

   

   4,726,578

   

   4,826,276

   

   3,624,363

   

   2,574,835Stockholders’ Equity

   US$ 2,289,441

   

   R$ 3,814,666

   

   R$ 3,507,515

   

   R$ 2 ,771,567

   

   R$ 2,751,313Total Liabilities and Stockholders’ Equity

   US$5,126,182

   

   R$8,541,244

   

   R$ 8,333,791

   

   R$ 6,395,930

   

   R$ 5,326,148   As of December 31,2010

   

   

   2010

   

   2009

   

   2008(Convenience translation to US$ in thousands, except operating data)

   

   

   (R$ in thousands, except operating data)OPERATING DATA(at end of period)Total homes passed by cable, excluding optical network(5)

   11,543,224

   

   

   11,543,224

   

   10,776,603

   

   10,192,715Total connected pay-television subscribers(6)

   4,212,288

   

   

   4,212,288

   

   3,689,736

   

   3,182,196Cable penetration (7)

   36.5%

   

   

   36.5%

   

   34.2%

   

   31.2%
 
 (1)Revenue includes fees from subscription services (pay-television and broadband Internet), connection fees, pay-per-view and fixed line telephony services. (2)     Taxes and other deductions from revenues consist primarily ofImposto sobre Circulação de Mercadorias e Prestação de Serviços,or ICMS, a value-added tax;Imposto Sobre Serviço,or ISS, a municipal tax;Programa de Integração Social,or PIS, a federal tax;Contribuição para o Financiamento da Seguridade Social,or COFINS, afederal social security tax;Fundo de Universalização dos Serviços de Telecomunicações,orFUST; andFundo para o Desenvolvimento Tecnológico das Telecomunicações,or FUNTTEL taxes.See “Item 5. Operating and Financial Review and Prospects—Financial Statement Presentation—Taxes and Other Deductions from Revenues.” (3)     Includes judicial deposits, recoverable taxes and other non-current assets. (4)     Includes deferred income taxes and social contribution, provisions and other non-current liabilities. (5)     Includes 147,094 ESC90 homes passed by cable in 2009. (6)     Includes 31,054 ESC90 total connected pay-television subscribersin 2009. (7)     Cable penetration is calculated by dividing connected subscribers by homes passed as of the end of each year. In 2009, cable penetration without ESC90 homes passed by cable and total connected pay-television subscribers was 34.4%.    5 NETC Annual Report 2010 – Form 20-F


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Table of Contents
 Risk Factors You should carefully consider the risks and uncertainties described below and the other information in this Form 20-F, including the discussions set forth in “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects,” as well as our audited consolidated financial statements and related notes included elsewhere in this Form 20-F. Risks Related to Our Business We operate our cable systems under licenses that are non-exclusive, and the industry in which we operate is highly competitive, so that an increase in overbuild and competition can adversely impact our business and results of operations. We and our subsidiaries provide cable television services pursuant to the terms and conditions of licenses granted and supervised byAgência Nacional de Telecomunicações,or Anatel, the Brazilian National Telecommunications Agency, the applicable regulatory authority. Anatel has the power to grant licenses to competitors in the same geographic areas in which we already operate. As a result, competing operators may build systems and provide services in areas in which we hold licenses. The existence of more than one cable system operating in the same territory is referred to as an “overbuild.” Overbuilds could adversely affect our growth, financial condition and results of operations by increasing competition or creating competition where none existed previously. We currently compete with: ·cable systems in seven of the 93 locations in which we operate, including systems in the cities of São Paulo, Curitiba and Florianópolis; ·direct-to-home, or DTH, services offered in Brazil by Brazilian and international media consortia and by three large telecommunication companies; ·Brazilian broadcast networks and their local affiliates; ·multi-channel multi-point distribution systems, or MMDS, in São Paulo and Rio de Janeiro; ·wireless telephony services and wireless 3G broadband Internet services offered by wireless telephony companies; ·movie theaters, video rental stores and other entertainment and leisure activities generally; and ·fixed line telephony service providers. We also compete with incumbent telecommunications companies in all cities in which we offer pay-television, broadband Internet and fixed line telephony services. Each of these incumbent telecommunications companies has significantly greater financial resources than we do. The attractive demographics of our service territory make it a desirable location for investment by these companies. Their competitive position may be improved due to changes in the current legislative and regulatory framework or if they invest in new technologies or infrastructure.  6 NETC Annual Report 2010 – Form 20-F


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Table of Contents
 The effects of competition on our business are highly uncertain and will depend on a variety of factors, including economic conditions, regulatory developments, the behavior of our customers and competitors and the effectiveness of measures we take in response to the competition we face. Our ability to compete successfully will depend on customer service, on our marketing strategy and on our ability to anticipate and respond to various competitive factors affecting our industry, including the introduction of new services and technologies, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors. If we are unable to successfully respond to competition and compensate for declining prices by adding new customers, increasing usage and offering new services, our revenues and profitability could decline. We may not be able to continue charging our customers for equipment costs related to more than one pay-television outlet per household.  On April 22, 2009, Anatel Resolution No. 528 was published, or Resolution No. 528, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. TheAssociação Brasileira de TV por Assinatura, or the ABTA (the Brazilian Pay TV Association), filed an administrative appeal to Resolution No. 528 with Anatel. As a result of this appeal, Anatel published a clarification to Resolution No. 528 explaining that pay-television operators can charge for the cost of the equipment, including rental, lease and sale of set-top boxes. However, several state consumer defense associations are challenging this rule in court claiming that pay-television operators cannot charge for multiple outlets, including any equipment cost. We cannot predict the outcome of such claims, and, as a result, we are currently unable to assess the impact of Resolution No. 528 on our business, cash flows and results of operations. On March, 19, 2010, Anatel issued an administrative resolution known as “Sumula 9” that authorizes rental charges for equipment used in multiple outlets. There can, however, be no assurance that we will be able to charge customers for lease and sale of set-top boxes costs relating to multiple outlets until such challenges are definitively resolved.  This could have a material adverse effect on our business, cash flows and results of operations. We may not be able to keep pace with developments in technology. Technology in the communications industry is changing rapidly, which means it is possible that the technology in which we invest for purposes of delivering our new services could be rendered obsolete by the advent of superior or cheaper technology. It is also likely that many of the services we will offer in the future will also be offered by our competitors. Moreover, new technologies have been, and will likely continue to be, developed that further increase the number of competitors we face for our video, high-speed Internet and telephony services. Therefore, our failure to introduce these new services rapidly and efficiently to the marketplace and to sell them as effectively as our competitors could significantly harm our ability to generate sufficient revenues from such services. New services, once marketed, may not meet consumer expectations or demand, can be subject to delays in development and may fail to operate as intended. A lack of market acceptance of new services which we may offer, or the development of significant competitive services by others, could have a material adverse impact on our revenues and operating cash flow. Technological advances could require us to expend substantial financial resources in the development or implementation of new technologies in order to prevent our services from becoming obsolete, and there is no assurance that sufficient financial resources will be available in order to fund new technology, especially in light of our debt service obligations and restrictive covenants. As a result, significant competition in the future may come from new entrants to our markets that do not face the cost of upgrading an installed base of older equipment.  7 NETC Annual Report 2010 – Form 20-F


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 We cannot assure you that demand for new services, such as digital cable television, high-definition cable television, digital video recorder, near video-on-demand and fixed line telephony, will be sufficient to recover our costs of developing and marketing such services. In addition, we are unable to assure you as to the ultimate effect on us of possible technological changes. Increases in rates of churn could negatively affect our revenues and profitability. Subscriber “churn” is the total number of net disconnected subscribers (excluding temporarily blocked subscribers) for a period as a percentage of the average number of subscribers for the same period. Our ability to generate pay-television, broadband Internet and telephony subscription revenues is dependent on our ability to attract and retain subscribers, which entails significant costs. Such costs include marketing expenses and the programming fees we must pay in order to assemble attractive programming packages and keep an adequate level of customer satisfaction, which may be temporarily affected during accelerated growth periods. We also incur certain unrecoverable costs, particularly equipment installation costs, sales commissions and marketing costs, for every new subscriber we connect to our cable network. The fact that we experience a variety of significant fixed costs for each new subscriber means that high rates of subscriber churn could have a material adverse effect on our operating expenses and profitability, especially for services, such as telephony, where we expect to recover our customer acquisition costs over a longer period. In addition, in 2008 we started to offer a new package targeting a lower income segment. In case of a downturn of the Brazilian economy, or as a result of differences inherent to this new customer segment, we may experience higher churn rates. See “Item 4. Information on the Company—Customer Care—Customer Service and Management of Churn.” Increases in our programming costs would adversely affect our cash flow and operating margins. Programming has been, and is expected to continue to be, our largest operating expense, representing 23.3% and 22.5% of our net sales in 2010 and 2009, respectively. Under Brazilian law, our contracts with our current subscribers allow us to increase subscription fees only once every 12 months and then only in proportion to inflation. Accordingly, these subscriber contracts, along with market constraints, limit our ability to pass along increases in programming costs to our subscribers. Any increase in programming costs that we are unable to pass on to subscribers could adversely affect our cash flows and operating margins. Historically, the amounts charged to us under our programming agreements had been denominated in U.S. dollars. During 2003, we entered into negotiations with our programmers to amend our programming agreements to provide that we are charged for programming in reais instead of in U.S. dollars, so as to reduce the impact of exchange rate fluctuations on our programming costs. In 2009, we concluded the execution of definitive agreements with substantially all of our programmers, which provide that we are charged for programming in reais instead of in U.S. dollars. We may be subject to substantial additional expenses on our network, which would have a material adverse impact on results of operations. The legislative branch of the municipal government of São Paulo passed a bill which would require all cable networks installed in the city of São Paulo on poles belonging to power and telephone utilities and cable companies to be moved to underground facilities. The bill is still subject to approval by the mayor of São Paulo. Should the law be enacted, all cable installations would be required to be underground. Presently, substantially all of our network in the city of SãoPaulo is installed on poles. Our network in the city of São Paulo represents approximately 29.0%of our total network as of December 31, 2010. Should the mayor approve the bill, we would have to incur significant costs in order to comply with its terms. This would materially and negatively impact our cash flows.  8 NETC Annual Report 2010 – Form 20-F


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Piracy could negatively affect our revenues. “Piracy” refers to a household purposely receiving a provider’s services without paying for such services. Piracy of our cable television services occurs principally through illegal cable connections to our network which provide our services to unauthorized outlets and unauthorized installations. Brazilian pay-television service providers experience a high rate of piracy, mainly due to Brazil’s economic environment. If we are not able to control levels of piracy under our network, our revenues could be negatively affected. We operate our cable systems under licenses that are subject to conditional renewal. Our cable licenses are subject to periodic renewal, which is conditioned upon, among other things, our having met certain requirements concerning our ownership, system build-out and technical, financial and legal ability to operate the system. Anatel may seek a judgment allowing it to revoke the license of a cable television licensee that, due to the lack of technical, financial or legal capacity, fails to render cable television services on a regular basis. Our cable licenses begin to expire in 2011 and we have begun the renewal process with Anatel. We cannot assure you that we will be able to maintain the technical and financial capacity necessary to render regular cable television services. Anatel could refuse to renew one or more of our licenses if we fail to provide such regular cable television services. If we were to lose one or more of our licenses, such loss could materially and adversely affect our business, financial condition and results of operations. We depend upon third parties to provide certain sales and customer services. We rely on third-party vendors to provide cost-effective and efficient customer services. Among other activities, these outsourced services relate to direct sales and customer relations, including call centers, installation workforce and sales people. If any of our third party service providers were to discontinue their services, due to operating or financial difficulties or otherwise, or were to provide poor service quality or otherwise not meet our specifications, our ability to respond to our customers timely, cost effectively, or at all, would be hindered, which could in turn harm our business. We depend on key suppliers and vendors to provide equipment that we need to operate our business. We depend upon various key suppliers and vendors to provide us network equipment, which we need to expand and operate our business. If these suppliers or vendors fail to provide equipment or services to us on a timely basis or at all, due to operating or financial difficulties or otherwise, we could experience disruptions, which could have an adverse effect on our revenues and results of operations. Unforeseen events could interfere with our ability to provide our services. Unforeseen events, such as fissures in our cable network, power outages, natural disasters, fire in our control centers or other similar events, could temporarily impair the quality of our signal or prevent us from sending and receiving broadcast signals, as well as cause damage to ourequipment. We cannot assure you that should such events occur we would be able to prevent interruptions in our services. Extended interruptions in service may have a negative effect on our revenues to the extent that such interruptions cause customers to cancel services, request for reimbursement or require significant capital resources to correct.  9 NETC Annual Report 2010 – Form 20-F


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Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.  The rising popularity of bandwidth-intensive Internet-based services poses special risks for our broadband Internet service. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and download. In order to continue to provide high quality service at competitive prices, we need the continued flexibility to develop and refine business models that respond to changing consumer uses and demands and to manage bandwidth usage efficiently. If heavy usage of bandwidth-intensive services grows beyond our current expectations, we may have higher operating costs than currently anticipated to obtain additional bandwidth from third parties or our customers may have a suboptimal experience when using our broadband Internet service. We are subject to extensive government regulations and changes in such regulations could adversely affect our operations. Substantially all of our cable television activities are regulated by Anatel. Regulations cover all facets of the Brazilian cable industry and relate to, among other things, licensing, local access, commercial advertising and foreign investment. For example, Brazilian cable regulations currently: ·require that 51.0% of the voting rights of the cable television companies be held by Brazilian-born persons or persons that have held Brazilian citizenship for over 10 years, or by companies controlled by Brazilian-born persons or persons that have held Brazilian citizenship for over 10 years; ·place limits on the number of licenses that may be held by any single cable television operator and its affiliates; ·provide that cable television licenses may not be transferred without the approval of Anatel; ·require cable television operators to carry certain channels or content; and ·require us to meet certain quality of service goals and maintain quality of service standards and impose sanctions for failure to meet such goals/standards. In addition, under Brazilian currency rules, our contracts with our current subscribers allow us to increase subscription fees only once every 12 months and then only in proportion to inflation. The Brazilian Congress, from time to time, considers revisions to one or more aspects of the regulations applicable to us. Legislative Bill No. 29/2007, or Bill No. 29, proposes restrictions on pay-television operators such as requiring a minimum amount of Brazilian produced content to be distributed and the same must carry channels for all pay-television operators, regardless thetechnology (cable, MMDS or DTH). In addition, Bill No. 29 would allow telecommunication companies to provide cable services and eliminate foreign ownership limitations on cable companies that distribute content through mass electronic communication systems. “Mass electronic communications services/systems” is defined as the distribution of electronic content to the public by means of a subscription contract. It is unclear what changes, if any, will ultimately be enacted to the regulatory regime applicable to our company and our business under Bill No. 29. Bill No. 29 is currently a proposal in the Senate as Complementary Bill No. 116 . It is possible that it will be voted and approved in the second semester of 2011. However, the deadline is uncertain.  10 NETC Annual Report 2010 – Form 20-F


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Changes to the current Brazilian regulatory framework could have a material adverse impact on our results of operations and financial condition. See “Item 4. Information on the Company—Regulation.” The Internet access portion of our business is subject to a number of factors that could adversely affect its growth and performance. Our business plan depends in part on the continued growth of our broadband Internet service, NET Vírtua. If residential Internet usage, and specifically residential broadband Internet usage, does not increase, declines or evolves away from the technologies in which we invest, our business plan could be adversely affected. The Internet industry in Brazil faces a number of uncertainties, including but not limited to: lack of access to computers among Brazilian consumers; lack of reliable security technologies; privacy concerns; excessive or unduly restrictive government regulation; uncertainty regarding intellectual property rights and other legal issues; and failure of the Internet infrastructure, such as servers and modems, to support current levels of usage growth. In addition, our high-speed Internet customers utilize our network to access the Internet and, as a consequence, we or they may become victim to common malicious and abusive Internet activities, such as peer-to-peer file sharing, unsolicited mass advertising (i.e., “spam”) and dissemination of viruses, worms, and other destructive or disruptive software. These activities could have adverse consequences on our network and our customers, including degradation of service, excessive call volume to call centers, and damage to our or our customers' equipment and data. In addition, any security breaches could damage our reputation and require us to expend resources to remedy. Significant incidents could lead to customer dissatisfaction and, ultimately, loss of customers or revenue, in addition to increased costs to service our customers and protect our network. Any of these and other factors could negatively affect our ability to sell our broadband Internet service or any other Internet-based services we may introduce in the future. In addition, any significant loss of high-speed Internet customers or revenue, or significant increase in costs of serving those customers, could adversely affect our growth, financial condition and results of operations. We and our subsidiaries are party to several legal proceedings arising out of the regular course of our business. If we receive unfavorable outcomes in these proceedings, our cash flows could be materially and adversely affected. We and our subsidiaries are party to several legal proceedings arising out of the regular course of our business. Such legal proceedings relate predominantly to tax matters and civil andlabor disputes. Any litigation connected with such legal proceedings could be costly, time consuming and injure our reputation.  11 NETC Annual Report 2010 – Form 20-F


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We cannot assure you that we will obtain a final favorable court decision with regard to any particular proceeding. In addition, we cannot assure you that, should a final judgment be entered against us, the plaintiff will permit, or applicable law will allow, us to pay the imposed judgment over time. If we obtain unfavorable outcomes in such proceedings and if we are forced to pay a large judgment over a short period of time, our cash flows could be materially and adversely affected. See “Item 4. Information on the Company—Legal Proceedings.” We may be subject to substantial additional taxes on our network, which would have a material adverse impact on our business and results of operations. We may be subject to substantial additional taxes on our network, which would have a material adverse impact on our business and results of operations. The most significant of these potential additional taxes on our network is the tax on the use of public thoroughfares (which includes the installation and passage of cables), or “shadow” tax. We have not made any reserves for the payment of the shadow tax. If the courts rule that the collection of this tax by the municipalities is valid, the tax would have to be paid retroactively. In addition, if the municipalities which currently impose the tax were successful in implementing and collecting this tax, additional municipalities may seek to impose it. If we are required to pay this tax, our operating results would be materially and adversely affected. See “Item 4. Information on the Company—Legal Proceedings—Judicial Tax Proceedings—Shadow Tax.” Our current major shareholders control most of our corporate transactions and their interests may differ from yours. Globo Comunicação e Participações S.A., or Globo, and Telmex Internacional, S.A.B. de C.V., or Telmex Internacional, through its subsidiaries Embratel Participações S.A., or Embrapar, and Empresa Brasileira de Telecomunicações S.A., or Embratel, own, directly or indirectly, 99.4% of our common shares as of December 31, 2010. We are indirectly controlled by Globo (which we refer to as “Grupo Globo” in this Form 20-F), but Telmex Internacional has significant approval rights under the current shareholders’ agreement by and among Grupo Globo, Embratel, Embrapar, GB Empreendimentos e Participações S.A., or GB, a special purpose company, and Telmex Internacional. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements.” In addition, if Brazilian law changes so that a non-Brazilian entity is permitted to own a controlling interest in a Brazilian company, Telmex Internacional would have the right to indirectly acquire control over 51.0% of our voting common shares. See “Item 7. Major Shareholders and Related Party Transactions – Major Shareholders.” Telmex Internacional could have significantly different interests in Net Serviços and our operations than Grupo Globo or Telmex Internacional and may not be willing or able to provide us with the financial and other support that Globo and our other previous major shareholders have provided to us historically. Also, Grupo Globo may not be willing or able to provide us with the financial and other support that it provided to us in the past. Grupo Globo has interests in companies that currently or may in the future compete with us, including its interests, and those of the Marinho family, in Sky Brasil, a satellite pay-television provider, and in several broadcast television stations. Telmex Internacional has interests in companies that currently compete or may in the future compete with us, including its interests in Embratel, a telecommunications carrier that offers a wide range of telecommunications services over its network, including high-speed data transmission, Internet services and satellite pay-television service.  12 NETC Annual Report 2010 – Form 20-F


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 Furthermore, our common shares are the only shares of capital stock that hold full voting rights. In accordance with Brazilian corporate law and our by-laws, holders of the preferred shares, and thus of the ADSs, are entitled to vote at meetings of our shareholders in only limited circumstances. This means, among other things, that you, as a holder of preferred shares or ADSs, are entitled to vote only on the following matters: ·our transformation, consolidation, merger or spin-off; ·valuation of assets used in increases in our capital; ·approval of certain specified agreements between us and our controlling shareholders or their affiliates; ·selection of a specialized firm skilled in determining our fair market value, in relation to a public offering of our shares; and ·a change or repeal of provisions of our by-laws that alter or modify anyBM&FBOVESPA(the Brazilian stock exchange), or BM&FBovespa, requirements. Accordingly, the interests of our major shareholders, Grupo Globo and Telmex Internacional, may conflict with the interests of holders of our preferred shares, and Grupo Globo and Telmex Internacional may cause us to act in a manner divergent with the interests of such holders. We depend on key members of our senior management. Any difficulty in hiring new managers could adversely affect our ability to operate our business. Our business is managed by a small number of key senior managers. The loss of any of these individuals could materially affect our business. In addition, our success depends on our ability to continue to attract and recruit qualified scientific, technical, managerial and administrative personnel. Competition for qualified personnel in Brazil is strong, and there are generally a limited number of professionals with the requisite experience in the sectors in which we operate. We cannot assure you that we will be able to retain such managers or do so without costs or delays, nor can we assure you that we will be able to find new qualified senior managers, should the need arise. A failure to either retain or to hire new qualified senior managers could adversely affect our business. Acquisitions could prove difficult to integrate or have an adverse effect on ourresults of operations.  We may seek opportunistically to acquire other cable television and broadband Internet service providers. Any acquisition involves numerous risks, including: (1) potential loss of key employees or clients of acquired companies; (2) difficulties integrating acquired personnel and distinct cultures into our business; (3) difficulties integrating acquired companies into our operating, financial planning and financial reporting systems; (4) diversion of management attention from existing operations; and (5) assumption of liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for their failure to comply with applicable telecommunications regulations and tax contingencies.   13 NETC Annual Report 2010 – Form 20-F


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 Acquisitions may also involve significant anticipated and unexpected cash expenditures, debt incurrence and integration expenses that could have a material adverse effect on our financial condition, results of operations and cash flows. Any acquisition may ultimately have a negative impact on our business and financial condition. Weakening economic conditions and turmoil in the financial markets may negatively impact our ability to attract new subscribers, increase fees and maintain or increase revenues. Most of our revenue comes from residential subscribers whose spending patterns may be affected by prevailing economic conditions. A weakening in general economic conditions could lead to reductions in consumer demand for our services and a continued increase in the number of homes that replace their traditional telephone service with wireless service, which would negatively impact our ability to attract customers, increase rates and maintain or increase subscription revenues. Our ability to achieve incremental growth in pay-television and broadband Internet subscribers is dependent to a large extent on growth in the disposable income of Brazilians. If growth in the disposable income of Brazilians starts to decline, it may negatively impact our ability to gain new pay-television and broadband Internet subscribers. In addition, current subscribers may reduce the advanced or premium services to which they subscribe, or may discontinue subscribing to our cable or broadband Internet services. We may also be unable to increase the fees we charge our subscribers. If economic conditions  deteriorate, the growth of our business and results of operations may be adversely affected. Further, because of the turmoil in the global financial markets in 2008 and 2009, some financial and other institutions have experienced significant financial distress. Although we have attempted to be prudent in our management of our operations and financial condition, it is not possible to predict how the financial market turmoil and the deteriorating economic conditions may affect our financial position. Additional financial institution failures could restrict our access to the public equity and debt markets. In addition, due to recent consolidation among Brazilian financial institutions, we may not be able to diversify our cash under management and, consequently, if one of the financial institutions in which we deposit our cash becomes bankrupt, our liquidity may be materially adversely affected. Risks Related to Brazil A downturn or increased volatility in the Brazilian economy or the depreciation of the real could adversely affect our revenues, cash flows and profitability. All of our operations and customers are located in Brazil. Therefore, our results of operations and financial condition depend upon the level of economic growth in Brazil, and, consequently, upon customer demand for our services. Weakness in the Brazilian economy has adversely affected our subscriber and revenue growth in the past. Similar or more severe economic weakness would lead to shortfalls in our revenues and subscriber levels and could have an adverse impact on the market price of our preferred shares and ADSs. See “—Weakening economic conditions may negatively impact our ability to attract new subscribers, increase fees and maintain or increase revenues.” The real increased in value by 4.3% against the U.S. dollar in 2010, from an exchange rate of R$1.7412 per US$1.00 at December 31, 2009 to an exchange rate of R$1.6662 per US$1.00 at December 31, 2010. The average exchange rate in 2010 was R$1.7589 per US$1.00, an increase in value of the real against the U.S. dollar of 11.6% when compared to an average exchange rate of R$1.9905 per US$1.00 in 2009. The real has historically suffered several major depreciationsagainst the U.S. dollar and has been volatile against the U.S. dollar since it was first allowed to float by the Brazilian government in 1999. Given the current state of the Brazilian currency market, we do not attempt to hedge this risk over the long-term. Accordingly, potential depreciation of the real against the U.S. dollar could negatively impact the market price of our preferred shares and ADSs  14 NETC Annual Report 2010 – Form 20-F


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Our revenues are in reais. A significant percentage of our capital expenditures, including network equipment costs, and a portion of our indebtedness are denominated in or indexed to U.S. dollars. Accordingly, depreciation of the real against the U.S. dollar would result in decreased cash flows and could result in a net loss as a result of higher financial expenses. Brazilian political and economic conditions have a direct impact on our business, and the Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Our financial condition and results of operations are substantially dependent on the Brazilian economy. The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes drastic changes in monetary, fiscal, taxation, credit, tariff, wage and price controls and other policies in order to influence the course of the economy. In addition, changes in administrations may result in changes in government policy that may affect our business. Our business, financial condition and results of operations may be adversely affected by changes in policy as well as by other factors outside of our control, such as currency fluctuations, inflation, price instability, interest rates, monetary policy, the liquidity of Brazilian capital markets, general economic growth, tax policy, wage and price controls, energy shortages and other political, diplomatic, social and economic developments in or affecting Brazil. Adverse economic, political and social conditions may inhibit demand for our services and create uncertainties regarding our operating environment, which could have a material adverse effect on us. Inflation could increase our costs, contribute significantly to economic uncertainty in Brazil and cause heightened volatility in the Brazilian securities markets. Brazil has, from time to time, experienced extremely high rates of inflation, with annual rates of inflation reaching over 1,000% in the early 1990s, according to theIndice Geral de Preços do Mercado, or IGP-M, a widely used monthly indicator of inflation in Brazil published by the Getúlio Vargas Foundation. Brazil’s rate of inflation, according to the IGP-M, was 3.8% in 2006, 7.8% in 2007, 9.8% in 2008 (1.7%) in 2009 and 11.3% in 2010. Inflation itself and governmental measures to combat inflation have, in the past, had significant negative effects on the Brazilian economy. Since 1999, governmental actions to combat inflation, including interest rate increases and intervention in the foreign exchange market through the sale of U.S. dollars and government bonds linked to the U.S. dollar and public speculation about possible future actions, have also contributed to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. Should Brazil experience substantial inflation in the future, our costs may increase and our operating and net margins may decrease, which may adversely affect our financial condition and results of operations. Inflationary pressures may also curtail our ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy and stall or reverse growth.   15 NETC Annual Report 2010 – Form 20-F


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 Developments and the perception of risk in other countries, including the United States, the European Union and emerging market countries, may adversely affect the market price of Brazilian securities, including the ADSs and our preferred shares. The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries.  Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor’s reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers.  Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours.  This could adversely affect the trading price of the ADSs or our preferred shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all. Restrictions on the movement of capital out of Brazil may hinder your ability to receive distributions on, and the proceeds of any sale of, the preferred shares or ADSs. Brazilian law permits the Brazilian government to impose restrictions on the conversion of Brazilian currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Brazil. The government may impose such restrictions whenever there is a serious imbalance in Brazil’s balance of payments or there are reasons to foresee a serious imbalance. If reintroduced, these restrictions would hinder or prevent the conversion of distributions or the proceeds from any sale of the preferred shares or ADSs, as the case may be, from reais into U.S. dollars and the remittance of U.S. dollars abroad. In the case of ADSs, the custodian, acting on behalf of the depositary for the ADSs, will hold the reais it cannot convert for the accounts of the ADR holders who have not been paid as a result of the restrictions. The depositary will not reinvest the reais and will not be liable for any interest on the monies held. In addition, any reais so held will be subject to depreciation risk. We cannot assure you that the Brazilian government will not impose restrictions on the conversion of Brazilian currency into foreign currencies in the future, temporarily or otherwise. Risks Related to Our Securities The liquidity of the trading market for ADSs in the United States is limited; this could lead to price volatility and a lack of buyers for ADSs. As of December 31, 2010, there were approximately 2.5 million of our ADSs outstanding, compared to 62.6 million ADSs as of December 31, 2009.  This decrease was due to a tender offer by Embratel to purchase all of our preferred shares, including those represented by ADSs, which was completed on October 7, 2010.  From January 1, 2011 to January 13, 2011, additional preferred shares were acquired by Embratel from minority shareholders pursuant to the shareholder put right under Brazilian regulations. The average daily trading volume for our ADSs on the Nasdaq Stock Market’s, or NASDAQ, Global Market during 2010 was approximately 863,529 ADSs per day, equivalent to approximately US$10.4 million per day. Securities that trade at similar volumes and with a similar float typically have much lower levels of liquidity than other equity securities traded in the United States. This means there tends to be fewer willing buyers and sellers and fewer trades for our ADSs than for other equity securities. As a result, the price quoted for an ADS may be less reliable and more volatile than that quoted for another equity security traded inthe United States. In addition, the reduction in the number of ADSs outstanding resulting from the tender offer and subsequent shareholder put right has likely adversely affected the liquidity and market value of our ADSs.  16 NETC Annual Report 2010 – Form 20-F


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We are subject to different corporate rules and regulations as a Brazilian company, and the preferred shares and ADSs have fewer and less well defined shareholders’ rights. Our corporate affairs are governed by our by-laws and Brazilian corporate law, which differs from the legal principles that would apply if we were incorporated in a United States jurisdiction, such as Delaware or New York, or in other jurisdictions outside Brazil. Under Brazilian corporate law, the rights of those holding preferred shares or ADSs may be fewer and based on less precedent than they would be under the laws of other jurisdictions outside Brazil. The Brazilian securities markets are not as highly regulated or supervised as the United States securities markets or markets in certain other countries. Rules and policies with respect to the preservation of minority shareholder interests and against self-dealing may not be enforced in Brazil to the same extent as such rules are enforced in the United States, and the law may be less developed in such areas, putting holders of the preferred shares and ADSs at a potential disadvantage. Because we are a Brazilian company, you may face difficulties in proceedings with respect to your interests as a shareholder. We are asociedade anônima, or corporation, organized under the laws of Brazil and all of our directors and officers reside in Brazil. Substantially all of our assets and those of our directors and officers are located in Brazil. As a result, it may not be possible for investors to effect service of process upon us or our directors and officers within the United States or other jurisdictions outside Brazil or to enforce against us or our directors and officers judgments obtained in the United States or other jurisdictions outside Brazil. Because judgments of U.S. courts for civil liabilities based upon the U.S. federal securities laws may only be enforced in Brazil if certain requirements are met, you may face greater difficulties in protecting your interests, in the case of actions against our directors or officers, than would shareholders of a corporation incorporated in a state, or other jurisdiction, of the United States. If you exchange ADSs for preferred shares, you risk losing the ability to remit foreign currency abroad and you risk unfavorable tax treatment. The Brazilian custodian for the preferred shares must obtain an electronic certificate of registration from the Central Bank to be entitled to remit U.S. dollars abroad for distributions relating to the preferred shares or upon the disposition of the preferred shares. If you decide to exchange your ADSs for the underlying preferred shares, you will be entitled to continue to rely, for five business days from the date of the exchange, on the custodian’s electronic certificate of registration. Thereafter, you may not be able to obtain, and the custodian may not be able to remit, U.S. dollars abroad upon the disposition of the preferred shares unless you obtain your own electronic certificate of registration or register your investment in the preferred shares under specified regulations that entitle foreign investors to buy and sell securities on the BM&FBovespa. These regulations require, among other things, the execution of foreign exchange transactions without actual payment orders, which are subject to IOF tax. If you obtain an electronic certificate of registration, you may be subject to taxation on gains with respect to the preferred shares. In addition, if you are resident in a tax haven jurisdiction, gains with respect to the preferred shares will be subject to unfavorable tax treatment. If you obtain an electronic certificate of registration,you may be subject to unfavorable tax treatment on gains with respect to the preferred shares unless you are resident in a tax haven jurisdiction. See “Item 10. Additional Information—Taxation—Material Brazilian Taxation Considerations.” If you attempt to obtain your own electronic certificate of registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to the preferred shares or the return of your capital in a timely manner.  17 NETC Annual Report 2010 – Form 20-F


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We cannot assure you that the custodian’s electronic certificate of registration or any certificate of foreign capital registration obtained by you may not be affected by future legislative changes, or that additional restrictions applicable to you, the disposition of the underlying preferred shares or the repatriation of the proceeds from any disposition will not be imposed in the future. You might be unable to exercise certain rights, including preemptive rights with respect to the preferred shares. As a holder of ADSs, as opposed to holders of preferred shares, you may find it difficult to exercise some of your rights. For instance, if we fail to timely provide the depositary with voting materials, you may not be able to give instructions to the depositary on how it should vote your ADSs. In addition, you may not be able to exercise the preemptive rights relating to the preferred shares, including preferred shares underlying the ADSs, unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements is available. We are not obligated to file a registration statement with respect to the preferred shares or other securities relating to these preemptive rights, and we cannot assure you that we will file any such registration statement. Unless we file a registration statement or an exemption from the registration requirements is available, you will receive only the net proceeds from the sale of your preemptive rights by the depositary or, if the preemptive rights cannot be sold by the depositary, they will be allowed to lapse. The preferred shares and ADSs do not entitle you to a fixed or minimum dividend. We are a holding company and our ability to obtain funds for the payment of cash dividends depends entirely on our ability to obtain funds from our subsidiaries and investees. Our by-laws, in accordance with Brazilian corporate law, require that, for any year in which we have “adjusted net profits” (as defined in Brazilian corporate law), we will be required to pay, subject to certain exceptions, a yearly minimum dividend equal to not less than 25.0% of adjusted net profits, referred to as the “mandatory distribution.” Brazilian corporate law, however, permits publicly held companies, such as the Company, to suspend the mandatory distribution of dividends if the board of directors and the audit committee report to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors and audit committee so report, the board of directors must file a justification for such suspension with theComissão de Valores Mobiliários(the Brazilian Securities and Exchange Commission), or the CVM, within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments. Due to our accumulated net loss, historically, we have never declared or paid any cash dividends, nor made any cash distribution on our shares, including the preferred shares underlying our ADSs. In addition, due to the fact that we are seeking new growth opportunities, we do not expect to make any cash distribution in the near future.  18 NETC Annual Report 2010 – Form 20-F


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 The issuance by us or our major shareholders of a substantial number of preferred or common shares could decrease the market price of preferred shares and ADSs and could significantly dilute your holdings. The issuance by us or our major shareholders of a substantial number of preferred or common shares could decrease the market price of preferred shares in general and ADSs. In the future, subject to the restrictions of our debt facilities and debt instruments, we may choose to raise further capital by issuing additional preferred shares, convertible securities or other equity-related securities. The timing, terms, size and pricing of any such transaction will depend on investor interest and market conditions. Any issuance of equity or equity-related securities, however, would dilute your holdings-and possibly substantially-to the extent that preemptive rights are not made available to you or exercised by you. ITEM 4.          INFORMATION ON THE COMPANY. Business Overview We are a leading multiservice company in the pay-television and broadband Internet industries in Brazil. Currently, we are the largest cable operator in Brazil and in Latin America, based upon the number of subscribers and homes passed. As of December 31, 2010, we had 4.2 million pay-television connected subscribers in 93 locations within Brazil, including São Paulo and Rio de Janeiro, the two largest Brazilian cities. We are the leading provider of high-speed cable modem Internet access in Brazil through our NET Vírtua service, which had 3.5 million subscribers as of December 31, 2010. We also provide fixed line telephony through our NET Fone via Embratel service, which had 3.2 million subscribers as of December 31, 2010. As of December 31, 2010, our advanced network of coaxial and fiber-optic cable covered over 66,000 kilometers and passed approximately 11.5 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2010, we had gross sales revenue of R$7,101.6 million. Currently, our principal services include pay-television and pay-per-view programming under the “NET” brand name, digital cable under the “NET Digital” brand name, high-definition cable television combined with digital video recorder under the “NET Digital HD MAX” brand name, broadband Internet service under the “NET Vírtua” brand name and fixed line telephony service under the “NET Fone Via Embratel” brand name. In 2004, we began to offer digital cable services to our subscribers. As of December 31, 2010, we offered digital cable in 52 locations, including Rio de Janeiro and São Paulo. Through providing digital cable services, we are able to offer subscribers additional channels and value-added programming options and services, such as audio channels containing a variety of music packages, near video-on-demand, interactive services and high-definition content. In 2005, we launched high-speed broadband Internet services to our subscribers, offering speeds of 2Mbps, 4Mbps and 8Mbps. In 2008, to respond to a demand for faster connections to the Internet, we increased speeds of NET Vírtua to 3Mbps, 6Mbps and 12Mbps. In 2008, we also began to offer NET Vírtua 5G in the cities of São Paulo and Rio de Janeiro, providing a speed of 60Mbps that combines high network capacity with Docsis 3.0 technology. In 2010, we responded to client needs by launching new speeds of 10Mb, 20Mb, 50Mb and 100Mb, making our Internet services more attractive and maintaining substantial growth of our client base.  19 NETC Annual Report 2010 – Form 20-F


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Since 2006, we have provided a fixed line telephony service in partnership with Embratel, which marked our entry in the triple play market (joint offering of pay-television, broadband Internet and fixed line telephony). This product, which uses voice-over-Internet protocol technology, works like conventional fixed line telephony and allows the user to make local, long distance and international calls to any telephone or handset, such calls being charged per minute and not by pulse. In addition, subscribers can apply their minimum monthly fee to make any type of call, including local and long distance calls and calls to mobile phones. Subscribers have the benefit of making calls between NET Fone subscribers at no cost within the same city and at the cost of a local call for long distance calls. This service is primarily directed to the residential market and complements our existing services by offering to our subscribers an additional quality service option. In 2008, we launched a new package that includes our fixed line telephony services, broadband Internet at a speed of 100kbps and free broadcast television through cable under the “Net Fone.com” brand name. This package is targeted at a lower income segment of potential customers for whom pay-television and high-speed broadband Internet are less important. In 2009, we launched broadband Internet services at a speed of 200kbps under the “Internet Popular” brand name in the state of São Paulo, in connection with São Paulo state’s policy, which exempts Internet services from the ICMS tax if the package offers a minimum speed of 200kbps at a price no higher than R$29.90, to increase Internet broadband availability to the lower income segment. In 2010, we upgraded from 200kbps to 512kbps. In 2007, we introduced select high-definition, also referred to as HD, channels in Brazil.  In 2010, we focused on expanding the number of subscribers with HD access and in expanding our HD channels.  As part of this strategy, since 2010 we have been offering higher broadband Internet speeds for customers who subscribe to HD services. According to www.teleco.com.br, we were Brazil’s leading pay-television operator in the HD market as of December 2010. After accelerated growth in 2010 related to the World Cup broadcast, high-definition pay-television remained in high demand in 2011.  In addition we launched the NOW service, an on-demand content delivery platform available only to HD subscribers for high-definition on-demand movie rentals and regular programming. In 2007, 2008 and 2009, we completed the acquisition of Vivax, BIGTV and ESC 90, respectively, whereby each became a wholly-owned subsidiary of Net Serviços. On November 29, 2009, the entities controlled by Vivax and BIGTV were merged into Net Serviços, and on July 31, 2010, ESC 90 was merged into Net Serviços. We have completed the integration of Vivax, BIGTV and ESC 90 into Net Serviços by introducing our brand name in cities served by Vivax, BIGTV and ESC 90 and launching our entire line of products in these areas, in addition to having completed integration of the administrative and billing systems. On December 29, 2009, we entered into two Indefeasible Right of Use, or IRU, agreements with Embratel, each with a term of five years beginning on December 1, 2009, to (i) use Embratel’s network for the provision of our broadband Internet service in exchange for a one-time payment in the amount of R$849.6 million; and (ii) allow Embratel to use our transmission capacity in local accesses in our hybrid fiber-coaxial network to provide fixed telephony services in exchange for a one-time payment in the amount of R$873.5 million. For financial accounting purposes, we have elected to defer both our rental expenses to Embratel and our rental revenue from Embratel under the IRU agreements. Such amounts are recognized monthly over the term of the IRU agreements. In 2010, Embratel conducted a public tender offer to purchase for all of our preferred shares, including preferred shares represented by ADSs, other than preferred shares held by its parent company, Embrapar.  In accordance with applicable Brazilian regulations, Embratel purchased the preferred shares in the tender offer through an auction on the BM&FBOVESPA heldon October 7, 2010.  Embratel announced that it has acquired 143,853,463 preferred shares at a price of R$23.00 per share in the tender offer.  Pursuant to CVM Instruction 361, given the acquisition of more than two-thirds of the preferred shares by Embratel in the tender offer, holders of preferred shares had the right to require Embratel to purchase their preferred shares for cash at the tender offer price, adjusted for the monthlyTaxa Referencial(also referred to as the stockholder put right).  Therefore, the offer was extended until January 13, 2011 and an additional 49,847,863 shares were acquired by Embratel.  20 NETC Annual Report 2010 – Form 20-F


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As of June 1, 2011, Embratel held 210,838,097 preferred shares, corresponding to 92.3% of our total preferred shares, while Embrapar, together with Embratel, held 223,080,448 preferred shares, representing 97.6%of our total preferred shares. Grupo Globo, through GB, remains our controlling shareholder. Telmex Internacional, through Embratel and Embrapar, holds an increasingly significant equity stake in us and has significant approval rights under a shareholders’ agreement with Grupo Globo.  As of June 1, 2011, Grupo Globo directly and indirectly controlled 61.0% and 0% of our common and preferred shares, respectively, and Telmex Internacional directly and indirectly controlled 36.0% and 97.6% of our common and preferred shares, respectively. Strategy Our goal is to become the leading multi-service provider of entertainment and communications services in the Brazilian residential market. Our strategy for achieving this goal is to provide a triple-play service offerings (the joint offering of pay-television, broadband Internet and fixed line telephony). In order to execute this strategy, we focus on (i) retaining our position as the Brazilian pay-television leader in Brazil; (ii) continuing to expand our broadband Internet business, offering our subscribers increasingly rapid connections; (iii) further developing our fixed line telephony business under NET Fone via Embratel ; and (iv) improving customer service. We are taking the following business and financial initiatives in order to support this strategy. Business Initiatives ·Pursue growth with profitability.We focus our marketing and sales efforts on households covered by our network. Through this targeted marketing approach, we hope to encourage existing customers to migrate to higher-end programming packages and to purchase value-added services, while at the same time attracting new subscribers to our services. ·Continue the growth of NET Vírtua, our broadband Internet service. Broadband Internet has generally an attractive return. The main processes involved in NET Vírtua’s operating structure, including the cost of its link, customer service center and cable modem technology, are regularly reviewed. Since its launch, increasing the transmission speed of NET Vírtua has been an important factor in driving additional growth, as demand from broadband Internet users has increased as a result of the rising popularity of bandwidth-intensive Internet-based services. ·Pursue further growth of fixed line telephony services.Since March 2009, number portability for all telephony subscribers is available in Brazil. We are taking advantage of number portability as we have a lower subscriber base compared to our competitors. We have been doing marketingcampaigns targeting subscribers to transfer their main fixed line telephone number to our service and we have been increasing the number of our fixed line telephony subscribers.  21 NETC Annual Report 2010 – Form 20-F


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·Continue to rollout digital cable and remain technologically competitive. We offer digital cable in 52 locations, including Rio de Janeiro and São Paulo. By providing digital cable services, we are able to offer subscribers additional channels and value-added programming options and services, such as audio channels containing a variety of music packages, near video-on-demand and interactive services. Since 2007, we have offered a set-top box which converts the high-definition signal, provides access to digital services and provides recording capabilities. Our subscriber base of HD services has been increasing and we have launched a content-delivery service for HD subscribers. ·Enhance our triple play offer.We compete in the triple play market (joint offering of pay-television, broadband Internet and fixed line telephony). We aim to increase the number of subscribers that are using a higher number of our services, thereby increasing our share of our customers’ spending on entertainment and communication. ·Provide reliable, high quality products and responsive customer service.We view our business as a service business. Therefore, we aim to provide high quality products and services and achieve higher levels of customer satisfaction in respect of our pay-television, broadband Internet and fixed line telephony services and our responsiveness to customer inquiries, including improving call centers. Financial Initiatives ·Initiatives to fund our business growth. We expect to fund organic growth in the near term through our own cash flow generation. We have achieved our objective of having a debt amortization schedule compatible with our cash generation, allowing us to sustain growth mainly from our own cash generation. However, we may in the future determine to issue additional indebtedness in order to fund inorganic growth and strategic initiatives. ·Optimize capital expenditures by making targeted investments. Our capital spending plan targets our capital expenditures on triple play services to improve returns on our investments. Pursuant to this plan, we target our capital spending on subscriber acquisition, principally in urban areas, where we anticipate greater demand for broadband Internet, fixed line telephony, basic and digital cable and advanced services, such as HD. ·Hedge our short-term cash disbursement.We import certain equipment, including set-top boxes and cable modems and we pay for this equipment in U.S. dollars. In addition, a portion of our debt is denominated in U.S. dollars. In order to protect our cash disbursement we hedge our expected cash payments up to the next 36 months. We carry no positions in speculative derivatives. Our derivative positions are exclusively to protect our cash disbursement exposure to the U.S. dollar,  22 NETC Annual Report 2010 – Form 20-F


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 ·Continue our focus on corporate governance. Since June 2002, our shares have been listed on the BM&FBovespa’s Special Corporate Governance Level 2, or Level 2, which provides enhanced shareholder protections. We believe that trading our shares on Level 2 brings several benefits to shareholders, including greater transparency and more effective corporate governance. Consistent with this approach, we have established certain voting rights with regard to our preferred shares, and we offer 100.0% tag-along rights to holders of our common and preferred shares. See “Item 9. The Offer and Listing—Trading Markets—Level 2 of the BM&FBovespa.” Our ADSs are also listed on NASDAQ and as of the date of this annual report we are in compliance with their listing requirements. As of December 31, 2010, we were in compliance with the Sarbanes-Oxley Act of 2002. See “Item 15. Controls and Procedures—Disclosure Controls and Procedures.” History and Development of the Company Under our previous name, Multicanal Participações S.A., or Multicanal, we first listed our ADSs on the NASDAQ Global Market in October 1996. In late 1997, the major shareholders sold their interests in us to Grupo Globo. In September 1998, Multicanal acquired certain cable assets and related liabilities of Grupo Globo and changed its name to Globo Cabo S.A. The assets we acquired from Grupo Globo included a 50.0% interest in Unicabo Participações e Comunicações S.A, or Unicabo, and controlling interests in three significant metropolitan-area cable operators: Net São Paulo Ltda., or Net São Paulo, Net Rio Ltda., or Net Rio, and Net Brasília Ltda., or Net Brasília. In May 2000, we acquired the remaining 50.0% of Unicabo. In September 2000, we completed the acquisition of Net Sul Holding S.A., the then 99.99% owner of Net Sul Comunicações Ltda., or Net Sul then the second largest cable television operator in Brazil. The Net Sul acquisition significantly increased our subscriber base and provided us access to markets in southern Brazil, a region in which we historically had no presence. In May 2002, we changed our name from Globo Cabo S.A. to Net Serviços de Comunicação S.A. Beginning in 2001, our financial condition and results of operations were significantly and adversely affected by foreign and Brazilian economic factors and the depreciation of the Brazilian real against the U.S. dollar. Because all of our revenue was, and continues to be, denominated in reais, the depreciation of the real in 2001 and 2002 resulted in a lower amount of funds in dollar terms being available to us to support our significant U.S. dollar-denominated debt service obligations. In response to these developments, in 2005, we completed a restructuring of our outstanding indebtedness. Through the restructuring, we achieved our objective of having a debt amortization schedule compatible with our cash generation and that would allow us to sustain organic growth from our own cash generation, making us less dependent of capital markets conditions. In the wake of our debt restructuring, we developed a new strategy of pursuing higher subscriber growth and therefore we increased our capital expenditures. In 2006, we issued new debt instruments with longer maturities and lower costs than our existing debt. As a result of the stability and strength of the Brazilian economy, as well as an increase in the use of the Internet by Brazilian consumers and the consolidation of digital technology in Brazil, in 2006 we started to increase the scope of our bi-directional network and to expand the geographic scope of our digital-based services to continue our current growth on a sustainable basis. In 2007, we concluded the expansion of our bi-directional network targeting high and middle class households, we expanded our digital-based services to several additional geographic regions and we concluded the acquisition of Vivax. In 2008, we launched a new package that includes our fixed line telephony services, Internet at a speed of 100kbs and free broadcast television through cable under the “NetFone.com” brand name, which is targeted at a lower income segment of potential customers for whom pay-television and high speed broadband Internet are less important. We also began to offer “Net Vírtua 5G,” which provides a speed of 60Mbps in the cities of São Paulo and Rio de Janeiro, combining our high network capacity with Docsis 3.0 technology, and we concluded the acquisition of BIGTV. In 2009, we launched a broadband Internet package for the lower income segment in São Paulo and we concluded the acquisition of ESC 90. In 2010, NET launched new speeds for our broadband Internet service of 10Mb, 20Mb, 50Mb and 100Mb.  23 NETC Annual Report 2010 – Form 20-F


