As filed with the Securities and Exchange Commission on May 13, 2011 
 UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C.  20549 
 FORM 20‐F 
  ̈

   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORx

   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2010OR ̈

   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934OR ̈

   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  Commission file number 333‐131938

   Commission file number 333‐145838‐02

   Commission file number 333‐145838‐01TAM S.A.

   TAM Capital Inc.

   TAM Linhas Aéreas S.A.(Exact name of registrant as specified in its charter)

   (Exact name of registrant as specified in its charter)

   (Exact name of registrant as specified in its charter)Not applicable

   Not applicable

   TAM Airlines S.A.(Translation of registrant name into English)

   (Translation of registrant name into English)

   (Translation of registrant name into English)The Federative Republic of Brazil

   Cayman Islands

   The Federative Republic of Brazil(State or other jurisdiction of incorporation or organization)

   (State or other jurisdiction of incorporation or organization)

   (State or other jurisdiction of incorporation or organization)4512

   4512

   4512(Primary Standard Industrial Classification Code Number)

   (Primary Standard Industrial Classification Code Number)

   (Primary Standard Industrial Classification Code Number)Not applicable

   Not applicable

   Not applicable(I.R.S. Employer Identification Number)

   (I.R.S. Employer Identification Number)

   (I.R.S. Employer Identification Number)
  Av. Jurandir, 856, Lote 4, 1° andar04072‐000, São Paulo, SP Federative Republic of Brazil(Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each class

   Name of each exchange on which registeredPreferred Shares issued by TAM S.A., without par value

   New York Stock Exchange*American Depositary Shares (as evidenced by American Depositary Receipts), each representing one Preferred Share

   New York Stock Exchange
 
 *      Not for trading purposes, but only in connection with the trading on the New York Stock Exchange of American Depositary Shares representing those Preferred Shares.


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Securities registered or to be registered pursuant to Section 12(g) of the Act:None. Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: TAM Capital Inc.  U.S.$300,000,000 7.375% Senior Guaranteed Notes due 2017, 
unconditionally guaranteed by
TAM S.A. and TAM Linhas Aéreas S.A. 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. 55,816,683 Common Shares
100,390,098 Preferred Shares 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. ̈YesxNo 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.xYes ̈No 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). ̈Yes ̈No 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 Exchange Act. Large accelerated filerx
     Accelerated filer ̈
     Non‐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 ̈
     IFRSx
     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 17 ̈Item 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). ̈YesxNo


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CONTENTS
PageINTRODUCTION
     1PRESENTATION OF FINANCIAL AND OTHER DATA
     2FORWARD‐LOOKING STATEMENTS
     4ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
     5ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE
     5ITEM 3.  KEY INFORMATION
     5A.Selected Financial Data
     5B.Capitalization and Indebtedness.8
     8C.Reasons for the Offer and Use of Proceeds
     8D.Risk Factors
     8ITEM 4.  INFORMATION ON THE COMPANY
     21A.History and Development of the Company
     21B.Business Overview..21
     24C.Organizational Structure.49
     54D.Property, Plant and Equipment50
     55ITEM 4A.  UNRESOLVED STAFF COMMENTS
     55ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
     55A.  Operating Results
     56B.  Liquidity and Capital Resources
     65C.  Research and Development, Patents and Licenses, etc.
     72D.  Trend Information
     73E.  Off‐balance Sheet Arrangements
     73F.  Tabular Disclosure of Contractual Obligations.68
     73ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
     74A.  Directors and Senior Management
     74B.  Compensation
     77C.  Board Practices
     78D.  Employees
     79E.  Share Ownership.77
     82ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
     83A.  Major Shareholders
     83B.  Related Party Transactions
     84C.  Interests of Experts and Counsel
     85ITEM 8.  FINANCIAL INFORMATION
     85A.  Consolidated Statements and Other Financial Information
     85B.  Significant Changes
     90ITEM 9.  THE OFFER AND LISTING
     90A.  Offer and Listing Details
     90B.  Plan of Distribution
     92C.  Markets
     92D.  Selling Shareholders.93
     98


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E.  Dilution.93
     98F.  Expenses of the Issue
     99ITEM 10.  ADDITIONAL INFORMATION
     99A.  Share Capital
     99B.  Memorandum and Articles of Association
     99C.  Material Contracts
     103D.  Exchange Controls
     106E.  Taxation
     108F.  Dividends and Paying Agents
     113G.  Statement by Experts
     114H.  Documents on Display
     114I.  Subsidiary Information
     114ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
     114ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
     116D.  American Depositary Shares
     116ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
     118ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
     118ITEM 15T.  CONTROLS AND PROCEDURES
     119ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT
     119ITEM 16B.  CODE OF ETHICS
     119ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
     119ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.113
     120ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
     120ITEM 16F.  CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT
     120ITEM 16G.  CORPORATE GOVERNANCE
     120ITEM 17.  FINANCIAL STATEMENTS
     121ITEM 18.  FINANCIAL STATEMENTS
     121ITEM 19.  EXHIBITS
     121SIGNATURES
     122
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INTRODUCTION In this annual report (the "Annual Report"), "TAM S.A." refers to TAM S.A., asociedade anônima de capital abertoorganized under the laws of Brazil, "Multiplus" or "Multiplus Fidelidade" refers to Multiplus S.A., asociedade anônima de capital abertoorganized under the laws of Brazil, "TAM Linhas Aéreas" or "TLA" refer to TAM Linhas Aéreas S.A., asociedade anônima de capital fechadoorganized under the laws of Brazil, "Pantanal" refers to Pantanal Linhas Aéreas S.A., asociedade anônima de capital fechadoorganized under the laws of Brazil, "TAM Viagens" refers to Fidelidade Viagens e Turismo Limited, asociedade limitadaorganized under the laws of Brazil, "TAM Mercosur" refers to Transportes Aéreos Del Mercosur S.A., asociedade anônimade capital fechadoorganized under the laws of Paraguay, "TP Franchising" refers to TP Franchising Limited, a *sociedade limitada* organized under the laws of Brazil, "TAM Milor" refers to TAM Milor - Táxi Aéreo, Representações, Marcas e Patentes S.A., a *sociedade anônima de capital aberto* organized under the laws of Brazil, "TAM Capital" refers to TAM Capital Inc., "TAM Capital 2" refers to TAM Capital 2 Inc., "TAM Financial 1" refers to Tam Financial Services 1 Limited  and "TAM Financial 2" refers to Tam Financial Services 2 Limited, and each of TAM Capital, TAM Capital 2, TAM Financial 1 and TAM Financial 2 is an exempted company incorporated with limited liability in the Cayman Islands.  The terms "we," "our" and "us" refer to TAM S.A., its consolidated subsidiaries and each of the companies mentioned above, which are its controlled subsidiaries.  References to "preferred shares" and "ADSs" refer to the non‐voting preferred shares of TAM S.A. and the American depositary shares representing those preferred shares, respectively, except where the context otherwise requires. In this Annual Report, the term "Brazil" refers to the Federative Republic of Brazil and the phrase "Brazilian government" refers to the federal government of Brazil.  The term "ANAC" refers to the National Civil Aviation Agency orAgência Nacional de Aviação Civil, the national aviation agency, which is part of the Brazilian government.  The term "Central Bank" refers to the Central Bank of Brazil.  The terms "U.S. dollar" and "U.S. dollars" and the symbol "U.S.$" refer to the legal currency of the United States.  The terms "real" and "reais" and the symbol "R$" refer to the legal currency of Brazil and the term "centavos" means the 100th part of thereal. This Annual Report contains terms relating to operating performance within the airline industry that are defined as follows: ·"ASK" means available seat kilometers, or the product of the number of seats available in all aircraft multiplied by the distance the seats are flown in kilometers. ·"Average tariff" means the quotient of passenger transport revenue divided by the number of paying passengers transported. ·"BELF" means the break‐even load factor, or the load factor in which revenue equals operating expenses. ·"Block hours" refers to the elapsed time between an aircraft's departure from its airport departure gate and arrival at its airport destination gate. ·"CASK" means cost per ASK, or the quotient of total operating expenses (excluding the fair value of fuel derivatives) divided by the number of available seat kilometers.  The result is presented in this Annual Report incentavosper ASK. ·"Load factor" means the percentage of an aircraft occupied by paying passengers on a flight, or the quotient of RPK divided by ASK. ·"RASK" means revenue per ASK, or the quotient of net revenue divided by the number of available seat kilometers.  The result is presented in this Annual Report incentavosper ASK. ·"RPK" means revenue passenger kilometer, which corresponds to the product of the number of paying passengers transported multiplied by the number of kilometers flown by those passengers. ·"Yield" means the average amount paid per passenger to fly one kilometer.


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PRESENTATION OF FINANCIAL AND OTHER DATA We prepare our consolidated annual financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB").  Our financial statements are prepared under the historical cost model and derivative financial instruments are accounted for using the fair value measurement model. Our audited consolidated annual financial statements as of and for the years ended December 31, 2010, 2009, 2008 and 2007, as included in this Annual Report, have been audited by our independent registered public accounting firm. In 2008, we adopted IFRS and prepared IFRS consolidated financial statements for the year ended December 31, 2008, which was two yearsearlier than required by CVM Instruction 457/07.  CVM Instruction 457/07 mandated that Brazilian listed companies prepare consolidated financial statements in conformity with the pronouncements issued by the IASB as of andfrom the year ended December 31, 2010.  In accordance with our adoption of IFRS, we elected to adopt certain accounting policies permitted under IFRS, including the policy permitting periodic revaluation of the carrying amount of our flight equipment.  Accordingly, our financial statements prepared in accordance with IFRS as of and for the years ended December 31, 2009 and 2008, filed in our annual reports on Form 20-F for those years, were prepared recognizing the periodic revaluation of flight equipment, as permitted under IFRS. Our non-consolidated individual parent company financial statements as of and for those years, which are not part of our annual reports on Form 20-F, were prepared in accordance with accounting practices adopted in Brazil.  In those financial statements, we did not revalue our flight equipment because that accounting policy is not permissible under Brazilian Corporate Law.  Accounting practices adopted in Brazil for years ending December 31, 2010  and thereafter ("New Brazilian GAAP") include standards issued by the Brazilian Accounting Pronouncements Committee ("CPC"), which are strictly based on the corresponding standards issued by the IASB. However, certain electable accounting policies allowed under IFRS are not permitted under New Brazilian GAAP, including the option for measuring property, plant and equipment at revalued amounts. On December 2, 2010, the CVM issued CVM Resolution 647 approving Technical Pronouncement CPC 37 (R1) – First-time Adoption of International Accounting Standards ("CPC 37 (R1)").  CPC 37 (R1) establishes that if an entity presented IFRS consolidated financial statements for any year prior to January 1, 2009 in a manner that was not consistent with New Brazilian GAAP standards, that entity should limit any inconsistency in accounting practices solely to those existing at the time of adoption of IFRS.  The CVM  also required that Brazilian listed companies that have already published their IFRS consolidated financial statements submit detailed information supporting the maintenance of those differences to the CVM, with the CVM then having the discretion to allow such inconsistency, restrict the continuation of such inconsistency, or eliminate such inconsistency altogether. On December 16, 2010, the CVM issued CVM Resolution 651 approving Technical Pronouncement CPC 43 (R1) – First-time Adoption of Technical Pronouncements CPC 15 to 41 ("CPC 43 (R1)").  One of the purposes of CPC 43 (R1) is, together with CPC 37 (R1), to facilitate the reconciliation of net income/loss and shareholders equity between non-consolidated individual parent company financial statements prepared in accordance with New Brazilian GAAP and consolidated financial statements prepared in accordance with IFRS. CPC 43 (R1) reaffirms the CPC’s view that it its undesirable to have two sets of financial statements that contain different accounting criteria and different net income/loss and shareholders’ equity. To avoid this result, CPC 43 (R1) permits adjustments to non-consolidated individual parent company financial statements of Brazilian companies, so that, when consolidated, the assets, liabilities, equity, and net income/loss in consolidated financial statements prepared under IFRS reconcile with individual parent company financial statements prepared under New Brazilian GAAP. On the basis that: ·Brazilian Corporate Law prohibits our individual non-consolidated parent company financial statements from recognizing the effects of flight equipment revaluation, and -2 -


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·the purpose of CPC 43 (R1) is that no differences should exist between net income/loss and shareholders equity in individual and consolidated financial statements prepared under IRFS and New Brazilian GAAP, we have elected to change our accounting policy with respect to recognizing the effects of flight equipment revaluation in our consolidated financial statements prepared under IFRS.  This will provide consistency with our individual non-consolidated parent company financial statements prepared under New Brazilian GAAP.  As a result, the consolidated financial statements prepared in accordance with IFRS and presented herein have been prepared to account for property, plant and equipment at historical cost as permitted by IAS 16. For comparison purposes, our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007 that were filed in our Annual Report on Form 20-F for the year ended December 31, 2009 have been retroactively adjusted in this Annual Report to reflect this change in accounting policy.  Please see Note 4 to our audited consolidated annual financial statements as of and for the year ended December 31, 2010 included in this Annual Report for additional information on this change in accounting policy and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007. For ease of presentation, certain financial information contained in this Annual Report has been presented in U.S. dollars.  This Annual Report contains translations of variousrealamounts, before rounding, into U.S. dollars at specified rates solely for your convenience.  You should not construe these translations as representations by us that therealamounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated.  Unless otherwise indicated, we have translated therealamounts using a rate of R$1.67to U.S.$1.00, the U.S. dollar selling rate published by the Central Bank on December 31, 2010.  On May 9, 2011, the U.S. dollar selling rate published by the Central Bank was R$1.62 to U.S.$1.00. The information contained in this Annual Report relating to Brazil and the Brazilian economy is based on data published by the Central Bank, government agencies and other independent sources.  Data and statistics regarding the Brazilian civil aviation markets are based on publicly available data published by ANAC.  Data and statistics regarding the international civil aviation markets are based on publicly available data published by the International Civil Aviation Organization ("ICAO") and the International Air Transport Association ("IATA").  We also make statements in this Annual Report about our competitive position and market share in, and the market size of, the Brazilian airline industry.  We have made these statements on the basis of statistics and other information from third‐party sources that we believe are reliable.  Although we have no reason to believe any of this information or these reports are inaccurate in any material respect, we have not independently verified the competitive position, market share and market size or market growth data provided by third parties or by industry or general publications. Certain figures in this document have been subject to rounding adjustments.  Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.


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FORWARD‐LOOKING STATEMENTS This Annual Report includes certain forward‐looking statements (particularly in "Item 3.  Key Information — D. Risk Factors," "Item 4.  Information on the Company — B. Business Overview" and "Item 5.  Operating and Financial Review and Prospects").  These forward‐looking statements are based principally on our current expectations and on projections of future events and financial trends that currently affect or might affect our business.  In addition to the items discussed in other sections of this Annual Report, there are many significant factors that could cause our financial condition and results of operations to differ materially from those set out in our forward‐looking statements, including factors such as: ·the risk factors set forth in "Item 3.  Key Information — D. Risk Factors" generally and with respect to TAM's proposed business combinationwith Lan Airlines S.A. ("LAN") in particular; ·whether the proposed business combination with LAN is approved  by regulators, LAN's shareholders and other third parties, and whetherany conditions required in order to obain such approvals have been satisfied or waived; ·economic and political developments in both Brazil and the principal international markets in which we operate; ·our management's expectations and estimates as to future financial performance, financial plans and the impact of competition on our business, including competitive pressures on pricing; ·our level of indebtedness and other payment obligations; ·our plans relating to investments and capital expenditures; ·variations in interest rates, inflation and the exchange rate relating to thereal(with respect to both potential depreciation and appreciation of thereal); ·existing and future regulations; ·increases in fuel expenses, maintenance expenses and insurance premiums; ·changes in market prices, consumer preferences and competitive conditions; ·cyclical and seasonal variations in our results of operations; ·defects or other mechanical problems in our aircraft; ·developments or changes in the Brazilian civil aviation infrastructure, including air traffic control, airspace and airport infrastructure; ·the implementation of our strategies and growth plans; ·our ability to obtain financing on commercially reasonable terms; and ·changes in fiscal policy and tax laws. The words "believe," "expect," "continue," "understand," "hope," "estimate," "will," "may," "might," "should," "intend" and other similar expressions are intended to identify forward‐looking statements and estimates.  Such statements refer only to the date on which they were expressed, and we assume no obligation to publicly update or revise any such estimates resulting from new information or any other events.  As a result of the inherent risks and uncertainties involved, the forward‐looking statements included in this Annual Report may not be accurate and our future results of operations and performance may differ materially from those set out in this Annual Report for a number of different reasons.  No forward‐looking statement in this Annual Report is a guarantee of future performance and each estimate involves risks and uncertainties. Investors are cautioned not to place undue reliance on any forward‐looking statements. -4 -


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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 A.           Selected Financial Data The information set forth in this section should be read in conjunction with our audited consolidated annual financial statements (including the notes thereto) set forth in "Presentation of Financial and Other Data," "Item 18.  Financial Statements" and "Item 5.  Operating and Financial Review and Prospects." The summary consolidated annual financial information as of and for the years ended December 31, 2010, 2009, 2008 and 2007, prepared in accordance with IFRS, is derived from our audited consolidated annual financial statements included elsewhere in this Annual Report, which have been audited by our independent registered public accounting firm.AtDecember 31, 2010, we elected to change the accounting policy related to recognition of flight equipment revaluation in its consolidated financial statements. The reason for this change is that Brazilian Corporate Law does not permit the revaluation of assets and, accordingly, our parent company’s financial statements, prepared in accordance with New Brazilian GAAP, cannot include revaluation of assets. In order to avoid differences in the amounts reported on our financial statements and those of our parent company, we made this accounting policy change. For comparison purposes, our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007 that were filed in the Annual Report on Form 20-F for the year ended December 31, 2009, filedJune 30, 2010,have been retrospectively adjusted in this Annual Report to reflect the revaluation reserve reversal.  Please see Note 4 to our audited consolidated annual financial statements as of and for the year ended December 31, 2010 included in this Annual Report for additional information on the change in accounting policy referred to above and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007. For your convenience, the following tables also contain U.S. dollar translations of therealamounts presented at December 31, 2010, translated using the rate of R$1.67 to U.S.$1.00 published by the Central Bank.  On May 9, 2011, the U.S. dollar selling rate published by the Central Bank was R$1.62 to U.S.$1.00. The tables below entitled "Operating Data Computed Using Financial Information Under IFRS" and "Additional Operating Data" also include unaudited operational and other data indicative of performance utilized by certain investors in evaluating companies operating in the global air transportation sector.  This unaudited operational data is not included in or derived from our consolidated annual financial statements. At December 31,IFRS
     2010
     2010
     2009(2)
     2008(2)
     2007(2)(U.S.$ millions)
     (R$ millions)Balance sheet dataCash and cash equivalents
     606
     1,012
     1,075
     672
     467Financial assets at fair value through profit and loss
     843
     1,407
     1,011
     1,242
     2,140Trade account receivables
     932
     1,557
     1,122
     1,157
     938Total assets
     8,681
     14,497
     12,940
     13,417
     10,333Borrowings(1)
     368
     615
     497
     402
     1,068Finance lease obligations(1)
     2,849
     4,758
     4,521
     6,448
     2,968Debentures(1)
     585
     977
     1,111
     529
     532Advance ticket sales
     564
     942
     1,008
     820
     807Total equity
     1,573
     2,627
     1,294
     293
     1,912Total liabilities and equity
     8,681
     14,497
     12,940
     13,417
     10,333
 (1)    Refers to the total balance of current liabilities plus long-term liabilities.(2)    Retrospectively adjusted (See Note 4 of our audited consolidated annual financial statements included in this Annual Report for additional information on the reversal of our revaluation reserve and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007).
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Year Ended December 31,IFRS
     2010
     2010
     2009(3)
     2008(3)
     2007(3)(U.S. millions)(1)
     (R$ millions)(1)Revenue
     6,814
     11,379
     9,765
     10,513
     8,019Operating expenses
     (6,229)
     (10,402)
     (9,556)
     (9,935)
     (7,709)Operating profit before movements in fair value of fuel derivatives
     585
     977
     210
     578
     309Movements in fair value of fuel derivatives
     22
     37
     317
     (1,273)
     130Operating (loss)/profit
     607
     1,014
     527
     (696)
     440Finance income
     1,062
     1,774
     2,413
     1,410
     1,007Finance cost
     (1,001)
     (1,672)
     (1,041)
     (3,006)
     (755)Profit / (loss) before income tax and social contribution
     668
     1,116
     1,898
     (2,292)
     691Income tax and social contribution
     (268)
     (447)
     (649)
     710
     (214)Profit / (loss) after tax (all continuing operations)
     401
     669
     1,248
     (1,581)
     478Attributable toNon-controlling interest
     (18.9)
     (31.5)
     (1.7)
     0.9
     0.2Equity holders of TAM
     381
     637
     1,247
     (1,582)
     477Number of shares outstanding at year end, excluding treasury shares (in thousands of shares):(2)Common shares
     55,817
     55,817
     50,195
     50,195
     59,792Preferred shares
     100,390
     100,390
     100,390
     100,390
     90,793Total
     156,207
     156,207
     150,585
     150,585
     150,585Earnings (loss) per share (common and preferred) – in R$(2)Basic
     2.53
     4.22
     8.30
     (10.52)
     3.17Diluted
     2.51
     4.20
     8.29
     (10.52)
     3.15Dividends declared per share:Common shares (inreaisand U.S. dollars)
     0.978
     1.1634
     1.5762
     0.27
     0.2093Preferred shares (inreaisand U.S. dollars)
     0.978
     1.1634
     1.5762
     0.27
     0.2093Dividends declared per ADS (inreaisand U.S. dollars)
     0.978
     1.1634
     1.5762
     0.27
     0.2093
 
 (1)     Except per share information and where otherwise indicated. (2)     In 2008, there was a conversion of common shares to preferred shares by a relevant shareholder. (3)     Retrospectively adjusted (See Note 4 of our audited consolidated annual financial statements included in this Annual Report for additional information on the reversal of our revaluation reserve and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007).   Year Ended December 31,Operating Data Computed Using Financial Information Under IFRS
     2010
     2010
     2009(1)
     2008(1)
     2007(1)(U.S.$)
     (R$)Operating dataRASK (cents/centavos)(2)
     9.53
     15.91
     15.09
     17.78
     16.85RASK domestic (cents/centavos)(3)
     7.56
     12.72
     13.34
     16.80
     15.16RASK international (cents/centavos)(3)
     7.14
     11.92
     10.32
     12.74
     12.56Yield domestic (cents/centavos)
     11.84
     19.78
     21.60
     25.90
     22.62Yield international (cents/centavos)
     9.04
     15.09
     14.26
     16.87
     17.55CASK (cents/centavos)
     8.71
     14.54
     14.76
     17.40
     16.20CASK except fuel (cents/centavos)
     5.82
     9.72
     10.53
     10.52
     10.87Average tariff (dollars/reais)
     158.66
     264.96
     268.11
     298.07
     250.04
 
 (1)  Retrospectively adjusted (See Note 4 of our audited consolidated annual financial statements included in this Annual Report for additional information on the reversal of our revaluation reserve and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007). (2) Includes passenger, cargo and other revenue. (3) Includes passenger revenue.  Year Ended December 31,Additional Operating Data
     2010
     2009
     2008
     2007Paid passengers transported (thousands)
     34,553
     30,407
     30,144
     27,850RPK (millions)
     51,446
     44,148
     40,518
     33,500ASK (millions)
     71,521
     64,720
     57,091
     47,599Load factor — %
     71.9%
     68.2%
     71.0%
     70.4%Break‐even load factor (BELF) — %
     65.7%
     66.7%
     69.5%
     67.7%Block hours
     625,780
     566,006
     523,114
     462,380Kilometers flown — km (thousands)
     376,717
     340,545
     309,625
     273,056Liters of fuel
     2,480,331
     2,216,168
     2,047,756
     1,739,430Number of employees
     28,193
     24,348
     24,389
     20,469Average aircraft use during the period (hours per day)
     12.9
     12.5
     13.4
     13.4Take‐offs
     303,496
     285,006
     274,856
     261,171Average leg (km)
     1,241
     1,195
     1,126
     1,046
 -6 -


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Exchange Rates Until January 1999, 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 (i) foreign trade transactions and (ii) transactions that generally required prior approval from Brazilian monetary authorities, like the purchase and sale of registered investments by foreign persons and related remittances of funds abroad (including the payment of principal of, and interest on, loans, notes, bonds and other debt instruments denominated in foreign currencies and duly registered with the Central Bank).  The Floating Market was for specific transactions that did not require Central Bank approval. The Central Bank reported both the Commercial Market rate and the Floating Market rate on a daily basis.  In January 1999, the Brazilian government announced the unification of the exchange rates for the Brazilian Commercial Market and the Floating Market, leading to a convergence in the pricing and liquidity of both markets. On March 4, 2005, theConselho Monetário Nacional(the "CMN") issued Resolution No. 3,265 and Resolution No. 3,266 (each of which became effective on March 14, 2005), which introduced several changes in the Brazilian foreign exchange regime, including (i) the unification of the Commercial Market and the Floating Market, and (ii) the relaxation of rules for the acquisition of foreign currency by Brazilian residents.  It is expected that the Central Bank will further regulate foreign exchange transactions, as well as payments and/or transfers of Brazilian currency between Brazilian residents and non‐residents (those transfers, the International Transfers ofReais), including those made through non‐resident accounts. See "Item 3.  Key Information — D. Risk Factors — Risks relating to Brazil — Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares." The following tables set forth the Commercial Market rate for the purchase of U.S. dollars expressed inreaisper U.S. dollar for the periods and dates indicated: Exchange Rates ofReaisper U.S. $1.00Year Ended
     Low
     High
     Average(1)
     Period EndDecember 31, 2006
     2.059
     2.371
     2.215
     2.138December 31, 2007
     1.733
     2.156
     1.944
     1.771December 31, 2008
     1.559
     2.500
     1.837
     2.337December 31, 2009
     1.702
     2.422
     1.998
     1.741December 31, 2010
     1.655
     1.881
     1.759
     1.666
 
 (1)       Represents the daily average rate during each of the relevant periods. Source:Central Bank. Exchange Rates ofReaisper U.S. $1.00Month Ended
     Low
     High
     Period EndSeptember 2010
     1.694
     1.744
     1.694October 2010
     1.655
     1.711
     1.701November 2010
     1.680
     1.734
     1.716December 2010
     1.666
     1.712
     1.666January 2011
     1.651
     1.691
     1.673February 2011
     1.661
     1.678
     1.661March 2011
     1.629
     1.676
     1.629April 2011
     1.565
     1.619
     1.573
  Source:  Central Bank.


-7 -




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B.           Capitalization and Indebtedness Not applicable. C.           Reasons for the Offer and Use of Proceeds Not applicable. D.           Risk Factors Investing in our ADSs or our preferred shares involves a high degree of risk.  Before making an investment decision, you should carefully consider the risks set forth below.  Our business, financial condition and results of operations may be materially adversely affected by any of these risks.  The trading price of our ADSs or our preferred shares may decrease due to any of these risks, and you may lose all or part of your investment.  The risks described below are those that we currently believe may materially affect us. Risks Related to TAM's Proposed Combination with LAN  **The completion of the proposed combination is subject to many conditions precedent and if these are not satisfied or waived the proposed combination will not be completed.**  TAM's proposed combination with LAN will involve an exchange offer (the "exchange offer"). See the section titled "Item 4. Information on the Company - Business Overview - Proposed Combination with LAN" for a description of the exchange offer and the corporate steps to effect the proposed combination.The commencement of the exchange offer is subject to certain conditions, including receipt of all required regulatory approvals (including the required approvals from the CVM, theSuperintendencia de Valores y Seguros(theChilean Securities and Insurance Supervisor, or "SVS"), and the SEC) and approval of the proposed combination by the holders of LAN common shares.  In addition, the exchange offer is subject to the conditions that the exchange offer be accepted by (i) the holders of at least 66 2/3 % of the outstanding shares of TAM not owned by TAM - Empreendimentos e Participações S.A. ("TEP" or the "TAM controlling shareholder") and its affiliates (which is the minimum threshold required to permit the delisting of TAM stock from the BM&FBOVESPA S.A. - *Bolsa de Valores, Mercadorias e Futuros*, orBM&FBovespa,after completion of the proposedcombination), and (ii) the holders of a sufficient number of TAM shares so that the sum of (A) the total number of TAM shares that have accepted the exchange offer and (B) the number of TAM shares owned by TAM’s controlling shareholder is more than 95% of the outstanding TAM shares (which is the minimum threshold required to permit a statutory squeeze-out under Brazilian law of all TAM shares that do not accept the exchange offer after completion of the proposed combination).  Certain of these conditions may not be waived without the written agreement of TAM's controlling shareholder and Costa Verde Aeronáutica and Inversones Mineras del Cantábrico (the "LAN controlling shareholders") and neither theTAM controlling shareholder nor the LAN controlling shareholders have any obligation to waive any conditions not satisfied on or prior to the expiration of the exchange offer. Therefore, even if TAM is willing to waive an unsatisfied condition, TAM may be unable to complete the exchange offer if LAN's or TAM's controlling shareholders refuse to waive the condition.  In addition, the obligation of TAM’s controlling shareholder under an implementation agreement and an exchange offer agreement, both agreements by and among TAM, the TAM controlling shareholder and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro (the "Amaro family") on the one hand and LAN and the LAN controlling shareholders on the other hand (the "transaction agreements") to contribute its TAM shares into the proposedcombination prior to the completion of the exchange offer is subject to certain conditions relating to the operations and business of LAN and certain other events outside of LAN's and TAM's control.  Further, the mergers are subject to the condition that the holders of no more than 2.5% of the outstanding LAN common shares exercise their appraisal rights under Chilean law.  If any of these conditions are not satisfied or waived, the proposedcombination will not be completed.  **The proposed combination cannot be completed unless TAM and LANreceive consents and clearances from regulatory authorities and such authorities could impose conditions that could adversely affect TAM and/or the combined companies.**  Before the proposedcombination may be completed, applicable waiting periods must expire or terminate under antitrust and competition laws and various approvals or consents must be obtained from regulatory entities, including the*Tribunal de Defensa de la Libre Competencia*(the Chilean Tribunal of the Defense of Free Competition), or the "TDLC".  See the section entitled "Item 4.  Information on the Company – Business Overview – Proposed Combination with LAN" below for a discussion of the status of the review of the proposed combination by the TDLC.  In deciding whether to grant antitrust or regulatory clearances, the relevant governmental entities will consider, among other things, the effect the proposedcombination will have on competition and operations within their relevant jurisdictions. The terms and conditions of the approvals that are granted may impose requirements, limitations or costs or place restrictions on the conduct of the combined companies’ businesses. The transaction agreements expressly provide that neither LAN nor TAM are required to sell, hold separate or otherwise encumber any of TAM's respective assets or to take the other actions specified therein in order to obtain such approvals and thus either company may refuse to complete the proposedcombination on the basis of those regulatory conditions. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions or that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the proposedcombination or imposing additional material costs on, or materially limiting the revenues of, the combined companiesfollowing the proposedcombination. In addition, it is a condition to TAM's and LAN’s obligation to complete the proposed combination that no governmental authority shall have issued any law or order making the proposed combination illegal or materially limiting or impairing the ownership or operation of any material part of the combined companies.  -8 -
   **Any delay in completing the proposed combination may reduce or eliminate the benefits TAM expects to be achieved as a result of the proposed combination.**  In addition to the required regulatory clearances, the proposedcombination is subject to a number of other conditions beyond TAM's control that may prevent, delay or otherwise materially adversely affect its completion. TAM cannot predict whether or when these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the completion of the proposed combination for a significant period of time or prevent it from occurring. Any delay in completing the proposed combination could limit the ability of the combined companies to realize some or all of the synergies that TAM expects to achieve if the proposedcombination is successfully completed within its expected time frame.  **Failure to complete the proposed combination could negatively impact TAM's stock price and future business and financial results.**  If the proposedcombination is not completed, TAM's ongoing businesses may be adversely affected, and TAM would be subject to several risks, including the following:  being required to pay a termination fee to LAN of U.S.$200 million and reimburse up to U.S.$25 million of LAN’s expenses under certain circumstances provided in the transaction agreements;having to pay certain costs relating to the proposedcombination, such as legal, accounting, financial advisor and printing fees; andhaving had TAM's management focus on the proposedcombination instead of pursuing other opportunities that could have been beneficial to TAM.  If the proposedcombination is not completed, TAM cannot assure its stockholders that these risks will not materialize and will not materially adversely affect TAM's business, financial results and stock price.  **The transaction agreements contain provisions that could discourage a potential competing acquirer of TAM.**  The transaction agreements require TAM's board of directors to recommend that TAM's shareholders tender their shares as part of the proposed combination and does not permit TAM's board of directors to withdraw or adversely modify that recommendation. The transaction agreements also contain "no shop" provisions that prohibit TAM from soliciting, initiating or encouraging any competing third party proposals, including acquisitions of TAM's equity securities or material assets, and there are no exceptions to these provisions. In addition, if the transaction agreements are terminated under certain circumstances, TAM may be required to pay to LAN a termination fee of U.S.$200 million and to reimburse LAN for up to U.S.$25 million of expenses incurred by LAN in connection with the transaction agreements and the proposed combination. These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of TAM from considering or proposing that acquisition, even if it were prepared to pay consideration with a value per share higher than the benefits TAM shareholders may receive from the proposedcombination, or might result in a potential third-party acquiror proposing to pay a lower price to the TAM shareholders than it might otherwise have proposed to pay because of the added expense of the U.S.$225 million termination fee and expense reimbursement that may become payable in certain circumstances.   -9 -
    **Uncertainties associated with the proposed combination may cause a loss of management personnel and other key employees that could adversely affect TAM, LAN and/or the combined companies.**
The success of the operations of TAM, LAN and the combined companies is dependent, among other things, on the experience and industry knowledge of their senior management and other key employees and their ability to execute their business plans. In order to be successful, TAM, LAN and the combined companies must be able to retain their senior management and other key employees and their ability to attract highly qualified personnel in the future. Current and prospective employees of TAM and LAN may experience uncertainty about their roles within the combined companies following completion of the proposed combination, which may have an adverse effect on the ability of TAM, LAN and/or the combined companies to retain or attract senior management and other key employees. Competition for highly qualified personnel in the various locations and business segments in which TAM and LAN operate is intense. No assurances can be given that TAM, LAN or, after completion of the proposed combination, the combined companies will be able to retain or attract senior management and other key employees to the same extent that TAM and LAN have previously been able to do so.   **TAM has and will continue to incur significant costs and expenses in connection with the proposed combination and integration of the business operations of TAM and LAN.** TAM has incurred and expects to continue to incur substantial expenses in connection with the proposed combination and the integration of TAM and LAN. Non-recurring expenses expected to be incurred by TAM and LAN in connection with the proposed combination in 2011 are anticipated to be significant. These costs and expenses include financial advisory, legal and accounting fees and expenses, reorganization and restructuring costs, severance/employee benefit-related expenses, filing fees, printing expenses and other related charges. Some of these costs are payable regardless of whether the proposed combination is completed. There are also a large number of processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the proposed combination. While both TAM and LAN have assumed that a certain level of expenses would be incurred in connection with these transactions, there are many factors beyond TAM's control that could affect the total amount or the timing of the integration expenses.  There may also be additional unanticipated significant costs in connection with the combination that TAM may not recoup. These costs and expenses could, particularly in the near term, exceed the savings that TAM expects the combined companiesto achieve from the elimination of duplicative expenses and the realization of economies of scale, other efficiencies and cost savings. Although TAM expects that these savings will offset these transaction- and combination-related costs over time, this net benefit may not be achieved in the near term or at all.  **TAM and LAN may be unable to fully realize the anticipated benefits of the proposed combination.**  The proposed combination involves bringing together two large and complex businesses that currently operate as independent public companies. The combined companies will be required to devote significant management attention and resources to integrating certain aspects of the business practices and operations of TAM and LAN. The success of the proposed combination will depend, in part, on the combined companies' ability to realize anticipated revenue synergies, cost savings and growth opportunities by combining the businesses of TAM and LAN. TAM hopes to generate synergies resulting from the consolidation of capabilities, rationalization of operations and headcount, greater efficiencies from increased scale and market integration, experience of product and service offerings and organic growth. There is a risk, however, that TAM and LAN may not be able to combine their respective businesses in a manner that permits the combined companies to realize these revenue synergies, cost savings and growth opportunities in the time, manner or amounts it currently expects, or at all. Potential difficulties the combined companies may encounter as part of the integration process include, among other things:  ·the inability to successfully combine the businesses of TAM and LAN in a manner that permits the combined companies to achieve the full revenue and cost synergies anticipated to result from the proposed combination; ·complexities associated with managing the combined companies; ·the need to implement, integrate and harmonize various business-specific operating procedures and systems, as well as the financial, accounting, information and other systems of TAM and LAN; ·potential loss of key employees as a result of implementing the proposed combination; and ·potential unknown liabilities and unforeseen increased expenses or delays associated with the exchange offer, the mergers and the other combination transactions, including one-time cash costs to integrate the two airlines that may exceed the one-time cash costs that TAM and LAN currently anticipate. In addition, TAM and LAN have operated and, until the completion of the proposedcombination, will continue to operate independently. It is possible that the integration process could result in the disruption of, or the loss of momentum in, each company’s ongoing businesses, which could adversely affect each company’s ability to maintain good relationships with its customers, suppliers, employees and other constituencies or achieve the anticipated benefits of the proposed combination or could increase costs or reduce each company’s earnings or otherwise adversely affect the businesses, financial condition, results of operations and/or prospects of the combined companies following the completion of the exchange offer and mergers. Even if they are achieved, actual revenue synergies, cost savings and efficiency and operational benefits may be lower and may take a longer time to achieve than TAM currently expects.  -10 -
   The integration of two large companies also presents significant management challenges. In order to achieve the anticipated benefits of the proposed combination of TAM and LAN, the operations of the two companies will need to be reorganized and their resources will need to be combined in a timely and flexible manner. There can be no assurance that TAM and LAN will be able to implement these steps as anticipated or at all. If TAM or LAN fail to achieve the planned restructuring effectively within the time frame that is currently contemplated or to the extent that is currently planned, or if for any other reason the expected synergies fail to materialize, the proposed combination may not produce the benefits TAM currently anticipates.  **The proposed combination will involve a delisting exchange offer under Brazilian law pursuant to which there will be a statutory squeeze-out if applicable requirements are met.** TAM's proposed combination with LAN will involve an exchange offer to be structured as a delisting exchange offer under Brazilian law.  See the section entitled "Item 4.  Information on the Company – Business Overview – Proposed Combination with LAN" for a description of the exchange offer and the corporate steps to effect the proposed combination.  If the number of TAM shares validly tendered as part of the exchange offer is sufficient so that the sum of (A) the total number of TAM shares that have accepted the exchange offer and (B) the number of TAM shares owned by the TAM controlling shareholder is more than 95% of TAM's outstanding shares, LAN will conduct a statutory squeeze-out under Brazilian law of all TAM shares that do not accept the exchange offer after completion of the proposed combination.  If this statutory squeeze-out occurs, a holder of non-tendered shares would be forced to sell its shares to LAN and receive cash in an amount equal to the product of (i) the number of LAN common shares that it would have received pursuant to the exchange offer in respect of its non-tendered shares, and (ii) the closing price of the LAN common shares on the Santiago Stock Exchange (Bolsa de Comercio de Santiago) on the day on which the exchange offer is completed. Risks relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy.  Brazilian political and economic conditions have a direct impact on our business, financial condition, results of operations and prospects as well as the trading price of our ADSs and preferred shares. The Brazilian economy has been characterized by the significant involvement of the Brazilian government, which often changes monetary, credit, fiscal and other policies to influence Brazil's economy.  The Brazilian government's actions to control inflation and effect other policies have involved wage and price controls, depreciation of thereal, controls over remittance of funds abroad, intervention by the Central Bank to affect base interest rates and other measures.  We have no control over, and cannot predict, what measures or policies the Brazilian government may take in the future.  Our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares may be adversely affected by changes in Brazilian governmental policies, as well as general economic factors, including, without limitation: ·Brazilian economic growth; ·inflation; ·interest rates; ·variations in exchange rates; ·exchange control policies; ·fiscal policy and changes in tax laws; ·liquidity of domestic capital and lending markets; ·government control of production activities and oil refining; and ·other political, diplomatic, social and economic developments in or affecting Brazil. We cannot predict what future fiscal, monetary, social security or other policies will be adopted by current or future Brazilian governments, or whether these policies will result in adverse consequences to the Brazilian economy, to our business, results of operations, financial condition or prospects, or to the trading prices of our ADSs and preferred shares. In October 2010, presidential elections took place in Brazil. Uncertainties in relation to the implementation by the new government of changes relating to the monetary, tax and pension funds policies as well as to the relevant legislation may contribute to economic instability. This may increase market volatility of Brazilian securities. It is not possible to predict whether the government that was elected in October 2010 or any succeeding governments will have an adverse effect on the Brazilian economy, and, consequently, on our business, results of operations, financial condition or prospects, or on the trading prices of our ADSs and preferred shares. -11 -


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In addition, possible political crises may affect the confidence of investors and the public in general, which may result in economic deceleration and affect the trading prices of securities issued by Brazilian companies. Exchange rate instability may have adverse effects on the Brazilian economy, our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares. As a result of inflationary pressures, the Brazilian currency has depreciated frequently over the past decade.  Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini‐devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system.  Although long‐term depreciation of therealis generally linked to the rate of inflation in Brazil, depreciation of therealoccurring over shorter periods of time has resulted in significant variations in the exchange rate between thereal, the U.S. dollar and other currencies.  In 2002, therealfell 34.3% against the U.S. dollar, caused in part by political uncertainties involving the presidential election in Brazil and the global economic recession.  Notwithstanding the fact that therealappreciated 13.4%, 9.5% and 17.2% against the U.S. dollar in 2005, 2006 and 2007 respectively, from mid‐2008 through the end of that year, therealdepreciated 31.9% against the U.S. dollar as a result of the ongoing global financial crisis.  However, in 2009, therealappreciated 25.5% against the U.S. dollar, as reported by the Central Bank and in 2010, therealappreciated 4.3% against the U.S. dollar.  On December 31, 2010, the exchange rate was R$1.666 per U.S. dollar and on March 17, 2011, the exchange rate was R$1.676 per U.S. dollar.  We cannot assure you that therealwill not depreciate or appreciate substantially against the U.S. dollar in the future. The majority of our revenues are denominated inreais,and a significant portion of our operating expenses (such as fuel, aircraft and engine maintenance, aircraft leasing and insurance payments, parts and engines) are denominated in, or linked to, the U.S. dollar or other foreign currencies.  In the event that we are unable to adjust our prices or to obtain protection through hedging transactions, adepreciation in therealwould reduce our profit margins and/or cause operating losses as a result of increased expenses.  Devaluations in therealagainst the U.S. dollar or other foreign currencies also create inflationary pressures, which can restrict our access to foreign financial markets and lead to government intervention (including the implementation of recessionary policies to curb aggregate demand).  Exchange rate instability may adversely affect our business, financial condition, results of operations and the trading price of our ADSs and preferred shares. Inflation and certain measures by the Brazilian government to curb inflation have historically adversely affected the Brazilian economy and Brazilian securities market, and high levels of inflation in the future would adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares. Brazil has historically experienced extremely high rates of inflation.  Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally.  Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian securities market. Since the introduction of therealin 1994, Brazil's inflation rate has been substantially lower than in previous periods.  However, inflationary pressures persist.  According to the General Price Index (Índice Geral dePreços‐Mercado, or IGP‐M), Brazilian inflation rates were 3.8%, 7.7%, 9.8%, -1.7% and 11.4% in 2006, 2007, 2008, 2009 and 2010 respectively.  According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo, or "IPCA"), Brazilian inflation rates were 3.1%, 4.5%, 5.9%, 4.3% and 5.9% in 2006, 2007, 2008, 2009 and 2010 respectively. Brazil may experience high levels of inflation in the future.  Inflationary pressures may lead to the Brazilian government intervening in the economy and introducing policies that could adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares. In the event that Brazil experiences high inflation in the future, we may not be able to adjust the prices we charge our passengers to offset the impact of inflation on our expenses.  This would lead to decreased net income.Inflationary pressures may also adversely affect our ability to access foreign financial markets, causing adverse effects on our capital expenditure plans. -12 -


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Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may adversely affect the Brazilian economy, our business, financial condition, results of operations and prospects and the market price of Brazilian securities, including the trading price of our ADSs and preferred shares. The market for securities issued by Brazilian companies is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States and Europe.  Although economic conditions are different in each country, the reaction of investors to developments in one country may have a material adverse effect on the market value of Brazilian companies' securities.  Crises in another emerging market country, the United States or Europe could decrease investor demand for Brazilian securities, including our notes, ADSs and preferred shares.  This may adversely affect the trading value of our ADSs and preferred shares, and any decline in trading value would impede our access to capital markets and financing for future operations. The recent global financial crisis has had significant consequences worldwide and in Brazil, causing stock and credit market volatility, credit unavailability, interest rate increases, a general economic slowdown, volatile exchange rates and inflationary pressure, which may adversely affect the market price of Brazilian securities, including our ADSs and preferred shares.If the Brazilian economy experiences a sustained recession, or if Brazil experiences significant political disruptions, our business, financial condition and results of operations could be materially and adversely affected. Variations in interest rates may have adverse effects on our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares. We are exposed to the risk of interest rate variations, principally in relation to the Long Term Interest Rate (Taxa de Juros de Longo Prazo, or TJLP), with respect to loans denominated inreais, the Interbank Deposit Rate, or DI Rate, and with respect to operating and finance leases denominated in U .S. dollars, the London Interbank Offer Rate, or LIBOR. Beginning in 2003, as inflationary pressures eased, the CMN, the highest monetary regulatory body in the Brazilian government, decreased the TJLP.  At December 31, 2008, the TJLP was 6.25% and at December 31, 2009, the TJLP was 6.0%.  As of December 31, 2010, the TJLP was 6.0%.  The DI Rate at December 31, 2008 was 13.6% and at December 31, 2009, the DI Rate was 8.55%.  At December 31, 2010, the DI Rate was 10.6%.  The LIBOR at December 31, 2008 was 1.4% and at December 31, 2009, it was 0.3%.  At December 31, 2010, the LIBOR was 0.3%.  Significant increases in consumption, inflation or other macroeconomic pressures may lead to an increase in these rates, which may have an adverse effect on our business. In addition, our repayments under many of our operating and finance leases are linked to LIBOR, and we are exposed to the risk of variations in LIBOR.  At December 31, 2010, the estimated future payments due on our operating and finance lease contracts linked to LIBOR amounted to U.S.$3.0 billion. If the TJLP, the DI Rate or LIBOR was to increase, our loan repayments would increase, and we might not be able to adjust the prices we charge to offset increased payments.  If we are unable to adequately adjust our prices, our revenues would not offset the increased loan expenses, adversely affecting our results of operations.  Accordingly, interest rate increases may adversely affect our business, financial condition, results of operations and prospects and the trading price of our ADSs and preferred shares. -13 -


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Risks Relating to our Business and the Brazilian Aviation Industry The airline industry is particularly sensitive to changes in economic conditions and continued negative economic conditions that would likely continue to negatively impact our results of operations and our ability to obtain financing on acceptable terms. Our operations, and the airline industry in general, are particularly sensitive to changes in economic conditions.  Unfavorable economic conditions, such as high unemployment rates, a constrained credit market and increased business operating expenses, can reduce spending for both leisure and business travel.  Unfavorable economic conditions can also impact our ability to raise fares to counteract increased fuel, labor, and other expenses.  An increasingly unfavorable economic environment would likely negatively impact our results of operations.  We continue to be cautious of current domestic economic conditions. Factors such as continuing unfavorable economic conditions, a significant decline in demand for air travel, or continuing instability of the credit and capital markets could result in pressure on our borrowing costs, operating results and financial condition and would affect our growth and investment plans.  These factors could also negatively impact our ability to obtain financing on acceptable terms and our liquidity in general. The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations. Scheduled air transportation services are considered public utilities in Brazil and are subject to extensive regulation by the Brazilian government.  Over recent years, the Brazilian regulatory authorities have taken a more proactive role in monitoring the development of the Brazilian civil aviation market.  For example, in an effort to prevent excess supply, the authorities have established rigorous criteria for air transport companies to follow when creating new routes or increasing flight frequencies.  Various legislative initiatives have taken place, including the drafting of a bill to amend the Brazilian Aeronautics Code, Law No. 7,565 of December 19, 1986, the establishment of ANAC, the national aviation agency that replaced theDepartamento de Aviação Civil, or "DAC", as the principal regulatory body for Brazilian civil aviation, and the Civil Aviation Secretariat (*Secretaria de Aviação Civil*), or SAC, created on March 18, 2011 pursuant to Provisory Measure (*Medida Provisória*) No. 527, or Provisory Measure No. 527. See "Item 4.  Information on the Company — B. Business Overview — Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Future legislation." Operation of air transportation services, as well as airport infrastructure, is an exclusive right of the Brazilian government, which may choose to provide these services directly or through third parties by means of concessions or permits.  Our concession to operate public air transportation was obtained on December 9, 1996, and is valid until December 9, 2011. We cannot assure you that we will be able to automatically renew our concession.  See "Item 4.  Information on the Company — B. Business Overview — Regulation of the Brazilian Civil Aviation Industry — Overview — Air transportation services concession." Our growth plans include expanding into new markets, increasing flight frequency and expanding our fleet, which consisted of 151 aircraft at the end of 2010.  ANAC has actively monitored the developments of Brazil's airline market and has taken restrictive measures to help restore greater stability in the industry.  Accordingly, our capacity to grow is dependent on receiving the necessary authorizations from ANAC and the Bureau of International Relations (Superintendência de Relações Internacionais, or "SRI").  We cannot assure you that we will obtain all necessary authorizations in the future and any failure to do so would require us to re‐evaluate our strategies. The Brazilian civil aviation structure may change significantly in the future and we may not be able to anticipate or evaluate how this change will affect our business and results of operations.  We cannot assure you that these or other changes in Brazilian civil aviation regulations will not have an adverse effect on our business or results of operations.  Any change that requires us to focus a significant level of resources on compliance with new aviation regulations, for example, would result in additional expenditure on compliance and consequently adversely affect our results of operations. In addition, our ability to increase prices to offset an increase in our fixed expenses may be adversely affected in the event that the Brazilian civil aviation authorities impose price control restrictions on air transportation services.  If we are unable to adequately increase prices to offset increases in fixed expenses, this would adversely affect our results of operations.  Changes in the regulations issued by the Brazilian government or the occurrence ofany of the above factors may increase our expenses, limit our capacity to expand our routes or adversely affect our business and results of operations. -14 -


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Competition in both the domestic and international civil aviation markets is increasing, and the Brazilian government may intervene in the domestic market. We face intense competition in both the domestic and international markets.  The Brazilian government has the power to authorize or deny the entry of new participants into the domestic market in which we operate, as well as the power to assume air transportation operations.  Accordingly, each year we face increased competition from existing and new participants, including new low cost carriers on some of our domestic routes.  The air transportation sector is highly sensitive to price discounting, particularly as a result of the arrival of low‐cost airlines and some airlines use of predatory pricing policies.  Other factors, such as flight frequency, schedule availability, brand recognition, and quality of offered services (such as loyalty programs, VIP airport lounges, in‐flight entertainment and other amenities) also have a significant impact on market competitiveness.  In addition, it does not require significant investment to acquire an airline concession in Brazil and, as a result, the barriers to entering the domestic market are low.  We cannot assure you that the Brazilian government will not assume control of the air transport operations or that existing or new competitors in our markets will not offer lower prices, more attractive services or increase their routes capacities in an effort to obtain greater market share.  In the event that any of the foregoing events occur, we cannot assure you that the price of our fares, passenger demand or our profit margins will not be negatively affected.  Any negative impact on our fares would lead to decreased net revenues and may require us to focus on cost‐saving programs. In 2010, ANAC approved the deregulation of international airfares for flights departing from Brazil to the U.S. and Europe, removing the prior minimum fares that applied to these routes in stages.  In addition, in 2010, the National Civil Aviation Council (Conselho de Aviação Civil), or "CONAC", approved the continuity of bilateral agreements providing for open skies policies with other South American countries and a new open skies policy with the United States, and began negotiations for an open skies policy with Europe.  These regulations will likely increase competition in the market and we cannot assure you that our results will not be adversely impacted as a result. Until 2010, landing fees charged by Brazilian airports were standardized, regardless of how busy the airport was.  In February 2011, the Brazilian government announced that it will increase landing fees at the busiest airports.  Accordingly, competitors who operate from airports that have traditionally been less busy obtain cost advantages, which could adversely affect our results of operation. The Brazilian Government is studying an increase to the regulatory limitation on foreign capital investmentsin Brazilian airline companies from 20% to 49% of voting capital. The Brazilian Congress is already discussing certain draft bills related to this increase, which may be voted upon and/or approved with Provisory Measure No. 527. We cannot predict the effects of this regulation on the competitive environment, our industry or on us. Substantial fluctuations in fuel prices or decreased availability of sufficient quantities of fuel may harm the Brazilian civil aviation market and our business if we cannot pass those cost increases on to passengers through our fares or our fuel hedging arrangements become more expensive. Fuel expenses represent a significant portion of operating expenses for airlines in general, and fuel prices have risen significantly in recent periods.  For the year ended December 31, 2010, fuel expenses represented 32.4% of our operating expenses. Historically, fuel prices in Brazil have been subject to significant variations in international prices, which in turn vary as a result of global political issues and global supply and demand.  The availability of fuel is also subject to periods of market scarcity and surplus and is affected by the demand for gasoline and other petroleum derivatives.  Therefore, it is not possible to predict the cost and availability of fuel in the future with any degree of certainty.  In the event that the supply of fuel is reduced for any reason, we may need to increase our prices or reduce our scheduled services, which would adversely affect our net revenues. Fuel prices reached record levels during the middle of 2008, but decreased substantially in the second half of that year.  However, in 2009, this trend reversed and fuel prices became more volatile. In 2010, fuel pricesincreased by approximately 14% in Brazil, following the global trend of price correction after 2009 ́s high volatility.  Jet fuel expenses have been subject to wide fluctuations as a result of increases in demand, sudden disruptions in global supply, as well as market speculation.  In addition, some of our competitors may be able to obtain fuel on better terms (with respect to both price and quality).  Significant increases in fuel expenses (or in the relative price we pay for fuel compared to our competitors) may harm our financial condition and results of operations in the event that it is not possible for us to pass on price increases to passengers through our fares (or in the event that competitors can decrease their prices relative to ours and take market share from us). -15 -


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Substantial fluctuations in fuel prices or decreased availability of sufficient quantities of fuel may harm the Brazilian civil aviation market and our business if we cannot pass those cost increases on to passengers through our fares or our fuel hedging arrangements become more expensive. Since 2006, we have routinely hedged our future fuel requirements.  However, there can be no assurance that, at any given point in time, our hedge contracts will provide any particular level of protection against increased fuel costs (or that our counterparties will be able to perform under our hedge contracts, such as in the case of a counterparty's bankruptcy).  Additionally, a deterioration in our financial condition could negatively affect our ability to enter into new hedge contracts in the future.  The Financial Risk Management Policy initially established in 2006 was revised in 2009 so as to reflect the evolution in the understanding of risk by the Company. Thus, the hedging horizon was expanded to five years (quarterly rolling) with minimum levels of protection set at 20% for the first 12 months and 10% for the following 12 months with a maximum of 60% during the whole period, compared to the previous minimum of 30% and maximum of 80%. The decrease in fuel prices in the latter half of 2008 had the effect of increasing the costs associated with our fuel hedging arrangements, so that we recorded a liability of R$1.1 billion at December 31, 2008 as a result of those arrangements.  In 2010, fuel prices increased thereby increasing our fuel price variation costs. In 2011, fuel prices have shown volatility and our fuel hedging transactions and adjustments to our price margins might not be sufficient to protect us from fuel price variations, in which case our results of operations could be significantly and adversely affected. Airlines have significant fixed expenses that may harm our ability to attain our strategic goals. As is the case with other airlines, we have high fixed expenses (arising principally from aircraft lease agreements).  We expect to incur additional fixed expenses and contractual debt as we lease or acquire new aircraft and other equipment to implement our growth strategy.  As of December 31, 2010, we had firm commitments to purchase 91 aircraft, with an aggregate manufacturer's list price of approximately U.S.$9.16 billion.  Additionally, in 2011, we announced the order of 32 Airbus A320 family aircraft and two Boeing 777-300ER aircraft.  Out of this order, 22 of the Airbus A320 family aircraft are for the new model A320neo.  These aircraft will be delivered between 2016 and 2018.  The engine option will be announced at a later date. We will require substantial capital from external sources to meet our future financial commitments.  Volatility in global financial markets may make it difficult for us to obtain financing for new aircraft on favorable terms. As a function of our fixed expenses, we may (i) have limited ability to obtain additional financing for working capital and other purposes, (ii) be required to dedicate a significant part of our cash flow to fixed expenses resulting from operating and finance leases for aircraft, (iii) incur higher interest or leasing expenses in the event that interest rates increase or (iv) have a limited ability to plan for, or react to, changes in our businesses, the civil aviation sector generally and overall macroeconomic conditions. We depend significantly on automated systems and any breakdown in these systems may harm our business and results of operations. We depend on automated systems to operate our businesses, including our sales system, automated seat reservation system, fleet and network management system, telecommunications system and website.  Significant or repeated breakdowns of our automated systems may impede our passengers and travel agencies' access to our products and services, which may cause them to purchase tickets from other airlines, adversely affecting our net revenues.  Any interruption in our automated systems may result in the loss of important information and increase our expenses, which may cause a negative public perception of our airline and reduce demand for our services. -16 -