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 In 2010, Embratel conducted a public tender offer to purchase for all of our preferred shares, including preferred shares represented by ADSs, other than preferred shares held by its parent company, Embrapar, and, in early 2011, completed the purchase of 193,701,299 of our preferred shares. Our Services We offer our customers traditional pay-television services and programming, as well as new and advanced high bandwidth services such as our broadband Internet services and telephony services. As an important part of our overall strategy, in 2006 we launched our triple play, offering a bundle of cable television, broadband Internet and fixed line telephony services. We plan to continue to enhance and upgrade the services we offer by selectively adding new programming and more advanced products and services as they become available. As of December 31, 2010, we had 4.2 million pay-television subscribers, 3.5 million broadband Internet subscribers and 3.2 million fixed line telephony subscribers, as compared to 3.7 million pay-television subscribers, 2.9 million broadband Internet subscribers and 2.3 million fixed line telephony subscribers as of December 31, 2009. The table below shows the amount and percentage of our gross sales revenue that each of our pay-television and broadband Internet subscriptions, sign-on and hook-up fees and other services, which includes fixed line telephony services and pay-per-view, accounted for the years ended December 31, 2010, 2009 and 2008: Year Ended December 31,2010

   

   2009

   

   2008(R$ in thousands)

   %

   

   (R$ in thousands)

   %

   

   **(R$ in****thousands)**

   %Gross salesrevenue:Pay-television and broadbandInternet subscriptions

   R$6,147,394

   86.6%

   

   R$5,301,316

   87.3%

   

   R$4,298,280

   88.6%Sign-on and hook-up fees

   22,057

   0.3%

   

   117,055

   1.9%

   

   77,459

   1.6%Other services

   932,137

   13.1%

   

   652,030

   10.8%

   

   477,016

   9.8%Total gross sales

   R$7,101,588

   100%

   

   R$6,070,401

   100%

   

   R$4,852,755

   100% Pay-Television Currently, most of our revenues are derived from our operations related to providing pay-television services, including cable television and pay-per-view services. We offer our pay-television services through the “NET” brand name using our cable television network and, to a lesser extent, through MMDS. We operate in 93 locations in Brazil, including some of Brazil’smost populated metropolitan areas, such as São Paulo, Rio de Janeiro, Belo Horizonte, Porto Alegre, Recife, Brasília, Goiânia, Curitiba and Florianópolis. In order to attract and retain pay-television subscribers, we are committed to offering a broad variety of quality programming coupled with a range of programming packages.  24 NETC Annual Report 2010 – Form 20-F


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According to Pay-TV Survey No. 169, published in March 2011, we provided service to approximately 43.5% of Brazil’s pay-television subscribers as of December 31, 2010. Our Programming Packages We offer our pay-television service through various programming packages that provide our customers with a variety of price points and channel selection. Our prices range from R$39.90 to R$259.90 per month. We divide our packages into three major categories: top, which includes the Total and Família packages; intermediate, which includes the Atualidade, Estilo and Diversão packages; and basic, which is represented by the Compacto package. We offer digital cable services to our subscribers in 52 locations under the “NET Digital” brand name. Our digital cable services carry significantly more channels than our analog programming packages. In addition, digital cable allows for high-quality broadcasting and enables us to offer near video-on-demand, a service that offers movies at multiple times in short intervals. In December 2007, we introduced high-definition cable television services under the “NET Digital HD MAX” brand name. Our programming packages include the programming we purchase, as well as other channels that we are required to provide. These required channels include free broadcast television stations generally available in the service area in which a subscriber resides and government public service channels that are available nationwide. Pay-Per-View Alternatives In addition to the programming packages described above, we also offer pay-per-view alternatives. These include a variety of sporting events, musical concerts by national and international artists, and movies. The sporting events include broadcast rights to the Brazilian Soccer Championship and certain popular State Soccer Championships, such as the São Paulo Soccer Championship. Programming Sources On June 27, 2004, we entered into an amended and restated programming agreement with a term of 10 years with Net Brasil S.A., or Net Brasil, whereby we obtain all of our programming from Brazilian sources through Net Brasil and all international content from sources outside of Brazil, for our own account and benefit. On June 27, 2004, we also entered into a licensing agreement with Net Brasil, whereby Net Brasil grants us the right to use the “NET” brand name until 2015 and, in the case of termination, for an additional 30 months from the date of termination. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.”  25  NETC Annual Report 2010 – Form 20-F


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Table of Contents Broadband Internet In April 2000, we launched NET Vírtua. NET Vírtua is, by number of subscribers, the fourth largest broadband Internet service provider and the largest high-speed cable Internet accessservice provider in Brazil. As of December 31, 2010, our broadband Internet service was available in the 90 locations in Brazil, including São Paulo, Rio de Janeiro, Brasília, Belo Horizonte, Curitiba, Porto Alegre, Florianópolis, Campo Grande and Goiânia, serving 3.5 million residential subscribers. Until 2004, we offered broadband Internet service only to subscribers of our pay-television service, in accordance with regulations. During 2004, we acquired new licenses, which allow us to sell broadband Internet separately from other services. Since 2005, we have provided high-speed broadband Internet services, and in 2008, we increased the transmission speeds to 3Mbps, 6Mbps and 12Mbps. In 2009, we launched the “Internet Popular” broadband Internet package, offering transmission speed of 200Kbps. In 2010, we increased our transmission speeds to 10Mb, 20Mb, 50Mb and 100Mb.
 According to www.teleco.com.br, a website that furnishes telecommunications data, as of December 31, 2010, we were the second largest broadband Internet provider in terms of number of subscribers in Brazil, servicing 26.0% of Brazil’s broadband subscribers. Our Service Packages As with our pay-television offerings, we tailor our Internet access offerings to our subscribers’ needs. Towards that end, we currently offer through NET Vírtua Internet connection speeds ranging from 512 Kbps to 100 Mbps with monthly subscription fees that range in price from R$29.80 to R$399.90 per month, as of December 31, 2010. Fixed Line Telephony In March 2006, we launched, in partnership with Embratel, our fixed line telephony services, NET Fone Via Embratel. NET Fone Via Embratel is primarily directed at the residential market and complements our existing pay-television and broadband Internet services by offering our subscribers an additional fixed line telephony services option. As of December 31, 2010, the service was available in 90 locations including in São Paulo, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília, and we had 3.2 million residential subscribers. Our Service Packages We currently offer through NET Fone Via Embratel a fixed line telephony service with a minimum monthly subscription fee from R$14.90 to R$79.90, as of December 31, 2010. Triple Play In March 2006, we started to offer our triple play packages, a combination of pay-television, broadband Internet and fixed line telephony services, which have been our primary service offerings directed at the residential market. As of December 31, 2010, triple play packages were available in 90 locations, including in São Paulo, Rio de Janeiro, Porto Alegre, Curitiba, Florianópolis, Belo Horizonte and Brasília. In 2008, we launched a new package that includes our fixed line telephony services, Internet at a speed of 100kbs and free broadcast television through cable under the “Net Fone.com” brand name. This package is targeted at a lower income segment of potential customers for whom pay-television and a high-speed broadband Internet are less important.   26 NETC Annual Report 2010 – Form 20-F


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 Our Service Packages We currently offer various combinations of pay-television, broadband Internet and fixed line telephony services through our triple play packages, with monthly subscription fees that range in price from R$39.90 to R$599.80 per month, as of December 31, 2010. Operations Subscriber and Operational Data In building our network, we have focused primarily on high and middle income households, which have the largest percentage of disposable income available to purchase our services, particularly value-added services. The table below provides certain information about our network and subscribers. As of December 31,2010

   2009(in thousands)Total connected pay-television subscribers

   4,212

   3,690Total connected broadband Internet subscribers

   3,524

   2,882Total connected fixed line telephony subscribers

   3,153

   2,557Total kilometers of cable network

   66

   61Total homes passed

   11,543

   10,777
 Network Technology General Cable television utilizes a broadband network employing radio frequency transmission over fiber-optic and coaxial cable lines to transmit multiple channels carrying images, sound, voice and data between a central facility and the subscriber’s television set. A cable system consists of three major parts: ·A headend, which is the point from which a programming or other signal originates along a network. A headend typically includes a satellite dish, satellite receivers, modulators, amplifiers and video cassette playback machines. Our headends typically receive programming content via satellite and then amplify process and feed this signal into a distribution path that reaches the subscriber. ·A distribution network, which consists of fiber-optic cable and coaxial cable. A signal generally travels most of its distance over fiber-optic cable and is transferred to coaxial cable at a “node.” As it approaches the subscriber, the network carries the signal over progressively smaller cables, terminating with the drop cable that connects to the subscriber’s television receiver. ·A home terminal, or set-top box, which allows an individual subscriber to receive the cable signal.   27 NETC Annual Report 2010 – Form 20-F


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Cable Network Our current network architecture utilizes advanced technologies, including a significant use of fiber-optic cable. Our headends send content via light signals through our optical cable to an optical node where an optical receiver translates the signals into an electric signal that is transmitted over our coaxial cable. The coaxial cable is then divided into individual cables that terminate in individual subscriber households, each of which has been equipped with a set-top box and/or a cable modem. Our network consists of cables having bandwidth capacities of 450 MHz, 550 MHz, and 750 MHz or above. Most of our network has a capacity of at least 550 MHz. This capacity allows subscribers to access numerous premium services, including pay-per-view services, digital cable, fixed line telephony service and Internet access. As of December 31, 2010, our cable network totaled 66,000 kilometers. As of December 31, 2010, we had coded, or “scrambled,” the signal of 82% of the homes we passed, with the objective of reducing piracy. As of December 31, 2010, we had activated two-way, or bi-directional technology for most of our 11.5 million homes passed. This technology permits us to offer broadband Internet and fixed line telephony services. Bi-directionality also supports our interactive services by allowing the subscriber to use their remote control to request programming from, and to respond to, the cable operator and allowing a cable operator to transmit to a subscriber specific programs the subscriber has ordered. The architecture allows for future migration to 250 to 500 homes per fiber node design and is designed to create a platform to support services such as pay-per-view television, near video-on-demand and video-on-demand. The platform may be used to support additional services as they become commercially viable and is already being used to provide broadband Internet service through NET Vírtua and fixed line telephony service through NET Fone Via Embratel. In 2010, we invested in certain network improvements, mainly splitting the fiber nodes, so that each node covers less homes, which allows us to provide our customers higher broadband Internet speeds. A substantial portion of our network consists of aerial cables (as opposed to underground cables) often strung on electrical utility poles. We gain access to the utility poles by pole attachment rental agreements with local electrical utilities, which are generally required to provide us this access for a negotiated fee. In Belo Horizonte, our cable network incorporates fiber-optic trunk line distribution capacity leased from Telemar Norte Leste S.A., or Telemar, one of the three Brazilian fixed line telephone companies. We are required to pay Telemar a monthly fee in Belo Horizonte under this lease. We believe that using aerial cables makes outages easier to locate and repair. The most frequent problems we have experienced with our network relate to damage due to automobile accidents in urban areas. We maintain our network by employing a maintenance crew, as of December 31, 2010, of 7,336 employees, as well as by employing independent contractors. MMDS In addition to our traditional cable network, we have MMDS licenses in Recife, Porto Alegre and Curitiba, with 40,464 subscribers as of December 31, 2010. MMDS is a microwave transmission system whereby programming is sent by microwave transmitters from an antennalocated on a tower or a building to a small receiving antenna located at a subscriber’s premises where the encoded microwave signals are decoded.  28 NETC Annual Report 2010 – Form 20-F


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Customer Care Customer Service and Management of Churn We believe that, by continuing to focus on customer service, we will be able to maintain our low churn rate and limit bad debt expense. We calculate churn by taking the total number of net disconnected subscribers for a period as a percentage of the average number of paying subscribers for the same period. We include as disconnected only those subscribers whose payment has been in arrears for more than 30 days. When a subscriber becomes reconnected, that subscriber is netted against the number of disconnected subscribers in that period. Historically, our annual churn rate for pay-television has been in the range of approximately 13.0% to 16.0% since 2006. Churn rate increased since 2007 primarily due to our acquisition of Vivax which historically had a higher churn rate than us, but decreased in 2010.In order to maintain low levels of bad debt, we have adopted a past due disconnection policy whereby we temporarily block the signal of subscribers whose payments are past due and, if the subscriber continues to fail to make payment, we collect the subscriber’s set-top box. Our annual bad debt expense, as a percentage of gross sales revenue, has been stable since 2004, as set forth in the table below:  Year

   Bad Debt as a Percentage of Gross Sales Revenues2010

   2009

   0.8%

   0.9%2008

   1.1%2007

   1.3%2006

   1.2%
 We manage five large call centers and various smaller call centers and outsource the operation of our call centers to third parties. TNL Contax S.A. and Tivit S.A are the major customer service suppliers to whom we have outsourced the operation of various of our large call centers. We require that the operators of our call centers comply with high standards for service quality. New call center regulations came into effect in December 2008, requiring improved customer service; for example, call centers must provide clients with the option to contact an operator in the first electronic menu, be available 24/7 and respond to client complaints within five days. We have implemented these call center requirements in all of our call centers. Sales and Marketing We have a centralized sales and marketing team responsible for overseeing our sales and marketing. In addition, we have marketing specialists dedicated specifically to each region and committed to building a detailed action plan for each of our main operations. For each region, we continuously monitor subscriber perception, competition, pricing and service preferences to increase our responsiveness to subscribers.  29 NETC Annual Report 2010 – Form 20-F


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 Among our long-term marketing objectives is to increase our market penetration, subscriber loyalty and our growth in revenue per household. Over time, we expect our subscribers to view their cable connection as the best “pipeline” to the home. To achieve this objective, we are pursuing the following strategies: ·introducing new value-added services; ·designing offerings to enable greater opportunities for subscriber entertainment choices; ·packaging product offerings to promote the sale of premium services and niche programming and to provide attractive price/value options; ·targeting marketing opportunities based on demographic data; and ·employing the “NET”, “NET Vírtua”, “NET Digital”, “NET Digital HD MAX” and “NET Fone Via Embratel” brand names to promote subscriber awareness and loyalty. To increase subscriber penetration and to introduce more value added services to our customers, we use coordinated marketing techniques, including telemarketing, the Internet, door-to-door sales, direct mail, retail sales, condominium sales channels and outsourced customer service centers. Each of these marketing techniques focuses on minimizing our cost of acquisition of new customers. The Social Responsibility Project In 2010, we continued with our commitment to social responsibility, improving  the NET Education Internet portal, our first major social responsibility project. This free program, initially designed to improve teachers’ training, was launched in 2004 and provides free access to online content and training, thereby expanding and enhancing the use of technology and the exchange of knowledge through educational and cultural projects focused on stimulating individuals and communities. Another important project is NET Community, which encourages the community to play an active role in social transformation and fosters conditions for their development as individuals, professionals and citizens. The program is founded on three pillars: Community Reporter, an annual communications and technology course with a focus on community communications; NET Action, through which Net Serviços volunteers take part in community initiatives; and Culture and Leisure Sessions, which includes movie screenings, interactive games, cultural exhibits and presentations and one-off, or modular, short-term workshops offering training in communications, art and technology in the communities of Cambuci, in São Paulo, and Vila União, in Campinas. Competition According to Pay-TV Survey No. 169, published in March 2010, we provided services to 43.5% of Brazil’s pay-television subscribers as of December 31, 2010. In addition to other pay-television providers, such as DTH, we compete with free broadcast television and other sources of home entertainment generally, including the Internet. We compete with these organizations on the basis of price, service offerings and service reliability. Furthermore, new sources of competition have emerged as a result of changing technology and approval by regulatory authorities, whichallowed regional telecommunication companies to merge and telecommunications companies to enter the cable television market. In 2007, Anatel approved the acquisition of cable companies by two major telecommunications companies, which has increased competition, particularly in the triple play market. In 2008, a telecommunication company started to offer triple play services through fiber network for a limited number of households in certain districts in the city of São Paulo. In addition, the availability of bundled services offerings and of wireless offerings, whether as a single offering or as part of a bundle, has intensified competition. We expect that competition will continue to intensify in the future, which may negatively affect the growth of revenue generating units or increase churn. In addition, to the extent we expand into additional services such as interactive services, we will face competition from other providers of each type of service.  30 NETC Annual Report 2010 – Form 20-F


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The following describes our key sources of competition: Broadcast Television Free broadcast television remains the dominant media provider in Brazil. Brazil represents the largest free broadcast television market in Latin America, with approximately 56 million television households as of December 31, 2009, according to www.teleco.com.br, a website that furnishes telecommunications data. The majority of free television services are broadcast by six privately-owned national broadcast television networks and a government-owned national public television network. These national television networks utilize one or more satellites to retransmit their signals. DTH DTH systems use medium- or high-power satellites to deliver signals to satellite dish antennas installed at residences, hotels and other buildings. DTH systems are less capital intensive than building cable television networks and, different from cable, DTH has a nation-wide license, allowing DHT operators to offer services more broadly within Brazil. This competitive advantage, however, may be offset by several factors. Among these is that DTH tends to entail higher monthly subscription fees than cable. In addition, DTH requires the subscriber to own a special receiver targeted at the satellite, which is not always possible in densely populated areas. Currently, we compete with four DTH operators in all cities where we offer our services. Cable Overbuilds According to Pay-TV Survey No. 169, as of December 31, 2010, the Brazilian cable industryconsisted of 48 operatorsin approximately 206 municipalities, serving an estimated 4.9 million subscribers. Under Brazilian law, cable television service licenses in a specific service area are non-exclusive licenses. In certain markets our licensed service areas overlap completely with the service areas of other licensees. There are overbuilt cable systems in the cities of São Paulo, Curitiba, Florianópolis, Pelotas, Rio Grande, Vitória and Belo Horizonte. MMDS Pay-television utilizing MMDS technology became available in Brazil in 1991, initially targeting the largest urban areas of the country. According to Pay-TV Survey No. 169, as of December 31, 2010, it was estimated that MMDS accounted for approximately 3.0% of pay-television services in Brazil. We estimate that we accounted for approximately 13.0%  as of December 31, 2010 of all MMDS subscribers in Brazil.  31 NETC Annual Report 2010 – Form 20-F


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 Establishing an MMDS system is less capital intensive than constructing a cable television network. While this cost differential may give an MMDS operator some competitive advantage in providing pay-television services, this advantage may be offset by several factors. Among these is that MMDS generally requires a clear line-of-sight because microwave signals will not pass through obstructions. MMDS, therefore, can generally not be received in “shadowed” areas where microwave transmission is blocked by terrain, buildings or other physical objects, though sometimes blocked signals can be retransmitted by low-power repeaters that can send an otherwise blocked signal over a limited area. Moreover, MMDS has the disadvantages of limited channel capacity, lower reliability and lower quality of signal. In key cities such as São Paulo, Rio de Janeiro and Belo Horizonte, where there are a high concentration of tall buildings and topographical barriers, MMDS is at a disadvantage to cable. Broadband Internet Broadband Internet access is currently being offered in Brazil primarily by telecommunications companies and cable television operators. Cable technology has a competitive advantage over asymmetric digital subscriber line, or ADSL, technology. In addition to higher speeds, broadband cable modem subscribers can download and upload at the same speed while ADSL subscribers experience asymmetrical speeds between download and upload. Fixed Line and Wireless Telephony Fixed line telephony services are currently being offered in Brazil primarily by fixed line and wireless telecommunications companies. In addition, our fixed line telephony product competes with other voice-over-Internet protocol providers. Licenses We currently hold 95 licenses to operate pay-television systems. Three of these licenses are for MMDS service and the remaining 92 are for cable services. The licenses are issued on a non-exclusive basis by Anatel, the national communications agency. The licenses are for a term of 15 years and are automatically renewable, subject to: ·satisfactory fulfillment of all technical and financial requirements for establishing a network and operating the business; ·compliance with applicable laws and regulations; and ·the payment of a fee. ·In 2010, we began the renewal process with Anatel Description of Property We own most of the fixed assets essential to our operations. As of December 31, 2010, our major fixed assets were: ·coaxial cable and fiber optic cable;  32 NETC Annual Report 2010 – Form 20-F


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 ·set-top boxes and cable modems for subscribers’ homes, including digital and high-definition set-top boxes; ·electronic transmission, receiving, processing and distribution equipment; ·microwave equipment; and ·antennas. We lease some of our distribution facilities from third parties. These facilities include space on utility poles and underground ducts where we place portions of our cable systems, roof rights and land leases which we use to place some of our hub sites and headends and certain portions of the fiber-optic network of the Minas Gerais state Telecommunication Company. We lease most of our office space, including our headquarter located in São Paulo, which consists of approximately 3,200 square meters, and data processing equipment from third parties. We generally own our service vehicles, data processing facilities and test equipment. We anticipate that, upon the expiration of any of our current leasing arrangements, we will be able to renew those arrangements or enter into alternative leasing arrangements at comparable costs. Regulation Cable Television Services Cable television services in Brazil are licensed and regulated by Anatel pursuant to Law No. 8,977, enacted by the Brazilian Congress on January 6, 1995; Decree No. 2,206, enacted by the President of Brazil on April 14, 1997; Ordinance No. 256, issued by the Ministry of Communications on April 18, 1997; and the General Telecommunications Law No. 9,472, enacted on July 16, 1997. Under Law No. 8,977 and Decree No. 2,206, a cable operator must obtain a license from Anatel in order to provide cable television services in Brazil. All cable licenses are non-exclusive licenses to provide cable television services in a service area. Cable television licenses are granted by Anatel for a period of 15 years and are renewable for equal and successive periods. Renewal of the cable television license by Anatel is assured if the cable system operator has (i) complied with the terms of the license grant and applicable governmental regulations, (ii) agreed to meet certain technical and economic requirements relating to the furnishing of adequate service to subscribers, including system modernization standards, and (iii) requested the renewal of such license at least 24 months prior to the expiration date of the license. The renewal of cable television licenses may also be subject to the payment of a renewal fee in an amount agreed upon by the licensee and Anatel. Only private legal entities providing cable television services as their main business activity headquartered in Brazil and at least 51% of their voting capital controlled by Brazilian citizens or naturalized Brazilian citizens for over ten years, or by companies incorporated in Brazil controlled by Brazilian citizens, are eligible to receive a license to operate cable television systems in Brazil. In the event that no private entity displays an interest in providing cable television services in a particular service area, Anatel may grant the local incumbent telephone operator a license to provide cable television services.  33 NETC Annual Report 2010 – Form 20-F


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 Decree No. 2,206 establishes specific guidelines relating to bids for cable licenses. In general, cable television licenses will be granted pursuant to a public bidding process administered by Anatel. In order to submit a bid for a license, a bidder must meet certain financial, technical and legal prerequisites. After such prerequisites are met, a bidder must then submit a detailed bid describing its plan to provide cable television services in the service area and the intended price for the license. Once a cable television license is granted, the licensee has an 18-month period from the date of the license grant to complete the initial stage of the installation of the cable system and to commence providing cable services to subscribers in the service area. The 18-month period is subject to a single 12-month extension at the request of the licensee, with such extension granted at the discretion of Anatel. Although Anatel has indicated it is considering granting new licenses, Anatel hasn’t granted new licenses for cable television services recently. Transfers of cable television licenses are subject to the prior approval of Anatel. A licensee may not transfer its license until it has commenced the commercial operation of its services in its service area. The license may, however, be transferred to a subsidiary company controlled by the licensee, by hereditary succession or by a spin-off transaction before the commencement of cable television services. Transfers of shares causing a change in the control of a licensee or the legal entity that controls a licensee are also subject to the prior approval of Anatel. Anatel must receive notice of any change in the capital structure of a licensee within 60 days, including any transfer of shares or capital increases which do not result in a change of control. Law No. 8,977 and Decree No. 2,206 regulate programming content and access to cable systems. In addition to channels allocated for unrestricted programming, a cable television operator is required to make available in its service area channels in the following categories: (i) basic channels for use free of charge; (ii) channels devoted to occasional services; and (iii) channels devoted to permanent services. A cable operator must provide access free of charge the following basic channels: ·channels for the distribution of programming by local uncodified VHF and UHF broadcast stations; ·a channel for transmitting the sessions and proceedings of state and municipal legislatures; ·a channel for transmitting the sessions and proceedings of the federal House of Representatives; ·a channel for transmitting the sessions and proceedings of the federal Senate; ·a channel for use by local universities; ·a channel for use by federal, state and municipal bodies for cultural and educational purposes; ·a channel for use by local non-profit private institutions; and ·a channel for use by the Brazilian Supreme Court.  34 NETC Annual Report 2010 – Form 20-F


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 In addition to the above, Bill of Law PLV 2/08, which was approved by the Senate on March 12, 2008 and remains subject to the President’s approval, created “TV Pública” (a public television entity) and requires that pay-television operators make available within their service areas two new channels, in addition to those already required by Law No. 8,977: ·a channel for use byEmpresa Brasileira de Telecomunicação, a company created in 2007 by the Brazilian federal government to manage their radio and television channels; and ·a channel for use by the official broadcaster of the Executive Branch. A cable operator must reserve at least two channels for occasional services, which include the transmission of seminars, public protests and demonstrations, meetings of Congress and similar events of public interest. Thirty percent of a cable system’s available channels must be reserved for permanent services, which is the transmission of programming produced by companies not affiliated with the cable television operator. Channels for occasional or permanent services must be publicly offered by the operator, and compensation of the operator is to be established pursuant to market practices and costs involved in the rendering of such services. Law No. 8,977 and Decree No. 2,206 impose the following limitations on channels reserved for unrestricted programming. A cable television operator may not (i) impose conditions that result in participation in the control of or require any financial interest in the entity providing programming; (ii) compel the programming entity to provide for exclusivity rights as a condition to the programming agreement; or (iii) restrict the unaffiliated programming entity’s market competition capacity. Further, a cable television operator may acquire programming produced outside of Brazil only through a company located in Brazil. Cable television operators are also required to offer at least one channel consisting exclusively of independently produced Brazilian motion pictures and features. Decree No. 2,206 also specifies that cable system operators should make available to subscribers, upon their request and at their expense, a device that blocks reception of certain subscription programming. Cable system operators are permitted under Ordinance No. 256 to offer commercial advertising on channels other than the free basic channels, as discussed above. Access to basic television services is guaranteed to all those located within the relevant service area upon the payment of an installation fee and a periodic subscription fee established by the cable television operator. Anatel is empowered to regulate installation and subscription fees. Under Law No. 8,977 and Decree No. 2,206, the fees shall be reasonable and fair. Anatel may revoke a license upon the issuance of a judicial decision, after due process, if the licensee: ·lacks the technical, financial or legal capacity to continue to operate a cable system; ·is under the management of individuals, or under the control of individuals or corporations, who, according to Law No. 8,977, do not qualify for such positions; ·has its license transferred, either directly or by virtue of a change in control,without the prior consent of Anatel;  35 NETC Annual Report 2010 – Form 20-F


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 ·does not start to provide cable services within the time limit specified by Law No. 8,977; or ·suspends its activities for more than 30 consecutive days without justification, unless previously authorized by Anatel. In September 1996, the Ministry of Communications issued Ordinance No. 1,086. This ordinance established Cable Television Rule No. 13/96. Cable Television Rule No. 13/96 subsequently was amended by, and republished as, Ordinance No. 256. Ordinance No. 256 imposes restrictions on the number of areas that can be served by a single cable television system operator, including its affiliates. According to Ordinance No. 256, a single cable system operator, including its affiliates, may only hold licenses with respect to (i) a maximum of seven areas with a population of 700,000 and above and (ii) a maximum of 12 areas with a population of 300,000 or more and less than 700,000. The restrictions only apply to areas in which the cable system operator, including its affiliates, faces no competition from other pay-television services, excluding services that utilize satellites to transmit their signal. Ordinance No. 256 grants Anatel the ability to alter or eliminate these ownership restrictions. The term “affiliate” is defined by Federal Decree No. 2,206 as any legal entity that, directly or indirectly, holds at least 20% of the voting capital of another legal entity, or any of two legal entities with common ownership of at least 20% of their respective voting capital. Law No. 3,449, enacted on September 30, 2004, and effective as of October 7, 2004, provides that consumers are not required to pay any minimum usage or enrollment fees charged in Distrito Federal by, among other service providers, cable television operators. Law 3,449 has been challenged in court by several telecommunications companies, all of whom have obtained favorable preliminary injunctions. We believe that such law is not applicable to our business since the services offered by us have fixed prices and do not vary according to the usage. We intend to challenge Law 3,449 in court, if necessary. Anatel Resolution No. 411, issued on July 14, 2005, and effective as of January 2006, established mandatory goals for pay-television services in Brazil known as the General Plan of Quality Goals for Pay-Television Services, or PGMQ. The PGMQ establishes a total of ten goals, which we are required to comply with the following goals which are divided into four different groups: ·Service Quality Goals. 1.Do not exceed certain ratio of total received complaints to total connected subscribers; 2.Achieve certain level of total requested installations; and 3.Not charging a certain percentage of subscribers 24 hours after a disconnection request. ·Customer Service Goals. 1.Respond to complaints from subscribers within 7 business days; 2.Reduce subscriber wait time to less than 20 minutes at our customer relations departments; 3.Achieve certain level of total received subscriber calls; and 4.Respond to subscriber calls received at our call centers within 20 seconds.   36 NETC Annual Report 2010 – Form 20-F


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 ·Billing Goal. 1.Do not exceed certain levels of incorrect bills. ·Service Continuity Goals. 1.Solve any service interruption within 24 hours; and 2.Solve subscriber requests for necessary equipment repairs within 24 hours. In addition, if we do not comply with PGMQ goals, Anatel may impose on us several penalties, such as warnings, fines, temporary suspensions and revocation of our licenses. We have been in compliance with this resolution since it took effect in July 2006. Anatel Resolution No. 488, issued on December 3, 2007, or Resolution 488, amended by Anatel Resolution No. 505 and effective as of June 2008, established the Administrative Act for the Protection of Pay-Television Subscribers (Regulamento de Proteção e Defesa dos Direitos dos Assinantes dos Serviços de Televisão por Assinatura). Among other things, Resolution 488: ·Requires that we operate a toll free number for the submission of complaints; and ·Establishes the right of subscribers to suspend our services at no charge for up to 120 days every year. Prior to the issuance of Anatel Resolution No. 488, a subscriber of our pay-television services was charged according to the number of outlets in each home. Effective June 6, 2008, pursuant to Anatel Resolution No. 488, Anatel prohibited pay-television service providers from charging subscribers for more than one outlet per household; on June 5, 2008, however, Anatel adopted Resolution No. 505 and suspended this prohibition under Resolution No. 488. In addition, on June 25, 2008, the 14th Federal District Court ruled that pay-television service providers could continue to charge customers for more than one outlet per household until Anatel approved a final resolution. On April 22, 2009, Resolution No. 528 was published, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. The ABTA filed an administrative appeal to Resolution No. 528 with Anatel. As a result of this appeal, Anatel published a clarification to Resolution No. 528 explaining that pay-television operators can charge for the cost of the equipment, including rental, lease and sale of set-top boxes. However, several state consumer defense associations are challenging this rule in court claiming that pay-television operators cannot charge for multiple outlets, including any equipment cost. We cannot predict the outcome of such claims, and, as a result, we are currently unable to assess the impact of Resolution No. 528 on our business, cash flows and results of operations.On March, 19, 2010, Anatel issued an administrative resolution known as “Súmula 9” that authorizes rental charges for equipment used in multiple outlets.There can, however, be no assurance that we will be able to charge customers for equipment costs relating to multiple outlets until such challenges are definitively resolved or that such challenges will ultimately succeed. This could have a material adverse effect on our business, cash flows and results of operations. The Brazilian Congress is currently discussing a series of bills, which, if enacted, may significantly modify the current regulatory framework. Some of these legislative discussions are at a preliminary stage, and it is unclear what modifications, if any, may ultimately be enacted.  37 NETC Annual Report 2010 – Form 20-F


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Bill No. 29 proposes restrictions on pay-television operators such as requiring a minimum amount of Brazilian produced content to be distributed and the same must carry channels for all pay-television operators, regardless the technology (cable, MMDS or DTH). In addition, Bill No. 29 would allow telecommunication companies to provide cable services and eliminate foreign ownership limitations on telecommunication companies that distribute content through mass electronic communication systems. “Mass electronic communications services/systems” is defined as the distribution of electronic content to the public by means of a subscription contract. It is unclear what changes, if any, will ultimately be enacted to the regulatory regime applicable to our company and our business under Bill No. 29. On December 9, 2009 Bill No. 29 was approved at the Brazilian Congress’ Science and Technology Commission. As of the filing date, Bill No. 29 is being discussed at the Brazilian Congress’ Constitutional and Justice Commission. Bill No. 29 is currently a proposal in the Senate as Complementary Bill No. 116. It is possible that it will be voted and approved in the second semester of 2011. However, the deadline is uncertain. MMDS Services MMDS services are regulated pursuant to Decree No. 2,196, enacted by the President of Brazil on April 8, 1997, and Ordinance No. 254, issued by the Ministry of Communications on April 16, 1997. MMDS services differ from cable services in that consent to render services is given by an authorization, not through a license, and only to companies incorporated under Brazilian law and headquartered in Brazil that are either controlled by a company incorporated under Brazilian law and headquartered in Brazil or by Brazilian born individuals. There is also no regulation with respect to MMDS programming content. Since their establishment in Brazil, MMDS services have been operated on two frequency ranges: 2,500-2,690 MHz and 2,170-2,182 MHz. Anatel Resolution No. 429, issued and effective on February 13, 2006, provided that the latter frequency range (2,170-2,182 MHz, or the SCM Range) will no longer be available for MMDS services. Instead, the SCM Range will be used primarily for multimedia communications services, or SCM. Authorizations for the operation of MMDS services on the SCM Range that were granted by Anatel prior to February 13, 2006 will remain valid until their respective expiration dates. Our current MMDS authorizations expire on February 16, 2024. More recently, Anatel published the Public Consultation No. 31 defining that 140MHz out of the 2,5000-2,690 MHz band will be assigned to mobile services (SMP) instead of MMDS services by the end of 2015. This ruling has been questioned by several associations and Congress, and Anatel has not published a final decision. It is possible that all MMDS operators will be assigned 50 MHz by 2015. As our operations are primarily offered by cable, we do not expect Anatel Public Consultation No. 31 to have a material impact on our operations. Cable-Related Services General Prior to the enactment of Amendment No. 8 in 1995, Article 21 of the Federal Constitution required the Brazilian government to operate directly, or through concession, permissions or authorizations granted to companies whose shares were controlled by the Brazilian government, all telephone, telegraph, data transmission or other public telecommunications services. This constitutional requirement was the basis for the establishment of the state-owned telephonemonopoly, Telebrás, which held controlling interests in 27 regional telephone operating companies. With the adoption of Amendment No. 8, Article 21 was modified to permit the Brazilian government to operate telecommunications services either directly or though authorizations, concessions or permissions granted to private entities. Since the enactment of Amendment No. 8, the government has implemented structural reform in the telecommunications sector. The main purpose of this reform was the transfer of the control and operation of the services from the state to private companies.  38 NETC Annual Report 2010 – Form 20-F


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On July 16, 1997, Congress approved Law No. 9,472, known as the General Telecommunications Law, or LGT, which provided the legislative framework and is the basis for telecommunications regulation in Brazil. The LGT governs the regulation of all telecommunications services, with the exception of radio and television broadcasting services. The adoption of the LGT, as well as the privatization of switched fixed telephone and cellular services, has led to sweeping changes in the operating, regulatory and competitive environments of the Brazilian telecommunications sector. The changes include: (i) the establishment of an independent regulator, Anatel, and the development and implementation of comprehensive regulation for the telecommunications sector; (ii) the break up of the previously existing state-owned telephone monopoly; and (iii) the introduction of competition in the rendering of all telecommunications services. The Telecommunications Sector As part of the restructuring and privatization of the state-owned telecommunications companies, the Brazilian government approved Decree No. 2,534 of April 2, 1998, which established the General Plan of Concessions, also known asPlano Geral de Outorgas, or PGO, for switched fixed telephone carriers. The PGO divided Brazil into four geographic regions, each of which had two switched fixed telephone carriers, one of which held a license to operate a telephone network and the other holding an authorization to do so. The passage of the PGO was the first step toward increased competition within the telecommunications sector. With Anatel Resolution No. 283, which went into effect on November 29, 2001, Anatel began auctioning off new licenses for the rendering of switched fixed telephone services. This was the second step toward increased competition within the telecommunications sector. With respect to cable television services, although the PGO permitted the switched fixed telephone operators to provide other telecommunications services, they were and remain subject to certain limitations. For instance, the license agreement among Federal Government and the local fixed line telephone carriers prohibits such carriers from providing cable television services or owning interests in cable television carriers in the same switched fixed telephone services license areas. According to Law No. 8,977, the carriers may only provide such cable television services where there is a clear of lack of interest by other private companies to provide such services. In December 2008, Anatel approved a new PGO, allowing the merger of two local fixed line telephone carriers. High-Speed Cable Broadband Internet Services Law No. 8,977, Decree No. 2,206 and Anatel Resolution No. 190, issued in November 1999, authorize cable television operators such as Net Serviços to:  39 NETC Annual Report 2010 – Form 20-F


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 ·furnish video and audio signals on their cable networks; and ·utilize their networks to provide value-added services, including high-speed access to Internet service providers that enable the transmission of meteorological, banking, financial, cultural, price and other data. Multimedia Communications Services Anatel issued the SCM Regulation, Resolution No. 272 of August 9, 2001, which permits the offering of capacity for transmission, emission and reception of multimedia information in the format of audio signals, video, data, voice and other sounds, images, texts and other information of any nature, to subscribers within the same area of service, using any means. The SCM is a fixed telecommunication service rendered for the collective interest on a domestic or international basis, excluding fixed telephony, mass electronic communication services (cable television, MMDS and DTH), and broadcast service. According to Resolution No. 272, SCM providers can offer their services to any residential subscriber. Therefore, cable television operators could request an Anatel authorization to offer SCM and then offer high-speed cable broadband Internet service, not only to their cable television subscribers, but to any user of this service located in the licensed area of the cable television operator. Legal Proceedings We are party to several tax, civil and labor proceedings, both administrative and judicial, arising out of our regular course of business. While it is impossible to determine with certainty the ultimate outcome of these matters, management has established reserves when it can reasonably estimate probable losses based on its analysis of the pending disputes and on the opinion of its legal counsel. Total reserves for losses with respect to the tax and social security, civil and labor proceedings to which we are a party decreased from R$605.4 million as of December 31, 2009 to R$554.8 million as of December 31, 2010. The table below sets forth the reserves established for administrative and judicial tax and social security proceedings, civil litigation and labor proceedings as of December 31, 2010: (R$ in thousands)Tax and social security related matters

   $    476,007Labor related matters

   33,186Civil related matters

   45,571Total

   $   554,764
 Of the R$554.8 million of liabilities listed above, R$161.3 million is currently being disputed in court proceedings and R$393.5 million relates to administrative proceedings which have been brought against us and tax provisions. As of December 31, 2010, we have made judicial deposits in an aggregate amount of R$83.7 million related to such proceedings and disputes. Administrative tax proceedings and tax provisions IOF We and our subsidiaries carried out commercial current account transactions reflecting monetary transfers between ourselves and our subsidiaries. The Secretariat of the Federal InternalRevenue may deem such transfers to be inter-company loans. In the event such transfers are deemed to be inter-company loans, we may be subject to Financial Transactions Tax,Imposto sobre Operações Financeiras, or IOF, on the amount of the loans. IOF applies to loans between non-financial entities at a maximum rate of 1.5% per year where the principal amount and the term for repayment is fixed, and at a daily rate of 0.0041% on the outstanding balance, without limit on the total amount of tax payable, if the principal amount of the loan is not fixed. We have recorded liabilities in the amount of R$80.9 million with respect to the IOF, as of December 31, 2010. If we are assessed IOF on the transfers by the Secretariat of Federal Internal Revenue, the assessment could materially and adversely affect our cash flows.  40 NETC Annual Report 2010 – Form 20-F


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IRPJ and CSLL In December 2003, the Federal Public Administration issued a tax assessment notice against our subsidiary Cabodinâmica TV Cabo São Paulo S.A., or Cabodinâmica, which was merged into Net São Paulo in 2004, alleging that Cabodinâmica owes federal corporate income tax, or IRPJ, andContribuição Social sobre o Lucro Líquido, or CSLL, a tax levied upon a company’s net profits, as a result of a 1998 loan transaction between Cabodinâmica and Preferential Holdings Ltda. At the time of the loan transaction, IRPJ and CSLL were imposed only on domestic transactions. Cabodinâmica has presented a defense against the fine on the basis that the loan transaction with Preferential Holdings Ltda. was not a domestic transaction and Cabodinâmica is, therefore, exempt from paying IRPJ and CSLL on the transaction. In May 2007, the lower court decided to uphold the tax assessment notices and Net São Paulo appealed this decision. In March 2010, the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais) dismissed the appeal filed by us. In March 2011, we presented another appeal to Board of Tax Appeals (Câmara Superior de Recursos Fiscais) and the decision is pending. We have recorded liabilities of R$14.3 million with respect to this matter as of December 31, 2010. In December 2009, Net São Paulo received a tax-deficiency notice from the Federal Revenue Service in the total amount of R$547.3 million alleging that we had improperly recognized tax credits related to goodwill between 2004 and 2008. By decision of the lower court in October 2010, the amounts were reduced to R$274.1 million (income taxes) and R$97.8 million (social contribution) but the alleged improper recognition of tax credits with respect to goodwill were upheld. Based on analysis performed by legal counsel, the chances of losing this lawsuit were changed in 2010 from remote to possible. In October, 2010, Net São Paulo appealed this decision and the appeal is pending at the Board of Tax Appeals (Conselho Administrativo de Recursos Fiscais). ICMS Net Rio recorded liabilities in the amount of R$8.5 million as of December 31, 2010 with respect to the tax assessment notices challenging ICMS tax rate of 5%, which is the tax rate charged on cable television services. The tax assessment notices assume an ICMS tax rate of 25% should have been applied Five of these ICMS-related administrative proceedings have resulted in unfavorable decisions and, as a result, Net Rio has provided a guarantee of R$21.4 million in order to continue the appeal process. On October 20, 2008, and February 25, 2010, Net Brasília Ltda., or Net Brasília, received tax assessment notices from the State Internal Revenue of theDistrito Federalin the amounts of R$155.4 million and $50.9 million, respectively, relating to the ICMS tax. The State Tax Authority claims that during the period from January 2003 to June 2008 and July 2008 to June 2009 Net Brasília should have paid the ICMS on pay-television subscription revenues at a rate of 25%instead of the rate of 10% actually applied by Net Brasília. In the State Tax Authority’s view, the rate reduction benefit allowed by ICMS Agreement No. 57/99 expired on December 31, 2001. Net Brasília filed its defense in the lower administrative court and a decision on its defense is pending. We believe the probability of loss is remote. Therefore, we have not made any provisions in connection with this tax assessment.  41 NETC Annual Report 2010 – Form 20-F


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IRRF On July 6, 2007, the Brazilian Federal Income Office issued an IRRF notice of infraction against our subsidiary Net Rio in the amount of R$19.6 million. The notice alleges a difference between the real value and the stated value of Net Rio’s income from August 2003 to March 2007. In August 2007, Net Rio submitted an appeal to this tax assessment with the Administrative Sector of the Brazilian Federal Income Office and its appeal is pending. We have not made any provisions in connection with this tax assessment. We believe the probability of loss is remote. Other In addition to the administrative tax proceedings discussed above, we and our subsidiaries are involved in administrative tax proceedings relating to, among other things: (i) tax assessment notices from theInstituto Nacional do Seguro Social, the Social Security National Institute, alleging amounts owed relating to social contributions; (ii) additional amounts allegedly owed with respect to income tax, including the withholding of income tax on the Multicanal Notes and the Net Sul Floating Rate Notes, both of which have been fully repaid; (iii) additional amounts allegedly owed relating to IRPJ and CSLL; and (iv) amounts allegedly due relating toContribuição ao Programa de Integração Social, or PIS, andContribuição para Financiamento da Seguridade Social, or COFINS. We do not expect losses from any of these proceedings, individually or in the aggregate, to have a material adverse effect on our liquidity, our consolidated financial condition or our results of operations. Withholding tax (IRRF) on foreign currency bonds The Senior Notes and Floating Rate Notes are not subject to IRRF and IOF, as long as the average term is not less than 96 months. As result of the fact that some noteholders exercised their rights have the notes repurchased prior to the end of this 96-month-period, the Company recorded a provision of R$148,419 at December 31, 2010 (R$143,281 at December 31, 2009) related to these taxes.  Judicial Tax Proceedings Shadow tax Since 1999, several Brazilian municipalities, which currently represent approximately 66% of our homes passed, passed legislation imposing a tax on the use of public thoroughfares, including the installation and passage of cables. This municipal tax is assessed per meter of cable installed in the relevant municipality and the tax rate itself varies widely by municipality.The municipalities currently imposing such a “shadow” tax include São Paulo, Rio de Janeiro, Caxias do Sul, Anápolis, Campinas, Florianópolis, Criciúma, São Carlos, Indaiatuba, Jacareí, Bragança Paulista, Caçapava, Limeira, Rio Claro, São Vicente, Taubaté, São José dos Campos, Brasília, Curitiba, Porto Alegre, Campo Grande and Sumaré.The tax generally applies to power companies and telecommunication companies, among others.  42 NETC Annual Report 2010 – Form 20-F


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 We have filed lawsuits in each of these municipalities to challenge the constitutionality and legality of this tax. In these lawsuits, we argue that (i) the tax intrudes upon the exclusive authority of the Brazilian federal government to legislate on telecommunications; and (ii) the legal nature of the tax is not that of a public price, fee or contribution, as defined under Brazilian law. Furthermore, we believe the shadow tax is unconstitutional since it is not included in the list of taxes within the jurisdictional authority of municipalities, as established by the Brazilian federal constitution. In Rio de Janeiro, we won our case in the lower court. However, this decision was reversed on appeal. A decision on our appeal is pending at the higher court. On March 3, 2010, the Municipality of Rio de Janeiro imposed tax assessments of R$4.5 million against Net Rio, charging the shadow tax from 2001 through 2009. Net Rio filed its defense in the lower administrative court and a decision is pending. This charge regards the two lawsuits filled by TELCOMP (Associação Brasileira das Prestadoras de Serviços de Telecomunicações Competitivas) of which Net Rio is a member. In both cases, TELCOMP obtained a favorable decision. Due to this fact we believe the probability of loss is remote. Therefore we have not made any provisions in connection with this tax assessment. In São Paulo, there have been three different decrees imposing a shadow tax. We filed an injunction in the lower court opposing the first decree and were met with an unfavorable decision. We appealed and are currently awaiting the decision on our appeal. We also filed an injunction in the lower court against this second decree, where we received a favorable decision. We are now awaiting the decision on the government’s appeal. The second decree, however, has been modified by a third decree. Thus, we filed another injunction in the lower court against this third decree, where we also received a favorable decision. In April 2006, we received an unfavorable decisionby a higher court. In November 2006, we appealed this decision and we are awaiting for a decision. With respect to other municipalities, we have obtained six favorable decisions, which have been appealed by the municipalities, and four unfavorable decisions, which we have appealed.We filed eight lawsuits against nine different municipalities: Jacareí, Bragança Paulista,  Limeira, Rio Claro, São Vicente, Taubaté, São José dos Campos and Sumaré.We obtained seven lower court favorable decisions. The municipalities have filed appeals at the higher court. With respect to Limeira, the lower court decision was unfavorable and we filed an appeal at the higher court. Finally, with respect to Sumaré, the lower court has not issued its decision. We have not made any provisions for the payment of the shadow tax. The tax varies in each municipality and it is calculated per meter of installed cable. We have approximately 24,000 kilometers of installed cable in the municipalities where this tax exists. If the courts rule that the collection of this tax by the municipalities is valid, the tax would have to be paid retroactively. In addition, if the municipalities which currently impose the tax were successful in implementing and collecting this tax, additional municipalities may seek to impose it. If our appeals fail and we are required to pay this tax, our operating results and cash flows would be materially and adversely affected. Income tax retained on earnings We have brought actions against the Federal Internal Revenue to dispute income tax retained on earnings under certain of our hedge transactions. In accordance with preliminary injunctions obtained in these actions, we have not collected or remitted a total amount of R$36.4 million on those transactions as of December 31, 2010. Of this amount, R$11.7 million hasbeen deposited with the court by the financial institution, which liquidated the transactions and is responsible for withholding the income tax. We have not made provisions for the remaining R$24.8 million. In the event of an unfavorable decision, the remaining R$24.8 million will be collected and accounted for as a tax credit available to offset future income tax liabilities.  43 NETC Annual Report 2010 – Form 20-F


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ICMS Net Rio received a tax assessment notice from the State Internal Revenue of the State of Rio de Janeiro in the amount of R$51.6 million relating to the ICMS tax. The State Tax Authority alleged that, as a result of delays in the payment of its ICMS tax during the period from September 2001 to October 2002, Net Rio lost its rate reduction benefit. Net Rio presented to the State Internal Revenue of the State of Rio de Janeiro its administrative defense. In May 2005, Net Rio obtained an unfavorable decision at the lower court with respect to the administrative defense. In June 2005, Net Rio filed an appeal to this decision and in 2008 obtained an unfavorable decision. In January 2009, a tax enforcement action was filed with respect to the delayed payments and Net Rio presented its defense to the lower court, where a decision is pending. The amount under dispute was R$32.4 million as of December 31, 2010, which is guaranteed by a bank bond. Additionally, Net Rio filed a writ of mandamus before the judicial court with regards to the tax assessment. With respect to the writ of mandamus, Net Rio obtained an unfavorable decision from the lower and higher judicial court for the assessed period, with the exception of the period between October and December 2001, for which Net Rio has recorded liabilities in the amount of R$34.1 million, as of December 31, 2010. IPI The Federal Internal Revenue has imposed tax assessments of R$17.8 million on our subsidiary Reyc Comércio e Participações Ltda., or Reyc, alleging that, for the purpose of the Import Duty, orImposto sobre Produtos Importados, or IPI, Reyc did not correctly classify transactions related to the import of our analog decoders. Reyc filed three lawsuits against the imposition of the tax assessments and the lower court’s decision in connection with one of these lawsuits is pending. In May 2005, the court decision for the third lawsuit was favorable to Reyc, but the Federal Internal Revenue appealed the decision with a higher court. In June 2009, one lawsuit was decided favorably to Reyc. Reyc has recorded a liability in the amount of R$4.9 million as of December 31, 2010. In spite the lawsuits filed by Reyc, the Federal Internal Revenue started a judicial procedure for the enforcement of the tax liability in the amount of R$17.8 million as of December 31, 2010. On March 3, 2007, the Attorney-General of the National Treasury issued an Import Duty federal tax assessment against our subsidiary Reyc in the amount of R$31.4 million alleging a tax payment deficiency as a result of errors in classification of imported goods. On February 14, 2007, the Attorney-General of the National Treasury requested that the Federal Fiscal Enforcement Agency of the City of Florianópolis disregard the corporate entity of Reyc in order to be able to hold Net Serviços, Net Serviços’ subsidiaries and Net Serviços’ shareholders liable for any judgment. On the same day, Reyc requested that a portion of the claim be suspended due to a decision of Federal Justice Court of the State of Santa Catarina granting Reyc an annulment of the claim in the amount of R$31.4 million based on the finding that Reyc’s classifications were correct. An administrative decision from the Federal Fiscal Enforcement Agency of the City of Florianópolis is pending. On November 18, 2010, The Federal Internal Revenue has imposed tax assessments of R$22.9 million on Reyc alleging that additional transactions subject to the IPI were not correctlyclassified. Reyc filed its defense in the lower administrative court and a decision is pending. We believe the probability of loss is possible. Therefore we have not made any provisions in connection with this tax assessment.  44 NETC Annual Report 2010 – Form 20-F


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ISS This judicial tax enforcement action was filed after administrative proceedings related to the defense of three tax deficiency notices issued against Net on June 28, 2004 ended unfavorably to us at the administrative level. On October 23, 2009, we filed our defense in the lower court. On September 20, 2010, we obtained a partially favorable decision at the lower court. Two tax deficiency notices were canceled (lower values) and the third deficiency notice (of higher value) obtained an unfavorable decision. We appealed and the decision is pending. The amount involved in this tax enforcement action, as of December 31, 2010, was R$118.9 million. We believe the probability of loss is remote. We have not made a provision in connection with this proceeding.  Other In addition to the judicial tax proceedings discussed above, we and our subsidiaries are involved in judicial tax proceedings relating to, among other things: (i) theInstituto Nacional do Seguro Social, the Social Security National Institute, with respect to the collection and offsetting of social security contributions; and (ii) theImposto Sobre Serviços, or ISS, a tax levied by municipal governments on revenues derived from the provision of services. We do not expect losses from any of these proceedings, individually or in the aggregate, to have a material adverse effect on our liquidity, our consolidated financial condition or our results of operations. Civil Claims Increase in monthly subscription rates and other contractual disputes We are currently party to nine  lawsuits against our subsidiaries as a result of increases in monthly subscription rates by state public attorneys, by consumer protection organizations and by individuals. The plaintiffs in each lawsuit allege that the increases in monthly subscription rates were abusive and unjustified and violate principles of the Brazilian Consumer Defense Code and legislation establishing that contractual payment increases shall only occur once a year. The plaintiffs further argue that the increases were illegal, that the amounts paid should be reimbursed to subscribers and that the clause in our standard subscription contract, which provides for an increase in monthly subscription rates in the event that the cost of providing services increases, should be declared null and void. We have obtained unfavorable final decisions for two of our subsidiaries, which have since been merged into us. In both cases, we settled with the General Attorney’s office and agreed to reimburse current and former subscribers in the amount which we increased their monthly subscription. One has fulfilled the agreement and the other is in process of fulfillment. In addition, we have obtained unfavorable decisions a third subsidiary that has since merged into us, but they are currently before the appeals court. Court decisions for the remaining lawsuits are pending. As of December 31, 2010, we recorded liabilities of R$5.9 million for the seven existing lawsuits. If we obtain unfavorable final decisions in these and similar lawsuits, our cash flows could be materially and adversely affected.  45 NETC Annual Report 2010 – Form 20-F


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Moreover, we are party in another three lawsuits filed against our subsidiaries by state public attorneys or by consumer protection organizations, which challenge the validity of certain clauses in our standard subscription contract (i.e. penalty clauses, slip collection clauses, etc.). The plaintiffs seek to prevent us from including clauses that would allow our subsidiaries to charge contractual penalties for example, but are not seeking monetary compensation. Because our standard subscription contracts no longer include these disputed clauses, we believe that the outcome of such proceedings will not affect our business or cash flows. Lawsuits related to signal scrambling and Internet access An action was brought in August 2001 by the consumer defense organizationAssociação Brasileira de Defesa do Consumidor, or ANADEC, against nine of our subsidiaries (some of which have since been merged into us), all of which are located in the State of São Paulo, whereby plaintiffs seek to prevent the subsidiaries from scrambling their cable signals. Plaintiffs claim that while such scrambling may help prevent piracy, it interferes with picture-in-picture television viewing and with the recording of programs when using a VCR, specifically when the viewer is watching one program while trying to record a second program. In February 2005, we obtained a favorable decision regarding this action. The consumer defense organizationAssociação Brasileira de Defesa do Consumidor, or ABRASCON, and a credit consumer organizationAssociação dos Consumidores de Crédito, or ANDEC, respectively, filed a lawsuit against Net seeking to prevent it from requiring that subscribers connecting to the Internet through Net  Vírtua also maintain a contract with an Internet service provider. The plaintiff is seeking R$8.0 million in compensation and a court decision is still pending. In addition, four similar actions have been filed against our subsidiaries, all pending of judgment by the court. We believe that we have probable and possible chances of loss. Most of these lawsuits does not request damages but unfavorable decisions may involve injunctions against our subsidiaries, such as the prohibiting them from entering into contracts with Internet providers for NET Vírtua subscribers. ECAD settlement In 1996, theEscritório Central de Arrecadação e Distribuição, or ECAD, filed separate lawsuits against each member of the Brazilian pay-television trade association, including separate suits against Net Serviços and each of our cable operating subsidiaries. ECAD is an organization which acts as the legal representative of artists and authors in collecting on behalf of and distributing to such artists and authors royalty payments resulting from the public broadcast of musical compositions in Brazil. ECAD’s complaints sought injunctions and damages on the grounds that the defendant pay-television companies had been using copyrighted musical material in their programming without prior approval and without paying royalties. As of December 31, 2010, all of these of lawsuits were pending and no final decision has been issued. We have recorded the liabilities in the aggregate amount of R$99.4 million and deposited into court the aggregate amount of R$25.6 million. Multiple outlets We are party to thirty two lawsuits filed by state public attorneys or by consumer protection organizations against the fees charged for more than one outlet per household on the grounds that such fee is abusive, unjustified and violates principles of the Brazilian ConsumerDefense Code and Anatel Resolution No. 528. See “Risk Factors — Risks Related to Our Business — We may not be able to continue charging our customers for equipment costs related to more than one pay-television outlet per household.” Some of these lawsuits seek, in addition to a prohibition on charging fees, reimbursement for the amounts charged to subscribers for multiple outlets. We believe that our chances of loss are possible and we have not recorded a provision in connection with these proceedings. On March 19, 2010, Anatel issued an administrative resolution known as “Súmula 9” that authorizes rental charges for equipment used in multiple outlets but a definitive resolution has not been reached and the lawsuits remain outstanding.  46 NETC Annual Report 2010 – Form 20-F


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Other civil public and collective actions Our subsidiaries are defendants in another thirty-two civil public and collective actions, all with different claims, which can be summarized as follows: unlawfulness of channels grid modification; unlawfulness of subscribers data form modification; improper collection of taxes and monthly subscription; invalidity of cable television concessions; unlawfulness of bundled sale of products and services. Although most of them do not request damages, all of them request high punitive fines for the case of continuance of those alleged illegal practices, and unfavorable decisions to our subsidiaries may adversely affect their ordinary course of business. Labor Claims As of December 31, 2010, we and our subsidiaries were party to 1,773 labor proceedings filed by former employees of our company and our subsidiaries involving total claims of R$33.2 million (calculated based on the award granted by the most recent court decision on the claim and, where no decision has been issued, the amount requested by the plaintiff). These proceedings most frequently involve claims seeking additional compensation for employees performing high-risk activities and for overtime pay and commissions. In one lawsuit involving a claim for R$20.0 million, the Labor Public Prosecutor's Office alleged that our subsidiary Net Sul violated workplace condition regulations (Net Sul has since been merged into us). In December 2010, Net Sul and the Labor Public Prosecutor's Office reached a preliminary agreement pursuant to which Net Sul has undertaken to, among other things, improve and maintain work conditions in compliance with applicable worker health and safety requirements and to supply at no cost 28 municipal public schools in the region in which Net Sul operates with cable television, subject to a penalty of daily fines for non-compliance.  In December 2010, we signed a settlement agreement with substantially similar terms as the preliminary agreement. Organizational Structure We were incorporated in 1994 as asociedade anônima, or corporation, under Law 6,404/76 of the Federative Republic of Brazil. We are currently a publicly-held corporation (sociedade por ações) registered with the CVM. We are registered in the commercial registry of the State of São Paulo under number 35.300.177.240. Our registered office is located at Rua Verbo Divino, 1356, São Paulo-SP-04719-002, Brazil, telephone +55 11 2111‐2785. We conduct our cable television and related activities through a group of companies that we have acquired and developed over the past decade. Set forth in the table below is a list of our direct and indirect subsidiaries, as of December 31, 2010:   47 NETC Annual Report 2010 – Form 20-F


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Jurisdiction ofIncorporation orOrganization

   Direct

   Total Interest(percent)SubsidiaryNet Brasília Ltda

   Brazil

   100

   100Net Rio Ltda

   Brazil

   100

   100Net São Paulo Ltda

   Brazil

   100

   100Reyc Comércio e Participações Ltda

   Brazil

   100

   100Jacarei Cabo S.A*

   Brazil

   100

   100614 TVH Vale Ltda

   Brazil

   100

   100614 Serviços de Internet Maceió Ltda

   Brazil

   100

   100614 Serviços de Internet João Pessoa

   Brazil

   100

   100Ltda -Big TV* Pending approval from Anatel   48 NETC Annual Report 2010 – Form 20-F


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ITEM 4A.       UNRESOLVED STAFF COMMENTS. We have no unresolved comments from the staff of the U.S. Securities and Exchange Commission, or SEC. ITEM 5.          OPERATING AND FINANCIAL REVIEW AND PROSPECTS. The following discussion should be read in conjunction with ouraudited consolidated financial statements included elsewhere in this Form 20‐F. This discussion and analysis contains forward-looking statements that involve risks and uncertainties. See “Forward-Looking Statements.” Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors that include, but are not limited to, those set forth under “Item 3. Key Information—Risk Factors” and elsewhere in this Form 20-F.The following discussion is organized as follows: •

   Overview.This section provides a general description of our business, as well as recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends.•

   Critical Accounting Policies and Estimates.This section discusses accounting policies and estimates that require the use of assumptions that were uncertain at the time the estimate was made and that could have a material effect on our consolidated results of operations or financial condition if there were changes in the assumptions or if a different assumption was made. Our significant accounting policies, including those considered to be critical accounting policies and estimates, are summarized in Note 3 to the audited consolidated financial statements included elsewhere in this Form 20-F.•

   Financial Statement Presentation.This section provides a summary of how our operations are presented in the audited consolidated financial statements included elsewhere in this Form 20-F.•

   Results of Operations.This section provides an analysis of our results of operations for the year ended December 31, 2010 and the year ended December 31, 2009.•

   Liquidity and Capital Resources.This section provides an analysis of the our cash flows for the year ended December 31, 2010 and the year ended December 31, 2009, as well as a discussion of our outstanding debt and commitments that existed as of December 31, 2010. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our future commitments, as well as a discussion of other financing arrangements.•

   Brazilian Economic Environment.This section provides general overview of the Brazilian economic environment and effects of inflation and exchange rate fluctuations.
   49 NETC Annual Report 2010 – Form 20-F


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Overview We are a leading multiservice company in the pay-television and broadband Internet industries in Brazil. Currently, we are the largest cable television operator in Brazil and in Latin America, based upon the number of subscribers and homes passed. As of December 31, 2010, we provided one or more of our services in 93 locations in Brazil, including São Paulo and Rio de Janeiro, the two largest Brazilian cities. As of December 31, 2010, our advanced network of coaxial and fiber-optic cable covered over 66,000 kilometers and passed approximately 11.5 million homes. Most of our customers belong to high and middle income classes, which helps to keep bad debt expense at low levels. In 2010, we had gross sales revenue of R$7,101.6 million. We principally offer three services – pay-television, broadband Internet and fixed line telephony. We market our services separately, but we emphasize the “bundled” packages with multiple services and features. Historically, we have focused primarily on residential customers, while also selling pay-television, broadband Internet and networking and data services to commercial customers. Currently, our principal services include pay-television and pay-per-view programming under the “NET” brand name, digital cable under the “NET Digital” brand name, high-definition cable television combined with digital video recorder under the “NET Digital HD MAX” brand name, broadband Internet service under the “NET Vírtua” brand name and fixed line telephony service under the “NET Fone Via Embratel” brand name. Pay-television is our largest service in terms of revenues generated and, as of December 31, 2010, we had 4.2 million pay-television subscribers, of which approximately 57% subscribed to our digital cable service. Although providing pay-television services is competitive, we expect to continue to increase pay-television revenues through the offering of advanced digital cable services, as well as through price increases and digital cable subscriber growth. Our digital cable subscribers provide a broad base of potential customers for additional services. Pay-television programming costs represent a major component of our expenses and are expected to continue to increase, reflecting programming rate increases on existing services and subscriber growth. We do not expect that our pay-television service margins as a percentage of pay-television revenues will decline over the next few years. As of December 31, 2010, we had 3.5 million broadband Internet subscribers. We expect continued growth in residential broadband Internet subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenues is expected to continue to slow over time as penetration increases in broadband Internet services. As of December 31, 2010, we had 3.2 million residential fixed line telephony subscribers. We expect increases in fixed line telephony subscribers and revenues for the foreseeable future; however, the rate of growth of both subscribers and revenues is expected to slow over time as fixed line telephony services already have high level of penetration and an increasing number of homes in Brazil is replacing their traditional telephone service with wireless phone service. The profitability of our telephony services business is sensitive to customer churn as acquisition costs for certain telephony customers, especially Net Fone.com customers, are recovered over a longer period than, for example, customers who subscribe to pay-television or multiple services. We face intense competition from a variety of alternative information and entertainment delivery sources, principally from other pay-television providers, including DTH providers and certain telecommunications companies, each of which offers a broad range of services. These services are also offered in bundles of pay-television, broadband Internet and fixed line telephonyservices similar to ours and, in certain cases, these offerings also include wireless services. The availability of these bundled service offerings and of wireless offerings, whether as a single offering or as part of a bundle, has intensified competition. We expect that competition will continue to intensify in the future, which may negatively affect the growth of revenue generating units or increase churn. By continuing to enhance our services with innovative offerings and continuing to focus on customer service, we believe we can distinguish our services from those of our competitors.  50 NETC Annual Report 2010 – Form 20-F


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Table of Contents We believe we continue to have adequate liquidity to meet our liquidity needs for the 2011. As of December 31, 2010, we had R$821.6 million of cash and cash equivalents. Additionally, there are no significant maturities of our short-term or long-term debt prior to June 2012. On May 26, 2011, we redeemed our outstanding US$150.0 million aggregate principal amount of 9.25% perpetual bonds with available cash on hand. In 2011, we intend to maintain our subscriber growth, in terms of net additions, at the 2010 level. Key factors that will influence our ability to achieve these objectives include: ·Competition. Our pay-television, broadband Internet and fixed line telephony services face a growing number of competitors. We are pursuing a marketing strategy to attract and retain customers. We are working on developing new packages of bundled products to better match customers’ expectations and we are working to improve the customers’ satisfaction. ·Cost control. To maintain our profitability in the increasingly competitive Brazilian environment, we must continue to improve operating efficiency. We plan to do this by limiting operating costs, selling, general and administrative expenses and bad debt expenses. ·New opportunities. Our ability to expand our revenues will depend, in large part, on the success of our strategy for continued growth and increased triple play (pay-television, broadband Internet and fixed line telephony) sales. ·Brazilian economic conditions and level of disposable income. Pay-television is still seen in Brazil as a luxury product and faces strong competition from free broadcast television. Our ability to achieve incremental subscriber growth is dependent to a large extent on growth in Brazilians’ disposable income. If growth in Brazilians’ disposable income starts to decline, it may negatively impact our ability to gain new subscribers. Acquisitions Acquisition of BIGTV On December 29, 2008, we completed the acquisition of BIGTV, whereby BIGTV became a wholly owned subsidiary of Net Serviços. BIGTV has operations in 12 locations in the states of São Paulo, Paraná, Alagoas and Paraíba. We paid a total amount of R$373 million for the acquisition of BIGTV. On November 29, 2009, BIGTV was merged into Net Serviços. Acquisition of ESC 90 On June 30, 2009, we completed the acquisition of ESC 90 by 100% of the shares representing the capital of ESC 90. ESC 90 has operations in two cities, Vitória and Vila Velha, in the state of Espírito Santo. The purchase price was R$98 million and we paid for this acquisition incash on the date of the closing of the transaction. On July 31, 2010, ESC 90 was merged into Net Serviços.  51 NETC Annual Report 2010 – Form 20-F


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Critical Accounting Policies and Estimates We prepared our consolidated financial statements as of and for the year ended December 31, 2010 and 2009 in accordance with IFRS. The SEC considers an accounting policy to be critical if it is important to a company’s financial condition and results of operations and if it requires significant judgments and estimates on behalf of the management in its application. The development and selection of these critical accounting policies have been determined and reviewed by our management. The following accounting policies are the most critical to us. For a summary of all of our significant accounting policies, including the critical accounting policies discussed below, see the Note 3 to our audited consolidated financial statements included elsewhere in this Form 20‐F. Deferred income taxes The amount of deferred income tax assets is reviewed at each reporting date and reduced by the amount that is no longer recoverable through estimates of future taxable income. Amounts reported involve considerable exercise of judgment by management and future taxable income may be higher or lower than the estimates considered when valuing a deferred tax asset. Valuation of assets acquired and liabilities assumed in business combinations In recent years, we entered into certain business combinations. Under IFRS 3, we must allocate the cost of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values on the acquisition date. Any excess of the cost of the acquired entity over the fair value of assets acquired and liabilities assumed is recorded as goodwill. We exercise significant judgment in identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and determining their remaining useful lives. Management generally engages third party’s valuation consultants to assist in valuing the assets and liabilities. The valuation assumptions include estimates of discounted cash flow and discount rates. The usage of alternative assumptions would result in different estimates of the value of assets acquired and liabilities assumed. Test of impairment of non-financial assets We evaluate annually the carrying value of goodwill and indefinite-lived intangible assets using a consistent discounted cash flow model. This process involves significant judgmental assumptions and estimates about future cash flows, growth rates and discount rates. Weuse the discounted cash flow model, a technique that is widely used in the valuation of assets. The discount rate assumption is based on the weighted average cost of capital, or WACC. WACC was calculated based on a U.S. historical risk-free rate of 4.7% and a market risk premium of 6.5%, which is calculated as the difference between the return of the stock market and the risk-free rate, adjusted for a Brazilian risk premium of 2.0% and an inflation difference between the United States and Brazil of 2.5%, each for the year ended December 31, 2010. The weighted average cost of debt provided by the third parties, net of taxes was 7.5%, for the year ended December 31, 2010. The cost of equity plus the weighted average cost of debt provided by the third parties resulted in a WACC of 14.4% for the year ended December 31, 2010.The assumptions about future cash flows and growth rates are based on our budget and business plans, as approved by the board of directors,as well as on comparable market analyses and include the acquisitions of Vivax, BIGTV and ESC 90.   52  NETC Annual Report 2010 – Form 20-F


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When evaluating whether goodwill is impaired, we compare the fair value of our business to our carrying amount, including goodwill. If our fair value exceeds our carrying amount, goodwill is not deemed impaired and the second step of the impairment test is not performed. If the carrying amount exceeds fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with our carrying amount. If the carrying amount exceeds the implied fair value, an impairment loss is recognized in an amount equal to such excess. The implied fair value of goodwill is determined based on the fair value of our assets and liabilities as if we had been acquired in a business combination and the fair value was the purchase price paid to acquire our assets and liabilities. Our revenue and cost projections vary with the growth of the numbers of subscribers. The compounded annual growth rate, or CAGR, of our net cash provided by operating activities after net cash provided by financing activities and net cash used in investing activities, or free cash flow, during the period from 2007 and 2010 was (174.6%), which reflects the acquisition of Vivax, BIGTV and ESC90. The acquisition of Vivax was a share to share transaction, the acquisition of BIGTV was financed by a loan from Banco Inbursa and we used our own cash generation to pay for the acquisition of ESC90 in 2009.We estimate that the minimum projected 10-year free cash flow CAGR to be 8.14% in order to avoid a goodwill impairment charge.We use conservative assumptions for our long-term business plan, reflecting lower growth of our subscriber base compared to actual sales and household growth in recent periods. We believe that our business plan and impairment analysis are appropriate, even if there is no improvement in the overall economy. We did not record an impairment charge for the year ended on December 31, 2010 Provisions We record provisions that involve considerable exercise of judgment by management in estimating tax contingencies and civil liability and labor claims that may be liable for payment in future years as a result of tax inspections by tax authorities. We are also subject to various claims, legal, civil and labor proceedings covering a wide range of issues that arise from the ordinary course of business. We record these liabilities when we determine, based on the opinion of our legal advisors, that losses are probable and can be reasonably estimated. Provisions are reviewed and adjusted to consider changes in circumstances, such as the applicable limitation period, findings of tax inspections or additional exposures identified based on new issues or court rulings. Actual results may differ from estimates. Financial Statement Presentation Sources of Revenues Monthly subscription fee revenues represent the dominant portion of our revenues, and sign-on and hook-up fees constitute a relatively minor portion of our revenues. All of our revenuesare denominated in reais.Under Brazilian currency rules, our contracts with our current subscribers allow us to increase subscription fees once every 12 months and then only in proportion to the inflation rate measured based on the IGP-M. Our revenues include the following:  53 NETC Annual Report 2010 – Form 20-F


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·Monthly subscription revenues.Monthly subscription revenues consist of monthly subscription fees paid by pay-television and broadband Internet subscribers. Subscription fees are recorded in the month the service is provided. Substantially all of our revenues come from monthly subscription fees. ·Sign-on and hook-up fee revenues.We charge subscribers a fee for the installation of the equipment necessary to receive our pay-television, broadband Internet and fixed line telephony services. Sign-on and hook-up fees billed to new subscribers are deferred to the extent that they exceed related direct selling costs. The deferred fees are amortized to revenue over a period of six years, which better represents the estimated average period during which we expect subscribers will remain connected to our cable network. ·Other services revenues.Other services revenues consist of sales of our fixed line telephony services, pay-per-view service, data transmission service, programming guide, technical support services, disconnection/reconnection services, fiber optic rental services and other services. Other services revenues are recorded in the month services are provided. The following are the main factors that have historically influenced our revenues: ·Subscriber base.Most of our revenues are recurring monthly revenues from our subscribers. Thus, key factors to maintaining profitability of our business include controlling the churn rate, increasing sales to existing customers, bundling our services and acquiring new customers. ·Subscription fee levels.Our strategy is to maintain competitive prices compared to our main competitors and at the same time increase average revenue per user by providing bundled products to our premium clients. ·Mix of subscriber base.Historically we have focused on high and middle income class households. In 2008, we launched a lower priced package, Net Fone.com. Changes in our mix of subscribers may affectaverage revenue per user. On April 22, 2009, Resolution No. 528 was published, prohibiting pay-television providers from charging subscribers content for more than one outlet per household. The ABTA filed an administrative appeal to Resolution No. 528 with Anatel. As a result of this appeal, Anatel published a clarification to Resolution No. 528 explaining that pay-television operators can charge for the cost of the equipment, including rental, lease and sale of set-top boxes. However, several state consumer defense associations are challenging this rule in court claiming that pay-television operators can not charge for multiple outlets, including any equipment cost. We cannot predict the outcome of such claims, and, as a result, we are currently unable to assess the impact of Resolution No. 528 on our business, cash flows and results of operations. On March, 19, 2010, Anatel issued an administrative resolution known as “Sumula 9” that authorizes rental charges for equipment used in multiple outlets. There can, however, be no assurance that we will be able to charge customers for equipment costs relating to multiple outlets until such challenges are definitively resolved or that such challenges will ultimately succeed. This could have a material adverse effect on our business, cash flows and results of operations.  54 NETC Annual Report 2010 – Form 20-F


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Taxes and Other Deductions from Revenues Taxes and other deductions from revenues are directly related to our volume of subscription sales. Except for the FUST and FUNTTEL, each of the taxes described below is passed on to our subscribers as part of their subscription fee. Note that our business is also subject to other taxes that are not deducted from revenues. Taxes and other deductions from revenues consist of: ·ICMS value-added tax. In São Paulo, Santa Catarina, Rio Grande do Sul, Amazonas and Distrito Federal, the ICMS tax is levied at a rate of 25%. In Minas Gerais, Paraná, Goiás and Rio de Janeiro, the ICMS tax is levied at a rate of 18%, 27%, 29% and 30%, respectively. However, for pay-television subscription revenues, pay-television sign-on and hook-up fees and pay-per-view revenues in each of the Brazilian states in which we operate, the ICMS tax is levied at a rate of 10%, except the state of Rio Grande do Sul, where the rate is 12%. ·ISS municipal tax. ISS is a municipal tax on services that is levied at a maximum rate of 5.0% (some municipalities have lower rates) on certain services, such as maintenance and other technical activities. ·PIS-related federal tax. PIS is a federal social security tax that is levied at a rate of 0.65% on revenues derived from pay-television, telecommunication and broadband Internet services and at a rate of 1.65% on revenues derived from all other services. ·COFINS federal social security tax. COFINS is a federal social security tax that is levied at a rate of 3.0% on revenues derived from pay-television, telecommunication and broadband Internet services and at a rate of 7.6% on revenues derived from all other services. ·FUST and FUNTTEL taxes. FUST and FUNTTEL are taxes based on gross telecommunication service revenues, excluding canceled sales and other taxes, over the amounts charged to our subscribers. The FUST and FUNTTEL are levied at the rates of 1.0% and 0.5%, respectively. Operating Costs and Expenses Our most significant operating costs and expenses are: programming costs and other direct operating costs, which are reported in costs of services rendered in our audited consolidated financial statements; selling, general and administrative expenses, which are reported in selling expenses and general and administrative expenses; and depreciation, which is reported in both costs of services rendered and general and administrative expenses. For more information on cost of services rendered and the classification of our expenses, see Notes 5 and 7 to our audited consolidated financial statements included elsewhere in this Form 20-F. ·Programming costs.Programming has been, and is expected to continue to be, our largest operating expense, representing in 2010, 23.3% of our net sales.

Programming purchase costs consist of programming fees paid by our operating subsidiaries directly to certain international programmers for the acquisition of new international content from sources outside of Brazil and to Net Brasil primarily in relation to programming produced in Brazil. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.”  55 NETC Annual Report 2010 – Form 20-F


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The programming fees we pay are generally highest with respect to the programs obtained for our digital and high-definition programming packages. ·Other direct operating costs.Other direct operating costs include: expenses for utility pole rentals paid to utility companies, electricity, maintenance, bandwidth to access the Internet and other costs that increase as a function of the development of our network, payroll and related charges, and costs related to our customer service, billing and information systems. A substantial portion of our network consists of aerial cables (as opposed to underground cables) often strung on electrical utility poles. We gain access to the utility poles by pole attachment rental agreements with local electrical utilities, which are generally required to provide us this access for a negotiated fee. The rising popularity of bandwidth-intensive Internet-based services poses special risks for our broadband Internet service. Examples of such services include peer-to-peer file sharing services, gaming services and the delivery of video via streaming technology and download. See “Item 3. Key Information—Risk Factors—Significant unanticipated increases in the use of bandwidth-intensive Internet-based services could increase our costs.” ·Selling, general and administrative expenses.Selling, general and administrative expenses includes expenses related to payroll, benefits, sales commissions and consulting, financial advisory and computer software maintenance, as well as expenses related to advertising, provisions and allowance for doubtful accounts receivable. ·Depreciation.Due to the investments we have made in our cable network, set-top boxes, cable modems and subscriber installation, we face significant annual depreciation costs. See “—Depreciation and Amortization” directly below. The following are the principal factors that have historically influenced our operating costs: ·Programming costs. We pay programming costs on a per subscriber base. We expect programming costs to remain as our main cost. Our ability to maintain a good relationship with our programming suppliers and keep prices at attractive levels are important factors for the profitability of our business. ·Selling expenses. Selling expenses includes selling commissions and marketing campaigns to drive subscriber base growth. ·Other costs. Other costs consist principally of the cost of bandwidth to provide our Internet broadband services and call center services.   56 NETC Annual Report 2010 – Form 20-F


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Depreciation and Amortization We depreciate our cable network, decoders, cable modems and fiber optic cable assets using the straight-line method, over the estimated economic useful life of the assets. We estimate the useful life of our cable plant to be from 5 to 12 years for our cable network and 12 years for our fiber optic cable, resulting in annual depreciation rates of 20.0% to 8.3% and 8.3%, respectively. The estimated useful lives of specified items of our cable distribution plant as follows:  Useful lifeDescription

   

   (In years)Cable network

   

   5 - 12Decoders and cable modem

   

   5Fiber optic

   

   12Leasehold improvements, installations, fixtures and fittings and other equipment

   

   10Data processing equipment

   

   3 - 5
 Other Income and Expenses Other income and expenses consist of: ·Financialexpense. Financial expense consists of monetary correction charges on real-denominated debt, exchange rate losses on U.S. dollar-denominated debt, interest payable on our outstanding debt and other financial expenses, which includes the IOF tax on financial operations and gain or losses from financial instruments. ·Financial income. Financial income consists of interest on cash equivalents, gain on extinguishment of liabilities, exchange rate gains on U.S. dollar-denominated debt, monies collected in the form of penalty and interest payments from late payments of monthly subscription fees. ·Income taxes and social contribution. Income taxes expenses consist of the IRPJ and the CSLL, which are calculated based on our earnings before taxes on us and are also imposed on each of our operating subsidiaries. Results of Operations Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Net sales Sales and taxes and other deductions from sales by major category were as follows: Year ended December 31,2010

   2009

   % Change(R$ in millions)Gross sales revenue:Pay-television and broadband Internet subscriptions

   6,147.4

   5,301.3

   16%Sign-on and hook-up fees

   22.1

   117.1

   (81)%Other sales (including pay-per-view and telephony)

   932.1

   652.0

   43%Total gross sales revenue

   7,101.6

   6,070.4

   17%Taxes on sales , discounts and cancellations

   (1,696.0)

   (1,457.0)

   16%Net sales

   5,405.7

   4,613.4

   17%
  57 NETC Annual Report 2010 – Form 20-F


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Selected subscriber-related key financial indicators were as follows:  As of December 31,2010

   

   2009

   

   %Change(in thousands)Total connected pay-television subscribers

   4,212

   

   3,690

   

   14%Total connected broadband Internet subscribers

   3,524

   

   2,882

   

   22%Total connected fixed line telephony subscribers

   3,153

   

   2,557

   

   23%Total kilometers of cable network

   66

   

   61

   

   8%Total homes passed

   11,543

   

   10,777

   

   7%  Pay-television and broadband Internet subscription revenues increased as a result of increases in the pay-television and broadband Internet subscriber base and the annual price increase on subscribers’ agreements based on the IGP-M inflation index, which were partially offset by lower average revenue per subscriber related to an increase in the sales of our lower priced products. Sign-on and hook-up fees decreased primarily due to the fact that we stopped charging sign-on fees for intermediate and top packages and continue to charge sign-on fees only for basic packages. Other sales increased primarily due to the increase in fixed-line telephony revenues, as a result of increases in the subscriber base for this service in 2010. Taxes on sales, discounts and cancellations increased principally due to the increase in taxes resulting from higher revenues. Additionally, this increase reflects the higher taxes due to broadband Internet revenue growth, where the ICMS (tax on distribution of goods and services) rate is higher. See “—Overview—Financial Statement Presentation—Taxes and Others Deductions from Revenues” for a discussion of ICMS rates applicable to the individual services and products. As a percentage of total revenues, taxes on sales, discounts and cancellations remained fairly stable at 23.9% in 2010 when compared to 24.0% in 2009. Operating costs and expenses Operating costs and expenses by major category were as follows:   58 NETC Annual Report 2010 – Form 20-F


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Year ended December 31,2010

   2009

   % Change(R$ in millions)Operating Costs and Expenses:Programming costs

   (1,262.1)

   (1,037.4)

   22%Other direct operating costs

   (1,317.5)

   (1,237.5)

   6%Selling, general, administrative and other expenses

   (1,266.8)

   (1,096.3)

   16%Depreciation and amortization

   (901.2)

   (618.7)

   46%
 The increase in our pay-television programming costs was primarily due to the increase in our pay-television subscriber base and the increase in programming costs reflecting the price increase by the IGP-M inflation rate. As a percentage of net sales, programming costs increased to 23.3% in 2010 compared to 22.5% in 2009. Other operating costs increased primarily due to: (i) expenses incurred in obtaining additional bandwidth from third parties to support our broadband Internet service growth; (ii) higher call center expenses to service a greater number of subscribers, to address a broader array of products and services to support our growing triple play customer base which requires more complex customer care, to assure high customer service quality and to comply with the regulation for call centers; (iii) an increase in the number of employees for field services; and (iv) higher network expenses, such as electricity. As a percentage of net sales, other operating costs decreased to 24.4% in 2010 compared to 26.8% in 2009. Selling, general and administrative expenses increased primarily due to higher employee and marketing costs and sales commissions, partially offset by lower IT expenses. Employee costs increased primarily due to a headcount increase, marketing costs increased primarily due to intensified marketing efforts and sales commissions increased due to higher number of new entrants to our subscriber base. As a percentage of net sales, selling, general and administrative expenses decreased to 23.4% in 2010 compared to 23.8% in 2009. Other expenses decreased mainly due to a reversal of provisions for tax contingencies. Depreciation and amortization expenses increased primarily due to higher depreciation expenses related to increased acquisition of digital set-top boxes and new subscriber installation. Finance results Year ended December 31,2010

   2009

   % Change(R$ in millions)Finance resultsFinance expense

   (359.4)

   (27.3)

   1.216%Finance income

   169.4

   92.8

   83%Total

   (190.0)

   65.5

   (390%)
 Finance results were an expense in 2010, compared to an income in 2009, primarily as a result of the appreciation of the real against the U.S. dollar in 2009. The primary impact was related to our dollar-denominated perpetual bonds, senior notes due 2020 issued in November 2009, and our loan with Banco Inbursa.   59 NETC Annual Report 2010 – Form 20-F


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 Income taxes and social contribution Year ended December 31,2010

   2009

   % Change(R$ in millions)Income tax and social contribution

   (160.8)

   47.0

   (442%)
 Income tax and social contribution was an expense in 2010 compared to an income in 2009 because of the recognition of deferred income tax on temporary differences for R$182.3 million higher than in 2009 and also because in 2010 we increased the expenses related to amortization of goodwill tax benefits in R$59.9 million.  Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 Net sales Sales and taxes and other deductions from sales by major category were as follows:   Year ended December 31,2009

   

   2008

   

   % Change(R$ in millions)Sales:Pay-TV and broadband Internet subscriptions

   5,301.3

   

   4,298.3

   

   23%Sign-on and hook-up fees

   117.1

   

   77.4

   

   51%Other sales (including pay-per-view andtelephony)

   652.0

   

   477.0

   

   37%Total sales

   6,070.4

   

   4,852.7

   

   25%Taxes and other deductions from sales

   (1,457.0)

   

   (1,162.3)

   

   25%Net operating sales

   4,613.4

   

   3,690.4

   

   25%   Selected subscriber-related statistics were as follows:   As of December 31,2009

   2008(in thousands)Total connected pay-television subscribers

   3,690

   3,182Total connected broadbandInternet subscribers

   2,882

   2,284Total connected fixed line telephony subscribers

   2,557

   1,802Total kilometers of cable network

   61

   59  Pay-television and broadband Internet subscription revenues increased as a result of increases in the pay-television and broadband Internet subscriber base and the annual price increaseon subscribers’ agreements based on the IGP-M inflation index, which were partially offset by lower average revenue per subscriber related to an increase in the sales of our lower priced products.  60 NETC Annual Report 2010 – Form 20-F


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Sign-on and hook-up fees increased primarily due to higher sales of our high-definition packages which have higher hook-up fees than other pay-television packages. Other revenues increased primarily due to the increase in fixed line telephony revenues, as a result of increases in the subscriber base for this service in 2009, which were partially offset by lower revenues from pay-per-view services. Average monthly subscription revenue (which includes pay-television, broadband Internet and fixed line telephony revenues) per connected household, or ARPU, increased. This increase was primarily a result of the increased sales of triple play and high definition packages. Taxes and other deductions from revenues increased principally due to the increase in taxes resulting from higher revenues. Additionally, this increase reflects the higher taxes due to broadband Internet revenue growth, where the ICMS (tax on distribution of goods and services) rate is higher. See “—Overview—Financial Statement Presentation—Taxes and Others Deductions from Revenues” for a discussion of ICMS rates applicable to the individual services and products. As a percentage of total revenues, taxes and other deductions from revenues remained fairly stable at 24.0% in 2009. Operating costs and expenses Operating costs and expenses by major category were as follows:  Year ended December 31,2009

   

   2008

   

   % Change(R$ in millions)Costs and **Expenses**Programming andother operating costs

   2,274.9

   

   1,749.4

   

   30%Selling, general, administrative and other expenses

   1,096.3

   

   962.1

   

   14%Depreciation and amortization

   618.7

   

   493.4

   

   25%  The increase in our pay-television programming costs was primarily due to the increase in our pay-television subscriber base and the increase in programming costs reflecting the price increase by the IGP-M inflation rate. As a percentage of net sales, programming costs decreased to 22.5% in 2009 compared to 23.0% in 2008, as a result of increased broadband Internet and fixed line telephony revenues as a percentage of total sales. Other operating costs increased primarily due to: (i) expenses incurred in obtaining additional bandwidth from third parties to support our broadband Internet service growth; (ii) higher call center expenses to service a greater number of subscribers, to address a broader array of products and services to support our growing triple play customer base which requires more complex customer care, to assure high customer service quality and to comply with the new regulation for call centers; (iii) an increase in the number of employees for field services; and (iv) higher network expenses, such as electricity. New call center regulations came into effect in December 2008, requiring improved customer service. For example, call centers must now provide clients with the option to contact an operator in the first electronic menu, be available 24/7 andrespond to client complaints within five days. As a percentage of net sales, other operating costs increased to 26.8% in 2009 compared to 24.4% in 2008.  61 NETC Annual Report 2010 – Form 20-F


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Selling, general and administrative expenses increased primarily due to higher employee and marketing costs and sales commissions, partially offset by lower IT expenses. Employee costs increased primarily due to a headcount increase, marketing costs increased primarily due to intensified marketing efforts and sales commissions increased due to higher number of new entrants to our subscriber base. As a percentage of net sales, selling, general and administrative expenses decreased to 22.5% in 2009 compared to 25.7% in 2008. In 2010, we will continue pursuing our growth strategy. Other administrative expenses increased mainly due to higher provisions for tax contingencies. Depreciation and amortization expenses increased primarily due to higher depreciation expenses related to increased acquisition of digital set-top boxes and new subscriber installation. Finance results Year ended December 31,2009

   

   2008

   

   % ChangeFinancial results

   (R$ in millions)Financial expense

   27.3

   

   432.5

   

   (94%)Financial (income)

   (92.8)

   

   (113.9)

   

   (19%)Total

   (65.5)

   

   318.6

   

   (121%)   Finance results were an income in 2009, compared to an expense in 2008, primarily as a result of the appreciation of the real against the U.S. dollar in 2009. The primary impact was related to our dollar-denominated perpetual bonds, senior notes due 2020 issued in November 2009, or global notes2020, and our loan with Banco Inbursa. Income tax and social contribution Year ended December 31,2009

   

   2008

   

   % Change(R$ in millions)Income tax and social contribution

   (47.0)

   

   146.8

   

   (132%)   In 2009, income taxes expense (benefit) was an income of R$47.0 million principally as a result of the recognition of deferred income tax on temporary differences in the amount of R$203.8 million. Temporary differences refer to timing difference of expense and income recognition between fiscal and accounting records.  62 NETC Annual Report 2010 – Form 20-F


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Liquidity and Capital Resources
 We broadly define liquidity as our ability to generate sufficient cash flow from operating activities to meet our obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet our strategic and financial objectives. Accordingly, liquidity cannot be considered separately from capital resources that consist of current or potentially available future funds for use in meeting debt service requirements and long-range business objectives. Pursuant to our shareholders’ agreement, our ability to obtain equity financing depends on the approval from Grupo Globo and Telmex Internacional. As of December 31, 2010 and 2009, our net debt, calculated as the sum of “debt” in current liabilities and “debt” in non-current liabilities minus “cash and cash equivalents”, amounted to R$1,356.7 million and R$1,183.2 million, respectively. In general, we hold our cash and cash equivalents in Brazilian reais. Additionally, as of December 31, 2010 and 2009, our current assets were R$210.5 million and R$475.6 million greater than our current liabilities, respectively. In 2010, our inventories in current assets decreased and debt in current liabilities increased when compared to 2009. We are in the process of combining a number of our operating and non-operating subsidiaries toimprove administrative and income tax and social contribution efficiencies, which we expect will improve our cash generation. Given the level of our operating cash flows, the expected level of capital expenditures needed to support our growth and our schedule for principal debt amortization, we believe that our cash generation in addition to our current position in cash and cash equivalents will be sufficient in the near term to cover all expected cash outflows. Our management uses net debt as a supplemental measure of indebtedness in order to calculateour ability to obtain debt financing at appropriate cost. Cash Flows Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Year ended December 31,2010

   

   2009Operating activities

   (R$ in millions)Profit for the year

   307.2

   

   735.9Monetary and exchange rate variations, net

   (69.1)

   

   (177.3)Interest expense on borrowing

   215.1

   

   176.6Losses on derivatives

   65.9

   

   97.3Depreciation and amortization

   901.2

   

   618.7Deferred income tax and social contribution

   82.8

   

   (158.6)Loss (gain) on disposal of property, plant and equipment

   (4.1)

   

   7.1Provisions

   (44.4)

   

   (101.3)Decrease in operating assets and liabilities

   (218.4)

   

   (195.8)Net cash provided by operating activities

   1,236.2

   

   1,002.6
 Cash flows from operating activities. Net cash provided by operating activities increased from R$1,002.6 million in 2009 to R$1,236.2 million in 2010, an increase of 23.3%. This increase was primarily due to higher revenues and control over operating costs and expenses, which resultedin increased operating income before depreciation and amortization and a decrease in working capital.  63 NETC Annual Report 2010 – Form 20-F


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Year ended December 31,2010

   

   2009Investing activities

   (R$ in millions)Acquisition of business, net of cash received

   -

   

   (97.9)Purchase of property, plant and equipment and intangible assets

   (1,249.9)

   

   (1,089.2)Cash proceeds from sale of property, plant and equipment

   2.9

   

   2.5Net cash used in investing activities

   (1,247.0)

   

   (1,184.6)
 Cash flows used in investing activities. We used R$1,247.0 million in cash in investing activities in 2010, a increase of 5.3%, as compared to R$1,184.6 million used in investing activities in 2009. This increase was primarily due to investments in equipment related to the growth in our broadband Internet and pay-television subscriber bases. Year ended December 31,2010

   

   2009Financing activities

   (R$ in millions)Proceeds from third party borrowing

   103.6

   

   677.0Repayment of principal

   (92.6)

   

   (46.1)Payment of interest

   (194.3)

   

   (170.2)Net cash (used in) provided by financing activities

   (183.2)

   

   460.7
 Cash flows (used in) provided by financing activities. We used R$183.2 million in cash in financing activities in 2010, compared to net cash provided by financial activities of R$460.7 million in 2009, primarily due to prepayment of our Bank Credit Notes in the aggregate principal amount of R$30.7 million and prepayment of indebtedness outstanding under FINAME in the aggregate principal amount of R$61.9 million, as well as increased payment of interest related to our debt.  This was partially offset by the issuance of FINAME in the aggregate principal amount of R$103.6 million. Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 Year ended December 31,2009

   

   2008Operating activities

   (R$ in millions)Profit for the year

   735.9

   

   20.3Net variations in interest rates, monetary restatement andexchange rate

   (177.3)

   

   269.3Interest expense on borrowing

   176.6

   

   156.4Loss (gain) on market value of derivatives

   97.4

   

   (5.0)Depreciation and amortization

   618.7

   

   493.4Deferred income tax and social contribution

   (158.6)

   

   65.5Loss (gain) on disposal of property and equipment

   7.1

   

   (6.9)Increase (decrease) in operating assets and liabilities

   (297.1)

   

   298.6Net cash provided by operating activities

   1,002.7

   

   1,291.6 Cash flows from operating activities. Net cash provided by operating activities decreased from R$1,291.6 million in 2008 to R$1,002.7 million in 2009, a decrease of 22.4%. This decreasewas primarily related to higher working capital in 2009, in connection to higher purchase volume of equipment at the end of 2008, which payment occurred at the beginning of 2009.  64 NETC Annual Report 2010 – Form 20-F


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Year ended December 31,2009

   

   2008Investing activities

   (R$ in millions)Acquisition of business, net of cash received

   (97.9)

   

   (382.7)Purchase of property and equipment and intangible assets

   (1,089.2)

   

   (992.9)Cash proceeds from sale of property and equipment

   2.5

   

   3.1Net cash used in investing activities

   (1,184.6)

   

   (1,372.5) Cash flows used in investing activities. We used R$1,184.6 million in cash in investing activities in 2009, a decrease of 13.7%, as compared to R$1,372.5 million used in investing activities in 2008. This decrease was primarily due to the payment for the acquisition of BIGTV in 2008. Year ended December 31,2009

   

   2008Financing activities

   (R$ in millions)Proceeds from third party borrowings

   677.0

   

   93.5Repayment of borrowings

   (46.1)

   

   (14.3)Payment of interest

   (170.2)

   

   (147.4)Proceeds from related party borrowings

   -

   

   316.4Net cash provided by financing activities

   460.7

   

   248.2  Cash flows provided by financing activities. We had net cash provided by financing activities of R$460.7 million in 2009, compared to R$248.2 million in 2008 an increase of 85.6%, mainly as a result of the issuance of the global notes 2020 in the amount of US$350 million. Liquidity Requirements and Sources Most of our capital expenditures are related to customer acquisition activity in connection with our ongoing operations. If we continue at our current rate of growth and consequently continue to increase the number of our pay-television and broadband Internet subscribers, we will need significant cash to fund capital expenditures. Also, we have made interest payments on our debt and scheduled principal payments, with significant maturities starting in June 2012. We have historically funded these liquidity requirements through operating cash flows, borrowings under our credit facilities, proceeds of debt and equity financings and capital advances and loans from our shareholders. After taking into consideration the range of projections of cash flows from operations, anticipated capital expenditures, acquisitions and debt principal and interest payment requirements, we do not expect to need to raise funds to meet our anticipated cash requirements in 2011. The amount of our anticipated operating cash flows in 2011 and future periods could be adversely affected by a number of factors, many of which are not within our control. Any weakening of the Brazilian economy could result in a decline in the number of our subscribers, which would lower subscription revenues. Depreciation of the real against the U.S. dollar would also decrease the amount of cash that we have available to cover our U.S. dollar-denominated or U.S. dollar-indexed expenses, which include a significant percentage of our equipment expenses. Our ability to raise short-term or long-term debt financing or equity financing in the future will depend on a number of factors outside of our control, including conditions in Brazil and in international financial markets. We cannot assure you that in the future we will be able to raise debt financing in sufficient amounts to meet our cash requirements or at all.  65 NETC Annual Report 2010 – Form 20-F


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 We had cash and cash equivalents of R$821.6 million as of December 31, 2010, a 19% decrease compared to R$1,015.6 million as of December 31, 2009, mainly as a result of the payment of interest and the repayment of principal of our debt. Contractual Obligations The following table sets out our major contractual obligations as of December 31, 2010:   Payments due by periodLess than

   1 – 3

   3 – 5

   More than

   Total1 Year

   Years

   Years

   5 Years(R$ in millions)Debt (1)

   66.7

   625.2

   284.3

   1,202.1

   2,178.3Lease of utility poles (2)

   93.7

   203.9

   222,7

   –

   520.2Lease of office space

   22.8

   48.9

   –

   –

   71,7Programming, equipment and servicepurchase obligation (3)

   107.0

   –

   –

   –

   107.0Total

   290.2

   878.0

   507.0

   1,202.1

   2,877.3(1)

   On May 26, 2011, we redeemed our outstanding US$150,000,000 aggregate principal amount of our 9.25%perpetual bonds with available cash on hand.(2)

   In addition to the amounts listed in the table above, we are contractually obligated to make lease payments underour utility pole lease arrangements from the time the lease expires until our equipment is removed from such poles.Those fees will be based on the amounts we will be paying at the time those arrangements expire.(3)