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A failure to implement our growth strategy may harm our results of operations and the trading price of our ADSs and preferred shares. Our growth strategy in the domestic and international markets, and the consolidation of our leadership in those markets, includes, among other objectives, increasing the number of markets we serve and increasing the frequency of the flights we provide.  These objectives are dependent on obtaining approvals for operating new routes from local regulators and obtaining adequate access to the necessary airports.  Guarulhos airport in São Paulo and Juscelino Kubitschek airport in Brasília are highly congested, and passenger utilization is near, or at, maximum capacity.  In addition, Congonhas airport in São Paulo and Santos Dumont airport in Rio de Janeiro are subject to slot restrictions that limit both the number of landings and take‐offs and the times at which landings and take‐offs may be scheduled.  Other airports may also reach maximum passenger capacity in the future or impose slot restrictions, which would adversely affect our growth strategy.  Any factor preventing or delaying our access to airports or routes which are vital to our growth strategy (including our ability to maintain our current slots and obtain additional slots at certain airports) may restrict the expansion of our operations and, consequently, adversely affect our growth strategy. TAM, together with its controlling shareholder, TEP, and the Amaro family, entered into agreements to combine with LAN, and its respective controlling shareholders to effect a proposed business combination of LAN and TAM. For additional risks related to this proposed business combination, see "– Risks Related to TAM's Proposed Combination with LAN" above. Our insurance expenses may increase significantly as a result of a terrorist attack, harming our financial condition and results of operations. Insurance companies may significantly increase insurance premiums for airlines and reduce the amount of insurance coverage available to airlines for civil liability in respect of damage resulting from acts of terrorism, war, or similar events, as was the case following the terrorist attacks of September 11, 2001 in the United States. In response to substantial increases in insurance premiums to cover risks related to terrorist attacks following the events of September 11, 2001 in the United States, the Brazilian government enacted legislation, authorizing the Brazilian government to assume civil liability to third parties for any injury to persons or goods on the ground caused by terrorist attacks or acts of war against Brazilian airlines operating in Brazil or abroad.  However, the Brazilian government may, at its sole discretion, suspend the assumption of liability at any time, provided that it gives seven days' notice of the suspension.  If the Brazilian government suspended its assumption of liability, the Brazilian airlines are required to reassume the liability and contract for insurance in the market. Airline insurers may reduce their coverage or increase their premiums in case of terrorist attack, seizures, aircraft accident and the Brazilian government's termination of its assumption of liability or other events affecting civil aviation in Brazil or abroad.  If there are significant reductions in insurance coverage, our potential liability would increase substantially.  If there are significant increases in insurance premiums, our operating expenses would increase, adversely affecting our results of operations. We may not succeed in obtaining all aircraft and parts on time, which may result in a suspension of the operations of certain of our aircraft because of unscheduled or unplanned maintenance. At December 31, 2010, we had firm orders outstanding with Airbus for an additional 56 Airbus A320 aircraft, 2 Airbus A330 aircraft, and 27 Airbus A350 aircraft, together with an additional 5 options for Airbus A350 aircraft. We also had firm orders outstanding with Boeing for 6 B777 aircraft.  Additionally, in 2011, we announced the order of 32 Airbus A320 family aircraft and two Boeing 777-300ER aircraft.  Out of this order, 22 of the Airbus A320 family aircraft are for the new model A320neo.  These aircraft will be delivered between 2016 and 2018.  Any disruption or change in the manufacturers' delivery schedules for these new aircraft will affect our operations andwould negatively affect our financial condition and results of operations because we would not be able to accommodate increased passenger demand.  Our ability to obtain these new aircraft from Airbus or Boeing may be affected by several factors, including (i) Airbus or Boeing may refuse to, or be financially limited in its ability to, fulfill the obligations it assumed under the aircraft delivery contracts, (ii) the occurrence of a fire, strike or other event affecting Airbus' or Boeing's ability to fulfill its contractual obligations in a complete and timely fashion and (iii) any inability on our part to obtain aircraft financing or any refusal by Airbus or Boeing to provide financial support.  Our operations may also be affected by any failure or inability of Airbus or Boeing (or other suppliers) to supply sufficient replacement parts in a timely fashion, which may cause the suspension of operations of certain aircraft because of unscheduled or unplanned maintenance.  Any such suspension of operations would decrease passenger revenue and adversely affect our financial condition. -17 -


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The reputation and financial results of airlines may be harmed by any accident or incident involving their aircraft. Any accident or incident involving the aircraft of any airline may require repair or replacement of the damaged aircraft and temporary or permanent loss of service, in addition to significant expenses arising from indemnities payable to injured passengers and third parties.  We believe that the level of insurance we have contracted for accidents is consistent with market practice.  However, we may incur losses in the event that our insurance is insufficient to cover the damage from an accident.  Any requirement to pay amounts not covered by our insurance may harm our business and results of operations.  Any accident or incident involving one of our aircraft, even if completely covered by insurance, may affect our image and generate a public perception that we are less safe or reliable than other airlines, which would harm our passenger demand, our revenues and our market position.  In addition, any accident or incident relating to an aircraft operated by another airline, but which involves one of the same models of aircraft we have in our fleet may generate a public perception that the particular model of aircraft is unsafe, which may also harm passenger demand for our services, our revenues and, consequently, our results of operations. Our business may be adversely affected by downturns in the airline industry caused by terrorist attacks, war or outbreak of disease, which may alter travel behavior or increase expenses. Demand for air transportation may be adversely affected by terrorist attacks, war or political or social instability, epidemics, natural disasters and other similar events that are out of our control.  Any of these events in the markets in which we operate could have a material impact on our business, financial condition and results of operations.  Furthermore, such events could have a prolonged effect on air transportation and on certain expenses including insurance and airport fees. For example, the terrorist attacks in the United States on September 11, 2001 severely and adversely impacted the worldwide airline industry.  Airline traffic in the United States fell dramatically after the attacks and decreased, albeit less severely, throughout Latin America.  Our revenues depend on the number of passengers traveling on our flights.  Therefore, any future terrorist attacks or threat of attacks, whether or not involving commercial aircraft, any increase in hostilities relating to reprisals against terrorist organizations or otherwise and any related economic impact could result in decreased passenger traffic and materially and negatively affect our business, financial condition and results of operations. In addition, the escalation of military activity in the Middle East and the public concerns about the possibility of an outbreak of disease (such as the H1N1 virus) could negatively impact the public's willingness to travel by air.  We cannot determine if and when such an event will occur and whether the event will decrease demand for air travel, thus materially and negatively affecting our business, financial condition and results of operations. Our operations are often affected by factors beyond our control, including airport congestion, weather conditions and increased safety measures. Like other airlines, we are subject to delays caused by factors beyond our control, including airport congestion, adverse weather conditions and increased safety measures.  Delays have the effects of leaving passengers dissatisfied, reducing aircraft utilization (the average number of hours per day an aircraft is in operation) and increasing expenses, which may affect our profitability.  Adverse weather conditions may cause cancellationsof, or significant delays in, our flights.  Cancellations or delays resulting from airport congestion, adverse weather conditions and safety related measures may decrease our revenues and harm our reputation as a punctual airline, which could lead to decreased passenger demand for our services. -18 -


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In 2010, a volcanic eruption in Iceland affected our operations in London, Paris, Frankfurt and Milan between April 15th and April 21st.  We had to cancel 56 flights, which represented approximately 2% of our international flights scheduled for that month.  While this volcanic eruption had only a small effect on our operations, if a volcanic eruption occurs that requires us to cancel a large number of flights, our revenues may be adversely affected.  We cannot guarantee that further cancellations will not happen due to the same or other volcanic eruptions. Problems with air traffic control systems or other technical failures could interrupt our operations and materially affect our business. Our operations, including our ability to deliver customer service, are dependent on the effective operation of our equipment, including our aircraft, maintenance systems and reservation systems.  Our operations are also dependent on the effective operation of domestic and international air traffic control systems and the air traffic control infrastructure in the markets in which we operate.  Equipment failures, personnel shortages, air traffic control problems and other factors that could interrupt operations could adversely affect our operations and financial results and our reputation. Technical and operational problems in the Brazilian air traffic control systems since the last quarter of 2006 have led to extensive flight delays, higher than usual flight cancellations and increased airport congestion.  This negatively affected our punctuality and operating results.  The Brazilian government and air traffic control authorities have taken measures to improve the Brazilian air traffic control systems, but if the changes undertaken by the Brazilian government and regulatory authorities do not prove successful, these air traffic control‐related difficulties might recur or worsen, which may have a material adverse effect on our business, our results of operations and our growth strategy. The successful execution of our strategy is partly dependent on us maintaining a high daily aircraft utilization rate, making us especially vulnerable to delays. In order to successfully execute our strategy, we need to maintain a high daily aircraft utilization rate, which is a measure of the number of block hours that we use our aircraft per day.  Achieving a high daily aircraft utilization rate allows us to maximize the amount of revenue that we generate from each aircraft and is achieved, in part, by reducing turnaround times at airports and developing schedules that enable us to fly more hours on average per day.  Our aircraft utilization rate could be adversely affected by a number of factors that we cannot control, including air traffic and airport congestion, interruptions in the service provided by air traffic controllers, adverse weather conditions and delays by third‐party service providers in respect of matters such as fueling and ground handling.  In addition, high aircraft utilization rates increase the risk that, if an aircraft falls behind schedule, it could remain behind schedule for up to two days.  Such delays could result in a disruption in our operating performance, leading to customer dissatisfaction due to any resulting delays or missed connections. Risks Relating to our ADSs and Preferred Shares We have a stable group of principal shareholders with the power to manage our business, and the interests of these persons may conflict with those of other shareholders. Our principal shareholders, TEP and the Amaro family together, collectively control 85.4% of our common stock and have the power to, among other things, (i) elect the majority of our directors and (ii) control the results of any proposal requiring shareholder approval (including transactions with related parties, corporate re‐organization, sales of assets and the timing and conditions of payment of any future dividends, subject to the minimum mandatory dividend distribution requirements under Brazilian corporation law).  Our principal shareholders have the power to approve transactions that might not be in theinterests of other shareholders and may prevent or frustrate any attempts to remove our current directors or executive officers. -19 -


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Our preferred shares do not carry general voting rights. Our preferred shares and, consequently, our ADSs do not carry general voting rights except in relation to certain specific matters and under specific circumstances.  See "Item 10.  Additional Information — B. Memorandum and Articles of Association."  Our principal shareholders, who hold the majority of common shares with voting rights and control us, are therefore able to approve corporate measures without the approval of holders of our preferred shares. Accordingly, you will not have control over the approval of corporate measures such as appointment of directors, approval of significant transactions or changes in our capital structure. The economic value of your investment may be diluted. In the event that we need to obtain capital for our operations by issuing new shares, any such issuance may be made at a value below the book value of our preferred shares on the relevant date.  In that event, the then holders of our ADSs and preferred shares would suffer an immediate and significant dilution of their investment. The sale of significant quantities of ADSs or preferred shares may cause the stock market price of our ADSs and preferred shares to decline. In the event that we or our shareholders elect to sell a significant number of our ADSs or preferred shares, or in the event that the market perceives that we have the intention of any such sale, the stock market price of our preferred shares or ADSs could decline significantly unless there are high levels of demand to purchase our ADSs or preferred shares. Brazilian securities markets are relatively volatile and illiquid.  Therefore you may not be able to sell the preferred shares underlying the ADSs at the price and time you desire. Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature.  The Brazilian securities market is substantially smaller, less liquid and can be more volatile than major securities markets in the United States.  There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States.  Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depository at any time, you may not be able to sell the preferred shares underlying the ADSs at the price and time you wish. Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of our preferred shares or ADSs. Law No. 10,833 of December 29, 2003 provides that the disposition of assets located in Brazil by a non‐resident to either a Brazilian resident or a non‐resident is subject to taxation in Brazil, regardless of whether the disposition occurs outside or within Brazil.  This provision results in the imposition of income tax on the gains arising from a disposition of our preferred shares by a non‐resident of Brazil to another non‐resident of Brazil.  There is no judicial guidance as to the application of Law No. 10,833 of December 29, 2003 and, accordingly, we are unable to predict whether Brazilian courts may decide that it applies to dispositions of our ADSs between non‐residents of Brazil.  However, in the event that the disposition of assets is interpreted to include a disposition of our ADSs, this tax law would result in the imposition of withholding taxes on the disposition of our ADSs by a non‐resident of Brazil to another non‐resident of Brazil.  Because any gain or loss recognized by a U.S. Holder (as defined in "Item 10.  Additional Information — E. Taxation — United States") will generally be treated as a U.S. source gain or loss unless such credit can be applied (subject to applicable limitations) against tax due on the other income treated as derived from foreign sources, such U.S. Holder would not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our preferred shares. -20 -


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The Brazilian government may impose exchange controls and significant restrictions on remittances ofreaisabroad, which would adversely affect your ability to convert and remit dividends, distributions or the proceeds from the sale of our preferred shares and our capacity to make dividend payments to non‐Brazilian investors and would reduce the market price of our preferred shares or ADSs. The Brazilian government may restrict the remittance abroad of proceeds of investments in Brazil and the conversion of therealinto foreign currencies.  The Brazilian government last imposed such remittance restrictions for a brief period in 1989 and early 1990.  In the event that the Brazilian government determines that the Brazilian foreign currency reserves need to be maintained, it may impose temporary charges on any overseas remittance of up to 50% of the value of the remittance.  We cannot assure you that the Brazilian government will not take similar measures in the future.  The return of any such restrictions would hinder or prevent your ability to convert dividends, distributions or the proceeds from any sale of our preferred shares into U.S. dollars and to remit U.S. dollars abroad and our capacity to make dividend payments to non‐Brazilian investors.  The imposition of any such restrictions would have a material adverse effect on the stock market price of our preferred shares or ADSs. If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages. As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, permitting the custodian to convert dividends and other distributions with respect to the preferred shares into non‐Brazilian currency and remit the proceeds abroad.  If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian's electronic certificate of foreign capital registration for only five business days from the date of withdrawal.  Thereafter, upon the disposition of distributions relating to the preferred shares, unless you obtain your own electronic certificate of foreign capital registration, or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration, you would not be able to remit abroad non‐Brazilian currency.  In addition, if you do not qualify under the foreign investment regulations, you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares. If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner.  The depositary's electronic certificate of foreign capital registration may also be adversely affected by future legislative changes. If we do not maintain a registration statement and no exemption from the Securities Act is available, U.S. Holders of ADSs will be unable to exercise preemptive rights with respect to our preferred shares. We will not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available.  We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file a registration statement.  If a registration statement is not filed and an exemption from registration does not exist, JPMorgan Chase Bank, N.A., as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of the sale.  However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights. ITEM 4.  INFORMATION ON THE COMPANY A.           History and Development of the Company General TAM S.A. is a holding company founded in May 1997 under the nameCIT —Companhia de Investimentos em Transportesfor the specific purpose of participating in, managing and consolidating shareholdings in airlines.  InNovember 1997, we implemented a corporate restructuring that increased*CIT — Companhia de Investimentos em Transportes'**stake*in TAM Taxi Aéreo Marília S.A. ("TAM Marília")*, a sociedade**anônima de capital fechado*organized under the laws of Brazil*.*We also changed our corporate name toTAM — Companhia de Investimentos em Transportes.  In September 2002, we again changed our corporate name to TAM S.A.  We currently hold ownership interests in TAM Linhas Aéreas, TAM Mercosur, TP Franchising, Multiplus and Pantanal. TAM Linhas Aéreas holds an ownership interest in TAM Viagens, TAM Capital, TAM Capital 2, TAM Financial 1, TAM Financial 2 and TAM Milor, which was acquired in July 2010 and merged into TAM Linhas Aéreas in March 2011. -21 -


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TAM S.A. is asociedade anônima de capital abertoorganized and operating under the laws of Brazil.  Our headquarters are located at Avenida Jurandir, 856, Lote 4, 1o andar, CEP 04072‐000, São Paulo, SP, Brazil.  Our telephone number is +55 11 5582 9715. TAM Marília was founded in January 1961 in the interior of the state of São Paulo, where the late Captain Rolim Amaro worked as a pilot.  In 1971, Captain Rolim Amaro became an executive partner and minority shareholder of TAM Marília.  TAMTransportes AéreosRegionais ("TAM Regionais") was founded in May 1976 and was TAM Marília's first scheduled airline, with 67% of its capital stock held by Captain Rolim Amaro.  In 1978, Captain Rolim Amaro became the major shareholder of TAM Marília, holding 98% of its capital stock. In 1986, Captain Rolim Amaro incorporated TAM Linhas Aéreas, launching its operations throughBrasil‐Central Linha Aérea Regional S.A.(which was created to operate in the country's northern and central‐western regions).  In the same year,Brasil‐Central Linha Aérea Regional S.A.was granted a concession to operate at Guarulhos International Airport and becameTAM Transportes AéreosMeridionais S.A., Brazil's second largest domestic airline. In 1993, we launched the TAM Loyalty Program (the first airline loyalty program in Brazil) in order to incentivize existing customers to fly with us more often and to attract new customers.  In 1998, we inaugurated our first international flight between São Paulo and Miami.  In 1999, we initiated flights to Paris through a codeshare agreement with Air France. In 1998, we acquiredItapemirim Transportes Aéreos Regionais(whose corporate name was changed toInterexpress Transportes AéreosRegionais S.A.,or "Interexpress TransportesAéreos Regionais") and then acquiredHelisul Linhas Aéreas S.A.(whose corporate name was changed to TAM Express S.A., or "TAM Express"). In 1999, TAM Express and Interexpress Transportes Aéreos Regionaismerged into TAM Linhas Aéreas, resulting in greater integration, operational efficiency and a consequent reduction in expenses.  As a continuation of this restructuring process, and as a result of the need to unify our regional, national and international operations,TAM Transportes Aéreos MeridionaisS.A.was merged into TAM Linhas Aéreas in November 2000. On February 6, 2003, we signed a protocol of understanding with Varig S.A. ("Varig") for code sharing operations as a preliminary stage in a possible merger between the two companies.  This was primarily intended to eliminate overlapping flights and to rationalize supply in the market.  As a result of signing this protocol of understanding, we were able to reorganize our aircraft fleet, negotiate the return of 19 Fokker 100 aircraft and reduce our operating expenses. On February 15, 2005, as it became clear that the proposed merger would not take place, both parties (Varig and TAM S.A.) submitted detailed plans to theConselho Administrativo de Defesa Econômica, orCADE, to cancel the codeshare arrangement.  On February 23, 2005, the codeshare agreement was cancelled (with the approval of the CADE) and all of our codeshare operations with Varig had to be terminated by May 24, 2005.  We ceased all codeshare operations with Varig on May 2, 2005. On June 17, 2005, we completed our initial equity offering of preferred shares, offering a total of 30,190,000 preferred shares to institutional investors in the United States and institutional and other investors elsewhere.  On July 19, 2005, we and the selling shareholders in the equity offering issued a further 281,600 preferred shares pursuant to an over‐allotment option granted to the underwriters in that offering. -22 -


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On March 15, 2006, we completed a follow‐on equity offering of preferred shares in Brazil and our initial public offering of ADSs in the United States and elsewhere outside Brazil.  This offering of preferred shares and ADSs was registered with the SEC and the ADSs are listed on the New York Stock Exchange.  We became a reporting company under the Securities Exchange Act of 1934, or the Exchange Act.  We offered 2,660,103 ADSs and 2,339,897 preferred shares, while the selling shareholders in that offering sold 21,209,462 ADSs and 9,408,636 preferred shares.  On April 11, 2006, we and the selling shareholders in that offering sold an additional 1,103,000 ADSs pursuant to an over‐allotment option granted to the underwriters in that offering. TAM Mercosur operates scheduled air transportation operations and is headquartered in Asunción, Paraguay.  TAM Mercosur, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia, was founded in March 1993 under the nameLíneas Aéreas Paraguayas S.A.("LAPSA") and all of its capital stock was initially held by the government of Paraguay.  The Paraguayan government currently holds 5.02% of TAM Mercosur's capital stock.  In January 1997, LAPSA's corporate name was changed toTransportes Aéreos del Mercosur S.A.In September 2003, upon approval of TransAmérica's dissolution and liquidation, we acquired all shares of TAM Mercosur held at the time by TransAmérica (which consisted of 94.98% of its capital stock).  In the year ended December 31, 2010, TAM Mercosur's net operating revenues represented 1.4% of our total consolidated net operating revenues. TAM Viagens is a limited company (sociedade limitada) and tourism operator controlled by TAM Linhas Aéreas.  Through TAM Viagens, we package and sell tourism travel and corporate events in Brazil and abroad. In 2007, TAM Linhas Aéreas incorporated TAM Capital as a wholly‐owned subsidiary, organized under the laws of the Cayman Islands, for the purpose of issuing U.S.$300 million 7.375% senior guaranteed notes due 2017 on April 25, 2007.  On December 18, 2007 we completed an exchange offer pursuant to which holders of 99.2% of the notes issued on April 25, 2007 exchanged their notes for new notes that were registered under the Securities Act of 1933, as amended, and otherwise carried identical terms. In 2007, TAM Linhas Aéreas incorporated TAM Financial 1, a wholly‐owned subsidiary organized under the laws of the Cayman Islands, for the purpose of raising funds for pre‐delivery payments of four Boeing 777 aircraft.  In that same year, TAM Linhas Aéreas also incorporated TAM Financial 2, a wholly‐owned subsidiary organized under the laws of the Cayman Islands, whose main activities include aircraft acquisition and financing. In 2008, we began operating the Boeing 777-300ER, our largest passenger capacity aircraft.  The Boeing 777‐300ER currently transports up to 365 passengers on our routes connecting Brazil, Germany, England and Chile.  These Boeing aircraft were financed by a structured deal with a financial guarantee from the Export‐Import Bank of the United States ("Ex‐Im Bank") and included the participation of four international financial institutions: Calyon, Natixis, Private Export Funding Corporation (Pefco) and Société Générale.  In that same year, we finalized the phase‐out program of the Fokker 100 (100‐seat aircraft) from our fleet and returned our MD‐11s, older and less efficient aircraft that we had used to operate some of our long haul routes. In 2009, TAM Linhas Aéreas incorporated TAM Capital 2, a wholly‐owned subsidiary organized under the laws of the Cayman Islands, for the purpose of issuing U.S.$300 million 9.5% senior guaranteed notes due 2020 on October 22, 2009. In 2009, we also incorporated a new company,  Multiplus, which establisheda network of loyalty programs that allows TAM customers to accrue loyalty points from a wide array of product and service providers.  In February 2010, Multiplus conducted an initial public offering of its common shares, which reduced our ownership in Multiplus from 100% to 73%.  See "Item 4 — Information on the Company — B.  Business Overview — Competitive Advantages" and "Item 4 — Information on the Company — C.  Organizational Structure".  As of December 31, 2010, we held 73% of Multiplus' common shares. In December 2009, we announced and reported to the CVM and other appropriate authorities that we had agreed to purchase all shares of the regional airline company, Pantanal.  This acquisition represented an important step towards transforming TAM into a diversified business in the civil aviation field, and aligned with TAM's objective to seek out new and attractive opportunities for growth.  On March 15, 2010, this acquisition was approved by ANAC. As operation of air transportation services, as well as airport infrastruture, is anexclusive right of the Brazilian government, we need a concession or permit to operate Pantanal. On March 30, 2010, we received a concession to operate Pantanal, which is valid until 2020. -23 -


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On May 13, 2010, TAM became a full member of the Star Alliance, the largest global alliance in commercial aviation based on the number of members and geographical coverage.  During 2008, our integration into the Star Alliance began with experts from TAM, its mentor in the alliance, United, and the Star Alliance, teaming up to ensure we complied with the requirements set by the Star Alliance.  These requirements include, for example, compatibility with StarNet, the Star Alliance's IT backbone, implementing the Star Alliance IT platform and implementing common guidelines for loyalty programs and customer service.  As a result of our successful integration, we now share products and services in the 1,160 airports and 181 countries served by the Star Alliance members.  Star Alliance services include baggage check‐in to final destinations, easier connections and the convenience of more than 970 lounges.  Another benefit for our passengers is the integration of all Star Alliance members' frequent flyer programs, which allows the accrual of points/miles  among all members, provides more redemption options and offers additional benefits for the top tier members, like priority boarding and baggage delivery. On July 13, 2010, our Board of Directors approved the acquisition, through our subsidiaryTAM Linhas Aéreas, of all of the outstanding shares of TAM Milor held by individuals that are also shareholders of TAM.  TAM Milor is the holder of the brand "TAM" and other related TAM trademarks, which we,TAM Linhas Aéreasand certain other related companies use.  TAM Milor was merged into TLA in March 2011.  In January 2011, TAM, together with its controlling shareholders, TEP and the Amaro family, entered into agreements with LAN, and its respective controlling shareholders to effect a proposed business combination of LAN and TAM. This merger remains subject to governmental, regulatory and shareholders' approval. See " - B. Business Overview - Proposed Combination with LAN " below. On March 29, 2011, TAM signed a term sheet with TRIP Linhas Aéreas S.A. ("TRIP") announcing ongoing negotiations between the two companies to identify possible expansion opportunities through the development of a strategic alliance agreement that would be complementary to TAM's existing codeshare agreement with TRIP.  Pursuant to the signed term sheet, TAM will seek to acquire a minority stake (31%) of TRIP's capital stock.  We believe this potential transaction will help TAM capture additional market growth in medium density route markets. Capital Investments During 2010, we invested R$84.6 million in fixed assets, primarily due to aircraft acquisition.  We also increased our intangible assets by R$234 million, primarily due to acquiring new rights to airport slots as result of the Pantanal acquisition in March 2010, and due to the acquisition of the "TAM" brands through our acquisition of TAM Milor.  The TAM Milor acquisition totaled R$98.4 million.  During 2009, we invested R$335 million in fixed assets, primarily due to aircraft acquisition and replacement parts for our fleet, and R$135 million in intangible assets.  During 2008, we invested R$637 million in fixed assets for aircraft acquisition and replacement parts for our fleet, and R$133 million in intangible assets. For more information on our capital investments, see below "Item 5 — Operating and Financial Review and Prospects — B.  Liquidity and Capital Resources". B.           Business Overview Overview We provide scheduled air transportation in both the domestic market and the international market through our operating subsidiaries, TAM Linhas Aéreas and TAM Mercosur, and since March 2010, through Pantanal.  According to data provided by ANAC, we are the leading airline in the domestic market, with a 43.3% market share as of December 2010 and a 41.2% and 50.3% market share as of December 2009 and December 2008, respectively, as measured in RPKs.  We offer flights throughout Brazil.  We serve, together with our commercial partners, the largest number of destinations in Brazil, out of all Brazilian airlines.  We operate scheduled passenger and cargo air transport routes to 49, and through regional alliances with other airlines, we serve an additional 44 domestic airports.  In total we serve 93 domestic airports.We also directly serve 19 international airports,and provideconnections to other destinations through commercial agreements with United Airlines, Lufthansa, TAP, LAN and other airlines.  We offer convenience to our passengers by offering frequent and direct flights to and from all major domestic airports at competitive prices.  In 2010, we transported approximately 29.3 million passengers on domestic flights compared to 25.8 million in 2009 representing a 13.5% increase, which aligned with our 13.5% domestic supply growth in the same period.  In 2008, we transported approximately 25.6 million passengers in the domestic market.  In the international market, we transported 5.2 million passengers in 2010 compared to 4.6 million passengers in 2009, representing a 14.4% growth, partly due to a 6.0% international supply growth and a load factor increase of 6.6%.  By comparison, in 2008, we transported 4.5 million passengers in the international market.  In 2010, we averaged 831 take-offs per day compared to an average of 781 take-offs per day and 751 take‐offs per day in 2009 and 2008, respectively.  In order to meet domestic demand, we primarily cater to the business market, but also operate in the leisure and cargo markets, which complement our primary operations and allow us to maximize the use of our aircraft. -24 -


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At December 31, 2010, we operated with a fleet of 151 aircraft, consisting primarily of Airbus models A340, A330, A321, A320 and A319, as well as Boeing models B777 and B767, and we had 28,193 employees.  As of the same date, TAM Linhas Aéreas consisted of 146 aircraft, as set forth in the table below, including 3 Airbus A320 subleased to TAM Mercosur, and 1 Airbus A320 and 2 Airbus A319 subleased to Pantanal. Since our incorporation, we believe that we have demonstrated a history of sustained growth and a proven ability to adapt to developments in the civil aviation industry in Brazil and around the world.  According to IATA, Brazil is the fourth largest domestic aviation market in the world (in number of scheduled passengers transported) and has one of the busiest shuttle services in the world (São Paulo – Rio de Janeiro). We believe that we have a strong corporate culture, grounded by principles set forth by our founder, Captain Rolim Adolfo Amaro, that permeates all levels of our company and continues to guide the day‐to‐day activities of our management.  In order to ensure that we act in accordance with best practices and provide value‐added service to our passengers, we seek to embed our culture in our employee training, and believe that our entire staff is a product of this practice.  Our mission is to be the people's favorite airline company, through joy, creativity, respect and responsibility, and we consistently transmit this mission statement to our employees. Our vision is to make our customers happy by working with a "spirit of serving".  We seek to achieve this goal by offering comprehensive service that gives passengers superior value for their money.  We are able to do this by continuing to reduce expenses and by improving the return on capital invested. Total at December 31,Model

   2010

   2009

   2008Boeing 777

   4

   4

   4Airbus A340

   2

   2

   2Airbus A330

   18

   16

   16Boeing 767

   3

   3

   3Airbus A321

   7

   5

   3Airbus A320

   86

   81

   81Airbus A319

   26

   21

   20ATR-42

   5

   -

   -Total

   151

   132

   129
  Proposed Combination with LAN On August 13, 2010, we jointly announced with LAN that we had entered into a non-binding Memorandum of Understanding relating to the proposed all-stock transaction that would combine the holdings of TAM and LAN under a single parent entity. On January 18, 2011, we, the TAM controlling shareholder and the Amaro family entered into the transaction agreements with LAN and the LAN controlling shareholders, which set forth the terms and conditions of a proposed business combination of TAM and LAN.  On the terms and subject to the conditions set forth in the transaction agreements (including the minimum conditions discussed in this section below), all or substantially all of the outstanding voting common shares of TAM will be acquired by a new Chilean corporation ("Holdco 1") and all or substantially all of the outstanding non-voting preferred shares of TAM will be acquired by LAN if the series of transactions and corporate restructurings described below are successfully completed.  ·The Amaro family will create a new Chilean corporation ("TEP Chile") that will be wholly owned by them;  ·TEP Chile will acquire and hold at least 80% of the voting stock of Holdco 1, which will have no economic rights in Holdco 1 (other than nominal dividend rights);  ·LAN will acquire no more than 20% of the voting stock of Holdco 1;   -25 -
    ·LAN will acquire and hold 100% of the non-voting stock of Holdco 1, which will have all of the economic rights in Holdco 1 (other than the nominal dividend rights of the voting stock of Holdco 1);  ·Holdco 1 will acquire and hold all or substantially all of the voting common shares of TAM;  ·LAN will acquire and hold all or substantially all of the non-voting preferred shares of TAM; and  ·TAM, TEP Chile, Holdco 1, LAN and the LAN controlling shareholders will enter into the shareholder agreements relating to the holding of shares in, and the governance of, and relationships between, TAM, Holdco 1, LAN and their respective subsidiaries.  Pursuant to and subject to the terms of the transaction agreements, the parties will form a new Chilean corporation ("Holdco 2") that will commence a delisting exchange offer to acquire all of the voting common shares of TAM and all of the non-voting preferred shares of TAM (in each case other than any such shares owned indirectly by the Amaro family) in exchange for the same number of shares of common stock of Holdco 2.  At or prior to the completion of the exchange offer:  ·the Amaro family will contribute to TEP Chile all of the voting common shares of TAM and non-voting preferred shares of TAM beneficially owned by them;  ·TEP Chile will pay nominal consideration for all of the voting shares of Holdco 1 and will contribute all of the voting common shares of TAM it receives from the Amaro family to Holdco 1 in exchange for all of the non-voting shares of Holdco 1;  ·TEP Chile will contribute (i) all of the non-voting shares of Holdco 1, (ii) 6.2% of the voting shares of Holdco 1 and (iii) all of the non-voting preferred shares of TAM it receives from the Amaro family to a new Chilean corporation ("Sister Holdco") in exchange for all of the shares of common stock of Sister Holdco (other than one share held by a nominee of TEP Chile);  ·each of Holdco 2 and Sister Holdco will merge with and into LAN (together, the "mergers," and individually, the "Holdco 2 Merger" and the "Sister Holdco Merger," respectively), with LAN being the surviving company of each such merger; and  ·in the mergers, each share of common stock of Holdco 2 and each share of common stock of Sister Holdco will be converted into the right to receive 0.9 of a LAN common share.  As a result of the exchange offer and Holdco 2 merger, each holder of a voting common share of TAM and each holder of a non-voting preferred share of TAM that sells such shares in the exchange offer will ultimately receive 0.9 of a LAN common share for each share they sell.  Similarly, as a result of the foregoing transactions and the Sister Holdco merger, the Amaro family will ultimately receive 0.9 of a LAN common share for each voting common share of TAM and each non-voting preferred share of TAM that they own. The commencement of the exchange offer is subject to certain conditions set forth in the transaction agreements, including receipt of all required regulatory approvals and approval of the proposed combination by the holders of LAN common shares.  The commencement of the exchange offer is also subject to certain conditions set forth in the transaction agreements, including minimum tender conditions and conditions to the Amaro family’s obligation to contribute their TAM shares as described above.  In addition, the mergers are subject to the condition that the holders of no more than 2.5% of the outstanding LAN common shares exercise their appraisal rights under Chilean law.  As a result, no assurance can be given that the proposed combination will be completed. -26 -
   If the proposed combination is completed, then: ·the LAN common shares will be listed in Brazil on the Bovespa in the form of BDRs; ·the LAN common shares will continue to be listed in Chile on the SSE and in the United States on the NYSE in the form of ADRs; ·subject to satisfaction of the minimum tender conditions described above, all TAM shares (whether voting common shares or non-voting preferred shares) will be delisted from the Bovespa in Brazil and the NYSE in the United States; and ·LAN will change its name to "LATAM Airlines Group S.A." On January 28, 2011, in response to a petition filed by a Chilean consumer association,  Conadecus,  theTribunal de Defensa de la Libre Competencia, or the "TDLC," determined to submit the proposed combination between TAM and LAN to a voluntary review procedure that is available under the Chilean antitrust laws upon the request of theFiscalía Nacional Económicaor someone with a legitimate interest. This voluntary review procedure could delay the implementation of the proposed combination because TAM and LAN cannot complete the proposed combination until the TDLC renders its final decision at the end of this process. On April 5, 2011, LAN, together with TAM, submitted a presentation in support of the proposed combination.  On March 1, 2011, ANAC authorized the transfers of the shares of TAM and its subsidiaries that are necessary to implement the proposed combination.  However, the proposed combination remains subject to other regulatory and shareholder approvals. Competitive Advantages We believe that our principal competitive advantages are: ·Value‐added service at competitive prices.We believe that we offer the best combination in the domestic market of a network of destinations and frequent flights, with value‐added service, high on‐time rates and competitive prices, based on: ·broad domestic network of destinations:  our own domestic network serves 49 airports in Brazil, many of which are direct flights, offering greater convenience to our clients.Through our regional alliances withTRIP Linhas Aéreas S.A.("TRIP") andNHT Linhas Aéreas Ltda("NHT"), our network extends to a further 44 airports in Brazil; -27 -


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·convenient schedules with high on‐time arrival rates:we always work to maintain a high percentage of on‐time flights, in order to offer the best service possible; ·efficient network of international destinations and supporting domestic service:we currently serve 19 international airports (11 in South America, 3 in North America and 5 in Europe) that are in high demand by the Brazilian public.  We also serve various other destinations in North America, Europe, and other continents through agreements with several international carriers; ·special services:we have developed special services to meet specific demands and optimize the use of our aircraft, such as by offering night and holiday flights at promotional rates. ·Focus on cost management.  We are an airline with low operating expenses.  In 2003, we implemented a restructuring project that initiated a cultural change within us, making our employees aware of cost management.  We continuously seek opportunities to reduce expenses focusing our efforts on reducing operating, commercial and administrative expenses.  Our overall CASK decreased from R$17.40 in 2008 to R$14.76 in 2009 and decreased to R$14.54 in 2010 and our CASK excluding fuel decreased from R$10.52 in 2008 to R$10.53 in 2009 and decreased to R$9.72 in 2010.  In 2010, this was partly due to the reversal of an additional tariff of R$364,854 that occurred in September.  Otherwise, some of our principal cost savings arise from: ·efficient use of our aircraft:we maintained the average load factor of our aircraft and the daily average block hours per aircraft by optimizing our network of destinations and our fleet.  In 2010, the average load factor of our aircraft was 71.9% and the block hours per aircraft was 12.9 hours, compared to 68.2% and 12.5 hours in 2009 and 71.0% and 12.5 hours in 2008; ·modern and flexible fleet:we have one of the newest fleets in the domestic market, with an average age of 6.4 years at December 31, 2010.  Our use of a modern fleet allows us to reduce operating and maintenance expenses.  We primarily operate Airbus narrow‐bodied aircraft in the domestic and South American markets and Airbus and Boeing wide‐bodied aircraft in the long haul routes, providing us with the flexibility required to serve routes of different passenger densities.  We believe that all of our aircraft are equipped with the most advanced equipment and technology, ensuring greater reliability, comfort and safety.  In 2010, we added 5 A319, 5 A320,2 A321 and 2 A330 to our fleet; ·proprietary maintenance team:we have our own maintenance team trained to service all aircraft in our fleet quickly and at labor expenses that we believe are lower than that of our competitors.  We also have our own maintenance center in the city of São Carlos (in the interior of the state of São Paulo) which performs all hull maintenance on our aircraft and also provides maintenance services for other airlines.  By using our own maintenance center, we have been able to reduce the maintenance time of our aircraft and, consequently, obtain more efficient use of our aircraft; and ·use of technology in operating processes:at the end of 2009, we implemented the Amadeus Altéa platform, which is used by other Star Alliance members and which helped us reach a new level of web sales, largely because the related FlexPricer Amadeus search engine provides a more customer-friendly method for finding and purchasing tickets by presenting fare and date comparisons.  Our web sales increased 31% from 2009 to 2010. ·Innovative services and products combined with a strong brand and our "espírito de servir"(spirit of serving).Our corporate culture is based on providing value‐added services to our passengers.  We consistently seek to make travel a more convenient and comfortable experience for our passengers and believe that we have successfully positioned our brand so as to associate it with superior service, aircraft and technologically‐advanced operations.  We strive to be a company that is focused on our passengers, translating our "spirit of service" into all operations, and we believe this is evidenced by: ·high on‐time arrival rates and frequent flights; -28 -


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·a modern fleet equipped with interiors specifically designed to afford greater comfort to our passengers, such as a wider middle seat (one of the widest middle seats of all the Airbus model aircraft); ·a polite approach to our passengers, including courteous flight crew and attendants and our red carpet welcoming to all passengers at airports and aircraft; ·video and audio entertainment on domestic flights, in addition to offering free in‐flight meals and magazines; ·self‐service options for check‐in in major airports; and ·open channels of communication with our passengers through our call center, our "Talk to the President" program and online service chat sessions at our portal. ·TAM Loyalty Program.We were the first airline in Brazil to offer a loyalty program, and there are currently over 8 million members in the TAM Loyalty Program.  We regard our loyalty program as a strong relationship tool and believe that it is the most flexible loyalty program in the market because it imposes no restrictions on flights or the number of seats available when members are redeeming accumulated points in the domestic or South American market.  Members may accumulate points quickly and easily by flying on TAM or partner airlines, making purchases through TAM Loyalty Program‐affiliated credit cards or using services and products at Multiplus Fidelidade partner establishments.  In addition, the TAM Loyalty Program strengthens lines of communications with our passengers. The TAM Loyalty Program is currently operated by our subsidiary, Multiplus, on our behalf and the TAM Loyalty Program is one of several coalition partners of the Multiplus Fidelidade network of loyalty programs. ·Multiplus Fidelidade. In 2009, we launched a new program, Multiplus Fidelidade, designed to create an even broader network in which customers can earn TAM Loyalty Program points.  Multiplus Fidelidade is an expansion of our loyalty program concept and acts as a tool to assist in the integration of partner companies into our loyalty network.  The program permits the accrual of points for redemption from products or services purchased with our partners. We believe this expansion of our loyalty network helps to capture and retain customers and increase sales.  We believe this program is a source of value generation and after its initial public offering, the company increased its corporate governance, dedicating a team that, we believe, will improve even more those sales.  At the close of2010, Multiplus had 151 partner establishments,of which 14 were coalition partners, including the TAM Loyalty Program, and the remainder were accrual partners.Of the 14 coalition partners, seven joined in 2010. ·An experienced management team and motivated professionals.To further our mission, we hire and retain motivated professionals.  We consider the talent, skill and dedication of our employees as a key competitive edge.  We are focused on keeping our employees satisfied and motivated by providing them with ongoing professional development, ensuring their safety and adopting a people‐oriented approach to management.  In our recruiting and selection process we deliberately look for employees with the potential to fit the "TAM" profile.  People hired attend an orientation to educate them about our corporate history, the founder's principles, and our fundamental values, mission and culture.  Management also invests in our employees through the Commander Rolim Amaro Training Academy, and providing opportunities for internal transfers. Some of our key motivational tools include: "Employee of the Month" and "Employees of the Year" programs; breakfasts with team managers; graduation ceremonies for flight attendants; a Quality of Life program; barbecues for technical crews and the TAM Ethics Channel, a program that allows employees to write comments, suggestions or concerns about us in confidence and receive answers on an individual basis. -29 -


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In addition to these motivational tools, we have an internal webcast which is a new way to guarantee that our strategic information is communicated to all employees across the world.  Employees can access these webcast sessions via the internet or intranet. Our compensation policy for executives is variable.  For all other employment levels, the compensation policy is profit sharing, reflecting employee needs and the market, within the bounds of current legislation and the terms and conditions of the Airline Ground Crew and Pilots Union's collective labor agreements. Strategy Our strategic goal is to maintain our strong position in the domestic and international passenger markets and to attain high levels of profitability in both markets.  We will seek to pursue this goal by offering comprehensive service that delivers superior value to our passengers as we work to reduce expenses and increase our return on invested capital.  To reach these objectives, our strategies are: ·Continue providing superior customer service.One of our key strategies is to offer differentiated and high‐quality service.  Relying on a strong and reliable network, we consistently seek to make travel more convenient and comfortable for our passengers and to perfect our service and strengthen our commitment to passengers. ·Increase revenue and profitability and serve a greater number of passengers at a competitive price.We will seek to continue to provide what we believe is a service that delivers the best value to our customers in the domestic market, offering more convenient and higher quality services at competitive prices.  Our goal is to increase revenues, as well as profitability, through: ·expansion of business traveller market:consolidating and expanding our traditional passenger base of business travellers, who we believe represent approximately 70% of demand for our domestic flights, through measures focusing on business travellers and sales channels that traditionally serve that market; ·growth in our tourism and leisure travel operations:we believe that the tourism and leisure markets are complementary to our core market of business travellers.  In order to use our fleet more efficiently, our strategy involves capturing additional demand in the tourism and leisure market through specific promotions for flying at off-peak hours during the day, besides holidays and local events (for example, festivals and city anniversaries, among others) using our scheduled operations.  We also serve leisure travelers by (i) the operation of charter flights, and (ii) the sale of tourism packages through TAM Viagens (an indirect subsidiary controlled by TAM Linhas Aéreas).  TAM Viagens recorded a gross revenue of R$478 million, R$451 million and R$412 million at December 31, 2010 2009 and 2008, respectively, representing approximately 4.1%, 4.4% and 3.8% of our consolidated revenues for the same periods.  We believe that through our subsidiary, TAM Viagens, we also own the second-largest tourism and leisure travel operator in the country; ·selective expansion in international markets:in the last three years, our international operations have consistently grown as a percentage of our total revenues.  In the year ended December 31, 2010, international flights represented 38.5% of our ASKs.  Our strategy involves maintaining our leadership in the international market and selectively identifying new international destinations to serve our customers; and ·expansion of our cargo business:we have focused on greater utilization of cargo space in our aircraft to develop our cargo business line, while maintaining our commitment to further improve service to our passengers.  Our cargo transportation business line represented R$1,112.7 million or 9.4% of our consolidated revenues at December 31, 2010, compared to R$936.3 million or 9.2% of our consolidated revenues at December 31, 2009 and R$1,009 million or 9.2% of our consolidated revenues at December 31, 2008. -30 -


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·Reduce our operating expenses, optimize the use of our fleet and streamline our processes.We believe that successfully implement of our strategy we need to reduce expenses and improve how we invest.  We are pursuing this strategy by: ·maintaining a standardized, efficient and flexible fleet:we will continue to optimize the size of our fleet, in order to keep maintenance and operating expenses for our fleet at a low level.  In 2006, we announced our decision to phase out our entire fleet of Fokker 100 aircraft by mid‐2008 and we met that target.  As a result of this decision, we have been exclusively using Airbus A320 family aircraft in the domestic market since mid‐2008, excluding the five ATR-42 from Pantanal.  We maintain a high aircraft utilization and to maintain a flexible fleet with aircraft capable of easily adapting to the differing levels of demand from route to route; and ·increasing productivity by redesigning operational processes and using technology:since the implementation of our restructuring project in 2003, we have applied a cost reduction policy aimed at increasing our productivity through new information technology tools, redesigning operational processes and redeployment of labor and outsourcing activities which are not related to our core strategy.  We also hope to obtain economies of scale by increased growth in our operations. ·LATAM -In January 2011, TAM, together with its controlling shareholders, TEP and the Amaro family, entered into agreements with LAN, and its respective controlling shareholders to effect aproposed business combination of LAN and TAM.  This merger remains subject to governmental, regulatory and shareholder approval. Products and Services Our principal product is the scheduled air transportation of passengers.  In addition, we also have products targeted specifically towards the development of domestic and international tourism.  We also provide cargo transportation operations. We set out below a breakdown of our gross revenues by type of service rendered for the periods indicated: Year Ended December 31,2010

   2009

   2008(R$ millions)By type of service rendered:DomesticPassengers

   5,871

   5,469

   6,163Cargo

   511

   447

   4596,382

   5,916

   6,622InternationalPassengers

   3,284

   2,684

   2,823Cargo

   602

   489

   5503,886

   3,173

   3,372OtherLoyalty Program (TAM) (1)

   382

   539

   441Loyalty Program (Multiplus) (1)

   445

   -

   -Travel and tourism agencies

   62

   60

   64Other (includes expired tickets)

   643

   452

   4211,531

   1,050

   926Total Gross

   11,799

   10,139

   10,920Sales taxes and other deductions

   (420)

   (374)

   (407)Revenue

   11,379

   9,765

   10,513
  (1)Since January 1, 2010 points to TAM’s flying customers are issued under the Multiplus Fidelidade loyalty program. Points were issued under the TAM Loyalty Program through December 31, 2009. Points issued, both under the Multiplus Fidelidade loyalty program and the TAM Loyalty Program, are valid for two years from the date when issued and revenue with respect to those points is recognized when the points are redeemed for awards (which in the case of award tickets, is when the participant flies using an award ticket), which may be after two years from when the points was issued. -31 -


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Sales and Distribution We are continuously developing direct and indirect distribution channels for air fare ticket sales.  We plan to increase direct sales (which at December 31, 2010 represented approximately 24.9% of our total ticket sales) by targeting the leisure market and by making it easier for our passengers to purchase tickets, principally through the internet and our call center.  We were the first airline in Latin America to sell tickets on the internet.  Through our website, registered users may purchase tickets online, receive customer service, make reservations up to one hour before departure and access information relating to the TAM Loyalty Program.  As part of our plan to increase direct sales through the internet, in 2006 we launched a new "fare profile" system for sales of domestic tickets.  We offer five fare profiles, "Promo," "Light," "Flex," "Max" and "Top," which significantly increased our direct sales in the first month after its introduction.  In 2010, we adopted the same strategy for the international market in order to focus on more attractive sectors.  The bundles available are "Access," "Flex," "Plus," "Classic," "Executive" and "First." In November 2009, we migrated our reservation platform to Amadeus Altéa, which we believe offers greater conveniences to our passengers.  In 2009, 78.4% of our sales were through travel agencies and 21.6% were through direct channels, of which 13.8% were through the website.  In 2010, 75.1% of our sales were through travel agencies and 24.9% were through direct channels, of which 17.3% were through the website. Our call center allows passengers an alternative means to make reservations and purchase tickets.  Our call center is available 24 hours a day.  We also sell tickets through our network of stores located in the main cities of Brazil and at each airport from which we operate. Indirect sales are those made through corporate travel agencies, agencies with registrations and pre‐approved credit and travel operators.  Currently, there are approximately 5,651 travel agencies authorized to sell our tickets in Brazil. We use our proprietarye‐TAM portal to integrate our entire sales chain, from the time of reservation to passenger boarding, consolidating indirect sales in our Brazilian distribution chain.  Data obtained from thee‐TAM portal allows us to offer a set of customized services, based on the "one‐to‐one" concept.  In the last 12 months of operation, 92.4% of indirect channel reservations made in Brazil were made through thee‐TAM portal. We believe that about 70% of our passenger traffic consists of business travelers and employees of large and medium‐sized companies with whom we have travel agreements.  To further develop our business relationship with our corporate clients, we have signed agreements with hotel chains and car rental companies to offer our customers complete corporate transportation and accommodation packages.  Our advertisements run primarily in media vehicles such as internet sites, radio spots, local newspaper advertisements, magazines and outdoor billboards. In 2010, we observed a new trend in our passenger’s profile.  We believe many of our new airline passengers have transitioned to us from bus travel, especially travelers previously covering more than 800 kilometers on bus.  To help target this new passenger profile, in August 2010, we launched a new retail campaign, that includes selling tickets at Casas Bahia, marketing and selling new products, and the production of a new advertising campaign with the singer, Ivete Sangalo. Pricing Policy, Revenue and Yield Management In general, prices charged in the Brazilian domestic market by airlines are freely set by the airlines, with ANAC responsible for monitoring the prices.  No discounts greater than 65% of the total price may be granted without ANAC's approval five days in advance of the date such discounts will be offered to consumers.  Brazilian airlines are freely able to set their prices.  See "Item 4.  Information on the Company — B.  Business Overview — Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Prices." We believe that our current pricing policy is dynamic.  Focusing on maximizing profitability, we aim to define particular niches within the market to better serve projected demand.  Pricing availability is based on traffic projections and is accompanied by closely monitored performance indicators.  Our pricing policy focuses specifically on our indirect distribution channels (GDS system ande‐TAM portal) and direct channels (our website, reservation call center and stores). -32 -


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We seek to achieve the greatest possible competitiveness for each origin/destination in relation to the competition, keeping in mind at all times our product's added value in terms of flight frequency, schedules, the TAM Loyalty Program and our on‐time record. We continuously analyze market opportunities with the intention of stimulating demand for specific routes and periods.  Lower prices are offered for one‐time promotions (such as national or regional holidays) and as incentives to take flights at particular times (such as night flights).  These prices generally carry restrictions, such as the requirement to purchase a round‐trip, a minimum stay at the destination, or the requirement that the ticket be issued within 24 hours, and generally earn reduced points for the TAM Loyalty Program. As determined by Portaria ANAC No 1887/SRE, dated of October 25, 2010, airlines operating domestic and/or international passenger flights must register all information regarding fares that were sold until the last day of the previous month with ANAC. The price a passenger is willing to pay may vary depending upon factors such as destination, month of the year, day of the week and departure schedule.  Revenue and yield management is the process by which (based on historical data and statistical projection models) airlines establish the number of seats to be offered for each price category over time, in order to maximize total operating revenue for each flight.  We believe that efficient yield management is the key to success in the air transportation market in Brazil and abroad. We believe that we have an efficient and accurate system for collecting data on reservations, departures and revenue.  The system also monitors levels of overbooking and recommends discounts for future departures.  Data relating to reservations and departure is collected daily, forming reservation profiles for each flight and allowing specific recommendations from flight to flight.  The system allows our analysts to ascertain whether flights are above or below historic reservation levels and decide whether to close the discount classes or offer more space for passengers who generate higher revenues.  Accordingly, our yield management practices allow us to anticipate and react quickly to market changes. We currently have a team of analysts dedicated to revenue and price management.  These professionals are divided by market sector and have particular knowledge of specific routes in order to better understand features which are specific to each route (such as holidays, high and low season, peak schedules and days and the competitive environment). Air Transportation Operations Passenger transportation Scheduled domestic operations We currently operate an average of 735 daily flights to 49 airports in Brazil.  Through our regional alliances with TRIP and NHT we serve an additional 44 domesticairports. Passenger traffic in the domestic market represented approximately 50% of our gross revenues in 2010, 53.9% of our revenues in 2009 and 56.4% in 2008.  Our RPKs in the domestic market increased 17.2% in 2010, 6.4% in 2009 and 10.6% in 2008.  The RPKs in the total domestic market increased 23.5% in 2010, 18.9% in 2009 and 7.6% in 2008. In 2010, according to data provided by INFRAERO, we recorded the highest number of passengers boarded in 20 of the 42 airports operated by INFRAERO that we serve.  The table below sets forth the airports we serve in Brazil, our average number of departures per day at those airports and the number of passengers who took our flights in 2010: Route

   Average Number of Departures per day with our Aircraft(1)

   Passenger Departures per year(2)São Paulo (Congonhas)

   99

   2.858.690São Paulo (Guarulhos)

   80

   2.862.602Brasília

   83

   1.507.999Rio de Janeiro (Galeão)

   42

   1.149.488Salvador

   38

   910.476Rio de Janeiro (Santos Dumont)

   44

   1.251.455Recife

   28

   934.591Fortaleza

   27

   926.548Porto Alegre

   26

   794.803Curitiba

   35

   847.577Belo Horizonte (Confins)

   31

   831.847Belém

   19

   549.039Vitória

   14

   440.395Natal

   12

   479.602Florianópolis

   16

   501.708Manaus

   13

   477.136Goiânia

   10

   381.738São Paulo (Viracopos)

   10

   292.040São Luiz

   10

   371.118Maceió

   6

   244.172Cuiabá

   9

   262.905Foz Do Iguaçu

   8

   281.507Porto Seguro

   3

   132.158Campo Grande

   10

   237.334Aracaju

   6

   234.619João Pessoa

   5

   251.121Londrina

   7

   191.386Teresina

   5

   168.690Macapá

   3

   126.483São José Do Rio Preto

   4

   144.942Uberlândia

   3

   126.758Porto Velho

   3

   127.539Ribeirão Preto

   4

   158.687Navegantes

   3

   104.668Ilhéus

   2

   67.430Palmas

   2

   90.840Imperatriz

   4

   73.523Marabá

   2

   64.338Rio Branco

   1

   48.686Santarém

   2

   65.720Boa Vista

   1

   60.718Joinville

   2

   58.585
 
 (1)       Figures relate to departures on TAM aircraft only. (2)       Figures relate to TAM Issued tickets (and include departures on non-TAM
   -33 -




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Scheduled international operations





We operate an average of 97 daily international flights to Buenos Aires, Santiago, Asunción, Montevideo, Lima, Ciudad del Este, Santa Cruz de la Sierra, Cochabamba, Caracas, La Paz, Bogotá, Miami, Orlando, New York, London, Paris, Frankfurt, Madrid and Milan.  We have codeshare agreements with LAN Group, Pluna, United Airlines, Air Canada, TAP, Lufthansa, Air China, Swiss International, Continental, All Nippon, US Airways and British Midland Airways Limited, or BMI, allowing our passengers to make connections to destinations throughout the world, in addition to other services, such as simplified check‐in, luggage shipping and access to VIP lounges.  We offer the ability to earn and redeem points through the TAM Loyalty Program on all Star Alliance member flights besides LAN.

International passenger traffic represented 27.8% of our gross revenue in 2010, 26.4% in 2009 and 25.9% in 2008.  Our RPKs from international flights grew 15.6% in 2010, 12.5% in 2009 and 40.2% in 2008, successive increases that have resulted primarily from increased capacity on selected routes that presented substantial traffic throughout the year. Our share of the international market operated by Brazilian carriers was 87.6%, 89.9% and 75.2% in 2010, 2009 and 2008, respectively, successiveincreases that have resulted primarily from a decrease in Varig's long haul international flights as result of its liquidation.