   Programming, equipment and service purchase obligations reflected in the table above represent the minimumquantities to be purchased under the applicable agreements.
  Capital Expenditures A description of our capital expenditures, identified by major category, is as follows: ·subscriber installation, including purchases of set-top boxes and cable modems; ·cable network construction and rebuilding, which primarily includes construction costs related to installing cable system infrastructure in multiple-dwelling units, or MDUs, rebuilding portions of our cable network and the growth or build-out of our cable network; ·broadband Internet network construction and rebuilding, which primarily includes construction costs related to cable modem installation, installing broadband infrastructure in MDUs, rebuilding portions of our broadband network to permit two-way communication and the build-out of our broadband network, including our data center; and  66 NETC Annual Report 2010 – Form 20-F


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·upgrading existing systems, the purpose of which is principally to improve technical quality, meet regulatory requirements, further improve management controls and support subscriber growth. In 2010 and 2009, our capital expenditures of R$1,249.9 million and R$1,089.2 million, respectively, were primarily used to sustain our organic subscriber growth, through the acquisition of equipment such as cable modems, digital set-top boxes, digital video recorder boxes, cable modem termination system, or CMTS, and optical nodes equipment. We import part of this equipment and make payments in U.S. dollars. Thus the depreciation of the real against the U.S. dollar can negatively impact our cash disbursements to acquire such equipment. In 2011, we expect to continue to increase the number of our pay-television, broadband Internet and fixed line telephony subscribers. As most of our capital expenditures are related to subscriber acquisition, including the acquisition of equipment and the installation cost, we expect to maintain our annual capital expenditures for this purpose in 2011. In addition, we expect to spend similar amounts as 2010 in network improvements, maintenance and systems development for improved customer service and to expand our network, both increasing our bi-directional network and expanding our network to new areas. We do not plan on making substantial capital expenditures for the encoding of our network. We expect to be able to fund our day-to-day capital expenditures in 2011 using funds from operations. These statements are forward-looking statements and are therefore based on estimates and assumptions that are subject to significant uncertainties, many of which are beyond our control or are subject to change. See “Forward-Looking Statements.” Debt Financing As of December 31, 2010, we had the following debt (including accrued interest) outstanding: (R$ in thousands)U.S. dollar-denominated debt (1):Banco Inbursa S.A

   336,082Global notes 2020

   598,973Perpetual bonds(2)

   252,425Total U.S. dollar-denominated debt

   1,187,480Real-denominated debt:Non-convertible debentures – 6th Public Issuance

   584,001Bank credit notes

   147,679FINAME

   259,091Total real-denominated debt

   990,771Total

   2,178,251
 ________________________ (1)Calculated using the December 31, 2010 exchange rate of R$1.6662 per US$1.00 (2)On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. In 2010, the rate used to determine the interest rate of our real-denominated debt was the Brazilian interbank interest rate, or CDI, which was 10.64%.   67 NETC Annual Report 2010 – Form 20-F


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At December 31, 2010 the principal maturities of our debt were as follows:

Principal Amortization Schedule:

   (R$ in thousands)2011

   66,7672012

   217,9232013

   192,6632014

   217,8622015

   214,3392016

   68,5412017-2020

   921,289Total amortizing debt

   1,899,384Accrued interest

   28,931Perpetual bonds (1)

   249,930Total debt

   2,178,245
 ________________________ (1)      Perpetual bonds have no scheduled maturity. On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. Perpetual Bonds On November 28, 2006, we issued 9.25% Guaranteed Perpetual Bonds, or perpetual bonds, in an aggregate principal amount of US$150.0 million. These notes may be redeemed at our option, in whole but not in part, on any interest payment date on or after November 27, 2009 at 100% of the principal amount thereof, plus accrued and unpaid interest and any additional amounts payable. On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. Loan and Guaranty Agreement - Banco Inbursa S.A. We have entered into a Loan and Guaranty Agreement, dated as of June 19, 2008, or the Loan and Guaranty Agreement, with Banco Inbursa S.A., an affiliate of Telmex Internacional, and certain of our subsidiaries as guarantors. The Loan and Guaranty Agreement provides for a US$200 million term loan facility, or the Term Credit Facility, guaranteed by our subsidiaries that are a party thereto. Interest on borrowings under the Term Credit Facility accrues at a rate of 7.875% per annum and is payable in arrears on April 15 and October 15 of each year. On June 24, 2008, we drew down the full amount available under the Term Credit Facility. The Term Credit Facility matures on June 18, 2019 and amortizes in three equal installments as follows: one third on June 18, 2017, one third on June 18, 2018 and one third on June 18, 2019. The Term Credit Facility is pre-payable in whole or in part, at any time after the fifth anniversary of the draw date, together with accrued and unpaid interest on the amount prepaid plus certain prepayment fees. We paid Banco Inbursa S.A. a fee of US$1.2 million in connection with entry into the Loan and Guaranty Agreement, which was deferred and will be amortized over the term of the facility using the interest method. The Term Credit Facility contains a number of covenants that, among other things, will limit or restrict our ability and our subsidiaries to incur additional indebtedness (including guarantees of other indebtedness); pay dividends or make other restricted payments; enter into certain types of transactions with affiliates; sell certain assets, consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; and create liens. In addition, the Term Credit Facility contains a  69 NETC Annual Report 2010 – Form 20-F


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requirement that we not exceed a maximum ratio of consolidated interest expenses to consolidated EBITDA (as those terms are defined in the Loan and Guaranty Agreement). As of December 31, 2010, we were in compliance with such financial covenants. The Term Credit Facility provides for customary events of default, including non-payment of principal, interest or fees, violation of covenants, material inaccuracy of representations or warranties, specified cross defaults to other material indebtedness, certain bankruptcy events, invalidity of guarantees, material judgments and change of control.
 Global Notes 2020 On November 4, 2009, we issued 7.50% Guaranteed Senior Notes due 2020 in an aggregate principal amount of US$350.0 million. These notes may be redeemed at our option, in whole or in part, at any time (i) prior to January 27, 2015, at a redemption price, plus accrued and unpaid interest, if any, to the redemption date, equal to the greater of (a) 100% of the principal amount and (b) the sum of the present values of the remaining scheduled payment of principal and interest thereon discounted to the redemption date on a semi-annual basis at the Treasury Rate (as defined in the indenture governing the global notes 2020) plus 50 basis points; and (ii) on or after January 27, 2015, at the following redemption prices (expressed as percentages of the principal amount), plus accrued and unpaid interest and any additional amount payable with respect thereto : (a) 103.75% during the 12-month period commencing on January 27, 2015; (b) 102.5% during the 12-month period commencing on January 27, 2016; (c) 101.25% during the 12-month period commencing on January 27, 2017; and (d) 100% during the 12-month period commencing on January 27, 2018 and thereafter. In the case of partial redemption, no less than US$100.0 million aggregate principal amount must remain outstanding. We pay interest semi-annually in arrears on each interest payment date. The indenture governing the global notes 2020 includes a number of covenants, including limitations on incurrence of additional debt, limitation on liens, limitations on guarantees, limitations on merger, consolidation or sale of assets, certain obligations regarding the payment of dividends and other distributions and certain reporting requirements, subject in each case to important exceptions. Under the indenture governing the global notes 2020, an event of default is generally defined to include non-payment of interest or principal, breach of certain obligations, cross-default (with a US$45 million threshold), unsatisfied judgments and enforcement proceedings (with a US$45 million threshold), insolvency-related events and unenforceability of obligations. The global notes 2020 are jointly guaranteed by all our wholly-owned subsidiaries. Non-Convertible Debentures - 6th Public Issuance Issued on December 27, 2006, the Non-Convertible Debentures -6th Public Issuancein the aggregate principal amount of R$580.0 million, bear interest at the CDI rate plus 0.70%, payable semi-annually in arrears on June 1and December 1 of each year. The CDI rate is a Brazilian interest reference rate published by the Brazilian Securities Custody and Settlement Center (Central de Custódia e Liquidação Financeira de Títulos) and is subject to change on a daily basis. Originally, the principal amount of these debentures was payable in four annual installments commencing on December 1, 2010, with the final installment of principal due on December 1, 2013. On September 23, 2009, the debenture holders approved the extension of the maturity of the Non-Convertible Debentures -6th Public Issuanceand the principal amount will be payable in four annual installments commencing on June 1, 2012 with the final installment of principal due on June 1, 2015. The debenture holders’ meeting also approved: (i) changing the interest rate of the Non-Convertible Debentures -6th Public Issuanceas of October 1, 2009 from CDI rate plus 0.70% to CDI rate plus 1.6% per year, and (ii) a R$1,760 renegotiation premium per R$100,000 principal amount of debentures to debenture holders, paid on October 1, 2009. Subject to an optional prepayment provision, we may prepay the debentures at any time, with a premium no greater than 70  NETC Annual Report 2010 – Form 20-F


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0.50% of the principal amount then outstanding, which premium shall decrease linearly to zero at maturity of the debentures. Under the indenture governing the Non-Convertible Debentures -6th Public Issuance, an event of default is generally defined to include: non-payment of interest or principal, breach of certain obligations, cross-default (with a R$50 million threshold), change of control, not maintaining Net Debt to EBITDA ratio (as those terms are defined in the Non-Convertible Debentures - 6th Public Issuance indenture) above 2.5x and Interest Coverage ratio (as those terms are defined in the Non-Convertible Debentures - 6th Public Issuance indenture) below 1.5x, unsatisfied judgments and enforcement proceedings, insolvency-related events and unenforceability of obligations.
 Bank Credit Note In connection with the acquisition of Vivax, we assumed debt in the aggregate principal amount of R$220.0 million with Banco Itaú BBA in the form of a Bank Credit Note, or CCB. On July 6, 2007, this loan agreement was renegotiated and amended as to the interest rates, guarantees and financial covenants. The pledge of accounts receivable from subscribers was replaced by our guarantee and the financial covenants were amended to reflect those of the Non-Convertible Debentures - 6th Public Issuance. We may prepay the CCB at any time, with a premium no greater than 0.60% of the principal amount then outstanding, which premium shall decrease linearly to zero at maturity of the CCB. On November 13, 2007, we prepaid R$50.0 million of this debt. On August 31, 2009, this loan agreement was renegotiated and amended as to the interest rates and maturity. The interest rate changed from CDI rate plus 1.2% to CDI rate plus 2.55% per year and the maturity from a bullet payment in November 2011 to be payable in three installments: December 2014, June 2015 and January 2016. In 2010 we prepayment of our Bank Credit Notes in the aggregate principal amount of R$30.7 million. Finame Since 2007, we have obtained asset financing loans with commercial banks under the Government Agency for Machinery and Equipment Financing – FINAME program. These loans bear interest at 3.15% per year plus the Long-Term Interest Rate, or TJLP or fixed rates from 4.5% up to 5.5% per year and five years maturity. The FINAME loans are guaranteed by the digital equipment acquired with the loans. We may prepay the FINAME at any time, with no premium. As of December 31, 2010 FINAME amounted R$259.1 million. Off-Balance Sheet Arrangements We are a party to certain swap agreements as part of a program to hedge part of our expenses that are linked to the U.S. dollar in the short- and medium-term, which currently include capital expenditures and interest expense on the perpetual bonds, global notes 2020 and the Loan and Guaranty Agreement with Banco Inbursa. As of December 31, 2010, we had swap agreements in the aggregate notional amount of R$528.2 million with the settlement dates starting in January 2011. On May 26, 2011, we redeemed, in whole, our perpetual bonds with available cash on hand. Brazilian Economic Environment General Historically, the Brazilian economy has been subject to periodic and occasionally significant intervention by the Brazilian government. The Brazilian government has often changed  71  NETC Annual Report 2010 – Form 20-F


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monetary, credit, tariff, exchange rate and other policies, with the goal of influencing the economy. The Brazilian government’s actions to control inflation and effect other policies have involved wage and price controls, as well as other interventionist measures, such as freezing bank accounts and imposing capital controls. Although the stated intention of the present Brazilian government is to gradually reduce governmental intervention in the economy, it remains possible that future government economic policies could adversely affect our business and financial condition, as could the government’s response to certain political or social developments.
 Historically, inflation, government actions taken to combat inflation and public speculation about possible future government actions have also contributed significantly to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets. Beginning in December 1993, the Brazilian government launched an economic stabilization plan, known as the Real Plan, which was intended to reduce inflation by reducing certain public expenditures, collecting liabilities owed to the Brazilian government, increasing tax revenues, continuing a privatization program and introducing into circulation in June 1994 a new currency, the real. Following the implementation of the Real Plan, inflation dropped significantly from previous levels (which at times had exceeded 40% per month) to monthly rates of lower than 1%. In addition, the Brazilian government demonstrated a commitment to instituting conservative fiscal policy. Early in 2000, the Brazilian Congress passed the Fiscal Responsibility Law, which limited public payroll expenditures. The Brazilian gross domestic product, in U.S. dollar terms, increased 4.2% in 2000. A somewhat lower growth rate occurred for 2001 as a result of a Brazilian electricity shortage and the subsequent limitations imposed by the Brazilian government on energy consumption. Emerging markets volatility and the 2002 elections in Brazil caused considerable outflows of funds and a decline in the amount of foreign investment in Brazil. These factors adversely affected the Brazilian trading markets and, in October 2002, the real depreciated to its lowest ever value against the U.S. dollar at R$3.9552 per US$1.00. From 2003 through 2011, President Luis Inácio Lula da Silva generally followed the policies implemented by the previous administration. On December 31, 2009, the real was quoted at R$1.7412 per US$1.00, corresponding to an appreciation of 25.5% when compared to December 31, 2008.In the end of 2008 and the first half of 2009, the Brazilian economy stagnated in the wake of the international financial crisis; however, the recession lasted a few quarters until the second quarter of 2009 before the Brazilian economy emerged from recession and resumed GDP growth. Notwithstanding the relatively brief effects of the international crisis, we remain exposed to volatility in the Brazilian currency, inflation, and regulatory changes. Since taking office in January 2011, President Dilma Rousself has followed the policies implemented by Lula’s administration. The world economy has been recovering throughout 2010 and beginning of 2011, though effects of the international financial crisis remain, including the possible financial deterioration of countries in the European Union, which may indirectly impact Brazil. In 2010, Brazil experienced strong growth; however, there are concerns regarding the acceleration of inflation. See below for a discussion of the impact of inflation on our business. Effects of Inflation and Exchange Rate Fluctuations Until July 1994, Brazil had experienced high and generally unpredictable rates of inflation for many years, as well as a steady depreciationof its currency relative to the U.S. dollar. The following table sets forth Brazilian inflation, as measured by the IGP-M, and thefluctuationof the year-end exchange rate of the real against the U.S. dollar for the periods shown:   72 NETC Annual Report 2010 – Form 20-F


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Year Ended December 31,2010

   2009

   2008

   2007

   2006Inflation (IGP-M Index)

   11.32%

   (1.7)%

   9.8%

   7.8%

   3.8%Currency appreciation (depreciation)

   4.3%

   25.5%

   (31.9)%

   17.2%

   8.7%
 As a result of the Real Plan, the rate of inflation and the rate ofdepreciationhave been reduced considerably since July 1, 1994. In recent years, the Brazilian currency has recovered as a result of appreciation of the real. The real appreciated 4.3% as of December 31, 2010 when compared to December 31, 2009. Inflation has affected and will continue to affect our results of operations. A portion of our operating expenses (e.g., maintenance, selling, general and administrative expenses) tends to increase with Brazilian inflation. Additionally, a substantial portion of our capital expenditures, primarily network equipment costs, is denominated in or indexed to U.S. dollars. Any changes in exchange rates can result in a relative increase or decrease in the expenses related to such capital expenditures. We have a limited amount of foreign exchange contracts to manage our exposure to the U.S. dollar. See “—Liquidity and Capital Resources—Off-Balance Sheet Arrangements.”   On December 31, 2010 and 2009 our U.S. dollar exposure was comprised as follows:  2010

   

   2009(R$ in thousands)Interest payable

   85,947

   

   15,981Accounts payable related to equipment acquired from foreign suppliers

   24,799

   

   34,721Accounts payable related to programming

   1,873

   

   2,944Global notes 2020

   578,345

   

   603,940Perpetual bonds

   249,930

   

   261,180Banco Inbursa S.A

   330,429

   

   345,164Total

   1,271,323

   

   1,263,930
   73  NETC Annual Report 2010 – Form 20-F


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ITEM 6.          DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.
 Directors and Board Practices

Board of Directors We are managed by ourConselho de Administração, or board of directors, and ourDiretoria, or board of executive officers. In accordance with our by-laws, our directors are elected at a general meeting of shareholders, each to serve for a one year term, with the option for reelection. The existing tenure of the directors will end upon the election of the new members at our 2011 annual shareholders’ meeting, which must be held in the first four months of 2011. On April 29, 2011, our directors were reelected at our 2011 annual shareholders’ meeting and will hold office until the 2012 annual shareholders’ meeting. Our by-laws provide that the board of directors shall be composed of no fewer than nine and no more than twelve members. According to our by-laws and Brazilian corporate law, each member of our board of directors must be a Net Serviços shareholder. In addition, under Brazilian law, non‐voting, non‐controlling shareholders representing at least 10% of the total capital shares of a company have the right to elect by separate vote one member of a company’s board of directors. Our by-laws provide that for each member appointed to our board of directors, an alternate member shall be appointed to act in place of the permanent director when such director is not available for conducting board business. The term of such alternate member mirrors the term of his or her corresponding member director. Our by-laws provide that our board of directors shall hold a meeting at least once every quarter or as called by any director. Its responsibilities include, among other things, the establishment of the policy and general strategy of the business and the appointment and supervision of our executive officers. Pursuant to a shareholders’ agreement discussed under “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements,” our board of directors is comprised of twelve members and an equal number of alternates. Of these twelve members and twelve alternates, one member and one respective alternate is appointed directly by Grupo Globo, six members and six respective alternates are appointed by GB, which is controlled by Grupo Globo, and three members and three respective alternates are appointed by Telmex Internacional. Additionally, in accordance with the Level 2 of BM&FBovespa’s Corporate Governance requirements, 20% the members of our board of directors must be independent. Net Serviços’ current directors are:   74 NETC Annual Report 2010 – Form 20-F


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Name

   Position

   Position Held Current Term**Since****Expires**Jorge Luiz de Barros Nóbrega

   Chairman, Board of Directors

   April 30, 2009April 30, 2012Rossana Fontenele Berto

   Director

   April 30, 2003April 30, 2012Juarez de Queiroz Campos Júnior

   Director

   April 19, 2004April 30, 2012Carlos Henrique Moreira

   Director

   Aptil 28,2005 April 30, 2012Jose Formoso Martínez

   Director

   Aptil 28,2005 April 30, 2012Sérgio Lourenço Marques

   Director

   Aptil 28,2006 April 30, 2012Mauro Szwarcwald

   Director

   Aptil 28,2006 April 30, 2012Isaac Berensztejn

   Director

   April 02.2007 April 30, 2012Luiza Marinho Rabelo

   Director

   April 30, 2011April 30, 2012Gabriela Salomão Vaz Moreira

   Director

   April 30, 2009April 30, 2012Luiz Tito Cerasoli

   Director

   April 30, 2011April 30, 2012Augusto Cesar Roxo de Urzedo Rocha

   Director

   April 30, 2010April 30, 2012
 Biographies of Our Board of Directors Jorge Luiz De Barros Nóbregahas been a member of our board of directors since April 2009 and has served as Chairman of the board of directors since that time. Prior, he served as an alternate member for the Chairman of our board of directors. Mr. Nóbrega is Director of the Corporate Center at Organizações Globo and New Media, Radio and Publishing Director. He joined Organizações Globo in 1998 as Strategic Coordination Director. Previously, he held executive positions at Mesbla, a Brazilian retailing group, and Xerox and headed his own consulting firm for 4 years. He graduated in Business Administration from EBAP/Fundação Getúlio Vargas and holds a M.Sc. Degree in Industrial Engineering/Corporate Planning from Universidade Católica do Rio de Janeiro. Rossana Fontenele Bertohas been a member of our board of directors since April 30, 2003. Ms. Berto has been Director of Strategic Planning of Globo (and prior to their restructuring, of TV Globo and Globopar) since 2002. Prior to that, Ms. Berto was the Managing Director of Sky Brasil from 1999 to February 2002, General Director of Net Rio from 1998 to 1999 and Controller of Multicanal from 1993 to 1998. She is also a board member of Sky Brasil. She holds a B.A. degree from Universidade do Estado do Rio de Janeiro and an MBA degree from Coppead/UFRJ (Rio de Janeiro, Brazil). Juarez de Queiroz Campos Júniorhas been a member of our board of directors since April 19, 2004. In February 2001, he was appointed to the position of Managing Director of Globo.com, and in July 2003 of Globo Filmes. Previously, Mr. Queiroz was Tele Norte Leste Participações S.A.’s Marketing & Corporate Vice President and the Marketing Officer of Souza Cruz S.A. Mr. Juarez Queiroz has a bachelor’s degree in Law from USP/PUC and a degree in Business Administration from EAESP/FGV. Carlos Henrique Moreirahas been a member of our board of directors since April 29, 2005. Currently he is Embratel’s chairman of the Board of Directors and Chief Executive Officer. Previously he held the positions of Chief Executive Officer at Algar Telecom Leste, Vice-President at Xerox, Vice President at IBM, Operations Executive Officer at Embratel, member of TELERJ’s board of directors, member of TELESP’s board of directors and Operations Executive Officer at  75 NETC Annual Report 2010 – Form 20-F


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Standard Eléctrica S.A. He holds a bachelor’s degree in Electronic Engineering from the Instituto Tecnológico de Aeronáutica.
 Jose Formoso Martínezhas been a member of our board of directors since April 29, 2005. He holds a bachelor’s degree in Mechanical Engineering from Universidad La Salle, Mexico and a post-graduate degree in Corporate Management from the Instituto Panamericano de Alta Dirección de Empresas, Mexico. Currently, he is the Vice Chairman of Embratel’s board of directors. His previous positions include Executive Officer at Telguas S.A, Managing Director at Cablevisión and operations manager and sales manager at Condumex. Isaac Berensztejnhas been a member of our board of directors since April 2, 2007. Isaac Berensztejn has been Embratel’s Chief Financial Officer since August 2004. Previously he was the Chief Financial Officer of StarOne for three years. Prior to that he was the Chief Financial Officer of Telecomunicações do Rio de Janeiro S.A. and Telemar Norte Leste S.A. He graduated in Telecommunicastions Engineering from Pontifícia Universidade Católica do Rio de Janeiro, and received a Master of Science degree in Production Engineering from COPPE/UFRJ and an Executive MBA from COPPE-AD/UFRJ. Sérgio Lourenço Marqueshas been a member of our board of directors since April 28, 2006. He has been Globo’s Treasury Director since February 2000. Previously, he worked as controller and portfolio manager at Banco Pactual for five years. He also worked at Atlantic Petróleo and Companhia Brasileira de Petróleo Ipiranga. He graduated with a degree in Computer Engineering from Pontifícia Universidade Católica do Rio de Janeiro and received a MBA in Finance from IBMEC. Mauro Szwarcwaldhas been a member of our board of directors since April 28, 2006. Currently he is Partner Director at Aplus Consultoria. Previously, he worked as Marketing Vice President at Oracle and Telemar. He also worked as Commercial Operations Executive Director at Xerox do Brasil. Mauro Szwarcwald has a Masters of Science in Mathematics and Statistics from the University of Rochester. He is an independent member of our board of directors. Luiz Tito Cesarolihas been the CEO of Cesaroli Telecomunicações since 2009, in addition to acting as a member of the Board of Directors of Anatel from 1999 to 2003. Before joining Anatel, he worked as an engineer with Embratel from 1983 to 1995 and has held positions as an engineer with a number of other telecommunication companies throughout his career, including Telesp and Standard Electrica.  Mr. Cesaroli studied engineering at Universidade Federal do Rio de Janeiro (UFPJ) and Electrical Engineering at Universidade Gama Filho. Gabriela Salomão Vaz Moreirahas been a member of our board of directors since April 30, 2009. She has worked at Globo as Media Legal Matters Director since 2004. She has a Law degree from Faculdade Cândido Mendes. She also holds LLM in capital markets and corporate law from Columbia Law School. Previously, she has worked for Shearman Sterling LLP and for Barbosa, Müssnich & Aragão Advogados. Luiza Marinho Rabeloworked as a trainee and an architect in the offices of Indio da Costa AUDT from August 2005 to February 2011, participating in the design, coordination and monitoring of architecture projects. She graduated in Architecture from PUC-RJ in December 2007. In 2010 she joined the group of shareholders of Organizações Globo and has since prepared to become a member of the Boards of Directors in the affiliated companies of the group. Augusto Cesar Roxo de Urzedo Rocha Filhohas been a member of our board of directors since April 30, 2010. He graduated with a degree in Civil Engineering from Universidade  76 NETC Annual Report 2010 – Form 20-F


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Fluminense in 1988 and received a MBA from NYU in 1992. Currently he is Globo’s Financial Planning and Business Account Director. Previously, he worked at Net Serviços de Comunicação as Treasury and Capital Markets Director for six years and as Capital Markets Analyst at Banco Bozano Simonsen for five years.
 Fiscal Board We maintain a permanent Fiscal Board, orConselho Fiscal, that acts as an Audit Committee and complies with Rule 10A-3 of the Exchange Act and the NASDAQ corporate governance rules.Under Brazilian corporate law, theConselho Fiscalis a corporate body independent of the board of directors and independent auditors. TheConselho Fiscal’sprimary responsibilities are to review management’s activities and the company’s financial statements and to report its findings to shareholders.See also “Item 16A. Audit Committee Financial Expert.” Our by-laws provide that theConselho Fiscalshall be composed of no fewer than three and no more than five members. In addition, if we did not maintain a permanentConselho Fiscal, in accordance with Article 161 of Brazilian corporate law, shareholders representing at least 10% of the voting shares have the right to nominate a member to theConselho Fiscalat a general shareholders’ meeting. Name

   

   Position

   

   Position Held Since

   

   Current Term ExpiresMartin Roberto Glogowsky

   

   Chairman,Conselho Fiscal

   

   July 12, 2005

   

   April 30, 2012Charles Barnsley Holland

   

   Director

   

   July 12, 2005

   

   April 30, 2012Fernando Carlos Ceylão Filho

   

   Director

   

   October 2, 2008

   

   April 30, 2012
 Martin Roberto Glogowskyhas been a member of ourConselho Fiscalsince July 2005. He joined Fundaçao Cesp in 1999 and he has been the Chief Executive Officer since May 2005. Previously, Mr. Glogowsky worked at Banco BBA and Banco Schahin Cury in the capital market department. Currently he is also member of several Boards of Directors, Fiscal Boards and Audit Committees for BM&FBovespa’s Novo Mercado companies. He holds a B.A. degree in Law from the Pontifícia Universidade Católica de São Paulo and a Business Administration degree from the Fundação Getúlio Vargas. Charles Barnsley Hollandhas been a member of ourConselho Fiscalsince July 2005. He is a registered accountant, with a MBA degree from Wharton School, University of Pennsylvania. Currently, he is a partner at Holland & Associados. Until 2001, for twenty years he was an audit partner at Ernst & Young serving as a member of the Partners Administrative Committee, member of the Executive Committee and in charge of the Audit Division. In 1979, he was the Chief Financial Officer at American Medical International, and before that date Senior Auditor of another leading public accounting firm. In compliance with American rules, he is the financial expert due to his knowledge in U.S. GAAP and IFRS and U.S. and IFAC GAAS. Fernando Carlos Ceylão Filhohas been a member of ourConselho Fiscalsince October 2008. Currently he is an independent consultant. Previously, Mr. Ceylão was CEO of Globalstar do Brasil S.A., a satellite communications service provider and worked as a director of Americel S.A. In 1969, Mr. Ceylão joined Embratel, occupying various management positions at financial and international departments. In 1995, Mr.Ceylão was a director of Fundação Embratel de Seguridade Social, the pension fund of Embratel. He holds a degree in Law from Universidade Federal do Rio de Janeiro and a MBA in Strategic Management from Fundação Getúlio Vargas/RJ.   77 NETC Annual Report 2010 – Form 20-F


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Compensation Committee We are currently not required to, and do not, maintain a compensation committee. Executive Officers and Senior Managers Our by-laws provide for a minimum of three and a maximum of four executive officers appointed by our board of directors for renewable two-year terms. Our executive officers are responsible for all matters concerning our day-to-day management and operations. Our executive officers must be residents of Brazil and may or may not be shareholders of Net Serviços. Currently, we employ three executive officers. In addition, we currently employ three senior managers that make significant contributions to our business. Net Serviços’ executive officers and senior managers are: Name

   

   Position

   

   Position Held Since

   

   Current Term ExpiresJosé Antônio Guaraldi Félix(1)

   

   Chief Executive Officer

   

   January 2008

   

   December 31, 2011Roberto Catalão Cardoso(1)

   

   Chief Financial Officer

   

   August 2010

   

   December 31, 2011André Müller Borges(1)

   

   Chief Legal Counsel

   

   January 2002

   

   December 31, 2011Rodrigo Marques de Oliveira(2)

   

   Chief Strategic Planning Officer

   

   December 2009

   

   N/ADaniel Feldmann Barros(2)

   

   Chief Operating Officer

   

   December 2009

   

   N/A
 (1)Executive Officers (2)Senior Managers José Antônio Guaraldi Félixbecame Chief Executive Officer of Net Serviços in January 2008. Mr. Félix had been our Chief Operating Officer since May 2003. Previously, he was the Chief Operating Officer for five years and before a regional officer for two years at Net Serviços. Prior to that he was an officer of Net Sul, where he headed 16 operations in southern Brazil. Mr. Félix worked at RBS from 1980 to 1990, holding various positions in the operational area. Mr. Félix has a degree in Telecommunication Engineering from Pontifícia Universidade Católica do Rio Grande do Sul. Mr. Félix also graduated in Strategic Business Management from Fundação Dom Cabral, from Kellogg School of Management in Chicago, and from Insead Business School in France. Roberto Catalão Cardosohas been our Chief Financial Officer since August 2010. Previously, he worked for seven years at Embratel, where he ultimately held the position of Controller and managed other activities in the financial and business units. At Embratel, Mr. Catalão was actively involved in issues related to the partnership established between Net Serviços and Embratel.  Before joining Embratel, Mr. Catalão worked in large and renowned international audit and consulting firms.  He started his career in Brazilian financial institutions. Mr. Catalão holds a bachelor’s degree in Accounting from the Universidade Federal  of Rio de Janeiro and he graduated in Corporate Finance from the Pontifícia Universidade Católica of Rio de Janeiro André Müller Borgeshas been our Chief Legal Counsel since January 2002. Mr. Borges joined Grupo Globo in 1999 as Chief Legal Counsel of Distribution and Telecommunications, in which position he served until 2001, when he joined Net Serviços as a Corporate Officer, responsible for its legal, corporate and regulatory obligations. Previously, he was a law partner at the law firm Tozzini, Freire, Teixeira e Silva Advogados. Mr. Borges holds a degree in Law from the Faculdade Paulista de Direito of the Pontifícia Universidade Católica of São Paulo.  78 NETC Annual Report 2010 – Form 20-F


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Rodrigo Marques de Oliveirahas been our Chief Strategic Planning Officer since December 2009. He served as our Financial Planning Officer since March 2004. Previously, he worked as Head of Research of Banco Santander Brazil for three years. Mr. Marques worked at Banco Bozano Simonsen from 1994 to 2000, as senior analyst and Head of Research. Mr. Marques has a degree in Mechanical Engineering from Pontifícia Universidade Católica do Rio de Janeiro and holds the Chartered Financial Analyst, or CFA, designation. Daniel Feldmann Barroshas been our Chief Operating Officer since December 2009. He served as our Regional Operating Officer for São Paulo since June 2005, during which time he was responsible for managing our operation in the city of São Paulo. Previously, he worked as Regional Operating Officer for 33 of our operations in different states. He worked at Net Sul in various positions in the operational units. Mr. Barros has a degree in Telecommunication Engineering from Universidade Federal de Santa Catarina and a degree in Business Administration from the University of California. Indemnification We currently provide insurance for our directors, executive officers and senior managers for indemnification by us or our subsidiaries against any liabilities incurred by the directors, executive officers and senior managers in their official capacity as such. Compensation of Directors and Principal Executive Officers All members of our board of directors and of ourConselho Fiscalare entitled to receive compensation in connection with their serving on our boards. Currently, the two independent members of our board of directors and all members of ourConselho Fiscalreceive compensation in connection with their serving on our boards. For the year ended December 31, 2010, the aggregate compensation paid and benefits in kind granted by us to our independent directors, members of ourConselho Fiscaland our principal executive officers for services in all capacities was R$ 6.1 million. Directors’ Service Contracts Our directors and alternates are not subject to any service contracts with us or any of our subsidiaries. Employees All of our employees are located in Brazil. At December 31, 2010, we had 15,746. At December 31, 2009 and 2008, we had 14,629 and 12,272 employees, respectively.We believe that our relations with our employees and the labor unionSindicato Nacional dos Trabalhadores em Empresas Prestadoras de Serviços e Operadoras de Sistemas de Televisão por Assinatura, a Cabo e MMDSare generally good. Share Ownership Under Brazilian corporate law, each member of our board of directors is required to be a shareholder of Net Serviços. No director, executive officer or senior manager of Net Serviços is the record owner of more than 1.0% of our shares. For certain information on the beneficial ownership


of our shares, including shares held by affiliates of our directors, see “Item 7. Major Shareholders and Related Party Transactions.”  79 NETC Annual Report 2010 – Form 20-F


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 Variable Compensation Plan and Long-Term Incentive Plan We currently have two complementary compensation plans as described below: (i) a variable compensation plan, the “Plano de Participação nos Resultados,” or PPR.In accordance with a labor agreement with the union, we pay our employees up to 3.6 monthly wages if we achieve pre-determined financial and operational performance goals established in accordance with the annual goals approved by the board of directors. For a selected number of administrative members, directors and managers, we have individual agreements with individually established goals, which includes reaching a certain target number pay-television and broadband Internet subscribers, free cash flow generation and customer satisfaction. (ii) a retention plan was offered to a selected number of administrative employees, officers and managers, with the objective of retention. The expenses related to this plan have been accrued since its inception in 2008. This retention plan was implemented in 2008 in accordance with our previous long-term plan. Expenses are recognized on the accrual basis and the payments  on a annual basis. In 2010, we reached substantially all pre-determined goals and amounts under the PPR were paid on February 18, 2011. Pension, Retirement and Similar Benefits We currently do not have any pension or retirement plans for our employees.  80 NETC Annual Report 2010 – Form 20-F


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ITEM 7.          MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS. Major Shareholders We have two classes of capital stock authorized and outstanding: common shares and preferred shares. Our common shares have full voting rights. Our preferred shares have voting rights in only limited circumstances. As of June 1, 2011, none of our outstanding common shares and approximately 2.4% of our outstanding preferred shares, including in the form of ADSs, were held in the United States. On June 1, 2011, there wereapproximately5,422,468 record holders of preferred shares, including in the form of ADSs, in the United States Together, Grupo Globo and Telmex Internacional directly or through their respective affiliates, owned 99.4% of our common shares as of June 1, 2011, with Grupo Globo continuing to control, through GB, a majority of our outstanding voting shares, although Telmex Internacional has significant approval rights under our shareholders’ agreement. Under current Brazilian law, as a non-Brazilian entity, Telmex Internacional is not permitted to own a controlling interest in us.  In 2010, Embratel, an indirect subsidiary of Telmex Internacional, conducted a public tender offer to purchase for all of our the preferred shares, including preferred shares represented by ADSs, other than preferred shares held by its parent company, Embrapar, and, in early 2011, completed the purchase of 193.7 million of our preferred shares. Globo is a Brazilian holding company controlled by the Marinho family with operations in broadcast television, pay-television programming, magazine publishing and printing and interests in cable and satellite television. Telmex Internacional owns and operates the largest telecommunications system in Mexico. It is the sole provider of fixed line telephony services in Mexico and the leading provider of fixed local and long distance telephony services and Internet access in Mexico. In the event Brazilian law changes so that a non-Brazilian entity is permitted to own a controlling interest in a Brazilian cable company, Embrapar would have the right to acquire from Grupo Globo, and Grupo Cable Globo would have the right to cause Embrapar to purchase from Grupo Globo, subject to certain conditions, an additional interest in the voting capital of GB that would give Embrapar, through GB, control over 51% of our voting common shares. The additional interest in GB’s voting capital would be equal to the greater of (i) 2% of the voting capital of GB or such amount of voting capital as would give Emprapar voting control of GB and (ii) the percentage of GB’s total equity capital equal to the percentage that 16,162,799 common shares represent of the total voting capital of Net Serviços held by GB at the time. The benchmark price for this transaction would be equivalent to R$0.6277 (R$9.42 given the reverse split effective on August 1, 2006), which corresponds to the price per share Emprapar has paid to Grupo Globo for our common shares in the transactions described above, adjusted according to the exchange rate.Following such a transfer, Grupo Globo would continue to hold a significant minority stake in us, directly and through its stake in GB, and so long as Grupo Globo held directly or indirectly a specified minimum level of our common shares, it would continue to have the consent and other rights under the shareholders’ agreement described below under “—Shareholders’ Agreements.” We believe that the acquisition by Telmex Internacional, through Embrapar, of this additional interest in voting capital of GB would constitute an acquisition of a controlling interest in Net Serviços that, pursuant to our by-laws, would require Embrapar to make an offer to purchase all of our outstanding common shares and preferred shares at a price equal to 100% of the price paid by Embrapar for such controlling interest.  81 NETC Annual Report 2010 – Form 20-F


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As of June 1, 2011, GB is our controlling shareholder, holding 51.0% of our common shares. Grupo Globo, in turn, holds a controlling interest in GB. Grupo Globo has agreed, subject to its fiduciary duties, not to vote to approve certain changes in our capital structure or certain extraordinary compensation arrangements or to vote in favor of any increases to our officers’ long-term incentive plan. Furthermore, Grupo Globo has agreed not to enter into any new transactions with us other than in the ordinary course, subject to certain exceptions. The following table sets forth, as of June 1, 2011, information regarding the beneficial ownership of common shares and preferred shares by each person known by us to own beneficially more than 5% of any class of our equity securities. None of our major shareholders identified in this table has special voting rights. Common Shares

   Preferred Shares

   Total EquityName

   Number

   Percentage

   Number

   Percentage

   Number

   PercentageGlobo Comunicação e Participações S.A.

   11,855,947

   10.4%

   1,000

   0.0%

   11,856,947

   3.5%GB Empreendimentos e Participações S.A.(1)

   58,374,440

   51.0%

   –

   –

   58,374,440

   17.0%Empresa Brasileira de Telecomunicações S.A.(2)

   2,580,655

   2.2%

   210,838,097

   92.2%

   213,418,752

   62.2%Embratel Participações S.A.(3)

   40,928,401

   35.8%

   12,242,351

   5.4%

   53,170,752

   15.5%
 
  (1)     Grupo Globo holds 51% of the voting interests of GB, a special purpose company,and Telmex Internacional holds 49% of the voting interests of GB and 100% of the non-voting interests of GB. (2)     Empresa Brasileira de Telecomunicações S.A. is controlled by Telmex Internacional. (3)     Embratel Participações S.A. is controlled by Telmex Internacional. As of June 1, 2011, non-affiliates owned 0.6% of our common shares and 2.4% of our preferred shares, representing 1.8% of our total capital stock. Shareholders’ Agreements Grupo Globo, Embratel, Embrapar and GB, together with Telmex Internacional, entered into our shareholders’ agreement, and Grupo Globo and Telmex Internacional entered into a separate shareholders’ agreement with respect to GB, which we refer to as the “GB shareholders’ agreement”. We refer to these shareholders’ agreements together as the “shareholders’ agreements.” The shareholders’ agreements contain provisions relating to, among other things, the transfer of our shares and of the shares issued by GB, rights of first refusal, and governance, including the right of each of Grupo Globo, Telmex Internacional and GB to appoint members to our board of directors and board of executive officers. Right of first refusal and transfer of shares.The shareholders’ agreements establish specific rules for the transfer of our shares and GB shares. In the event that one of the shareholders party to the shareholders’ agreements intends to transfer its shares, such shareholder is required to notify in writing the other shareholders party to the shareholders’ agreements in order to enable them to exercise their right of first refusal. Under the shareholders’ agreements, transfers to our competitors, as defined in the shareholders’ agreements, are not permitted. Furthermore, the shareholders party to the shareholders’ agreements may not encumber or otherwise create any liens on our shares or the shares of GB, except under limited circumstances.  82 NETC Annual Report 2010 – Form 20-F


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Previous meetings.The shareholders’ agreements provide that a previous meeting of the representatives of Grupo Globo and Telmex Internacional must be held prior to each of our, or any of our subsidiaries’, general shareholders meetings or board of directors meetings at which a material matter is to be considered. The previous meeting is to establish the position that will be adopted at the general shareholders meeting or board of directors meeting, as the case may be, by the shareholders party to the shareholders’ agreements. Material matters (as described below) must be approved at a previous meeting by the affirmative vote of shareholders party to the shareholders’ agreements. The shareholders are then required to vote or instruct their respective directors to vote, as the case may be, in accordance with the outcome of the vote at such previous meeting. Material matters. The shareholders’ agreements require the approval of Emprapar, or if Emprapar is allowed by a change in Brazilian law to acquire control over a majority of our common shares, the approval of Grupo Globo, at a previous meeting as described above for specified material matters. These material matters include certain extraordinary corporate transactions relating to us, including certain business combinations, the disposition or acquisition of assets in excess of specified thresholds and dissolving or liquidating us; changes to specified commercial arrangements to which we are party, including certain programming and network arrangements, affiliate transactions and pay-television concession matters; and other matters such as deregistering us as a public company, changing our corporate purpose and determining the compensation and benefits of our key employees. The approval rights are subject to maintaining specified minimum levels of shareholdings in Net Serviços. Tag-along rights.Under the shareholders’ agreements, in the event of a sale of control of us by any shareholder party to the shareholders’ agreements, the purchaser must agree to undertake a public offering to purchase the shares of the remaining shareholders within a period of no more than 90 days at the same price and under the payment conditions offered to the selling shareholder. Furthermore, in the event that one of the shareholders party to the shareholders’ agreements disposes of all or any part of its common shares or its GB shares, as the case may be, the other shareholders party to the shareholders’ agreements will have the right to require such selling shareholder to include in the sale such other shareholders’ common shares or GB shares, subject to the same price and payment conditions; provided that, if the number of common shares or GB shares, as the case may be, exceeds the number of shares the purchaser is willing to acquire, the number of common shares or GB shares, as the case may be, sold will be or GB shares, as the case may be, reduced proportionately for each selling shareholder. Board of directors (Conselho de Administração).The shareholders’ agreements require that our board of directors be comprised of eleven sitting members and an equal number of alternate members, all of whom must, as required by Brazilian law, be shareholders of Net Serviços. Based on current share ownership, one sitting member and one respective alternate member are appointed directly (and can be dismissed) by Grupo Globo, six sitting members and six respective alternate members are appointed (and can be dismissed) by GB, which is controlled by Grupo Globo, and three sitting members and three respective alternate members are appointed (and can be dismissed) by Embratel and Emprapar, which are controlled by Telmex Internacional. Additionally, in accordance with BM&FBovespa Level 2 listing requirements, two sitting members and two respective alternate members must be appointed by a non‐controlling preferred shareholder. Additionally, in the event that shareholders that are not parties to the shareholders’ agreement become entitled to representation on our board of directors, the total number of  83 NETC Annual Report 2010 – Form 20-F


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members of our board of directors will be recalculated, but in no event shall our board of directors be comprised of fewer than eleven members. Furthermore, shareholders owning more than 50% of the common shares subject to the shareholders’ agreements will always be entitled to appoint (and remove) at least a majority of the members of our board of directors.
 Board of officers (Diretoria­).The shareholders’ agreements provide that our board of officers and the board of officers of each company controlled by us will be comprised, except under certain circumstances, of the following three executive officers: (i) Chief Executive Officer, (ii) Chief Operating Officer and (iii) Chief Financial Officer. Telmex Internacional has the right to appoint and remove the Chief Operating Officer. Otherwise these officers are appointed, and may be removed by, any shareholder that has control of over 50% of the total amount of our common stock governed by the shareholders’ agreements. Business covenants.Under the shareholders’ agreements and subject to certain ownership requirements, Emprapar will agree not to, and not to cause a related party to, own, conduct or participate in the management of any broadcast television or pay-television distribution platform (other than ours and except under certain circumstances) or content production businesses (other than those specified in the shareholders’ agreements) in Brazil. Term.The shareholders’ agreements shall be valid and effective so long as each of Grupo Globo and Embrapar owns (including through GB according to a formula incorporating adjusted interest), directly or indirectly, at least 153,759,717 (10,250,648 given the reverse split effective on August 1, 2006) of our common shares, irrespective of the percentage ownership represented by such common shares. Other.Under certain circumstances, Grupo Globo may exchange our common shares or its GB shares for preferred shares issued by us. In the case of an exchange of our common shares, the ratio for exchange will be one common share to one preferred share. In the case of an exchange of GB shares, the number of preferred shares to be delivered to Grupo Globo will be determined according to a formula incorporating adjusted interest. In either type of exchange, all shareholders party to the shareholders’ agreements are required to waive their rights of first refusal and tag-along rights, as the case may be. Related Party Transactions We have engaged in a variety of related party transactions, including the transactions described below. We cannot state with any certainty the extent to which such transactions are comparable to those which might have been obtained from a non-affiliated third party. We intend to enter into any future material related party transactions on terms that are fair and reasonable to us. Material Transactions with Affiliates Net Brasil Programming Agreement Net Brasil is wholly owned by Grupo Globo. On June 27, 2004, we entered into an amended and restated programming agreement with Net Brasil whereby we obtain all of our programming from Brazilian sources through Net Brasil. We obtain directly, for our own account and benefit, all international content from sources outside of Brazil. The amended and restated programming agreement has a term of ten years but will be automatically renewed unless one party notifies the other of its intent to terminate the agreement at least six months prior to the ten year  84 NETC Annual Report 2010 – Form 20-F


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anniversary of the agreement. We pay Net Brasil a fixed brokerage service fee equal to R$145,030 per month, adjusted by the Consumer Price Index.
 On June 27, 2004, we also entered into a licensing agreement with Net Brasil, whereby Net Brasil grants us the right to use the “NET” brand name for 10 years from the date of effectiveness and, in the case of termination, for an additional 30 months from the date of termination. On December 16, 2005, we entered into an amended agreement with Net Brasil whereby we extended the term of the current licensing agreement until 2015. Although with respect to Brazilian programming Net Brasil provides us with exclusive cable-television rights in our licensed areas, it also provides programming to Sky Brasil, a satellite-television provider that competes directly with us and in which Globo owns a interest. In addition, much of the programming that we purchase through Net Brasil is produced by Globosat Programadora Ltda., or Globosat, which is wholly-owned by Globo, and its affiliates. The shareholders’ agreement between Grupo Globo, Embratel, Emprapar, GB and Telmex Internacional provides that our board of directors must approve alterations in certain of our programming arrangements and transactions with affiliates. Furthermore, if Grupo Globo and Telmex Internacional are entitled to elect at least one member to our board of directors, any alterations in these same programming arrangements and transactions with affiliates must also be approved by such directors. See “—Shareholders’ Agreements.” Pursuant to our programming agreements with Net Brasil, we recognized expenses of R$908.2 million to Net Brasil in 2010, including programming from Globosat and the brokerage fee. Our liabilities to Net Brasil are considered normal trading transactions and are classified as “accounts payable – programming suppliers” under current liabilities in the consolidated balance sheet in our audited consolidated financial statements included elsewhere herein. Programming Guide Our programming guide is produced by Editora Globo S.A., or Editora, a publishing company affiliated with Globo. In 2010 and 2009, we recognized expenses of R$11.8 million and R$11.5 million, respectively, for the publication of our program guide. Fixed Line Telephony and Small and Medium Business Services In 2006, we entered into agreements with our shareholder Embratel to offer fixed line telephony services and small and medium business services. With these fixed line telephony services, we can offer triple play (pay-television, broadband Internet and fixed line telephony) service for households that are covered by our bidirectional network. With these small and medium business services, we provide broadband Internet and fixed line telephony services for potential small- and medium-sized businesses that are covered by our bidirectional network. By offering such services, we intend to create synergies and increase the utilization and profitability of our existing infrastructure. According to the agreement governing fixed line telephony services, as amended, we are responsible for managing the operation of such services, which should strengthen our pay-television and broadband Internet businesses for residential customers. Embratel, which owns the licenses to provide fixed line telephony services, is responsible for investments in infrastructure to offer the services and provides customer service expertise for the fixed line telephony business. Pursuant to the agreement governing fixed line telephony services, as amended, we share with  85 NETC Annual Report 2010 – Form 20-F


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Embratel fixed line telephony services operating results, calculated by subtracting taxes on revenues, interconnection fees and costs incurred in connection with defaulting end users from gross fixed line telephony revenues.
 According to the agreement governing small and medium business services, as amended, we maintain the infrastructure to provide Embratel corporate Internet protocol access telecommunication services, including certain equipment and general field services.  Embratel offers broadband Internet and fixed line telephony services, provides certain required equipment and adapts and manages its information technology systems and applications in connection with services provided to small and medium business. Net sales from fixed line telephony services and small and medium business services amounted to R$451.1 million and R$391.6 million for the years ended December 31, 2010 and 2009, respectively. On December 31, 2008 sales were R$273.8 million. Internet Services and IRU Agreements On June 26, 2003, we entered into an agreement with Embratel to acquire access to Embratel’s bandwidth, that connects our network to the Internet through private lines. This contract enables us to provide our broadband Internet services. This contract has been amended several times to include certain of our subsidiaries and to update prices and bandwidth capacities to access the Internet. On December 29, 2009, we entered into two IRU agreements with Embratel, each with a term of five years beginning on December 1, 2009, to (i) use Embratel’s network for the provision of our broadband Internet service in exchange for a one-time payment in the amount of R$849.6 million; and (ii) allow Embratel to use our transmission capacity in local accesses in our hybrid fiber-coaxial network to provide fixed telephony services in exchange for a one-time payment in the amount of R$873.5 million. For financial accounting purposes, we have elected to defer both our rental expenses to Embratel and our rental revenue from Embratel under the IRU agreements. Such amounts will be recognized monthly over the term of the IRU agreements. Other transactions involving us and companies related to Embratel, such as: (i) private circuits for internal fixed line telephony services; and (ii) general fixed telephony services are provided at prices believed to be at market rates. The amount paid to Embratel for these services, together with bandwidth access to the Internet, totaled R$370.7 million in 2010 and R$262.9 million in 2009. The increase is primarily due to higher cost related to the bandwidth to access the Internet. Optical Fiber Lease Agreement On November 22, 2005, we entered into an agreement with Embratel pursuant to which we lease new and surplus optical fibers, i.e., disconnected optical fibers, to Embratel for an initial term of 10 years. Lease payments under this Optical Fiber Lease Agreement are made on a monthly basis and are calculated based on use. The Optical Fiber Lease Agreement, as amended, prohibits Embratel from providing certain pay-television and residential Internet broadband services through the subject optical fibers and prohibits us from providing certain voice and corporate Internet broadband services through the subject optical fibers. Under the Optical Fiber Lease Agreement, Embratel has a right of first refusal to acquire our optical fiber network should we decide to sell it or any part thereof.   86 NETC Annual Report 2010 – Form 20-F


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Financing Arrangements with Affiliates Globotel Participações S.A. As a result of certain ownership reorganization among companies controlled by Grupo Globo, on August 31, 2001, our extraordinary shareholder meeting approved the down-stream merger of Globotel Participações S.A., a subsidiary of Roma Participações Ltda., or Romapar, with us. With this merger, we succeeded the merged company in the right of amortizing for Brazilian local statutory and tax purposes a premium of R$452.2 million generated at the acquisition of its ownership in us and certain of our subsidiaries. The amortization of this premium for local statutory purposes results in future tax benefits for us and our subsidiaries over an estimated period of up to six years. As compensation for benefits realized we issued to Romapar: (i) on December 9, 2005, 2,647,107 common and 3,842,018 preferred shares, at a price corresponding to R$13.20 per share; (ii) on May 18, 2006, 1,771,730 common and 2,571,494 preferred shares, at a price corresponding to R$17.10 per share; (iii) on February 1, 2007, 1,146,354 common and 1,881,774 preferred shares at a price corresponding to R$23.25 per share; (iv) January 31, 2008, 1,229,387 common and 2,454,256 preferred shares at a price corresponding to R$19.92 per share; and (v) February 17, 2009, 1,408,161 common and 2,816,320 preferred shares at a price corresponding to R$13.96 per share. Loan Agreement with Banco Inbursa S.A. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resorces–Debt Financing–Loan and Guaranty Agreement.”  87 NETC Annual Report 2010 – Form 20-F


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ITEM 8.          FINANCIAL INFORMATION. Our audited consolidated financial statements as of December 31, 2010 and 2009 and for the years ended on December 31, 2010, 2009 and 2008 are included elsewhere in this Form 20-F. On May 26, 2011, we redeemed our outstanding US$150.0 million aggregate principal amount of 9.25% perpetual bonds with available cash on hand. Other than the redemption, no significant change has occurred since the date of our audited consolidated financial statements as of and for the year ended December 31, 2010. See “Item 4. Information on the Company—Legal Proceedings” for a discussion of our legal proceedings. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources” for a discussion of our financial position and the redemption of our perpetual bonds. See “Item 10. Additional Information—Dividend Policy” for a discussion of our policy on dividend distributions.             88 NETC Annual Report 2010 – Form 20-F


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Item 9.          The Offer and Listing. General The principal non-United States market for our preferred shares is the BM&FBovespa. Our preferred shares are traded on the BM&FBovespa under the symbol “NETC4.” In addition, our shares are also traded in Spain on Latibex under the symbol “XNET.” Since June 2002, we have complied with the requirements of Level 2 of the BM&FBovespa. Level 2 is a listing segment created for the trading of shares issued by companies that voluntarily undertake to comply with certain corporate governance practices and disclosure requirements that are in addition to those imposed by Brazilian law. The inclusion of an issuer in Level 2 signifies the issuer’s compliance with a series of corporate rules, known as good practices of corporate governance, which are more rigid than those required by the Brazilian legislation. These rules increase the rights of the shareholders as well as improve the quality of information we provide to the market. Our predecessor company, Multicanal, conducted an offering of ADSs in October 1996. Each ADS represents one preferred share. The ADSs trade in the United States on the NASDAQ Global Market under the symbol “NETC” and are evidenced by ADRs. The ADSs are outstanding under an amended and restated deposit agreement dated as of July 28, 2006 among us, JPMorgan Chase Bank N.A., or JPMorgan Chase, as depositary, and the owners and holders from time to time of the ADSs. An ADR may represent any number of ADSs. Only persons in whose names ADSs are registered on the books of the depositary are treated as owners of ADSs under the deposit agreement. On August 1, 2006, we effected a reverse split on the common and preferred shares converting each lot of fifteen shares to one share. Effective from this date, each of our ADSs was changed to represent one of our preferred shares. The table below sets forth, for each period indicated, the high and low closing prices in reais for the preferred shares on the BM&FBovespa and the high and low closing prices of the ADSs in U.S. dollars as reported by the NASDAQ Global Market. BM&FBovespa (1)

   R$ per preferred share

   NASDAQ (1) (2)

   US$ per ADSYear

   Low

   High

   Low

   High2006

   14.68

   24.47

   6.30

   12.092007

   19.69

   34.67

   10.76

   18.702008

   9.86

   26.06

   3.88

   15.802009

   13.46

   25.23

   5.74

   14.922010

   16.79

   17.60

   9.10

   14.76Quarter2009:First Quarter

   13.46

   17.54

   5.74

   7.88Second Quarter

   14.91

   20.09

   6.83

   10.27Third Quarter

   18.64

   20.99

   9.66

   11.70Fourth Quarter

   20.55

   25.23

   11.52

   14.922010:First Quarter

   20.92

   25.11

   11.19

   14.76Second Quarter

   16.91

   23.49

   9.10

   13.28Third Quarter

   16.76

   22.95

   9.40

   13.26Fourth Quarter

   21.56

   23.14

   12.77

   13.98MonthDecember 2010

   22.60

   23.05

   13.10

   13.84January 2011

   17.00

   23.00

   11.20

   14.20February 2011

   17.32

   18.79

   10.30

   11.60March 2011

   13.76

   18.10

   8.37

   10.84April 2011

   14.01

   14.86

   8.56

   9.34May 2011

   15.50

   15.90

   9.42

   9.94June 2011 (through June 1st)

   15.83

   16.20

   9.91

   10.07
  ____________________________ (1)   Reflects the fifteen to one reverse split effective on August 1, 2006. (2)    Reflects the ratio change effective on August 1, 2006. One preferred share represents one ADS.  89 NETC Annual Report 2010 – Form 20-F


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Trading Markets NASDAQ Global Market The primary market for our preferred shares held in the form of ADSs is the NASDAQ Global Market. On December 31, 2010, there were 2.5 million ADSs outstanding. The average daily trading volume of the ADSs on the NASDAQ Global Market during 2010 wasUS$2.5 million, or 863,529 ADSs. Compliance with Certain NASDAQ Corporate Governance Rules Under the NASDAQ listing rules, a foreign private issuer may follow its home country corporate governance practices in lieu of certain NASDAQ corporate governance rules subject to certain requirements. The practices we follow in lieu of certain NASDAQ rules are described below. Independent directors.Rule 5605(b)(1) requires that a majority of a listed company’s board of directors be comprised of independent directors. In lieu of complying with Rule 5605(b)(1), we follow Brazilian corporate law, which does not require us to have independent directors on our board of directors. However, as required by Level 2 of BM&FBovespa’s Corporate Governance requirements, 20% of the members of our board of directors are independent. Executive Sessions. Rule 5605(b)(2) requires that a listed company’s independent directors have regularly scheduled meetings at which only independent directors are present. In lieu of complying with Rule 5605(b)(2), we follow Brazilian corporate law, which does not require our independent directors to have regularly scheduled meetings at which only independent directors are present. Compensation of Officers.Rule 5605(d) requires that the compensation of a listed company’s executive officers be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent directors, or (ii) a compensation committee comprised solely of independent directors. In lieu of complying with Rule 5605(d), we  90 NETC Annual Report 2010 – Form 20-F


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follow Brazilian corporate law, which does not require us to have either a compensation committee or independent directors on our board of directors. Compensation of our executive officers is determined by our board of directors.
 Nomination of Directors.Rule 5605(e)(1) requires that a listed company’s director nominees be selected, or recommended to the board of directors for selection, either by (i) a majority of the independent directors, or (ii) a nominations committee comprised solely of independent directors. In lieu of complying with Rule 5605(e)(1), we follow Brazilian corporate law, which does not require us to have either a nominations committee or independent directors on our board of directors. Instead, our directors are appointed as described under “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements—Board of directors (Conselho de Administração).” Nominating Committee Charter. Rule 5605(e)(2) requires that a listed company adopt a formal written charter or board resolution addressing the director nomination process. In lieu of complying with Rule 5605(e)(2), we follow Brazilian corporate law, which does not require us to adopt a formal written charter or board resolution addressing the process for nomination of directors. Audit committee composition.Rule 5605(c) requires, among other things, that a listed company maintain an audit committee comprised of at least three members, each of whom must be independent as defined in the NASDAQ rules. In lieu of complying with Rule 5605(c), we follow Brazilian corporate law and we maintain a permanent Fiscal Board, orConselho Fiscal. OurConselho Fiscalcomplies with the requirements of Rule 10A-3 of the Exchange Act. See “Item 6. Directors, Senior Management and Employees—Directors and Board Practices.” Quorum.Rule 5620(c) requires that a listed company’s by-laws provide for a quorum for any meeting of the holders of common stock of at least 33 1/3% of the outstanding shares of the listed company’s common voting stock. In lieu of complying with Rule 5620(c), we follow Brazilian corporate law, which requires a minimum quorum for a shareholders’ meeting of 25% of the outstanding shares of common voting stock on a first summoning of shareholders. Under Brazilian corporate law, however, there is no minimum quorum requirement in the event that a first summoning of shareholders does not elicit a quorum and a second summoning of shareholders is made. Shareholder Approval. Rule 5635 generally requires that a listed company obtain shareholder approval at or prior to the issuance of securities in connection with (a) the establishment or amendment of a compensation arrangement pursuant to which stock may be acquired by officers, directors, employees, or consultants; (b) certain acquisitions of stock of another company; (c) an issuance of securities that will result in a change of control of the issuer; or (d) certain transactions other than a public offering. In lieu of complying with Rule 5635, we follow Brazilian corporate law, which does not require us to obtain shareholder approval at or prior to the issuance of securities in connection with the above mentioned topics. Code of Ethics. Rule 5610 requires that a listed company adopt a code of conduct applicable to all directors, officers and employees, which is publicly available. In lieu of complying with Rule 5610 with respect to our directors, we follow Brazilian corporate law, which does not require us to adopt a code of ethics, such as that required by the NASDAQ rules, for our directors. However, pursuant to applicable Brazilian corporate and securities laws, our directors and officers are required to publicly disclose certain facts and information, including trading in our securities.   91 NETC Annual Report 2010 – Form 20-F


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Brazilian Stock Exchanges In 2000, Brazilian stock exchanges were reorganized through the execution of a memorandum of understanding. Pursuant to the memorandum, all securities are now traded only on the BM&FBovespa, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange. In 2010, the BM&FBovespa accounted for 100% of the trading volume of equity securities. The BM&FBovespa is a non-profit entity owned by its member brokerage firms. Trading on the BM&FBovespa is limited to member brokerage firms and a limited number of authorized non-members. Trading. Trading is conducted between 11:00 a.m. and 6:00 p.m., or between 10:00 a.m. and 5:00 p.m. during daylight savings time in the United States, on an automated system known as the Computer Assisted Trading System on the BM&FBovespa and on the National Electronic Trading System. The BM&FBovespa also permits trading from 6:45 p.m. to 7:30 p.m. on an online system connected to traditional and Internet brokers called the “After Market.” Trading on the After Market is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers. There are no specialists or officially recognized market makers on the BM&FBovespa. Trading in securities listed on the Brazilian stock exchanges may be effected off the exchanges in certain circumstances, although such trading is very limited. In order to better control volatility, the BM&FBovespa adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the BM&FBovespa Index, or Ibovespa, falls 10% or 15%, respectively, in relation to the index registered in the previous trading session. Settlement of transactions is effected three business days after the trade date without adjustment of the purchase price for inflation. Delivery of and payment for shares are made through the facilities of a clearinghouse, orCâmara Brasileira de Liquidação e Custódia S.A., which maintains accounts for member brokerage firms. The seller is ordinarily required to deliver shares to the exchanges on the second business day following the trade date. Market Size. As of December 31, 2010, the aggregate market capitalization of all the companies listed on the BM&FBovespa was equivalent to approximately US$1.6 trillion. Although any of the outstanding shares of a listed company may trade on a Brazilian stock exchange, in most cases fewer than half of the listed shares are actually available for public trading. The remaining shares are held by small groups of controlling persons, by governmental entities or by one principal shareholder. Although at December 31, 2010 the Brazilian equity market was Latin America’s largest in terms of market capitalization expressed in U.S. dollars, it remains relatively small and less liquid compared to major world markets. In 2010, the average daily trading value on the BM&FBovespa was to approximately US$3.9 billion. Index. Net Serviços has been included as part of the Ibovespa since May 2000. The Ibovespa is the most representative indicator of the performance of the Brazilian stock market. On December 31, 2010, the weighting of our preferred shares in the index was 0.01% as compared to our weighting of 0.8% on December 31, 2009. Our securities also trade on several additional markets, including the Chicago, Pacific and American option exchanges, on which our options on  92 NETC Annual Report 2010 – Form 20-F


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ADSs began trading in February 2000, and Latibex, the trading market for Latin American companies that trade on the Madrid Stock Exchange, on which our shares began trading in July 2000.
 Tax Matters. Trading on Brazilian stock exchanges by a holder not deemed to be domiciled in Brazil for Brazilian tax and regulatory purposes, or a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution No. 2,689, of January 26, 2000, of the National Monetary Council. Resolution No. 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions duly authorized by the Central Bank and the Brazilian securities commission. In addition, Resolution No. 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through a private transaction. See “Item 10. Additional Information—Taxation—Material Brazilian Taxation Considerations—Taxation of Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 2,689. Level 2 of the BM&FBovespa On December 11, 2000, the BM&FBovespa launched three new listing segments designed for the trading of shares issued by publicly held companies: the Special Corporate Governance Level 1, the Special Corporate Governance Level 2 and theNovo Mercadoof BM&FBovespa. These listing segments were designed for the trading of shares issued by companies that voluntarily undertake to abide by corporate governance practices and disclosure requirements in addition to those required under Brazilian corporate law. The inclusion of a company in any one of the segments implies the adherence to a series of corporate rules, known generally as good corporate governance practices. These rules are designed to increase shareholders’ rights and enhance the quality of information provided by Brazilian corporations to shareholders. Our shares have been listed in BM&FBovespa’s Level 2 since June 2002. Pursuant to Level 2 requirements, we are required to adopt certain practices as part of our corporate structure. We have adopted such practices as follows: Preferred Shares with Voting Rights. In accordance with Level 2 rules, we have established, voting rights in relation to our preferred shares with respect to: ·our transformation, takeover, merger or spin-off; ·valuation of assets used in increases in our share capital; ·approval of certain specified agreements between us and our controlling shareholders or their affiliates; ·selection of a specialized firm to determine our fair market value, in relation to a public offering of our shares; and  93 NETC Annual Report 2010 – Form 20-F


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 ·change or repeal of provisions of our by-laws that alter or modify any BM&FBovespa requirements. Tag-Along Rights. Upon the acquisition of a controlling interest in us, pursuant to Level 2 requirements, the purchaser must offer tag-along rights to the remaining shareholders in an amount equivalent to 100% of the price paid for each share in the controlling stake, in the case of holders of common shares, and at least 70% of the price paid for each share in the controlling stake, in the case of holders of preferred shares. Our by-laws require the purchaser to offer 100% of the price paid for each share in the controlling stake to holders of our common and preferred shares. Establishment of a single one year mandate for the entire board of directors. Level 2 establishes unified mandate for all members of Board of Directors. Board of Directors must have at least five members, of which at least 20% shall be independent members. Our by-laws provide that our board of directors shall be composed of no fewer than nine and no more than twelve members elected at an annual general meeting of shareholders, each to serve for a one year term, with the option for reelection. Free float. Level 2 requires that at all times at least 25% of an issuer’s total capital stock be held by persons or entities other than those party to a shareholders’ agreement. Independent Board members. Level 2 requires that at least 20% of our board members be independent. We have been in compliance with this requirement since this requirement was implemented. Public offers of shares through mechanisms intending to favor capital dispersion and broader retail access. In any and all public distributions of stock, Level 2 requires us to exert our best efforts towards shareholding dispersion. Toward this end, we have adopted special procedures to ensure, in any public offer of our shares by us, (i) access to all interested investors and (ii) allocation of at least 10% of the total distribution to individuals or non-institutional investors. Improvements, in addition to quarterly information statements. In addition to the information to be included in quarterly information statements as required by law, Level 2 requires us to, and we do: ·present a consolidated balance sheet, a consolidated statement of results, a consolidated cash flow statement and a consolidated performance report, whenever we are required to submit year-end consolidated financial statements; ·disclose any direct or indirect ownership interest per type and class exceeding 5% of each type and class of our capital stock, to the level of individual shareholders; ·disclose, on a consolidated basis, the quantity and class of those of our securities held, directly or indirectly, by our controlling shareholders, by members of our board of directors, by our executive officers and by the members of ourConselho Fiscal; ·report any trades of securities held by our controlling shareholders, by members of our board of directors, by our executive officers and by the members of ourConselho Fiscalwithin the preceding twelve months;  94 NETC Annual Report 2010 – Form 20-F


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 ·include, in explanatory notes, our cash flow statements; and ·disclose the quantity of our outstanding shares and the percentage expressed in relation to the total amount of shares issued. Furthermore, under Level 2, each fiscal quarter a quarterly information statement must be filed with CVM. The quarterly information statement must include a special report issued by an independent auditor duly registered with CVM, in accordance with CVM regulations. Trading of securities and derivatives by members of our board of directors andConselho Fiscal, executive officers and controlling shareholders. Pursuant to Level 2 requirements, members of our board of directors andConselho Fiscal, executive officers and controlling shareholders are obligated to report to BM&FBovespa the volume and the class of our securities held by them, directly or indirectly, including any related derivatives. Any trades in securities and derivatives by such persons are reported in detail to BM&FBovespa within ten days as of the last day of the month in which such trade occurs. Self-regulatory procedures. We have an internal management committee that adopts internal policies with respect to trading in our securities and related derivatives. This committee has passed the following resolutions: ·from one month before the end of each fiscal year until the publication of the notice to shareholders regarding the availability of our financial statements for such year, our senior managers and controlling shareholders are obligated to abstain from trading in our securities and related derivatives; ·following a decision to raise capital, distribute dividends to shareholders, distribute bonuses in shares or related derivatives or adopt a share split, until the publication of the notice announcing such decision, our senior managers and controlling shareholders are obligated to abstain from trading in our securities and related derivatives; and ·our senior managers and controlling shareholders are obligated to periodically inform BM&FBovespa and us of their plan to trade in our securities and related derivatives, and if such plan changes, they are required to notify BM&FBovespa and us of the change. Shareholder agreement, stock option program and contracts with the same economic group. Upon entering into a shareholders’ agreement with us, Level 2 mandates that within five days of such signature, we file with BM&FBovespa a copy of the agreement. Similarly, a copy of all option plans for our employees and administrators are also to be filed with BM&FBovespa within five days. In addition, whenever a single contract or a series of related contracts within any twelve month period, between ourselves and a subsidiary, senior manager or controlling shareholder, involves an amount equal to or greater than R$200,000 or involves an amount equal to or greater than 1% of our net worth, we are required to notify BM&FBovespa of this fact and make a public disclosure of such contract or series of contracts. Resolution of corporate conflicts through arbitration. Under Level 2, we, our controlling shareholders, senior managers and, to the extent we establish aConselho Fiscal, the members of  95 NETC Annual Report 2010 – Form 20-F


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suchConselho Fiscal,are required to refer to arbitration any and all disputes or controversies relating to the enforcement, validity, efficacy, violation and related effects of: (a) the provisions in the Brazilian corporate law and in our by-laws, (b) the rules issued by the National Monetary Council, the Central Bank and the CVM, (c) all other rules governing capital markets in general, and (d) the directives in the BM&FBovespa listing rules, arbitration rules and the corporate governance Level 2 agreement.
 Regulation of Brazilian Securities Markets The Brazilian securities markets are principally governed by (i) Law No. 6,385, of December 7, 1976, and Law No. 6,404, of December 15, 1976, which together, as amended and supplemented, comprise Brazilian corporate law and (ii) regulations issued by (a) the CVM, which has general regulatory authority over the stock exchanges and securities markets, (b) the National Monetary Council and (c) the Central Bank, which has licensing authority over financial institutions, including brokerage firms and also regulates foreign investment, the BM&FBovespa and foreign exchange transactions. Such regulations, among others, relate in part to disclosure requirements applicable to issuers of publicly traded securities, the protection of minority shareholders and criminal penalties for insider trading and market manipulation. They also provide for the licensing and oversight of brokerage firms and the governance of the Brazilian stock exchanges. Under Brazilian corporate law, a company is eithercompanhia aberta, or publicly held, as we are, orcompanhia fechada, or closely held. All public companies, including us, are registered with the CVM and are subject to certain reporting requirements. A company registered with the CVM may have its securities traded on the Brazilian stock exchanges or in the Brazilian over-the-counter market. Our preferred shares are listed and traded on the BM&FBovespa and may be traded privately, subject to some limitations. Issuers may request that trading of their securities on the BM&FBovespa be suspended in anticipation of a material announcement. Trading may also be suspended at the discretion of the BM&FBovespa or the CVM due to, among other things, a belief that an issuer has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the BM&FBovespa or the CVM. The Brazilian over-the-counter market consists of direct trades between individuals wherein a financial institution registered with the CVM serves as an intermediary. No special application, other than registration with the Brazilian securities commission, is necessary for securities of a public company to be traded in this market. The CVM requires that notice be given to it of all trades carried out in the Brazilian over-the-counter market by the respective intermediaries. Trading on the BM&FBovespa by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation Shareholders who are not residents of Brazil must register their investment with the Central Bank in order for dividends, sales proceeds or other amounts to be eligible for remittance in foreign currency outside of Brazil. The preferred and common shares underlying our ADSs are deposited with a Brazilian custodian, who acts on behalf of and as agent for the depositary of the ADSs, and who is registered with the Central Bank as the fiduciary owner of such shares. Payments of cash dividends and distributions, if any, on common and preferred shares will be made in reais to the custodian on behalf of the depositary. The custodian will then convert such proceeds into U.S. dollars and will deliver such U.S. dollars to the depositary for distribution to the holders of ADSs. In the event that the custodian is unable to  96 NETC Annual Report 2010 – Form 20-F


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immediately convert the dividends in reais into U.S. dollars, holders of the preferred and common ADSs may be adversely affected by devaluations or other exchange rate fluctuations before such dividends can be converted and remitted. Fluctuations in the exchange rate between the real and the U.S. dollar may also affect the U.S. dollar equivalent of the real price of the preferred and common shares on the BM&FBovespa.
 The proceeds from the redemption of ADSs may, within five business days from the date of the relevant redemption, be remitted abroad in compliance with the foreign exchange regulatory provisions. Alternatively, the foreign investor may convert the previous ADSs investments into another type of authorized foreign investment, such as foreign direct investment or portfolio investment. Additionally, according to CMN Resolution No. 3,845, dated March 23, 2010, such conversions are subject to simultaneous foreign exchange transactions and the taxes that may be levied thereon. Trading in Brazilian securities markets is not as highly regulated or supervised as it is in the United States and some other markets. Brazilian securities market laws and regulations prohibit market manipulation and insider trading, and require a company’s insiders, including directors, officers and major shareholders, as defined under Brazilian corporate law, to disclose all of their transactions in a given issuer’s securities. Brazilian corporate law also prohibits an issuer from trading in its own shares, subject to very limited exceptions. The enforcement of these legal provisions and the supervision of trading markets, however, are not as well developed as they are in the United States.  97 NETC Annual Report 2010 – Form 20-F


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ITEM 10.        ADDITIONAL INFORMATION. Memorandum and Articles of Association Organization, Register and Entry Number We are a publicly held corporation registered with CVM and organized under the laws of the Federative Republic of Brazil. We are registered in the commercial registry of the State of São Paulo under the entry number 35.300.177.240 and in the Taxpayers’ General Registry of the Ministry of Finance under registration number 00.108.786/0001-65. Our constituent document is ourEstatuto Social, which we refer to in this Form 20-F as our by-laws. Object and Purpose Our corporate object and purpose, described in Article Three of our by-laws, are those of a holding company and the distribution of our pay-television and other value-added services to subscribers; the provision of telecommunication services; the distribution of signals of any kind, through local cable networks; and the dissemination of information on local channels. Our subsidiaries also have as their corporate purpose the distribution of our pay-television and other value-added services to subscribers; the provision of telecommunication services; the distribution of signals of any kind, through local cable networks; and the dissemination of information on local channels. We also provide our operating subsidiaries with administrative, financial and consulting support. We may, without restriction, acquire or hold quotas or shares in other companies which carry on activities similar to ours and to those of our subsidiaries, or which engage in trade commerce and representation. Voting Rights Relating to Our Common and Preferred Shares Each holder of our common shares is entitled to one vote per common share at our general shareholders’ meetings; each holder of our preferred shares is entitled to one vote per preferred share at our general shareholders’ meetings exclusively with respect to the following matters in accordance with BM&FBovespa’s Corporate Governance Listing Rules for Level 2: ·our transformation, takeover, merger or spin-off; ·valuation of assets used in determining increases in our capital; ·approval of certain specified agreements between us and our controlling shareholders or their affiliates; ·selection of a specialized firm to determine our fair market value, in relation to a public offering of our shares; and ·change or repeal of provisions of our by-laws that alter or modify any BM&FBovespa requirements. According to Article 111 of the Brazilian corporate law, if a company is required but fails to pay dividends for three consecutive years, the preferred shares acquire voting rights. However,  98 NETC Annual Report 2010 – Form 20-F


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since our preferred shares do not have rights to fixed or minimum dividends, Article 111 is not applicable to us.
 According to the Brazilian corporate law, the resolutions of a general shareholders’ meeting shall be passed by a simple majority of those present. Nevertheless, according to Brazilian corporate law, the approval of shareholders representing at least one-half of our outstanding voting shares shall be necessary for a resolution which: ·creates preferred shares or increases an existing class of shares without maintaining its ratio to the other classes of shares; ·alters a preference, a privilege or a condition of redemption or amortization conferred upon one or more classes of preferred shares, or creates a new, more favored class; ·reduces a mandatory dividend; ·merges the corporation with another corporation or consolidates the corporation; ·participates in a group of corporations as defined under Brazilian corporate law; ·changes the corporation’s corporate purpose; ·liquidation of the corporation; ·creates founders’ shares; ·spins-off the corporation; or ·dissolves the corporation. Shareholders participating in a general shareholders’ meeting have the power to decide the following: ·the grant of guaranties and other securities in favor of third parties; ·cancellation of our registration as a public company; ·cancellation of our registration for trading of shares on Level 2 of the BM&FBovespa; and ·selection of a specialized firm to determine our fair market value, in relation to a public offering of our shares. According to Brazilian corporate law, any shareholder, with or without a right to vote, may attend a general meeting and take part in the discussion of matters submitted for consideration. Generally, apart from certain exceptions provided by law, quorum for a general meeting shall be the presence of shareholders representing at least one-quarter of the voting capital; if quorum is not met, the meeting is reconvened and quorum shall be the presence of any number of shareholders. 99  NETC Annual Report 2010 – Form 20-F


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Each of our ADSs represents one preferred share. Since voting rights are restricted on our preferred shares, the holders of ADSs are only entitled to vote at our shareholders’ meetings on the matters discussed above. Conversion Rights Under Brazilian corporate law, the conversion of a class of shares into another class of shares must be expressly authorized in the by-laws of the company. Our by-laws do not contain any such provisions, and therefore unless a shareholders’ meeting expressly approves the amendment of the by-laws, our common shares cannot be converted into preferred shares and our preferred shares cannot be converted into common shares. Preemptive Rights Under Brazilian corporate law, upon the issuance of new common or preferred shares, as the case may be, or securities convertible into shares, all existing shareholders of a particular class have the right to subscribe for new shares of the same class, in proportion to the shares they already own. If, in effecting such preemptive rights, an insufficient amount of new shares exist to assure that all existing shareholders of a certain class are able to exercise their full preemptive rights, the rights may be extended on a pro rata basis to another class of shares so as to enable all existing shareholders who wish to exercise their preemptive rights to do so. Preemptive rights are freely transferable. A minimum period of 30 days following the publication of a notice of a capital increase must be allowed for the exercise of preemptive rights. Brazilian corporate law and our by-laws authorize us to issue shares, or securities convertible into shares, without preemptive rights so long as such shares are sold on a stock exchange, through public subscription or by an exchange of shares in a public tender offer. In the event of a new share issuance, holders of ADSs have preemptive rights to the extent described above. However, holders of ADSs may not be able to exercise their preemptive rights relating to the preferred shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. In addition, our shareholders’ agreements establish certain rules in relation to preemptive rights among our major shareholders. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements.” Liquidation Rights In the event of our liquidation, our common and preferred shares have pro rata rights to share in our assets. Preferred shares, however, have priority over common shares in the distribution of capital. Redemption Provision Our by-laws do not contain a redemption provision. However, our shareholders, acting at a general shareholders’ meeting, may elect to effect a redemption of our outstanding shares.   100 NETC Annual Report 2010 – Form 20-F


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Rights of Withdrawal Brazilian corporate law provides that, under certain circumstances, a shareholder has the right to withdraw his or her equity interest from a company in exchange for payment for such shares by the company. In our case, this right of withdrawal may be exercised by dissenting shareholders in the event that at least half of all holders of our outstanding voting shares authorize us to: ·create new preferred shares or increase the amount of preferred shares already existing without maintaining such existing preferred shares’ ratio to the other classes of existing shares, unless otherwise provided by our by-laws; ·reduce the mandatory distribution of dividends; ·change our corporate purpose; ·merge with another company or consolidate with another company subject to the conditions set forth under Brazilian corporate law; ·transfer all of our shares to another company in order to make us a wholly-owned subsidiary of such company, known asincorporação de ações; ·participate in a centralized group of companies as defined under Brazilian corporate law and subject to the conditions set forth therein; ·alter a preference, privilege or condition of redemption or amortization conferred upon one or more classes of preferred shares, or create a new, more favored class; or ·spin-off. The right of withdrawal lapses 30 days after the publication of the minutes of the shareholders’ meeting that approved the corporate actions described above. We would be entitled to reconsider any action giving rise to withdrawal rights within ten days following the expiration of such rights if the withdrawal of shares of dissenting shareholders would jeopardize our financial stability. With respect to the first and seventh bullet points above, only shareholders affected by such actions have the right to withdraw from the corporation. In addition, shareholders may only exercise the rights of withdrawal with respect to the fourth and seventh bullet points above if such shares are not part of the Ibovespa or any other stock exchange index and if less than 50% of the shares issued by the company are outstanding. Our preferred shares are included in the Ibovespa. This right of withdrawal may also be exercised in the event that the entity resulting from our merger, consolidation or spin-off fails to become a listed company within 120 days of the shareholders’ meeting at which such decision to merge, consolidate or spin-off, as the case may be, was made. Changes in Rights of Shareholders Under Brazilian corporate law, the rights of our shareholders may only be changed by a shareholder resolution amending our by-laws. A resolution to amend the by-laws requires the approval of an absolute majority of votes cast at a shareholders’ meeting. A quorum of not less  101 NETC Annual Report 2010 – Form 20-F


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than two-thirds of the share capital entitled to vote must be present. If the quorum requirement is not met at the initial meeting, the resolution may be approved at a later date by the majority of any number of holders of voting shares present at a second call of the shareholders’ meeting.

Shareholders’ Meetings Shareholders’ meetings are typically held at our principal office. Shareholders’ meetings are called by publication of a notice in the Diário Oficial, the Brazilian official gazette, and in the Brazilian newspaper Valor Econômico. Our annual shareholders’ meeting must be held during the first four months after the end of the fiscal year and must be convened on not less than fifteen days’ notice. At the annual shareholders’ meeting, the annual report, including a report on our activities during the previous year and our audited financial statements, is presented to the shareholders for examination, discussion and approval. Brazilian corporate law require that if the board of directors fails to call a shareholders’ meeting within eight days after the receipt of a proper request for such a meeting, an extraordinary meeting may be called upon the request of theConselho Fiscal(if any) or shareholders holding at least 5% of our share capital. If the board of directors fails to call a shareholders’ meeting within 60 days after the receipt of a proper request for such a meeting, any shareholder may call an extraordinary meeting. Pursuant to our shareholders’ agreements our major shareholders are required to vote in accordance with voting decisions made in their previous meetings. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements.” In accordance with Article 126 of the Brazilian corporate law, only shareholders of Net Serviços and attorneys-in-fact of such shareholders may attend a shareholders’ meeting. Attorneys-in-fact must (1) have a power-of-attorney issued at no more than year before the date of the shareholders’ meeting and (2) be (i) a shareholder of Net Serviços; or (ii) a lawyer or a business administrator of a Net Serviços shareholder. The total compensation for our board of directors is determined at our annual shareholders’ meeting and the board of directors distributes such amount among its members as described in our by-laws. Transfer of Shares; Limitations on Shareholdings There are no restrictions on the transferability of our common shares, except as provided under applicable law, in our by-laws or in our shareholders’ agreements. CVM has issued rules providing that whenever a controlling shareholder makes a purchase of any class of shares (or securities convertible into shares) that results in an increase (or a potential increase) by at least 5% of a company’s share capital, the controlling shareholder must immediately provide notice of such purchase to CVM, the stock exchange and the over-the-counter market in which the company’s securities trade. In addition, current CVM regulations require that the controlling shareholder must effect a public offering whenever it purchases shares representing more than one-third of the total capital stock of a company, if such acquisition of shares was not already effected through a public offering. Under the Brazilian telecommunications regulatory framework, only non-government legal entities headquartered in Brazil and controlled as to 51% of their voting capital by Brazilian-born citizens or persons who have held Brazilian citizenship for more than ten years are eligible to receive a license from Anatel to operate cable television systems in Brazil. Therefore, presently, it is not legally possible for a person or a legal entity other than those mentioned to acquire control of  102 NETC Annual Report 2010 – Form 20-F


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Net Serviços. See also “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders” for a discussion of this law in relation to Telmex Internacional’s investment in us.
 Change of Control Provisions According to the Corporate Governance Listing Rules for Level 2 of the BM&FBovespa, in the event of an acquisition of a controlling interest in us, the purchaser must offer tag-along rights to all of our remaining shareholders in an amount equal to, in the case of holders of common shares, 100% of the price paid for each share of the controlling stake and, in the case of holders of preferred shares, at least 70% of the price paid for each share of the controlling stake. Our by-laws, however, as allowed by Level 2, require the purchaser to offer to holders of both common and preferred shares 100% of the price paid for each share in the controlling stake. CVM also requires that whenever a publicly held company experiences a change of control, the new controlling shareholder must immediately disclose the transaction to CVM, the stock exchange and the over-the-counter market in which the company’s securities trade. Capitalization As of December 31, 2010, our corporate capital amounted to R$5.6 billion, of which R$12.9 million has not been paid in. As of December 31, 2010, our corporate capital consisted of 114,459,685 common shares and 228,503,916 preferred shares. Pursuant to our by-laws, the board of directors may increase our corporate capital up to a maximum amount of R$6.5 billion. This capital increase may be effected without amending our by-laws or obtaining prior shareholder approval and without maintaining the existing proportion among our classes of shares, subject to the applicable limitations under Brazilian law. Changes to Brazilian Corporate Law and Rules Enacted by CVM On October 31, 2001, Law No. 10,303 was passed by the Brazilian legislature amending Brazilian corporate law. Throughout 2001 and 2002, CVM also enacted new rules affecting Brazilian companies. As a result, companies are required to observe, and we adhere to, the following requirements: ·disputes among shareholders are subject to arbitration if so provided by the by-laws of the company. Our by-laws provide that disputes arising or related to (i) our by-laws, (ii) rules enacted by CVM, BM&FBovespa, the Brazilian Central Bank or the National Monetary Council, (iii) rules applicable to the Brazilian capital markets or (iv) Brazilian corporate law are subject to arbitration which shall occur in accordance with the Market Arbitration Chamber created by BM&FBovespa; ·upon a delisting or a substantial reduction in the liquidity of shares resulting from purchase(s) by controlling shareholder(s), a company must engage in a tender offer for all outstanding shares, at a purchase price equal to the fair market value for such shares. If less than 5% of all shares issued and outstanding have not been purchased by such controlling shareholder(s) after the expiration of such tender offer, holders of such shares may decide at a general meeting to redeem those shares for the offering price; ·non‐controlling shareholders representing at least 15% of voting shares will have the right to elect by separate vote one member of the board of directors;  103 NETC Annual Report 2010 – Form 20-F


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·non‐voting, non‐controlling shareholders representing at least 10% of the total capital shares will have the right to elect by separate vote one member of the board of directors; ·in the event of a change in control, the purchaser of the controlling stake must offer tag-along rights to all remaining holders of common shares in an amount equal to at least 80% of the price paid for each share of the controlling stake. Our by-laws, as allowed under Brazilian corporate law, require the purchaser to offer to holders of both common and preferred shares 100% of the price paid for each share in the controlling stake; ·shareholders are entitled to effect a spin-off only if the spin-off reflects a change in the company’s corporate purpose, a reduction in mandatory dividends or the participation by the company in a centralized group of companies; ·controlling shareholders, the shareholders that elect members to the board of directors and audit committee, if any, the members of the board of directors and audit committee, if any, and executive officers are required to disclose any purchase or sale of a company’s shares to CVM and BM&FBovespa; ·the chairman of any shareholders’ meeting or board of directors or executive officers’ meeting is entitled to enforce the voting provisions of any shareholders’ agreement which has been duly filed with the company; and ·the first and second notices for shareholders’ meetings must be made fifteen and eight days, respectively, before such meeting, except that the CVM may also require the first notice 30 days before a shareholders’ meeting. On July 13, 2007, CVM issued CVM Rule No. 457 to require listed companies to publish their consolidated financial statements according to International Financial Reporting Standards, or IFRS, starting with the year ending December 31, 2010. On December 28, 2007, Law No. 11,638 was enacted and amended numerous provisions of the Brazilian corporate law relating to accounting principles and authority to issue accounting standards. Law No. 11,638 sought to enable greater convergence between Brazilian corporate law and IFRS. To promote convergence, Law No. 11,638 modified certain accounting principles of the Brazilian corporate law and mandated the CVM to issue accounting rules conforming to the IFRS. Additionally, the statute acknowledged a role in the setting of accounting standards for theComitê de Pronunciamentos Contábeis(the Committee for Accounting Pronouncements, or CPC), which is a committee of officials from the BM&FBovespa, industry representatives and academic bodies that has issued accounting guidance and pursued the improvement of accounting standards in Brazil. Law No. 11,638 permits the CVM and the Central Bank to rely on the accounting standards issued by the CPC in establishing accounting principles for regulated entities. On December 3, 2008, Medida Provisória No. 449 was issued by the President and, among other things, amended numerous provisions of the Brazilian corporate law, specifically accounting provisions. On May 27, 2009, Medida Provisória No. 449 was approved in the Congress and became Law No. 11.941. Law No. 11.941 states that companies are considered to be affiliated when the investing company has significant influence over the company it has invested in, meaning that it holds or exercises the power to participate in the decisions of financial or operating policies  104 NETC Annual Report 2010 – Form 20-F


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of such company, without controlling it. Significant influence is presumed when the investor holds 20% or more of the voting shares of the investee, without controlling it.
 On December 11, 2008, CVM issued CVM Deliberation No. 560, which deals with disclosures regarding accounting standards applied to related party transactions and it is applicable to financial statements as of and for the year ended December 31, 2008. On December 7, 2009, CVM issued Instruction No. 480, establishing new rules for registration and reporting requirements to be met by issuers of securities. The following important rules of Instruction No. 480 include: (i) creation of two classes of issuers: (a) those authorized to negotiate any securities in regulated markets, and (b) those who cannot trade shares, depositary receipts of shares or any other securities convertible into shares of the issuer or give the holder the right to acquire such shares or certificates of shares; (ii) establishment of a new disclosure system, with the creation of the Reference Form to replace the Annual Information Form and adopting high standards of disclosure; (iii) consolidation of the rules and procedures of registration, suspension and cancellation of registration of securities; (iv) extension of the liability of directors; (v) creation of issuers named as "Emissor de Grande Exposição ao Mercado", which accelerates the approval process for a security offering; and (vi) creation of new criteria for foreign issuers to facilitate the issuance of Brazilian Depository Receipts. On December 17, 2009, CVM issued Instruction No. 481, which deals with information requests and public proxy to exercise voting rights in shareholder meetings. Instruction No. 481 establishes important changes to information disclosure requirements prior to the holding of general meetings of shareholders to vote on: (i) matters of special interest to related parties; (ii) elections of senior officers and officers; (iii) retirement plan status; (iv) setting remuneration for officers, including the highest, the lowest and the average individual income and share compensation; (v) capital increase or reduction; (vi) issuance of debentures and warrants; (vii) creation of preferred shares and changes in their characteristics; (viii) reduced mandatory dividend; (ix) acquisition of control of another company; and (x) choice of independent firm to evaluate the fair market value when there is a right of withdrawal. Instruction No. 481 also aims to incentivize participation of minority shareholders: (i) by permitting the use of public attorneys, whose costs should be partially or fully reimbursed by company; (ii) voluntary adoption of electronic proxy, thereby facilitating the participation of absent shareholders; (iii) rules to allow shareholders representing at least 0.5% of the total capital to nominate the candidates for election of the board of directors; and (iv) rules to abolish the obligation of the prior deposit of proxies at the company headquarters. Instruction No. 481 was enacted on January 1, 2010. Material Contracts Shareholders Agreement Our major shareholders are party to two shareholders’ agreements with respect to their ownership of our shares. See “Item 7. Major Shareholders and Related Party Transactions—Shareholders’ Agreements” for additional details about the shareholders’ agreements. Net Brasil Programming Agreement On June 27, 2004, we entered into an amended and restated programming agreement with Net Brasil whereby we obtain all of our programming from Brazilian sources through Net Brasil whereas we obtain directly all international content from non-Brazilian sources. See “Item 7. Major  105 NETC Annual Report 2010 – Form 20-F


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Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Net Brasil Programming Agreement.”
 Embratel Indefeasible Right of Use Agreements See Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Fixed Line Telephony Offer Agreement and IRU Agreements.” Fixed Line Telephony Offer Agreement See “Item 7. Major Shareholders and Related Party Transactions— Related Party Transactions—Material Transactions with Affiliates—Fixed Line Telephony Offer Agreement and IRU agreements.” OpticalFiber Lease Agreement See Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions—Material Transactions with Affiliates—Optical Fiber Lease Agreement.” Exchange Controls Until March 2005, there were two legal foreign exchange markets in Brazil, the commercial rate exchange market, or the Commercial Market, and the floating rate exchange market, or the “Floating Market. The Commercial Market was reserved primarily for foreign trade transactions and transactions that generally required prior approval from Brazilian monetary authorities, such as the purchase and sale of registered investments by foreign persons and related remittances of funds abroad. The Floating Market rate generally applied to specific transactions for which Central Bank approval was not required. Both the Commercial Market rate and the Floating Market rate were reported by the Central Bank on a daily basis. The changes to the foreign exchange regulation described below were intended to make foreign exchange transactions simpler and more efficient. On March 4, 2005, the Brazilian National Monetary Council issued Resolution 3,265, introducing several changes in the Brazilian foreign exchange regime, including: (i) the unification of the foreign exchange markets into a single foreign exchange market, called the foreign exchange market, for all transactions effective as of March 14, 2005; (ii) the easing of several rules for the acquisition of foreign currency by Brazilian residents; and (iii) the extension of the term for converting foreign currency derived from Brazilian exports. It is expected that the Central Bank will provide further easing of regulations in relation to foreign exchange transactions as well as on payments and transfers of Brazilian currency between Brazilian residents and non-residents (such transfers being commonly known as the international transfer of reais), including those made through the so-called non-resident accounts (also known as CC5 accounts). Additionally, on March 9, 2005, the Central Bank issued Circular 3,280, containing the regulations for the foreign exchange market and for international investments, which governs the Brazilian foreign exchange market, Brazilian investments abroad and foreign investment in Brazil. On July 1, 2008, Resolution No. 3,568 revoked Resolution No. 3,265, but kept its main innovation concerning the consolidation of the foreign exchange markets. Therefore, transactions  106 NETC Annual Report 2010 – Form 20-F


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involving foreign currency in the Brazilian market, whether carried out by investors resident or domiciled in Brazil or investors resident or domiciled abroad, must be conducted on this exchange market, through institutions authorized by the Central Bank, subject to the rules of the Central Bank.
 Foreign currencies may be purchased only through a Brazilian bank authorized to operate in the foreign exchange market. Foreign exchange rates are freely negotiated, but may be strongly influenced by Central Bank intervention. From its introduction on July 1, 1994 through January 1995, the real appreciated against the U.S. dollar. In 1995, the Central Bank announced that it would intervene in the market and buy or sell U.S. dollars, establishing a band within which the real/U.S. dollar exchange rate could fluctuate. This policy resulted in a gradual devaluation of the real against the U.S. dollar. On January 13, 1999, due to monetary pressure, the band was set at R$1.20 and R$1.32 per US$1.00, respectively. Two days later, on January 15, 1999, due to market pressure, the Central Bank abolished the band system and allowed the real-U.S. dollar exchange rate to float freely. Since January 15, 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely and, consequently, since that time, the exchange rate has fluctuated considerably, with the Central Bank intervening only occasionally to control unstable movements. From January 1, 2006 through December 31, 2006, the real appreciated by 8.7%. From January 1, 2007 through December 31, 2007, the real appreciated by 17.2%. From January 1, 2008 through December 31, 2008, the real depreciated by 31.9%. From January 1, 2009 through December 31, 2009, the real appreciated by 25.5%. From January 1, 2010 through December 31, 2010, the real appreciated by 4.3%. It is not possible to predict whether the exchange markets will continue their volatility, whether the Central Bank will continue to let the real float freely, nor whether the real will remain at its present level as compared to the U.S. dollar. Accordingly, it is not possible to predict what impact the Brazilian government’s exchange rate policies may have on us. The Brazilian government could impose a currency band system in the future and/or the real could devalue substantially. Dividend Policy General We have never paid cash dividends on our preferred shares or ADSs. We are a holding company and our ability to obtain funds for the payment of cash dividends depends entirely on our ability to obtain funds from our subsidiaries and investees. In addition, several of our debt agreements limit our ability to pay dividends. Our by-laws, in accordance with Brazilian corporate law, require that, for any year in which we have “adjusted net profits” (as defined in Brazilian corporate law), we will be required to pay, subject to certain exceptions, a yearly minimum dividend equal to 25% of adjusted net profits, referred to as the “mandatory distribution.” Brazilian corporate law, however, permits publicly held companies, such as us, to suspend the mandatory distribution of dividends if the board of directors and theConselho Fiscalreport to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors andConselho Fiscalso report, the board of directors must file a justification for such suspension with CVM within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension  107 NETC Annual Report 2010 – Form 20-F


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shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments.
 We have never reported adjusted net profits and consequently have never paid the mandatory distribution. We do not anticipate reporting adjusted net profits in the near-term. We intend to retain any profits in excess of any mandatory distribution in a supplementary reserve for use in the operation and expansion of our business, and therefore we do not anticipate paying any dividends in excess of any mandatory distribution for the foreseeable future. To the extent that we declare and pay dividends on the preferred shares, holders of ADSs on the applicable record date will be entitled to any dividend declared as of such record date in respect of the preferred shares underlying the ADSs, subject to the terms of the amended and restated deposit agreement. We would pay any cash dividend in reais, so that the exchange rate in effect at the time of payment would determine the dollar value of the dividend received by the depositary, and hence the amount in dollars paid by the depositary to ADS holders upon the depositary’s conversion of the dividend amounts into U.S. dollars. Dividends on Our Common Shares and Our Preferred Shares In accordance with Brazilian corporate law, our common and preferred shares each carry the right to receive mandatory dividends. The preferred shares carry the right to receive in cash a dividend amount of 10% or more over the dividend amount available for distribution on the common shares. In addition, in the event of our liquidation, preferred shares have priority over common shares in the distribution of capital. In the event that we pay dividends to our shareholders in the future, the owners of our shares on the record date, as identified in our shareholder registry, will be entitled to receive the payment. Amounts Available for Distribution At each annual general shareholders’ meeting, shareholders must determine how to allocate net profits from the preceding fiscal year. The board of directors must then approve the decision of the shareholders. For purposes of Brazilian corporate law, net profits are defined as net income after payment of income taxes and social contribution taxes for a given fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and managements’ participation in the profits. In accordance with Brazilian corporate law and our by-laws, the amount available for dividend distribution is equal to our net profits less any amounts allocated from such net profits to: ·the legal reserve; ·a contingency reserve for anticipated losses; and ·an unrealized revenue reserve. We are required to maintain a legal reserve, to which we must allocate each fiscal year 5% of net profits for such year until the amount reserved equals 20% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in any fiscal year in which the legal reserve, when added to our other established capital reserves, would exceed 30% of our capital. Net  108 NETC Annual Report 2010 – Form 20-F