-34 -




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Cargo transportation operations We also earn revenues through cargo transportation operations.  These operations represented 9.4% of our gross revenue in 2010 and 9.2% of our gross revenue in 2009 and 2008.  TAM Cargo is our freight business unit, reporting directly to our Commercial and Planning Vice President.  We do not operate exclusive cargo aircraft; however, we sell the empty space available in the belly of passenger aircraft, both in domestic and international markets. We are continuously improving our cargo terminal operating structures, products and processes, resulting in faster receipt of packages and better branding.  In 2009, we implemented a new cost saving and advanced tracking system, which allows shippers to track in detail and in real-time the entire path of their freight.  In 2010, we enlarged our infrastructure even more and in November, we began to operate the domestic cargo terminal in Petrolina (PE).  Since November, we began offering a new way to send and receive cargo in and to Pernambuco and the Northeast, a strategic region for our business.  In 2010, we also introduced the Big Box, an innovative packaging specially developed for transportation of parcels.  This product increases our operational excellence in airline cargo, improves the ergonomics of our cargo operations, provides benefits for employees and contributes to cost control.  We intend to meet our customers' needs by growing our operations, both by increasing the freight of small packages, which have higher yields, and in large volume freight, such as industrials and perishable cargo. In the international cargo segment, we are continuously improving our management systems, resulting in quicker processing and better revenue monitoring.  These improvements help us analyze market behavior to enhance our accuracy and decision making with respect to the shipments.  We are entering into Special Prorate Agreements (SPA) with several airline companies, allowing us to send shipments worldwide, increasing volumes sold and TAM Cargo's brand awareness. Travel and tourism operations We also have a travel and tourism operation, TAM Viagens.  In 2010, 2009 and 2008, this business represented 4.1%, 4.4% and 3.8% of our total revenues respectively.  TAM Viagens offers complete packages including air tickets, ground transportation, hotels, tours and several tourism services.  Nowadays, it is one of the largest tour operators in Brazil and has 77 of its own stores, which deals with more than 5,000 agencies all over the country, offering products to more than 750 tourist destinations. Our main objective is to attract passengers flying for tourism and leisure purposes to occupy seats that would otherwise be empty during certain flights, either off‐peak flights, or flights during low season – as the Brazilian market has the characteristic of being predominantly composed by business passengers that fly during specific periods of the day.  Our tour operator also has fundamental importance in promoting and selling tickets for newly launched flights.  We have commercial offices in the U.S. and Argentina, where we focus our sales efforts on promoting trips to Brazil. In 2010, TAM Viagens became part of the Multiplus coalition and began accepting and giving points for the sales of packages.  We have also completed the process of opening TAM Viagens franchise stores and our subsidiary, TP Franchising, operates the expansion and quality control of the related franchisees.  We expect to have 200 retail shops open by the end of 2011.  Under our franchise model, the franchisee is responsible for all operating expenses ,including the store opening.  As a result, each additional TAM Viagens franchise store increases the reach of our operations at no additional cost, further improving our margins. Marketing TAM Loyalty Program The TAM Loyalty Program was the first loyalty program launched by a Brazilian airline and represents a key element in our marketing strategy.  We believe our program is the most flexible in the market because it imposes no restrictions on flights or the number of seats available when members are redeeming accumulated points.The TAM Loyalty Program has more than 8 million members and approximately 13 million free flights have been distributed since its creation in 1993.  Beginning in 2009, we launched Multiplus Fidelidade, a loyalty network that integrates the TAM Loyalty Program and allows our members to accumulate points, not just by flying with TAM, but also by flying with partner airlines, making purchases through TAM Loyalty Program‐affiliated credit cards or using services and products at Multiplus Fidelidade partner establishments. The TAM Loyalty Program is currently operated by our subsidiary, Multiplus, on our behalf and the TAM Loyalty Program is one of several coalition partners of the Multiplus Fidelidade network of loyalty programs. Multiplus Fidelidade is described below. Banco Itaú Unibanco S.A., or Itaú Unibanco,offers credit cards that allow holders to earn Multiplus Fidelidade points, and credit cards are available in both MasterCard and Visa designations.  TAM Loyalty Program customers are classified in four different categories (white, blue, red and black) and qualification for a particular category is based on miles flown.  The rate at which points accumulate varies depending on membership tier.  The white card is the base level of membership and cardholders accrue points each time they fly.  Blue and red cardholders receive progressively greater benefits and increased points for miles flown, allowing the holders to accrue redeemable points for free travel more quickly.  We launched the black card in 2009 to create additional benefits and conveniences for our most frequent flyers, such as granting black cardholders access to a dedicated customer service group to help meet all of their needs. -35 -


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Points earned by TAM Loyalty Program members must be redeemed for tickets within two years, and historically approximately 22.6% of points expire without being redeemed.  This two year period for redemption limits the growth in liabilities arising from the TAM Loyalty Program and Multiplus Fidelidade, assuming a stable trend in relation to the number of passengers we carry.  See "Item 5.  Operating and Financial Review and Prospects — A. Operating Results — Critical Accounting Estimates and Judgments — Revenue Recognition". Multiplus Fidelidade In 2009, we launched Multiplus Fidelidade, a program designed to create a broader network in which our customers can earn points through the TAM Loyalty Program.  Multiplus Fidelidade is a coalition of loyalty programs that permits the accrual of points for redemption from products and services offered by many different partner companies, not just ours.  We believe this expanded network helps to capture and retain customers and increase sales.  It is attractive to our less frequent flyers because it allows them to accrue loyalty points in many ways besides flying.  We believe Multiplus Fidelidade is a source of value generation and after its initial public offering, the company increased its corporate governance, dedicating a team that, we believe, will improve even more those sales. At the end of2010, Multiplus had 151 partner establishments,of which 14 were coalition partners, including the TAM Loyalty Program, and the remainder were accrual partners.Of the 14 coalition partners, seven joined in 2010. Communications with our passengers Our "Talk to the CEO" initiative was introduced to encourage passengers to send us suggestions, compliments and complaints.  TAM ́s customers can contact us by telephone, e-mail, fax, letter and other social medias. Our 0800 123 200 hotline number is available 24 hours a day, 7 days a week.  Once an issue is raised by a passenger, we research and analyze it, and  keep the customer informed about the solution.  In 2010, the service generated 510,000 responses from our passengers (including suggestions, compliments and complaints), compared to 350,000 in 2009 and 179,564 in 2008.  In 2010, TAM launched a new communication platform, Customer Relations 2.0.  This new platform focuses on responding the contacts received by social medias, such as twitter, facebook, blogs, etc. The customer relations service is also available in 13 countries in North America, South America and Europe. Fleet General Our fleet policy focuses on achieving the highest levels of safety, quality, efficient scheduling and high on‐time arrival rates, as well as rationalizing maintenance expenses.  Currently, our fleet consists of advanced technology jet aircraft, yielding cost benefits that allow us to achieve high results in efficiency indices and safety standard qualifications.  See "— Safety." -36 -


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The two Airbus "families" operating in our fleet are the A330‐200 and the A340‐500 aircraft (wide‐bodied aircraft used for long‐distance flights), and the A321, A320‐200 and A319‐100 aircraft (narrow‐bodied aircraft used for medium and short‐distance flights).  The aircraft in these families differ by number of seats, allowing us flexibility when making commercial decisions regarding passenger demand for flights.  The A321, A320 and A319 models are considered to be among the most comfortable aircraft operating in Brazil in their category, with the ability to operate at low cost on routes with up to five hours of flying time.  They are also the only Brazilian narrow‐bodied fleet to have fly‐by‐wire flight controls, with computers receiving and analyzing each pilot command, making flights more accurate and efficient.  Airbus family aircraft also have the benefit of standardized maintenance and operations, allowing pilots and technicians to fly and work on different models after minimum additional training.  All our aircraft are equipped with the best and most advanced equipment and software options offered by the manufacturer, giving us what we believe is one of the most advanced aircraft fleets in the world. We have constant data communication capability between each of our aircraft and all of our departments on the ground, even when flying.  For these communications, we developed a proprietary system, called DMS (Datalink Management System), that allows us to manage all information sent in real time by the ACARS (Aircraft Communication Addressing and Reporting System) installed in our fleet.  Using the aircraft DMS, pilots may send text messages to any of our sectors.  The messages are transmitted via satellite and appear on the DMS user screen in real time.  In addition to communicating with the pilot, these resources also allow remote online monitoring of aviation systems, such as computer functions, landing and departure times, fuel consumption and engine performance parameters.  As a result, any operating variance may be analyzed by our maintenance technicians even before an aircraft arrives at its destination.  This technology yields savings in maintenance costs and also significantly improves our efficiency and safety. The quality of our technical services is regularly audited by Brazilian and international authorities, manufacturers and insurance companies.  Our codeshare agreements with United Airlines and Lufthansa also require that we meet the maintenance and safety compliance requirements of the competent international aviation authorities. The advantages of our modern technology, combined with our excellent operating and maintenance standards for our aircraft, yield high equipment utilization rates and reliability levels ("technical dispatch capacity").  Our fleet maintains a high technical dispatch capacity index according to IATA standards.  This index measures the on‐time departure capacity of aircraft without taking into consideration external factors such as bad weather.  In 2010, we had an average fleet operational reliability index of 98.7% (compared to 98.6% and 98.8% in 2009 and 2008, respectively) for our fleet in operation, the reference point used in auditing our technical services.  Aircraft, engine and equipment manufacturers audit our data according to IATA's unified standard. TAM Linhas Aéreas has RBAC (Brazilian Aviation Approval Regulation) certifications 121 and 145 for maintenance operations and services.  It also has FAA and EASA 145 certification for maintenance services, which are performed at the São Carlos maintenance center in São Paulo. In 1998, we received a U.S. Federal Aviation Regulation (FAR 129) operating certification, and in 1999, we received a European certification from theDirection Généralede L'Aviation Civile — DGAC, allowing us to begin operating scheduled commercial flights to European and U.S. cities.  In addition to the destinations in which we now operate scheduled flights, such as Miami, New York, Orlando, Paris, London, Madrid, Milan and Frankfurt, these certifications also permit us to apply to operate additional scheduled flights to cities such as Washington, Indianapolis, Lisbon, Barcelona, Zurich, Amsterdam, and Moscow. All of these certifications, obtained as a result of our modern maintenance facilities and the high technical quality of our maintenance, rank us among the top airlines in global aviation standards.  Since 2000, we have had the Extended Twin Engine Operations (ETOPS) certification of 180 minutes for Airbus A330 model aircraft, proving that we are in compliance with the most stringent global aviation standards in this respect.  We also have state-of-the-art equipment in Brazil, such as the Future Air Navigation Systems (FANS), which increases safety in congested air space and achieves fuel savings by using more direct routes. The following table illustrates our fleet composition over the last three years: In OperationDecember 31,Model

   2010

   2009

   2008Boeing 777

   4

   4

   4Airbus A340

   2

   2

   2Airbus A330

   18

   16

   16Boeing 767

   3

   3

   3Airbus A321

   7

   5

   3Airbus A320

   86

   81

   81Airbus A319

   26

   21

   20ATR - 42

   5

   —

   —Total

   151

   132

   129
 -37 -


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TAM Mercosur's fleet consists of 3 Airbus A320 aircraft (sub‐leased from TAM Linhas Aéreas) and Pantanal’s fleet consists of 1 Airbus A320 and 2 Airbus A319 (sub-leased from TAM Linhas Aéreas), also Pantanal has 5 ATR-42 aircraft in its fleet. The average age of the TAM Linhas Aéreas fleet is one of the lowest in global aviation: 6.3 years for Airbus A319/320/321 model aircraft, and 6.5 years for Airbus A330/340 model aircraft.  With 151 aircraft in operation, the overall average age of our fleet was 6.4 years at the end of 2010. The following table sets forth the historical and projected development of our operational fleet at December 31 in each of the years indicated: 2012(1)
     2011(1)
     2010
     2009
     2008
     2007(Number of aircraft)Airbus A330/A340
     21
     22
     20
     18
     18
     14Airbus A319/A320/A321
     131
     124
     119
     107
     104
     88Fokker 100
     —
     —
     —
     —
     —
     5MD‐11
     —
     —
     —
     —
     —
     3Boeing 767
     3
     3
     3
     3
     3
     —Boeing 777
     8
     4
     4
     4
     4
     —ATR-42
     —
     3
     5
     -
     -
     —Total
     163
     156
     151
     132
     129
     110
 
 (1)       Our fleet projection is based on the following:  we currently have firm orders with Airbus for 58 Airbus aircraft (56 aircraft narrow body family A320 and two A330) for delivery through 2013. In addition, we have firm orders for 27 Airbus A350XWB models 800 and 900, with options for five more, with delivery between 2014 and 2018.  We currently have firm orders placed with Boeing for six B777-300ER aircraft, of which four are expected to be delivered in 2012 and two in 2013.  In 2010, we made firm orders with Airbus for an additional 20 Airbus A320 family to be delivered in 2014 and 2015, and converted 5 of our 10 A350 options existing at December 31, 2009 into firm orders with deliveries through 2018. We phased out our entire fleet of Fokker 100 aircraft in 2008, at which point we started operating only Airbus A320 family aircraft in the domestic market. In November 2006, we entered into an agreement with Airbus pursuant to which we agreed to lease 31 A319/A320/A321 family aircraft, with 20 additional options and six A330 aircraft, with four additional options.  On January 2008, the options under the 2006 agreement were converted into firm orders.  In February 2007, we entered into an agreement with Boeing pursuant to which we agreed to lease four Boeing 777 aircraft, with an additional four options that were converted to firm orders in 2008, when we also signed a firm order for two additional aircraft.  In July 2007, we entered into an agreement with Airbus pursuant to which we agreed to lease 20 Airbus A319/A320/A321 aircraft.  In December 2007, we entered into an agreement with Airbus pursuant to which we agreed to lease 22 Airbus A350‐900 aircraft, plus 10 options.  In 2010, we converted five of those 10 A350 options into firm orders, and we made firm orders with Airbus to purchase an additional 20 A320 aircraft. -38 -


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As of December 31, 2010, we had firm commitments to purchase 91 aircraft, with an aggregate manufacturer's list price of approximately U.S.$9.16 billion.    Additionally, in 2011, we announced the order of 32 Airbus A320 family aircraft and two Boeing 777-300ER aircraft.  Out of this order, 22 of the Airbus A320 family aircraft are for the new model A320neo.  These aircraft will be delivered between 2016 and 2018.  The engine option will be announced at a later date. Leasing agreements TAM Linhas Aéreas currently leases all of its aircraft using long‐term lease agreements and Pantanal Linhas Aéreas leases two aircraft and owns three.  We believe that leasing, rather than owning, aircraft gives us greater flexibility because it allows us to change the composition of our fleet relatively quickly in the event that we need to do so. Of our total fleet of 151 aircraft at the end of 2010, 144 of our aircraft were subject to operating leases, four to finance leases and three were owned by Pantanal Linhas Aéreas.  However, for accounting purposes, 75 of TAM Linhas Aéreas’ lease contracts are classified as finance leases. Operating leases require us to make periodic payments, but do not include aircraft purchase options at the end of the agreement.  The payments are denominated in U.S. dollars and the majority of these payments are subject to interest based on LIBOR.  Pursuant to the terms of these agreements, aircraft are returned under agreed conditions at the end of the lease.  The lessor retains ownership of the aircraft.  We are responsible for maintaining and contracting insurance for the aircraft during the leasing period. Finance leases are capitalized at the lease's commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.  Each lease payment is allocated between liability and finance charges.  The corresponding lease obligations, net of finance charges, are recorded as financial liabilities.  The interest due on the finance lease is recorded on the income statement over the lease period to produce a constant interest rate on the remaining balance of the financial liability. Maintenance We rigorously follow the maintenance plans proposed by the aircraft manufacturers and approved by the competent Brazilian and international aviation authorities.  Accordingly, maintenance carried out on our aircraft may be divided into three general categories: (i) line maintenance, (ii) heavy maintenance and (iii) component repair and overhaul.  Line maintenance includes daily inspections and minor corrective actions, along with "A" checks, all of which are performed between flights or overnight and do not require changes to our scheduled operations. Heavy maintenance includes more complex aircraft inspections, including aircraft modifications and corrective actions, and may require removal of aircraft from operations during periods ranging from four days to four weeks, depending on the complexity of the maintenance. Engine maintenance contracts cover all significant engine maintenance activities.  We pay for services rendered pursuant to our engine maintenance contracts on an as‐incurred basis.  The basis on which maintenance expenses are considered incurred is dependent on the nature of the services provided under our engine maintenance contracts: ·contracts under which amounts are payable to the maintenance provider, and are recognized in the income statement, based on actual maintenance activities performed by the maintenance providers.  The expenses incurred reflect the actual time required to perform maintenance and the material costs used in the maintenance activities.  These maintenance contracts are referred to as "time and materials" contracts; and ·contracts under which maintenance expenses are payable to the maintenance provider based on hours flown.  These maintenance contracts are referred to as "power by the hour" contracts.  We accrue a liability and record an expense for maintenance under these contracts on the basis of hours flown.  These payments are made to maintenance providers when the engines undergo a maintenance shop visit based on an agreed hourly rate.  Our "power by the hour" contracts alsoprovide for a relatively small administrative fee that is paid and expensed monthly (this fee represents less than 5% of amounts paid under all of our "power by the hour" contracts considered together). -39 -


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We have entered into a number of agreements with suppliers and service providers in order to assist with our maintenance requirements, of which the following are material: ·a general terms agreement between TAM Linhas Aéreas and GE Engine Services Distribution, L.L.C., or GE, dated May 7, 2001, pursuant to which TAM Linhas Aéreas has agreed to purchase certain spare engines and support equipment for both the spare engines it has purchased from GE and certain engines that have already been installed on its operating fleet.  The agreement also provides that GE may provide non‐standard maintenance training courses upon request of TAM Linhas Aéreas.  The agreement provides that GE will charge for any such courses on an "as incurred" basis.  The agreement has no fixed termination date; ·an engine maintenance agreement between TAM Linhas Aéreas and MTU Motoren‐und Turbinen‐Union München GmbH, or MTU, dated September 14, 2000, or the TAY Agreement, pursuant to which MTU has agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105 aircraft engines.  This agreement was amended by means of a novation and amendment between TAM Linhas Aéreas and Rolls‐Royce Brazil Ltda.  or Rolls‐Royce, dated November 8, 2001, pursuant to which Rolls‐Royce replaced MTU as contract counterparty.  The agreement provides that Rolls‐Royce may subcontract services to be performed and that it will not be held liable for damages to or losses of TAM Linhas Aéreas or third parties due to the performance of the services contracted under the agreement, unless caused by willful misconduct or negligence of Rolls‐Royce.  The agreement provides that service orders placed by TAM Linhas Aéreas are to be charged based on a fixed rate specified for each type of service and subject to an escalation formula.  TAM Linhas Aéreas is required to make payments based on actual services performed.  This agreement terminates on June 30, 2015; ·an engine maintenance agreement between TAM Linhas Aéreas and MTU Maintenance Hannover GmbH, or MTU Hannover, dated September 14, 2000, pursuant to which MTU Hannover has agreed to provide certain maintenance, refurbishment, repair and modification services with respect to certain V2500‐A5 engines.  The agreement provides that MTU Hannover may subcontract to third parties and that MTU Hannover will not be held liable for damages to or losses of TAM Linhas Aéreas or third parties due to the performance or non‐performance of the services contracted, unless caused by willful misconduct or negligence of MTU Hannover.  The agreement provides that service orders placed by TAM Linhas Aéreas will be charged on actual services performed, based on hourly rates for engine/module repair work and on a fixed price for test runs, including fuel and oil, subject to an escalation formula.  This agreement terminates on June 30, 2014; and ·an engine maintenance agreement between TAM Linhas Aéreas and United Technologies Inc., Pratt and Whitney Division, or Pratt and Whitney, dated September 14, 2000, pursuant to which Pratt and Whitney has agreed to perform maintenance, modification and/or overhaul of engines, engine modules and their parts and components.  Pratt and Whitney has a limited exclusivity right for maintenance services of engines and modules pursuant to the terms of this agreement.  This exclusivity provision requires TAM Linhas Aéreas to obtain prior written authorization from Pratt and Whitney before sending the equipment to another maintenance service supplier, with an exception in the case of delay or non‐performance of services by Pratt and Whitney.  The services to be provided by Pratt and Whitney are charged based on a fixed rate specified for each type of service, subject to an escalation formula.  TAM Linhas Aéreas is required to make payments based on actual services performed.  This agreement terminated on September 14, 2010. We are certified to conduct maintenance on each type of aircraft in our fleet.  Line maintenance is performed at all bases at which we operate, but mainly at the airports in São Paulo, Congonhas and Guarulhos.  We also conduct heavy maintenance and component repair and overhaul at our main maintenance center in São Carlos,which is 250 kilometers northwest of São Paulo.  The São Carlos maintenance center is approximately 4.6 million square meters in size and is fully certified by ANAC, EASA, FAA, TC - Canada and other Latin American aeronautical authorities to perform heavymaintenance ("C" & "D") on most of our fleet, including the Airbus A330, A320, A318, A319 and A321, ATR 42, Boeing 767 and Fokker 100, as well as over 2,500 different aeronautical components and parts for Fokker 100 and several parts for all Airbus aircraft and many of our Boeing aircraft.  Our maintenance center completed its ANAC 145 certification for Boeing 767 aircraft at the end of 2008, and the first inspections began in 2009.  Our maintenance center currently has over 1,150 direct employees (for core maintenance activities) and approximately 300 indirect employees (providing support functions, such as security, facility maintenance and cleaning).  Line maintenance and supply chain activities include approximately 100 additional employees. -40 -


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All maintenance that is conducted in‐house presents significant cost savings and strategic advantages.  As we are qualified to perform most line maintenance, heavy maintenance and component repair and overhaul services, we substantially reduce the need to send aircraft and parts overseas, decreasing downtimes and avoiding the costs of aircraft ferry-flights, parts logistics and import‐export taxes.  For those parts requiring maintenance at costs that are not economically efficient, due to complexity or low volume repairs, we have implemented, where possible, long‐term, optimized maintenance agreements with engine manufacturers. As required by our codeshare agreements with several airlines, including Lufthansa, United, TAP, Air Canada and LAN, we have the IATA Operational Safety Audits (IOSA) maintenance certification.  Further, our maintenance division also has required certifications from each country in which we fly our aircraft (for example, the FAR 129 certification required by the United States). In addition to the manufacturers (Airbus, Boeing, Rolls Royce, GE, Pratt & Whitney) training, we train our engineers and technicians at our own training center, which is fully certified under ANAC 147, and which uses the same equipment and software that the manufacturers use.  We refer to our training center as the "TAM Service Academy". Besides maintenance on our own aircraft, we also perform maintenance for third party aircraft and flight components, including maintenance for certain of our competitors, within the ranges of our certifications.  We are party to several line maintenance support contracts, pursuant to which we provide maintenance on Airbus aircraft, as well as heavy and component support for Brazilian and foreign airlines.  We also have a total care maintenance contract for the President of Brazil's A319 ACJ.  Our maintenance services are consistently growing, helping us to dilute our fixed expenses, as well as increase our revenues. A significant part of our aircraft and vehicle maintenance expenses are indexed to the U.S. dollar.  For a description and analysis of the effect of exchange rate variations on our income, including fleet maintenance expenses, see "Item 11.  Quantitative and Qualitative Disclosures about Market Risk — Exchange rate risk." Fuel Fuel is the largest component of our operating expenses, representing 33% of our operating expenses in 2010. Fuel consumed in Brazil represents approximately 85% of our total consumption and is acquired through the following distributors: Air BP, BR Aviation (Petrobrás) and Shell Aviation (which acquired the Cosan business, formerly known as Exxon Mobil, in 2009).  We purchase fuel abroad from Air BP, Petrobrás, Exxon Mobil, J&D Oil Field, Shell, Morgan Stanley, Repsol YPF, World Fuel Services, Q8 and Air Total.  Supply contracts for fuel in Brazil are normally made for a two to three year period and current contracts expire at the end of 2012.  Supply contracts at our international bases normally have a term of one or two years.  The great majority of our fuel is purchased under "into‐plane" terms, meaning that the supplier is responsible for delivering the fuel directly into the tanks of our aircraft.  The fuel prices in the contracts we sign normally consist of three components: (i) the reference price from regional refinery, (ii) the supplier logistics and operational margin (differential) and (iii) airport storage/hydrant fees and taxes. Refineries kerosene price is subject to international market variations (offer/demand) in the reference price of crude oil and refineries' margins.  The supplier differential is the portion charged by the supplier, which normally consists of a fixed amount per volume negotiated and committed to be charged during the contractual period, and reflects the cost of fuel procurement, distribution, storage, and refueling, as well as a profit margin.  Airport taxes and fees vary by airport.  We have a department responsible for negotiating fuel purchasecontracts and, as a result of the high volumes of fuel we purchase, we believe that we are normally able to obtain more favorable terms than most of our competitors. -41 -


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To reduce our exposure to international fuel price and exchange rate variations, in 2006 we began to enter into arrangements intended to hedge a minimum of 30% and a maximum of 80% of our projected fuel consumption.  Due to new market and macroeconomic conditions, we decided to modify this policy.  We now hedge our fuel requirements up to a five year period with between 20% and 60% of our future fuel requirements hedged over the first 12 months, and 10% to 60% hedged over the second 12 months.  For a description and analysis of the effect of volatility in fuel prices on our income, see "Item 11.  Quantitative and Qualitative Disclosures about Market Risk — Risks relating to variations in the price of oil." Another important cost reduction initiative involving fuel is our "fuel tanker" program, pursuant to which we refuel aircraft in regions where fuel prices are relatively low.  This initiative has more of an effect in Brazil, where the local taxes for each state cause significant variances in final fuel price.  We have also formed a multidisciplinary work group, involving each of our departments responsible for fuel, engineering, control, operations, dispatching and financing, to develop other measures to reduce spending and fuel consumption by our fleet. Safety We adopt the highest safety standards in the world.  We comply with Brazilian and foreign aviation regulations, including those issued by the ICAO (International Civil Aviation Organization), the FAA – Federal Aviation Administration (U.S. aviation authority) and the EASA – European Aviation Safety Agency (EASA).  As an international airline, we are a member of the IATA, and sit on the Regional Flight Safety Committee (RCG).  We are also a member of the Flight Safety Foundation (the largest nongovernmental organization for flight safety) and the Flight Safety Committee (a committee comprised of all Brazilian airlines). Our priority is to provide safe air transportation.  Our founder, Commander Rolim Amaro, passed down one of our key corporate mottos:  "Safety comes first to the client."  We are devoted to flight safety and adopt modern certification  and system standards.  For example: ·In 2002, we were the first Brazilian company to implement the FOQA (Flight Operations Quality Assurance) system, a system used for the systemic analysis of flights and the prevention of operating failures that may affect the safety of a flight, which subsequently became a benchmark for other Brazilian companies; ·In 2004, the European Union Aviation Authority granted us the EASA 145 certification for our aircraft maintenance and repair facility located in São Carlos and we have been recertified annually since then; ·In July 2006, we became a member of the United Kingdom Flight Safety Committee (UKFSC), an association of organizations and professionals dedicated to improving flight safety standards in commercial aviation in the United Kingdom.  In 2006, we also became a member of the Steering Committee of the Emergency Response and Planning Task Force (ERPTF) of IATA; ·In 2007, we were the first company in Latin America to implement the AQD (Aviation Quality Database) system for safety database management, which analyzes operating risks and implements the SMS (Safety Management System) in conformity with Brazilian and foreign regulations; ·In 2009, the U.S. aviation authority (FAA) granted us the FAR 145 certification for our aircraft maintenance and repair facility located in São Carlos; ·In January 2010, we ratified the IOSA certification that IATA granted us in 2007 and validated in 2008.  The IOSA certification is the most complete and recognized international operational safety certificate.  The IOSA certification requires an independent evaluation system focused on the operational management and control systems of airlines.  The IOSA audit encompasses over 940 requirements related to operational safety, such as management system, flight operations, operational dispatch, ramp operations, airports, maintenance, cargo operation, operational safetyand training for each area associated with operations.  With IOSA registration renewal, we met a pre-requisite for joining the Star Alliance; -42 -


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·In February 2010, we were certified by the Argentine National Civil Aviation Administration for the rendering of maintenance services on Airbus A318, A319 and A320 aircraft registered in Argentina, along with their components; ·In March 2010, we were certified by Ecuador aeronautical authority (Direccion General de Aviation Civil) to perform maintenance service on Airbus A318, A319, A320, A321 and Fokker-100 aircraft registered in Ecuador, along with their components; and ·In August 2010, we were certified by Transport Canada Civil Aviation (TCCA) to perform maintenance service on aircraft registered in Canada. Brazilian civil aviation follows the highest safety standards in the world.  Brazil is classified as a Category 1 (the highest category)country in terms of the flight safety standards established by ICAO.  Category 1 is the highest. Insurance We maintain insurance policies as required by law and the terms of our aircraft leasing agreements.  The scope of these policies includes all risk coverage for aircraft hulls, including war risks and third party legal liability for passengers, cargo, baggage and injuries to third parties on the ground.  Our current policies, which will be in force through December 19, 2011, follow practices adopted by the international civil aviation industry. We have also contracted for asset insurance against the risk of theft, fire, flood, electrical damage and similar events for equipment and buildings we own or for which we are responsible, including airport areas where we have operations.  Similarly, we have contracted for vehicle insurance against the risk of robbery, theft, fire and civil liability against third parties for all vehicles we own or for which we are responsible. We have also contracted for liability insurance in respect of our directors and officers and the existing policy is due to expire on March 30, 2012. Information Technology We invest significantly in information technology systems that enhance our operating processes, allow us to provide higher quality services to our passengers, grant us greater flexibility and increase the speed of our operations. In 2004, we introduced thee‐TAM portal, a tool that integrates our entire sales chain, from the time of reservation through to passenger boarding.  Moreover, data obtained from thee‐TAM portal allows us to offer our passengers a set of customized services.  The great majority of our domestic reservations made in Brazil are made through the portal environment.  The use of thee‐TAM portal allows us to reduce the cost of reservations and ticket issuance by consolidating the GDSs previously used for almost all our reservations.  Currently, GDS is used more for international tickets issued in Brazil and for tickets issued abroad. We were the first Brazilian airline to develop and install self‐service check‐in kiosks in airports.  With over 167 units in Brazil's major airports, the kiosks allow passengers who purchasee‐tickets to check‐in and select their seat in less than ten seconds, reducing lines in the check‐in halls and on board the aircraft.  In 2010, 2009 and 2008 approximately 3,270,531, 6,220,208 and 5,888,474 passengers, respectively, checked in through the self‐service kiosks. In October 2003, we signed a general services agreement with Sabre Travel International Limited, pursuant to which we were granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup.  This agreement was intended to remain in force for ten years, unless early terminated by either party.  In March 2009, we announced that we were exercising our right to early terminate the contract and that early termination became effective in March 2010. -43 -


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In July 2009, we signed an agreement with Amadeus IT Group SA, pursuant to which we were granted a license to operate our core processes using their software.  This agreement shall expire ten years from the date we began to use the Amadeus platform, November 15, 2009, unless terminated early in accordance with the termination clause. The TAM Loyalty Program and "special services" system are also important tools for obtaining profile information on our passengers.  The TAM Loyalty Program allows us to monitor the activity of passengers registered with the program, recording information on each passenger flight in addition to personal information and preferences (such as preferred seat, special meal requests and other data obtained through our contacts or customer surveys).  The "special services" system allows the crew to input data on preferences of our passengers directly to our database.  This data is also used to study passengers, offer promotions and new services and define our advertising message. Our DOV‐line tracing system monitors all aircraft baggage and cargo, following the location of items inside the aircraft, for proper weight balancing.  A balanced aircraft is critical for a safe flight and has the added benefit of reducing fuel consumption.  The DOV‐line tracing system also manages crew distribution. Seasonality The Brazilian passenger air transportation market is subject to seasonality, as there is always higher demand for air transportation services in the second half of the year.  However, this seasonality is partially mitigated by the fact that we have a higher concentration of business travel than the market average (and business travel is less sensitive to seasonality).  Our other operations do not vary significantly as a result of seasonality. Competition Domestic Airlines in Brazil compete primarily in terms of routes, price, flight frequency, service reliability, brand recognition and benefits offered to passengers, such as loyalty programs and customer service.  We believe our market leadership and the TAM Loyalty Program enhance our competitive performance in many of these areas. Our competitors, both actual and potential, include Brazilian airlines, airlines operating on regional air routes and new participants in the market who operate primarily on regional transportation networks.  Our principal competitor is Gol.  In previous years, Varig had been one of our major competitors.  However, Varig filed for bankruptcy protection in Brazil and the United States in June 2005.  Varig's assets and operations were sold to various investors over the course of 2006 and, on December 14, 2006, Varig ceased operations altogether.  On December 15, 2006, a new company, VRG Linhas Aéreas S.A., initiated operations on some of the routes previously used by Varig.  On March 24, 2007, Gol announced that it had entered into an agreement to acquire VRG Linhas Aéreas S.A.  In compliance with applicable CADE requirements, Gol and Varig operated as separate airlines until CADE's final approval of the acquisition on June 25, 2008.  On October 19, 2008, the route networks of both companies were integrated. To a much less degree, we also face competition from a number of significantly smaller airlines operating in the domestic market.  In 2010, 13 different airlines together shared the 17.7% of the domestic market that is not served by TAM and Gol (who together share approximately 82.3% of the domestic market). ANAC's resolution provides that 80% of new airport slots are distributed to existing airlines, with these slots being divided evenly (without regard to market shares).  New slots are only available to airlines that have a history of punctuality, no pending proceedings with ANAC and a positive shareholders' equity.  The remaining 20% of slots are available to new entrants.  See "— Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Policy on slots." -44 -


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The table below shows the history of market participation on domestic routes, calculated by reference to RPKs, for the major Brazilian airlines, for the periods indicated (based on data provided by ANAC):  __2010__
     __2009__
     __2008__
     __2007__
     __2006__
     __2005__in percentagesTAM
     42.8
     45.4
     50.4
     48.8
     47.8
     41.3GOL/VRG
     39.5
     41.7
     42.4
     -
     -
     -GOL
     -
     -
     -
     39.5
     34.3
     25.9Varig
     -
     -
     -
     3.5
     10.0
     25.5Others
     17.7
     12.9
     7.2
     8.1
     7.9
     7.3
 ______________________ Source:  ANAC. We also face competition, albeit to a lesser degree, from land transportation companies such as road transport companies. International The international market is substantially more competitive than the domestic market.  In the international market, there are many international airlines that are larger than us and more experienced.  To ensure sustained market competitiveness, airlines are dependent on partnerships and codeshare agreements in the international market. With respect to international flights, airlines compete primarily on the basis of routes, services, price and mileage and frequent flyer programs.We offer 96 daily international flights to Buenos Aires, Santiago, Asunción, Montevideo, La Paz, Bogota, Ciudad del Este, Santa Cruz de la Sierra, Cochabamba, Caracas, Lima, Miami, New York, Orlando, London, Paris, Frankfurt, Madrid and Milan.We have codeshare agreements with LAN Group, Pluna, United Airlines, Air Canada, TAP, Lufthansa, BMI, Air China, Swiss International, Continental, All Nippon and US Airways, allowing our passengers to make connections throughout the world, in addition to other services such as simplified check-in, luggage shipping and access to VIP lounges.  We also have interline agreements allowing us to offer our passengers a wide range of destinations around the world.  On October 7, 2008, we publicly announced that we were joining the Star Alliance, the largest global alliance in commercial aviation.  We became a full member of the Star Alliance on May 13, 2010. In the international market, our main competition is from major international airlines that serve the markets in which we operate.  Our average international market share in 2010 was 87.6% (measured by RPK among Brazilian companies).  According to ANAC, Brazilian airlines were responsible for approximately 35% of international passengers transported in 2009.  We believe that in 2010, Brazilian airlines transported 35% of those passengers to and from Brazil.  The table below shows the history of market participation on international routes, calculated by reference to RPKs, among only the Brazilian airlines, for the periods indicated (based on data provided by ANAC): __2010__
     __2009_
     __2008__
     __2007__
     __2006__
     __2005__in percentagesTAM
     87.6
     89.9
     75.3
     67.5
     37.3
     18.4GOL/VRG
     12.2
     10.0
     23.9
     -
     -
     -GOL
     -
     -
     -
     14.2
     7.3
     2.1Varig
     -
     -
     -
     13.1
     50.4
     77.0Others
     0.2
     0.1
     0.8
     5.2
     5.0
     2.5
 ______________________ Source:  ANAC.  To help compete effectively in the international market, in January 2011, TAM, together with its controlling shareholders, TEP and the Amaro family, entered into agreements with LAN, and its respective controlling shareholders to effect a proposed businesscombination ofLAN andTAM.  This merger remains subject to governmental and regulatory approval. -45 -


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Overview of the Industry General According to INFRAERO, Brazil is the fourth largest domestic aviation market in the world (in number of scheduled passengers transported), covering a vast area (greater than the continental United States) with a population of approximately 190.7 million people in 2010 (according to the Brazilian Geography and Statistics Institute –Instituto Brasileiro de Geografia e Estatística, or IBGE).  We believe that the São Paulo (Congonhas) — Rio de Janeiro (Santos Dumont) shuttle route is one of the busiest shuttle routes in the world.  According to ANAC, more than 3.3 million passengers were transported on this route in 2009.  Growth of the Brazilian commercial aviation industry is closely related to growth of Brazilian GDP.  According to INFRAERO, the Brazilian commercial aviation industry transported approximately 69.7 million passengers in the domestic market in 2010. Brazilian civil aviation follows the highest established standards of operational safety in the world.  Brazil is classified as Category 1 under the aviation safety standards established by the ICAO, the same classification as the United States and Canada. Airlines operating in the Brazilian commercial aviation market can be divided into the following four categories: ·domestic airlines, which provide public transportation service on a scheduled basis within Brazil and operate mainly with large aircraft between the major cities of Brazil; ·regional airlines, which provide public transportation service on a scheduled basis within Brazil, generally connecting smaller cities to bigger cities in Brazil.  Typically, regional airlines operate with smaller aircraft, such as turbo-props; ·charter airlines, which provide transportation service on a non‐scheduled basis; and ·international airlines, which provide international transportation services on a scheduled basis to and from Brazil. The market for scheduled airline service in Brazil includes two main types of passengers:  those traveling on business and those traveling for leisure.  Business passengers generally place more importance on factors such as frequency of flights, reliability, availability of direct flights, extent of area served and value‐added services.  These passengers are also becoming increasingly sensitive to price.  Leisure passengers generally place more importance on price and tend to be more flexible regarding the scheduling of their trips. The business travel sector is the largest and most profitable segment of the air transport industry in Brazil.  We believe that the number of business trips is significantly greater than the proportion of domestic business trips in the international civil aviation market.  In Brazil, small and medium‐sized companies (which comprise a large proportion of our customer base) place significant importance on receiving good service from their airline, while maintaining a balance between quality, frequency of flights and low prices. In 2009, the ten busiest airports accounted for 69% of all domestic traffic in terms of departures and arrivals, according to ANAC's annual report. The domestic civil aviation market is principally served by TAM and Gol/VRG, who together represented 82.3% of all domestic routes in 2010, in terms of RPK.  According to ANAC, in 2010, our share of the domestic market was 42.8%, while that of Gol/VRG was 39.5%.The remaining market share, approximately 17.7%, was served by 13 different airlines.  This market profile is consistent with the historical make‐up of the domestic market, which has traditionally seen a small number of airlines holding the vast majority of domestic market share and a much larger number of airlines (the identity of whom has continuously changed over the years as different airlines have entered and left the market) holding the remaining portion. On June 17, 2005, Varig became the first Brazilian company to file for an in‐court reorganization under Law No. 11,101 of February 9, 2005, which we refer to as the New bankruptcy law, in the courts of the State of Riode Janeiro.  Previously, the Brazilian Aeronautical Code provided that concessionaires of public air transportation were not allowed to apply for in‐court reorganization.  During this period of in‐court reorganization, Varig faced a drastic deterioration in its financial and operational condition.  It ceased operation of several flights and withdrew from important domestic and international markets.  On December 18, 2005, the creditors' assembly of Varig approved its in‐court reorganization plan, but this plan was amended by the creditors on May 9, 2006 in order to permit a judicial disposal of Varig's flight operating unit.  On July 17, 2006, the flight operating unit of Varig was sold in a public bid process held by the Judiciary of the State of Rio de Janeiro to VarigLog Linhas Aéreas S.A., a former subsidiary of Varig that was also sold on November 11, 2005 pursuant to the in‐court reorganization plan.  On March 24, 2007, VarigLog and Gol announced that Gol had entered into an agreement to acquire VRG Linhas Aéreas S.A., which is VarigLog's subsidiary and operates Varig's routes.  In compliance with applicable CADE requirements, Gol and Varig operated as separate airlines until October 19, 2008 when they integrated their networks, which was after CADE's final approval of the acquisition on July 25, 2008. -46 -


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Trends In the Domestic Market In the past 35 years, the domestic market has generally grown in terms of RPK, except during times of significant economic recession (such as the oil crisis, the debt‐moratorium crisis in the 1980s and the economic recession and political instability of the early 1990s). Since the year 2000, the annual air‐traffic passenger growth rate, in terms of RPK, was 11.1%, compared to an annual available capacity growth rate in terms of ASK, of 9.4%.  The average load factor in the period was 65.2%.  Domestic passenger traffic and available capacity rates for the period between 2000 and 2010 are set out in the following table: 2000

   2001

   2002

   2003

   2004

   2005

   2006

   2007

   2008

   2009

   2010(2)(in millions, except percentages)ASKs

   41,562

   45,314

   47,013

   41,851

   42,756

   48,740

   55,257

   64,598

   73,015

   86,471

   102,030Change in ASKs(1)

   –

   9%

   4%

   –11%

   2%

   14%

   13%

   17%

   13%

   18%

   18%RPKs

   24,479

   26,527

   26,711

   25,196

   27,962

   34,147

   39,261

   44,447

   47,814

   56,864

   70,210Change in RPKs(1)

   –

   8%

   1%

   –6%

   11%

   22%

   15%

   13%

   8%

   19%

   23%Load factor

   59%

   59%

   57%

   60%

   65%

   70%

   71%

   68%

   66%

   66%

   69%
 
 (1)Percentages refer to percentage change from previous year. (2)In 2010 ANAC change the methodology  of the data Source:  ANAC. Historically, growth in domestic civil aviation demand has generally exceeded growth in GDP.  From 2000 to 2010, domestic civil aviation RPK grew 11.1% per year, while the annual GDP growth rate in the same period was 3.7%, according to ANAC and IBGE. The variable factors that have the greatest influence on the commercial aviation market are the price of fuel and variations in exchange rates, because fuel is the most important element of expenses for airlines, and most elements of the market (including fuel) are tied to the U.S. dollar. The influence of the Brazilian government on the industry, through industry regulations, has also had a significant impact on the performance of airlines operating in the market.  From 1986 to 1993, the Brazilian government imposed more rigid control over local civil aviation activities because of high inflation levels which led to a series of economic crises in Brazil during that entire period.  The Brazilian government mainly monitored airline air fares and supervised the use and expansion of their routes.  In 1994, after successful efforts to control inflation and stabilize the Brazilian economy, the Brazilian government (acting through the aviation authorities) began to deregulate civil aviation activities, principally by gradually reducing government control over the airlines' local activities.  Even though Brazilian civil aviation is still a regulated sector, ANAC's current rules are significantly more flexible than the regulations which were previously in effect.  Further, the relevant authorities have frequently issued basic and essential regulations in order to harmonize the Brazilian regulatory environment with international, more modern models. We believe the current regulatory regime has favored the financial performance of Brazilian civil aviation.  As a result of imposing a more rational supply of services and ending implicit subsidies to less competitive airlines, we believe that the Brazilian government has enabled more competitive airlines such as TAM and Gol to betterutilize their aircraft in an environment of healthy competition, which in turn has led to improved average returns in the domestic market.  Such regulatory system is undergoing certain structural changes.  See "Item 3.  Key Information — D.  Risk Factors — Risks Relating to the Civil Aviation Industry and our Business — The regulatory structure of Brazilian civil aviation is undergoing change and we have not yet been able to evaluate the results of this change on our business and results of operations" and "— Regulation of the Brazilian Civil Aviation Industry — Rights to Operate Air Routes — Future legislation." -47 -


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Regulation of the Brazilian Civil Aviation Industry Overview Scheduled air transportation services are considered public services in Brazil and, accordingly, are subject to extensive regulation by the High Command of Aeronautics of the Ministry of Defense, or the High Command of Aeronautics, CONAC, ANAC and the recently created SAC. Scheduled air transportation services are also regulated by the Brazilian federal constitution and by the Brazilian Aeronautical Code. The Brazilian Aeronautical Code sets out the principal rules relating to airport infrastructure and operations, flight protection and safety, certification of airlines, aircraft leasing structure, liability, transfers, registration and licensing, training of crews, concessions, inspection and control of airlines, public and private air cargo transport services, airlines' civil liability and penalties for violations. CONAC is the Brazilian President's advisory body.  Its board of advisors includes the Minister of Defense, the Minister of Civil Affairs, the Minister of Finance, the Minister of Development, Industry and Foreign Trade, the Minister of Foreign Relations, the Minister of Tourism and the Command of the High Command of Aeronautics.  CONAC has the authority to establish policies for the Brazilian civil aviation industry that are adopted and carried out by the High Command of Aeronautics and ANAC.  CONAC establishes general rules related to adequate representation of Brazil in treaties, conventions and other matters related to international air transportation, airport infrastructure, the granting of additional funds to be used to benefit airlines and airports (based on strategic, economic and leisure considerations), the coordination of civil aviation operations, air safety, concessions for the operation of airline services and permits for the provision of related commercial services. Pursuant to Provisory Measure No. 527, the President of CONAC shall be the same person that serves as the Secretary of SAC. ANAC is the main civil aviation authority in Brazil and, pursuant to Provisory Measure No. 527, now reports directly to SAC. Prior to Provisory Measure No. 527, ANAC reported directly to the Ministry of Defense. ANAC is an independent regulatory agency associated with, but not under the control of, the Ministry of Defense and operates as an independent agency for an indefinite term.  ANAC principally has the authority to: (i) regulate, inspect and supervise services rendered by airlines operating in Brazil, (ii) grant concessions, permits and authorizations for air transport operations and airport infrastructure services, (iii) represent the Brazilian government before international civil aviation organizations, (iv) control, register and inspect civil aircraft, and (v) ensure that air transportation services are provided under free market principles. SAC is a new civil aviation and airport infrastructure regulatory authority created by Provisory Measure No. 527, issued by the Brazilian President on March 18, 2011. SAC is an advisory body, equivalent to a Ministry,to the Brazilian President, and holdsthe civil aviation powers and responsibilities previously vested with the Ministry of Defense. SAC's main objective is to facilitate the development of Brazil's airport infrastructure. Provisory Measure No. 527 is valid for a period of 60 days and is renewable for one additional 60 day period until the Brazilian Congress reviews and votes on the Measure. As part of Provisory Measure No 527's reorganization of civil aviation powers and responsibilities, ANAC will report directly to SAC, instead of the Ministry of Defense. The Brazilian government has recognized and approved the three main international conventions related to world commercial air transportation operations:  the Chicago Convention of 1944, the Geneva Convention of 1948 and the Montreal Convention of 1999. Recently, in February 2009, the Federal Government approved the new Civil Aviation National Policy (Política Nacional de Aviação Civil or "PNAC").  Although the PNAC does not establish any immediate measure, it contains the main guidelines for the national civil aviation system.  It encourages the Ministry of Defense, CONAC and ANAC to issue regulations on strategic matters such as safety, competition, environmental, and consumers' issues, as well as to inspect, review and evaluate the activities of all operating companies. Air transportation services concession The Brazilian federal constitution grants the Brazilian government the exclusive authority to explore air transportation services and airport infrastructure and provides that the government can render these services either directly or indirectly through third parties (by means of concessions or permits).  According to the Brazilian Aeronautical Code and regulations issued by the High Command of Aeronautics, any operation of scheduled air transportation services requires a concession granted by the High Command of Aeronautics.  The terms of each concession must be formalized by means of a concession agreement entered into with ANAC.  Any companyseeking a concession must meet certain economic, financial, technical, operational and administrative requirements established by ANAC.  In addition, all companies seeking a concession must (i) be legal entities constituted in Brazil, (ii) obtain an Air Transport Operation Approval Certification (CHETA), and (iii) comply with certain restrictions regarding ownership of its shares or quotas.  See "— Rights to Operate Air Routes — Restrictions against the ownership of shares in airlines operating under concessions." -48 -


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ANAC has the authority to revoke a concession in the event of any failure by an airline to comply with the rules of the Brazilian Aeronautical Code, supplemental laws and regulations and the terms of the applicable concession agreement. Article 122 of Law No. 8,666 of June 21, 1993 provides that concessions must be regulated by specific procedures stipulated in the Brazilian Aeronautical Code.  The Brazilian Aeronautical Code and the regulations issued by ANAC do not expressly establish any bidding procedures in relation to concessions.  Accordingly, it is not currently necessary to conduct bidding prior to awarding concessions for the operation of air transportation services (such as ours), as would be required in the case of other public services generally regulated by laws applicable to public concessions. Our concession to operate scheduled air transportation of passengers, cargo and mail at a national level was obtained on December 9, 1996 through the issuance of Ordinance 816/GM5 and the execution of the relevant concession agreement, which will remain valid until December 9, 2011.  Although we can offer no guarantee that we will be able to renew our concession, we do not currently foresee any problems in relation to this renewal. Aircraft registration The registration of aircraft in Brazil is governed by the Brazilian Aeronautical Code.  The Brazilian Aeronautical Code provides that no aircraft is authorized to fly in Brazilian airspace or to land in or take‐off from Brazilian territory without being duly registered.  In order to remain registered with a Brazilian registration number, an aircraft must have both a certificate of registration and an airworthiness certificate (certificado de*aero**navegabilidade*), each of which is issued by RAB after a technical inspection by ANAC.  The certificate of registration issued by ANAC attributes Brazilian nationality to the aircraft and proves for its enrollment with the proper authorities.  The airworthiness certificate is generally valid for six years from the date on which ANAC conducted its inspection of the aircraft and provided authorization for it to fly over Brazilian airspace (subject to continued compliance with certain technical requirements and conditions).  The registration of any aircraft can be cancelled in the event that the authorities verify that such aircraft is not in compliance with the requirements for registration (in particular any failure to adapt the aircraft to any safety requirements specified by ANAC or by the Brazilian Aeronautical Code). All agreements relating to aircraft registered in Brazil, including sale and purchase agreements, financial commercial leasing agreements, mortgages (and amendments to any such agreements) must be submitted to the Brazilian Aeronautical Registry (RAB) for the purpose of publishing the transactions contemplated thereby and updating aircraft registration. Rights to Operate Air Routes Domestic routes ANAC has the authority to grant Brazilian airlines the right to operate any new route.  Any airline seeking to operate a new route must submit studies proving both the technical and economic feasibility of the proposed route (in form satisfactory to ANAC) and must fulfill certain conditions in relation to the awarding of those routes.  In respect of awarding any new route or approving any change to existing routes, ANAC evaluates the infrastructure capacity of the airports from which the route will be operating and the increase in demand and competition between airlines.  In addition, approval for operation of a route is made subject to the condition that the route must be operated on a scheduled basis.  The operation of a route by any airline can be cancelled in the event that the airline (i) fails to initiate operation of the route within 15 days of receiving authorization, (ii) fails to maintain at least 75% of the flights established in the respective National Air Transport Schedule (hotran) for a period of 90 days, or (iii) suspends operations for more than 30 days.  ANAC's approval of new routes or changes to existing routes isgiven in the course of an administrative proceeding and does not require any amendment to the applicable concession agreement. -49 -


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Once awarded, the routes must be immediately reflected in thehotran(the report of the itinerary of all routes an airline operates), which will then become an integral part of each airline's database at ANAC.  Thehotrannot only establishes the routes but also the arrival and departure times at certain airports, none of which can be changed without the prior approval of ANAC.  Brazilian civil aviation laws and regulations provide that an airline may not sell or transfer routes to another airline. Recently, ANAC has imposed schedule restrictions to several Brazilian airports from which we operate.  Operating restrictions, including the prohibition of international flights' operations and the prohibition of civil aircraft's operation after 11:00 p.m. and before 6:00 a.m, were imposed for Congonhas Airport, one of the busiest Brazilian airports and the most important airport for our operations.  No assurance can be given that these or other government measures will not have a material adverse effect on our business and results of operations. International routes International airlines are those with points of departure in Brazilian territory and points of arrival in foreign territory, operated by Brazilian companies previously designated by the Brazilian government and operated in accordance with the terms of bilateral agreements with foreign governments.  The rights to international routes between major cities (as well as the corresponding landing rights) are derived from bilateral air transportation agreements negotiated between the government of Brazil and foreign governments.  Pursuant to the terms of those agreements, each government grants the other the right to designate one or more domestic airlines to operate scheduled service between certain destinations in each country. Requests for new international routes or changes in existing routes must be submitted by each interested Brazilian airline to SRI, which evaluates each request based on the provisions of the applicable bilateral agreement, the availability of existing routes between the two countries and the general policies of the Brazilian aviation authorities.  Following such evaluation, SRI may take any steps required in relation to qualification of the international route. Ordinance No. 569/GC5 of September 5, 2000 provides that international air transportation services may be cancelled in the event that such services are (i) not implemented or operated for more than six months, (ii) interrupted for more than six months, pursuant to Note No. 001 / GM5 / ADM enacted by the Cabinet of the Aeronautics' High Command or January 9th, 1987, (iii) the airline is proven to be incapable of performing the service, or (iv) the airlines fails to comply with the agreements, laws and regulations of the High Command of Aeronautics. Any airline's international route frequency rights may be terminated if the airline fails to maintain at least 80% of flights provided for in its air transportation schedule HOTRAN for any 180‐day period or suspends its operation for a period exceeding 180 days. Policy on slots Eachhotranrepresents the authorization for an airline to land and take off at certain airports within a predetermined space of time.  That space of time is known as an airport slot and establishes that an airline can operate in a specific airport at the times contained in thehotran. Brazilian law provides that a slot is an ANAC concession reflected in an airline'shotran.  As is in the case with routes, a slot is not owned by the airline and may not be transferred to another airline. The more congested Brazilian airports are subject to traffic restrictions via slot allocation policies.  On July 3, 2006, ANAC issued Resolution No. 2 which set forth the new rules to the distribution of domestic slots.  This resolution establishes that 20% of the available slots of a restricted airport will be distributed among new entrants and 80% of the available slots will be distributed among existing airlines.  In addition, ANAC requires that any airline applying for a slot must have a record of punctuality, have no pending proceedings with ANAC and have a positive shareholders' equity.  Although we comply with all conditions and requirements to apply for new slots, we can offer no guarantee that new slots will be allocated to us. -50 -


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TheDepartmento de Controle do Espaço Aéreo, or DECEA, is responsible for coordinating and inspecting the infrastructure support facilities of airports.  DECEA, acting jointly with ANAC and INFRAERO, also conducts studies at all Brazilian airports to determine the maximum operating capacity of each airport.  Congonhas airport in São Paulo currently has slot restrictions.  Investments currently being made in Brazilian aviation infrastructure are expected to enable an increase in aircraft operations at congested airports and, consequently, the granting of new slots to airlines. Aviation infrastructure and the airport system The Brazilian Federal Constitution grants the Brazilian government the exclusive authority to operate air transportation services and airport infrastructure and provides that the government can render these services either directly or indirectly through third parties (by means of concessions or permits).  The installation and operation of any aviation infrastructure services inside or outside an airport will always require the prior authorization of the aviation authority, which will also supervise them. Ground structures are required for the operation of air navigation systems.  Any surface structure which is intended to meet the needs of air navigation is included under the category of aviation infrastructure.  Accordingly, aviation infrastructure is broadly defined and includes all ground organizations, assets and facilities that support the development of air navigation.  Aviation infrastructure is made up of the group of ground agencies, facilities or structures that support air navigation in relation to safety, schedules and efficiency, including (i) the airport system, (ii) the flight protection and safety system, (iii) the Brazilian Aviation Registration system; (iv) the air accident investigation and prevention system, (v) the system of air transport safety and coordination facilities, (vi) the system of personnel training and education for the air navigation and aviation infrastructure, (vii) the aviation industry's system of coordination, and (viii) the aviation infrastructure coordination system. The airport system consists of all Brazilian landing fields (military and civilian, private and public) used for domestic aviation and international flights.  Airports are public landing fields equipped with installations and facilities to support aircraft operations and the departure and arrival of passengers and cargo.  The construction, administration, and operation of airports are subject to the rules, instructions, coordination and control of the aviation authority.  Airports include areas intended for airport administration, public agencies that function on a mandatory or optional basis in the airports (such as those relating to the Federal Revenue Service (customs), the Ministry of Justice (federal police), the Ministry of Health (health supervision), and the Ministry of Agriculture (agricultural inspection)).  In addition to these administrative areas, airports contain areas for passenger, baggage and cargo service and movement and for the general public (including vehicle parking facilities).  Airports are open to traffic and the public by means of the approval of the aviation authorities.  Airports may be built, maintained and operated directly by the Brazilian government or through concessions, authorizations or permits.  Airports may also be operated by specialized quasi‐public enterprises under the Brazilian government or its subsidiaries, reporting to the High Command of Aeronautics (such as INFRAERO), by Brazilian states or Municipalities and by legal entities considered technically, economically and financially qualified by the aviation authorities. INFRAERO, a government company that used toreport to the Ministry of Defense and now reports to SAC pursuant to Provisory Measure No. 527, has the function of managing, operating, and controlling most Brazilian federal airports (including their control towers and airport safety operations).  Smaller airports and regional airports may belong to state or municipal governments and, in such cases, are frequently managed by local government agencies.  INFRAERO performs safety activities at most Brazilian airports, including the verification of passengers and baggage, cargo safety and general airport safety measures. The use of areas within federal airports (such as hangars and check‐in counters) is subject to a concession‐for‐use granted by INFRAERO.  Where there is more than one candidate to use a certain airport area, INFRAERO may institute a bidding process. Prices Brazilian airlines are freely able to set their prices for domestic routes but must register the prices with ANAC for monitoring purposes.  ANAC constantly monitors airfares and may intervene in the market and in scheduled air service concessions to prevent acts against economic order and to protect the interests of consumers.  Airlines may establish price discounts or follow other promotional strategies.  Airlines must submit any promotional passenger fare discounts greater than 65% of ANAC's reference rate per kilometer to ANAC at least five businessdays in advance.  Reference rates are established by ANAC based on Brazilian civil aviation's average operating expenses. -51 -


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International prices are established in accordance with bilateral agreements.  Since 1993, fares from all companies selling international flights originating in Brazil were required to exceed a floor.  On April 22, 2009, ANAC approved a gradual phasing out of the floor (for flights to destination other than South America) through discounts of up to 20% until July 2009, 50% until October 2009, and 80% until April 2010, when the phase‐out ended.  For international flights with destinations to South America, the floor was removed in September 2008. Civil liability The Brazilian Aeronautical Code and the Montreal Convention of 1999 limit an aircraft operator's liability for damage to third parties caused by ground or air operations, or for damage resulting from persons or objects being thrown from aircraft.  The Brazilian National Congress approved the Montreal Convention of 1999 by means of Legislative Decree No. 59 of April 18, 2006 and Decree No. 5,910 of September 27, 2006.  The Montreal Convention replaced the Warsaw Convention of 1929 and will have the effect of increasing the liability limits for civil aircraft operators.  The Brazilian courts, however, have occasionally disregarded the liability limits set forth in both the Warsaw Convention of 1929 and its successor, the Montreal Convention of 1999, and have granted compensation based on the Civil Code and Consumer Defense Code (which do not expressly set out maximum liability limits). In response to the substantial increase in insurance premiums to cover damage from terrorist attacks after the September 11, 2001 attacks in the United States, the Brazilian government introduced a law authorizing it to assume responsibility for damage caused to third parties as a result of terrorist attacks or acts of war against aircraft pertaining to Brazilian airlines.  See "Item 4.  Information on the Company — B.  Business Overview — Insurance." Environmental legislation and regulations Brazilian airlines are subject to various federal, state and municipal environmental protection laws, including those relating to the disposal of materials and chemical substances and noise pollution generated by aircraft.  These laws and regulations are applied by the state and municipal governmental authorities, which can impose administrative sanctions following violations, in addition to liability in the civil and criminal courts for any party violating the laws and regulations.  For example, according to a ANAC ordinance, the operation of scheduled commercial flights departing from or arriving at Congonhas Airport is subject to a noise ban from 11:00 P.M. to 6:00 A.M.  because of the airport's proximity to residential areas in the city of São Paulo. Restrictions against the ownership of shares in airlines operating under concessions The Brazilian Aeronautical Code provides that, in order to be entitled to a concession to operate scheduled service, and subject to the carve‐outs described below, 80% of an airline's voting capital must be held directly or indirectly by Brazilian citizens and certain management positions must be held only by Brazilian citizens. The Brazilian Aeronautical Code sets out certain restrictions against transferring the capital of scheduled airlines operating under concessions (such as our subsidiary, TAM Linhas Aéreas) including the following restrictions: ·shares with voting rights must be registered, and the company's by‐laws must prohibit the conversion of preferred shares with no voting rights into shares with voting rights; ·ANAC's prior approval of any share transfer, regardless of the investor's nationality, which would result in (i) a change in the company's control, (ii) the concessionaire's ownership of more than 10% of the company's capital, or (iii) a transfer of more than 2% of the company's capital stock; ·the company must submit to ANAC in the first month of each six‐month period a detailed chart of shareholder participation, including a list of shareholders and a list of all share transfers that occurred during the six‐month period; and -52 -


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·based on the information in the chart described above, ANAC may determine that subsequent transfers must be subject to its prior approval. Our corporate purpose is the management of corporate participation in airlines.  We hold shares representing the shareholding control of TAM Linhas Aéreas, which, in turn, is a company operating under a concession for the operation of scheduled air transportation services.  The Brazilian Civil Aviation code provides that the restrictions against share transfers described above apply only to companies operating under concessions for the operation of scheduled air transportation service and, accordingly, do not apply to us. The Brazilian government is studying an increase to the regulatory limitation onforeign capital investmentsin Brazilian airline companies from 20% to 49% of voting capital. The Brazilian Congress is already discussing certain draft bills related to this increase, which may be voted upon and/or approved with Provisory Measure No. 527. The Brazilian government is considering potential privatization of commercial airport operations. Future legislation On March 28, 2001, CONAC published for public consultation a draft of a bill to replace the Brazilian Aeronautical Code and modernize the basic laws and regulations relating to the industry.  In general, this draft deals with matters related to civil aviation, including airport concessions, consumer protection, increased foreign shareholding participation in airlines, limitation of airlines' civil liability, compulsory insurance and fines.  However, at the date of this Annual Report there are no relevant discussions or developments in respect of this draft bill. Federal intervention The executive branch of the government may intervene in Brazilian civil aviation companies whenever their operations or financial situations jeopardize the continuation, efficiency and safety of Brazilian air transportation services.  The purpose of federal intervention is to re‐establish normal service by the company and the intervention may last as long as necessary to achieve this purpose, though it may not exceed a period of two years.  In the event that a technical inspection conducted before or after the decree of federal intervention demonstrates that the re‐establishment of normal service would be impractical, the federal intervention can be converted to extra‐judicial liquidation, provided at least half the company's debts can be liquidated by means of a sale of its assets.  In the event that the company's assets are not sufficient to pay at least half of the company's debts (or in the event that there is evidence of fraud), the federal intervention or extra‐judicial liquidation must be converted to bankruptcy. New bankruptcy law On February 9, 2005, the President of Brazil sanctioned the New Bankruptcy Law.  The New Bankruptcy Law became effective on June 9, 2005 and replaced the current bankruptcy law (Decree‐Law No. 7,661/45), and introduced significant innovations in the Brazilian bankruptcy system.  In general, the New Bankruptcy Law creates new processes of extra‐judicial recovery and judicial recovery (the latter being a replacement for current bankruptcy protection) and introduces other relevant changes in the bankruptcy process.  Business owners and business partnerships are subject to the New Bankruptcy Law, including those whose purpose is to operate air services or aviation infrastructure of any kind, and those who are currently prevented from filing for bankruptcy protection. Through the extra‐judicial recovery process, a debtor may ask the judiciary to approve agreements with one or more classifications of creditors or with groups of creditors of the same classification with similar payment terms.  The plan may not include credits of a labor or tax nature or those derived from future exchange contracts, leasing agreements or fiduciary agreements.  Once approved, the plan will apply to all creditors who adhered to it and will be binding on all creditors included in its scope, even those who did not sign the plan, provided that the debtor obtained the approval of at least three‐fifths of the creditors of each class of creditors. The judicial recovery process consists of judicial action intended to remedy the debtor's financial problems and enable it to continue its operations (provided that the economic feasibility of continuing operations can be proven).  Unlike the current Brazilian bankruptcy protection system, which merely covers unauthenticated credits, the judicial recovery process obliges all prior creditors to go to court to recover credits, including labor creditors, except credits of a labor or tax nature or those derived from future exchange contracts, leasing agreements orfiduciary agreements.  The recovery plan submitted by the debtor must present a proposal for the payment of debts, indicating the means of recovery to be utilized.  In the event that a creditor objects to the plan proposed by the debtor, the judge must call a meeting of the creditors to decide whether to accept or refuse the plan.  In the case of refusal, the judge must declare the debtor bankrupt.  In the case of acceptance and subsequent granting of judicial recovery, the original obligations of the debtor will be novated. -53 -


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The principal innovations introduced by the New Bankruptcy Law include (i) the requirement of a minimum amount of credit necessary for the creditor to request the debtor's bankruptcy; (ii) elimination of suspensive bankruptcy protection, (iii) the possibility of a rapid sale of assets (with priority given to sales of blocks of assets), and (iv) an alteration in the order of credit classification. In the case of judicial recovery and bankruptcy of airlines, the exercise of rights derived from commercial aircraft leasing agreements (or parts thereof) will not be suspended. C.           Organizational Structure We currently have 156,206,781 shares, divided into 55,816,683 common shares and 100,390,098 preferred shares.  TAM's main shareholders are TEP and the Amaro family together, which together hold 46.6% of the capital stock of TAM.  See "Item 17 — Related Shareholders and Transactions." We have a 53.4% free float.  The organization chart below summarizes TAM's ownership structure.  The following organizational chart sets out, in summary form, our shareholder structure and subsidiaries as of the date of this report:  *TAM Milor was acquired in July 2010 and merged into TAM Linhas Aéreasin March 2011. TAM is a joint stock company incorporated on May 12, 1997, whose main corporate purpose is holding  ownership interests in the capital of companies in the air transportation industry.  We hold direct ownership interests in: ·TAM Linhas Aéreas, a passenger and cargo transport company with routes in Brazil and internationally. TAM Linhas Aéreasalso has an MRO (maintenance, repair and overhaul) business line. - 54-


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·Mercosur, an airline headquartered in Asunción, Paraguay, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia. ·TP Franchising, a company dedicated to developing franchises. ·Multiplus, a company that we launched in October 2009 to administer a network of loyalty programs. Multiplus exclusively manages the TAM Loyalty Program.  In February 2010, an initial public offering was conducted for Multiplus, reducing our ownership in Multiplus from 100% to 73%.  Our current ownership is 73.17%. ·Pantanal, an airline headquartered in Brazil.  On December 19, 2009, we signed an agreement for the acquisition of all of Pantanal's shares.  This acquisition was approved by ANAC on March 18, 2010. Through our subsidiary, TAMLinhas Aéreas, we also control TAM Capital, TAM Capital 2, TAM Financial 1and TAM Financial 2. Each of these companies is headquartered in the Cayman Islands and each company's main activities involve aircraft acquisition, financing and debt issuance.  We wholly and unconditionally guarantee the debt issued by our wholly-owned companies. TAM Linhas Aéreasalso controls the company TAM Viagens, whose corporate purpose is to carry out the activities of a travel and tourism agency under the name TAM Viagens, and TAM Milor, whose corporate purpose is the ownership of the TAM trademarks. D.           Property, Plant and Equipment In 2001, we opened our maintenance center in São Carlos, a city in the interior of the state of São Paulo.  The maintenance center occupies an area of approximately 4.6 million square meters, with 50,000 square meters of building area.  At this maintenance center, we perform maintenance on our aircraft and components, as well as on other Latin American airlines, aircraft and components. The TAM Service Academy is located in an eight‐story building in São Paulo (close to Congonhas Airport) and covers an area of 12,000 square meters.  The TAM Service Academy is the largest and most modern aviation training center in Latin America and is dedicated to training pilots, flight attendants and customer service and administrative staff.  The TAM Service Academy has the capacity to accommodate over 750 persons training each day. We have entered into concession agreements with the management of different airports for the use of designated areas to provide services in passenger terminals, including check‐in halls, passenger sales and operational support areas.  These agreements provide for periodic adjustments in the renewal conditions and amounts paid for the concessions.  We also have concessions for the use of hangars and cargo terminals in airports throughout Brazil. ITEM 4A.  UNRESOLVED STAFF COMMENTS None. ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS The following discussion should be read in conjunction with our consolidated annual financial statements and the notes thereto, which are included elsewhere in this Annual Report and have been prepared in accordance with IFRS.  See "Presentation of Financial and Other Data" for a discussion of our adoption of IFRS, with ourconsolidated annual financial statements as of and for the years ended December 31, 2008 and 2007 being our first IFRS financial statements. -55 -


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A.  Operating Results Principal Factors Affecting Our Financial Condition and Results of Operations Brazilian macroeconomic conditions Our revenues and profitability are affected by conditions in the Brazilian economy in general. According to ANAC, growth in the Brazilian civil aviation market is closely correlated to growth in Brazilian GDP.  In terms of RPKs, the Brazilian domestic flight market increased 15.0% in 2006, 13.2% in 2007, 7.6% in 2008, 18.9% in 2009 and 23.5% in 2010.  We believe that Brazilian GDP is an important factor in determining our capacity for future growth and our results of operations. The Central Bank has changed the base interest rate several times in order to keep inflation within this target.  For the year ended December 31, 2008, the average base interest rate was 15.1% and the GDP growth for that year was 5.1%.  For the year ended December 31, 2009, the base interest rate was 8.55% and the GDP growth for that year was 4.9%.  For the year ended December 31, 2010, the base interest rate was 10.64% and the GDP for that year was 7.5%. Effects of exchange rate variations and inflation on our financial condition and results of operations Our financial condition and results of operations have been historically affected by variations in exchange rates and the rate of Brazilian inflation.  Our expenses (such as fuel expenses, lease obligations, aircraft insurance, engine maintenance and related expenses) are principally denominated in U.S. dollars or are linked to the U.S. dollar.  In 2010, 2009 and 2008,  approximately 44%, 42% and 50%, respectively, of our operating expenses were either denominated in or linked to the U.S. dollar.  By contrast, most of our revenues are received inreais.  We are therefore exposed to fluctuations in the U.S. dollar/Brazilianrealexchange rate.  In 2010, approximately 40% of our revenues, which includes revenue from Multiplus, were denominated in U.S. dollars, compared to 36.6% in 2009 and 35% in 2008. Inflation has historically had an impact on our financial conditions and results of operations and it continues to do so.  Our suppliers of services and certain products related to our operating expenses generally utilize the IPCA index to adjust their prices for inflation.  Approximately 53%, 52% and 46% of our operating expenses were linked to inflation in 2010, 2009 and 2008, respectively.  A substantial increase in inflation could adversely affect the amount of our expenses. The table below sets forth certain data relating to inflation, real GDP growth rates, the Brazilianreal/U.S. dollar exchange rate and oil prices for the periods indicated: Year Ended December 31,2010

   2009

   2008Real growth in GDP

   7.5%

   (0.6)%

   5.1%Inflation (IGP‐M)

   11.3%

   (1.7)%

   9.8%Inflation (IPCA)

   5.9%

   4.3%

   5.9%DI Rate(1)

   10.64%

   8.55%

   13.62%LIBOR(2)

   0,30%

   0.25%

   1.43%Appreciation (depreciation) of the Brazilian real in relation to the dollar

   4.5%

   34.2%

   (24.2)%Rate of exchange at end of period — U.S.$1.00

   R$1.6662

   R$1.7412

   R$2.337Average exchange rate(3) — U.S.$1.00

   R$1.7593

   R$1.9935

   R$1.837Increase in West Texas Intermediate oil price (per barrel)

   15.1%

   77.9%

   (53.5)%West Texas Intermediate oil (per barrel) (end of period)

   U.S.$91.38

   U.S.$79.36

   U.S.$44.60West Texas Intermediate oil (per barrel) (average price over period)

   U.S.$79.61

   U.S.$62.09

   U.S.$99.75
 
 (1)       The DI Rate corresponds to the overnight interest rate for the interbank market in Brazil (as of the last day of the period, annualized). (2)       Quarterly LIBOR for dollar deposits relative to last day of period. (3)       Represents average daily exchange rates in period.Sources:  Getúlio Vargas Foundation (Fundação Getúlio Vargas, or FGV), CETIP, Brazilian Geography and Statistics Institute (Instituto Brasileiro de Geografia e Estatística, or IBGE), Central Bank and Bloomberg. -56 -


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Role of ANAC ANAC can influence our capacity for growth and our ability to generate future revenues.  ANAC has the authority to grant Brazilian airlines the right to operate new domestic routes, increase the frequency of flights serving existing routes, award slots, purchase or lease aircraft and approve the entry of new companies into the domestic civil aviation market. Revenues Our revenues arise principally from passenger transportation.  In the years ended December 31, 2010, December 31, 2009 and December 31, 2008, our operating revenues were derived from the following sources: ·77.6%, 80.4% and 82.3%, respectively, from passenger transportation service; ·9.4%, 9.2% and 9.2%, respectively, from cargo service; and ·13.0%, 10.4% and 8.5%, respectively, from services and maintenance of aircraft operated by other airlines, receipt of fines and fees in relation to re‐pricing of air fares and sub‐leasing, together with revenue from credit card companies that purchase TAM Loyalty Program points to pass on to their customers and Multiplus Loyalty Program. Revenue from passenger transportation is driven by the number of paying passengers we transport, measured in revenue passenger kilometers, or RPKs, and the price those passengers pay, measured in thecentavosprice paid for each RPK, or yield  RPKs increase either as a function of increased capacity, measured in ASKs, or an increase in load factor, measured as increased RPK in relation to available ASKs. Our competitors' activities, such as a reduction in the number of flights operated by Varig throughout a year, can also present market opportunities to generate revenue.  New airlines entering the market and the ticket pricing policies employed by our competitors can also affect our revenues.  Accordingly, we are continuously evaluating the number of flights we offer and the size of our fleet. The following table sets forth our supply and demand, load factor and domestic and international yields for the periods indicated: Year Ended December 31,2010
     2009
     2008ASKs (millions)
     71,521
     64,720
     57,091RPKs (millions)
     51,446
     44,148
     40,518Load factor
     71.9%
     68.2%
     71.0%Domestic yield in centavos
     19.78
     21.60
     25.08International yield in centavos
     15.09
     14.26
     15.99
  We use RASK (revenue per ASK) as one of our key performance indicators because we believe it enables us to evaluate the balance between load factor and yield and thereby allows us formulate our strategy regarding pricing more accurately. Sales taxes and other deductions We deduct the following taxes and tariffs: PIS and COFINS ThePrograma de Integração Social(Social Integration Program, or PIS) and theContribuição para o Financiamento de Seguridade Social(Contribution for the Financing of Social Security, or COFINS) taxes are federal social contribution taxes assessed on gross operating revenues.  In respect of passenger transportation revenues, the applicable rates of PIS and COFINS are 0.65% and 3%, respectively.  In respect of cargotransportation and other revenues (except financial income), the applicable rates of PIS and COFINS are 1.65% and 7.60%, respectively (increased from 0.65% and 3% respectively in January 2003 and February 2004).  International revenues are exempt from PIS and COFINS. -57 -


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Separately, TAM Mercosur is required to pay 1% of its revenues arising from on‐line ticket sales and cargo sales under a Paraguayan tax referred to as the "assumed income" tax. ICMS TheImposto sobre Operações Relativas à Circulação de Mercadorias e sobreServiços de Transporte Interestadual e Intermunicipal e de Comunicação, aindaque as Operações se Iniciem no Exterior(Tax on the Circulation of Merchandise and Services, or "ICMS") is a value‐added state tax on gross operating revenues from the transportation of cargo.ICMS is charged for each stage in the chain of production and sale of products, at rates varying from 4% to 1.9% (depending on the product and the state where the service is rendered). ISS TheImposto Sobre Serviços(Tax on Services, or ISS) is a municipal tax assessed at rates varying from 2% to 5% of our gross operating service revenues.  We are required to pay ISS. Tariff surcharge We have been subject to a specific civil aviation industry contribution, referred to as a "tariff surcharge," that the government collected at a monthly rate of 1.0% of our domestic airfare revenues.  However, we have not paid this tariff surcharge since 2001 because we filed an injunction suspending our obligation to pay it.  While we waited for the Superior Tribunal de Justiça's (Superior Court of Justice's) decision regarding our injunction, we have been making provisions for the tariff surcharge.  In September 2010, the Superior Tribunal de Justiça confirmed a decision that definitively released us from paying the additional tariff.  In light of this decision, we reversed the provision we had recorded in our books from June 2001 through August 2010, which totaled R$585.9 million (R$439.4 million, net of income tax). Operating expenses The principal components of our operating expenses include personnel, fuel, depreciation and amortization, maintenance and repairs (excluding personnel), aircraft insurance, take‐off, landing and navigational aid charges, leasing of aircraft, engine and equipment under operating leases, third party services, marketing and related expenses and other expenses. Personnel expenses vary with the number of employees, our salary policy, collective bargaining agreements and profit‐sharing programs, as well as the number of hours flown by all crew members.  The base date relating to renegotiations of the collective bargaining agreements with our employees is December of each year.  Accordingly, any salary adjustments will be almost fully reflected in the following year. Fuel expenses vary depending on the international petroleum market and the size and utilization of our fleet.  From 2003 to December 2010, the price of West Texas Intermediate (“WTI”) oil, the reference price used internationally to price oil, quoted in dollars, increased 187%, from U.S.$31.85 per barrel to U.S.$91.38 per barrel.  In 2008, the price of WTI oil, quoted in dollars, decreased 53.5% from U.S.$95.98 per barrel to U.S.$44.60 per barrel, but increased to U.S.$150 per barrel in the middle of that year.  In 2009, the price of WTI oil, quoted in dollars, increased by 71.3% from U.S.$46.34 per barrel to U.S.$79.36 per barrel.  In 2010, the price of WTI oil, quoted in dollars, increased by 15% from U.S.$79.36 per barrel to U.S.$ 91.38 per barrel. Because the price of oil is quoted in U.S. dollars, our fuel expenses are also affected by exchange rate variations.  In past years, we have succeeded in passing on the increase in fuel prices and exchange rate variations to passengers by increasing our ticket prices, albeit with a delay of several months.  However, in 2009, due to the financial crisis and market competition, prices were not readjusted.  In 2010, we were able to increase fares in the international market, but due to market conditions we were not able to increase fares in the domestic market.  In 2011, fuel prices have been volatile and we may be able to pass on increased costs through our fare prices. However, we have entered intoderivative transactions to hedge against certain oil price and exchange rate variations. See "Item 11.  Quantitative and Qualitative Disclosures About Market Risk." -58 -


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In the case of domestic destinations, the price variances are mainly because different states in Brazil apply different rates of value‐added tax to fuel (which is not passed on to end consumers for passenger services), requiring us to continually adjust our fuel prices to optimize fuel uplift.  In the case of international destinations, the price variances reflect movements in the cost of oil on the international petroleum markets (which is itself driven by international commodity price variances), logistic costs and airport taxes on fuel.  In both cases, we believe that the factors highlighted will continue to drive fuel price variances in the future and, accordingly, that the fuel tanker program will continue to reduce expenses. We implemented the fuel tanker program to reduce expenses by obtaining fuel at lower prices at certain airports.  Our fuel tanker program operates as follows: if the airport of origin has fuel available at a lower price than at the destination airport, we purchase more fuel at the airport of origin, minimizing refueling at the destination airports where fuel is more expensive.  The price difference between airports must be significant enough to offset the additional costs incurred from the aircraft consuming more fuel due to its added weight from carrying the extra fuel.  Our systems allow us to calculate the reduction in expenses on a daily basis. Depreciation and amortization expenses principally relate to aircraft, engines, systems and spare parts and vary depending on the useful life of these components. Maintenance and repairs (excluding personnel) expenses consist of corrective and preventive work performed on our aircraft and flight equipment and include spare parts for aircraft.  These expenses are posted to our accounts as operating expenses as such parts are utilized.  Maintenance expenses vary according to the level of utilization of the fleet. Aircraft insurance expenses increase in proportion to the size of our fleet, the number of passengers we transport and the number of landings we perform (in addition to the classification of our fleet risk by our insurers).  These expenses are also affected by variations in the exchange rate, because we purchase insurance in foreign currency.  Our operating and finance lease agreements require us to keep the relevant aircraft insured. Take‐off, landing and navigational aid charges include aircraft parking and overflight fees and vary according to the volume of our operations and airfare adjustments established by the Brazilian Federal Airport Infrastructure Company, or INFRAERO, state and international authorities.  These expenses are also affected by variations in the exchange rate because international tariffs are charged in foreign currencies. The expenses incurred in the leasing of aircraft, engine and equipment under operating leases are denominated in foreign currencies and increase in proportion to the size of our fleet.  These expenses are affected by variations in the exchange rate and in LIBOR.  See "Item 11.  Quantitative and Qualitative Disclosures About Market Risk." Expenses relating to third party services include airport ground‐support services, GDS (or Global Distribution System, an electronic passenger distribution system) expenses and airport‐utilization concession expenses.  Third‐party expenses vary mainly according to the volume of our operations.  Since implementation of thee‐TAM portal in September 2004, our GDS utilization expenses have been substantially reduced in relation to domestic reservations.  At December 31, 2010, domestic reservations made via thee‐TAM portal accounted for approximately 92.4% of all domestic reservations, compared to approximately 97.6% at December 31, 2009 and 95.1% at December 31, 2008. The principal components of our marketing and related expenses are: commission for travel and cargo agents, as compensation for the sale of tickets, and cargo shipping (paid directly to the relevant agencies); and other marketing and related expenses, principally credit card administration fees. Other expenses include those relating to the provision of in‐flight services, which vary principally as a function of the volume of passengers we carry on domestic and international flights, and general administrative expenses. -59 -


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Movements in fair value of fuel derivatives In this line item, the changes in the fair value of fuel derivative instruments are recognized.  While we use derivatives to mitigate the economic effects of international petroleum prices, we do not apply hedge accounting. Net finance results Our finance costs are mainly impacted by the exchange rate variation as most of our liabilities is in foreign currency.  The interest expense, another component of the financial expenses, increase according to our outstanding liabilities.  TheContribuição Provisória sobre Movimentação ou Transmissão de Valores ede Créditos e Direitos de Natureza Financeira(Provisional Contribution to the Movement or Transfer of Securities and Financial Credits and Rights, or CPMF) included in our financial expenses was a 0.38% federal tax levied on every debit transaction occurring in a bank account.  However, as of January 1, 2008, CPMF was no longer in force, as the Brazilian Senate did not approve the Constitutional Amendment which would extend the term of CPMF collection.  Therefore, CPMF should not be levied on any debit to bank accounts carried out after such date. Taxes IRPJ and CSLL We are subject to theImposto de Renda Pessoa Jurídica(Income Tax, or IRPJ) and theContribuição Social Sobre Lucro Líquido(Social Contribution on Net Income, or CSLL), which together can require us to pay up to 34% of our adjusted net income (referred to as real income).  These taxes are divided up as follows (i) applicable income tax of 15%, (ii) additional income tax of 10% (applicable to that portion of our results that exceeds R$240,000 per year), and (iii) CSLL, which requires that we pay 9% of our taxable income. Non-controlling interest The government of Paraguay holds a 5.02% equity interest in TAM Mercosur's capital stock.  We acquired TAM Mercosur in September 2003.  The amounts corresponding to the interest held by the Paraguayan government vary as a function of TAM Mercosur's results. In addition, on February 5, 2010, Multiplus S.A. carried out an initial public offering, which resulted in third parties' holding a 26.8% non-controlling interest in Multiplus' capital stock. Critical accounting estimates and judgments Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.  Accounting estimates will, by definition, seldom equal the related actual results.  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. Revenue recognition Revenue related to the TAM Loyalty Program is deferred based on the number of points currently outstanding and the historical breakage of points in the last 12 months, calculated as the average rate of points left unredeemed over that period. The fair value of points issued to participants when flying with TAM or partnering airlines is determined based on the weighted average of points sold to trading partners and free tickets granted to passengers. Also, the deferral of revenue depends on the estimate of the quantity of points to be cancelled when they expire after two years from the issuance date. Deferred taxes TAM recognizes deferred income tax assets and liabilities based on the differences between the carrying amounts shown in the financial statements and the tax basis of the assets and liabilities, using prevailing tax rates.TAM regularly reviews deferred tax assets for recoverability, taking into account historical income generated and projected future taxable income based on a study of technical viability. -60 -


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Contingencies TAM is currently involved in various judicial and administrative proceedings.  Contingencies are recognized for all judicial proceedings that represent probable losses.  The probability of loss is valued based on available evidence, including the views of internal and external legal counsel.  TAM believes that these contingencies are properly recognized in the financial statements. In September 2010, the Superior Tribunal de Justiça confirmed a decision that definitively released us from paying the tariff surcharge, calculated at 1.0% of our domestic airfare revenues.  In light of this decision, we reversed the provision we had recorded from June 2001 through August 2010, which totaled R$585.9 million (R$439.4 million, net of income tax). Financial instruments used to mitigate the risks of variations in jet fuel prices TAM records the financial instruments used to mitigate the risks of variations in jet fuel prices at their fair market value based on market quotations for similar instruments.  Derivative financial instruments are used in order to mitigate the risk against variations in fuel prices. TAM does not apply hedge accounting to its derivatives.  If TAM were to apply hedge accounting, it would affect the timing of recognition of gains and losses in the income statement, but would not affect the underlying economic effects of the derivative contracts. Year ended December 31, 2010 compared to year ended December 31, 2009 The figures set forth in the table below are expressed in both millions ofreaisandcentavosand have been subject to rounding adjustments.  Accordingly, additions or divisions of certain figures may not be an arithmetic aggregation of the totals and the actual sum of percentage variations may differ from those indicated. Year ended December 31,% Net Operational Income2010
     2009*
     Variation (%)
     2010
     2009*
     Variation (%)
     2010(in cents of R$ per ASK)
     (in millions of R$)Domestic
     8.21
     8.45
     (2.8%)
     5,870.9
     5,468.6
     7.4%
     49.8%International
     4.59
     4.15
     10.6%
     3,284.5
     2,684.0
     22.4%
     27.8%Cargo
     1.56
     1.46
     6.8%
     1,112.7
     936.3
     18.8%
     9.4%Other
     2.14
     1.62
     31.9%
     1,530.7
     1,050.2
     45.8%
     13.0%Sales taxes and other deductions
     (0.59)
     (0.58)
     1.7%
     (420.1)
     (373.6)
     12.4%
     (3.7%)Revenue
     15.91
     15.09
     5.4%
     11,378.7
     9,765.5
     16.5%
     100%Operating expensesPersonnel
     (3.26)
     (3.07)
     6.1%
     (2,328.4)
     (1,985.2)
     17.3%
     (20.5%)Fuel
     (4.83)
     (4.24)
     13.9%
     (3,451.2)
     (2,741.3)
     25.9%
     (30.3%)Depreciation and amortization
     (0.98)
     (0.93)
     5.1%
     (699.8)
     (602.4)
     16.2%
     (6.1%)Maintenance and repairs (excluding personnel)
     (0.86)
     (0.99)
     (13.5%)
     (612.3)
     (640.4)
     (4.4%)
     (5.4%)Aircraft insurance
     (0.07)
     (0.10)
     (26.1%)
     (52.0)
     (63.7)
     (18.4%)
     (0.5%)Take‐off, landing and navigation aid charges
     (0.85)
     (0.91)
     (5.9%)
     (609.4)
     (585.9)
     4.0%
     (5.4%)Leasing of aircraft, engine and equipment under operating leases
     (0.66)
     (0.85)
     (22.5%)
     (471.0)
     (549.8)
     (14.3%)
     (4.1%)Third party services
     (1.08)
     (1.22)
     (11.1%)
     (773.3)
     (787.6)
     (1.8%)
     (6.8%)Marketing and related expenses
     (1.34)
     (1.32)
     1.6%
     (959.8)
     (854.7)
     12.3%
     (8.4%)Reversal of additional tariff
     
     
     
     364.8
     -
     -Other
     (1.13)
     (1.15)
     (1.7%)
     (809.3)
     (744.8)
     8.7%
     (7.1%)Total operating expenses
     (14.54)
     (14.76)
     (1.5%)
     (10,401.7)
     (9,555.6)
     8.9%
     (91.4%)Operating profit before movements in fair value of fuel derivatives
     1.37
     0.32
     321.3%
     977.0
     209.9
     365.5%
     8.6%Movements in fair value of fuel derivatives
     0.05
     0.49
     (89.6%)
     36.6
     316.9
     (88.5%)
     0.3%Operating (loss)/profit
     1.42
     0.81
     74.1%
     1,013.6
     526.7
     92.4%
     8.9%Finance income
     2.48
     3.73
     (33.4%)
     1,774.5
     2,412.7
     (26.5%)
     15.6%Finance costs
     (2.34)
     (1.61)
     45.3%
     (1,672.1)
     (1,041.4)
     60.6%
     (14.7%)Profit / (loss) before income and social contribution
     1.56
     2.93
     (46.8%)
     1,116.0
     1,898.0
     (41.2%)
     9.8%Income tax and social contribution
     (0.63)
     (1.00)
     (37.7%)
     (447.1)
     (649.5)
     (31.2%)
     (3.9%)Profit / (loss) after tax (all continuing operations)
     0.94
     1.93
     (51.5%)
     668.9
     1,248.5
     (46.4%)
     5.9%Attributable toNon-controlling interest
     (0.04)
     0.00
     -
     31.5
     1.7
     1,774.5%
     (0.3%)Equity holders of TAM
     0.89
     1.93
     (53.7%)
     637.4
     1,246.8
     (48.9%)
     5.6%
 *Retrospectively adjusted (See Note 4 of our audited consolidated annual financial statements included in this Annual Report for additional information on the change in accounting policy related to flight equipment and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007).
 -61 -


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Domestic Domestic passenger revenue increased by 7.4% to R$5,870.9 million in 2010, compared to R$5,468.6 million in 2009.  This was due to a 17.2% increase in RPKs, combined with an 8.4% decrease in yield. The yield reduction in the domestic market reflects dilution caused by: (i) a 3.9% increase in stage length, which is the average distance flown, per flight; (ii) an increase in the number of passengers using TAM Fidelidade loyalty program reward tickets; and (iii) an increase in the volume of leisure passengers flying during off-peak hours and buying tickets in advance.  The increase in load factors and the volume of leisure passengers supports the success of a marketing campaign that we started in August, that contributed to a change in the mix of domestic passengers that we believe will become increasingly relevant. We believe that this demographic has significant potential for business growth, as the Brazilian middle class has grown considerably in recent years and is expected to continue growing. Our supply in ASKs rose 13.5%, increasing the load factor by 2.1%, to 67.5%.  The combination of these factors caused our RASK to decrease by 4.9% to R$12.7. International International passenger revenue increased 22.4% to R$3,284.5 million due to a 20.1% increase in yield in dollars, while the yield in reais rose 5.8%.  The increase in international passenger demand, combined with a 6.0% increase in supply, raised our load factor rates by 6.6 percentage points to 79.0% for the year, the highest load factor we have ever recorded.  As a result, our RASK in dollars rose 31.0%, while RASK in reais rose 15.4%.  Cargo Cargo business increased by 18.8% to R$1,112.7 million in 2010, as a result of a 14.3% increase in our domestic cargo business and a 20.8% growth in our international cargo business, despite the appreciation of therealby 11.9% when comparing the average value of therealin each of 2009 and 2010.  In 2010, we also recorded a 28% growth in the total weight of cargo carried in both the domestic and international markets when compared to 2009. Other Other business increased by 45.8% to R$1,530.7 million in 2010, compared to R$1,050 million in 2009, primarily due to the creation of Multiplus, which generated R$444.9 million in revenue from the redemption of points, and a 42.3% increase in other revenues, including expired tickets. Sales taxes and other deductions Sales taxes and other deductions increased by 12.4% to R$420.1 million in 2010, compared to R$374 million in 2009 due to due to an increase in our revenues. Net Revenue Our revenue increased by 16.5% to R$11,379 million in 2010, compared to R$9,766 million in 2009 due to the increase in passenger, cargo and other revenues.  The total RASK increased by 5.4% to R$15.9 in 2010, as a result of the 10.5% increase in total ASKs, combined with the decrease in net revenue.  Our domestic RASK decreased 5.4% to R$12.6 in 2010 from R$13.3 in 2009.  Our international RASK increased by 15.4%, from R$10.3 in 2009 to R$11.9 in 2010. -62 -


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Operating expenses Our operating expenses increased by 8.9% to R$10,402 million in 2010, compared to R$9,556 million in 2009.  This increase is due to the decrease in fuel expenses, marketing and related expenses, personnel expenses, depreciation and amortization expenses, take off, landing and navigation aid charges and other expenses partially offset by an decrease in leasing of aircraft; engine and equipment expenses under operating leases, maintenance and repairs (excluding personnel) expenses, third-party services expenses and aircraft insurance expenses. Personnel expenses increased by 17.3% to R$2,328 million in 2010, compared to R$1,985 million in 2009, primarily due to the 15.8% increase in the number of employees in 2010 compared to 2009 and the 6.5% increase in wages. The increase in the number of employees is related to the growth of our operations, which grew 10.5% in 2010 compared to 2009.  We mainly increased the number of ground airport employees and flight crew, which we believe supports our high levels of customer service and customer satisfaction.  Personnel expenses per ASK increased by 6.1%. Fuel expenses increased by 25.9% to R$3,451 million in 2010 compared to R$2,741 million in 2009, due to a 12.4% increase in the average fuel price per liter, an increase of 28.3% in the average price of fuel related to the increase in the average price per barrel of WTI oil, which was U.S.$79.4 per barrel in 2009 and U.S.$91.4 per barrel in 2010.  The volume of fuel consumed grew by 11.9% due to an increase of 10.6% in the number of flown hours and a 3.7 percentage point increase in the load factors, which increased carried weight.  The increase was partially offset by an increase of 3.9% in the stage length (which is the average distance flown, per flight) and by the appreciation of therealby 11.9% in the same period.  Fuel expenses per ASK increased by 13.9%. Depreciation and amortization expenses increased by 16.2% to R$700 million in 2010, compared to R$602 million in 2009, mainly due to 13 new aircraft placed into service which are classified as capital leases.  Depreciation and amortization expenses per ASK increased by 5.1%. Maintenance and repairs (excluding personnel) expenses decreased by 4.4% to R$612 million in 2010, compared to R$640 million in 2009, primarily due to the appreciation of therealby 11.9% and an increase of 3.9% in the stage length, which was partially offset by a 14 aircraft increase in our fleet (excluding ATR-42) and a 10.6% increase in total flown hours. Maintenance and repairs (excluding personnel) expenses per ASK decreased by 13.5%. Aircraft insurance expenses decreased by 18.4% to R$52 million in 2010, compared to R$64 million in 2009, primarily due to improved market conditions in 2010 compared to 2009 and the appreciation of therealby 11.9%. This reduction was partially offset by a 14 aircraft increase in our fleet (excluding ATR-42), the growth of 13.6% in the number of passengers and an increase of 6.5% in the number of landings.  Aircraft insurance expenses per ASK decreased by 26.1%. Take‐off, landing and navigation aid charges increased by 4.0% to R$609 million in 2010, compared to R$586 million in 2009, primarily due to a 6.5% increase in the number of landings and a 10.6% increase in kilometers flown in the year, along with our expansion in international markets where prices are higher.  The increase was partially offset by the appreciation of therealby 11.9%, which impacted international flights tariffs. Take-off, landing and navigation aid charges per ASK decreased by 5.9%. Leasing of aircraft, engine and equipment expenses under operating leases decreased by 14.3% to R$471 million in 2010, compared to R$550 million in 2009, mainly due to the appreciation of therealby 11.9%.  This decrease was partially offset by two additional aircraft classified as an operational lease (excluding the ATR-42).  Leasing of aircraft, engine and equipment expenses under operating leases per ASK decreased by 22.5%. Third party services expenses decreased by 1.8% to R$773 million in 2010, compared to R$788 million in 2009, reflecting economies of scale pursuant to our internal efforts to reduce costs. The main reductions are related to consultants’ fees and IT services.  Third part services expenses per ASK decreased by 11.1%. Marketing and related expenses increased by 12.3% to R$960 million in 2010, compared to R$855 million in 2009.  However, when compared to our revenues, marketing and related expenses proportionately decreased.  Marketing and related expenses per ASK increased by 1.6%.  The increase in marketing expenses relates to our new marketing retail campaign that we launched in August 2010.  This retail campaign includes selling tickets at CasasBahia, marketing and selling new products and the production of a new advertising campaign with the singer, Ivete Sangalo.  We believe that the increase in our domestic load factor supports this campaign's success. -63 -


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Our expenses related to the tariff surcharge, previously provisioned at a monthly rate of 1.0% of our domestic airfare revenues, decreased as a result of the Superior Tribunal de Justiça's decision to definitively release us from paying the tariff surcharge.  In light of this decision, we reversed the provision of R$585.9 million (R$439.4 million net of income tax and social contribution) we had collected from June 2001 through August 2010.  Of that amount, R$364.9 million has been recognized in the statement of income in the operating expenses line. Other expenses increased by 8.7% to R$809 million in 2010, compared to R$745 million in 2009, primarily due to costs related to the increase in our operations and the increase of transported passengers.  We also had one-time expenditures, such as administrative and general costs due to the incorporation of Pantanal, the launch of new international routes from Brasilia and Belo Horizonte to Miami, the creation of a new base in Bogota for flights between that city and São Paulo, and costs associated with the due diligence period related to the merger with LAN.  Other expenses per ASK decreased by 1.7%. In line with our strategy of increasing productivity, we also intend to achieve an improved RASK minus CASK spread.  To achieve this goal, we plan to increase our fleet, the daily utilization of our aircraft and renegotiate our small and mid-sized contracts to lower our fixed costs.  Joining the Star Alliance has helped us reduce the number of internal systems we use, which lowered our maintenance, service and spare parts costs.  We are seeking to optimize our maintenance plan by conducting maintenance operations during the night when costs are lower and we are reducing credit card fees by increasing the number of payment methods on our website.  We are still susceptible to fluctuations in fuel prices, which remains a key factor in our ability to achieve our desired results.  Additionally, the exchange rate variation  between the Brazilianrealand the U.S. dollar has recently begun to fluctuate inconsistently.  If the U.S. dollar strengthens significantly against the Brazilianreal, our results may be negatively impacted. Movements in fair value of fuel derivatives Fuel derivatives gains (losses) was a gain of R$37 million in 2010, compared to a loss of R$317 million in 2009. We ended 2010 with an unrealized net gain on financial instruments of R$ 207.2 million due to mark to market of our fuel hedge positions, where the WTI increased from US$ 79.4 per barrel in the end of 2009 to US$ 91.4 per barrel in the end of the 2010. The realized loss on financial instruments of 2010 amounted R$ 170.6 million due to the variation in the price of WTI compared to average strike prices. Net finance income / (costs) Our net finance income was R$102 million in 2010, compared to an expense of R$1.4 million in 2009, principally due to the effect of exchange variations in 2009 and 2010. Interest income from financial investments increased 66.5% to R$137 million in 2010, compared to R$82 million in 2009, principally because we held less cash amounts on average during the year and received a lower average interest rate on that cash.  As of December 31, 2010, our financial investments amounted to R$1,405 million, compared to R$1,011 million as of December 31, 2009. Exchange variation was a gain of R$243 million in 2010, compared to a gain of R$1,722 million in 2009.  This decrease principally relates to the strengthening of the Brazilianrealagainst the U.S. dollar (R$1.74 per U.S. dollar at December 31, 2009 and R$1.67 per U.S. dollar at December 31, 2010).  This increase mainly impacted the capital leases on our balance sheet that are denominated in U.S. dollars. Interest expenses decreased 1.3% to R$416 million in 2010, compared to R$422 million in 2009, principally due to the reduction in LIBOR, which impacts the capital leases on our balance sheet. Income tax and social contributions Income tax and social contributions was R$447 million in 2010, compared to R$213 million in 2009.  Our effective rate of income tax and social contributions was 40.1% in 2010, compared to 34.2% in 2009. This increase was primarily due to certain tax losses recorded by our subsidiaries, for which tax credits are not recorded. -64 -


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Profit / (loss) after tax As a result of the factors discussed above, we recorded a profit after tax (all continuing operations) of R$669 million in 2010, compared to a profit of R$1,249 million in 2009.  This was principally due to the strengthening of the Brazilianrealagainst the U.S. dollar (R$1.74 per U.S. dollar at December 31, 2009 and R$1.67 per U.S. dollar at December 31, 2010). Year ended December 31, 2009 compared to year ended December 31, 2008 The figures set forth in the table below are expressed in both millions ofreaisandcentavosand have been subject to rounding adjustments.  Accordingly, additions or divisions of certain figures may not be an arithmetic aggregation of the totals and the actual sum of percentage variations may differ from those indicated. Year ended December 31,% Net Operational IncomeIFRS

   2009*

   2008*

   Variation (%)

   2009*

   2008*

   Variation (%)

   2009(in cents of R$ per ASK)

   (in millions of R$)Domestic

   8.45

   10.79

   (21.7%)

   5,468.6

   6,162.5

   (11.3%)

   53.9%International

   4.15

   4.91

   (15.5%)

   2,684.0

   2,822.6

   (4.9%)

   26.5%Cargo

   1.46

   1.80

   (18.8%)

   936.3

   1,009.0

   (7.8%)

   9.3%Other

   1.62

   1.62

   -

   1,050.2

   926.0

   13,4%

   10.8%Sales taxes and other deductions

   (0.58)

   (0.71)

   (19.0%)

   (373.6)

   (407.1)

   (8.2%)

   (3.8%)Revenue

   15.09

   18.41

   (18.1%)

   9,765.5

   10,513.0

   (7.1%)

   100%Operating expensesPersonnel

   (3.07)

   (3.12)

   (1.7%)

   (1,985.2)

   (1,782.0)

   11.4%

   (20.3%)Fuel

   (4.24)

   (6.88)

   (38.4%)

   (2,741.3)

   (3,927.9)

   (30.2%)

   (28.1%)Depreciation and amortization

   (0.93)

   (0.77)

   20.2%

   (602.4)

   (442.1)

   36.3%

   (6.2%)Maintenance and repairs (excluding personnel)

   (0.99)

   (0.91)

   9.0%

   (640.4)

   (518.3)

   23.6%

   (6.6%)Aircraft insurance

   (0.10)

   (0.08)

   17.6%

   (63.7)

   (47.8)

   33.3%

   (0.7%)Take‐off, landing and navigation aid charges

   (0.91)

   (0.87)

   4.3%

   (585.9)

   (495.4)

   18.3%

   (6.0%)Leasing of aircraft, engine and equipment under operating leases

   (0.85)

   (0.78)

   9.4%

   (549.8)

   (443.4)

   24.0%

   (5.6%)Third party services

   (1.22)

   (1.23)

   (1.0%)

   (787.6)

   (701.8)

   12.2%

   (8.1%)Marketing and related expenses

   (1.32)

   (1.73)

   (23.7%)

   (854.7)

   (988.6)

   (13.5%)

   (8.8%)Other

   (1.15)

   (1.03)

   11.7%

   (744.8)

   (588.1)

   26.6%

   (7.6%)Total operating expenses

   (14.76)

   (17.40)

   (15.2%)

   (9,555.6)

   (9,935.4)

   (3.8%)

   (97.9%)Operating profit before movements in fair value of fuel derivatives

   0.32

   1.01

   (67.9%)

   209.9

   577.6

   (63,7%)

   2.1%Movements in fair value of fuel derivatives

   0.49

   (2.23)

   -

   316.8

   (1,273.5)

   -

   3.2%Operating (loss)/profit

   0.81

   (1.22)

   -

   526.7

   (695.9)

   -

   5.4%Finance income

   3.73

   2.47

   50.9%

   2,412.7

   1,410.4

   71,1%

   24.7%Finance costs

   (1.61)

   (5.27)

   (69.4%)

   (1,041.4)

   (3,006.2)

   -65,4%

   (10.7%)Profit / (loss) before income and social contribution

   2.93

   (4.01)

   -

   1,898.0

   (2,291.7)

   -

   19.4%Income tax and social contribution

   (1.00)

   1.24

   -

   (649.5)

   710.2

   -

   (6.7%)Profit / (loss) after tax (all continuing operations)

   1.93

   (2.77)

   -

   1,248.5

   (1,581.5)

   -

   12.8%Attributable toNon-controlling interest

   0.00

   0,00

   -

   1.7

   0.9

   88,9%

   0.02%Equity holders of  TAM

   1.93

   (2.77)

   -

   1,246.8

   (1,582.4)

   -178,8%

   12.8%
 *Retrospectively adjusted (See Note 4 of our audited consolidated annual financial statements included in this Annual Report for additional information on the change in accounting policy related to flight equipment and the retrospective adjustments made to our consolidated annual financial statements as of and for the years ended December 31, 2009, 2008 and 2007). Domestic Domestic passenger revenue decreased by 11.3% to R$5,468.6 million in 2009, compared to R$6,162.5 million in 2008.  This was due to a decrease in our domestic yield from 25.9centavosin 2008 to 21.6centavosin 2009 caused by the global economic crisis.  The decrease was also partially due to a 2.7% decrease in our domestic load factor, from 68.1% in 2008 to 65.4% in 2009.  The domestic load factor decrease was due to a 10.8% increase in ASKs, but only a 6.4% increase in demand for our domestic flights. International International passenger revenue decreased by 4.9% to R$2,684 million in 2009, compared to R$2,823 million in 2008.  This was due to a decrease in our international yield from 16.9centavosin 2008 to 14.3centavosin 2009 caused by the global economic crisis (expressed in U.S. dollars, our scheduled international yield decreased from 9.2 cents in 2008 to 7.1 cents in 2009).  The decrease was also partially caused by a 3.1% decrease in ourinternational load factor, from 75.5% in 2008 to 72.4% in 2009.  The international load factor decrease was caused by a 17.4% increase in ASKs, but only a 12.5% increase in RPKs.  RPK's increased due to our launch of new international routes in the United States, including flights to Miami and New York from Rio de Janeiro and to Orlando from São Paulo. -65 -


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Cargo Cargo business decreased by 7.8% to R$936 million in 2009, compared to R$1,009 million in 2008, due to the global economic crisis causing a slowdown in the overall economy and impacting the volume of shipments from companies. Other Other business increased by 13.4% to R$1,050 million in 2009, compared to R$926 million in 2008, primarily due to an increase in revenues from the TAM Loyalty Program.  This increase is due to the increase in the number of points sold to our partners.  It is also due to the increase in the average foreign exchange rate which impacts the number of points sold to financial institutions because those points are denominated in U.S. dollars, causing the price of the points to vary with the foreign exchange rate. Sales taxes and other deductions Sales taxes and other deductions decreased by 8.2% to R$374 million in 2009, compared to R$407 million in 2008, due to a decrease principally in the domestic and cargo businesses. Net Revenue Our revenue decreased by 7.1% to R$9,766 million in 2009, compared to R$10,513 million in 2008 due to the decrease in both passenger and cargo revenues, partially offset by the increase in other business.  The total RASK decreased by 15.1% to R$15.1 in 2009, as a result of the increase of 13.4% in the total ASKs, combined with the decrease in net revenue.  Our domestic RASK decreased 20.6% to R$13.3 in 2009 from R$16.8 in 2008.  Our international RASK decreased by 19.0%, from R$12.8 in 2008 to R$10.3 in 2009. Operating expenses Our operating expenses decreased by 3.8% to R$9,556 million in 2009, compared to R$9,935 million in 2008.  This decrease is due to the decrease in fuel expenses and marketing and related expenses, partially offset by an increase in leasing of aircraft; engine and equipment expenses under operating leases, personnel expenses, maintenance and repairs (except personnel) expenses, third-party services expenses, take off, landing and navigation aid charges, depreciation and amortization expenses, aircraft insurance expenses and other expenses. Personnel expenses increased by 11.4% to R$1,985 million in 2009, compared to R$1,782 million in 2008, primarily due to the 6.1% increase in wages.  Personnel expenses per ASK decreased by 1.7%. Fuel expenses decreased by 30.2% to R$2,741 million in 2009 compared to R$3,928 million in 2008, due to a 35.5% decrease in the average fuel price per liter, a decrease of 38.0% in the average price of fuel related to the decrease in the average price per barrel of WTI oil, which was U.S.$99.6 per barrel in 2008 and U.S.$61.8 per barrel in 2009, and a 6.1% increase in the average stage length.  This overall decrease was partially offset by the 8.9% depreciation of the Brazilianrealagainst the U.S. dollar.  Fuel expenses per ASK decreased by 38.4%. Depreciation and amortization expenses increased by 36.3% to R$602 million in 2009, compared to R$442 million in 2008, primarily due to the average increase of 24.5% in the number of capital leased aircraft on our balance sheet and also due to the 8.9% depreciation of the Brazilianrealagainst the U.S. dollar. Maintenance and repairs (excluding personnel) expenses increased by 23.6% to R$640 million in 2009, compared to R$518 million in 2008, primarily due to the increase of 8.2% in the flown hours and the 8.9% depreciation of the Brazilianrealagainst the U.S. dollar.  Maintenance and repairs per ASK increased by 9.0% -66 -


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Aircraft insurance expenses increased by 33.3% to R$64 million in 2009, compared to R$48 million in 2008, primarily due to the increase in our total fleet combined with the 8.9% depreciation of the Brazilianrealagainst the U.S. dollar.  Aircraft insurance per ASK increased by 17.6%. Take‐off, landing and navigation aid charges increased by 18.3% to R$586 million in 2009, compared to R$495 million in 2008, primarily due to an increase in navigation charges related to a 10.0% increase in flown kilometers.  Take‐off, landing and navigation charges per ASK also increased due to the increase of 3.7% in the number of take-offs and landings.  Also, all charges for international flights are denominated in U.S. dollars and therealdepreciation of 8.9% impacted these expenses.  Take-off, landing and navigation chargers per ASK increased by 4.3%. Leasing of aircraft, engine and equipment expenses under operating leases increased by 24.0% to R$550 million in 2009, compared to R$443 million in 2008, due to the net increase in the number of leased operating aircraft in our average 2009 fleet compared to our 2008 fleet and the Brazilianrealdepreciation of 8.9% against the U.S. dollar.  Leasing of aircraft, engine and equipment expenses under operating leases per ASK increased by 9.4%. Third party services expenses increased by 12.2% to R$788 million in 2009, compared to R$702 million in 2008, primarily due to the increase of expenses linked to our operations, which grew 13.4% in ASKs.  Third party services per ASK decreased by 1.0%. Marketing and related expenses decreased by 13.5% to R$855 million in 2009 compared to R$989 million in 2008.  This decrease primarily resulted from the decrease in our international passenger and cargo business, where commercial expenses, principally commissions, are higher.  Marketing and related expenses represented 8.8% of our total net revenue in 2009 compared to 9.4% in 2008, a reduction of 0.7 percentage points. Other expenses increased by 26.6% to R$745 million in 2009, compared to R$588 million in 2008, primarily due to the increase of expenses linked to our operations, which grew 13.4% in ASKs, combined with certain non-recurring expenses related to our entrance into the Star Alliance.  Other operating expenses per ASK increased by 11.7%. In line with our strategy of increasing productivity, we also intend to achieve an improved RASK minus CASK spread.  To achieve this goal, we plan to increase our fleet, the daily utilization of our aircraft and renegotiate our small and mid-sized contracts to lower our fixed costs.  Joining the Star Alliance has helped us reduce the number of internal systems we use, which lowered our maintenance, service and spare parts costs.  We are seeking to optimize our maintenance plan by conducting maintenance operations during the night when costs are lower and we are reducing credit card fees by increasing the number of payment methods on our website.  We are still susceptible to fluctuations in fuel prices, which remains a key factor in our ability to achieve our desired results.  Additionally, the exchange rate variation  between the Brazilianrealand the U.S. dollar has recently begun to fluctuate inconsistently.  If the U.S. dollar strengthens significantly against the Brazilianreal, our results may be negatively impacted. Movements in fair value of fuel derivatives Fuel derivatives gains (losses) was a gain of R$317 million in 2009, compared to a loss of R$1,274 million in 2008, mainly due to the mark to market of the WTI price, which closed 2008 at a price of U.S.$44.60, compared to a 2009 closing price of U.S.$79.36. Net finance income / (costs) Our net finance income / (costs) was R$1,371 million in 2009, compared to an expense of R$1,596 million in 2008, principally due to the effect of exchange variations in 2008 and 2009. Interest income from financial investments decreased 57.4% to R$82 million in 2009, compared to R$193 million in 2008, principally because we held less cash amounts on average during the year and received a lower average interest rate on that cash.  As of December 31, 2009, our financial investments amounted to R$1,011 million, compared to R$1,242 million as of December 31, 2008. -67 -


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Exchange variation was a gain of R$1,722 million in 2009, compared to an expense of R$1,258 million in 2008.  This increase principally relates to the strengthening of the Brazilianrealagainst the U.S. dollar (R$2.34 per U.S. dollar at December 31, 2008 and R$1.74 per U.S. dollar at December 31, 2009).  This variation mainly impacted our  capital leases on our balance sheet that are denominated in U.S. dollars. Interest expenses decreased 21.3% to R$422 million in 2009, compared to R$536 million in 2008, principally due to the reduction in LIBOR, which impacts the capital leases on our balance sheet. Income tax and social contributions Income tax and social contributions was R$650 million in 2009, compared to a credit of R$710 million in 2008.  The credit related to losses that occurred in 2008.  Our effective rate of income tax and social contributions was 34.2% in 2009, compared to 31.0% in 2008. Profit / (loss) after tax As a result of the factors discussed above, we recorded a gain after tax (all continuing operations) of R$1,248 million in 2009, compared to a loss of R$1,581 million in 2008.  This was principally due to the exchange variation increase of R$1,722 million in 2009 and the movements in the fair value of fuel derivatives.  The overall gain was partially offset by losses on the revaluation of aircraft recognized in our income statement. B.  Liquidity and Capital Resources We believe that our liquidity position exceeds the minimum required to sustain our business adequately, and our working capital is sufficient for our present requirements.  We also believe that additional sources of liquidity are available to us, if they are needed, through bank facilities or through our access to debt markets. We increased our current liquidity ratio by 5.1% between December 31, 2009 and December 31, 2010, and decreased our liquidity ratio by 1.4% between December 31, 2008 and December 31, 2009, in both cases primarily due to the effect of changes in fair value of fuel derivative instruments and the cash from Multiplus activities.  Our liquidity ratio is calculated by dividing current assets by current liabilities. In order to manage our liquidity, we review our cash and cash equivalents, financial investments, accounts receivables and short term borrowings.  Our accounts receivables are affected by the timing of our receipt of credit card revenues and travel agency invoicing.  Customers purchasing tickets using credit cards have the option to pay the ticket price in installments, typically over a 70-day period.  We do not take credit risk on customers' credit card receivables because, pursuant to the terms of our agreements with credit card companies, the credit card companies are required to pay us on each of the customer's payment dates, regardless of whether the customer paid the credit card company.  At December 31, 2010, we had R$2,419 million in cash and cash equivalents and financial investments (financial assets at fair value through profit or loss) and R$1,556 million in accounts receivables, compared to R$2,086 million and R$1,122 million in cash and cash equivalents and financial investments (financial assets at fair value through profit or loss) and R$1,914 million and R$1,157 million in accounts receivables at December 31, 2009 and 2008, respectively. In January 2009, we, along with our key counterparties, began restructuring our existing derivative hedging transactions.  At December 31, 2008, due to the significant drop in the price of a barrel of oil, as set by the WTI, the market value of these transactions resulted in a loss of R$1,273 million.  Through restructuring, we were able to spread out the maturity dates of these transactions.  This allowed us to extend the life of the derivatives, but keep the other terms largely the same. At December 31, 2010, our current borrowings used to finance our working capital needs totaled R$600 million, compared to R$459 million at December 31, 2009.  At December 31, 2010, 96% of our borrowings was denominated in foreign currencies, including our Import Financing (FINIMP) and financing of pre‐delivery payments.Our Industrial Funding (FINEM) agreements were denominated inreaisand represented 3% of our total borrowings at December 31, 2010, compared to 7% at December 31, 2009.  At December 31, 2010, our Import Financing (FINIMP) agreements represent 87% of our borrowings, compared to 57% at December 31, 2009. -68 -


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The carrying value of financial liabilities, all of which are measured at amortized cost, and their corresponding fair values are shown in the following table:  Fair value
     
     
     
     
     
     
     