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losses, if any, may be charged against the legal reserve. AtDecember 31, 2010, our legal reserve had a zero balance.
 Brazilian corporate law also provides for two additional discretionary allocations of net profits subject to approval by the shareholders at the annual general meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses deemed probable in future years. Any amount so allocated in a prior year must be (i) reversed, if the loss does not occur, in the fiscal year in which the loss was anticipated or (ii) written-off, if the anticipated loss occurs. Second, if the amount of unrealized revenue exceeds the sum of: ·the legal reserve; ·retained earnings; and ·the contingency reserve for anticipated losses, such excess may be allocated to an unrealized revenue reserve. Under Brazilian corporate law, unrealized revenue is defined as the sum of: ·the share of equity earnings of affiliated companies; and ·profits from installment sales to be received after the end of the next succeeding fiscal year. With respect to unrealized revenue reserve, the amount of mandatory dividend exceeding the amount of the realized net profits in a given fiscal year may be allocated in an unrealized revenue reserve. Under Brazilian corporate law, realized revenues shall be the amount exceeding the sum of: ·the net positive result of equity adjustments; and ·profits or revenues from operations with financial results after the end of the next succeeding fiscal year. Under Brazilian corporate law, the by-laws of any company may authorize the creation of a discretionary reserve. By-laws which authorize the allocation of a percentage of a company’s net income to a discretionary reserve must also indicate the purpose of the reserve and the criteria for allocation of, and the maximum amount of, the reserve. Our by-laws require that, after the creation of a reserve as provided under Brazilian corporate law and the distribution of the applicable dividends, the remaining balance shall, upon a proposal submitted by the board of directors and approved by the shareholders in a general meeting, be allocated to a supplementary reserve so as to support the existence of working capital and for future capital appropriations. The amount of such supplementary reserve shall not exceed the capital of Net Serviços. The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses recorded in prior years but not realized, or further increased or reduced, as the case may be, as a result of allocations of revenue to or from the unrealized reserve. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with Brazilian corporate law.  109 NETC Annual Report 2010 – Form 20-F


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AtDecember 31, 2010, we had no investment reserve. Mandatory Distribution Brazilian corporate law generally requires that the by-laws of a Brazilian company specify for each fiscal year a minimum percentage of net income available for distribution, in the form of dividends, by such company to shareholders. Under our by-laws, such mandatory distribution has been fixed as an amount equal to 25% of net income, to the extent that such amounts are available for distribution. See “—General,” above. Under Brazilian corporate law, the mandatory distribution is based on a percentage of adjusted net income, not lower than 25%, rather than a fixed monetary amount per share.Brazilian corporate law, however, permits publicly held companies, such as our company, to suspend the mandatory distribution of dividends if the board of directors and theConselho Fiscalreport to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. If the board of directors andConselho Fiscalso report, the board of directors must file a justification for such suspension with CVM within five days of the shareholders’ meeting. Profits not distributed by virtue of this suspension shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of the company permits such payments. Payment of Dividends Brazilian corporate law and our by-laws require us to hold an annual shareholders’ meeting by the fourth month after the end of each fiscal year at which, among other things, shareholders must decide whether or not to we pay an annual dividend. The decision as to whether to pay an annual dividend is based on the financial statements for the relevant fiscal year. Under Brazilian corporate law, dividends are generally required to be paid within 60 days following the date the dividend is declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which the dividend is declared. A shareholder has a three-year period from the dividend payment date to claim unpaid dividends in respect of his or her shares. Our by-laws permit us, upon the approval of our board of directors, to pay interim dividends out of pre‐existing and accumulated profits for the preceding fiscal year or preceding two fiscal quarters. In general, shareholders who are not residents of Brazil must register their Brazilian investments with the Central Bank in order to receive dividends, sales proceeds or other amounts with respect to their foreign investments outside of Brazil. The preferred shares underlying the ADSs are held by JPMorgan Chase, also known as the custodian, as agent for the depositary and JP Morgan Chase is the registered owner of our preferred shares. The depositary electronically registers the preferred shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to those shares eligible to be remitted outside Brazil. Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. Under current Brazilian law, dividends paid to shareholders who are not Brazilian residents,  110 NETC Annual Report 2010 – Form 20-F


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including holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends based on profits generated prior to December 31, 1995.
 According to Brazilian corporate law, preferred shares without voting rights acquire such a right if, during a period provided for in a company’s by-laws (which must not exceed three consecutive fiscal years), such company fails to pay the fixed or minimum dividend to which the preferred shares are entitled. Such voting right shall continue until payment has been made if the dividend is not cumulative, or until all cumulative dividends in arrears have been paid. Pursuant to our by-laws, our preferred shares are not entitled to fixed or minimum dividends; thus, they will not acquire voting rights if we fail to pay dividends. We have not paid dividends to our shareholders in the past, nor do we expect to pay dividends in the foreseeable future. Record of Dividend Payments and Interest Attributed to Shareholders’ Equity Law No. 9,249, dated December 26, 1995, as amended, provides for the distribution of interest attributed to shareholders’ equity as an alternative form of dividend payment to shareholders. Such interest is limited to the daily pro ratavariation of the TJLP, a long-term interest rate that includes an inflation factor reset quarterly. Companies may treat such payments as a deductible expense for corporate income tax and social contribution purposes but the deduction may not exceed the greater of: ·50% of net income for the period in respect of which the payment is made (net income does not include the distribution or income tax deductions); or ·50% of retained earnings. Under Brazilian corporate law, dividend distributions are generally not deductible. However, a Brazilian company may elect to treat dividend distributions as “Interest Distributions,” in which case such distributions will be deductible, subject to certain limitations. Any payment of interest on shareholders’ equity to holders of ADSs or preferred shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15% or 25% if the beneficiary is a resident in a tax haven. We have not made any such payments of interest to-date. Taxation Material Brazilian Taxation Considerations The following discussion summarizes certain material Brazilian tax consequences of the acquisition, ownership and disposition of ADSs or preferred shares by a holder that is not domiciled in Brazil for purposes of Brazilian taxation (“Non-Brazilian Holder”). The discussion does not address any tax consequences under the laws of any particular state or municipality of Brazil. The discussion is based upon Brazilian law as currently in effect, subject to differing interpretations, which may result in different tax consequences than those described below; any change in such law may change the consequences described below. This discussion does not specifically address all of the Brazilian tax considerations applicable to any particular Non-Brazilian Holder, and each Non-Brazilian Holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in ADSs or preferred shares. There is no income tax treaty between Brazil and the United States.  111 NETC Annual Report 2010 – Form 20-F


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Income Tax on Dividends. In general, dividends paid by us to Non-Brazilian Holders or the depositary in respect of the preferred shares underlying the ADSs out of profits generated on or after January 1, 1996 will not be subject to withholding income tax in Brazil. However, dividends paid from profits generated on or before December 31, 1995 may be subject to Brazilian withholding income tax at varying rates. Income Tax on Gains. Brazilian law distinguishes between, on the one hand, direct foreign investments in Brazilian companies, or 4,131 Modality Investments, and, on the other hand, foreign investments in securities issued by Brazilian companies through the Brazilian capital markets, or 2,689 Modality Investments. Gains realized by a Non-Brazilian Holder on the disposition of assets located in Brazil, including preferred shares, are subject to Brazilian income tax as of February 2004. Gains realized on a sale or other form of disposition of preferred shares are subject to income tax at a rate of 15%, except in the following situations: the gains are exempt from income tax when (A) the gains arise from a sale or disposition of common shares carried out on a Brazilian stock exchange (which includes transactions carried out on an organized over-the-counter market), and (B) the gains are realized by a Non-Brazilian Holder that has registered its investment as a 2,689 Modality Investment and is not resident or domiciled in a country or location (1) that does not impose income tax, or (2) where the maximum income tax rate is lower than 20% (“Nil or Low Tax Jurisdiction”). See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”; and  the gains are subject to income tax at a rate of 25% when the gains are realized by a Non-Brazilian Holder that (A) has registered its investment as a 4,131 Modality Investment and (B) is resident or domiciled in a country or location (1) that does not impose income tax, or (2) where the maximum income tax rate is lower than 20%, or (3) the laws of which do not allow access to information related to shareholder composition, ownership of investments, or identification of beneficial owners of earnings attributed to non-residents (“Tax Favorable Jurisdiction”). See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”. In the cases above, if the gains are related to transactions conducted on a Brazilian stock exchange (which includes transactions carried out on an organized over-the-counter market) or on a Brazilian non-organized over-the-counter market with intermediation of a financial institution, a withholding income tax of 0.005% will apply and can be offset against the eventual income tax due on the gain. This withholding income tax does not apply in the situation mentioned above where the gains are exempt. We understand that ADSs are not assets located in Brazil for the purposes of the abovementioned tax. However, we are unable to predict whether Brazilian courts would concur with our understanding that ADSs are not assets located in Brazil. To date we are not aware of any judicial or administrative precedent on this specific matter. The deposit of preferred shares in exchange for ADSs may be subject to income tax at a rate of 15% or 25%, as the case may be. There may be arguments to claim that this income tax is not due if the preferred shares are registered as 2,689 Modality Investments and the Non-Brazilian Holder is not resident or domiciled in a Nil or Low Tax Jurisdiction.  112 NETC Annual Report 2010 – Form 20-F


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Gains on the disposition of preferred shares obtained upon cancellation of ADSs are not taxed in Brazil if such disposition is made on a Brazilian stock exchange by a Non-Brazilian Holder that has registered its investments as a 2,689 Modality Investment and that is not resident or domiciled in a Nil or Low Tax Jurisdiction, provided that the appropriate rules are complied with in connection with the registration of the investment with the Central Bank. Any gains realized by a Non-Brazilian Holder upon the redemption of preferred shares will be treated as gains from the disposition of such preferred shares not occurring on a stock exchange and will accordingly be subject to income tax at a rate of 15% or 25%, as the case may be. There can be no assurance that the current preferential treatment for Non-Brazilian Holders of ADSs and preferred shares registered as 2,689 Modality Investments will be maintained. Any exercise of preemptive rights relating to our preferred shares or ADSs will not be subject to Brazilian income tax. Gains on the sale or other form of disposition of preemptive rights relating to our preferred shares will be subject to Brazilian income tax according to the same rules applicable to the sale or other form of disposition of preferred shares. Income Tax on Interest on Capital Distributions. Dividend distributions are generally not deductible by us under Brazilian law. However, Brazilian corporations may make payments to shareholders characterized as interest on capital, or interest on capital distributions, as an alternative form of making dividend distributions, in which case such a distribution will be deductible for Brazilian corporate income tax purposes, subject to certain limitations. Our charter does not presently contemplate the payment of interest on capital distributions to shareholders. If we were to make such an interest on capital distribution, Non-Brazilian Holders would incur a 15% withholding income tax with respect to such a distribution. Such withholding would be increased to a rate of 25% for any Non-Brazilian Holders that are domiciled or resident in a Tax Favorable Jurisdiction. See “–Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions”. Discussion on Nil or Low Tax Jurisdictions and on Tax Favorable Jurisdictions.As of January 1, 2009, Law No. 11,727 introduced the concept of a “Privileged Tax Regime”, and defined it as a tax regime that (1) does not tax income or taxes income at a maximum rate lower than 20%; or (2) grants tax benefits to non-resident entities or individuals (a) without the requirement to carry out a substantial economic activity in the country or location or (b) conditioned on the non-exercise of a substantial economic activity in the country or location; or (3) does not tax income earned outside of the respective country or location or taxes such income at a maximum rate lower than 20%; or (4) does not allow access to information related to shareholder composition, ownership of assets and rights, or economic transactions that are carried out. Notwithstanding the fact that such Privileged Tax Regime concept was enacted in connection with transfer price rules, there is still no official guidance as to the application of the provisions of Law No. 11,727. As a result, there is no assurance that Brazilian tax authorities will not attempt to apply the concept of Privileged Tax Regimes to other types of transactions, where the concepts of Tax Favorable Jurisdictions or Nil or Low Tax Jurisdictions should be adopted. In addition, prior to Law No. 11,727, Brazilian tax authorities enacted a list of countries and locations considered to be “tax haven jurisdictions” for Brazilian tax purposes, without differentiating among different concepts. A new list considering the provisions of Law No. 11,727 has still not been enacted. Accordingly, there is still no official guidance as to which countries and  113 NETC Annual Report 2010 – Form 20-F


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locations should be defined as Tax Favorable Jurisdictions, Nil or Low Tax Jurisdictions, and/or Privileged Tax Regimes, as the case may be.
 Tax of Foreign Exchange Transactions, or IOF/Câmbio. The liquidation of foreign exchange agreements related to the conversion of Brazilian currency into non-Brazilian currency, and vice-versa, is subject to the IOF/Câmbio. The rate currently applicable to most types of foreign exchange agreements is 0.38%. Foreign exchange agreements entered into on or after October 20, 2009 by foreign investors in connection with inflows of proceeds to Brazil for investments in the Brazilian financial and capital markets are subject to IOF/Câmbio at a rate of 6%. Foreign exchange transactions related to outflows of proceeds from Brazil in connection with investments made by foreign investors in the Brazilian financial and capital markets are subject to the IOF/Câmbio at a zero percent rate. This zero percent rate applies to payments of dividends and interest on capital distributions received by foreign investors with respect to investments in the Brazilian financial and capital markets. The Brazilian government may increase the rate of the IOF/Câmbio to a maximum of 25% of the amount of the foreign exchange agreement at any time, but such an increase would not apply retroactively.   6%Tax on Bonds and Securities Transactions, or IOF/Títulos. IOF/Títulos may be imposed on transactions related to bonds and securities, such as the acquisition, sale or other disposition of preferred shares, even if such transactions are performed on the BM&FBovespa. The rate of the IOF/Títulos applicable to most transactions involving preferred shares is currently zero percent. In particular, the transfer of shares traded in the Brazilian stock exchange for the issuance of depositary receipts to be traded outside Brazil is currently subject to the IOF/Títulos at a rate of 1.5%. The Brazilian government may increase the rate of the IOF/Títulos up to 1.5% per day, but only in respect of future transactions. Other Brazilian Taxes. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of ADSs or preferred shares by a Non-Brazilian Holder except that certain Brazilian states may impose such taxes in the case of recipients of gifts or inheritances who are domiciliaries or residents of such states. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of ADSs or preferred shares. Documents on Display Statements contained in this Form 20-F as to the contents of any contract or other document filed as an exhibit to this Form 20-F summarize their material terms, but are not necessarily complete. We are also subject to the informational reporting requirements of the Exchange Act, which requires that we file periodic reports and other information with the SEC. As a foreign private issuer, we file annual reports on Form 20-F as opposed to Form 10-K. We do not file quarterly reports on Form 10-Q but file reports in relation to material events on Form 6-K. Our reports and other information filed by us with the SEC may be inspected and copied by the public at the public reference facilities maintained by the SEC at100 F Street, N.E., Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.In addition, the SEC maintains a website www.sec.gov where those documents electronically filed with the SEC may be found. We furnish JPMorgan Chase, as the depositary in connection with our ADSs, annual reports in English, which include a review of operations and annual audited consolidated financial statements prepared under IFRS. Upon our request, the depositary will promptly mail such reports to all record holders of our ADSs. We also furnish to the depositary, in English, all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. Upon our request, the depositary will make such notices, reports and  114 NETC Annual Report 2010 – Form 20-F


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communications available to holders of our ADSs and will mail to all record holders of our ADSs a notice containing a summary of the information contained in any notice of a shareholders’ meeting it receives. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of proxy statements and from the rules under the Exchange Act relating to short-swing profit disclosure and liability.
  115 NETC Annual Report 2010 – Form 20-F


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ITEM 11.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Foreign Exchange Risk Our foreign currency exposure gives rise to market risks associated with exchange rate movements against the U.S. dollar. A substantial portion of capital expenditures, including network equipment costs, and54.5% of our indebtedness was denominated in or indexed to the U.S. dollar, as of December 31, 2010. Substantially all of our revenues are denominated in Brazilian reais. As a result, we are exposed to currency exchange risks, which may adversely affect our business, financial conditions and results of operations. As part of a program to hedge part of our capital expenditures and interest expense linked to the U.S. dollar, as of December 31, 2010, we were a party to certain swap agreements.See also “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Off-Balance Sheet Arrangements” and “Item 10. Additional Information—Exchange Controls.”Based on the level and characteristics of our debt indexed to the U.S. dollar, the result from a hypothetical depreciation of the Brazilian real to R$2.00 per US$1.00, or 20.0% depreciation compared to the exchange rate as of December 31, 2010, would be a decrease of R$233.6 million in our profit before income taxes. The details of this analysis, which may differ from actual results, are as follows: Total U.S.Denominated Debtas ofDecember 31, 2010

   

   Real depreciation fromExchange Rate ofR$1.6662 per US$1.00to R$2.00 per US$ 1.00

   

   Market risk – Impacton Foreign ExchangeLosses on Loans(R$ in millions)

   

   (%)

   

   (R$ in millions)U.S. Dollar DenominatedDebt:Loan Agreement withBanco Inbursa

   

   336.1

   

   20.03

   

   (66.7)Global Notes 2020

   

   599.0

   

   20.03

   

   (116.8)Perpetual Bonds (1)

   

   252.4

   

   20.03

   

   (50.0)Total

   

   1,187.5

   

   

   

   (233.6)
 (1)On May 26, 2011, we redeemed our outstanding, in whole, our perpetual bonds with available cash on hand. Interest Rate Risk Interest rate risk is the effect on our financial results of an increase in interest rates on our floating rate debt indexed to CDI or TJLP. Based on the level and characteristics of our debt, a hypothetical 10% increase in interest rates would result in a decrease of R$8.5 million in our profit before income taxes. The details of this analysis, which may differ from actual results, are as follows:  116 NETC Annual Report 2010 – Form 20-F


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Total Debt as ofDecember 31, 2010

   

   10%InterestRate Increase

   

   Market risk –Impact on interestexpense on thirdparty borrowings(R$ in millions)

   

   (basis points)

   

   (R$ in millions)Floating Rate Debt:Debenture-6thPublic Issuance (1)

   

   584.0

   

   1.06

   

   (6.2)Bank Credit Note (2)

   

   147.7

   

   1.06

   

   (1.8)FINAME (3)

   

   259.1

   

   0.6

   

   (0.5)**Total**

   

   **990,8**

   

   

   

   **(8.5)**
  (1) Indexed to CDI plus a spread of 1.6% per year. CDI was 10.6% as of December 31, 2010. (2) Indexed to CDI plus a spread of 2.10% per year. CDI was at 10.6% as of December 31, 2010. (3) Indexed to TJLP plus a spread of 3.15% per year or fixed rate between 4.5% and 5.5% per year. TJLP was at 6.0% as of December 31, 2010.  The percentages and amounts of our debt subject to floating interest rates as of December 31, 2010 were as follows: Percentage of total debt

   

   Amount in R$ millionsFloating Rate Debt:Denominated in reais

   

   43.0%

   

   813.5
 Our floating interest rate exposure is primarily subject to the variations of CDI, as well as to TJLP. ITEM 12.        DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES. Fees and Expenses The following table summarizes the fees and expenses payable by holders of ADRs to the depositary for our ADSs:  117 NETC Annual Report 2010 – Form 20-F


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Persons depositing preferred shares or ADS holders must pay:

   For the following type of service:US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)

   ·Issuance of ADSs, including issuances resulting from a distribution of preferred shares or rights or other property

   ·Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminatesUS$0.02 (or less) per ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading)

   ·Any cash distribution to ADS holdersUS$1.50 per ADS (to the extent not prohibited by stock exchange rules)

   ·Transfer on registerA fee equivalent to the fee that would be payable if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSs

   ·Distribution or sale of securities or net cash proceeds distributed to holders of deposited securities which are distributed by the depositary to ADR holdersUS$0.02 (or less) per ADS per calendar year (to the extent not prohibited by stock exchange rules)

   ·Depositary servicesDelivery fees

   ·Delivery of deposited securitiesExpenses of the depositary in converting foreign currency to U.S. dollarsExpenses of the depositary

   ·Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or preferred share underlying an ADR. For example, stock transfer taxes, stamp duty or withholding taxes

   ·As necessaryAny charges incurred by the depositary or its agents for servicing the deposited securities

   ·No charges of this type are currently made in the Brazilian market
  118 NETC Annual Report 2010 – Form 20-F


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Payment of Taxes The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes. Reimbursement of Fees JP Morgan Chase, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADSs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors. The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid. Reimbursement of Fees Incurred in 2010 During 2010, we received from the depositary US$395,353for standard out-of-pocket maintenance costs for the ADSs, any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.  119 NETC Annual Report 2010 – Form 20-F


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Part II ITEM 13.        DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

Not applicable.

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

Not applicable.

ITEM 15.        CONTROLS AND PROCEDURES. Disclosure Controls and Procedures Our management, including our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of December 31, 2010. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of December 31, 2010 were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management’s Annual Report on Internal Control over Financial Reporting; Attestation Report of the Registrant Public Accounting Firm Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2010. The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young Terco Auditores Independentes S.S., an independent registered public accounting firm, as stated in its attestation report which is included under Item 18 in this annual report on Form 20-F.   120 NETC Annual Report 2010 – Form 20-F


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Changes in Internal Control Over Financial Reporting Our management identified no change in our internal control during the fiscal year ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Item 16A.     Audit Committee Financial Expert. In lieu of complying with Rule 5605(c) of the NASDAQ Corporate Governance rules, we follow Brazilian corporate law and we maintain a permanentConselho Fiscal. OurConselho Fiscalcomplies with the requirements of Rule 10A-3 of the Exchange Act. See “Item 6. Directors, Senior Management and Employees—Directors and Board Practices.” OurConselho Fiscalhas one “audit committee financial expert,” as defined in Item 16A of Form 20-F under the Exchange Act. Our financial expert is Mr. Charles Barnsley Holland, and he is independent as defined by Rule 10A-3 of the Exchange Act. ITEM 16B.      CODE OF ETHICS. We presently have a code of ethics that applies to all of our employees, including our principal executive officer, principal financial officer and principal accounting officer or controller. Our code of ethics appears in both English and Portuguese on our website at http://ir.netservicos.com.br. ITEM 16C.     PRINCIPAL ACCOUNTANT FEES AND SERVICES. Ernst & Young Terco Auditores Independentes S.S. acted as our independent auditors for 2010 and 2009 in connection with our IFRS financial statements. The chart below sets forth the fees for services performed by Ernst & Young Terco Auditores Independentes S.S. for those years and breaks down the amounts by category of service in reais: Total Fees(R$ in thousands)2010

   2009Audit-Fees(1)

   2,390.7

   1,943.2Audit-Related Fees(2)

   293.9

   705.2Tax Fees(3)

   466.9

   437.3All Other Fees(4)

   -

   877.0Total

   3,151.5

   3,962.7
 (1)Audit Fees Audit fees include fees to audit the company’s financial statements prepared in accordance with the IFRS as issued by the IASB and with the accounting practices adopted in Brazil, as well as the audit of the company’s internal controls as at year-end. (2)       Audit-Related Fees Audit-related fees include the review of offering documentation in connection with the issuance of debt and, in 2009, also the audit of target companies.   121 NETC Annual Report 2010 – Form 20-F


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(3)      Tax Fees

Tax fees include fees for review of tax returns of selected legal entities in 2010 and 2009.

(4)       All Other Fees Other fees include fees for the due diligence of possible target companies in 2009.  Pre-Approval Policies and Procedures During 2010 and 2009, ourConselho Fiscalserved as our audit committee for the purposes of the Sarbanes-Oxley Act of 2002. Accordingly, ourConselho Fiscalestablished pre-approval procedures for the engagement of Ernst & Young Terco Auditores Independentes S.S. as our independent auditor for audit and permitted non-audit services. OurConselho Fiscalreviews the scope of each service to be provided by our independent auditors before our auditors are engaged to render such service in order to ensure that independence is and will be maintained and that the provision of the service is not prohibited under the Sarbanes-Oxley Act of 2002. Each service is approved before our auditors are engaged to render such service. ITEM 16D.     EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES. See “Item 9. The Offer and Listing—Trading Markets—NASDAQ Global Market.”

ITEM 16E.      PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.

Not applicable.

ITEM 16F.      CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT.

Not applicable.

ITEM 16G.     CORPORATE GOVERNANCE. See “Item 9. The Offer and Listing—Trading Markets—NASDAQ Global Market—Compliance with NASDAQ Corporate Governance Rules.”  122 NETC Annual Report 2010 – Form 20-F


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Part III ITEM 17.        FINANCIAL STATEMENTS.

See “Item 18. Financial Statements.”

ITEM 18.        FINANCIAL STATEMENTS. The following financial statements are filed as part of this Form 20-F, together with the reports of the Independent Registered Public Accounting Firm. Net Serviços de Comunicação S.A. Consolidated Financial Statements

   PageManagement’s report on internal control over financial reporting

   F-1Reports of Independent Registered Public Accounting Firm

   F-2 and F4Consolidated Statements of Comprehensive Income for the Years ended December 2010, 2009 and 2008

   F-5Consolidated Balance Sheets as of December 31, 2010 and 2009

   F-6Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2010, 2009 and 2008

   F-8Consolidated Statements of Cash Flows for the Years ended December 31, 2010, 2009 and 2008

   F-9Notes to Consolidated Financial Statements

   F-11
         123 NETC Annual Report 2010 – Form 20-F


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ITEM 19.        EXHIBITS. Incorporated by ReferenceExhibit No.

   Exhibit Description

   Form

   SEC File No.

   Exhibit

   Date Filed/ Furnished

   Filed Herewith1.1

   Consolidated By-laws of Net Serviços de Comunicação S.A., as amended on September 30, 2009 (English-language translation).

   

   

   

   

   X1.1

   Consolidated By-laws of Net Serviços de Comunicação S.A., as amended on September 30, 2009 (English-language translation)

   20-F for 2009

   0-28860

   1.1

   May 21, 20104.1

   Shareholders’ Agreement, dated as of March 21, 2005, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   April 8, 20054.2

   First addendum to the Shareholders’ Agreement, dated as of March 21, 2005, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   September 6, 20064.3

   Second addendum to the Shareholders’ Agreement, dated as of April 28, 2006, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   August 5, 20104.4

   Third addendum to the Shareholders’ Agreement, dated as of September 18, 2009, among Globo Comunicação e Participações S.A., Distel Holdings S.A, Embratel do Brasil Participações S.A., GB Empreendimentos e Participações S.A. and Teléfonos de México, S.A. de C.V., as an intervening party (English-language translation).

   6-K

   0-28860

   

   August 5, 20104.5

   Programming Agreement (Contrato de Comissão), dated as of June 27, 2004, between Net Brasil S.A., Net Serviços de Comunicação S.A. and its Subsidiaries named therein (English-language translation).

   20-F for 2003

   0-28860

   4.2

   June 30, 20044.6

   Licensing Agreement, dated as of June 27, 2004, between Net Brasil S.A., Net Serviços de Comunicação S.A. and its Subsidiaries named therein (English-language translation).

   Amendment No. 1 to F-4

   333-120286

   10.6

   February 7, 20054.7

   Services Agreement and Other Covenants with Empresa Brasileira de Telecomunicações S.A. – Embratel, dated as of December, 2006 (English-language translation).

   20-F for 2007

   0-28860

   4.10

   June 30, 20084.8

   First addendum to the Services Agreement and Other Covenants with Embratel, dated July 31, 2007, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.5

   May 21, 20104.9

   Second addendum to the Services Agreement and Other Covenants with Embratel, dated April 4, 2008 with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.6

   May 21, 20104.10

   Third addendum to the Services Agreement and Other Covenants with Embratel, dated September 25, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.7

   May 21, 20104.11

   Fourth addendum to the Services Agreement and Other Covenants with Embratel, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.8

   May 21, 20104.12

   Indefeasible Right Agreement of transmission capacity in local accesses by Embratel to be provided by Net Serviços, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.9

   May 21, 20104.13

   Indefeasible Right Agreement of transmission capacity in Internet accesses by Net Serviços to be provided by Embratel, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.10

   May 21, 20104.14

   Commitment letter for provision of Internet services to be provided by Embratel, dated June 26, 2003, with Embratel (English-language translation)

   20-F for 2009

   0-28860

   4.11

   May 21, 20104.15

   Addendum to the commitment letter for provision of Internet services to be provided by Embratel, dated November 17, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.12

   May 21, 20104.16

   Addendum to the commitment letter for provision of Internet services to be provided by Embratel, dated December 29, 2009, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.13

   May 21, 20104.17

   Telecommunications Service Agreement under the Industrial Exploration Regime and Other Covenants, dated December 7, 2006, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.14

   May 21, 20104.18

   First Addendum to the Telecommunications Service Agreement under the Industrial Exploration Regime and Other Covenants, dated April 18, 2008, with Embratel (English-language translation).

   20-F for 2009

   0-28860

   4.15

   May 21, 20104.19

   Optical Fiber Lease Agreement, dated November 22, 2005 (English-language translation)

   Schedule 14D‐9

   005-84654

   e(18)

   September 14, 20104.20

   First Amendment to the Optical Fiber Lease Agreement, dated August 29, 2008 (English-language translation)

   Schedule 14D‐9

   005-84654

   e(19)

   September 14, 20104.21

   Loan and Guaranty Agreement, dated June 19, 2008, among Banco Inbursa S.A., Net Serviços and the guarantor subsidiaries parties thereto.

   Schedule 14D‐9

   005-84654

   e(20)

   September 14, 20108.1

   List of Net Serviços de Comunicação S.A.’s Subsidiaries.

   

   

   

   

   X12.1

   Certification of José Antonio Guaraldi Félix, Chief Executive Officer of Net Serviços de Comunicação S.A., pursuant to 15 U.S.C. Section 78(m), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X12.2

   Certification of Roberto Catalão Cardoso, Chief Financial Officer of Net Serviços de Comunicação S.A., pursuant to 15 U.S.C. Section 78(m), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X13.1

   Certification of José Antonio Guaraldi Félix, Chief Executive Officer of Net Serviços de Comunicação S.A., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X13.2

   Certification of Roberto Catalão Cardoso, Chief Financial Officer of Net Serviços de Comunicação S.A., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

   

   

   

   

   X
 We hereby agree to furnish to the SEC copies of any of our long term debt instruments and agreements as the SEC requests. The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
  124 NETC Annual Report 2010 – Form 20-F


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NET SERVIÇOS DE COMUNICAÇÃO S.A.

   

   /s/José Antonio Guaraldi Félix

   Name: José Antonio Guaraldi Félix

   Title: Chief Executive Officer

   

   

   /s/Roberto Catalão Cardoso

   Name: Roberto Catalão Cardoso

   Title: Chief Financial OfficerDate: June 30, 2011
   
  125 NETC Annual Report 2010 – Form 20-F


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Net Serviços de Comunicação S.A.   Consolidated Financial Statements  Years ended December 31, 2010, 2009 and 2008


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Table of Contents   NET SERVIÇOS DE COMUNICAÇÃO S.A.  CONSOLIDATED FINANCIAL STATEMENTS  Years ended on December 31, 2010 and 2009    Contents Management's reports on internal control over financial reporting

   1Reports of independent registered public accounting firm

   2 and 4Audited consolidated financial statementsConsolidated statements of comprehensive income

   5Consolidated balance sheets

   6Consolidated statements of changes in stockholders’ equity

   8Consolidated statements of cash flows

   9Notes to consolidated financial statements

   11


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Management’s report on internal control over financial reporting





The management of Net Serviços de Comunicação S.A. is responsible for establishing and maintaining adequate internal control over financial reporting for the Company.





The company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.





Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.





Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2010, based on the criteria set forth by the COSO – Committee of Sponsoring Organization of the Treadway Commission in Internal Control – Integrated Framework. Based on that assessment management has concluded that as of December 31, 2010, the Company’s internal control over financial reporting is effective.





The effectiveness of the company’s internal control over financial reporting as of December 31, 2010 has been audited by Ernst & Young Terco Auditores Independentes S.S., the company’s independent registered public accounting firm, as stated in their report which appears herein.







|José Antonio Guaraldi FelixChief Executive Officer |  | Roberto Catalão CardosoChief Financial Officer
|-------------------------------------------------- |  | ----------------------------------------------







Date:  February 16, 2011





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Report of independent registered public accounting firm  The Board of Directors and Stockholders of Net Serviços de Comunicação S.A.  We have audited Net Serviços de Comunicação S.A.’s internal control over financial reporting, as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Comission (the COSO criteria). Net Serviços de Comunicação S.A.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.  We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.  A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.  Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.  In our opinion, Net Serviços de Comunicação S.A. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the COSO criteria.






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We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Net Serviços de Comunicação S.A. as of December 31, 2010 and 2009, and related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010 and our report dated February 16, 2011 expressed an unqualified opinion thereon.  São Paulo, Brazil, February 16, 2011.   ERNST & YOUNG TERCO Auditores Independentes S.S. CRC-2SP015199/O-1   B. Alfredo Baddini BlancPartner

   Julio Braga PintoPartner


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Report of independent registered public accounting firm  The Board of Directors and Stockholders of Net Serviços de Comunicação S.A.   We have audited the accompanying consolidated balance sheets of Net Serviços de Comunicação S.A. as of December 31, 2010 and 2009, and the related consolidated statements of comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Net Serviços de Comunicação S.A. at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.  We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Net Serviços de Comunicação S.A.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 16, 2011, expressed an unqualified opinion thereon.  São Paulo, February 16, 2011.  ERNST & YOUNG TERCO Auditores Independentes S.S. CRC-2SP015199/O-1   B. Alfredo Baddini BlancPartner

   Julio Braga PintoPartner


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of comprehensive income Years ended on December 31, 2010, 2009 and 2008 (In thousands of reais, except per share amounts)  Notes

   

   12/31/2010

   

   12/31/2009

   

   12/31/2008Net sales

   4

   

   5,405,669

   

   4,613,389

   

   3,690,409Cost of services rendered

   5,7

   

   (3,346,818)

   

   (2,789,812)

   

   (2,153,454)Gross profit

   

   

   2,058,851

   

   1,823,577

   

   1,536,955Operating expensesSelling expenses

   7

   

   (594,470)

   

   (505,063)

   

   (429,545)General and administrative expenses

   7

   

   (792,597)

   

   (634,656)

   

   (604,968)Other

   7

   

   (13,725)

   

   (60,389)

   

   (16,905)(1,400,792)

   

   (1,200,108)

   

   (1,051,418)Operating profit

   

   

   658,059

   

   623,469

   

   485,537Finance resultsFinance expenses

   6

   

   (359,422)

   

   (27,335)

   

   (432,462)Finance income

   6

   

   169,354

   

   92,779

   

   113,935(190,068)

   

   65,444

   

   (318,527)Profit before income taxes and socialcontribution

   

   467,991

   

   688,913

   

   167,010Income taxes and social contribution

   12

   

   (160,840)

   

   47,035

   

   (146,756)Profit for the year

   

   307,151

   

   735,948

   

   20,254Basic and diluted earnings per share – common     23

   

   0.84

   

   2.01

   

   0.06Basic and diluted earnings per share – preferred    23

   

   0.92

   

   2.22

   

   0.06
    Profit for both years is fully attributable to equity holders of the Company.  The Company has no other comprehensive results that should be included in these statements of comprehensive income.  See accompanying notes to consolidated financial statements.






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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated balance sheets As at December 31, 2010 and 2009 (In thousands of reais)  Notes

   

   12/31/2010

   

   12/31/2009ASSETSCurrentCash and cash equivalents

   8

   

   821,560

   

   1,015,605Trade accounts receivable

   9

   

   350,905

   

   263,952Inventories

   10

   

   82,050

   

   58,763Related parties

   19

   

   -

   

   24,801Recoverable taxes

   12

   

   28,385

   

   3,624Prepaid expenses

   

   

   27,433

   

   33,215Prepaid rights for use

   19

   

   172,536

   

   175,088Other current assets

   

   

   15,969

   

   12,467Total current assets

   

   

   1,498,838

   

   1,587,515Non-currentJudicial deposits

   11

   

   83,735

   

   74,609Deferred taxes

   12

   

   562,423

   

   643,936Recoverable taxes

   12

   

   94,516

   

   71,056Prepaid rights for use

   19

   

   487,307

   

   659,842Property, plant and equipment

   13

   

   3,322,350

   

   2,767,037Intangible assets

   14

   

   2,485,940

   

   2,523,168Other non-current assets

   

   

   6,135

   

   6,628Total non-current assets

   

   

   7,042,406

   

   6,746,276Total assets

   

   

   8,541,244

   

   8,333,791






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Notes

   

   12/31/2010

   

   12/31/2009LIABILITIESCurrentTrade accounts payable

   15

   

   349,480

   

   327,715Accounts payable - programming suppliers

   16

   

   134,813

   

   124,602Income tax and social contribution

   

   

   2,635

   

   2,586Other fiscal obligations

   

   

   62,964

   

   70,270Payroll and related charges

   

   

   180,695

   

   181,678Debt

   17

   

   104,865

   

   85,475Copyright payable - ECAD

   18

   

   99,386

   

   77,794Unrealized losses on derivatives

   24/25

   

   50,857

   

   19,580Deferred revenues

   19

   

   208,859

   

   208,228Related parties

   19

   

   78,242

   

   -Other current liabilities

   

   

   15,507

   

   14,013Total current liabilities

   

   

   1,288,303

   

   1,111,941Non-currentDeferred income taxes and social contribution

   12

   

   185,071

   

   183,805Debt

   17

   

   2,073,386

   

   2,113,329Deferred revenues

   19

   

   612,190

   

   782,279Provisions

   20

   

   554,764

   

   605,363Other non-current liabilities

   

   

   12,864

   

   29,559Total non-current liabilities

   

   

   3,438,275

   

   3,714,335Stockholders’ equityShare capital

   21

   

   5,599,320

   

   5,599,320Capital reserves

   21

   

   153,168

   

   153,168Accumulated deficit

   

   

   (1,937,822)

   

   (2,244,973)3,814,666

   

   3,507,515Total liabilities and stockholders’ equity

   

   

   8,541,244

   

   8,333,791
   See accompanying notes to consolidated financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of changes in stockholders’ equity Years ended on December 31, 2010, 2009 and 2008 (In thousands of reais)   Number of shares (thousands)

   

   Capital stockCommon

   Preferred

   

   Subscribed

   To be paid in

   Paid in

   

   Capital reserves

   Accumulated deficit

   TotalBalances on January 1, 2008

   

   111,822

   223,233

   

   5,479,891

   (12,923)

   5,466,968

   

   285,520

   (3,001,175)

   2,751,313Capital increase by:Absorption of special goodwill reserve

   

   1,229

   2,455

   

   73,378

   -

   73,378

   

   (73,378)

   -

   -Profit for year

   

   -

   -

   

   -

   -

   -

   

   -

   20,254

   20,254Balances on December 31, 2008

   

   113,051

   225,688

   

   5,553,269

   (12,923)

   5,540,346

   

   212,142

   (2,980,921)

   2,771,567Capital increase by:Absorption of special

   goodwill reserve

   

   1,408

   2,816

   

   58,974

   -

   58,974

   

   (58,974)

   -

   -Profit for the year

   

   -

   -

   

   -

   -

   -

   

   -

   735,948

   735,948Balances on December 31, 2009

   

   114,459

   228,504

   

   5,612,243

   (12,923)

   5,599,320

   

   153,168

   (2,244,973)

   3,507,515Profit for the year

   

   -

   -

   

   -

   -

   -

   

   -

   307,151

   307,151Balances on December 31, 2010

   

   114,459

   228,504

   

   5,612,243

   (12,923)

   5,599,320

   

   153,168

   (1,937,822)

   3,814,666
    See accompanying notes to consolidated financial statements.






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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of cash flows Years ended December 31, 2010, 2009 and 2008 (In thousands of reais)  12/31/2010

   

   12/31/2009

   

   12/31/2008Net cash flows from operating activitiesProfit for the year

   

   307,151

   

   735,948

   

   20,254Adjustments to reconcile profit for the period to cash flows from operating activitiesMonetary and exchange rate variations, net

   

   (69,112)

   

   (177,265)

   

   269,259Interest expense on borrowing

   

   215,120

   

   176,598

   

   156,403Depreciation and amortization

   

   901,225

   

   618,748

   

   493,368Loss (gain) on derivatives

   

   65,915

   

   97,345

   

   (4,977)Deferred income taxes and social contribution

   

   82,777

   

   (158,596)

   

   65,541Loss (gain) on disposal of  property, plant and equipment

   

   (4,136)

   

   7,118

   

   (6,855)Provisions

   

   (44,399)

   

   (101,319)

   

   (8,895)Increase/decrease in operating assets and liabilities(Increase) decrease in trade accounts receivables

   

   (86,953)

   

   (92,010)

   

   (29,323)(Increase) decrease in inventories

   

   (23,287)

   

   3,224

   

   3,617(Increase) decrease in recoverable taxes

   

   7,833

   

   (12,616)

   

   (62,356)(Increase) decrease in other assets

   

   (14,705)

   

   18,029

   

   18,087(Increase) decrease in prepaid expenses

   

   5,888

   

   (8,728)

   

   7,761Increase (decrease) of trade accounts payable and accounts payable – programming suppliers

   

   31,976

   

   (56,156)

   

   128,448Increase (decrease) in other fiscal obligations

   

   (7,257)

   

   (28,983)

   

   77,197Increase (decrease) in payroll and related charges

   

   (10,260)

   

   23,218

   

   78,931Increase (decrease) in deferred revenues

   

   (169,457)

   

   (18,480)

   

   -Increase (decrease) in provisions and other accounts payable

   

   47,886

   

   (23,420)

   

   85,183Net cash provided by operating activities

   

   1,236,205

   

   1,002,655

   

   1,291,643Cash flow from investing activities

   Acquisition of business, net of cash received

   

   -

   

   (97,943)

   

   (382,687)Acquisition of property, plant and equipment and intangible assets

   

   (1,249,895)

   

   (1,089,211)

   

   (992,943)Cash proceeds from sale of property, plant and equipment

   

   2,890

   

   2,530

   

   3,099Net cash used in investing activities

   

   (1,247,005)

   

   (1,184,624)

   

   (1,372,531)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Consolidated statements of cash flows Years ended December 31, 2010, 2009 and 2008 (In thousands of reais)  12/31/2010

   

   12/31/2009

   

   12/31/2008Cash flows from financing activitiesThird party borrowingsProceeds

   

   103,630

   

   677,009

   

   93,503Repayments of principal

   

   (92,600)

   

   (46,090)

   

   (14,298)Payments of interest

   

   (194,275)

   

   (170,225)

   

   (147,436)Proceeds from related party borrowings

   

   -

   

   -

   

   316,393Net cash provided by (used in) financing activities

   

   (183,245)

   

   460,694

   

   248,162Net increase (decrease) in cash and cash equivalents

   

   (194,045)

   

   278,725

   

   167,274Cash and cash equivalents at the beginning of the year

   

   1,015,605

   

   736,880

   

   569,606Cash and cash equivalents at the end of the year

   

   821,560

   

   1,015,605

   

   736,880(194,045)

   

   278,725

   

   167,274Supplementary disclosure of cash flow informationIncome taxes and social contribution paid

   

   100,356

   

   176,104

   

   87,677
  See accompanying notes to consolidated financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 1. Operations  Net Serviços de Comunicação S,A, is a publicly held corporation organized under the laws of Brazil. The Company controls a group of cable subscription television companies, together referred to as “Net Serviços” or “the Company”. The shares of Net Serviços de Comunicação S.A. are traded on the São Paulo stock exchange – BM&FBOVESPA. The Company is located in Brazil and its headquarters are located at Verbo Divino Street, 1356 in São Paulo, São Paulo state.  The Company provides cable television services under the “NET” brand name and high-speed Internet access under the “NET VIRTUA” brand name through several cable networks located in the country’s largest cities. The Company and Empresa Brasileira de Telecomunicações S.A. – Embratel (Embratel), a subsidiary of Telmex Internacional S.A.B. de C.V. (Telmex), jointly provide voice services under the “NET FONE VIA EMBRATEL” brand name.  The Company holds interest in the following subsidiaries:


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)   1. Operations– ContinuedPercentage of share capital2010

   

   2009

   

   2008Direct

   

   Direct

   Indirect

   

   Direct

   IndirectSubsidiaryNet Belo Horizonte Ltda.

   -

   

   -

   100.00

   

   -

   100.00Net Brasília Ltda.

   100.00

   

   -

   100.00

   

   -

   100.00Net Rio Ltda.

   100.00

   

   100.00

   -

   

   100.00

   -Net Recife Ltda.

   -

   

   100.00

   -

   

   100.00

   -Net São Paulo Ltda.

   100.00

   

   100.00

   -

   

   97.40

   2.60Net Campinas Ltda.

   -

   

   -

   100.00

   

   -

   100.00Net Indaiatuba Ltda.

   -

   

   -

   -

   

   100.00

   -Net São Carlos Ltda.

   -

   

   -

   -

   

   100.00

   -Net Franca Ltda.

   -

   

   -

   -

   

   100.00

   -Net Sul Comunicações Ltda.

   -

   

   -

   -

   

   100.00

   -Reyc Comércio e Participações Ltda.

   100.00

   

   100.00

   -

   

   26.94

   73.06Net Anápolis Ltda.

   -

   

   -

   -

   

   -

   100.00Net Bauru Ltda.

   -

   

   100.00

   -

   

   9.06

   90.94Net Campo Grande Ltda.

   -

   

   -

   -

   

   -

   100.00Net Goiânia Ltda.

   -

   

   100.00

   -

   

   -

   100.00Net Ribeirão Preto Ltda.

   -

   

   100.00

   -

   

   12.07

   87.93Net São José do Rio Preto Ltda.

   -

   

   -

   -

   

   -

   100.00Net Sorocaba Ltda.

   -

   

   100.00

   -

   

   -

   100.00Horizonte Sul Comunicações Ltda.

   -

   

   100.00

   -

   

   -

   100.00DR – Empresa de Distribuição e Recepção de TV Ltda.

   -

   

   -

   -

   

   -

   100.00Antenas Comunitárias Brasileiras Ltda.

   -

   

   -

   -

   

   -

   100.00Net Paraná Comunicações Ltda.

   -

   

   100.00

   -

   

   -

   100.00Net Florianópolis Ltda.

   -

   

   -

   -

   

   78.13

   21,87Net Maringá Ltda.

   -

   

   -

   -

   

   -

   100.00Net Arapongas Ltda.

   -

   

   -

   -

   

   -

   100.00Televisão a Cabo Criciúma Ltda.

   -

   

   -

   -

   

   40.00

   60.00Net Londrina Ltda.

   -

   

   -

   -

   

   -

   100.00Jacareí Cabo S.A.

   100.00

   

   100.00

   -

   

   -

   100.00TV Eucalipto Ltda.

   -

   

   -

   -

   

   -

   100.00TV Mogno Ltda.

   -

   

   -

   -

   

   -

   100.00Horizon Line Brasil Ltda.

   -

   

   -

   -

   

   8.18

   91.92Canbras TVA Cabo Ltda.

   -

   

   -

   -

   

   -

   100.00614 TVH Vale Ltda.

   100.00

   

   100.00

   -

   

   -

   100.00Vivax Ltda.

   -

   

   -

   -

   

   100.00

   -614 Telecomunicações Ltda. - Big TV

   -

   

   -

   -

   

   100.00

   -614 Serviços de Internet Maceió Ltda. - Big TV

   100.00

   

   100.00

   -

   

   -

   100.00614 TVT Maceió S.A. – Big TV

   -

   

   -

   -

   

   50.00

   50.00614 Serviços de Internet João Pessoa Ltda. - Big TV

   100.00

   

   100.00

   -

   

   -

   100.00614 TVP João Pessoa S.A. – Big TV

   -

   

   -

   -

   

   50.00

   50.00614 Interior Linha S.A. – Big TV

   -

   

   -

   -

   

   -

   100.00Zerelda Participações Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00TV a Cabo Guarapuava Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00TV Jacarandá Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00TV a Cabo Cascavel Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00EBS Empresa Brasileira de Sinais Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00TVC Oeste Paulista Ltda. – Big TV

   -

   

   -

   -

   

   -

   100.00614 TVG Guarulhos S.A. – Big TV

   -

   

   -

   -

   

   -

   100.00ESC 90 Telecomunicações Ltda.

   -

   

   100.00

   -

   

   -

   -
   During 2010 and 2009, continuing its restructuring process, the Company has merged the net assets of the subsidiaries shown below:


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 1. Operations– Continued  Company

   Date of Incorporation

   Net assets merget

   

   Company

   Date of Incorporation

   Net assets mergetNet Belo Horizonte Ltda.

   11/30/2010

   112,183

   

   614 TVP João Pessoa S.A.

   11/30/2009

   18,316Net Bauru Ltda.

   11/30/2010

   19,617

   

   614 TVT Maceió S.A.

   11/30/2009

   19,723Net Goiania Ltda.

   11/30/2010

   42,941

   

   Net Campo Grande Ltda.

   10/30/2009

   26,786Net Ribeirão Preto Ltda.

   11/30/2010

   61,288

   

   Net São José do Rio Preto Ltda.

   10/30/2009

   22,610Net Sorocaba Ltda.

   11/30/2010

   58,284

   

   Net Sul Comunicações Ltda.

   10/30/2009

   327,901Net Paraná Comunicação Ltda.

   11/30/2010

   131,909

   

   Net São Carlos Ltda.

   10/30/2009

   11,201Net Campinas Ltda.

   11/30/2010

   91,908

   

   DR – Emp. de Distr. e Recep. de TV Ltda.

   10/30/2009

   120,733Net Recife Ltda.

   07/31/2010

   1,111

   

   Antenas Comunitárias Brasileiras Ltda.