     Carrying valueDecember 31,
2010
     
     December 31,
2009
     
     December 31,
2008
     
     January 1,
2008
     
     December 31,
2010
     
     December 31,
2009
     
     December 31,
2008
     
     January 1,
2008CurrentFinance lease obligations
     
     567,419
     
     497,147
     
     680,440
     
     298,478
     
     567,419
     
     497,147
     
     680,440
     
     298,478Senior notes
     
     25,477
     
     12,064
     
     4,372
     
     6,041
     
     24,350
     
     13,040
     
     9,336
     
     7,076Borrowings
     
     581,323
     
     523,989
     
     202,172
     
     891,346
     
     600,382
     
     458,602
     
     191,835
     
     860,273Debentures
     
     399,604
     
     281,738
     
     27,601
     
     32,419
     
     379,942
     
     275,896
     
     28,542
     
     32,1591,573,823
     
     1,314,938
     
     914,585
     
     1,228,284
     
     1,572,093
     
     1,244,685
     
     910,153
     
     1,197,986Non-currentFinance lease obligations
     
     4,190,502
     
     4,023,798
     
     5,768,040
     
     2,669,736
     
     4,190,504
     
     4,023,798
     
     5,768,040
     
     2,669,736Senior notes
     
     1,030,287
     
     949,846
     
     328,335
     
     453,694
     
     984,707
     
     1,026,685
     
     701,100
     
     531,390Borrowings
     
     14,193
     
     44,202
     
     221,034
     
     214,043
     
     14,658
     
     38,686
     
     209,733
     
     207,574Debentures
     
     627,873
     
     853,256
     
     483,517
     
     504,043
     
     596,979
     
     835,568
     
     500,000
     
     500,0005,862,855
     
     5,871,102
     
     6,800,926
     
     3,841,516
     
     5,786,848
     
     5,924,737
     
     7,178,873
     
     3,908,700
  Cash position and liquidity The following table provides a summary of our cash flows from operating activities, investing activities and financing activities for the years ended December 31, 2010, 2009 and 2008 and our total cash position as of December 31, 2010, 2009 and 2008. Year Ended December 31,2010
     2009
     2008Net cash generated from operating activities
     636,801
     191,103
     1,542,509Net cash used in investing activities
     (379,243)
     (480,918)
     (643,345)Net cash used in financing activities
     (320,510)
     693,202
     (693,917)Cash and cash equivalents at the beginning of the year
     1,075,172
     671,785
     466,538Cash and cash equivalents at the end of the year
     1,012,220
     1,075,172
     671,785
  Net cash generated from operating activities Year ended December 31, 2010 compared to year ended December 31, 2009 Net cash generated from our operating activities increased from R$191 million for the year ended December 31, 2009 to R$636 million for the year ended December 31, 2010.  This increase was principally the result of: (i) our revenue increasing by R$1,613 million, from R$9,765 million in 2009 to R$11,378 million in 2010 and our operational costs remaining relatively stable in this period.  This was partially offset because during 2010 we used cash generated for our operations to invest in financial assets at fair value through profit or loss in an amount of R$447 million while in 2009 obtained cash from selling those assets in the amount of R$231 million. The increase was also partially offset because we increased our trade account receivables by R$469 million in 2010, this increase was a reflection of the company’s operational growth Year ended December 31, 2009 compared to year ended December 31, 2008 Net cash generated from our operating activities decreased from R$1,543 million for the year ended December 31, 2008 to R$191 million for the year ended December 31, 2009.  This decrease was principally the result of the following: (i) our revenue decreased by R$748 million, from R$10,513 million in 2008 to R$9,765 million in 2009.  Our operational costs remained relatively stable in this period; accordingly, our operating profit and cash generated decreased, (ii) we decreased our conversion of financial assets into cash by R$667 million, from R$898 million in 2008 to R$231 million in 2009 and (iii) we increased our cash outflows by R$114 million in 2009compared to 2008 to pay our suppliers.  This overall decrease in net cash generated from our operating activities was partially offset by a R$140 million reduction in 2009 in cash outflows used to prepay aircraft maintenance. -69 -


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Net cash used in investing activities Year ended December 31, 2010 compared to year ended December 31, 2009 Net cash used in investing activities decreased from R$481 million in the year ended December 31, 2009 to R$379 million in the year ended December 31, 2010, a decrease of R$102 million.  This decrease was primarily due to a R$250 million reduction in cash outflows in 2010 compared to 2009 for the purchase of property, plant and equipment, as a result of our financing of flight equipment through FINIMP and the fact that we acquired less property, plant and equipment in cash.  The decrease was also partly due to a reduction in our investment in restricted cash of R$61 million, a increase in pre-delivery payments in 2010 because, in 2009, pre-delivery payments were financed or reapplied to other aircraft and, accordingly, no pre-delivery payment cash transaction occurred in 2009. The overall decrease in net cash used in investing activities was partially offset by an increase in cash used to purchase assets related to TAM Milor, including the TAM trademarks for R$98 million, and by a R$26 million reduction in cash reimbursements/deposits in guarantees. Year ended December 31, 2009 compared to year ended December 31, 2008 Net cash used in investing activities decreased from R$643 million in the year ended December 31, 2008 to R$481 million in the year ended December 31, 2009, a decrease of R$162 million.  This decrease was primarily due to a R$303 million reduction in cash outflows in 2009 compared to 2008 for the purchase of property, plant and equipment, as a result of our financing of flight equipment through FINIMP and the fact that we acquired less property, plant and equipment.  The decrease was also partly due to an investment in restricted cash of R$79 million, a decrease in pre-delivery payments because, in 2009, pre-delivery payments were financed or reapplied to other aircraft and, accordingly, no pre-delivery payment cash transaction occurred in 2009, compared to a R$44 million net reimbursement received in 2008 from pre-delivery payments.  The overall decrease in net cash used in investing activities was partially offset by an increase in the proceeds from the sale of property, plant and equipment of R$28 million, and for a R$119 million decrease in total cash reimbursements related to deposits in guarantee. Net cash used in financing activities Year ended December 31, 2010 compared to year ended December 31, 2009 Net cash used in financing activities was R$320 million in the year ended December 31, 2010 compared to net cash provided by financing activities of R$693 million in the year ended December 31, 2009.  The net cash used in financing activities in 2010 principally related to: (i) payment of dividends in amount of R$242 million, (ii) payment of financing liabilities in the amount of R$881 million, (iii) cash proceeds (net of related expenses) from  Multiplus' initial public offering in an amount equal to R$657 million; (iv) cash proceeds of R$73 million upon  TAM S.A’s capital increase in connection with the acquisition of assets of TAM Milor and (v) cash inflows upon obtaining new financing liabilities in the amount of R$70 million.  In 2009 the net cash generated from financing activities was substantially represented by debentures and senior bonds issued in the amount of R$593 million and R$503 million, respectively, and new financing in the amount of R$237 million, net of payments of leases and financings in the amounts of R$567 million and R$71 million, respectively Year ended December 31, 2009 compared to year ended December 31, 2008 Net cash from financing activities was R$693 million in the year ended December 31, 2009 compared to net cash used in financing activities of R$694 million in the year ended December 31, 2008.  We generated net cash from financing activities in 2009 principally as a result of TAM Linhas Aéreas issuing debentures in the principal amount of R$600 million and TAM Capital 2 issuing senior notes in the principal amount of U.S.$300 million, which generated positive net cash from financing activities of R$592 million and R$502 million respectively.  In 2009, we reduced our repayment of debt by R$401 million compared to 2008, and we did not pay any dividends in 2009 due to net losses in our 2008 fiscal year, compared to R$72 million paid in dividends to our stockholders in 2008.    The overall increase in net cash from financing activities was partially offset by the increase in ourpayments under finance leases, which increased by R$228 million in 2009 compared to 2008 due to an increase in contracted leases at the end of 2008, with payment obligations in 2009. -70 -


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Sources of financing We typically finance our aircraft through lease transactions.  Although we believe that debt and/or operating/finance leasing shall be available for our future aircraft to be delivered, we cannot guarantee that we will be able to secure obtain resources on terms that are attractive to us, if at all.  To the extent that we cannot secure financing, we may be required to modify our aircraft acquisition plans or incur higher financing costs.  We expect to continue to require working capital investment due to sources will be obtained our customers' ticket purchases through credit card receivables.  We also expect to meet our operating obligations as they become due through our available cash and internally generated funds, supplemented as necessary by short‐term credit lines, and when required, our access to the debt markets. Indebtedness At December 31, 2010, our total liabilities were R$11,870 million compared to R$11,646 million at December 31, 2009.  Our total liabilities consisted of (i) R$4,994 million in current liabilities (compared to R$4,455 million in 2009), of which R$1,801 million was deferred income, R$21 million was derivative financial instruments, R$522 million was related to accounts payables, R$1,572 million was financial liabilities, R$136 million was related to other current liabilities and R$14 million was current income tax liabilities and R$308 million was taxes, charges and contributions, and (ii) R$6,876 million in non-current liabilities, of which R$5,787 million was represented by financial liabilities, R$204 million was from provisions, R$66 million was represented by deferred income, R$15 million was represented by derivative financial instruments and R$237 million was represented by other non-current liabilities. We have FINIMP‐type lines of credit with financial institutions to help us finance our acquisition of aircraft parts.  At December 31, 2010, our FINIMP‐type contracts totaled R$507 million, compared to R$285 million at December 31, 2009, with guarantees of promissory notes in the amounts of U.S.$32.6 million and U.S.$13.9 million for the two periods, respectively. We have finance lease agreements for the leasing of aircraft, engines and computer equipment.  At December 31, 2010, the outstanding balance of such finance lease agreements was R$4,758 million, compared to R$4,521 million at December 31, 2009.  The increase in our outstanding balance of finance lease agreements was largely due to changes in the exchange rate of Brazilianreaisto U.S. dollars, which impacted our leasing obligations denominated in U.S. dollars. TAM Linhas Aéreas has a U.S.$50 million credit facility with the International Finance Corporation, or IFC.  We record amounts drawn down under this facility inreais.  In December 2005, TAM Linhas Aéreas entered into an agreement with International Finance Corporation, or IFC, to finance up to U.S.$33 million in pre-delivery payments to Airbus for firm order aircraft scheduled for delivery in 2010.  The full U.S.$33 million was guaranteed by TAM S.A.  As of December 31, 2010, we had R$7 million outstanding under this facility, compared to R$19 million outstanding as of December 31, 2009. TAM Linhas Aéreas also has outstanding FINEM agreements for machinery and equipment in the aggregate amount of approximately R$32 million with the National Bank of Economic and Social Development (Banco Nacional de Desenvolvimento Econômicoe Social,or BNDES).  The guarantees are mortgages of assets and accounts receivables. In 2006, we became the first Brazilian airline to register a program for the issuance of debentures with the CVM.  In August 2006, we offered R$500 million in principal amount of debentures pursuant to this program.  The final maturity date of these debentures is August 2012, with one third of the aggregate principal amount amortizing in each of 2010, 2011 and 2012.  The terms of the debentures provide that we must pay interest semi‐annually in an amount equal to 104.5% of CDI. In April 2007, TAM Capital issued U.S.$300 million 7.375% senior notes due 2017.  The notes are unconditionally guaranteed, on a senior unsecured basis, by TAM S.A. and TAM Linhas Aéreas, and are listed onthe Euro MTF market of the Luxembourg Stock Exchange.  On December 18, 2007 we completed an exchange offer pursuant to which holders of 99.2% of the notes issued on April 25, 2007 exchanged their notes for new notes that were registered under the United States Securities Act of 1933, as amended, and otherwise carried identical terms. -71 -


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In July 2009, TAM Linhas Aéreas issued R$600 million in principal amount of secured debentures that mature in July 2013.  Beginning in July 2010, the principal amortizes quarterly, and from August 2009 through maturity, interest on the debentures is payable monthly at a rate equivalent to 126.5% of the CDI. In October 2009, TAM Capital 2 issued U.S.$300 million 9.5% senior notes due 2020.  The notes were issued outside Brazil under an exemption from registration granted by the Brazilian CVM and the SEC.  TAM Capital 2 has the option to early redeem the senior notes at any time prior to January 29, 2015 and at specified redemption dates thereafter. The interest rates related to ourreal‐denominated indebtedness are typically indexed to TJLP or CDI, and the interest rates related to our U.S. dollar denominated indebtedness are typically indexed to LIBOR.  For a more detailed description of the interest rates associated with our indebtedness, see Note 15 of our consolidated annual financial statements for the years ended December 31, 2010, 2009 and 2008. C.  Research and Development, Patents and Licenses, etc. We hold or have filed registration applications for 217 trademarks before theInstituto Nacional da Propriedade Industrial, or INPI, the body with jurisdiction for registering trademarks and patents in Brazil, and 77 trademarks before the bodies with jurisdiction for registering trademarks in other countries in the Americas and Europe and Asia in which we operate.  Currently, we are facing no third‐party challenges to these applications. TAM Marília owned the "TAM" trademark from its incorporation until September 2004 when TAM Marília underwent a spin‐off which resulted in the creation ofTaxi Aéreo, Representações, Marcas e Patentes S.A.(TAM Milor).  TAM's trademark (and other trademarks related thereto) were transferred to TAM Milor.  Both TAM Marília and TAM Milor are companies controlled by the Amaro Family.  Until March 10, 2005, the relationship we, and our subsidiaries, TAM Viagens and TAM Mercosur, had with TAM Milor did not provide for any compensation for our use of the TAM trademarks and was subject to revision at any time.  In order to protect the use of TAM's trademark on an appropriate legal and commercial basis, on March 10, 2005, TAM S.A., TAM Milor, TAM Linhas Aéreas, TAM Viagens and TAM Mercosur entered into a License for Use of Trademark Agreement, pursuant to which TAM Milor granted the other parties a license to use the "TAM" trademark in exchange for a monthly compensation or royalty payment. The terms of this agreement provided that it may be terminated in the event of (i) bankruptcy, judicial composition with creditors or winding‐up of either party, (ii) one party failing to comply with any of its obligations and failing to remedy such non‐compliance within 15 days of receiving notice of such non‐compliance, or (iii) we and/or our subsidiaries TAM Viagens and TAM Mercosur utilizing TAM's trademark in a manner other than that set forth in the agreement.  The expense we, and our subsidiaries, TAM Viagens and TAM Mercosur, recorded on an annual basis for the use of the trademark was R$11.1 million (before the acquisition of TAM Milor in July 2010), compared to R$16.7 million in 2009.  This amount has been adjusted annually by reference to the IGP‐M inflation index.  The recording of the transfer of ownership of the TAM trademarks from TAM Marília to TAM Milor and the License for Use of Trademark Agreement were registered with the INPI.  The intention of recording both the transfer and the registration of the License for Use of Trademark Agreement before the INPI is to provide third parties with notice of the existence of such rights. The license for use was granted exclusively in relation to the classes of the activities we currently perform.  TAM Milor had the right to grant a license to use TAM's trademark to other parties for different activities that do not involve the scheduled transportation of passengers. However, on July 13, 2010, our Board of Directors approved the acquisition of TAM Milor, through our subsidiary TLA, by acquiring all of the shares of TAM Milor held by individuals that are also shareholders of TAM.  The payment by TLA was negotiated as follows: (a) a cash payment of R$25,481 thousand at the agreement date, and (b) the issuance of a promissory note by TLA to the selling shareholders in the amount of R$144,395 thousand ("Promissory Note"), totaling R$169,876 thousand.  The amount represented by the Promissory Note was convertedinto a capital increase in TAM, within TAM's authorized capital limit, totaling 5,621,634 newly issued shares.  This acquisition means that TAM now owns the TAM trademarks.  The terms of the License for Use of Trademark Agreement grant us an exclusive license for the use of TAM's trademark as a symbol for securities traded on stock exchanges. -72 -


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Besides these trademarks and patents, we have also conducted research and development to improse our business.  We have internally developede‐TAM portal, a tool that integrates our entire sales chain, from the time of reservation until boarding of the aircraft. D.  Trend Information Historically, demand growth in Brazil's domestic aviation market has a strong correlation and elasticity with the country’s GDP growth.  In 2010, we observed a new trend in our passenger’s profile.  We believe many of our new airline passengers have transitioned to us from bus travel, especially travelers previously covering more than 800 kilometers on bus.  To help target this new passenger profile, in August 2010, we launched a new retail campaign, that includes selling tickets at Casas Bahia, marketing and selling new products, and the production of a new advertising campaign with the singer, Ivete Sangalo.  We started this retail campaign because we believe that much of our growth over the next years will come from middle class Brazilians flying for the first time.  In 2011, we believe that demand for passenger aircraft travel will remain strong, driven by both passengers flying for business purposes, as well as for leisure.  As a result of the combination of projected Brazilian GDP growth and an expected increase in new passengers, we estimate that the domestic market demand will grow between 15% and 18% in 2011. To align our fleet with this demand growth, we expect to acquire seven aircraft in 2011 (two A330s, two A321s and three A319s).  We will also continue to optimize our costs through healthy utilization of our aircraft in the domestic market.  In the international market, we expect demand to increase 10% due to our launch of new destinations and increased frequency of flights.  Through our new retail campaign we also aim to increase our volume of passengers at off-peak hours, which will increase our load factors.  In the domestic market, we expect to increase our load factors by approximately 67.5% to 70%, while in the international market, we expect to increase our load factors by approximately 83%.  Throughout 2011, we expect WTI  prices to average US$93 per barrel, although prices have shown volatility during the first quarter of 2011.  With the dilution of fixed costs and our cost reduction efforts, we expect to be able to reduce our CASK, excluding fuel costs, by 5%. E.  Off‐balance Sheet Arrangements Our operating lease obligations are not reflected in our balance sheets.  We have no other off‐balance sheet arrangements. F.  Tabular Disclosure of Contractual Obligations The table below analyses TAM's financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date.  The amounts disclosed in the table are the contractual undiscounted cash flows and include interest. Non‐derivative financial liabilities
     Less than 1 year
     Between 1 and 2 years
     Between 3 and 5 years
     More than 5 years
     Total
     Effect of discounting
     Carrying valueAt December 31, 2010Finance lease obligations
     684,006
     1,279,397
     1,140,715
     2,315,571
     5,419,689
     (661,766)
     4,757,923Borrowings
     617,525
     8,297
     2,199
     7,228
     635,249
     (20,209)
     615,040Debentures
     418,926
     339,085
     292,758
     237,014
     1,287,783
     (310,862)
     976,921Senior notes
     108,701
     164,241
     164,241
     1,238,874
     1,676,057
     (667,000)
     1,009,057Other (1)
     989,195
     
     
     
     989,195
     
     989,195Refinanced taxes payable under Fiscal Recovery Program
     31,156
     73,724
     146,360
     887,023
     1,138,263
     (698,436)
     439,827(1)                  The amount is recorded under Suppliers and Salaries and social charges.
 We believe that our operational cash generation and lines of credit with financial institutions and leasing agents will enable us to honor our current contractual and financial commitments.  We believe that prudent liquidity risk management should entail maintaining sufficient cash and marketable securities, the availability of fundingthrough an adequate amount of committed credit facilities and the ability to close out market positions.  Due to the dynamic nature of our businesses, Our treasury maintains flexibility in funding by maintaining availability under committed credit lines. -73 -


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ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES A.  Directors and Senior Management In accordance with our by‐laws and Brazilian corporation law, we are managed by ourConselho de Administração(board of directors), made up of eight members and ourDiretoria(board of executive officers), made up of at least four and no more than eight members. Board of Directors Our board of directors provides our general strategic management guidelines and is responsible for, among other things, setting general commercial policies and electing the executive officers (as well as for supervising their management).  Our board of directors meets every month or whenever requested by the chairman, vice‐chairman, or by any two members of the board of directors. Brazilian corporation law provides that members of a company's board of directors must be shareholders in that company (although there is no specified minimum number of shares that such members must hold) and must be elected at a shareholders' meeting.  Members, who may reside or be domiciled in Brazil or abroad, are elected for a period of one year and re‐election is permitted.  The terms of office of the current members of our board of directors end on April 30, 2012 unless they are re‐elected.  Our by‐laws do not specify an age limit for mandatory retirement of members of our board of directors. Brazilian corporation law together with Article 24 of our by‐laws provides that members of our management may only enter into contracts with us under reasonable and equitable terms, either identical to those prevailing in the market or to those pursuant to which we would ordinarily contract with third parties.  Such transactions must also be approved by at least five of our directors at a board meeting and any director may request an independent expert to evaluate whether such agreement does in fact contain arm's length terms.  Brazilian corporation law also prevents such persons from voting at any shareholders' meeting or intervening in any corporate action in respect of which there is a conflict of interest between their interests and ours. The following table sets forth the name, position and election date of the current terms of office of each member of our board of directors. Name

   Position

   Election dateMaria Cláudia Oliveira Amaro

   Chairman

   09/18/2003Maurício Rolim Amaro

   Vice‐Chairman

   12/20/2004Noemy Almeida Oliveira Amaro

   Board Member

   10/30/2008André Santos Esteves

   Board Member

   08/18/2009Antônio Luiz Pizarro Manso

   Board Member

   04/29/2011Emilio Romano

   Board Member

   11/19/2009Marco Antonio Bologna

   Board Member

   08/18/2009Waldemar Verdi Júnior

   Board Member

   01/23/2006
  Summary biographical information for each member of our board of directors is set out below: Maria Cláudia Oliveira Amaro, Chairman of the Board of Directors.Mrs.Amaro has been a member of our board of directors since September 2003 and Chairman since April 2007. Mrs. Amaro has a degree in Business Administration. Mrs. Amaro is the daughter of Mrs. Noemy Almeida Oliveira Amaro and is also an executive director of TAM Empreendimentos e Participações, VP of the Board of TAM Aviação Executiva e Taxi Aéreo S.A.  From April 1992 to January 1997, Mrs. Amaro was the director of marketing of TAM Linhas Aéreas S.A.  Prior to that, Mrs. Amaro was an assistant manager of Colony Shops of Florida Inc. and store manager from January 1991 to December 1991.  From June 1986 through June 1987, Mrs. Amaro was a trader at Banco Itamaraty S.A. -74 -


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Maurício Rolim Amaro, Vice‐Chairman of the Board of Directors.Mr.Amaro has been a member of our board of directors since December 2004 and vice‐chairman since April 2007.  Mr. Amaro is the son of Mrs. Noemy Almeida Oliveira Amaro and holds the position of executive director of TEP.  He is also the chairman of the board of directors of Aerosystem and TAM Aviação Executiva e Taxi Aéreo S.A. and Multiplus S.A.  Mr. Amaro has a degree in business administration and Aviation Administration from Broward Community College, located in Florida, United States of America. *Noemy Almeida Oliveira Amaro, Board Member.*Mrs. Amaro has been a member of TAM's board of directors since October 2008.  She is currently an executive director of TAM Empreendimentos e Participações and a member of the board of TAM Aviação Executiva e Taxi Aéreo.  Mrs. Amaro is the widow of Mr. Rolim Adolfo Amaro, she has a degree in foreign languages and previously worked as a teacher*.* André Santos Esteves, Board Member.Mr. Esteves has been a board member of TAM since August 2009.  He has a degree in computer science from the Federal University of Rio de Janeiro (UFRJ).  Currently, Mr. Esteves is the chief executive officer of BTG Pactual and member of both the Brazil and Global Management Committees.  Before joining TAM, he occupied the position of chairman and chief executive officer of UBS Pactual from 2006 to 2008.  He joined the firm in 1989, became a partner in 1993, and was appointed a Managing Partner in 2002. After the sale of the bank to UBS in 2006, he became Chairman & Chief Executive Officer of UBS Pactual (2006-2008), where he was appointed Global Head of Fixed Income of UBS in August 2007 and Global Head of FICC (Fixed Income, Currencies and Commodities) of UBS in October 2007. André held both positions until leaving UBS in 2008.  He was also director of the Federation of Brazilian Banks (FEBRABAN) from 2003 until 2007, and a member of the board of Bolsa de Mercadorias e Futuros (Futures and Commodities Exchange) from 2002 until 2006. Antonio Luiz Pizarro Manso, Board Member.Mr. Pizarro Manso has been a member of our board of directors since April 2011.  He is also a board member of the following companies: Itapoá Terminais Portuários S.A. and Banco Caixa Geral.  He is also an alternate member of the board of Fibria Celulose S.A., and an associate of Pizarro Manso Suporte a Negócios Limited.  During his career, Mr. Pizarro Manso was Chief Financial Officer of Embraer – Empresa Brasileira de Aeronautica S.A., Financial Director of Tenenge – Técnica Nacional de Engenharia, a company in the Odebrecht  group, and Administrative and Financial Director of Transport Companies for the  Bozano Simonsen Group.  Mr. Pizarro Manso received a degree in mechanical engineering from PUC Rio de Janeiro and has a MBA in Finance from IBMEC (Instituto Brasileiro de Mercado de Capitais). Emilio Romano, Board Member.Mr. Romano has been a member of our board of directors since November 2009.  He has a law degree from the Escuela Libre de Derecho, where he graduated Cum Laude and was a graduate student at the City of London Polytechnic.  Currently, he is the president & chief executive officer of Air Group Latin America (AGL), an Investment Holding Company specialized in aerospace.  Mr. Romano is also a Senior Advisor for Latin America of Air Lease Corporation and a member of IATA's International Airline Training Fund Council. From 2004 to 2007, Emilio Romano was the chief executive officer of Grupo Mexicana de Aviacion, where he spearheaded the launch of the first low-cost carrier in Mexico, "Click Mexicana," and he was a member of the board of directors of the International Air Transport Association (IATA) and the Association of Latin American Air Carriers (ALTA).  In 2001, he co-founded Border Group, LLC, an investment and advisory firm specializing in Spanish speaking media companies.  Between 1995 and 1998, he served as Grupo Televisa’s director of mergers & acquisitions and later as vice-president of international operations.   From 1989 to 1995, Mr. Romano was appointed General Director of Revenue Policy and International Fiscal Affairs and later, he was appointed Federal Fiscal Attorney within the Mexican Ministry of Finance, where he was the chief negotiator for more than 20 tax treaties and NAFTA tax and customs provisions.  Mr. Romano has been a member of the board of directors of Univisión Communications, Claxson Interactive Group and Transportes Aeromar.  He also served as a professor for the doctoral program in tax law at the Escuela Libre de Derecho. Marco Antonio Bologna, Board Member.Mr. Bologna has been a member of our board of directors since August 2009.  Mr. Bologna has a degree in production engineering from Escola Politécnica at São Paulo University (USP) and has a specialization in financial services from Manchester Business School, UK.  Mr. Bologna is the current chief executive officer of TAM S.A.  He is also a board member of TAM Aviãção Executiva e Taxi Aéreo S.A., Suzano Papel e Celulose S.A., WTorre Properties S.A.  and of the International Air Transport Association Training Fund in Geneva, Switzerland.  Before joining our board, Mr. Bologna was chief executive officer of TAM Aviação Executiva e Taxi Aéreo S.A. (2009-2010), WTorre S.A. (2008), TAM S.A. and TLA (2004-2007), as well as of Banco VR (2003–2004). He was TAM S.A.'s chief financial officer from 2001 through 2003. -75 -


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Waldemar Verdi Júnior, Board Member.Mr.Verdi Júnior has been a member of our board of directors since January 2006.  He has a bachelor's degree in law and has taken extension courses in business administration at the University of Southern California (1977) and INSEAD (1982 and 2004).  Mr. Verdi Júnior is a member of the shareholders committee ofGRUPO VERDI — GV Holding S.A., and a member of the boards of directors of Banco Rodobens, Companhia Hipotecária Unibanco — Rodobens, Centro das Indústrias do Estado de São Paulo — CIESP and and Rodobens Negócios Imobiliários.Mr Verdi was also member of the board ofAssociação Comercial de São Paulo, COMGÁS — Companhia de Gás de São Paulo and CDES — Conselho do Desenvolvimento Econômico e Social do Presidente Luiz Inácio Lula da Silva.  Before joining us, Mr. Verdi Júnior worked for ASSOBENS — Associação Brasileira dos Distribuidores Mercedes‐Benz, ABRAD — Associação Brasileira das Administradoras de Consórico dos Distribuidores de Veículos Automotores and FENABRAVE — Federação Nacional da Distribuição de Veículos Automotores. None of our directors has service contracts with us or any of our subsidiaries providing for any compensation or benefits on the termination of their employment. Executive Officers The executive officers are responsible for our daily management and representation.  The executive officers exercise the individual responsibilities provided in our by‐laws and by our board of directors.  Our board of executive officers is currently made up of four members, but can be made up of at least four and no more than eight members, shareholders or otherwise, residing in Brazil. Executive officers are elected by our board of directors for a three‐year term of office, with re‐election permitted.  Any member of our board of executive officers may be removed by the board of directors before his or her term of office ends.  The current term of office of each member of our board of executive officers ends on April 30, 2012 unless re‐elected. Our Investor Relations Office is located at Avenida Jurandir, 856, Lote 4, 8° andar, CEP 04072‐000, São Paulo, SP, Brazil.  The person responsible for our Investor Relations Office is Mr. Líbano Miranda Barroso. The telephone number of our Investor Relations Office is +55 11 5582 9715 and the fax number is +55 11 5582 8141.  The e‐mail address of our Investor Relations Office is invest@tam.com.br. On April 30, 2010, Marco Antonio Bologna became chief executive officer of TAM S.A.  Líbano Barroso continues as chief executive officer of TAM Linhas Aéreas, in charge of airline operations.  Mr. Barroso also continues as director of investor relations for TAM S.A. The following table sets forth the name, position and election date of the current terms of office of each member of our board of executive officers: Name
     Position
     Election dateMarco Antonio Bologna
     Chief Executive Officer
     04/30/2010Líbano Miranda Barroso
     Chief Financial Officer and Director of Investor Relations
     05/17/2004Paulo Cezar Bastos Castello Branco
     Director
     02/28/2007José Zaidan Maluf
     Director
     10/09/2009
  Summary biographical information for each member of our board of executive officers is set out below: Marco Antonio Bologna, Chief Executive Officer.Mr. Bologna has been our chief executive officer since April 2010.  Mr. Bologna has a degree in production engineering from Escola Politécnica at São Paulo University (USP) and has a specialization in financial services from Manchester Business School, UK.Mr. Bologna is also a board member of TAM S.A., TAM Aviãção Executiva e Taxi Aéreo S.A., Suzano Papel e Celulose S.A., WTorre Properties S.A.and of the International Air Transport Association Training Fund in Geneva, Switzerland.  Before joining our board, Mr. Bologna was chief executive officer of TAM Aviação Executiva e Taxi Aéreo S.A. (2009-2010), WTorre S.A. (2008),  TAM S.A. and TLA (2004-2007), as well as of Banco VR (2003–2004). He was TAM S.A.'s chief financial officer from 2001 through 2003. -76 -


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Líbano Miranda Barroso Chief Financial Officer and Investor Relation Director.Mr. Barroso has been our chief financial officer, since May 2004.  He is also the chief executive officer of TLA and TAM Capital.  Mr. Barroso held executive positions at major financial institutions, including Banco Nacional S.A., Banco Real S.A., and Banco Safra S.A. He was also executive officer at Companhia de Concessões Rodoviárias.  Mr. Barroso holds a degree in economics, an executive MBA in finance from IBMEC Business School, and a post-graduate degree in business law from Getúlio Vargas Foundation (Fundação Getúlio Vargas, or FGV). Paulo Cezar Bastos Castello Branco, Director.Mr. Castello Branco has been director since February 2007. Mr. Castello Branco joined TAM as institutional relations director in October 2004.  In February 2007, he became planning and alliance director.  He currently holds a position as commercial and planning vice-president at TAM Linhas Aéreas.  Before joining us, he held various management positions in various companies as planning and logistics director of Varig Logística, vice-president of ECT – Empresa Brasileira de Correios e Telégrafos, financial and administration director of Casa da Moeda do Brasil and commercial department chief of INFRAERO – Empresa Brasileira de Infra-Estrutura Aeroportuária.  Mr. Castello Branco has a degree in business administration from Universidade Federal do Rio de Janeiro (UFRJ) and an MBA in airport administration and logistics extensions from Nevada’s University, in USA. José Zaidan Maluf, Director.Mr. Maluf has been director of TAM S.A. since October 2010.  Mr. Maluf joined TAM in 1995 and since 2000 has served as the director of international contracts.  Currently, Mr. Maluf holds a position as supply and contracts vice-president of TAM Linhas Aéreas.  With more than 30 years of experience in the aeronautic and airports industry, Mr. Maluf graduated with a degree in electrical engineering from the Mauá - Brazil School of Engineering (Escola de Engenharia Mauá - Brasil) and holds an MBA from IBMEC. Fiscal Council According to Brazilian corporation law, each company's fiscal council must be an independent body that is separate from the company's management and external auditors (and may or may not be permanent).  The fiscal council is installed to act during a given year at the request of shareholders representing at least 10% of the voting shares or 5% percent of non‐voting shares.  The fiscal council's principal function is to oversee the activities of management and to examine and provide its opinion in regard to the financial statements and certain proposals of management submitted to shareholders' meetings. Our by‐laws provide for a non‐permanent fiscal council, which can be installed by a shareholders' meeting. Following the annual general meeting of our shareholders on April 4, 2011, we established a Fiscal Council (Conselho Fiscal) in accordance with Brazilian corporate law, composed of up to five members. As required by Brazilian corporate law our Fiscal Council is independent of our management and external auditors. The Fiscal Council’s responsibilities include monitoring management’s activities and reviewing our annual report and financial statements. The members and their respective alternates were elected by the shareholders at the annual general shareholder’s meeting for this year. The current members of our Fiscal Council are: Flávio Jarczun Kac, Antonio Fernando Siqueira Rodrigues, Edvaldo Massao Murakami, Adalberto de Moraes Schettert and Nilton Maia Sampaio. We have an audit committee that satisfies the audit committee requirements of the SEC and the NYSE. B.  Compensation Brazilian corporation law and our by‐laws provide that our shareholders are responsible for setting the total compensation to be paid every year to our board of directors and board of executive officers.  Only if the shareholders set a global figure for the total compensation to be paid, is the board of directors then solely responsible for distributing that compensation individually, in accordance with the terms of our by‐laws. The key management personnel of TAM include the members of the Board of Directors, the president, vice presidents and statutory directors.  Their remuneration was as follows, including any contingent or deferred compensation accrued for the year: 2010

   

   2009

   

   2008*(R$ thousands)*Salaries

   7,681

   

   9,497

   

   9,031Profit share and bonuses

   12,515

   

   9,875

   

   7,326Share‐based payment

   15,999

   

   11,409

   

   16,512Other long‐term benefits

   

   

   810

   

   47636,195

   

   31,591

   

   33,345
  Our executive management fees represent total compensation paid to the members of our board of directors and executive officers.  Executive management fees were 14.57% higher in 2010 compared to 2009 due to the achievement of financial results reflected in the profit share and bonuses programs along with share-based program vesting periods.  Executive management fees were lower in 2009 compared to 2008 because profit sharing andbonuses are linked to our performance, and, in 2009, we did not achieve our targets for the main performance indicators. -77 -


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Our officers participate in our regular share purchase option plan.  See "Item 6.  Directors, Senior Management and Employees — E.  Share Ownership — Share Option Purchase Plan." C.  Board Practices Currently, our board of directors is comprised of eight members.  The terms of office of our current directors will expire in April 30, 2012.  See "Item 6.  Directors, Senior Management and Employees — A.  Directors and Senior Management — Board of directors." Swearing‐In of Members of Our Board of Directors, Board of Executive Officers and Fiscal Council The members of our board of directors, board of executive officers and fiscal council (i) take office upon signing our corporate register, which is itself conditional on them signing BM&FBOVESPA's agreement in respect of companies listed on the Level 2 segment of BM&FBOVESPA, and (ii) must notify BM&FBOVESPA, immediately after they are sworn in, as to how many securities issued by us they own (directly or indirectly) and the characteristics of such securities (including derivatives). Audit Committee Our audit committee reports to our board of directors.  Its main functions are to: assist the board of directors in monitoring, on behalf of our shareholders, the analysis of our financial statements; monitor and provide oversight with the purpose of ensuring that our executive officers develop reliable internal control mechanisms; ensure the adequate performance of internal audit; appoint external independent auditors when necessary; monitor any potential conflicts of interest in relation to our external auditors; ensure that our ethics code is being followed; monitor changes in our principal financial indicators, particularly focusing on our cash flow position; at times working with the Ethics Committee, establish receipt, retention and complaint procedures regarding accounting, internal control and audit matters and create policies for the confidential, anonymous treatment of employee concerns regarding accounting or auditing matters and review our capital, debt and cost structure.  The audit committee is comprised of three members of our board of directors, elected by the board of directors for a one‐year term, subject to re‐election.  The current members of our audit committee are: Antônio Luiz Pizarro Manso (independent), Waldemar Verdi (independent) and Emilio Romano (independent). Our audit committee satisfies the audit committee requirements of the SEC and the NYSE.  We do not have an audit committee financial expert serving on our audit committee because we believe that our audit committee members perform, as a whole, the functions of an "audit committee financial expert" within the meaning of the rules adopted by the SEC relating to the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934. Human Resources Committee Our human resources committee is responsible for defining strategies for the management and development of our employees.  It supports the board of directors in evaluating the results and performance of the main executives and determining their remuneration. The human resources committee is comprised of two members. Risk Management Committee Our risk management committee is responsible for approving policies, processes and activities to manage the liquidity, credit, legal, fiscal and operational risks inherent in the operation of our business.  The risk management committee is comprised of 15 of our officers. -78 -


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D.  Employees We believe our growth potential is directly linked to our ability to attract and retain the best professionals available in our sector.  For this reason, we assign high priority to selecting and developing people with potential who can add value to our operations and who we believe can adapt to our corporate culture. The value proposal of our Human Resources Management and Information department is to contribute to our sustainable growth and competition by anticipating future needs and providing long‐term solutions that attract, train and retain professionals with Passion to Fly and Serve. One of the key roles of this department is to disseminate our values and principles, particularly the Passion to Fly and Serve, by encouraging our employees' desires to become highly qualified professionals and conscientious citizens.  The aspiration to build a safe, healthy and sustainable work environment is also part of our path towards a more professional and efficient organization. With the aim of achieving its mission, our human resources department has developed several projects related to development, sustainability and culture, training (through the Commander Rolím Amaro Service Academy) and compensation, besides direct human resources support to business initiatives proposed by the human resources internal consulting (business partner) area. Sustainability and Culture Management We believe that our guiding motto, a Passion to Fly and Serve, encompasses the spirit of TAM's brand.  Sustainability is one of our key principles.  Accordingly, we seek to include sustainability in our day-to-day activities and corporate practices.  To highlight our commitment to sustainability, beginning in 2009, we created an annual sustainability report where we present our sustainability objectives and achievements.We believe that by supporting and promoting internationally accepted values from the human rights, labor relations, environmental and anticorruption areas, we help to create a culture of sustainability.  Several of our recent initiatives and projects highlight our serious commitment to sustainability. To foster social sustainability, we created the framework program "Under the Wings of TAM", which organizes and funds activities promoting social sustainability.  One project under this program is "On the Wings of Education - Young Apprentice TAM".  Since 2005, we have prepared young people for professional practice through apprenticeship training, increasing employability and social inclusion.  In 2007, we created another project, "On the Wings of Inclusion", which teaches disabled persons basic life and job skills.  In 2002, we created "Lifestyles TAM", renamed "Passionate for Life" in 2009.  This program focuses on encouraging and teaching our employees to manage their health.  We believe this program improves our employees' quality of life, both within and outside the workplace. We also invest and support local communities because we believe our investments promote the socioeconomic development of society.  We support projects related to the environment, education, vocational training, entrepreneurship, health and anti-slavery.   Some examples include our sponsorship of  SOS Mata Atlântica, a non-profit organization dedicated to preserving the Atlantic forest, and our work with theBrazilian Institute of Environment and Renewable Natural Resources(Instituto Brasileiro do Meio Ambiente e dos Recursos Naturais Renováveis, or IBAMA) for which we voluntarily transport wild animals back to their natural habitats with the assistance of IBAMA veterinarians. -79 -


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We also partner with third party entities and support their individual missions by providing free airfare and financial aid.  Examples of such partnerships include: Instituto Ethos, a project reporter in Brazil; Association Asas de Socorro; Brazil Foundation; GRAACC, a support group for adolescents and children with cancer; Ayrton Senna Institute; Junior Achievement; Social Stock Exchange and the Environment (BVS & A); Luggage Project; Abrinq Mara Gabrilli Institute; Rodrigo Mendes Institute; Laramara; and United Way Brazil, among others. Another key way we support sustainability is by signing important declarations and project mission statements.  We became a signatory of the Carbon Disclosure Project (CDP) in 2006, a major global project that is  committed to implementing direct and indirect emissions control measures and improving the reporting of greenhouse gas emissions. We were also the first airline, and one of the first 84 signatories, to join the declaration of Corporate Social Responsibility and Human Rights, a declaration sponsored by the Ethos Institute and the Special Secretariat for Human Rights of the Presidency.  By signing, we announced our support of their goal to foster sustainability and social development in Brazil. Qualification and Training Since 2008, we have particularly focused on personnel development and implemented many initiatives to reach our goal of becoming one of the best companies to work for in Brazil.  One initiative was our evaluation and redesign of our human resources value proposition.  We hired Fundação Dom Cabral (one of Brazil’s best development consultancies) to conduct a culture mapping examination of us, and with the assistance of their evaluation and our branding group, we developed a new value proposition.  We use this proposition as a guideline for human resources strategy implementation.  The new value proposition reinforces our desire to stand out through the quality of our services and it reinforces one of our core values, a Passion to Serve. Therefore, in 2008, together with Fundação Dom Cabral, we more clearly defined our management duties.  The first four levels of our management were then evaluated based upon those defined duties.  Taking into consideration individual performance, we established a succession plan for our three senior levels, ensuring continuity in the management of our business in the event of unexpected changes. In 2009 and 2010, we worked to create individualized corporate development plans for directors and vice presidents and began implementing those plans for certain leadership roles.  We reviewed employee training and skills through an assessment process that evaluated and identified professional and personal skills, and we also created the Drivers of Behavior Program and the Management Development Program. We are particularly focused on the qualification and growth of our employees, which we believe constitute our chief operating asset.  Our management of our human capital, which represents a broad illustration of the wealth, complexity and diversity of Brazilian society, is a key part of our strategic planning.  Our training area, the Commander Rolim Amaro Service Academy, seeks to contribute to the development and qualification of our staff.  In 2010, we invested approximately R$28 million in qualification and training programs and our employees participated in over 281 trainings.  Most of these training programs were live or given by electronic means (e‐learning) – available via the internet or intranet.  Examples of training programs offered during 2010 include foreign language programs designed to reinforce English to our crew and airport employees and finance and accounting classes designed to improve general accounting knowledge in our company.  Much of our training in 2010 was designed to prepare TAM to join the Star Alliance and to fulfill management needs concerning information technology tools that are designed to improve performance.  International trade and finance are two areas that had major system upgrades supported by our training initiatives. Compensation and Benefits ·Profit Sharing and Results The profit sharing amounts distributed in 2010 were 26.7% higher than the amounts distributed in 2009.  Employees profit sharing is calculated based on the achievement of two performance indicators.  One is a financial indicator, the EBIT (Earnings Before Interest and Taxes) and the other measures the satisfaction index of our passengers through a methodology called the Net Promotor Score (NPS).  The NPS was introduced in 2008 to improve services in each and every point of contact with our clients. -80 -


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The calculation of any such profit sharing is usually carried out at the end of the year, at which time the value could be measured by us in the most reliable manner.  In 2010, we did achieve our EBIT target, and our NPS target. ·Private Pension Obligations We have defined contribution plans, for which contributions are transferred to public or private pension plans on a mandatory, contractual or voluntary basis.  To the extent that contributions are made, we have no obligation relating to any additional payments.  Regular contributions comprise the net periodic expenses for the period in which any such contributions are due and are included in administrative expenses. ·Stock Option Plan We offer stock options plans to employees, officers and directors, based on our shares, pursuant to which we receive services in exchange for stock options.  The fair value of the stock options granted is recognized as an expense, during the period in which the right is vested (period during which the specific terms and conditions for vesting of rights should be complied with).  As of the balance sheet date, we review the estimates relating to the number of options which rights should be vested based on the terms and conditions.  We recognize the impact of the review of the original estimates, if any, in the statement of income, recorded against the shareholders' equity on future basis. At December 31, 2010 we had 28,193 employees, compared to 24,348 employees at December 31, 2009 and 24,389 employees at December 31, 2008.  Our personnel expenses in 2010 totaled R$2,328.4 million compared to R$1,985 million in 2009.  The following table shows the number of employees at December 31, 2010, 2009 and 2008 for the operations and locations indicated:  December 31, 2010
     December 31, 2009
     December 31, 2008TAM Linhas AéreasAssistants, secretaries and dispatchers
     11,077
     11,013
     10,762Analysts and assistants
     2,934
     2,912
     2,779Supervisors/coordinators
     855
     813
     844Chairman, vice chairmen, directors and managers
     287
     292
     320Mechanics, electricians and technicians
     2,389
     1,705
     1,858Attendants
     7,087
     4,785
     5,025Captains and co‐pilots
     2,222
     1,977
     2,043Interns
     64
     66
     74Total
     26,915
     23,563
     23,705
  Pantanal Linhas AéreasAssistants, secretaries and dispatchers
     140
     -
     -Analysts and assistants
     35
     -
     -Supervisors/coordinators
     31
     -
     -Chairman, vice chairmen, directors and managers
     6
     -
     -Mechanics, electricians and technicians
     16
     -
     -Attendants
     47
     -
     -Captains and co‐pilots
     41
     -
     -Total
     316
     -
     -MultiplusAssistants, secretaries and dispatchers
     9
     -
     -Analysts and assistants
     38
     -
     -Supervisors/coordinators
     19
     -
     -Chairman, vice chairmen, directors and managers
     19
     -
     -Total
     85
     -
     -TAM ViagensAssistants/receptionists/secretaries/interns
     36
     37
     33Analysts/assistants/secretaries
     89
     80
     66Attendants, promoters/issuers/sales reps
     231
     143
     109Attorneys/coordinators/leaders/supervisors
     28
     28
     21Directors/managers/advisors
     14
     15
     13Total
     398
     303
     242TAM MercosurParaguay
     444
     442
     413Chile
     0
     0
     0Argentina
     0
     0
     0Uruguay
     0
     0
     0Bolivia
     35
     40
     28São Paulo
     0
     0
     1Total
     479
     482
     442Grand Total
     28,193
     24,348
     24,389
 -81 -


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At the end of 2010, we had 28,210 employees, of which 26,416 were in Brazil and 1,794 were abroad.  We also had 393 outsourced employees.  In 2010, we recorded a 16% staff increase compared to an 0.2% decrease in 2009. Our staff largely consists of young men and women, where 44% are between the ages of 18 and 29, 38% are between 30 and 39 years and 18% are above 40 years.  Internal Social Indicators TAM's internal social indicators provides an overview of the volume of resources allocated to the employees, in addition to the fixed compensation.  This group includes items, such as the total value invested in food, private pension, health, occupational safety and medicine, education, training and qualification of employees. E.  Share Ownership The following table sets forth the class, number and percentage of shares held by our directors at the date of this Annual Report: Number of Common Shares Held
     Number of Preferred Shares HeldMaria Cláudia Oliveira Amaro
     500,284
     104,100Maurício Rolim Amaro
     500,284
     104,100Noemy Almeida Oliveira Amaro
     1,496,993
     208,200André Santos Esteves
     0
     1Antônio Luiz Pizarro Manso
     0
     1Emilio Romano
     1
     0Marco Antonio Bologna
     1
     0Waldemar Verdi Júnior
     1
     0
  We have implemented a preferred share purchase option plan for our and our controlled companies' officers and employees, as approved at our shareholders' meeting held on September 29, 2005.  Other than in respect of the first grant of options (described below), the strike price per preferred share is the amount equal to 80% of the average market price of our preferred shares in the month preceding the granting of the option, adjusted for inflation.  We granted 715,255 options to purchase our preferred shares in December 2005, with an exercise price of R$14.40 per preferred share.  On June 26, 2006, our board of directors granted the release of 239,750 preferred shares as a second award to be used as options under the plan, with an exercise price of R$43.48 per preferred share.  On December 14, 2007, our board of directors granted the release of 780,311 preferred shares as a third award to be used as options under the plan, with an exercise price of R$ 39.67 per preferred share.  On September 27, 2007, our board of directors granted the release of 230,000 preferred shares as an extraordinary granting, with an exercise price of R$ 38.36 per preferred share. The share purchase options will be granted on annual basis in accordance with our board of directors' resolution as long as the maximum amount of 2% of dilution of the participation of current shareholders is notexceeded, and certain annual value-added goals are reached.  The participants of our share purchase option plan may exercise their options within seven years as of the date of the relevant grant.  The vesting term will last five years and will comprise three annual installments, due on the third, fourth and fifth year, respectively.  Our share purchase option plan was effective until September 29, 2010. -82 -


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ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A.  Major Shareholders The following table shows the shareholdings of each shareholder holding 5% or more of our common or preferred shares and of the members of our board of directors as of December 31, 2010, being the most recent practicable date. Shares Beneficially OwnedCommon Shareholders
     Number
     PercentTAM — Empreendimentos e Participações S.A.(1)
     44,883,754
     80.41%Maria Cláudia Oliveira Amaro
     500,284
     0.90%Maurício Rolim Amaro
     500,284
     0.90%Noemy Almeida Oliveira Amaro
     1,496,993
     2,68%AndréSantos Esteves
     0
     -Antônio Luiz Pizarro Manso(2)
     0
     -Emilio Romano
     1
     -Marco Antonio Bologna
     1
     -Waldemar Verdi Júnior
     1
     -Amaro & Aviation Participações S.A
     5,492,833
     9,84%Other
     2,942,532
     5,27%Total
     55,816,683
     100%
  Shares Beneficially OwnedPreferred Shareholders
     Number
     PercentTAM — Empreendimentos e Participações S.A.(1)
     24,768,755
     24.67%Maria Cláudia Oliveira Amaro
     104,100
     0.10%Maurício Rolim Amaro
     104,100
     0.10%Noemy Almeida Oliveira Amaro
     208,200
     0.21%André Santos Esteves
     1
     -Antônio Luiz Pizarro Manso (2)
     1
     -Emilio Romano
     0
     -Marco Antonio Bologna
     0
     -Waldemar Verdi Júnior
     0
     -Treasury shares
     212,580
     0.21%Minority Shareholders:T.Rowe
     8,543,445
     8,51%Other
     66,448,916
     66.19%Total
     100,390,098
     100%
 
 (1)       TAM – Empreendimentos e Participações S.A., is owned by the Amaro family and has its principal offices at Rua Monsenhor Antonio Pepe, 397, São Paulo, SP, Brazil.  Noemy Almeida Oliveiro Amaro whose business address is at Rua Monsenhor Antonio Pepe, 331, São Paulo, SP, Brazil; Maria Claudia Oliveira Amaro whose business address is at Rua Monsenhor Antonio Pepe, 397, São Paulo, SP, Brazil; Maurcio Rolim Amaro whose business address is at Rua Monsenhor Antonio Pepe, São Paulo, SP, Brazil; and João Francisco Amaro whose business address is at Rua Monsenhor Antonio Pepe, 397, São Paulo, SP, Brazil own all of the shares in the company and exercise all of the voting rights and investment power. (2)      Mr. Pizarro Manso joined our board of directors in April 2011. Mr. Pizarro Manso replaced Mr. Alexandre Goncalves Silva, who, as of December 31, 2010, held 0 common shares and 1 preferred share.  On June 17, 2005, we completed our initial equity offering of preferred shares, pursuant to which we (and the selling shareholders in that offering) offered a total of 30,190,000 preferred shares to institutional investors in the United States and institutional and other investors elsewhere.  On July 19, 2005, we and the selling shareholders in the equity offering described above issued a further 281,600 preferred shares pursuant to an over‐allotment option granted to the underwriters in that offering. On March 15, 2006, we completed a follow‐on equity offering of preferred shares in Brazil and our initial public offering of ADSs in the United States and elsewhere outside Brazil.  This offering of preferred shares and ADSs and was registered with the SEC, and the ADSs are listed on the New York Stock Exchange.  We became a reporting company under the Securities Exchange Act of 1934, or the Exchange Act.  We offered 2,660,103 ADSs and 2,339,897 preferred shares, and the selling shareholders in that offering sold 21,209,462 ADSs and 9,408,636 preferred shares.  On April 11, 2006, we and the selling shareholders in that offering sold an additional 1,103,000 ADSs pursuant to an over‐allotment option granted to the underwriters in that offering. -83 -


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On November 5th, 2010, our Board of Directors approved and ratified the capital increase in the amount of R$144,395,450.00, by issuing 5,621,634 new common shares at a price of $25.69 per common share.  The issued shares started trading on the BM&FBOVESPA on November 8th, 2010. All shareholders within a class of our shares have the same voting rights. B.  Related Party Transactions We believe that all of the relevant transactions we entered into with the related parties described below were performed on terms that reflected the market rate for such transactions. License For Use of Trademark TAM Marília owned the "TAM" trademark from its incorporation until September 2004 when TAM Marília underwent a spin‐off which resulted in the creation of TAM Milor.  TAM's trademark (and other trademarks related thereto) were transferred to TAM Milor.  Both TAM Marília and TAM Milor are companies controlled by the Amaro Family.  Until March 10, 2005, the relationship we, and our subsidiaries, TAM Viagens and TAM Mercosur, had with TAM Milor did not provide for any compensation for our use of the TAM trademarks and was subject to revision at any time.  In order to protect the use of TAM's trademark on an appropriate legal and commercial basis, on March 10, 2005, TAM S.A., TAM Milor, TAM Linhas Aéreas, TAM Viagens and TAM Mercosur entered into a License for Use of Trademark Agreement, pursuant to which TAM Milor granted the other parties a license to use the "TAM" trademark in exchange for a monthly compensation or royalty payment. The terms of this agreement provided that it may be terminated in the event (i) of bankruptcy, judicial composition with creditors or winding‐up of either party, (ii) one party fails to comply with any of its obligations and fails to remedy such non‐compliance within 15 days of receiving notice of such non‐compliance, or (iii) we and/or our subsidiaries, TAM Viagens and TAM Mercosur, utilize TAM's trademark in a manner other than that set forth in the agreement.  The expense we, and our subsidiaries, TAM Viagens and TAM Mercosur, recorded on an annual basis for the use of the trademark was R$11.2 million (before the acquisition of TAM Milor in July 2010), compared to R$16.7 million in 2009.  This amount has been adjusted annually by reference to the IGP‐M inflation index.  The recording of the transfer of ownership of the TAM trademarks from TAM Marília to TAM Milor and the License for Use of Trademark Agreement were registered with the INPI.  The intention of recording both the transfer and the registration of the License for Use of Trademark Agreement before the INPI is to provide third parties with notice of the existence of such rights. The license for use was granted exclusively in relation to the classes of the activities we currently perform.  TAM Milor had the right to grant a license to use TAM's trademark to other parties for different activities that do not involve the scheduled transportation of passengers. However, on July 13, 2010, our Board of Directors approved the acquisition of TAM Milor, through our subsidiary TLA, by acquiring all of the shares of TAM Milor held by individuals that are also shareholders of TAM.  The payment by TLA was negotiated as follows: (a) a cash payment of R$25,481 thousand at the agreement date, and (b) the issuance of a promissory note by TLA to the selling shareholders in the amount of R$144,395 thousand ("Promissory Note"), totaling R$169,876 thousand.  The amount represented by the Promissory Note was converted into a capital increase in TAM, within TAM's authorized capital limit, totaling 5,621,634 newly issued shares.  This acquisition means that TAM now owns the TAM trademarks.  The terms of the License for Use of Trademark Agreement grant us an exclusive license for the use of TAM's trademark as a symbol for securities traded on stock exchanges. Service Agreement — TAM Marília In September 2002, we entered into a service agreement with TAM Marília for the sharing of our general management activities, relating mainly to human resources, purchasing and procurement, marketing and information technology systems.  Pursuant to the terms of this service agreement, we received payments from TAM Marília in the amounts of R$153 thousand in the year ended December 31, 2010, R$65 thousand in the year ended December 31, 2009 and R$130 thousand in the year ended December 31, 2008. -84 -


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On May 11, 2007, TLA and TAM Marília agreed to share the use of a hangar located near Congonhas airport in São Paulo for a period of 10 years.  TLA paid R$16 million up front to TAM Marília and is entitled to use the facilities and the infrastructure of the hangar.  TLA provides the same cargo services as those it previously provided in the cargo terminal.  The fee was established based on valuation reports performed by independent companies, reflecting the economic premium obtained by the use of such a location in TAM's cargo activities.  The amount recognized in our income statement for the year ended December 31, 2010 totaled R$2 million and for the year ended December 31, 2009, totaled R$2 million. C.  Interests of Experts and Counsel Not applicable. ITEM 8.  FINANCIAL INFORMATION A.  Consolidated Statements and Other Financial Information See "Item 3.  Key Information — A.  Selected Financial Data" and "Item 18.  Financial Statements." Legal Proceedings We are involved in various judicial and administrative proceedings arising from the normal course of our businesses.  We have established provisions for all amounts in dispute that represent a probable loss in the view of our legal advisors and in relation to those disputes that are covered by laws, administrative decrees, decrees or court rulings that have proven to be unfavorable.  The table below sets forth the total estimated value of amounts claimed, provisions for contingencies and court deposits at December 31, 2010 and December 31, 2009: Total Estimated Amount Claimed December 31, 2010
     Total Estimated Amount Claimed December 31, 2009
     Provision for Contingencies December 31, 2010
     Provision for Contingencies December 31, 2009
     Court Deposits December 31, 2010
     Court Deposits December 31, 2009(R$ thousands)Tax proceedings
     1,118,295
     1,699,434
     222,357
     690,774
     82,252
     77,189Labor proceedings
     345,744
     256,306
     20,930
     18,675
     28,898
     21,848Civil proceedings
     122,588
     99,295
     86,271
     67,380
     14,137
     12,218Total
     1,595,627
     2,055,035
     329,558
     776,829
     125,287
     110,256
  We believe that our results of operations and financial condition would not be significantly affected by any unfavorable single decision in such lawsuits because we have established provisions in respect of the amounts at risk in the tax and civil proceedings and because any future cash disbursement we may be liable for in respect of any unfavorable decisions in tax proceedings may be paid in installments over a long period. Proceedings filed against us Civil proceedings We are party to approximately 13,100 civil proceedings arising from the normal course of our business and the total amount claimed in these proceedings as at December 31, 2010 was estimated at R$122.6 million, compared to R$99.2 million at December 31, 2009.  The vast majority of these proceedings involve minor cases relating to customer relations.  The more significant actions relate to civil liability and disputes resulting from cancellation of agreements to provide services and commercial representation. At December 31, 2010, we had established provisions to address the potential liability from the civil proceedings classified with "probable risk" in the total amount of R$86.3 million (compared to R$67.4 million at December 31, 2009). Damage claims relating to accidents TAM Linhas Aéreas is party to 7 actions filed by relatives of victims of the accident that occurred in October 1996 involving one of our Fokker 100 aircraft which crashed during departure, in addition to 43 actions filed by residents of the region of the accident's location, who are claiming pain and suffering.  Any damages resulting from the aforementioned legal claims are covered by the civil liability guarantee provided for in ourinsurance policy withUnibanco Seguros S.A.  We believe that the cap of U.S.$400 million in that insurance policy is sufficient to cover any penalties and judicial or extrajudicial agreements arising as a result of this matter. -85 -


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The insurance coverage related to the risks and liabilities from the accident that occurred in July 2007 with an Airbus A320 aircraft has, as of December 31, 2010, been sufficient, with settlements being made directly between the insurance company and the victims' families.  As of December 31, 2010, approximately 192 settlements had been made and others were under negotiation with the insurance company.  Our management believes that the insurance coverage is adequate and that we did not incur any expenses that were not contemplated by the scope of the insurance policy that would result in TAM's obligation to pay. Tax proceedings We are party to various administrative proceedings or court actions in which we are claiming non‐application of a specific tax or reimbursement of taxes paid improperly, or in which we are contesting the charging of specific taxes resulting from the normal course of our business; the total amount claimed in these proceedings as at December 31, 2010 was estimated at R$1,118.3 million (compared to R$1,699 million at December 31, 2009).  We cannot guarantee that we will succeed in obtaining these tax credits or securing a favorable outcome in respect of the application of those taxes.  At December 31, 2010, we had established provisions totaling R$222 million for tax proceedings involving probable loss to us, including those listed below.  In respect of certain proceedings, we have made court deposits, while in respect of others we have court protection that allows us to dispute the cases without need for partial payments or judicial deposits.  In the event there is a difference between the amounts we have paid and deposited and the timing of payments required to satisfy the obligation recorded, we have the ability to fund any difference using cash from our operations and to the extent necessary, we are prepared to liquidate our financial investments to pay any such obligation. PIS and COFINS We challenged the constitutionality of the change in the tax basis of the PIS and the increase in the contribution and basis of calculation of COFINS, introduced under Law No. 9,718/98.  On November 9, 2005, the Supreme Court of Justice ruled that the change in the tax basis of the PIS was unconstitutional.  During 2006, we were successful in obtaining one favorable ruling which enabled us to partially reverse a provision of R$46 million that we had established.  In November 2009, Brazil established the Fiscal Recovery Program (REFIS) to refund amounts previously required to be paid under Law No. 9,718/98.  TAM Linhas Aéreas has applied to REFIS to settle its outstanding tax debt relating to Law No. 9,718/98. Tariff surplus We had been subject to a tariff surcharge that the government collected at a monthly rate of 1.0% of our domestic airfare revenues.  However, we have not paid this tariff surcharge since 2001 because we filed an injunction suspending our obligation to pay it.  While we waited for the Superior Tribunal de Justiça's (Superior Court of Justice's) decision regarding our injunction, we have been making provisions for the tariff surcharge.  In September 2010, the Superior Tribunal de Justiça confirmed a decision that definitively released us from paying the additional tariff.  In light of this decision, we reversed the accounting provision we had collected from June 2001 through August 2010, which totaled R$585.9 million (R$439.4 million, net of income tax). ICMS on the importation of aircraft Proceedings had been filed against TAM Linhas Aéreas concerning the alleged failure to pay ICMS due on imported aircraft, parts and engines.  In response, we had filed the appropriate challenges on the basis that ICMS should not be payable on leased aircraft.  On May 30, 2007, theSupremo TribunalFederal(Federal Supreme Court) ruled in our favor in respect of one of these cases.  On the basis of this precedent decision and of recent rulings of the Superior Tribunal of Justice, we believe our chance of loss in respect of the other pending cases is remote.  We had not established any provisions for the amounts in question. -86 -


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Airline worker fund We have filed an ordinary action with a request for an injunctive relief for non‐payment of the Airline Workers Fund, a tax charged monthly at the rate of 2.5% of an airline's payroll.  Payment of the tax credit is suspended by virtue of the injunctive relief in our favor.  Currently, the proceeding is in the expert witness phase.  In 2004, the INSS issued an assessment notice in order to toll the Statute of Limitations of the social security credit as a result of non‐payment of the Airline Workers Fund.  The administrative proceeding has been suspended until completion of the judicial process.  The approximate adjusted value of this proceeding at December 31, 2010 was R$174 million.  In the opinion of our legal advisors, the chance of loss in respect of this proceeding is considered probable.  On the basis that payment of this tax is required by law, our management established a provision in accordance in the amount of R$174 million until the final judicial outcome of the matter. Labor actions At December 31, 2010 we were party to 1,810 labor claims filed by our employees, former employees or service providers arising from the normal course of our business (compared to 1,406 labor claims at December 31, 2009).  We do not believe that such claims (individually or collectively) will have a material adverse effect on our results of operations in the event of unfavorable rulings.  Of those 1,810 labor claims, 1,300 are against TAM Linhas Aéreas, and 510 are against service providers or sales representatives and TAM Linhas Aéreas.  In the case of the individual labor claims, the principal disputes refer to demands for the payment of hazard supplements, overtime and make‐up work, as well as requests for the payment of wage differentials in specific cases involving crew members.  We are part of nine class actions, for which additional payment for ramp and maintenance functions is sought.  The total assessed value of those actions was approximately R$345.7 million at December 31, 2010, and according to our legal advisors, R$9.4 thousand correspond to claims with a remote chance of loss, R$316 thousand correspond to claims with a possible chance of loss, and R$19.7 thousand correspond to claims with a probable chance of loss.  We have established provisions totaling R$20,930 thousand at December 31, 2010 in respect of all of these claims.  For specific actions we have made court deposits totaling R$28,898 thousand to address labor claims.  The provision is based on our management's estimate as to likely losses we might incur as a result of the various labor claims filed by current or former employees.  We believe the provisioned amount is sufficient as to cover probable losses, estimated as applicable, in the event that the rulings are unfavorable to us. Proceedings instituted by us Damages relating to price freezes We are plaintiffs in an action filed against the Brazilian government in 1993 seeking damages for the breaking‐up of the economic‐financial equilibrium of an air transport concession agreement as a result of having to freeze our prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period.  The process is currently being heard before the Federal Regional Court and we are awaiting judgment on appeals we have lodged requesting clarification of the initial decision (which we challenged).  The estimated value of the action is R$245 million, based on a calculation made by an expert witness of the court.  This sum is subject to delinquent interest since September 1993 and inflation adjustment since November 1994.  Based on the opinion of our legal advisors and recent rulings handed down by the Supreme Court of Justice in favor of airlines in similar cases (specifically, actions filed by Transbrasil and Varig) we believe that our chance of success is probable.  Our management has not recognized these credits to our accounts and will only do so when the aforementioned decision is made final. Claims on amounts paid in error relating to ICMS We consider payments of ICMS made between 1989 and 1994 to be amounts paid in error because we believe it was unconstitutional to charge ICMS on air navigation services.  TAM Linhas Aéreas has filed claims against various states in Brazil to claim the amounts paid in error.  Rulings on these claims are pending.  The total value involved in these claims is R$55 million.  Our policy is to only adjust the value of these claims for inflation at the time that payment in respect thereto are recorded in our financial statements. -87 -


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Additional airport tariffs — ATAERO We also filed an ordinary claim, with a request for early judgment, in relation to a dispute concerning the legality of charging theAdicional dasTarifas Aeroportuárias(Additional Airport Tariffs, or ATAERO), which are charged at a rate of 50% on the value of tariffs and airport tariffs.  The total amount involved, adjusted for inflation, at December 31, 2010 totaled R$918 million. Dividends and Dividend Policy Amounts available for distribution At each general shareholders' meeting, our board of directors must propose the allocation of net profits earned during the preceding year (based on our non‐consolidated annual financial statements).  Brazilian corporation law provides that a company's net profit is defined as the results from the year, after deductions of income tax and social contribution on the net profit for that year, net of accumulated losses from preceding years and amounts allocated to profit‐sharing plans.  Brazilian corporation law also provides that the amounts available for distribution of dividends are the amounts corresponding to the net profit: ·less the amount allocated to the legal reserve; and ·less the amount allocated to the contingency reserve, if any. The payment of dividends may be limited to the amount of net profit earned, provided the difference is recorded as a future profit reserve, as discussed below.  The calculation of our net income for this purpose is made in accordance with Brazilian GAAP, which differs from IFRS in certain significant respects. According to the Brazilian corporation law and our by‐laws, we must maintain a legal reserve to which we must allocate 5% of our profit for each year until we reach 20% of the paid‐up capital.  We are not required to allocate any amount to the legal reserve in any year in which that reserve, when added to the others, is equal to or greater than 30% of our total capital.  Accumulated losses, if any, can be offset by the legal reserve.  If not utilized for these purposes, the legal reserve can only be utilized for a capital increase.  The legal reserve is subject to approval of the shareholders at a regular shareholders' meeting, and can be transferred to the capital, but it is not available for the payment of dividends in subsequent years.  Our net‐profit calculations and allocations to reserves for any year are determined based on the non‐consolidated (parent company) annual financial statements prepared in accordance with Brazilian GAAP. Brazilian corporation law provides that part of a company's net profit can be utilized to constitute discretionary or statutory reserves, which must be described in the company's by‐laws, precisely and comprehensively indicating the purpose of such reserves, the criteria for determining the annual portion of net profits that will be allocated for constituting the reserves and the maximum limit of the reserves.  Currently, our by‐laws do not provide for the constitution of statutory reserves or contingency reserves. According to Brazilian corporation law, the amount of mandatory dividend that exceeds the net profit realized in any year can be allocated for future‐profit reserves and the payment of mandatory dividends can be limited to the amount of net profit earned in the year.  The profits from any future year consist of the sum of (i) the portion of positive net profit equal to the net worth equivalency in that year, if any, and (ii) profit derived from transactions in respect of which the due date for repayment occurs after the end of the following year.  To the extent that amounts allocated for future profits reserve are earned in subsequent years, those amounts must be added to the payment of dividends relative to the year in which they were earned.  The profits recorded in the future profits reserve, when earned and if not absorbed by losses in later years, must be added to the first dividends declared after they are earned. A company is permitted to allocate to the future profit reserves all income from equity gains in subsidiaries that are not distributed to the company in the form of cash dividends.  When such gains are distributed to the company in the form of cash dividends, the company is required to reverse the reserve.  Under Brazilian corporate law, our shareholders may decide, upon a proposal of our board of directors, to allocate a discretionary amount of our net profits to a contingency reserve for estimated future losses which are deemed probable. -88 -


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The distributable amount may be further increased by the reversal of such reserve in the fiscal year when the reasons that justified the creation of such reserve cease to exist or in which the anticipated loss occurs.  Accordingly, there is no specific percentage of net profit allocable to this type of reserve. The amounts available for distribution can be increased by reversing the contingency reserve for losses considered probable, established in previous years, but not realized.  Allocations to the contingency reserve are also subject to the approval of shareholders at a shareholders' meeting. The balance of the profit reserve accounts (except for contingency reserves and future profit reserves) must not exceed our total capital.  In the event that the balance of the profit reserve accounts does exceed our capital, a shareholders' meeting must decide if the excess amount will be utilized to pay the subscribed but not paid‐up capital, subscription of new shares or the distribution of dividends. Brazilian corporation law provides that any net profit not allocated for the accounts set out above must be distributed as dividends. Mandatory dividend Brazilian corporation law generally requires that the by‐laws of each company must specify the minimum available percentage of profit to be distributed to shareholders as dividends, also known as the mandatory dividend. The compulsory dividend is based on a percentage of adjusted profit (and must be a minimum of 25%) instead of being based on a fixed monetary amount per share.  In the event that a company's by‐laws do not specifically address this issue, Brazilian corporation law provides that the applicable percentage is 50%.  Our by‐laws provide that at least 25% of the balance of the net profit from the preceding year (as calculated in accordance with Brazilian corporation law and Brazilian GAAP) must be distributed as mandatory dividends.  Brazilian corporation law allows us, however, to suspend the mandatory dividend in any year in the event that our board of directors informs the shareholders' general meeting that the distribution would not be feasible in light of our financial situation.  Any such suspension of the compulsory dividend is subject to both the review of our fiscal council and approval of the shareholders' meeting.  In the case of a public company, the board of directors must file a specific justification for the suspension with the CVM within five days of the shareholders' meeting.  Any dividends not distributed as a result of any such suspension must be allocated to a special reserve.  If not absorbed by subsequent losses, that amount must be distributed in the form of dividends as soon as the company's financial situation allows such distribution. Distribution of dividends Brazilian corporation law provides that we must hold a general shareholders' meeting by April 30th of each year at which, in addition to other matters, shareholders must make decisions regarding the allocation of our net profit with respect to the fiscal year ended immediately prior to our shareholders' meeting and the distribution of our annual dividends.  Interim dividends may also be declared by our board of directors.  Any payment of an interim dividend may be set off against the amount of the mandatory dividend distribution for that fiscal year.  Any holder of shares at the time of the declaration of dividends has the right to receive those dividends.  Dividends corresponding to shares held by custodians are paid to the custodian for distribution to shareholders.  According to Brazilian corporation law, dividends must generally be paid to owners within 60 days after the dividend is declared, unless shareholders elect a different payment date which, in any case, must occur before the end of the year in which the dividend was declared.  Dividends attributed to shareholders and not claimed shall not earn interest or be subject to inflation adjustment and the statute of limitations in respect of receiving such dividends will expire (in our favor) three years from the date such dividends were attributed to the shareholders. Interest on shareholders' equity According to current Brazilian tax law, companies have been authorized since January 1, 1996 to distribute interest on shareholders' equity instead of dividends and treat such distributions as deductible expenses for the purposes of income tax.  Since 1998, such distributions may also be treated as deductible expenses for the purposes of social contributions.  Such interest, which may be paid at the discretion of our board of directors, subject toapproval of the shareholders' meeting, is limited to the daily variations in the TJLP on a pro-rated basis and may not exceed the greater of: -89 -


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·50% of net income (after deducting provisions for social contribution on the net profit and before provision for income tax and interest on the company's own capital) for the period for which the payment is made; or ·50% of retained profits and profit reserves at the beginning of the year in relation to which the payment is made. For accounting purposes, although the deductible expense must be reflected in our statement of income in order to be deductible, the expense is immediately reversed before calculating net profit for the statutory financial statements and deducted from net worth in a manner similar to a dividend.  Income tax of 15% (or 25% in the event that the shareholder resides in a tax haven jurisdiction) is withheld at source and owed by shareholders upon receipt of the interest; however the tax is normally paid by the companies on behalf of the shareholders upon distribution of the interest. Our by‐laws and article 9, paragraph 7, of Law No. 9,249/95 provide that interest on Net Equity can be attributed to the payment of dividends for purposes of the mandatory dividend. Our dividend policy We did not distribute dividends or interest on capital to our shareholders between 1997 and 2004 because we had accumulated losses for those years.  Our directors declared a dividend payment of R$72,065 thousand in respect of the year ended December 31, 2007, which was approved by our shareholders on April 30, 2008.  Our board of directors declared that no dividends or interest on share capital would be distributed to our shareholders with respect to 2008 because we recorded a net loss in 2008.  Our board of directors declared a dividend payment in the gross amount of R$236,722 thousand in respect of the year ended December 31, 2009, which was approved by our shareholders on April 30, 2010.  Our board of directors declared a dividend payment of R$181,664 thousand in respect of the year ended December 31, 2010. We intend that any distribution of dividends or interest on capital be made in future will be made in accordance with Brazilian corporation law and our by‐laws.  Our board of directors may declare dividends and elect that they be paid against either accumulated profits or existing profits reserves, following approval at a shareholders' meeting.  The amount distributed will depend on various factors such as our financial condition and results of our operations, our cash requirements, prospects and other factors considered relevant by our board of directors and shareholders.  Holders of our ADSs will be entitled to the same rights in respect of any distribution of dividends as holders of our preferred shares. In addition, the payment of dividends to our shareholders is contingent upon the net profit distributed as dividends by our operating subsidiaries.  We may not be able to pay dividends to our shareholders in the event that our operational subsidiaries are unable to distribute dividends.  See "— Amounts available for distribution." B.  Significant Changes None ITEM 9.  THE OFFER AND LISTING A.  Offer and Listing Details In the United States, our preferred shares trade in the form of ADSs.  As of December 31, 2010, the ADSs represented approximately 42.6% of our preferred shares and 27,4% of our current global public float, compared to 41.6% and 27.7%, respectively, as of December 31, 2009. -90 -


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The following tables set forth the reported high and low closing sales prices for our ADSs on the NYSE for the periods indicated. U.S.$ per ADSQuarter

   Low

   Average(1)

   HighFirst quarter 2010

   15.80

   19.12

   24.85Second quarter 2010

   12.78

   15.61

   18.94Third quarter 2010

   13.81

   18.96

   23.21Fourth quarter 2010

   23.05

   25.85

   24.44First quarter 2011

   19.20

   22.05

   24.91
 
 (1)       Calculated as the average of closing prices for the period. U.S.$ per ADSMonth

   Low

   Average(1)

   HighOctober 2010

   23.05

   24.01

   25.49November 2010

   24.10

   24.82

   25.70December 2010

   23.71

   24.49

   25.85January 2011

   22.00

   24.25

   24.91February 2011

   20.27

   21.66

   22.65March 2011

   19.20

   20.49

   22.05April 2011

   18.12

   20.08

   21.22May 2011 (through May 9)

   20.20

   20.92

   21.46
 
 (1)       Calculated as the average of closing prices for the period. The following table sets forth the reported high and low closing sale prices for our preferred shares on the BM&FBOVESPA for the periods indicated. R$ per Preferred Share(1)Year

   Low

   Average(2)

   High2006

   40.15

   57.15

   75.002007

   39.64

   54.42

   68.712008

   13.70

   31.42

   42.002009

   12.70

   21.89

   39.202010

   23.37

   33.91

   43.20
 
 (1)       These figures have not been adjusted to reflect the share split agreed on May 16, 2005, pursuant to which holders of our existing shares received two shares of the same class and type for each share held. (2)       Calculated as the average of closing prices for the period. R$ per Preferred Share(1)Quarter

   Low

   Average(2)

   HighFirst quarter 2008

   29.66

   36.22

   42.00Second quarter 2008

   29.52

   34.49

   40.30Third quarter 2008

   24.25

   32.95

   40.53Fourth quarter 2008

   13.70

   22.09

   37.65First quarter 2009

   12.70

   16.66

   22.63Second quarter 2009

   12.87

   17.65

   21.25Third quarter 2009

   20.20

   23.81

   26.15Fourth quarter 2009

   23.00

   29.44

   39.20First quarter 2010

   28.40

   34.38

   42.99Second quarter 2010

   23.37

   27.89

   33.30Third quarter 2010

   24.44

   32.80

   39.44Fourth quarter 2010

   38.01

   40.73

   43.20
 
 (1)       These figures have not been adjusted to reflect the share split agreed on May 16, 2005, pursuant to which holders of our existing shares received two shares of the same class and type for each share held. (2)       Calculated as the average of closing prices for the period. R$ per Preferred ShareMonth

   Low

   Average(1)

   HighDecember 2009

   30.40

   35.36

   39.20January 2010

   34.47

   39.17

   42.99February 2010

   31.15

   33.98

   36.10March 2010

   28.40

   30.74

   33.95April 2010

   29.45

   31.39

   33.30May 2010

   23.75

   26.89

   30.91June 2010

   23.37

   25.67

   27.47July 2010

   24.44

   27.58

   29.47August 2010

   28.36

   32.93

   37.90September 2010

   35.09

   37.89

   39.44October 2010

   38.01

   39.72

   41.86November 2010

   40.45

   41.67

   43.20December 2010

   38.96

   40.80

   42.50January 2011

   36.61

   40.07

   41.29February 2011

   33.50

   35.60

   37.43March 2011

   31.50

   33.29

   35.69April 2011

   29.75

   31.06

   32.43May 2011 (through May 9, 2011)

   31.98

   32.99

   34.08
 
 (1)       Calculated as the average of closing prices for the period. -91 -




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B.  Plan of Distribution
 Not applicable. C.  Markets Trading on BM&FBOVESPA BM&FBOVESPA, apublicly‐held company, is the principal securities exchange in Brazil. Trading on such exchanges is limited to member brokerage firms and to a limited number of authorized non‐members. The CVM and BM&FBOVESPA have discretionary authority to suspend trading in shares of a particular issuer under certain circumstances.  Trading in securities listed on BM&FBOVESPA, including theNovo Mercadoand Levels 1 and 2 segments, may be effected off the exchanges in the unorganized over‐the‐counter market in certain circumstances. The shares of all companies listed on BM&FBOVESPA, includingNovo Mercadoand Level 1 and Level 2 companies, are traded together. Settlement of transactions occurs three business days after the trade date.  Delivery of and payment for shares is made through the facilities of separate clearing houses for each exchange, which maintain accounts for member brokerage firms.  The seller is ordinarily required to deliver the shares to the clearing house on the second business day following the trade date.  The clearing house for BM&FBOVESPA is the CBLC. In order to reduce volatility, BM&FBOVESPA has adopted a "circuit breaker" system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever specified indices of BM&FBOVESPA fall below the limits of 10% and 15%, respectively, in relation to the index levels for the previous trading session. Although the Brazilian equity market is Latin America's largest in terms of market capitalization, it is smaller and less liquid than the major U.S. and European securities markets.  Moreover, BM&FBOVESPA is less liquid than the New York Stock Exchange and other major exchanges in the world.  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 trading by the public, the remainder being held by small groups of controlling persons, governmental entities or one principal shareholder. Trading on Brazilian stock exchanges by non‐residents of Brazil is subject to registration procedures.  See "Item 10.  Additional Information — D.  Exchange Controls." -92 -


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Regulation of Brazilian Securities Markets The Brazilian securities markets are principally governed by Law No. 6,385, of December 7, 1976, and Brazilian corporation law, each as amended and supplemented, and by regulations issued by the CVM, which has authority over stock exchanges and the securities markets generally; the National Monetary Council; and the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. These laws and regulations, among others, provide for licensing and oversight of brokerage firms, governance of the Brazilian stock exchanges, disclosure requirements applicable to issuers of traded securities, restrictions on price manipulation and protection of minority shareholders.  They also provide for restrictions on insider trading.  However, the Brazilian securities markets are not as highly regulated and supervised as the U.S. securities markets or securities markets in some other jurisdictions.  Accordingly, any trades or transfers of our equity securities by our officers and directors, our controlling shareholders or any of the officers and directors of our controlling shareholders must comply with the regulations issued by the CVM. Under Brazilian corporation law, a corporation is either public (companhiaaberta), as we are, or closely held (companhia fechada).  All public companies are registered with the CVM and are subject to reporting requirements.  Our preferred shares are listed on the Level 2 segment of BM&FBOVESPA. See "—BM&FBOVESPA's Different Corporate Governance Levels." We have the option to ask that trading in securities on BM&FBOVESPA be suspended in anticipation of a material announcement.  Trading may also be suspended on the initiative of BM&FBOVESPA or the CVM, based on or due to, among other reasons, a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to inquiries by the CVM or BM&FBOVESPA. The Brazilian over‐the‐counter market consists of direct trades between individuals in which a financial institution registered with the CVM serves as intermediary.  No special application, other than registration with the CVM, is necessary for securities of a public company to be traded in this market.  The CVM requires that it be given notice of all trades carried out in the Brazilian over‐the‐counter market by the respective intermediaries. BM&FBOVESPA's Different Corporate Governance Levels BM&FBOVESPA, in carrying out its self‐regulatory functions, has established three differentiated levels of corporate governance:  Level 1, Level 2 andNovoMercado. Each of the different corporate governance levels includes companies that agree, on a voluntarily basis, to adopt the corporate governance practices established for the level they have adopted.  These corporate governance practices go beyond those required by law. The entry of a company into any one of the special listing segments of the BM&FBOVESPA occurs through the signing of a contract that obliges the company to abide by the rules of corporate governance established in the regulations for the relevant level. BM&FBOVESPA Level 2 Preferred shares with restricted voting rights Voting rights are guaranteed to holders of preferred shares with respect to the following issues: (i) transformation, merger, consolidation or spin‐off of the company, (ii) valuation of assets to be used for payment of capital increases by the company, (iii) selection of a specialized company to determine the economic value of our shares for the purpose of our delisting or discontinuation of our Level 2 registration, (iv) the approval in shareholders meetings of agreements between the company and its controlling shareholders, both directly and through third parties, as well as with other companies in which the controlling shareholders may have an interest, whenever required by law, (v) amending or changing terms in the company's by‐laws that result in a failure on the part of the company to meet the requirements established under the Level 2 regulations. -93 -


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Tag along rights A change of control of a Level 2 listed company must be conditioned on the acquiror undertaking, within a maximum period of 90 days from the date of the acquisition of the controlling interest, to make a public offer to purchase (i) 100% of the common shares at a price per share equal to the highest price offered per common share so as to guarantee that all common shareholders are treated equally for purposes of the change of control, and (ii) 100% of the preferred shares at a price per share of 70% of the price offered to the holders of the common shares.  In the event of a change of control, we have voluntarily adopted a provision in our bylaws, according to which we will offer to the preferred shareholders 100% of the price per share paid to the controlling shareholder group. Similarly, any party that acquires a controlling interest in the company through successive purchases of shares will be obliged to make a public offer to purchase the remaining shares as described above, and to pay the difference between the price it paid for the shares acquired during the previous six months, duly adjusted in accordance with the inflation index or any other monetary correction applicable to the relevant period, and the price to be paid to the other shareholders as described above. Free float Companies listed on Level 2 segment of the BM&FBOVESPA must maintain a minimum percentage of shares in circulation (free float), equal to at least 25% of its total share capital.  This percentage must be maintained for the duration of the Level 2 registration. Public offers of shares through mechanisms that favor broad distribution In each public offer of shares, we must make every effort to ensure the broad distribution of our shares, through the adoption of special procedures that must appear in the relevant prospectus, such as guaranteeing access to all qualified interested investors and distribution of at least 10% of the offer to private individuals or non‐institutional investors. Introduction of improvements in financial statements We must present our quarterly information report (ITR), or other unaudited financial information, including information reconciled to U.S. GAAP or IFRS standards, in each case translated into English, within a maximum of 15 days after the time established by law for the publication of quarterly information.  The ITR must include, in addition to the obligatory information established by law: (i)          a consolidated balance sheet, a consolidated income statement and a report on consolidated performance, if obliged to present consolidated annual financial statements at the end of the financial year; (ii)         information on the equity positions of all investors, including private individuals, holding, directly or indirectly, over 5% of our voting capital; (iii)        consolidated information on the number and characteristics of securities issued by us, and whether held, directly or indirectly, by individuals or groups forming the controlling shareholder group, by directors or by members of the audit committee; (iv)        information on the acquisition and disposition of securities over the 12 immediately preceding months by investors covered in item (iii) above with respect to relevant securities; (v)         in the explanatory notes, company and consolidated cash flow statements, if we are obliged to present consolidated statements at the end of the financial year; and (vi)        information on the number of outstanding shares and the percentage of total issued shares that they represent. In the Annual Information Report (IAN), the company should include, in addition to legal requirements, the information listed in items (iii), (iv) and (vi) above. -94 -


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The quarterly information must be accompanied by a special review report issued by an independent auditor that is duly registered with the CVM, observing the methodology specified in the regulations published by the CVM. As of 2006 onward, we must, in addition to the terms of current legislation and regulations in Brazil, release (i) financial information prepared in accordance with international standards of U.S. GAAP or IFRS or release financial information, in English, also disclosing the net income and shareholders' equity at the end of the respective year, as determined according to accounting practices adopted in Brazil; or (ii) financial statements, in English, prepared in accordance with Brazilian corporation law, together with additional notes demonstrating the reconciliation of results of operations and equity according to Brazilian GAAP and U.S. GAAP or IFRS, as the case may be, evidencing the main differences between the applied accounting criteria.  In addition, the annual financial statements must include, in the explanatory notes, a company cash flow statement and a consolidated cash flow statement, if applicable. Compliance with transparency rules on the part of controlling shareholders and managers in transactions involving our shares Our directors, our controlling shareholder group and members of our audit committee must report to BM&FBOVESPA the number and characteristics of our securities which they hold, directly or indirectly, including associated derivatives.  This information must be provided to the BM&FBOVESPA immediately after any such person is elected, or acquires control, as the case may be. In the same way, any transactions that may be effected with respect to securities and associated derivatives dealt with in this item must be communicated in detail to the BM&FBOVESPA, including pricing information, within ten days of the end of the month in which the transaction occurs.  These obligations are extended to securities and their associated derivatives that may be held, directly or indirectly, by spouses, partners and dependents who are included in the annual income tax declaration of directors, controlling shareholders, and members of the audit committee. Shareholders' agreement, stock option programs and contracts with companies in the same economic group We must submit to BM&FBOVESPA a copy of any shareholders' agreement filed at our headquarters.  Accordingly, whenever we sign new shareholders' agreements or amendments to any existing shareholders' agreement, the submission to BM&FBOVESPA must occur within five days following its filing and/or signing.  The date of filing and/or registration of any shareholders' agreement at our headquarters must be indicated on the copy. Details of stock option programs or other programs for the acquisition of any of our securities by our employees or directors must also be submitted to BM&FBOVESPA and disclosed. Finally, we must publish information setting out details of each agreement (a) between us and our subsidiaries and associated companies, directors and members of our controlling shareholder group, (b) between us and any company controlled by or associated with the directors and any member of the controlling shareholder group, as well as with other companies that form, in conjunction with any one of these parties, the same group, whetherde factoorde jure, in each case, whenever a single agreement, or a group of successive agreements, with or without the same purpose, in any period of one year, represents values of (i) R$200,000 or more, or (ii) 1% of our net stockholders' equity, whichever is greater. Resolution of disputes through arbitration We and our controlling shareholder group, directors and members of our audit committee must resolve through arbitration all disputes or controversies related to the Level 2 regulations, our by‐laws, Brazilian corporation law and any other regulations regarding the financial markets or securities, in each case in accordance with the terms of the Market Arbitration Chamber (Câmara deArbitragem do Mercado). -95 -


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Cancellation of Level 2 registration In the event we cancel the registration of our shares on Level 2 of BM&FBOVESPA, or de‐list as a publicly listed company, a public offering by the controlling shareholder group for the acquisition of all our outstanding shares will be required.  The minimum price to be paid per share will be determined through a report on the valuation of our shares, which must be prepared by a specialized company of proven experience that is independent of us, our directors and our controlling shareholder group, in addition to satisfying the applicable terms of and carrying responsibility under Brazilian corporation law. The choice of the specialized company responsible for determining the economic value of our shares is to be determined at a shareholders' meeting at which preferred shareholders will be entitled to vote, following presentation by the board of directors of a list of three specialized companies nominated for such purpose.  The selection must be made on the basis of a majority vote of the free float shares, excluding abstentions.  The cost of the valuation report will be borne in full by the controlling shareholders. In the event that the valuation report is available by the date of the shareholders' meeting called for the purpose of canceling our listing as a public company, the controlling shareholders must disclose the value per share or per 1,000 shares on the basis of which the offer to purchase will be made.  Unless the price per share announced by the controlling shareholder group in the shareholders' meeting is greater than or equal to the value determined in the valuation report, the meeting will automatically be cancelled, and timely notification of this fact must be given to the market, unless the controlling shareholders expressly agree to make the offer to purchase at a price per share equal to the economic value per share as set forth in the valuation report. The cancellation of registration as a listed company must follow the procedures and meet the other requirements established in the regulations applicable under the terms of current law applicable to a Brazilian company, particularly those appearing in regulations published by the CVM on the subject. Divestment of control following abandonment of Level 2 listing In the event that we abandon or cancel our Level 2 listing and in the subsequent 12 months there is a change in our control, the controlling shareholders relinquishing control and the acquiror undertake, jointly and with joint responsibility, to acquire the shares of all shareholders at the price per share and pursuant to the same terms and conditions obtained by the controlling shareholder group in the sale of their own shares in accordance with the inflation index or any other monetary connection applicable to the relevant period.  In the event that the price obtained by the controlling shareholder group for their shares is higher than the price per share offered to the other shareholders in the offer to purchase made in accordance with Level 2 regulations (see "— Cancellation of Level 2 registration"), the controlling shareholders relinquishing control and the acquiror undertake, jointly and with joint responsibility, to pay the difference between the proceeds in the operation for the transfer of control and the value paid to those shareholders who accept the terms of the offer. In addition, we and our controlling shareholders are obliged to register in our share registry book the obligation to fulfill the provision described in the paragraphs above. Significant Differences Between Our Corporate Governance Practices and NYSE Corporate Governance Standards We are subject to the NYSE corporate governance listing standards.  As a foreign private issuer, the standards applicable to us are considerably different to the standards applied to U.S. listed companies.  Under the NYSE rules, we are required only to (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our chief executive officer of any material non‐compliance with any corporate governance rules, and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practices required to be followed by U.S. listed companies.  The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below. -96 -


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Majority of Independent Directors The NYSE rules require that a majority of the board must consist of independent directors.  Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company.  Brazilian law does not have a similar requirement.  Under Brazilian law, neither our board of directors nor our management is required to test the independence of directors before their election to the board.  However, both Brazilian corporation law and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as well as the restrictions applicable to, a company's executive officers and directors.  Our directors meet the qualification requirements of Brazilian corporation law and the CVM, and a majority of our directors would be considered independent under the NYSE test for director independence.  Brazilian corporation law and our bylaws require that our directors be elected by our shareholders at a general shareholders' meeting. Executive Sessions NYSE rules require that the non‐management directors must meet at regularly scheduled executive sessions without management present.  Brazilian corporation law does not have a similar provision.  According to Brazilian corporation law, up to one‐third of the members of the board of directors can be elected from management.  The remaining non‐management directors are not expressly empowered to serve as a check on management, and there is no requirement that those directors meet regularly without management.  As a result, the non‐management directors on our board do not typically meet in executive session. Nominating/Corporate Governance Committee NYSE rules require that listed companies have a nominating/corporate governance committee composed entirely of independent directors and governed by a written charter addressing the committee's required purpose and detailing its required responsibilities, which include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. Compensation Committee NYSE rules require that listed companies have a compensation committee composed entirely of independent directors and governed by a written charter addressing the committee's required purpose and detailing its required responsibilities, which include, among other things, reviewing corporate goals relevant to the chief executive officer's compensation, evaluating the chief executive officer's performance, approving the chief executive officer's compensation levels and recommending to the board non‐chief executive officer compensation, incentive‐compensation and equity‐based plans.  We are not required under applicable Brazilian law to have a compensation committee.  Under Brazilian corporation law, the total amount available for compensation of our directors and executive officers and for profit‐sharing payments to our executive officers is established by our shareholders at the annual general meeting.  The board of directors is then responsible for determining the individual compensation and profit‐sharing of each executive officer, as well as the compensation of our board and committee members.  In making such determinations, the board reviews the performance of the executive officers, including the performance of our chief executive officer, who typically excuses himself from discussions regarding his performance and compensation. Audit Committee NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise, and (iv) is governed by a written charter addressing the committee's required purpose and detailing its required responsibilities.  However, as a foreign private issuer, we need only to comply with the requirement that the audit committee meet the SEC rules regarding audit committees for listed companies.  Brazilian corporation law requires companies to have a non‐permanentConselho Fiscalcomposed of three to five members who are elected at the general shareholders' meeting. -97 -


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Our statutory Fiscal Board is primarily charged with certain advisory, oversight and review functions with respect to the company's financial statements.  However, the statutory Fiscal Board, as required by Brazilian Corporate Law, has only an advisory role and does not participate in the management of the company.  Decisions of the statutory Fiscal Board are not binding on the company under Brazilian Corporate Law. As Brazilian Corporate Law does not specifically grant our statutory Fiscal Board the power to establish receipt, retention and complaint procedures regarding accounting, internal control and audit matters, or create policies for the confidential, anonymous treatment of employee concerns regarding accounting or auditing matters, we have also established an Audit Committee as a best corporate governance practice to address, at times working with the Ethics Committee, issues such as this, among others.  See "Item 6.C — Directors, Senior Management and Employees — Board Practices — Audit Committee."  We expect that there are some similar functions between the Audit Committee and our statutory Fiscal Board but we do not believe that our use of a fiscal board that complies with Brazilian Corporate Law, in combination with our Audit Committee, materially adversely affects the ability of our Audit Committee to act independently, satisfy the other applicable requirements of Exchange Act Rule 10A‐3. Shareholder Approval of Equity Compensation Plans NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions.  Under Brazilian corporation law, shareholders must approve all stock option plans.  In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval. NYSE rules require that listed companies adopt and disclose corporate governance guidelines.  We have not adopted any formal corporate governance guidelines beyond those required by applicable Brazilian law.  We have adopted and observe a disclosure policy, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, which, among other things, establishes black‐out periods and requires insiders to inform management of all transactions involving our securities. Code of Business Conduct and Ethics NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers.  Applicable Brazilian law does not have a similar requirement.  We have, however, adopted a Code of Ethics applicable to our officers, directors and employees.  See "Item 16B.  Code of Ethics." Internal Audit Function NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company's risk management processes and system of internal control. Sarbanes‐Oxley Act of 2002 We maintain controls and procedures designed to ensure that we are able to collect the information we are required to disclose in the reports we file with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC.  Our officer certifications under Section 404 of the U.S. Sarbanes‐Oxley Act of 2002 are included as Exhibits 12.1 and 12.2 to this Annual Report. D.  Selling Shareholders Not applicable. E.  Dilution Not applicable.  -98 -


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F.  Expenses of the Issue Not applicable. ITEM 10.  ADDITIONAL INFORMATION A.  Share Capital Not applicable. B.  Memorandum and Articles of Association We set forth below a brief summary of certain significant provisions of our by‐laws, Brazilian corporation law and the rules and regulations of the CVM.  Because this is a summary, it may not contain all information that is important to you.  Accordingly, this description is qualified entirely by references to our by‐laws and Brazilian corporation law. In addition, holders of our preferred shares will be entitled to all shareholders' rights provided to shareholders of companies listed on the Level 2 segment of BM&FBOVESPA.  For a summary description of these shareholder rights, see "Item 9. The Offer and Listing — C. Markets — BM&FBOVESPA's Differentiated Corporate Governance Practices." General Our corporate name is TAM S.A. and our head office is located in the city of São Paulo, state of São Paulo, Brazil.  We were registered with the Board of Trade of the state of São Paulo under NIRE number 35,300,150,007 and have been registered with the CVM as a public stock corporation under number 01639‐0 since 1997. All of our shares are registered with no par value and are indivisible.  Our entire capital stock is fully paid‐up.  We currently hold 402,311 treasury shares. Corporate purpose Pursuant to article 3 of our by‐laws, our corporate purposes are the participation (as either a shareholder or quotaholder) in companies engaged in scheduled air transportation services or related activities (including TAM Linhas Aéreas).  Our by‐laws provide that any sale of more than 50% of our holding of voting capital in TAM Linhas Aéreas to a third party is considered a change in corporate purpose and, accordingly, would allow shareholders to exercise their right to withdraw their shareholdings and receive in consideration the economic value of their shares, subject to the provisions of our by‐laws and the Brazilian corporation law.  See "Reimbursement and right of withdrawal." Rights of our common and preferred shares Each of our common shares gives the holder the right to vote on decisions of our shareholders' meetings.  Our preferred shares carry no right to vote on decisions of the shareholders' meetings, except (as long as we are listed on the Level 2 segment of BM&FBOVESPA) with regard to certain matters.  See "— Voting Rights." Our preferred shares shall have the following advantages as compared to our common shares: ·priority in the reimbursement of capital, without premium, in the event of our liquidation; and ·the right to be included in public offerings derived from the transfer of our control, at the same price paid per each common share of the controlling block. Reimbursement and right of withdrawal For purposes of the right of withdrawal, Brazilian corporation law provides that a dissident shareholder includes not only shareholders who vote against a specific resolution, but also those that have abstained from votingor failed to appear at the shareholders' meeting.  Brazilian corporation law provides that a dissident shareholder or shareholder with no voting rights has the right to withdraw from shareholding in a company upon receiving full reimbursement for all shares held in the event that the first invitation published for attending such shareholders' meeting is made (by a qualified quorum of shareholders representing at least 50% of the shares with the right to vote) to approve any of the following matters: -99 -


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·create preferred shares or increase an already existing class of preferred shares, without maintaining the same proportion in relation to the other classes of shares, unless already provided or authorized in the by‐laws; ·alter the preference, privilege, or conditions for redemption or amortization granted to one or more classes of preferred classes, or create a new class of shares with greater privileges than the existing classes of preferred shares; ·reduce the mandatory dividend; ·consolidate or merge with another company, including one of our controlling companies; ·participate in a group of companies; ·change of corporate purpose; ·transfer all shares to another company or receive shares in another company in such a way as to make the company whose shares were transferred to a wholly‐owned subsidiary of the merged company; ·perform a spin‐off that results in (i) a change in the company's corporate purpose (unless the company's assets and liabilities are transferred to a company that has substantially the same corporate purpose), (ii) a reduction in the compulsory dividend, or (iii) participation in a group of companies, as defined in Brazilian corporation law; or ·acquire control of another company for a price that exceeds the limits provided in Brazilian corporation law (and subject to the conditions set forth in Brazilian corporation law). In the case of the first two items set out above, only the holders of shares adversely affected may exercise the right of withdrawal. Whenever a company resulting from the consolidation, merger of shares, or spin‐off of a public stock corporation fails to obtain registration as a public stock corporation (and, if applicable, fails to obtain registration of its shares for trading on the stock exchange within 120 days of the date of the shareholders meeting that approved that decision), the dissident shareholders or shareholders without voting rights may also exercise the right of withdrawal. In the event that our shareholders approve any resolution for us to (i) consolidate or merge with another company, (ii) transfer all our shares to another company so as to transform our company into a wholly‐owned subsidiary of that company, or (iii) become part of a group of companies, the right of withdrawal may be exercised only if our shares fail to satisfy certain liquidity tests at the time of the shareholders' meeting. The right of withdrawal expires 30 days after publication of the minutes of the shareholders' meeting which approved any of the matters set out above.  In the case of the first two items above, the decision taken at the shareholders' meeting only becomes legally effective upon confirmation by shareholders holding preferred shares, which must be obtained at a special shareholders' meeting held within one year. In such cases, the 30‐day deadline begins on the date of publication of the minutes of the special shareholders meeting.  In the event that any redemption of shares held by dissident shareholders would potentially be prejudicial to our financial stability, we would have ten days following the expiration of that 30 day deadline to reconsider the resolution that caused the exercise of the right of withdrawal. -100 -


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Brazilian corporation law also provides that the value of any shares to be withdrawn by dissident shareholders, or shareholders with no voting rights who have exercised the right to withdraw, shall be valued in an amount greater than the portion of our net worth attributed to those shares, as demonstrated by reference to our assets in the latest balance sheet approved at a shareholders meeting (in the event that more than 60 days have passed since the date of that balance sheet, the dissident shareholders have the right to request that the value of their shares be calculated by reference to our assets on our most recent balance sheet). The change in the rights and benefits of our preferred shares was discussed at an extraordinary general shareholders' meeting held on September 19, 2008. The sale of more than 50% of our common stake in TAM Linhas Aéreas to a third party would be considered a change in our corporate purpose and would give our shareholders the right (subject to Brazilian corporation law and our by‐laws) to withdraw their shareholdings and receive the economic value of their shares. Increases in capital and preemptive rights Each shareholder has preemptive right in respect of any issuance of new shares we conduct for the purpose of increasing our capital (as well as in respect of subscribing to debentures convertible to shares and warrants).  The extent of the preemptive right is in direct proportion to the equity interest held by the shareholder and may be exercised at least 30 days after the publication of the notice of capital increase.  In the case of an increase of equal proportion in the number of shares of all existing types and classes, each shareholder may exercise the preemptive right only over the same type and class of shares already held.  In the event that the shares to be issued are of existing types and classes but the exercise of the preemptive right would result in a change in the respective proportions of our capital stock, the preemptive right may only be exercised over the types and classes identical to those already held by the shareholders and may only extend to any other shares in the event that these are insufficient to assure the shareholders the same proportion in our capital stock they had prior to the increase in capital.  In the event that there is an issuance of shares of types and classes different from those already existing, each shareholder may exercise their preemptive rights (in proportion to the same number of shares already held) over the shares of all types and classes in the capital increase. Our by‐laws provide that, in accordance with Brazilian corporation law and criteria set forth by our board of directors, preemptive rights may be excluded, or the deadline for exercise may be brought forward, in respect of any issuance of shares, subscription bonuses, debentures or other securities convertible to shares where such issuance is placed (a) via sale on the stock exchange or public subscription, or (b) in exchange for shares in a public offering of control acquisition, in accordance with applicable laws.  In addition, Brazilian corporation law provides that granting an option to purchase shares in relation to certain plans is not subject to preemptive rights. Shareholders' meetings Our board of directors is the competent body for calling our shareholders' meetings.  Notice of our shareholders' meetings must be published at least three times in theDiário Oficial do Estado, the official newspaper of the state where our headquarters are located and another newspaper in general circulation, currentlyValor Econômico.  Our shareholders' meetings take place in our headquarters, in the city of São Paulo, in the State of São Paulo.  Shareholders attending a shareholders' meeting must produce proof of their status as shareholders and proof that they hold the shares entitling them to vote. Voting rights Each common share grants the holder the right to one vote at shareholders' meetings. Our preferred shares do not grant their holders general voting rights except, for so long as we are listed on the Level 2 segment of BM&FBOVESPA, in relation to the following matters: ·any direct conversion, consolidation, spin‐off or merger of TAM; -101 -


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·agreements between us and our controlling shareholder(s), as well as other companies in which our controlling shareholder(s) have an interest, so long as such matters have been approved in a general shareholders' meeting to the extent required by law or statue; ·the evaluation of assets in relation to any capital increase; ·the appointment of any company specializing in evaluating the economic value of our shares in case of a mandatory tender offer launched by us or by our controlling shareholders if we elect to go private or if we elect to cease to follow the requirements of BM&FBOVESPA's Level 2 regulation; ·any change in our corporate purpose; and ·any change in, or the revocation of, provisions of our by‐laws resulting in any violation of certain requirements of BM&FBOVESPA's Level 2 regulation.  See "Item 9.  The Offer and Listing — C. Markets — BM&FBOVESPA's Differentiated Corporate Governance Practices." Brazilian corporation law provides that shares with no voting rights or restricted voting rights (which would include our preferred shares) must now carry unrestricted voting rights in the event we should fail to distribute, for three consecutive years, any fixed or minimum dividends granted by these shares until such time as the respective distribution is completed.  As a result of the fact that our by‐laws do not provide for any fixed or minimum dividend, such unrestricted voting rights do not apply to our preferred shares. Brazilian corporation law also provides that any change in the rights of preferred shareholders, or any creation of a class of shares with priority over the preferred shares must be approved by the owners of our common shares at a shareholders' meeting.  Any such approval will only become legally effective upon approval by the majority of our preferred shareholders at a special shareholders' meeting, at which preferred shareholders vote as a special class of shareholder. Brazilian corporation law grants the right to elect members of our board of directors (and alternates) at general shareholders' meetings to the holders of (i) preferred shares with no voting rights (or with restricted voting rights) representing at least 10% of the total capital, and (ii) common shares that are not part of the controlling group, representing at least 15% of the total voting capital.  In the event that the non‐controlling holders of preferred shares or common shares do not represent the respective thresholds set out above, Brazilian corporation law provides that holders of preferred shares and common shares representing at least 10% of our capital may combine their holdings in order to elect a member (and alternate) to our board of directors. Shareholders have certain rights that may not be altered by provisions of our by‐laws or resolutions of shareholders' meetings.  These rights are (i) in the case of common shares only, the right to vote at general shareholders' meetings, (ii) the right to participate in the distribution of dividends and interest paid on our own capital and to share in our remaining assets in the case of liquidation, (iii) rights to subscribe for shares or securities convertible to shares under certain circumstances, and (iv) withdrawal rights in certain cases.  Our by‐laws and a resolution of the majority of the shareholders with voting rights have the ability to establish as well as remove certain additional rights. Registration of Our Shares:  Form and Transfer Our preferred shares are held in registered book‐entry form, using the book‐entry form services of Banco Itaú S.A., as custodian.  Transfer of our preferred shares is carried out by means of an entry in their books, by debiting the share account of the transferor and crediting the share account of the transferee. Transfer of shares by a foreign investor are made in the same way and executed by the investor's local agent on the investor's behalf except that, if the original investment was registered with the Central Bank pursuant to foreign investment regulations, the foreign investor should also seek amendment, if necessary, through its local agent, of the Certificate of Registration to reflect the new ownership. -102 -


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The São Paulo Stock Exchange operates a central and fungible clearing system through the CBLC.  A holder of our preferred shares may choose, at its discretion, to participate in these systems and all shares elected to be put into the systems will be deposited in custody with the relevant stock exchange (through a Brazilian institution that is duly authorized to operate by the Central Bank and maintains a clearing account with the relevant stock exchange).  The fact that such shares are subject to custody with the relevant stock exchange will be reflected in our registry of shareholders.  Each participating shareholder will, in turn, be registered in our register of beneficial shareholders that is maintained by the relevant stock exchange and will be treated in the same way as registered shareholders. American Depositary Receipts JPMorgan Chase Bank, N.A., as depositary has executed and delivered the ADRs representing our preferred shares.  Each ADR is a certificate evidencing a specific number of American Depositary Shares, or ADSs.  Each ADS represents an ownership interest in one preferred share which we have deposited with the custodian, as agent of the depositary.  Each ADS also represents any securities, cash or other property deposited with the depositary but which they have not distributed directly to you.  Unless specifically requested by you, all ADSs will be issued on the books of our depositary in book‐entry form and periodic statements will be mailed to you which reflect your ownership interest in such ADSs.  In our description, references to American depositary receipts or ADRs shall include the statements you will receive which reflects your ownership of ADSs. The depositary's office is located at 4 New York Plaza, New York, NY 10004. You may hold ADSs either directly or indirectly through your broker or other financial institution.  If you hold ADSs directly, by having an ADS registered in your name on the books of the depositary, you are an ADR holder.  If you hold the ADSs through your broker or financial institution nominee, you must rely on the procedures of such broker or financial institution to assert the rights of an ADR holder.  You should consult with your broker or financial institution to find out what those procedures are. Because the depositary's nominee will actually be the registered owner of the shares, you must rely on it to exercise the rights of a shareholder on your behalf.  The obligations of the depositary and its agents are set out in the deposit agreement.  The deposit agreement and the ADSs are governed by New York law. C.  Material Contracts Most of our material contracts are directly related to our operating activities, such as contracts relating to aircraft leasing and fuel supply.  We do not have material contracts that are not related to our operating activities. Airbus Purchase Contracts A320 Family Purchase Agreement In 1998, we entered into a purchase agreement with Airbus S.A.S. for the purchase of 38 A319-100 and A320-200 aircraft, plus 5 options to lease these aircraft.  The last aircraft under this purchase agreement was delivered in February 2008. A350 Family Purchase Agreement In 2005, we entered into a purchase agreement with Airbus S.A.S. for the purchase of 10 A350-900 aircraft.  We later renegotiated this agreement and agreed to lease 22 A350, plus 10 options to lease these aircraft.  The A350 aircraft under this lease are scheduled to start being delivered in 2013. TAY Engine Maintenance Contract In 2000, we entered into an engine maintenance contract with MTU Motoren‐und Turbinen‐Union München GmbH, or MTU, pursuant to which MTU agreed to provide certain maintenance, refurbishment, repair and modification services with respect to approximately 105 TAY650‐15 aircraft engines.  This contract is complemented by a novation and amendment agreement between us and Rolls‐Royce Brazil Ltda.  pursuant towhich Rolls-Royce Brazil Ltda., replaced MTU as contract counterparty.  This agreement terminates on June 30, 2015. -103 -


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V2500 Engine Maintenance Contract In 2000, we entered into an engine maintenance contract with MTU Maintenance Hanover GmbH, or MTU Hanover, pursuant to which MTU Hanover agreed to provide certain maintenance, refurbishment, repair and modification services with respect to certain V2500‐A5 engines.  This agreement terminates on June 30, 2014. PW4168A Engine Maintenance Contract In 2000, we entered into an engine maintenance contract with United Technologies Inc., Pratt and Whitney Division, or Pratt and Whitney, pursuant to which Pratt and Whitney agreed to perform maintenance, modification and/or overhaul of PW4168A engines, engine modules and the parts and components thereof.  This agreement terminates on September 14, 2010. GE Contract In 2001, we entered into a general terms agreement with GE Engine Services Distribution, L.L.C., or GE, pursuant to which we have agreed to purchase certain spare engines and support equipment for both the spare engines that we have purchased from GE and certain engines that have already been installed on our operating fleet.  We have also agreed to purchase certain product support services from GE.  This agreement has no fixed termination date. Sabre Contract In October 2003, we entered into a general services agreement with Sabre Travel International Limited, pursuant to which we were granted a license (relating to the provision of maintenance services) for electronic reservation technology and database backup.  This agreement was supposed to remain in force for ten years, unless early cancelled by either party.  In March 2009, we announced that we would exercise our right to early terminate the agreement as of March 2010. Agreements in relation to TAM's proposed combination with LAN We set out below summaries of the material provisions of the agreements TAM has entered into in relation to TAM's proposed combination with LAN.  We are filing copies of these agreements as Exhibits 4.9 and 4.10 to this Annual Report.  These summaries are qualified in their entirety by reference to the full text of the agreements themselves. Implementation Agreement On January 18, 2011 (the "signing date") TAM entered into an implementation agreement with LAN, the LAN controlling shareholders, TEP and the Amaro family.  This agreement sets forth the corporate steps pursuant to which TAM's proposed combination with LAN will be effected.  Please see "Item 4.  Information on the Company – Business Overview – Proposed Combination with LAN" for a description of these steps. In addition, LAN and TAM each agreed that, subject to certain exceptions, it and its subsidiaries will use its commercially reasonable efforts to preserve its businesses and all licenses necessary to own, lease or operate its respective properties, rights and other assets and to carry on its respective business and operations and keep available the services of its officers, employees and consultants and existing relationships and goodwill with its customers, suppliers, employees and strategic partners.  LAN and TAM also each agreed that, subject to certain exceptions, they must obtain consent from the other party prior to taking certain actions including (among others) in relation to dividends, certain transactions in relation to their equity securities, granting security interests, amending their by-laws, making certain capital expenditures, transferring rights in relation to assets and properties, incurring certain indebtedness, settling claims, entering into material contracts, making material changes to labor policies, making changes in accounting policies, entering into new business lines, taking actions that would materially impact the ability to complete the proposed combination, amending or terminating material financing or other material contracts. Each of the parties also agreed to cease and immediately terminate all existing activities and discussions with any person conducted prior to the signing date with respect to an "alternative proposal" for LAN or TAM, meaning (i) an acquisition, lease, license or outsourcing of any assets, services or businesses of LAN or TAM, as applicable, or of subsidiaries of either of them collectively representing more than 25% of the fair market value of the total assets of LAN or TAM, as applicable, or collectively generating or contributing 25% or more of the total consolidated revenues or operating income of LAN or TAM, as applicable, during the last fiscal year, (ii) any tender exchange offer or exchange offer that would result in any person or group beneficially owning any equity securities of LAN or TAM, as applicable, or (iii) any business combination, recapitalization, issuance or amendment of securities, liquidation, dissolution, joint venture, share exchange or similar transaction involving LAN or TAM or any of their subsidiaries. -104 -
   Exchange Offer Agreement On the signing date, TAM also entered into an exchange offer agreement with LAN, the LAN controlling shareholders, TEP and the Amaro family.  This agreement contains (among others) provisions in relation to the proposed exchange offer to be made to TAM's shareholders. LAN and TAM each gave a number of representations and warranties in relation to their businesses, including (among others) in relation to due organization, power to enter into the agreements, the absence of conflicts with existing agreements, the absence of legal proceedings against each of them, compliance with applicable laws and regulations, the absence of certain undisclosed liabilities, aircraft they own or lease and the absence of any defaults under material contracts.  Many of these representations and warranties are qualified by, among other things, the absence of a "material adverse effect."  Each of the LAN controlling shareholders and TEP also gave a number of representations and warranties, including (among others) in relation to due organization, power to enter into the agreements, the absence of conflicts with existing agreements and the absence of legal proceedings against each of them. The obligations of the Amaro family, LAN and Holdco 2 to commence the exchange offer are subject to a number of conditions.  There are certain "mutual" conditions which must be satisfied or waived by both the Amaro family and LAN including (among others) receipt of certain shareholder approvals, receipt of regulatory approvals, the absence of proceedings by any court or governmental agency restricting the proposed combination and, in relation to the appraisal process for the economic value of TAM per TAM preferred share required by applicable Brazilian regulations, the product of 0.9 and the high end of the range of economic value of LAN per LAN common share most recently determined by the appraiser being greater than or equal to the low end of the range of economic value of TAM per share of TAM stock as determined by that appraiser.  Each of the Amaro family and LAN also have additional conditions to their obligations to commence the exchange offer including (among others) the holders of not more than 2.5% of the outstanding shares of LAN common stock having exercised their appraisal rights (derecho a retiro) under Chilean law with respect to the mergers, the accuracy of representations and warranties, the performance of material obligations and the absence of material adverse changes in the businesses of TAM and LAN.  Finally, the obligations of the Amaro family and LAN to consummate the exchange offer are also subject to a number of conditions.  The "mutual" conditions include (among others) none of the BM&FBOVESPA, the NYSE or the SSE having revoked or suspended its approval of any of its required listings and the number of TAM's shareholders agreeing to the exchange offer being the minimum required to allow TAM to delist under Brazilian law.  The Amaro family's obligations are subject to additional conditions (the "subscription conditions") including (among others) regulatory approvals, the absence of restraining orders, the absence of adverse actions and the absence of certain material changes in relation to LAN.  LAN's obligations are also subject to additional conditions including (among others) in relation to the number of TAM's preferred shares and ADSs validly tendered and not withdrawn from the exchange offer being sufficient so that a statutory squeeze-out may be effected under Brazilian law, regulatory approvals, the absence of restraining orders, the absence of adverse actions and the absence of certain material changes in relation to TAM. LAN agreed to indemnify TEP and the Amaro family for certain losses arising if the exchange offer is not completed (i) solely as a result of any failure by LAN to confirm in writing to TEP and the Amaro family on the expiration date of the exchange offer that any condition waivable only by LAN (other than the squeeze-out condition summarized above) was satisfied if (but only if) such condition was in fact satisfied, or (ii) after the Amaro family have paid for TEP Chile stock in exchange for the voting common shares and non-voting preferred shares of TAM held by them.  TEP and the Amaro family agreed to indemnify LAN for certain losses arising if the exchange offer is not completed because of any failure by them to confirm in writing to LAN on the expiration date of the exchange offer that any of the subscription conditions was satisfied if (but only if) such condition was in fact satisfied. Termination of the Implementation Agreement and Exchange Offer Agreement The agreements will terminate automatically if and when (i) the exchange offer expires in accordance with its terms or is revoked with the permission of CVM without the purchase of any TAM stock, or (ii) if the product of 0.9 and the high end of the range of economic value of LAN per share of LAN common stock as determined by the appraiser at any time is less than the low end of the range of economic value of TAM per share of TAM stock as determined by the appraiser at such time.  In addition, either the Amaro family or LAN may terminate the agreements following certain events including (among others) if required regulatory approvals are not obtained, if the exchange offer has not commenced by December 31, 2011 (as such date may be extended to June 30, 2012 by either party if the sole reason for the exchange offer not commencing by December 31, 2011 is the absence of regulatory approvals or the presence of certain adverse actions), if a non-appealable restraining order in relation to the proposed combination has been issued, if LAN shareholders do not approve the proposed combination or if TAM has called five shareholder meetings and a quorum is not present at any such meeting (or if a quorum was present and the vote of the holders to select an appraiser is taken and completed but the selection of an appraiser is not approved by a majority of the votes cast).  Each of the Amaro family and LAN may terminate the agreements following certain events relating to the Amaro family, TAM or LAN, as applicable, including (among others) a breach or failure to perform certain representations, warranties or agreements, a failure by their respective boards of directors to recommend the transaction, a change of recommendation for the proposed combination by their respective boards of directors or the approval, adoption or recommendation by their respective board of directors of an alternative transaction.  LAN may also terminate the agreements if, prior to the commencement of the exchange offer, the CVM has refused to grant its approval for any of LAN's conditions to the completion of the exchange offer. Each of LAN and TAM agreed to pay the other a termination fee of U.S.$200 million (plus up to U.S.$25 million in expenses) if the agreements are terminated following (i) a change of recommendation by their respective boards of directors, or (ii) within 12 months of the transaction agreements being terminated, a competing proposal with respect to either of them is made, becomes publicly known or announced  by a third party and, thereafter, either of them complete, enter into agreements in relation to or their respective boards of directors recommend (or do not oppose) a competing transaction. -105 -
   Shareholders' Agreements Prior to the commencement of the exchange offer, TEP, TEP Chile, Holdco 1, LAN and the LAN controlling shareholders will enter into several shareholders agreements to set forth their agreement with respect to the governance, management and operation of LAN (which will be renamed LATAM Airlines Group S.A.), Holdco 1, TAM and their respective subsidiaries (together, the "LATAM Group").  The agreements will cover (among others) the governance and management of the LATAM Group, the composition of the LATAM board of directors, the establishment of various LATAM board committees, the governance and management of Holdco 1 and TAM, the composition of the boards of directors of Holdco 1 and of TAM, supermajority matters in relation to Holdco 1 and TAM, certain voting arrangements in relation to voting of LAN common stock and transfer restrictions that will apply to holdings of LAN common stock and Holdco 1 common stock by the LAN controlling shareholders and/or TEP Chile, as applicable. D.  Exchange Controls Investors residing outside Brazil are authorized to purchase equity instruments, including our preferred shares, or as foreign portfolio investments on BM&FBOVESPA, provided that they comply with the registration requirements set forth in Resolution No. 2,689 of the National Monetary Council, (or Resolution No. 2,689) and CVM Instruction No. 325; or register their investment as foreign direct investments under Law No. 4,131/62. With certain limited exceptions, Resolution No. 2,689 investors are permitted to carry out any type of transaction in the Brazilian financial capital market involving a security traded on a stock, future or organized over‐the‐counter market.  Investments and remittances outside Brazil of gains, dividends, profits or other payments under our preferred shares are made through the foreign exchange market. In order to become a Resolution No. 2,689 investor, an investor residing outside Brazil must: ·appoint a representative in Brazil with powers to take actions relating to the investment; -106 -