   09/30/2009

   18,117Horizonte Sul Comunicações Ltda.

   07/31/2010

   3,741

   

   Televisão a Cabo Criciúma Ltda.

   09/30/2009

   539ESC90 Telecomunicações Ltda.

   07/31/2010

   34,819

   

   Net Arapongas Ltda.

   09/30/2009

   904Vivax Ltda.

   11/30/2009

   203,482

   

   Net Londrina Ltda.

   09/30/2009

   14,584Net Indaiatuba Ltda.

   11/30/2009

   5,141

   

   Net Maringá Ltda.

   09/30/2009

   9,641Net Franca Ltda.

   11/30/2009

   9,949

   

   614 TVG Guarulhos S.A.

   09/30/2009

   11,203Net Anápolis Ltda.

   11/30/2009

   2,545

   

   614 Telecomunicações Ltda.

   04/30/2009

   20,654TV Jacarandá Ltda.

   11/30/2009

   237

   

   614 Interior Linha S.A.

   04/30/2009

   (903)TV a Cabo Guarapuava Ltda.

   11/30/2009

   437

   

   TVC Oeste Paulista Ltda.

   04/30/2009

   308TV a Cabo Cascavel Ltda.

   11/30/2009

   507

   

   Net Florianópolis Ltda.

   02/28/2009

   275,918
  In addition to having common and preferred shares on the BM&FBOVESPA, the Company holds preferred shares traded on NASDAQ as “American Depositary Shares” – ADS in the United States of America and is subject to theSecurities and Exchange Commission– SEC regulations. Each ADS represents 1 preferred share traded under the code NETC.  The Company also has preferred shares that are traded on the LATIBEX, the Madrid stock exchange, and is therefore subject to the regulations of the Spanish Comisión Nacional del Mercado de Valores – CNMV.  The Company signed an agreement with BM&FBOVESPA to adopt differentiated corporate governance practices, thus becoming eligible for a Level 2 listing, which was created to distinguish a select group of companies committed to differentiated corporate governance practices. The Company’s annual and quarterly financial statements meet the additional requirements of BM&FBOVESPA. Under the Company’s articles of incorporation, disputes and controversies arising from or related to their social status, the Regulation of Level 2, the provisions of the Brazilian Corporate Law, the standards published by National Monetary Council, the Central Bank of Brazil and the Brazilian Securities Commission, the Regulations of the BM&FBOVESPA and other rules applicable to the operation of the capital market in general should be resolved by arbitration to be conducted as per the regulations of the Market Arbitration Committee set up by BM&FBOVESPA (Arbitration clause).






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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies  2.1 Basis of preparation  The Company’s consolidated financial statements for the years ended December 31, 2010, 2009 and 2008 were prepared and presented in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board - IASB.  The preparation of consolidated financial statements in accordance with IFRS requires the use of certain estimates made by the Company's management. The consolidated financial statements were prepared using the historical cost basis, except for the valuation of certain assets acquired and liabilities assumed in connection with business combinations and financial instruments, which were measured at fair value.  The Company has adopted all standards, revised standards and interpretations issued by the IASB that were in effect on December 31, 2010.  The Company's management approved and authorized the issuance of the consolidated financial statements on February 16, 2011.  The Company’s consolidated financial statements include the statements of Net Serviços de Comunicação S.A. and subsidiaries. All reporting periods are consistent with those of the parent company and accounting policies are uniformly adopted across the Company.  Subsidiaries are consolidated as of their acquisition dates, which are the dates on which the Company obtained control, and continue to be consolidated until the date such control ceases.  The consolidation process entails the line by line consolidation of assets, liabilities, income and expenses, and the elimination of the following:  ·Controlling company interest in share capital, reserves and retained earnings of subsidiaries; ·Assets and liabilities resulting from transactions among the group of companies; ·Revenues and expenses arising from transactions conducted among the group of companies.  The Company’s Board of Directors has the power to amend the consolidated financial statements after its issuance.






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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.2 Foreign currency translation  The Company and its subsidiaries are located in and have their entire operations in Brazil.  The financial statements of each subsidiary included in the consolidation of the Company are prepared using the functional currency of each entity. The functional currency of an entity is the currency of the primary economic environment in which it operates. By defining the functional currency of each of its subsidiaries, management considered that the currency significantly influences the selling price of its services, and the currency in which most of the cost of their inputs is paid or incurred. The consolidated financial statements are shown in Brazilian reais (R$), which is the functional and presentation currency of Net Serviços de Comunicação S.A. and all subsidiaries.  Transactions in foreign currencies are initially recorded at their respective functional currency rates prevailing at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency spot rate of exchange ruling at the reporting date. All differences are taken to income in the statement of comprehensive income.  2.3 Revenue recognition  Revenues include subscribers' monthly fees, connection fees, pay-per-view, high-speed data and telephone services. Revenues are recorded when services are provided. Connection fees are deferred to the extent that they exceed direct selling expenses and are amortized over the average estimated period that subscribers remain connected to the system.  Deferred revenue relates mainly to the prepayment of rights to use the Company’s fiber optic cable network to provide Net Fone services and rental revenue is released to income in the statements of comprehensive income over the contractual period. Revenues related to special projects and access to the network are recognized based on average estimated period subscribers are likely to remain connected to the system.  Rental income arising from operating leases of decoders and modems is accounted for on a straight-line basis over the lease terms.  For all financial instruments measured at amortized cost and interest bearing financial assets, interest income or expense is recorded using the effective interest rate (EIR), which is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or liability. Interest income is included in finance income in the statement of comprehensive income.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.4 Cash and cash equivalents  Cash and cash equivalents include cash, credit balances in bank accounts andhighly liquid investments, readily convertible in a known cash amount, with insignificant risk of change in value. These investments are carried at cost plus interest to the date of the balance sheet and measured at fair value, with gain or loss recorded in the income statement.  2.5 Trade accounts receivable and allowance for doubtful accounts  Trade accounts receivable are recorded at estimated net realizable value and are noninterests bearing. The allowance for doubtful accounts is established on the basis of the subscriber’s history of default and its amount is deemed sufficient to cover losses in the realization of accounts receivable. The average term for receipt from subscribers is approximately 30 days andany outstanding receivable older than 180 days iswritten off.The allowance for doubtful accounts is comprised, substantially, of account balanceswhich are 90 to180 days in arrears.  2.6 Inventories  Inventories are stated at the lower of net realizable value (estimated selling price in the ordinary course of business less estimated selling costs) and average cost. Provisions for slow moving or obsolete inventory items are made as necessary.  2.7 Property and equipment  Property and equipment is stated at historical cost net of depreciation, and impairment losses, if applicable. The cable network includes capitalized amounts related to personnel costs and other expenses incurred for the construction of the network during the prematurity phase and construction period.  Depreciation is provided using the straight-line method over the estimated useful lives of the assets, as shown on footnote 13. Subsequent costs are capitalized if the economic benefits associated with these items are probable and the amounts are reliably measured. The net book value of any replaced item is charged to income in the statement of comprehensive income. Repairs and maintenance expenditures are expensed as incurred.  The residual values and estimated useful lives of assets are reviewed and adjusted, if necessary, on an annual basis.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.8 Intangible assets  Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is its fair value on the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses, if any.  Intangible assets are assessed as having finite or indefinite estimated useful lives.  Intangible assets that have finite useful lives are amortized over their estimated useful lives,as shown on footnote 14. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life is reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of comprehensive income in the expense category consistent with the function of the intangible assets.The estimated useful lives of intangible assets with indefinite useful lives are not amortized, but are tested for impairment at the end of each reporting period  at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.  2.9 Impairment of non-financial assets  In accordance with IAS 36, at each financial statement date, the Company assesses whether there are any indicators that an asset may be impaired. If such indicators are identified, the Company estimates the recoverable value of the asset. The recoverable value of an asset is the greater of: (a) fair value less costs that would be incurred to sell it, and (b) its value in use. Value in use is the discounted cash flow (before taxes) arising from the continuous use of the asset to the end of its useful life.  Irrespective of the presence of indicators of impairment, goodwill and intangible assets with indefinite useful lives are tested for impairment at least once a year.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.9 Impairment of non-financial assets– Continued  When the net book value of an asset exceeds its recoverable value, the impairment loss is recognized as an operating expense in the in the income statement.  Except for the impairment of goodwill, reversal of losses previously recorded is allowed. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.  2.10 Business combinations and goodwill  Business combinations are recognized using the acquisition method. The cost of the acquisition is the fair value of assets and equity instruments paid and liabilities assumed on the date of acquisition. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at fair value on the acquisition date.  Goodwill represents the excess of acquisition cost over the fair value of net assets acquired and liabilities assumed, at the acquisition date. If the cost of acquisition is less than the fair value of net assets acquired, the difference is recognized directly in the income statement.  2.11 Taxes  Income taxes and social contribution  The statutory rates applicable for federal income taxes and social contribution are 15% plus an additional 10% over R$240 for income tax and 9% for social contribution. Income taxes and social contribution are recognized on the accrual basis.  Deferred taxes are provided using the liability method on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The amount of deferred income tax assets is reviewed at each reporting date and reduced by any amount that is no longer recoverable through future estimated taxable income. Deferred tax assets and liabilities are calculated using the tax rates applicable to taxable income in years in which these temporary differences should be realized based on tax rates that have been enacted at the reporting date.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.11 Taxes–Continued  Sales tax  Revenues, expenses and assets are recognised net of the amount of sales tax, except:  ·Where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authorities, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable;  ·Receivables and payables that are stated with the amount of sales tax included; and   ·The net amount of sales tax recoverable from, or payable to, the taxation authorities is included as part of receivables or payables in the consolidated balance sheets.  2.12 Provisions  Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of economic benefits will be required to settle the obligation and a reasonable estimate can be made of the amount of this obligation. If the effect of the time value of money is material, provisions are discounted using the discount rate that reflects specific risks for the liability, when appropriate. When discounted, the increase in the provision due to the passage of time is recognized as a finance expense.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments  Initial recognition and subsequent measurement  i)Financial assets  Initial recognition and measurement  Financial assets are classified as: i) financial assets at fair value through profit or loss; ii) receivables; iii) held-to-maturity investments; or iv) available-for-sale financial assets. The Company determines the classification of its financial assets at initial recognition.  The Company’s financial assets include cash and cash equivalents, trade accounts receivable, other current assets and derivative financial instruments.  Subsequent measurement  The subsequent measurement of financial assets depends on their classification as follows:  Financial assets at fair value through profit or loss  Financial assets at fair value through profit and loss are carried in the statement of financial position at fair value with changes in fair value recognised in finance income or finance costs in the income statement. As of December 31, 2010 and 2009, financial assets classified at fair value through profit or loss are derivative financial instruments.  Loans and receivables  Receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, such financial assets are subsequently measured at amortised cost using the effective interest rate method (EIR), less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included in finance income in the statement of comprehensive income. The losses arising from impairment are recognised in the statement of comprehensive income in finance costs. As of December 31, 2010 and 2009, financial assets classified as loans and receivables are trade accounts receivable.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments –Continued  Held-to-maturity investments  Non-derivative financial assets with fixed or determinable payments and fixed maturities are classified as held-to-maturity when the Company has the positive intention and ability to hold it to maturity. As of December 31, 2010 and 2009, the Company did not have any held-to-maturity investments.  Available-for-sale financial assets  Available-for-sale financial assets are those non derivative that are neither classified as financial assets at fair value through profit or loss, loans and receivables and held-to-maturity investments. Available-for-sale financial assets include equity and debt securities. As of December 31, 2010 and 2009, the Company did not have any available-for-sale financial assets.  Derecognition  A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised when:  •The rights to receive cash flows from the asset have expired; •The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.  When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. In that case, the Company also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments –Continued  ii)Impairment of financial assets  The Company assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’) and that loss event has an impact on the estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.  Financial assets carried at amortised cost  For financial assets carried at amortised cost, the Company first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, or collectively for financial assets that are not individually significant. If the Company determines that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses them for impairment.  Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be, recognised are not included in a collective assessment of impairment.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments –Continued  If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that have not yet been incurred). The present value of the estimated future cash flows is discounted at the financial assets original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate.  The carrying amount of the asset is reduced through the use of an allowance account and the amount of the loss is recognised in the income statement. Interest income continues to be accrued on the reduced carrying amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The interest income is recorded as part of finance income in the statements of comprehensive income. Loans together with the associated allowance are written off when there is no realistic prospect of future recovery and all collateral has been realised or has been transferred to the Company. If, in a subsequent year, the amount of the estimated impairment loss increases or decreases because of an event occurring after the impairment was recognised, the previously recognised impairment loss is increased or reduced by adjusting the allowance account. If a future write-off is later recovered, the recovery is credited to finance costs in the statements of comprehensive income.  iii)Financial liabilities  Initial recognition and measurement  Financial liabilities are classified as financial liabilities at fair value through profit or loss or loans and borrowings. The Company determines the classification of its financial liabilities at initial recognition. All financial liabilities are recognised initially at fair value and in the case of loans and borrowings, plus directly attributable transaction costs.  The Company’s financial liabilities include trade accounts payable, accounts payable – programming suppliers, other current liabilities, debt and derivative financial instruments.  Subsequent measurement  The measurement of financial liabilities depends on their classification as follows:


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments –Continued  Financial liabilities at fair value through profit or loss  Financial liabilities at fair value through profit or loss include derivative financial instruments. Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Gains or losses on liabilities held for trading are recognised in the statements of comprehensive income. As of December 31, 2010 and 2009, the Company did not have any available-for-sale financial liabilities.  Loans and borrowings  After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest rate method. Gains and losses are recognised in the statements of comprehensive income when the liabilities are derecognised as well as through the effective interest rate method (EIR) amortisation process. As of December 31, 2010 and 2009, the Company had its debt instruments classified and loans and borrowings.  Derecognition  A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.  When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the statements of comprehensive income.  iv)Derivative financial instruments  The Company is exposed to market risk arising from its operations, and it uses derivatives to minimize its exposure to such risks. The Company uses derivative financial instruments such as forward currency contracts and interest rate swaps. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to the statements of comprehensive income.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.13 Financial instruments –Continued  Derivative instruments are classified as current or non-current or separated into a current and non-current portion based on an assessment of the underlying contracted cash flows.  v)Offsetting of financial instruments  Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position if, and only if, there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.  vi)Fair value of financial instruments  The fair value of financial instruments that are traded in active markets at each reporting date is determined by reference to quoted market prices or dealer price quotations (bid price for long positions and ask price for short positions), without any deduction for transaction costs.  For financial instruments not traded in an active market, the fair value is determined using appropriate valuation techniques. Such techniques may include using recent arm’s length market transactions; reference to the current fair value of another instrument that is substantially the same; a discounted cash flow analysis or other valuation models.  An analysis of fair values of financial instruments and further details as to how they are measured are provided in Notes 24 and 25.  2.14 Lease agreements  Leases in which substantially all the risks and ownership of the asset are not assumed by the Company are classified as operating leases. Operating lease payments are recorded in the income statement on a straight-line basis over the lease terms.  The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.15 Operating segment  An operating segment is defined as a component of an enterprise for which separate financial information is available and is evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources to an individual segment and in assessing performance of the segment. Since all decisions are made on the basis of consolidated reports, all services are provided using the same cable network, there are no managers responsible for any specific element of the business, and all decisions relating to strategic planning, finance, purchasing, investment and liquidity application are made on a consolidated basis, the Company has concluded it has a single reportable segment.  2.16 Significant accounting judgments, estimates and assumptions  The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.  a) Deferred income taxes  The amount of deferred income tax assets is reviewed at each reporting date and reduced by the amount that is no longer recoverable through estimates of future taxable income. Amounts reported involve considerable exercise of judgment by management and future taxable income may be higher or lower than the estimates considered when valuing a deferred tax asset.  Valuation allowances are established when management determines it is more likely than not that deferred tax assets will not be realized.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.16 Significant accounting judgments, estimates and assumptions –Continued  b) Valuation of assets acquired and liabilities assumed in business combinations  In recent years, as described in Note 3, the Company entered into certain business combinations. Under IFRS 3, the Company must allocate the cost of the acquired entity to the assets acquired and liabilities assumed based on their estimated fair values on acquisition date. Any excess of the cost of the acquired entity over the fair value of assets acquired and liabilities assumed is recorded as goodwill. The Company exercises significant judgment in identifying tangible and intangible assets and liabilities, valuing such assets and liabilities and determining their remaining useful lives. Management generally engages third party valuation consultants to assist in valuing the assets and liabilities.  The valuation assumptions include estimates of discounted cash flow and discount rates.  Use of alternative assumptions would result in different estimates of the value of assets acquired and liabilities assumed.  The assumptions used for assessment includes estimates of discounted cash flow or discounted rates and can result in different estimated values of assets acquired and liabilities assumed.  c) Test of impairment of non-financial assets  At each financial statement date, the Company assesses whether there are any indicators of impairment. Goodwill and indefinite-lived intangible assets are tested for impairment annually and at other times when indicators of impairment exist.  Recoverable amounts are determined based on value-in-use calculations, using discounted cash flow assumptions established by management. These calculations require the use of estimates and use of alternative assumptions would result in different estimates of the value of assets acquired and liabilities assumed. The key assumptions used to determine the recoverable amount for the cash generating unit, including a sensitivity analysis, are further explained in footnote 14.  d) Provisions  The Company records provisions that involve considerable exercise of judgment by management in estimating tax contingencies and civil liability and labor claims that may be liable for payment in future years as a result of tax inspections by tax authorities. The Company is also subject to various claims, legal, civil and labor proceedings covering a wide range of issues that arise from the ordinary course of business.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.16 Significant accounting judgments, estimates and assumptions –Continued  The Company records these liabilities when it determines, based on the opinion of its legal advisors, that losses are probable and can be reasonably estimated.  Provisions are reviewed and adjusted to consider changes in circumstances such as the applicable limitation period, findings of tax inspections or additional exposures identified based on new issues or court rulings. Actual results may differ from estimates.  2.17 Standards issued, but not yet effective  IAS 24 Related Party Disclosures (Amendment)  The amended standard is effective for fiscal periods beginning on or after January 1, 2011. It clarified the definition of a related party to simplify the identification of such relationships and to eliminate inconsistencies in its application.The Company does not expectthat this standard will have an impact in the Company’s consolidated financial statements.  IFRS 9 Financial Instruments  IFRS 9 as issued reflects the first phase of the IASBs’ work on the replacement of IAS 39 and applies to classification and measurement of financial assets as defined in IAS 39. The standard is effective for annual periods beginning on or after January 1, 2013. The Company does not expect that this standard will have a significant impact in the consolidated financial statements.  IFRIC 14 Prepayments of a minimum funding requirement (Amendment)  The amendment to IFRIC 14 is effective for annual periods beginning on or after January 1, 2011 with retrospective application. The amendment provides guidance on assessing the recoverable amount of a net pension asset. The amendment permits an entity to treat the prepayment of a minimum funding requirement as an asset. The Company does not expectthat this interpretation will have an impact in the Company’s consolidated financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 2. Summary of significant accounting policies –Continued  2.17 Standards issued, but not yet effective –Continued  IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments  IFRIC 19 is effective for annual periods beginning on or after July 1, 2010. The interpretation clarifies that equity instruments issued to a creditor to extinguish a financial liability qualify as consideration paid. The equity instruments issued are measured at their fair value. In case that this cannot be reliably measured, the instruments are measured at the fair value of the liability extinguished. Any gain or loss is recognized immediately in profit or loss. The Company does not expect that this interpretation will have an impact in the consolidated financial statements.  Improvements to IFRSs The IASB issued improvements to IFRSs, an omnibus of amendments to its IFRS standards. The amendments have not been adopted as they become effective for annual periods on or after either July 1, 2010 or January 1, 2011. The amendments listed below, are considered to have a reasonable possible impact on the Company: ·IFRS 3 Business Combination. ·IFRS 7 Financial Instruments: Disclosures. ·IAS 1 Presentation of Financial Statements.  The Company does not expect that these improvements to IFRS will have a significant impact in the consolidated financial statements.  As per management, there are no other standards and interpretations issued that have not yet been adopted by the Company and that management expects that could have a material effect in the Company’s consolidated statements of comprehensive income and changes in stockholders’ equity.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 3. Business combinations  Transactions - 2009 - Acquisition of ESC 90  On June 30, 2009, the Company concluded its acquisition of 100% of the shares of ESC 90 Telecomunicações Ltda. (ESC 90), a major cable-TV and broadband service provider in the cities of Victoria and Vila Velha, State of Espírito Santo. The cash purchase price of R$97,943 (net of cash acquired) exceeded the fair value of assets acquired and liabilities assumed by R$41,384, resulting in goodwill which is deductible for tax purposes. Management believes the benefits of the transaction include the potential to grow pay-TV revenues by offering more attractive content to ESC 90 customers, launch the digital TV platform, and strengthen the broadband Internet platform in the market covered by ESC 90.  Management also believes there are medium-term benefits in terms of cost savings arising from operational and financial synergy, and the Company’s competitive position in the market will be improved.  The acquisition has been accounted for using the purchase method and the financial statements and operational earnings of ESC 90 have been consolidated in the Company’s consolidated financial statements as of June 30, 2009.  The fair value of assets acquired and liabilities assumed is as follows:  Fair value on the acquisition dateAssetsProperty and equipment

   40,475Intangibles:Customers relationship - subscribers

   8,248Customer relationships - telecommunication

   6,895Licenses

   30,931Other assets

   8,641Total assets acquired

   95,190LiabilitiesProvisions

   (18,036)Other liabilities

   (5,961)Deferred income

   (14,634)Total liabilities assumed

   (38,631)Net assets acquired

   56,559Purchase price, net of cash acquired

   97,943Goodwill

   41,384
  The amounts of revenue and profit of ESC90 since the acquisition date are not presented herein, as ESC90 is not material to the consolidated financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 3. Business combinations –Continued  Transactions - 2008 - Acquisition of BIGTV  On December 29, 2008, the Company acquired for R$ 372,508 cash, net of cash acquired,100% of the outstanding shares and quotas with voting rights, of 614 TelecomunicaçõesLtda. and its subsidiaries which have operations in the Pay-TV and Broadband Internetmarket under the “BIGTV” brand (“BIGTV Companies”). The transaction resulted in therecognition of goodwill in the amount of R$ 278,098. The Company incurred otheracquisition costs of R$ 5,589, which are included in the purchase price.  The acquisition has been accounted for using the purchase method and the financialstatements and operational earnings of BIGTV Companies have been consolidated in theCompany’s consolidated financial statements as of December 29, 2008.  BIGTV Companies are Pay-TV and broadband Internet service providers in Brazil, whichhave operations in 12 cities, in the States of São Paulo (Guarulhos, Valinhos, Botucatu,Jaú, Sertãozinho and Marília), Paraná (Ponta Grossa, Cascavel, Cianorte andGuarapuava), Alagoas (Maceió) and Paraíba (João Pessoa).The acquisition of BIGTVCompanies will allow the Company to increase its operational geographical area in themost prosperous areas of the country. Management believes the benefits of the transactioninclude the opportunity to increase the pay TV revenues by offering content at attractiveterms, launching its digital platform in markets covered by BIGTV Companies andstrengthening its broadband platform in important markets in the states served by BIGTVCompanies. Management also believes the Company will benefit over the medium-termthrough cost reductions and operational and financial synergies and the acquisition willimprove its competitive position among current and future competitors.  The fair value of assets acquired and liabilities assumed is as follows:  Fair value on the acquisition dateAssetsProperty and equipments

   

   87,180IntangiblesCustomer relationships

   

   16,223Licenses

   

   94,602Other assets

   

   8,427Total assets acquired

   

   206,432LiabilitiesTax installment plan

   

   (1,756)Provisions

   

   (36,053)Other liabilities

   

   (27,945)Deferred income

   

   (46,268)Total liabilities assumed

   

   (112,022)Net assets acquired

   

   94,410Purchase price net of cash acquired

   

   372,508Goodwill

   

   278,098
  Revenues and net income for the acquired company in the period prior to the acquisition dates are not shown as these amounts are not material to the consolidated financial statements.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 4. Net sales  Net sales revenues for the year are as follows:  12/31/2010

   

   12/31/2009

   

   12/31/2008Gross sales

   

   7,101,588

   

   6,070,401

   

   4,852,755Taxes on sales

   

   (1,259,841)

   

   (1,094,667)

   

   (879,690)Discounts and cancellations

   

   (436,078)

   

   (362,345)

   

   (282,656)Net sales

   

   5,405,669

   

   4,613,389

   

   3,690,409
  Taxes levied on sales consist primarily of ICMS state value added tax (Pay TV 10%, broadband 25% to 30%), ISS municipal taxes on services (2% to 5%), federal taxes on revenue PIS (0.65% or 1.65%), and COFINS (3% or 7.60%), and FUST (1%) and FUNTTEL (0.5%) taxes. All the Company’s revenues are generated in Brazil.  5. Cost of services rendered  12/31/2010

   

   12/31/2009

   

   12/31/2008Programming costs

   

   (1,262,083)

   

   (1,037,368)

   

   (849,006)Materials and maintenance

   

   (62,785)

   

   (53,488)

   

   (44,531)Personnel

   

   (385,621)

   

   (319,857)

   

   (224,539)Pole rental

   

   (70,457)

   

   (78,629)

   

   (55,124)Depreciation

   

   (600,911)

   

   (496,183)

   

   (322,700)Amortization

   

   (166,284)

   

   (18,713)

   

   (81,357)Programming guide

   

   (12,744)

   

   (12,976)

   

   (13,782)Third party service

   

   (393,341)

   

   (335,984)

   

   (240,378)Network electrical power

   

   (27,495)

   

   (39,072)

   

   (34,288)Vehicles

   

   (38,151)

   

   (30,095)

   

   (22,892)Telecommunications

   

   (246,332)

   

   (295,350)

   

   (205,381)Copyrights – ECAD

   

   (46,571)

   

   (41,175)

   

   (29,772)Sales commission

   

   (1,700)

   

   (1,714)

   

   (1,548)Lease of ducts

   

   (21,049)

   

   (7,434)

   

   (7,012)Other

   

   (11,294)

   

   (21,774)

   

   (21,144)(3,346,818)

   

   (2,789,812)

   

   (2,153,454)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 6. Finance results  12/31/2010

   

   12/31/2009

   

   12/31/2008Finance income:Interest on cash and cash equivalents

   

   84,585

   

   54,027

   

   89,980Interest on prepaid rights for use

   

   46,672

   

   3,779

   

   -Interest and fines on late monthly payments

   

   31,938

   

   25,951

   

   18,843Interest on tax credits

   

   5,226

   

   3,143

   

   3,065Discounts obtained

   

   616

   

   181

   

   599Other

   

   317

   

   5,698

   

   1,448169,354

   

   92,779

   

   113,935Finance expenses:Finance charges on loans and debentures

   

   (183,710)

   

   (179,355)

   

   (157,474)Monetary exchange rate variation on debt

   

   37,646

   

   195,831

   

   (236,281)Finance charges and monetary exchange – related parties

   

   (75,215)

   

   (11,270)

   

   (4,151)Finance charges on provisions for contingencies

   

   (10,580)

   

   (12,838)

   

   (8,360)Reversal of PIS/COFINS (footnote 20)

   

   -

   

   124,269

   

   -Losses on derivatives

   

   (65,915)

   

   (97,345)

   

   4,977IOF tax on intercompany transactions

   

   (23,343)

   

   (11,185)

   

   5,490PIS and COFINS taxes on interest income

   

   (11,041)

   

   (10,870)

   

   (9,370)Interest on suppliers and taxes

   

   (4,895)

   

   (4,808)

   

   (976)Discounts extended

   

   (15,107)

   

   (9,892)

   

   (2,930)Monetary and exchange rate variation on programming liabilities

   

   16

   

   2,599

   

   (3,827)Other

   

   (7,278)

   

   (12,471)

   

   (19,560)(359,422)

   

   (27,335)

   

   (432,462)Total

   

   (190,068)

   

   65,444

   

   (318,527)
  7. Expenses by nature The Company elected to present its consolidated statement of comprehensive income by function. The table below shows details by nature:  12/31/2010

   

   12/31/2009

   

   12/31/2008Programming costs

   (1,262,083)

   

   (1,037,368)

   

   (849,006)Other costs

   (538,577)

   

   (581,707)

   

   (435,472)Third party service

   (795,416)

   

   (635,339)

   

   (492,295)Depreciation and amortization

   (901,225)

   

   (618,748)

   

   (493,368)Payroll expenses

   (750,843)

   

   (651,203)

   

   (531,773)Other income and expenses

   (499,466)

   

   (465,555)

   

   (402,958)(4,747,610)

   

   (3,989,920)

   

   (3,204,872)Classified as:Cost of services sold

   (3,346,818)

   

   (2,789,812)

   

   (2,153,454)Selling expenses

   (594,470)

   

   (505,063)

   

   (429,545)General and administrative expenses

   (792,597)

   

   (634,656)

   

   (604,968)Other

   (13,725)

   

   (60,389)

   

   (16,905)(4,747,610)

   

   (3,989,920)

   

   (3,204,872)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 8. Cash and cash equivalents  12/31/2010

   

   12/31/2009Cash and banks

   

   43,227

   

   138,994Banking deposit certificates

   

   15,297

   

   98,106Fixed-income investment funds

   

   763,036

   

   778,505821,560

   

   1,015,605
  Bank deposit certificates (CDBs) earn an average of 100 % of the Interbank Certificate of Deposit (CDI) rate (10.64% in 2010 and 9.84% in 2009). CDBs are highly liquid investments issued by first-line banks with floating interest rates based on the CDI rate. The Company has immediate and total access to these CDBs.  Fixed-income investment funds are represented by shares in exclusive investment funds whose assets are mainly CDBs and government bonds. The Company has immediate and total access to these funds.  9. Trade accounts receivable  12/31/2010

   

   12/31/2009Trade accounts receivable

   

   395,465

   

   306,123(-) Allowance for doubtful accounts

   

   (44,560)

   

   (42,171)350,905

   

   263,952
  Due dates of the receivables are as follows:  12/31/2010

   

   12/31/2009Due

   

   211,820

   

   160,826Overdue:Up to 30 days

   

   116,939

   

   83,25631 – 60 days

   

   18,580

   

   15,28861 – 90 days

   

   11,628

   

   12,06091- 180 days

   

   36,498

   

   34,693395,465

   

   306,123
  The average term for receipt of subscriptions receivable is approximately 30 days.  The allowance for doubtful accounts is mainly comprised by amounts overdue from 90 to 180 days.  Amounts overdue by more than 180 days are written off.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 9. Trade accounts receivable– Continued  Allowance for doubtful accounts is shown below: At January 1, 2008

   

   (29,764)Expense for the year

   

   (40,310)Utilized

   

   32,111At  December 31, 2008

   

   (37,963)Expense for the year

   

   (41,053)Utilized

   

   36,845At December 31, 2009

   

   (42,171)Expense for the year

   

   (41,311)Utilized

   

   38,922At December 31, 2010

   

   (44,560)
  10. Inventories  12/31/2010

   

   12/31/2009Material for maintenance of networks

   

   32,379

   

   24,479Material for technical assistance

   

   49,671

   

   34,28482,050

   

   58,763
  In the year ended December 31, 2010, the Company consumed R$62,785 (R$53,488 in 2009 and R$44,531 in 2008) of materials related to the maintenance of networks and technical assistance, which were recorded in cost of services rendered.  11. Judicial deposits  The Company has judicial deposits related to labor, civil, tax and social security claims as shown below:  Judicial deposits

   

   12/31/2010

   

   12/31/2009Labor

   

   13,754

   

   9,409Civil

   

   2,519

   

   1,638Lease of poles and ducts

   

   21,354

   

   22,871Copyrights – ECAD

   

   25,633

   

   20,459Tax

   

   16,976

   

   16,733Social Security

   

   3,499

   

   3,49983,735

   

   74,609
   All states in which Net Serviços’ subsidiaries operate, except for the State of Rio Grande do Sul, are subject to to the provisions in the ICMS Agreement 57/99. The current ICMS tax rate under this Agreement is 10%. The State of Rio Grande do Sul is taxing such services at the rate of 12%. The Company challenged the rate of 12% and made judicial deposits of the amounts in excess of the rates in effect under the ICMS Agreement 57/99. However, in November 2009 a judicial decision was made in favor of the State resulting in the release of R$50,869 from the related judicial deposit in favor of the State.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 12. Income taxes and social contribution  a. Income taxes and social contribution  Income taxes in Brazil include federal income taxes and social contribution on net profits.  12/31/2010

   

   12/31/2009

   

   12/31/2008Current income tax and social contribution expenses

   

   (78,063)

   

   (111,561)

   

   (81,215)Deferred income tax and social contribution on:Temporary differences

   

   20,741

   

   202,980

   

   (1,190)Tax losses and negative tax basis of social contribution

   

   (31,332)

   

   (30,986)

   

   (1,398)Goodwill

   

   (89,259)

   

   (29,489)

   

   (76,157)Amortization property, equipment and intangible

   

   17,073

   

   16,091

   

   13,204Total deferred tax income

   

   (82,777)

   

   158,596

   

   (65,541)Total income tax benefit (expenses)

   

   (160,840)

   

   47,035

   

   (146,756)
   The statutory rates applicable for federal income taxes and social contribution are 25% and 9%, respectively, which represent an aggregate rate of 34%, for 2010, 2009 and 2008.  The amounts reported as income tax expense in the consolidated statements of comprehensive income are reconciled to the statutory rates as follows:  12/31/2010

   

   12/31/2009

   

   12/31/2008Profit before incometaxesand social contribution

   467,991

   

   688,913

   

   167,010Income taxes and social contribution at the nominal rate of 34%

   (159,117)

   

   (234,230)

   

   (56,783)(Additions) / exclusions:Income taxes and social contribution on permanently nondeductible expenses

   (2,623)

   

   (9,297)

   

   (21,472)Other reconciling items:Recognition of deferred income taxes and social contribution on tax losses and negative base from prior years

   -

   

   872

   

   5,479Unrecorded benefit from current year tax losses

   (59,338)

   

   (46,931)

   

   (87,214)Offsetting of tax losses and negative basis for social contribution taxes, for which deferred tax     asset was not recognized in previous years

   7,825

   

   47,352

   

   24,326Recognition/ derecognition of deferred income taxes and social contribution on temporary differences, including temporary differences originating from previous years

   45,614

   

   293,736

   

   14,200Other

   6,799

   

   (4,467)

   

   (25,292)Incometaxesand social contribution for the year

   (160,840)

   

   47,035

   

   (146,756)Effective rate

   (34.37%)

   

   6.83%

   

   (87.87%)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 12. Income taxes and social contribution –Continued  a. Income taxes and social contribution –Continued  Brazilian tax law allows tax losses to be carried forward indefinitely to be utilized to offset future taxable income. Tax legislation enacted in 1995 limits the utilization of tax loss carry forwards in a given year to 30% of taxable income.  Deferred tax assets are recognized on tax losses and negative calculation bases for the social contribution taxes are supported by projections of taxable income based on technical feasibility studies. These studies consider the history of profitability of the Company and its subsidiaries and the prospect of maintaining current profitability in the future as the basis for estimated recovery of credits within a period of not more than 10 years. The remaining deferred tax assets, which are based on temporary differences, mainly tax contingencies and provisions for losses, were recognized based on expectations for their realization.  12/31/2010

   

   12/31/2009Recoverable taxes:Withhold income tax

   38,515

   

   30,359Recoverable federal taxes

   66,052

   

   43,479Recoverable state tax

   17,572

   

   490Other

   762

   

   352122,901

   

   74,680Current

   28,385

   

   3,624Non-current

   94,516

   

   71,056Deferred taxes:AssetsIncome taxes:Tax loss carryforwards

   218,239

   

   241,041Temporary differences:Provisions

   102,762

   

   100,940Allowance for doubtful accounts

   19,712

   

   8,890Profit participation plan

   25,140

   

   25,364Currency exchange and derivative losses

   12,714

   

   11,024Property, equipment, inventories and trade payables

   24,585

   

   20,870Goodwill

   8,533

   

   61,689193,446

   

   228,777411,685

   

   469,818Social contribution:Tax loss carryforwards

   81,098

   

   89,628Temporary differences:Provisions

   36,994

   

   36,338Allowance for doubtful accounts

   7,076

   

   3,201Profit participation plan

   9,050

   

   9,131Currency exchange and derivative losses

   4,577

   

   3,968Property, equipment, inventories and trade payables

   8,850

   

   7,513Goodwill

   3,093

   

   22,20869,640

   

   82,359150,738

   

   171,987562,423

   

   641,805Tax credits resulting from goodwill  Net Brasília Ltda.

   -

   

   2,131562,423

   

   643,936


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 12. Income taxes and social contribution –Continued  b. Deferred and recoverable taxes  Rollforward of deferred tax assets

   Tax loss carryforwards

   

   Temporary differences

   

   TotalBalance on December 31,2008

   364,498

   

   123,872

   

   488,370Additions

   -

   

   378,998

   

   378,998Reductions

   (33,829)

   

   (191,734)

   

   (225,563)Balance on December 31, 2009

   330,669

   

   311,136

   

   641,805Additions

   -

   

   64,916

   

   64,916Reductions

   (31,332)

   

   (112,966)

   

   (144,298)Balance on December 31, 2010

   299,337

   

   263,086

   

   562,423
  Liabilities

   Income taxes:

   Temporary differences

   12/31/2010

   

   12/31/2009Intangible assets

   136,687

   

   136,487Property and equipment

   (1,967)

   

   (2,096)Other

   1,363

   

   760136,083

   

   135,151Social contribution:Temporary differencesIntangible assets

   49,205

   

   49,135Property and equipment

   (708)

   

   (754)Other

   491

   

   27348,988

   

   48,654185,071

   

   183,805
  The balance of deferred income tax and social contribution liability derived from business combinations of companies Vivax Ltda., Net Jundiaí Ltda., Big TV and ESC90 whose roll forward schedule is as follows: Rollforward of deferred tax liabilitiesBalance on December 31,2008

   185,156Additions

   14,634Reductions

   (15,985)Balance on December 31, 2009

   183,805Additions

   18,542Reductions

   (17,276)Balance on December 31, 2010

   185,071
   During 2010 and 2009, the Company merged with several profitable subsidiaries. Therefore, supported by projected future taxable income arising from operating activities of these subsidiaries, the Company recognized deferred tax assets on temporary differences, based on expected recovery of tax credits.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 12. Income taxes and social contribution –Continued  b. Deferred and recoverable taxes –Continued  The estimated realization of deferred tax assets is determined based on the projection of future taxable income as follows:  2011

   155,6022012

   140,1472013

   92,8142014

   113,0692015 to 2020

   60,791562,423
  The estimates for recovery of deferred tax assets are reviewed at least once a year and are based on projections of taxable income considering several financial and business assumptions prevailing at December 31, 2010 that are the same used for the assessment of recovery assets disclosed in note 14. Consequently, these estimates may not be realized in the future as expected due to the uncertainties inherent in these forecasts.  The Company has tax loss and a negative basis of social contribution to offset 30% of the annual taxable income, without expiration, for the following amounts:  12/31/2010

   

   12/31/2009Incometax

   Social contribution

   Total

   

   Incometax

   Social contribution

   TotalGross amounts

   2,817,601

   3,350,400

   -

   

   3,074,644

   3,741,608

   -Tax benefit (25% / 9%)

   704,400

   301,536

   1,005,936

   

   768,661

   336,745

   1,105,406Recognized tax benefit

   (218,239)

   (81,098)

   (299,337)

   

   (241,041)

   (89,628)

   (330,669)Non-recognized tax benefit

   486,161

   220,438

   706,599

   

   527,620

   247,117

   774,737


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 13.Property, plant and equipment  Cost

   Network

   

   Software and computer equipment

   

   Machinery and equipment

   

   Furniture and fixtures

   

   Facilities and improvements

   

   Vehicles

   

   Tools

   

   Land and other

   

   TotalBalances on December 31, 2008

   4,661,235

   

   112,471

   

   42,642

   

   26,859

   

   76,151

   

   5,035

   

   33,452

   

   4,540

   

   4,962,385Additions

   982,325

   

   21,467

   

   1,345

   

   1,798

   

   7,804

   

   405

   

   7,350

   

   918

   

   1,023,412Additions through acquisition of companies

   32,136

   

   692

   

   68

   

   220

   

   8

   

   115

   

   210

   

   -

   

   33,449Write- offs

   (42,506)

   

   (1,582)

   

   (346)

   

   (435)

   

   (3)

   

   (462)

   

   (88)

   

   (47)

   

   (45,469)Balances on December 31, 2009

   5,633,190

   

   133,048

   

   43,709

   

   28,442

   

   83,960

   

   5,093

   

   40,924

   

   5,411

   

   5,973,777Additions

   1.149.341

   

   6,115

   

   1,180

   

   2,411

   

   11,157

   

   57

   

   9,418

   

   2,732

   

   1,182,411Transfers

   (93)

   

   3

   

   (27)

   

   32

   

   (15)

   

   -

   

   -

   

   -

   

   (100)Write- offs

   (108,906)

   

   (854)

   

   -

   

   (42)

   

   (23)

   

   (994)

   

   (176)

   

   -

   

   (110,995)Balances on December 31, 2010

   6,673,532

   

   138,312

   

   44,862

   

   30,843

   

   95,079

   

   4,156

   

   50,166

   

   8,143

   

   7,045,093Accumulated depreciationDepreciation rate per annum

   8.33% to 20%

   

   20% to 33.33%

   

   10%

   

   10%

   

   4% to 25%

   

   20%

   

   20%

   

   -

   

   -Balances on December 31, 2008

   (2,542,204)

   

   (81,485)

   

   (28,687)

   

   (15,899)

   

   (38,111)

   

   (3,173)

   

   (15,145)

   

   -

   

   (2,724,704)Additions – purchase

   (487,042)

   

   (15,341)

   

   (3,214)

   

   (2,062)

   

   (4,213)

   

   (1,062)

   

   (5,957)

   

   -

   

   (518,891)Transfers

   1,505

   

   286

   

   (197)

   

   (13)

   

   (1,454)

   

   (101)

   

   506

   

   502

   

   1,034Write- offs

   33,267

   

   1,624

   

   197

   

   255

   

   -

   

   393

   

   85

   

   -

   

   35,821Balances on December 31, 2009

   (2,994,474)

   

   (94,916)

   

   (31,901)

   

   (17,719)

   

   (43,778)

   

   (3,943)

   

   (20,511)

   

   502

   

   (3,206,740)Additions – purchase

   (593,672)

   

   (17,868)

   

   (2,766)

   

   (2,081)

   

   (4,351)

   

   (497)

   

   (7,045)

   

   -

   

   (628,280)Transfers

   62

   

   (25)

   

   (9)

   

   (5)

   

   14

   

   -

   

   -

   

   -

   

   37Write- offs

   110,299

   

   854

   

   -

   

   19

   

   13

   

   878

   

   177

   

   -

   

   112,240Balances on December 31, 2010

   (3,477,785)

   

   (111,955)

   

   (34,676)

   

   (19,786)

   

   (48,102)

   

   (3,562)

   

   (27,379)

   

   502

   

   (3,722,743)Net book value at December  31, 2008

   2,119,031

   

   30,986

   

   13,955

   

   10,960

   

   38,040

   

   1,862

   

   18,307

   

   4,540

   

   2,237,681Net book value at December  31, 2009

   2,638,716

   

   38,132

   

   11,808

   

   10,723

   

   40,182

   

   1,150

   

   20,413

   

   5,913

   

   2,767,037Net book value at December  31, 2010

   3,195,747

   

   26,357

   

   10,186

   

   11,057

   

   46,977

   

   594

   

   22,787

   

   8,645

   

   3,322,350
  On December 31, 2010, R$140,470 (R$3,265 on December 31, 2009) of property and equipment items were provided as a guarantee for certain fiscal and labor claims against the Company.  During the year ended December 31, 2010, the Company transferred items in the amount of R$83,983 (R$35,061 during 2009) from inventories to property, plant and equipment.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 14. Intangible assets  Indefinite useful life

   

   Finite useful lifeCost

   Goodwill

   

   Licenses

   

   Software

   

   Customer portfolio

   

   Other

   

   TotalBalances on December  31, 2008

   1,903,563

   

   407,795

   

   362,216

   

   289,223

   

   8,107

   

   2,970,904Additions

   -

   

   -

   

   69,760

   

   

   

   -

   

   69,760Additions through acquisition of companies

   25,053

   

   30,931

   

   64

   

   15,144

   

   -

   

   71,192Transfers

   -

   

   -

   

   (1,165)

   

   -

   

   -

   

   (1,165)Balances on December  31, 2009

   1,928,616

   

   438,726

   

   430,875

   

   304,367

   

   8,107

   

   3,110,691Additions

   -

   

   -

   

   67,484

   

   -

   

   -

   

   67,484Transfers

   -

   

   -

   

   100

   

   -

   

   -

   

   100Write- offs

   -

   

   -

   

   (20,380)

   

   -

   

   -

   

   (20,380)Balances on December 31, 2010

   1,928,616

   

   438,726

   

   478,079

   

   304,367

   

   8,107

   

   3,157,895Accrued amortizationAmortization rate per annum

   -

   

   -

   

   20%

   

   16.67%

   

   20%

   

   -Balances on December 31, 2008

   (178,742)

   

   (1,806)

   

   (225,794)

   

   (89,595)

   

   (5,210)

   

   (501,147)Additions

   -

   

   

   

   (35,183)

   

   (49,466)

   

   (1,634)

   

   (86,283)Write- offs

   -

   

   

   

   (93)

   

   -

   

   -

   

   (93)Balances on December 31, 2009

   (178,742)

   

   (1,806)

   

   (261,070)

   

   (139,061)

   

   (6,844)

   

   (587,523)Additions

   -

   

   -

   

   (53,601)

   

   (50,727)

   

   (448)

   

   (104,776)Transfers

   -

   

   -

   

   (36)

   

   -

   

   -

   

   (36)Write- offs

   -

   

   -

   

   20,380

   

   -

   

   -

   

   20,380Balances on December 31, 2010

   (178,742)

   

   (1,806)

   

   (294,327)

   

   (189,788)

   

   (7,292)

   

   (671,955)Net book value at December 31, 2008

   1,724,821

   

   405,989

   

   136,422

   

   199,628

   

   2,897

   

   2,469,757Net book value at December 31, 2009

   1,749,874

   

   436,920

   

   169,805

   

   165,306

   

   1,263

   

   2,523,168Net book value at December 30, 2010

   1,749,874

   

   436,920

   

   183,752

   

   114,579

   

   815

   

   2,485,940
  The Company has goodwill arising from the excess of the purchase price over the fair value of net assets of the acquired companies, calculated on the purchase date, based on expectations of future profitability. The licenses acquired in connection with business combinations and accounted for based on their fair values at their acquisition date are not amortizedif they have anindefinite useful life. This indefinite useful life was determined based on the fact that these licenses are automatically renewable if the Company meets the mandatory requirements of ANATEL. Brazilian law guarantees renewal of these licenses and the Company intends in extending them indefinitely.  Intangible assets with finite useful lives are represented mainly by rights to use software internally developed together with specialized companies, adapted for use by the Company based on existing software available in the market, which are amortized over 60 months, and by the customer portfolio, which is amortized over 72 months or the average estimated period that subscribers remain connected to the system.  The Company tests its goodwill for impairment at least annually based on its value in use using the discounted cash flow model based on the lowest appropriate cash-generating unit. The Company operates in a single segment and has a single cash generating unit since it uses a single cable system to provide all of its services to its customers and all decisions made are based on consolidated financial and operating data.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 14. Intangible assets– Continued  Key assumptions for the value in use estimates, for which asset recovery is more sensitive, are described below:  ·Revenue – Revenues were projected on the basis of the Company’s budget of the next fiscal year and business plan covering the period of 2011 – 2015, taking into account the growth of the connected households base, the mix of multiservice offered to pay TV subscribers, broadband Internet and voice.  ·Costs and operating expenses – The costs and expenses were projected on the basis of the Company’s historical performance, and expense growth was projected in line with the growth of the connected homes base taking into account the expected volume of new sales, installations and changes in mix of products designed by management.  ·Capital investments – Investments in property and equipment were estimated on the basis of the infrastructure required to support the growth of the connected homes base, investments for renewal and maintenance of cable network and technological changes needed  to enable the continuous offer of value-added multiservice to the base of connected households.  Key assumptions were made considering the Company’s historical performance, the current dynamics and market forecasts of pay TV, broadband internet, voice and reasonable macroeconomic assumptions consistent with external information sources based on financial market projections documented and approved by the management and the Board of Directors.  Consistent with standard valuation techniques, evaluation of value in use was made for a 5-year period and thereafter takes into account the potential for the Company to operate for an indeterminate period. Income growth rates applied are consistent with long-term macroeconomic expectations and significant demographic data available, which are reviewed on a yearly basis based on the historical performance and perspectives of the sector where the Company operates. The Company used the zero nominal growth rates to extrapolate the projections beyond the period of 5 years.  Estimated future cash flows were discounted at a single discount rate of fifteen per cent in this fiscal year.  As a result of the impairment testing, management has concluded there has been no impairment of the Company’s intangible assets, even when considering conservative assumptions in a sensible adverse scenario.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 15. Trade accounts payable  12/31/2010

   

   12/31/2009Domestic suppliers

   

   324,681

   

   292,994Foreign suppliers

   

   24,799

   

   34,721349,480

   

   327,715
  The trade accounts payable do not bear interest and usually are settled in 30 days.  16.  Accounts payable - programming suppliers  Description

   

   12/31/2010

   

   12/31/2009Related partiesNet Brasil S.A.

   

   81,610

   

   60,903Globosat Programadora Ltda.

   

   -

   

   8,79681,610

   

   69,699Third parties

   

   53,203

   

   54,903134,813

   

   124,602
  The table below shows programming and related costs incurred:  Operating incomeCompanies

   12/31/2010

   

   12/31/2009

   

   12/31/2008Related partiesNet Brasil S.A.