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·appoint an authorized custodian in Brazil for the investments, which must be a financial institution duly authorized by the Central Bank and CVM; and ·through its representative, register itself as a foreign investor with the CVM and the investment with the Central Bank. Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM.  In addition, securities trading by foreign investors is generally restricted to transactions involving securities listed on the Brazilian stock exchanges or traded in organized over‐the‐counter markets licensed by the CVM. Foreign direct investors under Law No. 4,131/62 may sell their shares in both private or open market transactions, but these investors will generally be subject to less favorable tax treatment on gains. A foreign direct investor under Law No. 4,131/62 must: ·register as a foreign direct investor with the Central Bank; ·obtain a taxpayer identification number from the Brazilian tax authorities; ·appoint a tax representative in Brazil; and ·appoint a representative in Brazil for service of process in respect of suits based on the Brazilian corporation law. Resolution No. 1,927 of the National Monetary Council, which restated and amended Annex V to Resolution No. 1,289 of the National Monetary Council, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers.  We filed an application to have the ADSs approved under Resolution 1,927 by the Central Bank and the CVM, and we received final approval on March 6, 2006. If a holder of ADSs decides to exchange ADSs for the underlying preferred shares, the holder will be entitled to (i) sell the preferred shares on the BM&FBOVESPA and rely on the depositary's electronic registration for five business days from the date of exchange to obtain and remit U.S. dollars abroad upon the holder's sale of our preferred shares, (ii) convert its investment into a foreign portfolio investment under Resolution No. 2,689/00, or (iii) convert its investment into a foreign direct investment under Law No. 4,131/62. If a holder of ADSs wishes to convert its investment into either a foreign portfolio investment under Resolution No. 2,689/00 or a foreign direct investment under Law No. 4,131/62, it should begin the process of obtaining his own foreign investor registration with the Central Bank or with the CVM as the case may be, in advance of exchanging the ADSs for preferred shares. The custodian is authorized to update the depositary's electronic registration to reflect conversions of ADSs into foreign portfolio investments under Resolution No. 2,689/00.  If a holder of ADSs elects to convert its ADSs into a foreign direct investment under Law 4,131/62, the conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction. If a foreign direct investor under Law No. 4,131/62 wishes to deposit its shares into the ADR program in exchange for ADSs, such holder will be required to present to the custodian evidence of payment of capital gains taxes.  The conversion will be effected by the Central Bank after receipt of an electronic request from the custodian with details of the transaction.  Please refer to "Item 10.  Additional Information – E.  Taxation – Brazilian Tax Considerations" for a description of the tax consequences to an investor residing outside Brazil of investing in our preferred shares in Brazil.  -107 -


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E.  Taxation The summary below is based upon tax laws of Brazil and the United States as in effect on the date of this Annual Report, which are subject to change (possibly with retroactive effect). There is at present no income tax treaty between Brazil and the United States.  In recent years, the tax authorities of the two countries held discussions that did not, but may eventually, culminate in such a treaty.  No assurance can be given as to whether or when such a treaty might enter into force or how it would affect the United States holders of our preferred shares. Brazilian Tax Considerations The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of our preferred shares or ADSs by a holder that is not domiciled in Brazil for purposes of Brazilian taxation and, in the case of preferred shares, which has registered its investment in such securities with the Central Bank as a U.S. dollar investment (in each case, a Non‐Brazilian Holder).  Pursuant Brazilian law, investors may invest in the preferred shares under Resolution No. 2,689. Resolution No. 2,689 allows foreign investors to invest in almost all financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that some requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities, domiciled or headquartered abroad. Pursuant to Resolution No. 2,689, foreign investors must: (a) appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; (b) complete the appropriate foreign investor registration form; (c) register as a foreign investor with the Brazilian securities commission; and (d) register the foreign investment with the Central Bank. Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM.  In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over‐the‐counter markets licensed by the CVM, except for transfers resulting from a corporate reorganization, occurring upon the death of an investor by operation of law or will or as a consequence of the delisting of the relevant shares from a stock exchange and the cancellation of the registration with the CVM. Taxation of Dividends Dividends, including dividends in kind, paid by us to the depositary in respect of the preferred shares underlying the ADSs or to a Non‐Brazilian Holder in respect of preferred shares generally will not be subject to Brazilian income withholding tax provided that they are paid out of profits generated as of or after January 1, 1996.  Dividends relating to profits generated prior to December 31, 1995 are subject to a Brazilian withholding tax of 15% to 25% according to the tax legislation applicable to each corresponding year. Taxation of Gains Gains realized outside Brazil by a Non‐Brazilian Holder on the disposition of ADSs to another Non‐Brazilian Holder are not currently subject to Brazilian tax.  However, according to Law No. 10,833, enacted on December 29, 2003, or Law No. 10,833, the disposition of assets located in Brazil by a Non‐Brazilian Holder, whether to other Non‐Brazilian Holders or Brazilian holders, may become subject to taxation in Brazil.  Although we believe that the ADSs do not fall within the definition of assets located in Brazil for purposes of Law No. 10,833, considering the general and unclear scope of such provisions and the lack of a judicial court ruling in respect thereto, we are unable to predict whether such understanding will ultimately prevail in the courts of Brazil. For purposes of Brazilian taxation, there are two types of Non‐Brazilian Holders of preferred shares or ADSs: (a) Non‐Brazilian Holders that are not resident or domiciled in a tax haven jurisdiction (i.e., a country or location that does not impose income tax or where the maximum income tax rate is lower than 20% or where theinternal legislation imposes restrictions to disclosure of shareholding composition or the ownership of the investment), and that, in the case of holders of preferred shares, are registered before the Central Bank and the CVM to invest in Brazil in accordance with Resolution No. 2,689; and (b) other Non-Brazilian Holders, which include any and all non-residents of Brazil who invest in equity securities of Brazilian companies through any other means and all types of investors that are located in tax haven jurisdiction.  The investors mentioned in item (a) above are subject to a favorable tax regime in Brazil, as described below. -108 -


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The deposit of preferred shares in exchange for ADSs may be subject to Brazilian tax on capital gains at the rate of 15%, if the amount previously registered with the Central Bank as a foreign investment in the preferred shares is lower than (a) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit; or (b) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the 15 trading sessions immediately preceding such deposit.  In such case, the difference between the amount previously registered and the average price of the preferred shares calculated as above will be considered to be a capital gain.  Such taxation is not applicable in case of investors registered under Resolution No. 2,689 which are not located in a tax haven jurisdiction, which are currently tax exempt from income tax in such transaction. The withdrawal of ADSs in exchange for preferred shares is not subject to Brazilian tax.  Upon receipt of the underlying preferred shares, a Non‐Brazilian Holder registered under Resolution No. 2,689 will be entitled to register the U.S. dollar value of such shares with the Central Bank as described below. As a general rule, Non‐Brazilian Holders registered under Resolution No. 2,689 that are not located in a tax haven jurisdiction are subject to income tax at a rate of 15% on gains realized on sales or exchanges of preferred shares outside a Brazilian stock exchange.  With reference to proceeds of a redemption or of a liquidating distribution with respect to the preferred shares, the difference between the amount effectively received by the shareholder and the amount of foreign currency registered with the Central Bank, translated intoreaisat the commercial market rate on the date of the redemption or liquidating distribution, will be also subject to income tax at a rate of 15% once such transactions are treated as a sale or exchange not carried out on Brazilian stock exchange.  In both cases, if the Non‐Brazilian Holders are located in tax haven jurisdictions, the applicable rate is 25%.  Gains realized arising from transactions on a Brazilian stock exchange by an investor registered under Resolution No. 2,689 that is not located in a tax haven jurisdiction are exempt from Brazilian income tax.  This preferential treatment under Resolution No. 2,689 does not apply to Non‐Brazilian Holders of the preferred shares or ADSs that are resident in a tax haven jurisdiction, in which case, gains realized on transactions performed by such holder on the Brazilian stock exchange are subject to the same tax rate that is applicable to a Brazilian resident.  Pursuant to Law No. 11,033 of December 21, 2004, the rate applicable to Brazilian residents in transactions entered as of January 1, 2005 was established at 15%, being also subject to a withholding tax of 0.005% (to be offset against tax due on eventual capital gains). Therefore, Non‐Brazilian Holders are subject to income tax at a rate of 15% on gains realized on sales or exchanges in Brazil of preferred shares that occur on a Brazilian stock exchange, unless such sale is made by a Non‐Brazilian Holder that is not resident in a tax haven jurisdiction, and (a) such a sale is made within five business days of the withdrawal of such preferred shares in exchange for ADSs and the proceeds of such sale are remitted abroad within such five‐day period, or (b) such a sale is made under Resolution No. 2,689 by Non‐Brazilian Holders that register with the CVM.  In these two cases the transaction will be tax exempt. The "gain realized" as a result of a transaction on a Brazilian stock exchange is the difference between the amount in Brazilian currency realized on the sale or exchange of the shares and their acquisition cost, without any correction for innovation.  The "gain realized" as a result of a transaction that occurs other than on a Brazilian stock exchange, with shares that are registered under a certificate of registration of investment (other than under Resolution No. 2,689), will be calculated based on the foreign currency amount registered with the Central Bank which will be translated intoreaisat the commercial market rate of the date of such sale or exchange.  There can be no assurance that the current preferential treatment for holders of ADSs and Non‐Brazilian Holders of preferred shares under Resolution No. 2,689 will continue or will not be changed in the future.  Reductions in the tax rate provided for by Brazil's tax treaties do not apply to tax on gains realized on sales or exchanges of preferred shares. Any exercise of preemptive rights relating to the preferred shares or ADSs will not be subject to Brazilian taxation.  Any gain on the sale or assignment of preemptive rights relating to preferred shares by the depositary onbehalf of holders of ADSs will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of preferred shares. -109 -


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Distributions of Interest Attributable to Shareholders' Equity In accordance with Law No. 9,249, dated December 26, 1995, as amended Brazilian corporations may make payments to shareholders characterized as distributions of interest on the company's shareholders' equity.  Such interest is calculated by reference to the TJLP as determined by the Central Bank from time to time and cannot exceed the greater of: ·50% of net income (after social contribution on profits and before taking such distribution and any deductions for corporate income tax into account) for the period in respect of which the payment is made; or ·50% of the sum of retained profits and profit reserves, as of the date of the beginning of the period in respect of which the payment is made. Distributions of interest on shareholders' equity in respect of the preferred shares paid to shareholders who are either Brazilian residents or non‐Brazilian residents, including holders of ADSs, are subject to Brazilian income withholding tax at the rate of 15%, or 25% in case of shareholders domiciled in a tax haven jurisdiction.  The distribution of interest on shareholders' equity may be determined by our board of directors.  We cannot assure you that our board of directors will not determine that future distributions of profits may be made by means of interest on shareholders' equity instead of by means of dividends. The amounts paid as distribution of interest on shareholders' equity are deductible for corporate income tax and social contribution on profit, both of which are taxes levied on our profits, as far as the limits and rules described above are observed by us. Other Relevant Brazilian Taxes There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a Non‐Brazilian Holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by individuals or entities not resident or domiciled in Brazil or domiciled within the state to individuals or entities resident or domiciled within such state in Brazil.  There are no Brazilian stamp, issue, registration or similar taxes or duties payable by holders of preferred shares or ADSs.  Pursuant to Decree 6,306 of December 14, 2007, the conversion into foreign currency or the conversion into Brazilian currency of the proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market, including those in connection with the investment in the preferred shares and ADSs and those made under Resolution No. 2,689, is potentially subject to an exchange transactions tax (Imposto Sobre Operãçoes Financeiras – IOF/Câmbio), although at present the rate of such tax is generally 0.38%, which the Minister of Finance has the legal power to increase at any time to a maximum of 25%, but any such increase will only be applicable to transactions occurring after such increase becomes effective. Pursuant to Decree 6,306/07, the Tax on Bonds and Securities Transactions (IOF/Títulos), which may be imposed on any transactions involving bonds and securities effected in Brazil, even if there transactions are performed on a Brazilian stock exchange.  As a general rule, the rate of this tax is currently zero but the executive branch may increase such rate up to 1.5% per day, but only with respect to future transactions. Until December 31, 2007 financial transfers were taxed by theContribuição Provisória sobreMovimentação Financeira, or CPMF, at a rate of 0.38%.  The CPMF was levied upon the remittance of proceeds on the amount converted inreaisof the transaction and was required to be withheld by the financial institution that carries out the transaction.  Currently, the funds transferred from a bank account to acquire shares on the Brazilian stock exchange are exempt from CPMF.  In addition, Provisional Measure 281 of February 15, 2006 provided that the CPMF rate assessable on an acquisition of shares in a non‐organized over‐the‐counter transaction was to be reduced to zero (provided that such acquisition relates to a public offering of shares made by a publicly‐traded company).  However, since January 1, 2008, CPMF was no longer in force, as the Brazilian Senate did not approvethe Constitutional Amendment that would extend the term of CPMF collection.  Therefore, CPMF should not be levied on any debit to bank accounts carried out after such date. -110 -


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United States The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of our ADSs or preferred shares as of the date hereof.  Except where noted, this discussion deals only with U.S. Holders (as defined below) that hold our ADSs or preferred shares as capital assets for U.S. federal income tax purposes (generally, property held for investment).  This summary does not represent a detailed description of the U.S. federal income tax consequences applicable to you if you are subject to special treatment under the U.S. federal income tax laws, including if you are: ·a financial institution; ·a dealer or trader in securities or currencies; ·a regulated investment company; ·a real estate investment trust; ·an insurance company; ·a tax‐exempt organization; ·a person holding our ADSs or preferred shares as part of a hedging, integrated or conversion transaction, a constructive sale or a straddle; ·a person liable for alternative minimum tax; ·a person who actually or by attribution owns 10% or more of our voting stock; ·a partnership or other pass‐through entity for U.S. federal income tax purposes; or ·a person whose "functional currency" is not the U.S. dollar. The discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (which we refer to as the Code), and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in U.S. federal income tax consequences different from those discussed below.  If you are considering the purchase, ownership or disposition of our ADSs or preferred shares, you should consult your own tax advisors concerning the U.S. federal income tax consequences to you in light of your particular situation as well as any consequences arising under the laws of any other taxing jurisdiction. As used herein, "U.S. Holder" means a holder of our ADSs or that is for U.S. federal income tax purposes: ·a citizen or resident alien of the United States; ·a corporation created or organized in or under the laws of the United States or any political subdivision thereof; ·an estate, the income of which is subject to U.S. federal income taxation regardless of its source; or ·a trust which is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of the trust (or otherwise if the trust has a valid election in effect under current Treasury regulations to be treated as a U.S. person). -111 -


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If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds our ADSs or preferred shares, the tax treatment of a partner will generally depend on the status of the partner and the activities of the partnership.  If you are a partner of a partnership holding our ADSs or preferred shares, you should consult your tax advisors. In general, for U.S. federal income tax purposes, U.S. Holders of the ADSs will be treated as the beneficial owners of the underlying preferred shares that are represented by such ADSs.  Accordingly, deposits or withdrawals of preferred shares by U.S. Holders for the ADSs will not be subject to the U.S. federal income tax.  This summary is based, in part, upon representations made by the depositary to us and assumes that the deposit agreements, and all other related agreements, will be performed in accordance with their terms. The U.S. Treasury has expressed concerns that parties involved in transactions where depositary shares are pre‐released may be taking actions that are inconsistent with the claiming of foreign tax credits for U.S. Holders of ADSs.  Accordingly, the analysis of the creditability of Brazilian taxes and the availability of the reduced dividend rate discussed below could be affected by future actions that may be taken by the U.S. Treasury. Taxation of dividends Subject to the discussion under "— Passive foreign investment company rules" below, distributions on our ADSs or preferred shares, including distributions paid in the form of payments of interest on capital for Brazilian tax purposes, before reduction for any Brazilian income tax withheld by us, will be taxable as dividends to the extent paid out of our current or accumulated earnings and profits, as determined for U.S. federal income tax purposes.  Such dividends, including any withheld taxes, will be includable as ordinary income on the day received by the depository.  Such dividends will not be eligible for the dividends received deduction allowed to corporations.  Under current law, dividends received before January 1, 2013 by non‐corporate U.S. investors on shares of certain foreign corporations will be subject to U.S. federal income tax at a maximum rate of 15% if certain conditions are met.  A U.S. Holder will be eligible for this reduced rate only if it has held the ADSs or preferred shares for more than 60 days during the 121‐day period beginning 60 days before the ex‐dividend date.  A U.S. Holder will not be able to claim the reduced rate for any year in which the company is treated as a PFIC.  See "— Passive foreign investment company rules" below. Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares will be treated as qualified dividends because the preferred shares are not themselves listed on a U.S. exchange.  In addition, the U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends.  Because such procedures have not yet been issued, it is not clear whether the company will be able to comply with them.  Holders of ADSs should consult their own tax advisers regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances. The amount of any dividend paid inreaiswill equal the U.S. dollar value of thereaisreceived calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received by the depositary, regardless of whether thereaisare converted into U.S. dollars at that time.  A U.S. Holder should not recognize any foreign currency gain or loss in respect of such distribution if thereaisis converted into U.S. dollars on the date received.  If anyreaisreceived are not converted into U.S. dollars on the date of receipt, you will have a tax basis in thereaisequal to their U.S. dollar value on the date of receipt.  Any gain or loss realized on a subsequent conversion or other disposition of thereaiswill be treated as U.S. source ordinary income or loss. Subject to generally applicable limitations and restrictions, Brazilian withholding taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability.  In the event that you do not elect to claim a credit for foreign taxes, you may instead claim a deduction in respect of such Brazilian taxes.  For purposes of calculating the foreign tax credit, dividends paid on our ADSs or preferred shares will be treated as income from sources outside the United States.  The limitation on foreign taxes eligible for credit is calculated separately for specific categories of income.  The rules governing the foreign tax credit are complex.  You are urged to consult your tax advisors regarding the availability of the foreign tax credit under your particular circumstances. -112 -


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Taxation of capital gains Subject to the discussion under "— Passive foreign investment company rules" below, you will recognize capital gain or loss for U.S. federal income tax purposes on any sale, exchange or redemption of our ADSs or preferred shares in an amount equal to the difference between the amount realized for the ADSs or preferred shares and your tax basis in the ADSs or preferred shares.  This gain or loss will be long‐term capital gain or loss if you held the ADSs or preferred shares for more than one year at such time.  The deductibility of capital losses is subject to limitations.  Any gain or loss recognized by you will generally be treated as U.S. source gain or loss.  Consequently, you may not be able to use the foreign tax credit arising from any Brazilian tax imposed on the disposition of our ADSs or preferred shares unless such credit can be applied (subject to applicable limitations) against tax due on other income treated as derived from foreign sources in the appropriate income category.  Alternatively, you may take a deduction for the Brazilian tax. If Brazilian tax is withheld on the sale or disposition of our ADSs or preferred shares, your amount realized will include the gross amount of the proceeds of such sale or disposition before deduction of Brazilian tax. Passive foreign investment company rules Based on the information available, including our current market capitalization, we do not expect to be considered a passive foreign investment company for U.S. federal income tax purposes.  Passive foreign investment company status depends on a foreign company not earning more than a permitted amount of gross income that is considered "passive income" (such as interest, dividends and certain rents and royalties) and not holding more than a permitted percentage of assets, determined by value, that produce or are held to produce passive income.  These tests depend on our income and the fair market value of our assets from time to time, which include a significant number of passive assets.  Accordingly, there can be no assurance that we will not be considered a passive foreign investment company for any taxable year due, among other factors, to a decline in our market capitalization.  If you are a taxable U.S. Holder and we are treated as a passive foreign investment company for any taxable year during which you own preferred shares or ADSs, you could be subject to materially adverse consequences including the imposition of significantly greater amounts of U.S. tax liability on disposition gains and certain distributions as well as additional tax form filing requirements. Other Brazilian taxes You should note that any Brazilian IOF/Exchange Tax, IOF/Bonds Tax or the recently extinguished CPMF Tax (as discussed above under "— Brazilian Tax Considerations" above) may not be treated as a creditable foreign tax for U.S. federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code.  You should consult your tax advisors regarding the U.S. federal income tax consequences of these taxes. Information reporting and backup withholding Information returns may be filed with the Internal Revenue Service in connection with distributions on our ADSs or preferred shares and the proceeds from their sale, exchange or redemption unless you establish that you are exempt from the information reporting rules.  If you do not establish this, you may be subject to backup withholding on these payments if you fail to provide your taxpayer identification number or comply with certain certification procedures.  The amount of any backup withholding from a payment to you will be allowed as a credit against your U.S. federal income tax liability and may entitle you to a refund, provided that the required information is timely furnished to the Internal Revenue Service. Recent legislation has introduced new reporting requirements for certain U.S. Holders.  The penalty for failing to comply with these, or existing, reporting requirements can be significant.  You should consult their own tax advisors concerning any U.S. reporting requirements that may arise out of their ownership or disposition of ADSs or preferred shares in light of your particular circumstances. F.  Dividends and Paying Agents Not applicable.  -113 -


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G.  Statement by Experts Not applicable. H.  Documents on Display We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, which is also known as the Exchange Act.  Accordingly, we are required to file and/or furnish reports and other information with the SEC, including annual reports on Form 20‐F and reports on Form 6‐K.  You may inspect and copy reports and other information to be filed with the SEC at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington D.C.  20549.  Copies of the materials may be obtained from the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C.  20549 at prescribed rates.  The public may obtain information on the operation of the SEC's Public Reference Room by calling the SEC in the United States at 1‐800‐SEC‐0330.  In addition, the SEC maintains an internet website at http://www.sec.gov, from which you can electronically access these materials.  In addition, such reports, proxy statements and other information concerning us can be inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005, on which our equity securities are listed. As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act.  For example, we are not required to prepare and issue quarterly reports.  However, we furnish our shareholders with annual reports containing financial statements audited by our independent registered public accounting firm and make available to our shareholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year.  We file Annual Reports on Form 20‐F within the time period required by the SEC, which is currently six months from December 31, the end of our fiscal year. We will send the depositary a copy of all notices that we give relating to meetings of our shareholder or to distributions to shareholders or the offering of rights and a copy of any other report or communication that we make generally available to our shareholders.  The depositary will make all these notices, reports and communications that it receives from us available for inspection by registered holders of ADSs at its office.  The depositary will mail copies of those notices, reports and communications to you if we ask the depositary to do so and furnish sufficient copies of materials for that purpose. We also file financial statements and other periodic reports with the CVM located at Rua de Setembro, 111, Rio de Janeiro, RJ 20159‐900, Brazil. I.  Subsidiary Information Not applicable. ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks from our normal commercial activities.  These market risks principally relate to changes in interest rates, exchange rates and oil prices.  Any such changes may adversely affect the value of our financial assets and liabilities or our future cash flow and income.  Market risk is the possible loss derived from variations in market prices.  We have entered into derivative contracts and other financial instruments for the purpose of hedging against variations in these factors.  We have also implemented policies and procedures in order to evaluate such risks and approve and monitor our derivative transactions, including a policy that stipulates that we will only enter into derivative transactions with counterparties who have a high credit rating.  The counterparties to our derivative transactions are major financial institutions.  We do not have significant exposure to any single counterparty in relation to derivative transactions. Interest rate risk Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from floating rate debt instruments, variable‐rate leasing contracts and on interest income generated from our cash and short‐term investment balances.  To minimize possible impacts from interest rate fluctuations, TAM diversifies its debt among fixed and variable rate (such as LIBOR and CDI) agreements. -114 -


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As of December 31, 2010, our floating rate debt totaled approximately R$5,194 million (consisting of debentures in the outstanding principal amount of R$935 million and other floating rate debt and leasing contracts in the total aggregate amount of R$4,259 million).  A hypothetical 100 basis point increase in market interest rates at December 31, 2010 would have increased our annual variable‐rate interest expense by approximately R$52 million. Our interest rate risk was similar in 2009.  As of December 31, 2009, our floating rate debt totaled approximately R$5,167 million (consisting of debentures in the outstanding principal amount of R$1,100 million and other floating rate debt and leasing contracts in the total aggregate amount of R$4,067 million).  A hypothetical 100 basis point increase in market interest rates at December 31, 2009 would have increased our annual variable‐rate interest expense, in 2010, by approximately R$52 million. These estimates can be calculated directly by multiplying the hypothetical increase by the total outstanding floating rate debt. The calculation assumes the hypothetical increase would be effective for all interest payments due in the following year. Exchange rate risk A significant part of our costs and operating expenses, such as aircraft and engine maintenance services, aircraft lease payments and aircraft insurance, are denominated in U.S. dollars.  To manage exchange rate risk, we may enter into derivatives contracts with various counterparties to protect ourselves against a possible depreciation or devaluation of therealagainst the U.S. dollar. At December 31, 2010, if the Brazilianrealhad weakened/strengthened by 10% against the U.S. dollar, assuming all other variables (such as LIBOR and outstanding value) remained constant, net finance results for the year would have been R$534/R$535 million lower/higher, mainly as a result of exchange gains/losses (in respect of U.S. dollar‐denominated financial assets (valued at fair value), borrowings, finance leases and derivatives instruments).  Management does not consider our exposure to foreign currencies other than the U.S. dollar to be significant to our financial position and results of operations. Our exchange rate risk was similar in 2009.  At December 31, 2009, if the Brazilianrealhad weakened/strengthened by 10% against the U.S. dollar, assuming all other variables (such as LIBOR and outstanding value) remained constant, net finance results for the year would have been R$510 million higher/lower, mainly as a result of exchange gains/losses (in respect of U.S. dollar‐denominated financial assets (valued at fair value), borrowings, finance leases and derivatives instruments).  Management did not consider our exposure to foreign currencies other than the U.S. dollar to be significant to our financial position and results of operations. We believe that these potential changes in net financial results are not material. They arise mainly from a peculiarity in accounting standards that provides that our aircraft financing debt must be registered as a U.S. dollar debt while the corresponding asset (the aircraft) must be registered as a Brazilianrealasset. We believe there are no material limitations on the estimates above. Risks relating to variations in the price of oil Our results of operation are affected by changes in the price of oil.  We have entered into oil derivatives contract in order to hedge ourselves against this risk.  Our policy is to enter into oil derivatives contracts to hedge our projected fuel consumption.  In 2006, we began to enter into arrangements intended to hedge a minimum of 30% and a maximum of 80% of our projected fuel consumption for up to a rolling 24‐month period.  Due to new market and macroeconomic conditions, we decided to modify this policy.  We now hedge our fuel requirements over rolling 24-month periods with between 20% and 60% of our future fuel requirements hedged over the first 12 months, and 10% to 60% hedged over the second 12 months. At December 31, 2010, we were party to outstanding oil derivatives contracts corresponding to approximately 6.8 million barrels of oil, compared to approximately 3.6 million barrels of oil in 2009.  In 2010, we recorded liability of R$18.5 million (derivative assets of R$ 16.5 million and derivative liabilities of R$ 35.0 million) in respect of these contracts as compared to a liability of R$221 million in 2009. -115 -


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We enter into derivatives contracts only with counterparties rated at least A‐ (A3) by S&P, Moody's or Fitch.  The fair values of our oil derivatives contracts according to the credit rating of the counterparties at December 31, 2010 and 2009 are: Fair value of derivatives (inreaisthousand)2010

   2009AAA

   (22,454)

   (86,088)AA+, AA or AA‐

   3,671

   (105,056)A+, A or A‐

   274

   (29,817)(18,509)

   (220,961)
  In Brazil, the price of jet kerosene is determined by a state‐controlled oil company, Petrobras, and is based on international jet fuel prices.  We attempt to hedge against the volatility of kerosene prices through oil derivatives based on crude oil (WTI).  WTI is highly correlated with our average jet fuel price and is arguably the most actively traded commodity. A hypothetical 10% increase/decrease in the price of WTI at December 31, 2010 would lead to an increase/decrease of approximately US$10.4 million/US$11.5 million (R$17.4 million/R$19.1 million) respectively in the fair value of our WTI derivatives.  That hypothetical 10% increase/decrease in the price of WTI at December 31, 2009 would have led to an increase/decrease of approximately R$45 million.  In both cases, this assumes that the inherent components, interest rates and the exchange rates with respect to the contracts remain constant and that the 10% variation in WTI price is uniform along the future curve of WTI.  We calculate the fair value of our oil derivatives contracts individually using specific models for each contract, which include simple discounted cash flow models, Monte‐Carlo's simulation techniques and other analytical models. These figures would be materially different if there were changes in the implied volatility structure and shape of the future curve of WTI. Such change in WTI prices would directly influence our financial results.  The negative/positive cash flows from derivatives settlements, however, would be more than offset by a decrease/increase in our jet fuel costs.  To calculate the impact on our cash flows, we estimate our average Jet Kerosene price as a function of WTI prices (through a simple linear regression analysis of prices over rolling 24‐month periods).  Assuming a base monthly consumption of 1.3 million barrels of fuel and an average strike price of US$90 per barrel of crude oil under our derivatives contracts, a 10% increase/decrease in the price of WTI would increase/decrease our jet fuel expenses by US$152 million/US$146 million (R$252 million/R$243 million) respectively (including the relevant effects of settlements on our derivatives contracts).  In 2009, we assumed a base monthly consumption of 1.1 million barrels of fuel and an average strike price of US$115 per barrel of fuel under our derivatives contracts.  A 10% increase/decrease in the price of WTI with those assumptions would have increased/decreased our jet fuel expenses by R$401 million/ R$395 million (including the relevant effects of settlements on our derivatives contracts).  The increased effect in 2009 was due to the increased cost of fuel. These results strongly depend on the continued correlation between therealfuture observed prices and the relevant equation, which is determined by the linear regression parameters. The linear regression is updated regularly and consistently displays a coefficient of determination above 0.9, which suggests that our average jet fuel prices can be reasonably estimated from the average WTI prices. Nevertheless, there is no guarantee that Petrobras will not change its pricing model nor that the relationship between our average jet fuel prices and average WTI prices will remain the same.  ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES D.  American Depositary Shares -116 -


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In the United States, our preferred shares trade in the form of ADSs.  Each ADS represents an ownership interest in one preferred share, which we have deposited with the custodian, as agent of the depositary, JPMorgan Chase Bank, N.A. Direct and indirect fees and charges paid to the depositary The following table summarizes the fees and expenses payable by holders of our ADSs: Depositary action

   Associated fees paid by our ADS holdersIssuing ADSs, including issuances resulting from a stock dividend, stock split, merger, exchange, or other similar transaction

   U.S.$5.00 for every 100 ADSsCancelling ADSs for the purpose of withdrawal or surrender

   U.S.$5.00 for every 100 ADSsCash distributions to an ADS holder pursuant to the terms of the deposit agreement between TAM and the depositary

   U.S.0.02 for each ADSTransferring ADSs

   U.S.$1.50 for each ADSDistributing or selling preferred shares to holders of preferred shares which are distributed by the depositary to ADS holders

   U.S$5.00 for every 100 ADSsDepositary services (not chargeable more than once a year)

   U.S.$0.02 for each ADSDelivering preferred shares in connection with the depositary's, or the depositary's custodian's, compliance with applicable law, rule or regulation

   Expenses of the depositaryTransferring and registering preferred shares

   Expenses of the depositary, including taxes, other governmental charges and registration feesCable, telex and facsimile transmissions

   Expenses of the depositaryConverting foreign currencies into U.S. dollars

   Expenses of the depositaryServicing the ADSs or preferred shares

   Expenses of the depositary
 Reimbursement of fees and direct and indirect payments paid by the depositary In 2010, we received approximately US$387 thousand from the depositary for NYSE listing fees, SEC filing fees, investor relation support services, primarily being our access to the Thomson Reuters service and conference call facilities, distribution of certain press releases and travel expenses for non-deal roadshows and investor conferences. -117 -


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PART II ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS None. ITEM 15.  CONTROLS AND PROCEDURES Disclosure Controls and Procedures We carried out an evaluation under the supervision of, and with the participation of, our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, including those defined in United States Exchange Act Rule 13a-15(e), as of the year ended 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 controls and procedures can only provide reasonable assurance of achieving their control objectives. As a result of this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2010 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act was accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management's Annual Report on Internal Control over Financial Reporting and Attestation Report of Registered Public Accounting Firm Our management's annual report on internal control over financial reporting is included in this Annual Report on page F-3 and the opinion by our independent registered public accounting firm on the effectiveness of our internal control over financial reporting is included in the report of PricewaterhouseCoopers Auditores Independentes that is included in this Annual Report on page F-4. Our management assessed the effectiveness of our internal controls over financial reporting as of December 31, 2010.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in "Internal Control—Integrated Framework."  Based on this assessment, our management concluded that, as of December 31, 20010, our internal control over financial reporting was effective as of December 31, 2010. Changes in Internal Control over Financial Reporting There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting Remediation of previously existing material weaknesses On December 31, 2009 the Company's internal control over financial reporting was not effective because material weaknesses existed. The material weaknesses were related to the process of preparing financial statements in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board ("IASB") from the base accounting records of the Company, maintained in accordance with accounting practices adopted in Brazil. Throughout 2010 we initiated efforts to remediate the material weaknesses.The following actions were taken to address the previously identified material weaknesses:  (i) hiring new employees including senior accounting staff with relevant financial reporting experience and with specific supervision and review responsibilities, (ii) provide training delivered by third-party specialists for relevant accounting staff on International Financial Reporting Standards (“IFRS”), and (iii)  improvements in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 20-F including performing a comprehensive critical review of the then existing internal controls; such review included, among others, those controls over the compilation and preparation of the financial statements and related disclosures as well and over the classification, recognition, measurement and subsequent accounting for financial leases . -118 -


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As a result of the above actions, management concluded that we have remediated the previously identified material weaknesses related to internal controls over financial reporting as of December 31, 2010. ITEM 15T.  CONTROLS AND PROCEDURES Not applicable. ITEM 16A.  AUDIT COMMITTEE FINANCIAL EXPERT We do not have an audit committee financial expert serving on our audit committee because we believe that our audit committee members perform, as a whole, the functions of an "audit committee financial expert" within the meaning of the rules adopted by the SEC relating to the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.  For a discussion of the role of our audit committee, see "Item 6.  Directors, Senior Management and Employees C. Board Practices — Audit Committee." ITEM 16B.  CODE OF ETHICS Our board of directors has adopted a Code of Ethics applicable to our directors, officers and employees, including our principal executive officer and principal financial officer.  Our Code of Ethics can be found at www.tam.com.br under the heading "Investor Relations".  Information found at this website is not incorporated by reference into this document. ITEM 16C.  PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table sets forth by category of service the total fees for services provided by PricewaterhouseCoopers Auditores Independentes during the fiscal years ended December 31, 2009, 2008 and 2007. 2010

   2009

   2008(R$ millions)Audit Fees

   3.8

   5.4

   5.8Audit‐Related Fees

   —

   —

   —Tax Fees

   —

   —

   —All Other Fees

   —

   0.2

   —Total

   3.8

   5.6

   5.8
  Audit Fees Audit fees consist of the aggregate fees billed by PricewaterhouseCoopers Auditores Independentes in connection with the audit of our annual financial statements, internal control reviews, interim reviews of our quarterly financial information, the issuance of comfort letters, procedures related to the audit of income tax provisions in connection with the audit and the review of our financial statements. Audit‐Related Fees No audit‐related fees were paid to PricewaterhouseCoopers Auditores Independentes for the fiscal years ended December 31, 2010, 2009 and 2008. -119 -


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Tax Fees No tax fees were paid to PricewaterhouseCoopers Auditores Independentes for the fiscal years ended December 31, 2010, 2009 and 2008. All Other Fees In 2009, we paid PricewaterhouseCoopers Auditores Independentes R$198 thousand pursuant to a contract where PricewaterhouseCoopers Auditores Independentes performed security tests on web applications B2C and B2B with the purpose of identifying security vulnerabilities on those applications.  No other fees were paid to PricewaterhouseCoopers Auditores Independentes for the fiscal years ended December 31, 2010, 2009 and 2008. Pre‐Approval Policies and Procedures Our audit committee approves all audit, audit‐related services, tax services and other services provided by PricewaterhouseCoopers Auditores Independentes.  Any services provided by PricewaterhouseCoopers Auditores Independentes that are not specifically included within the scope of the audit must be pre‐approved by the audit committee in advance of any engagement.  Pursuant to Rule 2‐01 of Regulation S‐X, audit committees are permitted to approve certain fees for audit‐related services, tax services and other services pursuant to ade minimisexception prior to the completion of an audit engagement.  Our management periodically reports to our audit committee the nature and scope of audit and non‐audit services rendered by our independent auditors.  In 2010, 2009 and 2008, none of the fees paid to PricewaterhouseCoopers Auditores Independentes were approved pursuant to thede minimisexception. ITEM 16D.  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES None. ITEM 16E.  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS None. ITEM 16F.  CHANGE IN REGISTRANT'S CERTIFYING ACCOUNTANT Not applicable. ITEM 16G.  CORPORATE GOVERNANCE See "Item 9.  The Offer and Listing — C.  Markets — Significant Differences Between Our Corporate Governance Practices and NYSE Corporate Governance Standards." -120 -


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PART III ITEM 17.  FINANCIAL STATEMENTS See "Item 18.  Financial Statements." ITEM 18.  FINANCIAL STATEMENTS See our consolidated financial statements beginning on page F‐1. ITEM 19.  EXHIBITS 1.1

   By‐laws of TAM S.A. (English translation).1.2

   By‐laws of TAM Linhas Aéreas S.A. (English translation), incorporated herein by reference from our Registration Statement on Form F‐4, filed August 31, 2007, File 333‐145838‐01.1.3

   Memorandum of Association and Articles of Association of TAM Capital Inc. (English translation), incorporated herein by reference from our Registration Statement on Form F‐4, filed August 31, 2007, File 333‐145838‐02.2.1

   Form of Deposit Agreement among TAM S.A., JPMorgan Chase Bank, N.A., as depositary, and the Holders from time to time of American Depositary Shares issued thereunder, including the form of American Depositary Receipts, incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.2.2

   Indenture, dated as of April 25, 2007, among TAM Capital Inc., Tam S.A., TAM Linhas Aéreas S.A., The Bank of New York and The Bank of New York (Luxembourg) S.A., incorporated herein by reference from our Registration Statement on Form F‐4, filed August 31, 2007,File No. 333‐131938.2.3

   Indenture, dated as of October 29, 2009, among TAM Capital 2 Inc., TAM S.A., TAM Linhas Aéreas S.A., The Bank of New York Mellon and The Bank of New York Mellon (Luxembourg) S.A., incorporated herein by reference from our Annual Report for the fiscal year ended December 31, 2009 on Form 20-F, filed June 30, 2010, File. No. 333-1319382.3

   Shareholders' Agreement entered into by certain key shareholders of TAM S.A., dated August 27, 2007, incorporated herein by reference from our Annual Report for the fiscal year ended December 31, 2008 on Form 20-F, filed June 30, 2009, File. No. 333-131938.2.4

   First Amendment to the Shareholders' Agreement entered into by certain key shareholders of TAM S.A., dated June 17, 2009, incorporated herein by reference from our Annual Report for the fiscal year ended December 31, 2009 on Form 20-F, filed June 30, 2010, File. No. 333-131938.2.5

   Private Instrument of Termination of Shareholders' Agreement entered into by certain key shareholders of TAM S.A., dated March 1, 2011.4.1

   A320 Family Purchase Agreement, dated March 19, 1998, between Airbus S.A.S. (formerly known as Airbus Industrie GIE) and TAM Linhas Aéreas S.A. (formerly known as TAM Transportes Aéreas Meridionais S.A. and as successor in interest in TAM‐Transportes Aéreas Regionais S.A.), incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.2

   A350 Family Purchase Agreement, dated December 20, 2005, between Airbus S.A.S.  and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.3

   Tay Engine Maintenance Agreement, dated September 14, 2000, between TAM Linhas Aéreas S.A. and MTU Motoren‐und Turbinen‐Union Muchen GmbH, incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.4

   V2500 Maintenance Agreement, dated September 14, 2000, between TAM Transportes Aéreos Regionais S.A. (incorporated by TAM Linhas Aéreas S.A.) and MTU Maintenance Hannover GmbH (MTU), incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.5

   PW4168A Maintenance Service Agreement, dated September 14, 2000, between TAM Linhas Aéreas S.A. and United Technologies International, Inc., Pratt & Whitney Division, incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.6

   Novation and Amendment Agreement, dated November 8, 2001, between Rolls‐Royce, MTU Aero Engines GmbH and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.7

   General Terms Agreement N° GE‐00‐0059, dated May 2001, among General Electric Company, GE Engine Services Distribution LLC and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.8

   General Services Agreement, dated October 3, 2003, between Sabre Travel Information Limited and TAM Linhas Aéreas S.A., incorporated herein by reference from our sixth pre‐effective amendment to our Registration Statement on Form F‐1, filed March 2, 2006, File No. 333‐131938.4.9

   Implementation Agreement, dated as of January 18, 2011, among Lan Airlines S.A., Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A., TAM S.A., TAM Empreendimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro.4.10

   Exchange Offer Agreement, dated as of January 18, 2011, among Lan Airlines S.A., Costa Verde Aeronáutica S.A., Inversiones Mineras del Cantábrico S.A., TAM S.A., TAM Empreendimentos e Participações S.A. and Maria Cláudia Oliveira Amaro, Maurício Rolim Amaro, Noemy Almeida Oliveira Amaro and João Francisco Amaro.8.1

   List of subsidiaries.12.1

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Executive Officer of TAM S.A.12.2

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Financial Officer of TAM S.A.12.3

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Executive Officer of TAM Linhas Aéreas S.A.12.4

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Financial Officer of TAM Linhas Aéreas S.A.12.5

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Executive Officer of TAM Capital Inc.12.6

   Rule 13a‐14(a)/15d‐14(a) Certification of Chief Financial Officer of TAM Capital Inc.13.1

   Section 1350 Certification of Chief Executive Officer of TAM S.A.13.2

   Section 1350 Certification of Chief Financial Officer of TAM S.A.13.3

   Section 1350 Certification of Chief Executive Officer of TAM Linhas Aéreas S.A.13.4

   Section 1350 Certification of Chief Financial Officer of TAM Linhas Aéreas S.A.13.5

   Section 1350 Certification of Chief Executive Officer of TAM Capital Inc.13.6

   Section 1350 Certification of Chief Financial Officer of TAM Capital Inc.15.1

   Consent of PricewaterhouseCoopers Auditores Independentes.
 -121 -


---



SIGNATURES 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 amended Annual Report on its behalf. TAM S.A. By:/s/ Marco Antonio BolognaName:  Marco Antonio BolognaTitle:  Chief Executive OfficerDate:  May 13, 2011 By:/s/ Líbano Miranda BarrosoName:  Líbano Miranda BarrosoTitle:  Chief Financial OfficerDate:  May 13, 2011 TAM LINHAS AÉREAS S.A. By:/s/ Líbano Miranda BarrosoName:  Líbano Miranda BarrosoTitle:  Chief Executive OfficerDate:  May 13, 2011 By:/s/ Ricardo Froes Alves FerreiraName:  Ricardo Froes Alves FerreiraTitle:  Chief Financial OfficerDate:  May 13, 2011 TAM CAPITAL INC. By:/s/ Líbano Miranda BarrosoName:  Líbano Miranda BarrosoTitle:  Chief Executive OfficerDate:  May 13, 2011 By:/s/ Líbano Miranda BarrosoName:  Líbano Miranda BarrosoTitle:  Chief Financial OfficerDate:  May 13, 2011 -122 -


---



---

TAM S.A. Financial statements at December 31, 2010 and Report of Independent Registered Public Accounting Firm


---



Contents    Management’s report on internal control over financial reporting

   F-3Report of independent registered public accounting firm

   F-4Consolidated balance sheet

   F-5Consolidated income statement

   F-7Consolidated statement of comprehensive income (loss)

   F-8Consolidated statement of changes in equity

   F-10Consolidated statement of cash flows

   F-13Notes to the consolidated financial statements

   F-14 - F-115


---



TAM S.A. Managementreport on internal control over financial reporting Year ended December 31, 2010
  To the Board of Directors and Stockholders of TAM S.A. The management of TAM S.A. ("TAM" or the "Company"), including the CFO and CEO, is responsible for establishing and maintaining adequate internal control over financial reporting. 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 (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) 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 (c) 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. TAM's management has assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2010 based on the criteria established in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and, based on such criteria, TAM's management has concluded that, as of December 31, 2010, the Company's internal control over financial reporting are effective. The effectiveness of the Company's internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers Auditores Independentes, an independent registered public accounting firm, as stated in their report which appears herein. São Paulo, April 13, 2011 By:/s/ Marco Antonio Bologna Chief Executive Officer, TAM S.A. By: /s/ Líbano Miranda Barroso Chief Financial Officer, TAM S.A.    F-3


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TAM S.A. Report of independent registered public accounting firmYear ended December 31, 2010
  Report of Independent Registered Public Accounting Firm  ToBoard of Directors and Stockholders TAM S.A. In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, statements of comprehensive income, statements of changes in equity and statements of cash flows present fairly, in all material respects, the financial position of TAM S.A.  and its subsidiaries at December 31, 2010, 2009, 2008 and 2007, and the results of  their operations and their cash flows for each of the four years in the period ended December 31, 2010 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.  Also in our opinion, the Company maintained, in all material respects, effective 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 (COSO). The Company's management is responsible for these financial statements, 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 opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.  As described in Note 4 the financial statements as of and for the years ended December 31, 2009, 2008 and 2007 have been retroactively adjusted as a result of a change in accounting policy.  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 (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) 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 (iii) 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.  /s/ PricewaterhouseCoopers  PricewaterhouseCoopersAuditores Independentes  São Paulo, Brazil April 13, 2011    F-4


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TAM S.A. Consolidated balance sheet Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  Assets

   Note

   

   December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Current assetsCash and cash equivalents

   7

   

   1,012,220

   

   1,075,172

   

   671,785

   

   466,538Financial assets at fair value through profit and loss

   8

   

   1,407,698

   

   1,011,022

   

   1,242,271

   

   2,140,339Trade accounts  receivable

   9

   

   1,556,781

   

   1,121,979

   

   1,157,239

   

   937,928Inventories

   10

   

   198,760

   

   195,092

   

   169,422

   

   100,185Taxes recoverable

   

   

   57,557

   

   99,268

   

   120,712

   

   87,017Income tax and social contribution  recoverable

   

   

   18,424Prepaid expenses

   

   

   162,788

   

   148,910

   

   149,281

   

   195,886Derivative financial instruments

   11

   

   9,895

   

   

   

   

   

   62,967Other receivables

   

   

   81,234

   

   141,977

   

   97,944

   

   74,1044,505,357

   

   3,793,420

   

   3,608,654

   

   4,064,964Non-current assets held for sale

   

   

   

   

   

   

   62,134

   

   62,286Total current assets

   

   

   4,505,357

   

   3,793,420

   

   3,670,788

   

   4,127,250Non-current assetsRestricted cash

   

   

   98,305

   

   79,370Financial assets - bank deposits

   

   

   50,280Deposits in guarantee

   12

   

   51,778

   

   59,520

   

   116,135

   

   161,488Deferred income tax and social contribution

   13

   

   

   

   193,876

   

   839,443

   

   4,751Prepaid aircraft maintenance

   14

   

   410,306

   

   408,628

   

   383,593

   

   119,633Other non-current assets

   

   

   20,595

   

   29,542

   

   157,904

   

   104,709Derivative financial instruments

   11

   

   6,568Property, plant and equipment

   15

   

   8,711,850

   

   8,134,028

   

   8,097,351

   

   5,781,159Intangible assets

   16

   

   642,286

   

   241,701

   

   152,092

   

   34,2489,991,968

   

   9,146,665

   

   9,746,518

   

   6,205,988Total assets

   

   

   14,497,325

   

   12,940,085

   

   13,417,306

   

   10,333,238
    The accompanying notes are an integral part of these consolidated financial statements (*) See note 4.  F-5


---



TAM S.A. Consolidated balance sheet Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  Liabilities

   Note

   

   December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007(Adjusted (*))

   

   (Adjusted (*)) (**))

   

   (Adjusted (*))Current liabilitiesAccounts payable

   

   

   522,364

   

   430,982

   

   486,095

   

   426,857Financial liabilities

   17

   

   1,572,093

   

   1,244,685

   

   910,153

   

   1,197,986Salaries and social charges

   

   

   466,831

   

   307,607

   

   317,951

   

   236,707Deferred income

   18

   

   1,801,181

   

   1,698,321

   

   1,105,719

   

   1,049,514Taxes, charges and contributions

   

   

   308,189

   

   179,662

   

   246,338

   

   129,135Income tax and social contribution

   

   

   14,339Interest on own capital and dividends

   

   

   152,293

   

   233,985

   

   599

   

   32,052Derivative financial instruments

   11

   

   20,574

   

   235,727

   

   1,021,928Other current liabilities

   19

   

   135,658

   

   123,696

   

   149,091

   

   130,7654,993,522

   

   4,454,665

   

   4,237,874

   

   3,203,016Non-current liabilitiesFinancial liabilities

   17

   

   5,786,848

   

   5,924,737

   

   7,178,873

   

   3,908,700Derivative financial instruments

   11

   

   15,286

   

   6,288

   

   107,057Deferred income

   18

   

   66,420

   

   100,169

   

   369,210

   

   357,769Provisions

   20

   

   204,271

   

   666,573

   

   947,800

   

   769,696Refinanced taxes payable under Fiscal Recovery Program

   21

   

   416,675

   

   319,671Deferred income tax and social contribution

   13

   

   149,440Other non-current liabilities

   19

   

   237,472

   

   173,946

   

   282,992

   

   185,2776,876,412

   

   7,191,384

   

   8,885,932

   

   5,221,442Total liabilities

   

   

   11,869,934

   

   11,646,049

   

   13,123,806

   

   8,424,458EquityCapital and reserves attributable to equity share holders of TAM S.A.Share capital

   22

   

   819,892

   

   675,497

   

   675,497

   

   675,497Other reserves

   23

   

   1,602,021

   

   615,131

   

   224,463

   

   1,371,703Accumulated deficit

   

   

   

   

   

   

   (610,694)

   

   (141,049)2,421,913

   

   1,290,628

   

   289,266

   

   1,906,151Non-controlling interest

   

   

   205,478

   

   3,408

   

   4,234

   

   2,629Total equity

   

   

   2,627,391

   

   1,294,036

   

   293,500

   

   1,908,780Total liabilities and equity

   

   

   14,497,325

   

   12,940,085

   

   13,417,306

   

   10,333,238
    The accompanying notes are an integral part of these consolidated financial statements (*) See note 4.  F-6


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TAM S.A. Consolidated income statement Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  Note

   

   December 31,2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Revenue

   24

   

   11,378,691

   

   9,765,506

   

   10,513,044

   

   8,018,819Operating expenses (**)

   25

   

   (10,401,678)

   

   (9,555,632)

   

   (9,935,437)

   

   (7,709,487)Operating profit before movements in fair value of fuel derivatives

   

   

   977,013

   

   209,874

   

   577,607

   

   309,332Movements in fair value of fuel derivatives

   

   

   36,585

   

   316,852

   

   (1,273,461)

   

   130,410Operating profit/(loss)

   

   

   1,013,598

   

   526,726

   

   (695,854)

   

   439,742Finance income  (**)

   27

   

   1,774,489

   

   2,412,686

   

   1,410,361

   

   1,006,868Finance costs

   27

   

   (1,672,103)

   

   (1,041,414)

   

   (3,006,220)

   

   (755,198)Profit/(loss) before income tax and social contribution

   

   

   1,115,984

   

   1,897,998

   

   (2,291,713)

   

   691,412Income tax and social contribution

   28

   

   (447,054)

   

   (649,539)

   

   710,174

   

   (213,749)Profit/(loss)for the year

   

   

   668,930

   

   1,248,459

   

   (1,581,539)

   

   477,663Attributable toEquity shareholders of TAM S.A.