   (905,929)

   

   (674,744)

   

   (541,687)Globosat Programadora Ltda.

   -

   

   (8,227)

   

   (24,472)(905,929)

   

   (682,971)

   

   (566,159)Third parties

   (356,154)

   

   (354,397)

   

   (282,847)(1,262,083)

   

   (1,037,368)

   

   (849,006)
  Net Brasil S.A., a related party, serves as the agent and negotiates with producers and audiovisual programming suppliers for the acquisition of Brazilian content in its own name.  The contract establishes that all rights and obligations provided for in the acquisition of Brazilian program content that have been agreed upon between Net Brasil S.A. and the respective programming suppliers continue in full force until the end of their term of validity on November 2015.  Additionally, the contracts for the acquisition of existing international program content are negotiated by the Company directly and remain valid between 2011 and 2013.  In 2010, pay per view (PPV) programming previously acquired from Globosat started being acquired from Net Brasil S.A.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 17. Debt Effective interest rate per annumLocal currency

   Currency

   Nominal interest rate per annum

   12/31/2010

   

   12/31/2009

   

   12/30/2010

   

   12/31/2009Current

   

   Non-current

   

   Total

   

   Current

   

   Non-current

   

   TotalLocal currencyFiname

   R$

   TJLP + 3.15%

   9.15%

   

   9.15%

   

   65,512

   

   80,598

   

   146,110

   

   62,440

   

   154,998

   

   217,438Finame PSI

   R$

   4.50 to 5.50%

   4.50%

   

   -

   

   2,373

   

   110,608

   

   112,981

   

   -

   

   -

   

   -Bank Credit Note

   R$

   CDI + 2.10% to 2.55%

   12.96%

   

   11.39%

   

   2,679

   

   145,000

   

   147,679

   

   2,704

   

   170,000

   

   172,70470,564

   

   336,206

   

   406,770

   

   65,144

   

   324,998

   

   390,142Foreign currencyGlobal Notes 2020

   US$

   7.50%

   8.57%

   

   8.57%

   

   20,628

   

   578,345

   

   598,973

   

   7,510

   

   603,940

   

   611,450Perpetual Notes

   US$

   9.25%

   10.57%

   

   10.57%

   

   2,495

   

   249,930

   

   252,425

   

   2,531

   

   261,180

   

   263,711Banco Inbursa S.A.

   US$

   7.88%

   9.22%

   

   9.22%

   

   5,653

   

   330,429

   

   336,082

   

   5,940

   

   345,164

   

   351,10428,776

   

   1,158,704

   

   1,187,480

   

   15,981

   

   1,210,284

   

   1,226,265Loans and financings Total

   

   

   

   

   

   

   99,340

   

   1,494,910

   

   1,594,250

   

   81,125

   

   1,535,282

   

   1,616,407Debentures12/31/2010

   

   12/31/2009Non-convertible debentures

   

   

   58,000

   

   58,000

   

   5,525

   

   578,476

   

   584,001

   

   4,350

   

   578,047

   

   582,397Total debt

   

   

   

   

   

   

   104,865

   

   2,073,386

   

   2,178,251

   

   85,475

   

   2,113,329

   

   2,198,804
  Bank Credit Note  In November 2006, the Company contracted with Itaú Bank a bank credit note in the total amount of R$220,000, of which R$50,000 was prepaid by the Company in 2007.  On August 31, 2009, the note was amended and repayments of principal rescheduled from 2011 to 2014, 2015 and 2016. Additionally, finance charges on this note were changed from CDI plus a spread of 1.2% to CDI plus a spread of 2.55% per annum, with no retroactive effect.  Global Notes 2020  On November 4, 2009, the Company issued Guaranteed Notes of US$350 million (equivalent to R$593,425 as of December 31, 2010), with maturity in January,  2020 and a nominal interest rate of  7.5% per annum, payable semiannually in January and July of each year. The Notes are guaranteed by all the Company's subsidiaries.  The securities can be redeemed in full or in part any time.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 17. Debt– Continued  Perpetual Notes  On November 28, 2006, the Company issued Guaranteed Perpetual Notes in the amount of US$150 million (equivalent to R$326,966 as of December 31, 2010), with indefinite maturity and an annual interest rate of 9.25% per annum, payable in the second month of each quarter.  The Notes are guaranteed by all the Company's subsidiaries. Since November 2009, the Company has the option to redeem, in whole but not in part, on the date of any interest payment, 100% of the principal amount thereof, plus accrued and unpaid interest and any additional amounts payable.  FINAME  Since 2007, for the purpose of acquiring digital signal equipment, the Company has received financing using funds from FINAME - Government Agency for Machinery and Equipment Financing. For the year ended December 31, 2010, funds raised under this program amounted to R$103,716 (R$83,584 in 2009 and R$93,503 in 2008). These contracts are subject to interest rate at 100% of the long-term interest rate (TJLP) rate plus an average spread of 3.15% per annum and a fixed rates between 4.50% and 5.50 per annum, a five year term, and are collateralized by the assets financed.  Banco Inbursa S.A.  On June 19, 2008 the Company, executed a borrowing arrangement with Banco Inbursa S.A., a Mexican bank which is affiliated with the conglomerate Grupo Carso. Grupo Carso also includes Mexico’s national telephone company Telmex Group, which is an indirect shareholder of the Company. The borrowing in the amount of US$200,000 (equivalent to R$319,520 as of December 31, 2010) is repayable in 3 annual installments on June 2017, 2018 and 2019.  Interest is payable semi-annually, on October and April of each year. The Company may, at its option, prepay the borrowing in whole or in part at any time from June 2013. This borrowing is guaranteed by the Company and its subsidiaries  Debentures  On December 1, 2006, the Company completed its 6th debenture issuance by offering 58,000 simple debentures, of the nominal amount, single series, par value, non-secured and subordinated type in the amount of R$580,000.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 17. Debt –Continued  Debentures –Continued  On September 23, 2009, as decided during the Company debenture holders’ meeting, the term of debentures was amended and repayments were rescheduled from December 1, 2013 to June 1, 2015, with annual amortization beginning on June 1, 2012.  The following decisions were also approved at the meeting: (i) beginning October 1, 2009, debenture remuneration corresponded to 100% of the accumulated daily CDI variance plus a spread of 1.6% per annum as compared to remuneration of 0.7% per annum valid until September 30, 2009 and (ii) a payment of R$1,760 as a bonus for renewing debentures was paid on October 1, 2009 to the holder of these debentures. The remaining items related to the 6th issuance remain unchanged.  Covenants  The Company is committed to complying with a number of restrictive covenants related to the outstanding borrowings, the most important of which are:  -Maintenance of the ratio obtained from dividing Net Consolidated Debt by   EBITDA, as defined in the debt agreement, at less than 2.5; -Maintenance of the ratio obtained from dividing EBITDA by expenses net of consolidated interest, as defined in the debt agreement, at 1.5 or above.  As of December 31, 2010, the Company is in compliance with these above mentioned covenants.  Debt cost  As of December 31, 2010, the Company has R$10,471 of debt costs that are recorded offsetting the correspondent debt. The amortization schedule of these costs is set out below:  Year

   

   Inbursa

   

   Debentures

   

   Global Notes 2020

   

   Total2011

   

   265

   

   429

   

   616

   

   1,3102012

   

   286

   

   434

   

   616

   

   1,3362013

   

   310

   

   439

   

   616

   

   1,3652014

   

   336

   

   437

   

   616

   

   1,3892015 – 2019

   

   1,879

   

   215

   

   2,977

   

   5,0713,076

   

   1,954

   

   5,441

   

   10.471


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 18. Copyright payable - ECAD  ECAD (Escritório Central de Arrecadação e Distribuição) is an organization which acts as the legal representative of artists and authors in collecting on their behalf the royalties from public broadcast of music. As of December 31, 2010 the Company and its subsidiaries had a provision of R$99,386 (R$77,794 on December 31, 2009) for amounts payable to ECAD andhave judicial deposits of R$25,633 (R$20,459 on December 31, 2009) as disclosed in note11.  19. Related parties  a)Employee benefits Employee salary, benefits and related expenses are stated as follows: Description

   

   12/31/2010

   

   12/31/2009

   

   12/31/2008Payroll and related charges

   

   534,561

   

   432,873

   

   341,627Profit participation plan

   

   82,077

   

   106,916

   

   108,134Statutory benefits

   

   78,693

   

   67,478

   

   49,856Additional benefits

   

   55,512

   

   43,936

   

   32,156750,843

   

   651,203

   

   531,773
  Additional benefits:  In addition to the usual benefits required by labor legislation, the Company and its subsidiaries provide additional benefits contracted with third parties, such as: health and dental insurance and group life insurance, whose actuarial risks are not assumed by the Company.  The Company and its subsidiaries have complementary remuneration plans considering fulfillment of targets:  (i)Profit Participation Plan (PPR): the Company must remunerate its staff on the basis of profit sharing in the amount of up to three additional monthly salaries, in the event that the performance targets established according to annual planning approved by the Company’s Board of Directors are met.  (ii)AdditionalProfit Participation Plan (PPR – Short term):the Company also rewards a select number of members of management, directors and managers duly approved by the Board of Directors in the form of differentiated salaries.This supplement is geared to additional targets and in exceptional cases may be exempted from these conditions, as decided by the Board of Directors.  (iii)Long-termProfit Participation Plan(PPR long-term): the Company also rewards a select number of members of management, directors and managers duly approved by the Board of Directors in the form of differentiated salaries. The purpose of this supplement is to retain the services of these collaborators.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  a)Employee benefits– Continued  Additional benefits– Continued  (iv)Profit Participation Additional Plan (PPR):the Company will make an additional payment of up to 0.6 of the monthly salary of employees. The principal purpose of this supplementary payment is to have the Board of Directors targets fulfilled 100% to 120%.  In connection with these plans, as of December 31, 2010, the Company had recorded provisions for salaries and social charges in the amount of R$100,626 (R$132,495 on December 31, 2009).  b)Management’s remuneration  Remuneration paid to the Company's management for services in their respective fields of competence is shown below:  12/31/2010

   

   12/31/2009

   

   12/31/2008Short-term remuneration

   

   4,053

   

   12,169

   

   19,503Long-term remuneration

   

   5,248

   

   3,921

   

   5,7919,301

   

   16,090

   

   25,294
  The remuneration consists of fixed and variable compensation plans as profit sharing and bonus plans additional profits short and long term, as mentioned in item a) above.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies  The main asset and liability balances and profit and loss resulting from the transactions among related parties are shown below:  Current assetsTrade accounts receivable

   

   Related parties

   

   Prepaid rights for use

   

   TotalCompanies

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   12/31/2009

   

   12/31/2010

   12/31/2009StockholdersEmp. Brasil. de Telecom. S.A. Embratel

   

   -

   

   24,801

   

   172,536

   175,088

   

   172,536

   199,889Associated companiesGlobosat Programadora Ltda.

   

   246

   

   -

   

   -

   -

   

   246

   -246

   

   24,801

   

   172,536

   175,088

   

   172,782

   199,889
   Non current assetsPrepaid rights for useCompanies

   

   12/31/2010

   

   12/31/2009StockholdersEmp. Brasil.de Telecom. S.A. – Embratel

   

   487,307

   

   659,842487,307

   

   659,842






Table of Contents



NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies– Continued   Current liabilitiesTrade accounts payable

   

   Accounts payable programming suppliers

   

   Debt

   

   Deferred revenues

   

   Related

   parties

   

   TotalCompanies

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   

   12/31/2010

   

   12/31/2009StockholdersEmp. Brasil. de Telecom, S.A. – Embratel

   

   47,883

   

   48,598

   

   -

   

   -

   

   -

   

   -

   

   208,859

   

   208,228

   

   78,242

   

   334,984

   

   256,82647,883

   

   48,598

   

   -

   

   -

   

   -

   

   -

   

   208,859

   

   208,228

   

   78,242

   

   334,984

   

   256,826Associated companiesNet Brasil S.A.( * )

   

   -

   

   -

   

   81,610

   

   60,903

   

   -

   

   -

   

   -

   

   -

   

   -

   

   81,610

   

   60,903Globosat Programadora Ltda.( * )

   

   -

   

   -

   

   -

   

   8,796

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   8,796Brasilcenter Comunicações Ltda.

   

   -

   

   351

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   351Claro S.A.

   

   406

   

   872

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   406

   

   872Americel S.A.

   

   36

   

   122

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   36

   

   122Primesys Soluções Empresariais S.A.

   

   2,453

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   2,453

   

   -Editora  Globo S.A.

   

   995

   

   991

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   995

   

   991Banco Inbursa S.A

   

   -

   

   -

   

   -

   

   -

   

   5,653

   

   5,940

   

   -

   

   -

   

   -

   

   5,653

   

   5,940Infoglobo Comunicações

   

   1

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   -

   

   1

   

   -3,891

   

   2,336

   

   81,610

   

   69,699

   

   5,653

   

   5,940

   

   -

   

   -

   

   -

   

   91,154

   

   77,97551,774

   

   50,934

   

   81,610

   

   69,699

   

   5,653

   

   5,940

   

   208,859

   

   208,228

   

   78,242

   

   426,138

   

   334,801
  (*) In 2010, pay per view (PPV) programming previously acquired from Globosat Programadora Ltda. started being acquired from Net Brasil S.A.  Non-current liabilities

   

   TotalDebt

   

   Deferred revenues

   

   Non-current liabilitiesCompanies

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   

   12/31/2009

   

   12/31/2010

   12/31/2009StockholdersEmp. Brasil. de Telecom. S.A. – Embratel

   

   -

   

   -

   

   611,594

   

   782,279

   

   611,594

   782,279-

   

   -

   

   611,594

   

   782,279

   

   611,594

   782,279Associated companiesBanco Inbursa S.A

   

   330,429

   

   345,164

   

   -

   

   -

   

   330,429

   345,164330,429

   

   345,164

   

   611,594

   

   782,279

   

   942,023

   1,127,443


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies– Continued  Operating resultsRental revenues / telecommunications

   

   Financial

   

   Expenses telecommunications

   

   Programming / sales commissions

   

   Programming guide

   

   TotalCompanies

   

   12/31/2010

   12/31/2009

   12/31/2008

   

   12/31/2010

   12/31/2009

   12/31/2008

   

   12/31/2010

   12/31/2009

   12/31/2008

   

   12/31/2010

   12/31/2009

   12/31/2008

   

   12/31/2010

   12/31/2009

   12/31/2008

   

   12/31/2010

   12/31/2009

   12/31/2008StockholdersEmp. Brasil. de Telecom. S.A. – Embratel

   

   451,132

   391,624

   273,829

   

   (11,850)

   (7,257)

   (4,426)

   

   (370,695)

   (262,890)

   (167,421)

   

   -

   -

   

   

   -

   -

   

   

   68,587

   121,477

   101,982451,132

   391,624

   273,829

   

   (11,850)

   (7,257)

   (4,426)

   

   (370,695)

   (262,890)

   (167,421)

   

   -

   -

   

   

   -

   -

   

   

   68,587

   121,477

   101,982Associated companiesNet Brasil S.A.

   

   -

   -

   -

   

   -

   -

   -

   

   -

   -

   -

   

   (905,929)

   (674,744)

   (541,687)

   

   (1,701)

   (1,714)

   (1.548)

   

   (907,630)

   (676,458)

   (543,235)Globosat Programadora Ltda.

   

   2,097

   1,676

   2,242

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (8,227)

   (24,472)

   

   (570)

   -

   -

   

   1,527

   (6,551)

   (22,230)Editora Globo S.A.

   

   -

   -

   -

   

   -

   -

   -

   

   -

   -

   -

   

   -

   -

   -

   

   (11,839)

   (11,504)

   (12,835)

   

   (11,839)

   (11,504)

   (12,835)Infoglobo Comunicações Ltda.

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (2)

   (8)

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (2)

   (8)Claro S.A.

   

   -

   -

   -

   

   -

   -

   -

   

   (5,195)

   (6,432)

   (5,035)

   

   -

   -

   -

   

   -

   -

   -

   

   (5,195)

   (6,432)

   (5,035)Brasilcenter Comunicações Ltda.

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (546)

   (8,591)

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (546)

   (8,591)Americel S.A.

   

   -

   -

   -

   

   -

   -

   -

   

   (1,133)

   (1,207)

   (826)

   

   -

   -

   -

   

   -

   -

   -

   

   (1,133)

   (1,207)

   (826)Primesys Soluções Empresariais S.A.

   

   -

   -

   -

   

   -

   -

   -

   

   (3,841)

   -

   (62)

   

   -

   -

   -

   

   -

   -

   -

   

   (3,841)

   -

   (62)Click 21

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (26)

   (23)

   

   -

   -

   -

   

   -

   -

   -

   

   -

   (26)

   (23)Banco Inbursa S.A.

   

   -

   -

   -

   

   (16,695)

   84,132

   (166,527)

   

   -

   -

   -

   

   -

   -

   -

   

   -

   -

   -

   

   (16,695)

   84,132

   (166,527)2,097

   1,676

   2,242

   

   (16,695)

   84,132

   (166,527)

   

   (10,169)

   (8,213)

   (14,545)

   

   (905,929)

   (682,971)

   (566,159)

   

   (14,110)

   (13,218)

   (14,383)

   

   (944.806)

   (618,594)

   (759,372)453,229

   393,300

   276,071

   

   (28,545)

   76,875

   (170,953)

   

   (380,864)

   (271,103)

   (181,966)

   

   (905,929)

   (682,971)

   (566,159)

   

   (14,110)

   (13,218)

   (14,383)

   

   (876,219)

   (497,117)

   (657,390)


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies– Continued  The right to use the trademark Net has been assigned by Net Brasil S.A..  The programming contracts and pay-per-view with companies related to the Organizações Globo are SporTV, GNT, Multishow, Globo News, Futura, Canal Brazil, Sexy Hot, Universal Channel, For Man, Playboy, Vênus and Private.  The program schedule guides of the Company are published and distributed by Editora Globo S.A., a subsidiary of Globo Comunicação e Participações S.A.  The Company and Empresa Brasileira de Telecomunicações S.A. (Embratel) offer telephony services for subscribers of the Company. This service offers an Embratel voice product to existing and prospective subscribers of the Company, which calls for the sharing of results by means of the Company’s bi-directional network. In connection with this business, the Company also offers to its markets integrated video, broadband and voice (“triple play”) services.  The main aim of the partnership between the Company and Embratel is the exploitation of voice services based on Embratel licenses for conventional telephone services (Serviço Telefônico Fixo Comutado – STFC), multimedia service (Serviço de Comunicação de Multimídia – SCM) and/or through any other structure best suited to exploitation by the parties involved, through the use of the Company's network to access final customers, with the simultaneous use of Embratel's communications network.  The Company transactions involving the companies associated with Embratel Participações S.A., are recorded based on prices and conditions defined as follows:  a)Prepaid rights for use  a1) Net Fone revenue — In December 2009, Embratel paid us an amount of R$873,539 in the irretrievable and indefeasible acquisition of the right to use the maximum transmission capacity of 3 GBs generated by the Company’s coaxial  network, for a period of five years renewable for the same period through future negotiations between the parties.  The invested value, which was paid in cash, and accounted as deferred revenue to be amortized under the terms of the contract over 60 months, is consistent with the expected usage of the capacity by Embratel during the period and considers the finance discount related to the prepayment. Any excess usage is charged on a monthly basis.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies– Continued  a)Prepaid rights for use– Continued  a2) Link internet - The Company provides an Internet access service known as NetVirtua broadband service using Embratel's IP backbone infrastructure. In December 2009, the Company invested R$849,632 in irrevocable and irreversible acquisition of 45 GBs transmission capacity generated for 5 years renewable for a same period through future negotiations between the parties classified as prepaid rights for use. The invested value, which was paid in cash, and account as an asset to be amortized under the terms of the contract in 60 months, is consistent with the expected usage of the capacity by the Company during the period and considers the finance discount related to the prepayment. Amounts exceeding the monthly maximum capacity acquired are expensed as incurred.  The movement of asset and liabilities of direct referrals are as follows: Assets

   

   Prepaid rights for useBalance on 01/01/2009

   

   -Additions

   

   849,632Amortization

   

   (14,702)Balance on 12/31/2009

   

   834,930Amortization

   

   (175,087)Balance on 12/31/2010

   

   659,843Current

   

   172,536Non-current

   

   487,307LiabilitiesDeferred revenues

   (Net Fone)Balance on 01/01/2009

   

   -Additions

   

   873,539Amortization

   

   (15,115)Balance on 12/31/2009

   

   858,424Amortization

   

   (180,015)Balance on 12/31/2010

   

   678,409Current

   

   177,391Non-current

   

   501,018


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 19. Related parties– Continued  c)Related companies– Continued  b) The Company is responsible for invoicing Net Fone customers and passing on the pertinent amounts to Embratel.  c) Other services – Remunerated on the basis of percentage of costs incurred by each project. As per the agreement, these services are paid in advance by Embratel and are recorded as deferred revenues.  d) Network access revenue–Remunerated on the basis of the increase of Net Fone’s   subscribers basis.  e)Optic fiber lease revenue–Remunerated in accordance with specific contract.  f) Revenues from PME (services for small and medium businesses)–These services are.remunerated under specific contractual conditions, 50% of net amount of accounts.invoiced by Embratel, net of taxes and interconnection fees.  20. Commitments and provisions  I) Commitments  The Company has several contracts for rental of street lighting posts, underground ducts and offices renewed automatically each year for varying terms. These contracts may be terminated at the request of any party, subject to notice periods ranging from 1 to 2 months and rescission penalties. These expenses amounted to R$97,872 in 2010 (R$102,262 in 2009 and R$74,527 in 2008). There are also commitments, with several suppliers for the purchase of materials and equipment used for subscriber installation in the amount of R$11,865 as of 2010 (R$28,478 as of December 31, 2009).


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 20. Commitments and provisions– Continued  II) Provisions  The Company and its subsidiaries are involved in legal and administrative processes before several courts and governmental agencies arising during the normal course of operations, involving tax, labor, civil and other legal matters. These cases involve tax demands, compensation claims, requirements for contract review and other actions for which the amounts claimed can be substantially different from the final expected settlement value. Additionally, it is not possible to predict when these cases will be settled once they are dependent on factors not controlled by the Company’s management.  Management, based on information received from its legal advisors, pending legal processes and prior experience has recorded a provision for an amount that is believed to be sufficient to cover probable losses for the ongoing lawsuits as shown below:   Labor

   Civil

   Tax

   Social security

   TotalBalances at December 31, 2008

   

   46,704

   34,969

   607,273

   6,989

   695,935Additions

   

   18,721

   23,858

   65,466

   -

   108,045Addition of ESC 90

   

   290

   25

   17,721

   -

   18,036Currency adjustments

   

   1,018

   373

   16,370

   276

   18,037Payments and reversals

   

   (13,157)

   (13,190)

   (202,025)

   (6,318)

   (234,690)Balances at December 31, 2009

   

   53,576

   46,035

   504,805

   947

   605,363Additions

   

   20,040

   22,988

   76,659

   -

   119,687Currency adjustments

   

   1,484

   752

   29,033

   50

   31,319Payments and reversals

   

   (41,914)

   (24,204)

   (135,194)

   (293)

   (201,605)Balances at December 31, 2010

   

   33,186

   45,571

   475,303

   704

   554,764
  a) Labor provisions  Labor claims involving the Company and its subsidiaries comprise 1,773 lawsuits, mostly arising from employees and third party complaints. The main claims are for subsidiary liability and dangerous work pay. The Company made judicial deposits in the amount of R$13,754 as of December 31, 2010 (R$9,409 as of December 31, 2009) in relation to labor cases.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 20. Commitments and provisions– Continued  II) Provisions– Continued  b) Civil provisions  Civil claims relate mainly to service contract terminations, contract reviews, improper collection and negative credit reports, advertising disputes, channel availability, occupational accidents (own employees or outsourcers), accidents involving third parties other than staff or service providers and actions objecting to certain items in the standard contract adopted by operators, in particular in relation to the increase in monthly fees in April 1999.  The appeal in the civil proceedings mainly relate to indemnifications for personal and material damages sought by subscribers, except for actions relating to lease of poles and ducts, in which the Company is requesting to change the monthly rent amounts.  c) Tax and social security provisions  Tax charges and contributions calculated and collected by the Company and its subsidiaries, and their statement of comprehensive incomes, tax and company records, are subject to examination by tax authorities for varying periods under applicable legislation.  The following are the main tax and social security contingencies:  a. Value-added tax (ICMS – Imposto sobre circulação de mercadorias e prestação de serviços)  The Company is objecting to the ICMS tax rate levied on access provider revenue and also on other revenues for which it has recorded a provision of R$87,342 as of December 31, 2009 (R$112,443 as of December 31, 2009).  b. IOF (Financial operations tax) The Company and its subsidiaries have centralized cash management and cash transfers made under a current intercompany account. Based on the opinion of its external legal counsel, management believes that such transfers are not subject to Financial IOF charges. However, in view of certain adverse court decisions as to the applicability of this law, management has recorded estimated liabilities of R$80,895 at December 31, 2009 (R$60,718 at December 31, 2009).


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 20. Commitments and provisions– Continued  II) Provisions– Continued  c) Tax and social security provisions– Continued  c. Withholding tax (IRRF) on foreign currency bonds  The Senior Notes and Floating Rate Notes (Notes) are not subject to IRRF and IOF, as long as the average term is not less than 96 months. As result of the fact that some noteholders exercised their rights in advance, the Company recorded a provision ofR$148,419 at December 31, 2010(R$143,281at December 31, 2009) related to these taxes.  d. PIS (Programa de Integração Social) and COFINS (Contribuição para o financiamento da seguridade social) – Social contribution taxes  On September 30, 2009, the Company and its legal counsel assessed the progress of legal cases related to the increase in the calculation base for the PIS and the COFINS on income as provided in paragraph 1 of Article 3 of Law No. 9718/98 and revoked by Law No. 11941/09 on May 27, 2009.  Based on the results of this assessment, revocation of the legal provision which created the increased calculation base and the existence of favorable case law related to this matter, the Company reversed its provision of R$124,269. The adjustment was recorded as a reduction in financial expenses.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 20. Commitments and provisions– Continued  III) Contingent liabilities not recorded  In addition to the contingencies mentioned above, there are other open cases, in the amount of R$840,864 (R$364,525 in 2009) in the consolidated, which legal advisors assess as possible but not probable losses and thus, no provisions were recorded.  The main cases in which risk of loss is rated as "possible" are summarized below:  a. Disallowance of expenses - Income tax and social contribution . The subsidiary Net São Paulo Ltda. received a  tax assessment issued by the Brazilian  Internal Revenue Service questioning part of expenses considered as deductible in its calculation of income tax and social contribution basis in the period between 2004 to 2008 in the amount of  R$403,389 and R$143,914, respectively.                                        Based on the decision at first instance rendered in 2010, values were reduced to        R$274,126 and R$97,821 and the probability of loss initially analyzed as remote, has shifted to possible. .Management believes that these expenses are in accordance with tax legislation, with the possible disallowance required by the tax authority.  b. ISS (Imposto sobre Serviços) - the demand on services of public entertainment or amusement, leisure and entertainment and similar events.  In 2010, tax authorities of Santo André city issued a tax assessment notice against the Company claiming that cable TV services are classified as public entertainment services and, thus the taxation of ISS in the amount of R$115,955  as of December 31, 2010. On defense, management maintains that services provided by cable TV companies are classified as communication services instead of public entertainment services.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 20. Commitments and provisions– Continued  III) Contingent liabilities not recorded– Continued  c.Disallowed expenses and non-proven expenses  Net São Paulo and Net Rio received requests from the tax authorities in the amount of R$90,770 as of December 31, 2010 (R$88,660 as of December 31, 2009) for not having submitted documents supporting their registered expenses within the period determined by the tax inspectors..  Our lawyers are of the view that these expenses are in accordance with tax legislation, considered as a possible contingency character desired by the disallowance by the tax authority.  IV) Other information  Charge for extra outlet  On April 22, 2009, Anatel passed Resolution No. 528, which prevents cable subscription TV operators from charging clients for more than one outlet per residence.  The resolution only mentions that certain items such as installation, internal network, converter and signal decoder and other equipment repairs could be charged for by these operators.The Federal Court inBrasília had extended an injunction based on a case decided by ABTA (The Brazilian Pay TV Association) in 2008, allowing the Company to charge for the additional connections. However, in 2009, the Federal Court in Brasilia revoked the ABTA injunction related to additional connections. Nevertheless, management does not expect any substantial impact on Company operations, since the current sales model for the extra outlet is covered by the charge for the rental of the equipment and the installation fee as provided for in the resolution.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 21. Stockholders’ equity  Capital stock  On December 31, 2010, the Company’s share capital is represented by 114,459,685 ordinary shares and 228,503,916 preferred shares with no par value.  Share capital may be raised to a maximum of R$6,500,000 without need for a statutory amendment as per Article 168 of the Brazilian Corporate Law, as agreed by the Board of Directors who will determine conditions for the issue as per Article 170, paragraph 1 of the Brazilian Corporate Law.  The Company is controlled by GB Empreendimentos e Participações Ltda, whose stockholders are Globo Comunicação e Participações S.A (51% of ordinary shares) and Embratel Participações S.A. and its subsidiary Embratel (49% of ordinary shares and 100% of preferred shares). On December 31, 2010, Globo Comunicação e Participações S.A. holds 6.5% of the Company’s share capital and the Embratel Participações S.A. and its subsidiary Embratel holds 89.7% of the Company’s share capital.  On October 7,  2010, a shareholder Empresa Brasileira de Telecomunicacoes S.A. - Embratel acquired 143,853,436 preferred shares of the Company through a voluntary tender public offer of shares in the open market at a unit price of R$23, increasing its holding to  70.5% of the shares of that class. Under the tender public offer, the holders of the remaining preferred stocks could sell their shares to Embratel until January 13, 2011, by the tender offer price adjusted by variation in the reference rate - TR monthly.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 21. Stockholders’ equity– Continued  Capital stock– Continued  As of December 31, 2010, Embratel had acquired more 42,694,295 preferred shares representing 94.5% of the preferred shares.  The by-laws determine distribution of a mandatory dividend of 25% of net income adjusted as per article 202 of the Brazilian Corporate Law.  The preferred shares are not entitled to vote except for the following matters: (a) transformation, incorporation, merger or split off of the Company; (b) valuation of assets intended to comprise the Company’s capital increase; (c) choice of specialized company to determine the economic value of the Company’s shares, according to the terms of article 9, “iv”, of the Articles of Incorporation; and (d) amendments or revocation of provisions to the Articles of Incorporation which result in noncompliance on the part of the Company with those requirements provided for in Section IV, item 4.1, of the Corporate Governance Distinct Practices Regulation - Level 2, instituted by BM&FBOVESPA and they are entitled to vote in regard to the approval of contracts between the Company and its majority shareholder, either directly or through third parties as well as other companies in which the majority shareholder holds interest, at any time in the future, on the basis of legal or statutory provision, the approval of these contracts is decided at the General Meeting.  Preferred shares are entitled to the receipt of dividends in cash 10% (ten percent) greater than those paid out on common shares; priority in reimbursement in the event of the Company’s liquidation without premium at the value of shareholders’ equity; and treatment equal to that given to shareholders who have the power to govern the financial and operating policies of the Company, either directly or indirectly, in fact or in law (“Controlling Power”) in the event of the disposal of this Controlling Power, according to that provided in article 27 and item of the Articles of Incorporation.  Since preferred shares are not entitled to fixed or minimum dividends, they shall not acquire voting rights if the Company fails to pay dividends, but will take part on equal conditions with common shares regarding stock dividend distribution. They may represent up to two-thirds (2/3) of the total of shares issued by the Company. Their issuance may alter the prior existing proportion between common and preferred shares.  On March 21, 2005, a Company Shareholders’ Agreement was executed, whereby any shareholder in the agreement, that wants to transfer part or all of its common shares to a third party must notify in writing the other Shareholders, extending preemptive rights.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 21. Stockholders’ equity– Continued  Shareholders’ agreement  The Company’s Board of Directors is comprised of eleven effective members and the same number of alternate members, being, at least, twenty percent of its Independent Board members as defined in Regulation Level 2 of BM&FBOVESPA’s Corporate Governance.  The Company’s Board of Directors, with a unified mandate of one year, which re-election is allowed, and at least one effective member and respective alternate by exclusive and separate appointment by Globo, four effective members and respective alternates by joint, exclusive and separate appointment by Embrapar. The other effective members and respective alternates by exclusive and separate appointmentby GB Empreendimentos e Participações S.A. or their acceptable successors or assignees which individually or jointly hold over 50% common shares and whenever applicable, one member and respective alternate representing the minority Shareholders group. As defined in the second amendment to the Company’s Shareholders Agreement, entered into on April 28, 2006, Embrapar shall appoint for election and replacement one independent member and respective alternate, the votes of which shall not be entailed to the decisions made on Previous Meetings according to the provisions of the Shareholders’ Agreement.  Capital reserves  Capital reserves are comprised of goodwill and premium on issuance of debentures reserves. The goodwill reserve was generated when Globotel Participações S.A., was merged into Net Serviços de Comunicação S.A. in August 2001. The goodwill capital reserve represents the tax effect of the goodwill that was transferred to the Company through the merger.  During the year ended December 31, 2010, the Company obtained tax benefits by cash savings of R$8,087 (R$13,942 in 2009 and R$58,974 in 2008), resulting from amortization of goodwill.  Observing the preemptive rights of the non-majority shareholders, the portion of the goodwill reserve related to tax benefits realized may be capitalized in the future in favor of the shareholder Globo Comunicação e Participação S.A. (successor to Roma Participações S.A.). The remaining shareholders have the option of exercising their right on the subscription of these shares.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 22. Guarantees  The Company and some subsidiaries have signed letters of guarantee with financial institutions for the purpose of guaranteeing payment of tax suits lodged against the Company by the Brazilian Federal Tax Authority, the Finance Departments of the States of São Paulo and Rio de Janeiro, and the Belo Horizonte Federal Tax Office. The total amount of the letters of guarantee is as follows:  12/31/2010

   

   12/31/2009Net Rio Ltda.

   232,315

   

   253,467Net Serviços de Comunicação S.A.

   27,979

   

   19,275Reyc Comércio e Participações Ltda.

   10,987

   

   9,638Net São Paulo Ltda.

   3,214

   

   2,995Others

   -

   

   6,660274,495

   

   292,035
  Additionally, for the same purpose of guaranteeing the payment of tax claims, the Company entered into an insurance policy with Fator Seguros S.A. covering the amount of R$31,881 (R$15,062 on December, 2009).   23. Earnings per share  Basic earnings per share amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.  Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary share.  The following table shows earnings per share (in thousands, except earnings per share):  12/31/2010

   

   12/31/2009

   

   12/31/2008NumeratorProfit for the year

   

   R$307,151

   

   R$735,948

   

   R$20,254DenominatorWeighted average number of common shares

   

   114,459,685

   

   114,301,508

   

   112,947,396Weighted average number of preferred shares

   

   228,503,916

   

   228,187,562

   

   225,479,72210% - Preferred shares

   

   1.10

   

   1.10

   

   1.10Weighted average number of adjusted preferred shares

   

   251,354,308

   

   251,006,318

   

   248,027,694Denominator for basic and diluted earnings per share

   

   365,813,993

   

   365,307,826

   

   360,975,090Basic and diluted earnings per common share

   

   R$0.84

   

   R$2.01

   

   R$0.0610% - Preferred shares

   

   1.10

   

   1.10

   

   1.10Basic and diluted earnings per preferred share

   

   R$0.92

   

   R$2.22

   

   R$0.06


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24. Financial instruments  a)General considerations  The Company is exposed to market risk arising from its operations, and it uses derivatives to minimize its exposure to such risks. The Company's revenues are generated in Brazilian reais, while the Company debts, interest charges and accounts payable to certain suppliers of equipment are denominated in foreign currency. Therefore, the Company’s earnings are sensitive to varying exchange rates, in particular the US dollar. The market values of the Company's principal financial assets and liabilities were determined using available market information and appropriate valuation methodologies.  The use of different market methodologies may affect estimated realization values. Capital is managed using operational strategies aiming for protection, security and liquidity. The control policy involves constantly monitoring rates contracted against current market rates. The Company and its subsidiaries do not make speculative investments in derivatives or other risk assets.  The Company has a formal risk management policy. The Financial Committee provides support for the Company's Board of Directors and consists of one member from each of the main Stockholders (Globo and Embratel) and management. It examines issues relating to financial investments, debt and risk management, and refers matters for management approval. Pursuant to internal policy, the Company's financial earnings must come from cash generated through operations rather than gains on financial markets. The results obtained by the application of internal controls to manage risks were satisfactory for the objectives proposed.  b)Fair value  The fair values and carrying amount of loans payable are shown below:  12/31/2010

   

   12/31/2009Book

   value

   

   Fair

   value

   

   Book

   value

   

   Fair

   valueDebentures

   584,001

   

   575,266

   

   582,397

   

   563,295Perpetual Notes

   252,425

   

   255,237

   

   263,711

   

   265,343Global Notes 2020

   598,973

   

   665,396

   

   611,450

   

   627,729Banco Inbursa S.A.

   336,082

   

   345,577

   

   351,104

   

   358,919Bank Credit Note

   147,679

   

   148,675

   

   172,704

   

   173,543Finame

   259,091

   

   259,091

   

   217,438

   

   217,4382,178,251

   

   2,249,242

   

   2,198,804

   

   2,206,267


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24. Financial instruments– Continued  b)Fair value– Continued  Other financial assets and liabilities have fair values approximated to their carrying amounts.  The fair value of the Company’s debt has been calculated based on the estimated cost to pay the outstanding obligations at December 31, 2010, which considered the contractual penalties applicable for early payments.  c) Risks impacting the business of the Company  Foreign exchange rate risk  The Company's results are susceptible to exchange fluctuations, depending on the effects of exchange rate volatility on liabilities geared to foreign currencies, primarily the US dollar. The Company's revenues are generated in Brazilian reais while it pays certain suppliers of equipment and programming content in foreign currencies.  The Company’s foreign currency exposure on December 31, 2010, is shown below:  Debt in US dollars:Short-term:Interest on loans and financing

   28,776Suppliers of equipment and others

   24,779Programming Suppliers

   1,87355,428Long-term:Loans payable

   1,158,704Liability exposure

   1,214,132
  The Company acquired non-speculative derivative financing instruments to hedge its foreign currency exposure. The purpose of these transactions is to minimize the effects of changes in the exchange rate of the US dollar when settling short term transactions. Counterparties to the contracts are the banks: Itaú, Goldman Sachs, , HSBC, Santander, JP Morgan, Votorantin and Standard.  The Company only enters into foreign exchange derivatives in order to protect a portion of the accounts payable to suppliers of imported equipment and future obligations for purchases not yet made, which are or will be linked to the US dollar, and payments of debt interest charges payable in the short-term. For the period ended December 31, 2010, the Company had a derivative instrument (foreign exchange) position of R$528,185 relating to interest charges on loans in foreign currency and commitments to foreign suppliers.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24. Financial instruments– Continued  c) Risks impacting the business of the Company– Continued  Part of the total debt in dollars refers to a loan from Banco Inbursa due between 2017 and 2019, Global Notes 2020 due to 2020 and Perpetual Notes, which have no maturity date.  Financial derivatives are summarized below:  Reference value (notional)

   

   Fair value

   

   Accumulated effect

   (current period)Description

   12/31/2010

   12/31/2009

   

   12/31/2010

   12/31/2009

   

   Amount receivable / (received)

   Amount payable / (paid)“Swaps” contractsAsset positionForeign currency

   528,185

   94,721

   

   519,500

   94,328

   

   -

   -Liability positionRatios (Dollar vs, CDI)

   291,585

   59,897

   

   321,043

   68,556

   

   -

   36,399Rates (PRE) (NDF)

   236,600

   34,824

   

   249,314

   45,352

   

   -

   14,458-

   -

   

   (50,857)

   (19,580)

   

   -

   50,857
  The net liability of R$50,857 is recognized in the "unrealized losses on derivatives" account on the balance sheet. During the period of twelve months ended on December 31, 2010, the Company recognized a financial loss of R$65,915 (loss of R$97,345 in 2009 and a gain of R$2,711 in 2008), which was recorded as losses on derivatives.  The following table shows the sensitivity analysis of the Company’s management and effect of cash operations with financial derivative instruments outstanding on December 31, 2010:


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24. Financial instruments– Continued  c) Risks impacting the business of the Company–Continued  Scenario - currency appreciation (R$/ US$) and higher interbank rate (CDI)  Operations

   

   Contracts

   

   Probable Scenario

   

   Possible  adverse scenario (a)

   

   Remote adverse scenario (b)Quantity

   

   Value US$

   

   Maturity

   

   Dollar rate R$

   

   Rate CDI

   

   Dollar rate R$

   

   Rate CDI

   

   Loss R$

   

   Dollar rate R$

   

   Rate CDI

   

   Loss R$Dollar vs. CDI

   

   46

   

   175,000

   

   From Jan. 26 , 2011 to  Aug. 26, 2013

   

   1.6662

   

   10.64%

   

   1.2497

   

   13.30%

   

   (106,872)

   

   0.8331

   

   15.96%

   

   (179,759)Non Deliverable Forward -  NDF

   

   32

   

   142,000

   

   From Jan. 03 , 2011 to  Dec. 26, 2011

   

   1.6662

   

   10.64%

   

   1.2497

   

   13.30%

   

   (73,497)

   

   0.8331

   

   15.96%

   

   (132,640)
  (a)The possible adverse scenario is represented by an appreciation of the real in relation to the dollar and an increase of 25% of CDI rate of 25% over the rates of the probable scenario. (b)The remote adverse scenario is represented by an appreciation of the real in relation to the dollar and an increase of 50% of CDI rate of 50% over the rates of the probable scenario.  Scenario - depreciation of Brazilian currency (R$/ US$) and lower CDI rate  Operations

   

   Contracts

   

   Probable Scenario

   

   Possible  adverse scenario (c)

   

   Remote adverse scenario (d)Quantity

   

   Value US$

   

   Maturity

   

   Dollar rate R$

   

   Rate CDI

   

   Dollar rate R$

   

   Rate CDI

   

   Gain R$

   

   Dollar rate R$

   

   Rate CDI

   

   Gain R$Dollar vs. CDI

   

   46

   

   175,000

   

   From Jan. 26 , 2011 to  Aug. 26, 2013

   

   1.6662

   

   10.64%

   

   2.0828

   

   7.98%

   

   38,920

   

   2.4993

   

   5.32%

   

   111,825NDF

   

   32

   

   142,000

   

   From Jan. 03 , 2011 to  Dec. 26, 2011

   

   1.6662

   

   10.64%

   

   2.0828

   

   7.98%

   

   44,802

   

   2.4993

   

   5.32%

   

   103,859
  (c)The possible adverse scenario is represented by a devaluation of the real in relation to the dollar by 25% and reduction of CDI rate of  25% over the rates of the probable scenario. (d)The remote adverse scenario is represented by a devaluation of the real in relation to the dollar by 50% and reduction of CDI rate of  50% over the rates of the probable scenario


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24.  Financial instruments– Continued  c) Risks impacting the business of the Company – Continued  On December 31, 2010, the Company holds no leveraged derivatives and no limits for determining the results of the US dollar appreciating or depreciating against the Brazilian real.  Interest rate risk  The Company and subsidiaries’ results are susceptible to fluctuations due to the volatility effects of interest rates on liabilities and assets pegged to floating interest rates, especially CDI and TJLP.  The Company's exposure to fluctuating interest rates as of December 31, 2010, is shown below:  Debentures

   584,001Finame

   259,091Bank Credit Note

   147,679Liability exposure

   990,771(-) Financial investments denominated in reais

   778,333Net exposure

   (212,438)
  Credit risk  The financial instruments, which subject the Company to credit risks, are mainly represented by cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with a number of financial institutions and does not limit its exposure to one institution in particular, according to a formal policy. The Company also holds units in conservative-profile fixed-income investment funds. The funds' assets comprise government bonds and first-line private securities with low risk ratings as per the guidelines set by the Company. Management of the centralized fund's portfolio is provided by Itaú Unibanco Asset Management - Banco de Investimento S.A.  Custody and control of the funds are under the responsibility of Banco Itaú, and “Risk Office Consulting” performs risk management. Management believes the risk of not receiving amounts due from its counterparties is insignificant.  The credit risk is concentrated in subscriber accounts receivable and is limited by the large number of subscribers that comprise the client base.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 24. Financial instruments– Continued  c) Risks impacting the business of the Company–Continued  Debt acceleration risk  The Company’s loan agreements, financing and debentures include the debt covenants normally applicable to these types of transactions, in relation to its complying with economic and financial indices, cash flow requirements and other. The Company has complied with these covenants and they do not restrict its ability to conduct its business in the normal course of operations.  Liquidity risk  Liquidity risk is the risk of a shortfall of funds used for payment of debts. The table below shows payments required for financial liabilities on December 31, 2010.  The amounts presented below include principal and interest payments calculated using the dollar exchange rate at December 31, 2010 (R$1.6662/US$1) for the debt denominated in US dollars (Global Notes 2020 and Banco Inbursa). The debentures and bank credit notes (Banco Itaú BBA), which are denominated in Brazilian reais and are subject to interest based on the interbank rate (CDI), were forecasted based on the yield curve for their respective payment dates, in accordance with the indices  provided by BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros (Brazilian stock exchange). The Finame loan was estimated based on the long-term interest rate (TJLP) of 6.0% + 3.15% per year for the entire period and fixed rate between 4.5% and 5.5% per year.  Year of maturity

   

   FINAME

   

   Perpetual Notes

   

   Global Notes 2020

   

   Banco Inbursa

   

   CCB-Banco Itaú BBA

   

   Debentures

   

   TOTAL2011

   

   66,766

   

   26,421

   

   49,977

   

   30,858

   

   23,810

   

   76,750

   

   274,5822012

   

   72,922

   

   26,421

   

   49,977

   

   30,858

   

   24,850

   

   214,230

   

   419,2582013

   

   47,662

   

   26,421

   

   49,977

   

   30,858

   

   24,800

   

   194,160

   

   373,8782014

   

   24,528

   

   26,421

   

   49,977

   

   30,858

   

   72,930

   

   174,270

   

   378,9842015

   

   21,005

   

   26,421

   

   49,977

   

   30,858

   

   64,580

   

   154,700

   

   347,5412016

   

   20,208

   

   26,421

   

   49,977

   

   30,858

   

   52,330

   

   -

   

   179,7942017-2020

   

   4,879

   

   79,263

   

   758,091

   

   394,956

   

   -

   

   -

   

   1,237,189Total

   

   257,970

   

   237,789

   

   1,057,953

   

   580,104

   

   263,300

   

   814,110

   

   3,211,226
  The table shows only the estimated interest payments for the Perpetual Notes, with principal being excluded, as there is no maturity date.  Interest payments for the US Dollar denominated debt (Global Notes 2020 and Perpetual Notes) include withholding taxes, in accordance with the current law.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 25.Measurement and fair valuehierarchy  Fair value is an existing price representing the value that would be received from the sale of an asset, or that would be paid to transfer a liability in a normal transaction between market participants.  Therefore fair value is a market-based measurement and should be determined using the assumptions market participants would make when pricing an asset or liability. As a basis for consideration of the latter, a fair value hierarchy is determined on three levels prioritizing the inputs used in measuring fair value as follows:  •  Level 1. Observable inputs such as those with prices quoted in active markets; • Level 2. Inputs other than those with prices quoted in active markets, which are    observable either directly or indirectly; and •  Level 3. Unobservable inputs, for which there are few or no market data, which requires the reporting entity to develop its own premises.   Measurement of fair valueDerivative instruments – currency swap contracts

   Quoted prices in active markets for identical assets (Level 1)

   Other significant observableSources(Level 2)

   Significant unobservable inputs (Level 3)December  31, 2010

   (50,857)

   -

   (50,857)

   -December 31, 2009

   (19,580)

   -

   (19,580)

   -
   Currency swap derivative instruments are tools for managing risk arising from the effects of a major devaluation of the Brazilian real against the US dollar, which are inputs, other prices quoted in active markets, which are directly or indirectly observable.  During the year ended December 31, 2010, there were not transfers between Level 1 and Level 2 of the measurement of the fair value or transfers to Level 3.


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NET SERVIÇOS DE COMUNICAÇÃO S.A.  Notes to consolidated financial statements December31, 2010, 2009 and 2008 (In thousands of reais)
 26. Insurance (Unaudited)  The Company has adopted a policy of contracting insurance coverage for goods subject to risks at amounts deemed sufficient to cover any claims, taking into consideration the nature of its operations. The risk premises adopted, given their nature, are not included in the scope of an audit of the consolidated financial statements, therefore our independent auditors have not examined them.  Total coverage per insurance areas are shown below:  Area

   Main coverage

   Maximum annual coverageMulti-risk property insurance

   Fire, lightening, explosion, tornado, electrical damage, theft, valuables inside the premises, riots, strikes and restoration of records, open fidelity, electronic equipment, furniture and flooding.

   45,000Responsibilities

   Civil, operating – commercial/industrial establishments, service providers at the locations of third parties, employer, contingent risks, civil work sites, crossed civil liability, pain and suffering and parking lot valets

   3,000Civil responsibility of the directors and Management officers

   Legal defense costs, legal representation expenses and indemnities for financial losses caused to third parties owed to errors or omissions incurred in management acts, including worldwide coverage.

   24,993
  27. Subsequent events  From January 1, 2011 to January 13, 2011, an additional 7,153,568 preferred shares of the Company were acquired by Embratel from the minority stockholders. In total, 193,701,299 shares were acquired by Embratel since October 7, 2010. In connection with these transactions, as of January 13, 2010, Embratel and its parent company, Embrapar, holds 223,080,448 of the Company’s preferred shares, representing 97.6% of the Company’s preferred shares and 91.9% of the Company’s total shares.


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