   

   

   637,420

   

   1,246,778

   

   (1,582,407)

   

   477,486Non-controlling interest

   

   

   31,510

   

   1,681

   

   868

   

   177Earnings per share (common and preferred) – in R$Basic

   29

   

   4.22

   

   8.30

   

   (10.52)

   

   3.17Diluted

   29

   

   4.20

   

   8.29

   

   (10.52)

   

   3.15
  The accompanying notes are an integral part of these consolidated financial statements  (*) See note 4. (**)Includes reversal of additional tariff, as mentioned in note 20(b), (i).  F-7


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TAM S.A. Consolidated statement of comprehensive income/(loss) Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  December 31,

   2010

   

   December31,

   2009

   

   December 31,2008

   

   December 31,2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Profit/(loss) for the year

   668,930

   

   1,248,459

   

   (1,581,539)

   

   477,663Other comprehensive income/(loss)Currency translation gains (losses) of foreign operations – net of tax

   (469)

   

   (20,103)

   

   13,152

   

   (3,537)Other comprehensive income/(loss)

   (469)

   

   (20,103)

   

   13,152

   

   (3,537)Total of comprehensive income/(loss) for the year

   668,461

   

   1,228,356

   

   (1,568,387)

   

   474,126Atributable to:Equity holders of TAM

   636,951

   

   1,226,675

   

   (1,569,255)

   

   473,949Non-controlling interest

   31,510

   

   1,681

   

   868

   

   177
  The accompanying notes are an integral part of these consolidated financial statements  (*) See note 4.  F-8


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TAM S.A. Consolidated statement of changes in equity Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  Capital

   share

   

   Revaluationreserve

   

   Other reserves(Note 23)

   

   Retained earnings (accumulated deficit)

   

   Total

   

   Non-controlling interest

   

   TotalAt January 1, 2007

   

   675,000

   

   326,035

   

   615,041

   

   

   

   1,616,076

   

   2,744

   

   1,618,820Changes of accounting practices effects (Note 4)

   

   

   

   (326,035)

   

   162,844

   

   

   

   (163,191)

   

   

   

   (163,191)AtJanuary1, 2007 - adjusted

   

   675,000

   

   

   

   777,885

   

   

   

   1,452,885

   

   2,744

   

   1,455,629Profit for the year - adjusted (Note 4)

   

   

   

   

   

   

   

   477,486

   

   477,486

   

   177

   

   477,663Other comprehensive income/(loss)Foreign exchange loss of foreign operations  - net of tax

   

   

   

   

   

   (3,537)

   

   

   

   (3,537)

   

   

   

   (3,537)Total of comprehensive income

   

   

   

   

   

   (3,537)

   

   477,486

   

   473,949

   

   177

   

   474,126Transactions with ownersCapital increase through issuance of

   shares

   

   497

   

   

   

   

   

   

   

   497

   

   

   

   497Stock options plan

   

   

   

   

   

   11,230

   

   

   

   11,230

   

   

   

   11,230Movement in treasury shares

   

   

   

   

   

   (882)

   

   

   

   (882)

   

   

   

   (882)Dividends R$ 209.37 (per thousand shares in circulation)

   

   

   

   

   

   

   

   (31,528)

   

   (31,528)

   

   

   

   (31,528)Transfer to profit reserve

   

   

   

   

   

   599,747

   

   (599,747)Total of transactions with owners

   

   

   

   

   

   610,095

   

   (631,275)

   

   (20,683)

   

   

   

   (20,683)Other

   

   

   

   

   

   (12,740)

   

   12,740

   

   

   

   (292)

   

   (292)At December 31, 2007- adjusted

   

   675,497

   

   

   

   1,371,703

   

   (141,049)

   

   1,906,151

   

   2,629

   

   1,908,780
  The accompanying notes are an integral part of these consolidated financial statements  F-9


---



TAM S.A. Consolidated statement of changes in equity Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
 Capital

   share

   

   Other reserves(Note 23)

   

   Retained earnings (accumulated deficit)

   

   Total

   

   Non-controlling interest

   

   TotalAtJanuary1, 2008 - adjusted

   

   675,497

   

   1,371,703

   

   (141,049)

   

   1,906,151

   

   2,629

   

   1,908,780Loss for the year – adjusted (Note 4)

   

   

   

   

   

   (1,582,407)

   

   (1,582,407)

   

   868

   

   (1,581,539)Other comprehensive income/(loss)Foreign exchange gains of foreign operations  - net of tax

   

   

   

   13,152

   

   

   

   13,152

   

   

   

   13,152Total of comprehensive loss

   

   

   

   13,152

   

   (1,582,407)

   

   (1,569,255)

   

   868

   

   (1,568,387)Transactions with ownersStock options plan

   

   

   

   16,512

   

   

   

   16,512

   

   

   

   16,512Options exercised

   

   

   

   (9,336)

   

   

   

   (9,336)

   

   

   

   (9,336)Movement in treasury shares

   

   

   

   (14,269)

   

   

   

   (14,269)

   

   

   

   (14,269)Dividends R$ 269.56 (per thousand shares in circulation)

   

   

   

   

   

   (40,537)

   

   (40,537)

   

   

   

   (40,537)Absorption of losses with to profit reserve

   

   

   

   (1,150,536)

   

   1,150,536Total of transactions with owners

   

   

   

   (1,157,629)

   

   1,109,999

   

   (47,630)

   

   

   

   (47,630)Other

   

   

   

   (2,763)

   

   2,763

   

   

   

   737

   

   737At December 31, 2008- adjusted

   

   675,497

   

   224,463

   

   (610,694)

   

   289,266

   

   4,234

   

   293,500
  The accompanying notes are an integral part of these consolidated financial statements  F-10


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TAM S.A. Consolidated statement of changes in equity Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
 Capital

   share

   

   Other reserves(Note 23)

   

   Retained earnings (accumulated deficit)

   

   Total

   

   Non-controlling interest

   

   TotalAtJanuary1, 2009– adjusted

   

   675,497

   

   224,463

   

   (610,694)

   

   289,266

   

   4,234

   

   293,500Profit for the year – adjusted –  Note 4

   

   

   

   

   

   1,246,778

   

   1,246,778

   

   1,681

   

   1,248,459Other comprehensive income/(loss)Foreign exchange loss of foreign operations  - net of tax

   

   

   

   (20,103)

   

   

   

   (20,103)

   

   

   

   (20,103)Total of comprehensive income

   

   

   

   (20,103)

   

   1,246,778

   

   1,226,675

   

   1,681

   

   1,228,356Transactions with ownersStock options plan

   

   

   

   11,409

   

   

   

   11,409

   

   

   

   11,409Cancellation of share options

   

   

   

   (948)

   

   948Interest on own capital - R$ 166.45 (per thousand shares in circulation)

   

   

   

   

   

   (24,998)

   

   (24,998)

   

   

   

   (24,998)Dividends  - R$ 1,409.76 (per thousand shares in circulation)

   

   

   

   

   

   (211,724)

   

   (211,724)

   

   

   

   (211,724)Transfer to legal reserve

   

   

   

   49,134

   

   (49,134)Transfer to profit reserve

   

   

   

   353,007

   

   (353,007)Total of transactions with owners

   

   

   

   412,602

   

   (637,915)

   

   (225,313)

   

   

   

   (225,313)Other

   

   

   

   (1,831)

   

   1,831

   

   

   

   (2,507)

   

   (2,507)At December 31, 2009- adjusted

   

   675,497

   

   615,131

   

   

   

   1,290,628

   

   3,408

   

   1,294,036
  The accompanying notes are an integral part of these consolidated financial statements  F-11


---



TAM S.A. Consolidated statement of changes in equity Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
 Capital

   share

   

   Other reserves(Note 23)

   

   Retained earnings (accumulated deficit)

   

   Total

   

   Non-controlling interest

   

   TotalAt December 31, 2009 – adjusted

   

   675,497

   

   615,131

   

   

   

   1,290,628

   

   3,408

   

   1,294,036Profit for the year

   

   

   

   

   

   637,420

   

   637,420

   

   31,510

   

   668,930Other comprehensive incomeForeign exchange loss of foreign operations  - net of tax

   

   

   

   (469)

   

   

   

   (469)

   

   

   

   (469)Total of comprehensive income

   

   

   

   (469)

   

   637,420

   

   636,951

   

   31,510

   

   668,461Transactions with ownersCapital increase (Note 1.3)

   

   144,395

   

   

   

   

   

   144,395

   

   

   

   144,395Stock option plan

   

   

   

   15,999

   

   

   

   15,999

   

   

   

   15,999Sale of tresury shares

   

   

   

   3,355

   

   

   

   3,355

   

   

   

   3,355Dividends - R$ 1,001.34(per thousand shares in circulation)

   

   

   

   

   

   (151,387)

   

   (151,387)

   

   (9,387)

   

   (160,774)Capital gain on sale of equity interest (Note 1.1)

   

   

   

   489,115

   

   

   

   489,115

   

   179,947

   

   669,062Transferto legal reserve

   

   

   

   31,871

   

   (31,871)Transfer to profit reserve reserve

   

   

   

   463,587

   

   (463,587)Total of transactions with owners

   

   144,395

   

   1,003,927

   

   (646,845)

   

   501,477

   

   170,560

   

   672,037Other

   

   

   

   (9,299)

   

   9,299Reversal of revaluation reserve in foreign subsidiary - Mercosur

   

   

   

   (7,269)

   

   126

   

   (7,143)

   

   

   

   (7,143)At December 31, 2010

   

   819,892

   

   1,602,021

   

   

   

   2,421,913

   

   205,478

   

   2,627,391
  The accompanying notes are an integral part of these consolidated financial statements  F-12


---



TAM S.A. Consolidated statement of cash flows Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
  Note

   

   December 31,

   2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Cash flows generated from operating activities

   30

   

   1,002,438

   

   587,165

   

   1,904,477

   

   724,760Taxes paid

   

   

   (83,579)

   

   (83,429)

   

   (58,443)

   

   (65,528)Interest paid

   

   

   (282,058)

   

   (312,633)

   

   (303,525)

   

   (286,559)Net cash generated from operating activities

   

   

   636,801

   

   191,103

   

   1,542,509

   

   372,673Cash flows from investing activitiesInvestments in restricted cash

   

   

   (18,935)

   

   (79,370)Cash flows from investment acquired – Pantanal

   1.2

   

   (9,044)Proceeds from sale of property, plant and equipment (PPE) / intangible assets

   

   

   27,028

   

   35,869

   

   8,204

   

   4,558Purchases of property, plant and equipment

   

   

   (84,613)

   

   (334,896)

   

   (637,483)

   

   (311,852)Purchases of intangible assets

   

   

   (135,639)

   

   (135,296)

   

   (133,469)

   

   (37,071)Purchases of assets of TAM Milor including TAM Brands

   1.3

   

   (98,444)Deposits in guaranteeReimbursements

   

   

   15,657

   

   60,697

   

   106,292

   

   21,011Deposits made

   

   

   (9,485)

   

   (27,922)

   

   (30,503)

   

   (65,383)Pre delivery paymentsReimbursements

   

   

   150,486

   

   

   

   261,302

   

   401,977Payments

   

   

   (216,254)

   

   

   

   (217,688)

   

   (451,456)Net cash used in investing activities

   

   

   (379,243)

   

   (480,918)

   

   (643,345)

   

   (438,216)Cash flows from financing activitiesRepurchase / sale of treasury shares

   

   

   3,355

   

   

   

   (14,269)

   

   497Net cash received in a public offering of shares of subsidiary Multiplus

   1.1

   

   657,048Cash proceeds from issuance of shares in connection with acquisition of assets of TAM Milor

   1.3

   

   72,963Dividends paid – TAM S.A.

   

   

   (233,325)

   

   

   

   (72,065)

   

   (137,629)Dividends paid and interest on capital  own to non-controlling shareholders of Multiplus and Mercosur

   

   

   (9,078)Short and long-term borrowingsIssuance

   

   

   69,602

   

   236,581

   

   208,692

   

   638,105Repayment

   

   

   (179,939)

   

   (70,714)

   

   (471,390)

   

   (591,857)DebenturesIssuance

   

   

   

   

   592,686Repayment

   

   

   (166,666)

   

   

   

   (4,793)

   

   (19,957)Senior notesIssuance

   

   

   

   

   502,298Capital element of finance leases

   

   

   (534,470)

   

   (567,649)

   

   (340,092)

   

   (263,664)Net cash (used in) generated  from financing activities

   

   

   (320,510)

   

   693,202

   

   (693,917)

   

   232,575Net increase (decrease) in cash and cash equivalents

   

   

   (62,952)

   

   403,387

   

   205,247

   

   167,032Cash and cash equivalents at beginning of the year

   

   

   1,075,172

   

   671,785

   

   466,538

   

   299,506Cash and cash equivalents at end of the year

   

   

   1,012,220

   

   1,075,172

   

   671,785

   

   466,538Supplementary information on cash flows:Non cash investing and financing activities- Acquisition of aircraft under finance leases

   

   

   989,212

   

   181,201

   

   2,360,295

   

   1,325,685- Borrowing obtained for suppliers direct payment

   

   

   255,073- Acquisition of assets of TAM Milor through issuance of shares

   1.3

   

   71,444
  The accompanying notes are an integral part of these consolidated financial statements (*) See note 4.  F-13


---



TAM S.A. Notes to the consolidated financial statements Year ended December 31, 2010 (Amounts expressed in thousands of R$, unless otherwise indicated)
 1             General Information  TAM S.A ("TAM" or the "Company") was incorporated on May 12, 1997, to invest in companies which carry out air transportation activities. The Company wholly owns TAM Linhas Aéreas S.A. ("TLA"), a company that operates in the transportation of passengers and cargo in Brazil and on international routes, and also owns 94.98% of Transportes Aéreos del Mercosur S.A. ("TAM Airlines"), an airline headquartered in Assunción, Paraguay, which operates in Paraguay, Argentina, Brazil, Chile, Uruguay and Bolivia. TAM is incorporated and domiciled in Brazil and its registered office is in Av. Jurandir, 856, Lote 4, 1st floor, São Paulo, SP.  On July 15, 2005, the Company concluded a public offering of shares on the São Paulo Stock Exchange – BOVESPA. On March 10, 2006 the Company made an additional public offering – this time in the BM&F – Bolsa de Valores, Mercadorias e Futuros (BM&F Bovespa) and the New York Stock Exchange – NYSE  (in the form of American Depositary Shares – ADS), which was concluded on April 6, 2006.  The Company, through its subsidiary TLA, controls the companies TAM Capital Inc, (“TAM Capital”), TAM Capital Inc, 2 (“TAM Capital 2”), TAM Financial Services 1 Limited (“TAM Financial 1”) and  TAM Financial Services 2 Limited (“TAM Financial 2”), all headquartered in the Cayman Islands, whose main activities involve aircraft acquisition and financing and issuance of debt. Debt issued by these wholly-owned companies is wholly and unconditionally guaranteed by TAM.TLA also controls the company TAM Viagens e Turismo Ltda.(“TAM Viagens”)and TAM Milor Táxi Aéreo, Representações, Marcas e Patentes S.A. (“TAM Milor”),whose corporate purpose is to carry out the activities of a travel and tourism agency, under the name TAM Viagens and ownership of the TAM Brand, respectively.  The Company controls TP Participações Ltda. which on July 20, 2009, changed its name to TP Franchising Ltda. (“TP Franchising”) and modified its corporate purpose to the development of franchises. This company has had no activity since October 23, 2004, when it was established.  In the Extraordinary General Meeting (AGE) held on October 28, 2009, it was approved the change of the name of Q.X.S.P.E. Empreendimentos e Participações S.A. to Multiplus S.A. (“Multiplus”). Multiplus’s main activity is the development and management of customer loyalty programs. A public offering of shares of this subsidiary was concluded on February 5, 2010. See “Corporate Reorganization” below.  Since March 15, 2010, the date on which its purchase was approved, the Company controls Pantanal Linhas Aéreas S.A. – “Pantanal”. See “Acquisition of Pantanal” below. Pantanal is under bankruptcy protection.  On July 13, 2010, TLA acquired TAM Milor. See “Acquisition of TAM Milor” below.  These consolidated financial statements of TAM and its subsidiaries (Parent Company and Consolidated) were approved by theBoard of Directors on April 13, 2011.  1.1          Corporate Reorganization  During the second semester of 2009, the Company underwent a corporate reorganization that resulted in the creation of the subsidiary Multiplus. Multiplus is domiciled in Brazil, engaged in the development and management of customer loyalty programs, the creation of databases, the sale of reward redemption rights under customer loyalty programs, and the purchase of items related directly and indirectly with the development of the aforementioned activities.  The corporate reorganization had the purpose of segregating and transferring all of the TLA customer loyalty business to a separate company, providing more rationalization in the operational, administrative and financial structures of customer loyalty business of TLA, and greater efficiency, profitability and independence. The changes made can be represented as follows:  F-14


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
       Beginning on January 1, 2010, Multiplus assumed the exclusive management of the TAM Loyalty Program.  On February 3, 2010 Multiplus was listed as a publicly traded company on the BMF&Bovespa stock market. On February 5, 2010, the Company carried out an Initial Public Offering, obtaining proceeds in the gross amount of R$ 692,385, net of issue costs of R$ 35,337 and the related tax effect of R$ 12,014 through the issuance of 43,274,000 shares of common stock at the issue price of R$ 16.00 per share.  At the time of the public offering, transactions and results of Multiplus were not relevant and Multiplus had shareholders equity of less than R$ 1 (one thousand reais). As a result of the public offering TAM had its interest in Multiplus reduced from 100% to 73.17% while maintaining control.The sale of shares in the public offering resulted in an increase in the participation of non-controlling interest of R$ 179,947 and a reduction in the interest of TAM determined as follows:  Public offeringShareholders  equity of Multiplus before issuance of shares

   970Interest of TAM in Multiplus - %

   100%Interest of TAM in Multiplus

   970Shareholders equity of Multiplus after issuance of shares

   676,415Interest of TAM in Multiplus - %

   73.17%Interest of TAM in Multiplus

   494,933Increase in non-controlling interest

   179,947Transfer from non-controlling interest to equity attributable to equity holders of TAM S.A.

   489,115
  The following table presents the disclosures required by accounting standards for increases in equity attributable to equity holders of TAM as result of transactions with non-controlling interests when control in the investee is maintained:  2010Profit attributable to shareholders of TAM

   

   637,420Transactions with non-controlling interests:Increase in shareholders equity of TAM, as a result of the public offering of Multiplus

   

   489,115Profit attributable to shareholders of TAM and transactions from non-controlling shareholders

   

   1,126,535
  1.2          Acquisition of Pantanal Linhas Aéreas S.A.  On December 19, 2009 TAM announced and reported to the Comissão de Valores Mobiliários (“CVM”), the Brazilian Securities Commission and other appropriate authorities that it had agreed to purchase all shares of the regional airline company Pantanal. This acquisition, which has substantial strategic value in the view of management, has a purchase price of R$ 13,000, and R$ 3,000 was paid in December 2009 as an advance and the remaining amount of R$ 10,000 was paid in March 2010. This acquisition represents an important step towards transformation of the Company into a diversified business group in the civil aviation field, pursuant to its objective of constantly seeking out new opportunities for growth. On March 15, 2010 this acquisition was approved by the Agência Nacional de Aviação Civil (“ANAC”) the Brazilian civil aviation agency and on March 30, 2010  F-15


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 Pantanal’s authorization to operate was renewed to 2020. The transaction date for accounting purposes is March 15, 2010.  No contingent purchase price exists as result of the terms of the transaction and the selling shareholders did not grant guarantees or indemnification rights with respect to contingent liabilities.  Pantanal had at the date of the acquisition a fleet of three AT42-320 aircraft and operate out of São Paulo’s Congonhas Airport, performing regular passenger and cargo transportation services from São Paulo to six cities with medium-sized population in the states of São Paulo, Minas Gerais and Paraná. Its ATR42-320 aircraft regularly fly to and from Araçatuba, Bauru, Marília, Presidente Prudente, Juiz de Fora and Maringá. During 2010 it transported approximately 393 thousand passengers (2009 – 185 thousand passengers) (unaudited). On December 31, 2010, the Company had five ATR42-320 aircraft.  After concluding the acquisition of Pantanal, the Company prepared an opening balance sheet as of February 28, 2010, where assets and liabilities of Pantanal were recorded under the purchase method, in compliance with IFRS 3(R) - Business Combinations. Under this method, identifiable assets and liabilities were recognized at their fair value on the date of acquisition. As part of this process, items included in property and equipment of Pantanal were recorded at fair value.  The main components of the preliminary opening balance sheet as of February 28, 2010 are as follows:  Balances at

   February 28, 2010 –Historical amounts

   

   Acquisition adjustments

   

   Opening balance sheet

   at, February 28, 2010 - PreliminaryAssetsCash and cash equivalents

   

   956

   

   

   

   956Accounts receivable

   

   5,733

   

   

   

   5,733Inventories

   

   7,765

   

   

   

   7,765Others accounts receivable

   

   2,157

   

   

   

   2,157Property, plant and equipment

   

   26,373

   

   (12,392)

   

   13,981Intagible assets - goodwill

   

   

   

   38,262

   

   38,262Intangible assets - other

   

   

   

   124,927

   

   124,927Total

   

   42,984

   

   150,797

   

   193,781LiabilitiesCurrentAccounts payable

   

   5,440

   

   

   

   5,440Financial liabilities

   

   16,284

   

   

   

   16,284Salaries and social charges

   

   13,441

   

   

   

   13,441Deferred revenue

   

   4,808

   

   

   

   4,808Taxes, charges and contributions

   

   7,756

   

   

   

   7,756Provisions

   

   7,386

   

   

   

   7,386Other current liabilities

   

   2,886

   

   

   

   2,886Non-currentDeferred income tax and social contribution

   

   

   

   38,262

   

   38,262Fiscal recovery program

   

   68,935

   

   

   

   68,935Contingencies

   

   10,390

   

   

   

   10,390Other provisions

   

   5,193

   

   

   

   5,193142,519

   

   

   

   180,781Equity

   

   (99,535)

   

   112,535

   

   13,000Total

   

   42,984

   

   150,797

   

   193,781
  A separable intangible assets for the airport operation rights has been recognized at its estimated fair value of R$ 124,927. Those rights are considered to have an indefinite useful life and are based on the expected profitability from operating scheduled flights from the relevant airports.  Prior to the date of purchase, there were no relationships between TAM and Pantanal.  F-16


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  No tax deductible goodwill arose from this transaction.  The following table presents revenue and loss of Pantanal in the financial statements of TAM from the date of purchase:  December 31,

   2010Revenue

   

   99,936Net loss

   

   (4,653)
  1.3          Acquisition of TAM Milor  On July 13, 2010, the Board of Directors of the Company approved the acquisition throught its subsidiary TLA, of all shares of TAM Milor , held by individuals that are also shareholders of the Company.  TAM Milor isthe holder of thebrand “TAM” and other related brands ("TAM" Brands) which are used by the Company, by TLA and other related companies. The authorization to use of the TAM Brands by the Company and subsidiaries was formalized in the license agreement for use of trademarks, on March 10, 2005.  Considering that TAM Milor does not meet the definition of a “business” the transaction has been accounted for as an acquisition of assets.  The single relevant asset acquired by the entity is the “TAM” brand. The assets of TAM Milor acquired were accounted for at their estimated fair value, which also approximates the amount paid in cash, plus the fair value of TAM’s common shares. The market value of TAM brand was estimated based on discounted cash flow techniques and the valuation was performed by experts.  The payment by TLA was negotiated as follows: (a) cash payment of R$ 25,481 at the agreement date, and (b) issuance of a promissory note by TLA to the selling shareholders in the amount of R$ 144,395 (“Promissory Notes”), totaling R$ 169,876. The amount represented by the promissory note was converted into a capital increase in the Company, within the authorized capital limit, totaling the issuance of 5,621,634 new shares.  In order to avoid the dilution of the other shareholders who did not take part in the purchase process, and in conformity with the Corporation Law, all the other shareholders of the Company had, in the period from August 2, 2010 to September 14, 2010, the right to acquire part of the Company’s new common shares, in proportion to their equity interest, by means of cash payment (preemption right). The proceeds from the issuance of such shares by the Company were used to pay the promissory note. As a result, the selling shareholders of TAM Milor received, in addition to the cash payment of R$ 25,481, the proceeds from the issuance of shares to the other shareholders who exercised the in preemption rights, totaling R$ 72,963, equivalent to 2,834,039 new shares, and the remaining common shares representing their proportional interest in the Company’s capital and those that did not have the preemption right exercised by the other shareholders.  As a result acquisition of TAM Milor resulted in the following consideration:  R$ thousandsPaid in cash as result of the agreement

   25,481Paid in cash as repayment of the Note with proceeds from issuance of shares to other shareholders who exercised their preemption rights

   72,963Sub-total paid in cash

   98,444Paid in shares

   71,444Total consideration on acquisition of TAM Milor

   169,888
  On November 5, 2010, the Board of Directors approved the subscription to all of the 5,621,634 common shares, issued by the Company in view of the increase in its capital.   F-17


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  2            Significant accounting policies  The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated.  The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the group’s accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.  2.1          Basis of preparation  The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) issued by the International Accounting Standards Board–(IASB) and International Financial Reporting Interpretations Committee (IFRIC).  The consolidated financial statements were prepared under the historical cost model and the fair value measurement model for derivative financial instruments.  The first IFRS consolidated financial statements were prepared by the Company for the year ended December 31, 2008, in anticipation of the requirements in Brazilian Exchange Comission (CVM) Instruction 457/07, which established the preparation, by Brazilian listed companies, of consolidated financial statements in conformity with the pronouncements issued by the IASB. At that moment, the Company elected to adopt certain accounting policies, selected among those permitted by international accounting standards, including the policy of periodic revaluation of the carrying amount of its flight equipment. In its individual parent company financial statements, prepared in accordance with accounting practices adopted in Brazil, the revaluation of flight equipment was not considered, since this option is not legally provided for. As a result, the profit and equity presented in its individual financial statements were not equivalent to those in the consolidated financial statements.  Among the accounting policies adopted by Accounting Pronouncements Committee (CPC) for local purposes in its pronouncements, the option for measurement of assets at revalued cost is note included, considering the prohibition contained in the Brazilian Corporate Law. On December 2, 2010, CVM issued CVM Resolution 647, approving Technical Pronouncement CPC 37 (R1) – First-time Adoption of International Accounting Standards. CPC 37 (R1) defines that, should the entity have disclosed its IFRS consolidated financial statements related to any year ended before January 1, 2009 in disagreement with the Brazilian accounting practices defined by CPC, it should restrict its divergences of accounting practices to those adopted when CPC 37(R1) was approved and requires that new diverging pronouncements shall not be adopted. Nevertheless, in such resolution, CVM included the requirement that listed companies that have already published their IFRS consolidated financial statements in disagreement with the accounting practices defined by CPC shall present detailed information supporting the maintenance of these differences, and CVM can accept or restrict them or determine their elimination. On December 16, 2010, CVM issued CVM Resolution 651, approving Technical Pronouncement CPC 43(R1) – First-time Adoption of Technical Pronouncements CPC 15 to 41. One of the purposes of CPC 43(R1) is of, together with CPC 37(R1), permitting the presentation of equal net profit or loss and equity in the individual and in the consolidated financial statements of Brazilian entities. In its introduction, CPC 43(R1) reaffirms the CPC’s vision that it its fully undesirable to have two sets of statements with distinct accounting criteria and with different net profit or loss and equity. Thus, CPC 43(R1) permits adjustments in the individual financial statements of Brazilian companies, so that they may produce, when consolidated, the same amounts of assets, liabilities, equity, and profit or loss that the consolidation prepared under IFRSs and Technical Pronouncement CPC 37(R1). The Company understands that the


difference presented between its individual and consolidated financial statements, due to the recognition of flight equipment revaluation, is in accordance with the accounting practice issued by the CPCs and IFRSs issued by  IASB until now.  F-18


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 Since the recognition of the effects of flight equipment revaluation in the Company’s individual financial statements, basis for payment of dividends, is prohibited by law, and considering the purposes of CPC 43(R1) and CVM that preferably no differences exist between profit or loss and equity in the individual and consolidated financial statements, the Company’s management elected to change its accounting policy related to measurement of its flight equipment in the preparation of its consolidated financial statements for consistency with its individual financial statements. Such change in accounting policy has effects on the consolidated financial statements prepared in accordance with IFRS previously issued for the years ended December 31, 2009, 2008 and 2007. Therefore these consolidated financial statements prepared in accordance with IFRS and the accounting practices adopted in Brazil differ from IFRS financial statements previously issued as detailed in Note 4.  2.2             Basis of consolidation and investments in subsidiaries  (a)           Consolidated financial statements   The main accounting practices adopted in the preparation of these financial statements are as follows.  (i)           Subsidiaries  The consolidated financial statements include the financial statements of TAM and its subsidiaries, including special purpose entities. Control is obtained when the Company has the power to govern the financial and operating policies, as a result of holding more than half of the voting rights. The existence and the effect of potential voting rights, currently exercisable or convertible, are taken into account to assess whether TAM controls another entity. Subsidiaries are fully consolidated as from the date when control is transferred to TAM and are no longer consolidated as from the date when such control ceases.  The results of subsidiaries acquired during the year are included in the consolidated statements of income and of comprehensive income as from the actual acquisition date. The comprehensive income balance is attributable to the Company’s owners and to non-controlling interests, even if results in a negative balance of these interests. When necessary, the financial statements of subsidiaries are adjusted to conform their accounting policies to those established by the Company. Intercompany transactions and balances and unrealized gains are eliminated. Unrealized losses are also eliminated, although they are considered as an indicator of impairment of the transferred asset.  (ii)          Transactions and non-controlling interests  In the consolidated financial statements, any changes in the Company’s interests in subsidiaries that do not result in loss of the Company’s control over subsidiaries are recorded as capital transactions. The account balances of the Company’s interests and non-controlling interests are adjusted to reflect changes in their interests in subsidiaries. The difference between the fair value of consideration paid or received is recorded directly in equity and attributed to the Company's owners.  When the Company ceases to have control, any retained interest in the entity is remeasured to its fair value, and any change in the carrying amount is recognized in profit or loss. The fair value is the initial carrying amount for subsequent recognition of the retained interest in an associate, a joint venture or a financial asset. Also, any amounts previously recognized in other comprehensive income related to that entity are recorded as if the Group had directly disposed of the related assets or liabilities. This means that the amounts previously recognized in other comprehensive income are reclassified to profit or loss.  Non-controlling interests represent the portion of profit or loss and of equity of subsidiaries that is not held by TAM, and is recorded in a separate line item in the consolidated balance sheet.   F-19


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 (iii)Companies included in the consolidated financial statements  Ownership and voting power %Reporting date

   

   Ownership

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007TLA

   12.31.2010

   

   Direct

   

   100.00

   

   100.00

   

   100.00

   

   100.00TAM Viagens(i)

   12.31.2010

   

   Indirect

   

   99.99

   

   99.99

   

   99.99

   

   99.99TAM Capital(i)

   12.31.2010

   

   Indirect

   

   100.00

   

   100.00

   

   100.00

   

   100.00TAM Capital 2(i)

   12.31.2010

   

   Indirect

   

   100.00

   

   100.00TAM Financial 1(i)

   12.31.2010

   

   Indirect

   

   100.00

   

   100.00

   

   100.00

   

   100.00TAM Financial 2(i)

   12.31.2010

   

   Indirect

   

   100.00

   

   100.00

   

   100.00

   

   100.00FundoSpitfireII (exclusive investment fund) (ii)

   12.31.2010

   

   Indirect

   

   100.00

   

   100.00

   

   100.00

   

   100.00TP Franchising

   12.31.2010

   

   Direct

   

   100.00

   

   100.00

   

   100.00

   

   99.99Mercosur

   11.30.2010

   

   Direct

   

   94.98

   

   94.98

   

   94.98

   

   94.98Multiplus (iii)

   12.31.2010

   

   Direct

   

   73.17

   

   100.00

   

   100.00Pantanal  (iv)

   12.31.2010

   

   Direct

   

   100.00TAM Milor (v)

   12.31.2010

   

   Indirect

   

   100.00
  (i)   TAM's investments are held indirectly through TLA. (ii)  TAM's investment is held 12% directly and 17% through TLA and 71% through Multiplus. (iii)  See “1.1 Corporate reorganization”. (iv) As mentioned in Note 1.2, the Company started controlling Pantanal on March 15, 2010. The fianncial statements for the period ended December 31, 2010 include the net loss of the months from March  to December of Pantanal. (v) See “1.3 Acquisition of TAM Milor”.  2.3          Foreign currency translation  (a)           Functional and presentation currency  Items included in the financial statements of each of TAM's entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”) and are presented in Brazilian reais ("Real").  (b)           Transactions and balances  In the preparation of the financial statements of each consolidated entity, transactions in foreign currency, that is, any currency different from the functional currency of each company, are recorded at the exchange rates at the date of each transaction. At the end of each reporting period, foreign currency monetary items are translated using the closing rate. Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Other non-monetary items that are remeasured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Exchange gains and losses on the settlement of such transactions and the translation of monetary assets and liabilities in foreign currencies are taken to income.  (c)           Translation  In preparing the consolidated financial statements, the income statement, the cash flow statement and all other movements in assets and liabilities of the subsidiary TAM Airlines (the only subsidiary that has a functional currency different than the Brazilianreais) are translated at annual average rates of exchange, which are considered a good approximation to the exchange rates prevailing on the dates of the underlying transaction. The statement of financial position is translated at year-end rates of exchange.   F-20


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 The effects of exchange rate changes during the year on net assets at the beginning of the year are recorded as a movement in stockholders' equity, as is the difference between profit of the year retained at average rates of exchange and at year-end rates of exchange.  Cumulative exchange differences arising are reported as a separate component of equity within the reserve “Carrying value adjustement”. In the event of disposal or part disposal of an interest in a group company either through sale or as a result of a repayment of capital, the cumulative exchange difference is recognized in the income statement as part of the profit or loss on disposal.  2.4          Business combinations  In the consolidated financial statements, business acquisitions are accounted for under the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of fair values of assets transferred and liabilities incurred by the Company at the acquisition date for the former controlling stockholders of the acquiree and of interests issued by the Company in exchange for control of the acquiree. Transaction costs an a business combination, which are not associated with bond issues or equity issuance, are recognized as expense as incurred.  At the acquisition date, identifiable assets acquired and liabilities assumed are recognized at fair value at the acquisition date, except for:  ·Deferred tax assets and liabilities, and liabilities related to employee benefit plans are recognized and measured in accordance with IAS 12 – Income Taxes and IAS 19 – Employee Benefits;  ·Liabilities or equity instruments related to share-based payment agreements of the acquiree or share-based payment agreements of the Company entered into to replace share-based payment agreements of the acquiree are measured in accordance with IFRS 2 – Shared-Based Payment at the acquisition date;  ·Assets (or disposal groups) classified as held for sale in accordance with IFRS 5 – Non-current Assets held for Sale and Discontinued Operations are measured in conformity with that standard.  The Company measures goodwill as the fair value of the consideration transferred, including the recognized amount of any non-controlling interest in the acquired company, less the net amount recognized (generally the fair value) of identifiable assets acquired and liabilities assumed, all measured at the acquisition date. When the excess is negative, a gain from the purchase agreement is immediately recognized in the statement of income for the period.  2.4.1       Goodwill  Goodwill arising on a business combination is stated at cost at the business combination date, less any accumulated impairment losses.  For impairment testing purposes, goodwill is allocated to one of the Company's cash-generating units (or groups of cash-generating units) that are expected to benefit from the synergies of the business combination.  Cash-generating units to which goodwill has been allocated are tested for impairment annually, and whenever there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is lower than the carrying amount, the impairment loss is first allocated to reduce the carrying amount of any goodwill allocated to the unit and, subsequently, to other assets of the unit, proportionally to the carrying amount of each of its assets.Any impairment loss for goodwill is recognized directly in profit or loss, and the impairment loss is not reversed in subsequent periods.  2.5          Cash and cash equivalents  Cash and cash equivalents include cash in hand, bank deposits, short-term investments highly liquid with original   F-21


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 maturities of three months or less and which are subject to an insignificant risk of changes in value.  2.6         Restricted cash  Restricted cash represents pledged deposits with the purpose of guaranteeing some of Company’s derivatives and long-term financings.  2.7          Financial instruments  Financial assets and liabilities are recognized when the Company is a party to the contractual provisions of the instrument.  Financial assets and liabilities are initially measured at fair value. Transaction costs directly attributable to the acquisition or issue of financial assets and liabilities (except financial assets and liabilities recognized at fair value through profit or loss) are added to or deducted from the fair value of financial assets and liabilities, if applicable, after the initial recognition. Transaction costs directly attributable to the acquisition of financial assets and liabilities at fair value through profit or loss are immediately recognized in profit or loss.  Although TAM uses derivatives to mitigate the economic effects of fluctuations in exchange rates and international oil prices, it does not apply hedge accounting.  2.8          Financial assets  The Company’s financial assets are classified in the following categories: measured at fair value through profit or loss (including derivative financial instruments), held-to-maturity and loans and receivables. There are no financial assets classified as available-for-sale. The classification depends on the nature and purpose for which financial assets was acquired and is determined at the initial recognition date. All normal acquisitions or disposals of financial assets are recognized or derecognised based on the trade date. Normal acquisitions or disposals correspond to acquisitions or disposals of financial assets that require the delivery of assets within the term established by means of a standard or market practice.  (a)          Financial assets at fair value through profit or loss  Financial assets measured at fair value through profit or loss are financial assets held for active and frequent trading. Derivatives are also considered as held for trading and, therefore, are classified into this category, unless they have been designated as hedge instruments. Assets of this category are classified as current assets. Gains or losses arising from changes in the fair value are recognized in the statement of income in line item “Financial income/finance costs” in the period in which they occur, unless the instrument has been contracted in connection with another transaction. In this case, changes are recognized in the same profit or loss line in which the hedged transaction was recognized.  (b)           Held-to-maturity  Held-to-maturity financial assets are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability to hold to maturity. Held-to-maturity financial assets are included in non-current assets, except for thouse with maturities less than 12 months from the end of the reporting period, which are classified as current assets.  (c)           Loans and receivables  Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables (including Trade accounts receivable, Cash and cash equivalents, and Other receivables) are measured at amortized cost using the effective interest method, less any impairment loss, except for certain short-term investments that comply with the definition of assets at fair value through profit or loss. They are classified in current assets, except those with maturities of more than 12 months after the reporting  F-22


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 date, which are classified as non-current assets.  2.8.1      Measurement of financial assets  Financial assets carried at fair value through profit or loss  are  initially recognized at fair value, and transaction costs are expensed in the income statement. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the group has transferred substantially all risks and rewards of ownership. Financial assets at fair value through profit or loss are subsequently carried at fair value. Loans and receivables are subsequently carried at amortized cost using the effective interest method.  The fair values of quoted investments are based on current bid prices. For unlisted and for listed securities where the market for a financial asset is not active TAM establishes fair value using valuation techniques. These include the use of recent arm's length transactions, reference to other instruments that are substantially the same and discounted cash flow analysis.  2.8.2      Impairment of financial assets  Financial assets, except those designated at fair value through profit or loss, are assessed based on impairment indicators at the end of each reporting period. Impairment losses are recognized if, and only if, there is objetive evidence of impairment of the financial asset as a result of one or more events that occurred after its initial recognition, with impact on the estimated cash flows of this asset.  The criteria used to determine if there is objetive evidence of impairment may include:  Significant financial difficulty of the issuer or counterparty;  Breach of contract, such as a default or delinquency in interest or principal payments;  Probability of the debtor entering bankruptcy or financial reorganization; or  Disappearance of an active market for that financial asset because of financial difficulties.  For certain categories of financial assets, such as accounts receivable, the assets that are assessed as not impaired in an individual assessment may, subsequently, be assessed as impaired in a collective assessment. Objective evidence of impairment for a receivables portfolio may include the Company’s past experience in the collection of payments and the increased number of delayed payments after a period of days, as well as observable changes in the national or local economic conditions related to defaults on receivables.  The carrying amount of the financial asset is reduced directly by the impairment loss for all financial assets, except for accounts receivable, in which the carrying amount is reduced through the use of a provision. Subsequent recoveries of amounts previously written off are credited to the provision. Any changes in the carrying amount of the provision are recorded in profit or loss.  2.9          Trade accounts receivable  Trade accounts receivable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method, less provision for impairment. In practice, due to the short term nature of the receivables, they are usually recognized at the invoiced amount. A provision for impairment of trade receivables (allowance for doubtful receivables) is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables.  The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited to the income statement.   F-23


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 2.10        Inventories  Inventories, consisting mainly of spare parts and materials to be used in maintenance and repair activities, are stated at the average acquisition cost, or realizable value where lower, net of provisions to write down the value of obsolete items.  2.11        Intangible assets  (a)           Computer software and IT projects  Expenses related to software maintenance are recognized as expenses as they are incurred. Expenses directly related to internally developed software and other IT projects include materials, costs incurred with software development companies and other direct costs. They are capitalized as intangible assets when they will probably generate economic benefits greater than their costs, considering their economic and technological viability. Computer software development costs recognized as assets are amortized on a straight-line basis over their estimated useful life, which does not usually exceed 5 years.  (b)Other intangible assets  Include amounts related to: (a) right to slots arising from the acquisition of Pantanal in March 2010, based on the expected profitability of operating regular flights from the airports object of the acquired right (see “Acquisition of Pantanal”),  (b) acquisition of “TAM” brand in July 2010 on the acquisition of TAM  Milor (see “Acquisition of TAM Milor”), and (c) licenses and other contractual rights acquired from third parties, which are capitalized as intangible assets and amortized over their estimated useful life.  The carrying value of intangible assets is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable, or if the intangible assets have not yet started to be used and amortized.  (c)           Goodwill  Represents the excess of the cost of an acquisition over the fair value of the TAM’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in ‘intangible assets’.  Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.  Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose, identified according to operating segment.  2.12        Property, plant and equipment including aircraft pre-delivery payments  Depending on the type of the asset and the timing of its acquisition, the cost refers to the historical acquisition cost, demeed cost, or to the historical acquisition cost adjusted for the effects of hyperinflation, in the years in which the Brazilian economy was considered hyperinflationary. Brazil was considered a hyperinflationary economy for IFRS purposes until 1997.  Land is not subject to depreciation. Depreciation is recognized based on the estimated useful life of each asset under the straight-line method, so that the cost less its residual value after its useful life is fully written off. The estimated useful life, residual values and depreciation methods are reviewed annually and the effect of any changes in estimates is accounted for prospectively. The estimated useful life of items used in the calculation of depreciation is as follows:   F-24


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 YearsFlight equipment - Aircraft

   6 – 30Flight equipment - Engines

   10Overhaul

   4 – 6Buildings

   25Machinery and equipment

   10Computers

   5
  Major overhaul expenditure, including replacement spares and labor costs, is capitalized and amortized over the average expected life between major overhauls (the "built-in overhaul method"). All other replacement spares and other costs relating to maintenance of flight equipment assets, including all amounts payable under "power by the hour" maintenance contracts, are charged to the income statement on consumption or as incurred respectively, as described below in Note 2.25.  The costs of loans attributable to the acquisition of qualifying assets, which necessarily take a substantial period of time to get ready for use, are added to the cost of such assets until the date when they are ready for their intended use.  The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value is greater than its estimated recoverable amount.  A property, plant and equipment item is written off after disposal or when there are no future economic benefits as a result of the continued use of the asset. Any gains or losses on the sale or disposal of a property, plant and equipment item are determined by the difference between the amounts received from the sale and the carrying amount of the asset and are recognized in profit or loss.  (a)           Pre-delivery payments  Pre-delivery Payments (PDPs) paid to aircraft manufacturers under the terms of purchase agreements for aircraft are denominated in US dollars and are recognized in the financial statements at the amount paid translated at the exchange rate ruling at the date of payment. Borrowing costs, including interest and applicable foreign exchange differences incurred for the construction of qualifying assets are capitalized during the period which the aircraft are built.  In the event that a decision is taken that the aircraft will not be purchased by TAM, but rather it will be leased and it is agreed that the PDPs will be returned to TAM, then the related PDPs are reclassified to other receivables and are remeasured to the present value of the amount expected to be returned to TAM. This amount will, if it is denominated in a foreign currency, be translated at the exchange rate ruling at the reporting date, and any resulting difference recognized in the income statement.  2.13       Impairment of non-current assets  Assets that have an indefinite useful life including goodwill, are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. For impairment testing purposes, assets are grouped at the lowest level for which cash flows can be separately identified (cash generating units or "CGUs"). Impaired non-financial assets, except goodwill, are reviewed subsequently for analysis of the possible reversal of the impairment at the reporting date.  2.14        Accounts payable  Accounts payable are obligations to pay for goods or services that have been acquired in the ordinary course of   F-25


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 business. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities.  Accounts payable are recognized initially at fair value and subsequently measured at amortized cost using the effective interest rate method. In practice, due to the short term nature of most trade payables, they are usually recognized at the invoiced amount.  2.15        Non-derivative financial liabilities  Other financial liabilities (including loans, senior notes and debentures) are initially recognized at fair value, less transaction costs incurred. Subsequently, they are measured at amortized cost using the effective interest method.  The effective interest method is used to calculate the amortized cost of a financial liability and allocate its interest expense over the related period. The effective interest rate is the rate that discounts exactly estimated future cash flows (including fees and points paid or received that are an integral part of the effective interest rate, transaction costs and other premiums or discounts) over the estimated life of the financial liability or, when appropriate, over a shorter period, to the amount initially recognized.  Loans are classified in current liabilities, unless TAM has an unconditional right not to settle the liability for at least 12 months after the reporting date.  Non-convertible debentures and senior notes are recorded in the same manner as loans.  2.16        Derivative financial instruments  Derivative financial instruments are initially recognized at fair value at the date when a derivative contract is entered into and are subsequently remeasured at fair value. Transaction costs are recognized as expenses as incurred.  Although TAM uses derivatives to mitigate the economic effects of changes in exchange rates and international oil prices, it does not apply hedge accounting. Any changes in the fair value of financial instruments are immediately recognized in profit and loss.  Gains and losses arising from changes in the fair value of fuel derivatives are presented separately in the statement of income.  2.17        Income tax and social contribution  Income tax and social contribution expense represents the sum of current and deferred taxes. Income tax and social contribution are recognized in the income statement, except to the extent that they relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively. When current and deferred taxes are derived from the initial recognition in a business combination, the tax effect is considered in the recognition of the business combination.  The current income tax and social contribution charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation, it establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities.  Deferred income tax and social contribution are recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they arise from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither   F-26


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 accounting nor taxable profit or loss. Deferred income tax and social contribution are calculated on temporary differences arising from differences between the tax bases of assets and liabilities and their carrying amounts.  The rates currently defined for the determination of income tax and social contribution, current and deferred, are 25% and 9%, respectively (Notes 13 and 28).  Deferred tax assets are recognized to the extent that it is probable sufficient future taxable income will be available for offset against tax losses, considering projections of future income based on internal assumptions and future economic scenarios which may, therefore, suffer changes. The Company's management revises these projections annually.  2.18        Deferred income  Deferred revenue accounts comprises advance ticket sales, gains on sale and leaseback transactions (Note 2.24), and revenue related to TAM Loyalty Program Multiplus (Multiplus Fidelidade)  (Note 2.26).  The revenue from Multiplus Fidelidade is initially measured at fair value, against accounts receivable, and is recognized in profit or loss as program points are redeemed.  The Advance ticket sales account comprises tickets sold in the last 12 months but not yet used. These amounts are recognized as revenue when the service is provided or tickets expire.  2.19        Provisions  TAM recognizes provisions when it has a legal or constructive obligation as a result of past events, and a future disbursement of resources to settle the obligation is probable. Provisions are measured at the present value of expenditure required to settle the obligation, using a pre-tax discount rate, which reflects current market assessments of the time value of money and specific risks of the obligation. The increase in the obligation as a result of the passage of time is recognized as finance costs. Provisions are presented net of the related judicial deposits.  When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, an asset is recognized if, and only if, the reimbursement is virtually certain and the amount can be reliably measured.  2.20        Employee benefits  (a)           Profit-sharing and bonus  The Company recognizes a liability and an expense for bonuses and profit-sharing, based on a Profit Sharing Program and certain operating indicators. The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.  (b)           Share-based payment  TAM operates an equity-settled share-based compensation plan. The shared-based compensation plan is measured at the fair value of equity instruments at the granting date. Details regarding the determination of the fair value of these plans are described in Note 26.2.  The fair value of the employee services received in exchange for the grant of the options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions used to define the number of options that are expected to vest. At each balance sheet, TAM revises its estimates of the number of options that are   F-27


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 expected to vest, recognizing the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity.  When share options are exercised by issuing treasury shares, the proceeds received from the exercise of options, net of any directly attributable transaction costs are credited to treasury shares; the difference between the book value of the treasury shares awarded to the employee and the exercise price is recognized in retained earnings.  (c)           Pension plans  TAM only operates defined contribution plans. Once the contributions are made, the Company has no further liability for additional payments. Regular contributions comprise the net periodic costs of the period when they are due and, accordingly, are included in personnel expenses.  2.21        Share capital  Common shares and non-redeemable preferred shares are classified as stockholder's equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a deduction, net of tax, from the proceeds.  When any group company purchases the Company's equity share capital (treasury shares), the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from stockholders' equity until the shares are cancelled or reissued. When such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the company’s equity holders.  2.22        Dividends and interest on own capital  Dividend distributions and interest on own capital to the company’s shareholders is recognized as a liability in the financial statements at the end of the year. The financial statements reflect only minimum mandatory dividends, provided for in the Company’s statute, of 25% of the net profit. Any value above the minimum mandatory is only accrued on the date they are approved by shareholders in General Meeting (Ordinary / Extraordinary). Tax benefits of interest on own equity are recognized in the income statement.  2.23       Earnings per share  Earnings per share are calculated by dividing profit or loss for the year attributable to the Company's controlling and non-controlling stockholders by weighted average of common shares outstanding in the related year. Diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares for the years-ended presented.  2.24        Lease agreements  Leases are classified at inception. Leases of assets under which TAM has substantially all the risks and rewards of ownership are classified as finance leases. All other types of leases are classified as operating leases. Finance leases are capitalized at the lease's commencement at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between repayment of the liability and finance charges. The corresponding rental obligations, net of finance charges, are included within financial liabilities. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The long-term assets acquired under finance leases are depreciated over the shorter of the asset's useful life and the period for which the asset will be leased.  Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease.   F-28


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  Any gains arising on sale and leaseback transactions resulting in finance leases are deferred and recognized in the income statement on a straight-line basis over the period of the lease; gains arising on sale and leaseback transactions resulting in operating leases are generally recognized in the income statement immediately.  2.25        Aircraft and engine maintenance  Engine maintenance contracts cover all significant engine maintenance activity. The Company recognizes maintenance expenses for its engine maintenance contracts on an as-incurred basis. The basis on which maintenance expenses are considered incurred is dependant on the nature of the services provided:  Time and materials contract: under which amounts are payable to the maintenance provider, and are recognized in the income statement, based on actual maintenance activities performed by the maintenance providers. The costs incurred reflect the actual amount of time incurred by the maintenance providers and the cost of the materials and components used in the maintenance activities.  Power-by-the-hour contracts: under which amounts are contractually payable to the maintenance provider based on hours flown. A liability and a corresponding expense in the income statement are recognized as the hours are flown.  2.26        Revenue  Air transportation revenues (passengers and cargo) are recognized when transportation services are rendered. Revenue in respect of passenger tickets sold but not yet used (advance ticket sales) is treated as deferred income, classified within current liabilities. Revenue for unused tickets is recognized on the ticket expiration date, which is 12 months after the issuance date of the ticket.  The Company sponsors a program (Loyalty Program) to award frequent flyers, whereby points are accumulated when flying with TAM or partner airline companies, or when making purchases using TAM Loyalty Program credit card, or using the services and products of commercial partners. The Loyalty Program award credits when passengers use the flights of TAM or partnering airlines are recognized as a separately identifiable component of revenue based on the estimated fair value of the points awarded. This revenue is deferred, considering the points that are expected to be redeemed based on historical experience, and is recognized in the income statement as passenger revenue when the points are redeemed and passengers uplifted.  As mentioned in Note 1, beginning on January 1, 2010, the Company transferred the management of the loyalty program to its subsidiary Multiplus. As from January 1, 2010 points will be issued by Multiplus who will sell points to TAM in order to grant such points to its flying customers, as well as to commercial partners. TLA remains responsible for the redemption of points issued up to December 31, 2009.  The revenue from points sold to third parties is initially recognized when the deferred revenue is recognized in the income statement when points are redeemed for awards or, in the case of points that are expected not to be redeemed, is recognized over the points validity period of two years.  Other operating revenues, represented by fees arising from alterations to flight reservations, sub-lease of aircraft, maintenance services provided to other airlines and other services, are recognized when the service is provided.  Interest income is recognized using the effective interest rate method, taking into account the principal outstanding and interest rates in effect up to maturity or the statement of financial position date.  2.27        Segmental information  Operating segment information is presented consistent with the internal report provided to the chief operating decision maker. The chief operating decision maker, responsible for allocating resources and assessing the performance of operating segments, is the Chief Executive Officer.  Starting on January 1, 2010, as a result of the creation of Multiplus, with a reporting structure separate from TAM, the reporting structure was reviewed and since then TAM has two operating segments to be reported: Airlines and Loyalty Program.  2.28        Income statement presentation  On the face of the income statement the following amount is separately presented:  movements in the fair value of fuel derivatives.These item is shown separately as part of operating profit. These are material in terms of nature and amount, and are disclosed separately in order to help users of the financial statements better understand TAM's financial performance.  F-29


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TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)


2.29        New and revised standards and interpretations already issued but not yet adopted



(a)           Standards, amendments and interpretations of standards that are not yet effective for the financial year beginning January 1, 2010 and not early adopted



The IASB issued several IFRS standards, amendments to standards and interpretations during the year ended December 31, 2010, and permitted their early adoption. The Company did not elect the early adoption of any of the new standards or amendments to standards, since they do not yet have equivalent pronouncements issued by the Accounting Pronouncements Committee (CPC), and their adoption is Brazil is not permitted. In view of the commitment of CPC and the Brazilian Securities Commission (CVM) to keeping up-to-date the set of standards issued based on updates made by the International Accounting Standards Board (IASB), it is expected that these pronouncements and modifications will be issued by and approved by CVM by the date of their mandatory application.



IFRS 9 –Financial instruments, issued in November 2009 and amended in October 2010, introduces new requirements for classification, measurement and derecogntion of financial assets and liabilities. Mandatory for periods beginning on January 1, 2013. IFRS 9 establishes that all recognized financial assets that are within the scope of IAS 39 – Financial instruments: recognition and measurement  be subsequently measured at amortized cost or fair value. Specifically, debt instruments that are held under a business model, the purpose of which is receiving contractual cash flows, and that have contractual cash flows that refer solely to payments of principal and interest on the principal amount due are generally measured at amortized cost at the end of subsequent accounting periods. All other debt instruments and investments in equity instruments are measured at fair value at the end of subsequent accounting periods. The Company also assess the overall impact of IFRS 9. However, initial indications are that the effects are not relevant.




- IFRIC 13 - "Customer Loyalty Programmes". The meaning of “fair value” is clarified in the context of measurement of award credits in customer loyalty programmes. Effective January 1, 2011.



(b)           Standards, amendments to and interpretations of standards that are not yet effective and are not significant for the Company’s operations:



The following interpretations of and amendments to existing standards were published and are mandatory for the Company’s accounting periods beginning on January 1, 2011, or after this date, or for subsequent periods. However, they are not significant for TAM’s operations:



- Amendment to IAS 32, “Financial Instruments:  Presentation – Classification of Rights Issues”. The IASB amended IAS 32 to permit that rights, options or warrants to acquire a fixed number of an entity’s own equity instruments for a fixed price in any currency be classified as equity instruments, as long as the entity offers rights, options or warrants pro rata to all of its owners of the same class of its own non-derivative equity instruments.  Effective for periods beginning on or after February 1, 2010.



·IFRIC 19 – “Extinguishment of Financial Liabilities with Equity Instruments”, effective for transactions carried out on or after July 1, 2010. This standard clarifies the accounting treatment when an entity renegotiates the terms of its debts and as a result the liability is extinguished upon the issuance, by the debtor, of shares of its capital on behalf of the creditor.



- Amendments to IFRS 1 on elimination of fixed dates for first-time adopters of IFRSs: on December 20,  2010, IASB issued amendment to IFRS 1 –First-time Adoption of International Financial Reporting Standards(IFRSs), which deals with the elimination of fixed dates for first-time adopters of IFRSs. The amendments replace the fixed date for prospective adoption from January 1, 2004 to the date of transition to IFRSs, so that first-time adopters of IFRSs do not have to apply the derecognition requirements of IAS 39 retrospectively. The modification must be mandatorily adopted for years beginning on or after July 1, 2010.



- IAS 24, “Related Party Disclosures” (revised in 2009). Changes the definition of a related party and modifies certain requirements for government-related entities. Effective beginning on January 1, 2011.



- Amendment to IFRIC 14, “IAS 19, “The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction. Removes unintended consequences arising from the treatment of prepayments in some circumstances when there is a minimum funding requirement. The results from prepayments of contributions in certain circumstances are recognized as asset, rather than as expense.  Effective for periods beginning on or after January 1, 2011.



F-30

---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 Improvements to IFRS in 2010  The amendments are generally applicable for annual periods beginning after January 1, 2011, unless otherwise indicated.  Standard

   

   Main requirements

   

   ApplicationIFRS 1 - "First-time Adoption of International Financial Reporting Standards"

   

   (a)    Change in accounting policy in the year of adoptionClarifies that, if a first-time adopter changes its accounting policies or its use of IFRS 1 exemptions after having published an interim financial report in accordance with IAS 34, "Interim Financial Reporting", the entity should explain the changes and update the reconciliations between prior GAAP and IFRS..

   

   Applied prospectively.

   The entities that adopted IFRS in prior periods can apply the change retroactively in the first annual period after the change becomes effective, as long as the measurement date is within the period covered by the first IFRS financial statements.**(b)    Revaluation as deemed cost**

   

   Permits that entities that adopt the IFRS for the first time use the fair value determined by a specific event as deemed cost, even if the event occurs after the transition date, but before the first IFRS financial statements are issued. When this remeasurement occurs after the date of transition to IFRS, but during the period covered by their first IFRS financial statements, any adjustment subsequent to that fair value determined by the event will be recognized in equity. This event can be, for example, a privatization or acquisition.

   Applied prospectively.(c)    Use of deemed cost for operations subject to regulated prices (for example, concessionaires of public services)

   

   Entities subject to tariff regulation can use the prior carrying amounts, in accordance with prior GAAP, of property, plant and equipment or intangible assets as deemed cost on an item-by-item basis. The entities that use this exemption are required to test each item for impairment in accordance with IAS 36 at the transition date

   Applied prospectively.IFRS 3 (R)- "Business Combinations"

   

   (a)    Transition requirements for contingent consideration from a business combination that occurred before the date the revised IFRS became effective.Clarifies that amendments to IFRS 7 - "Financial Instruments: Disclosures", IAS 32 - "Financial Instruments: Presentation", and IAS 39 - "Financial Instruments: Recognition and Measurement”, which eliminate the exemption of contingent consideration, do not apply to contingent consideration arising from business combinations for which the acquisition dates precede the application of IFRS 3 (as revised in 2008).

   

   Applicable to annual periods beginning on or after July 1, 2010. Applied retrospectively.(b)    Measurement of non-controlling interests

   

   The choice of measuring non-controlling interests at fair value or based on the proportional share of the acquiree's net assets applies only to instruments that represent current interests and entitle their holders to a proportional share of the net assets in the event of liquidation. All other components of non-controlling interest are measured at fair value, unless another measurement is required by IFRS.

   Applicable to annual periods beginning on or after July 1, 2010. Applied prospectively, as from the date when the entity applies IFRS 3 (revised).(c)    Share-based payment awards  based on non-replaced shares or voluntarily replaced shares

   

   The application guidance in IFRS 3 applies to all share-based payment transactions that are part of a business combination, including share-based payment awards based on non-replaced shares or voluntarily replaced shares.

   Applicable to annual periods beginning on or after July 1, 2010. Applied prospectively.IFRS 7, “Financial Instruments”

   

   Emphasizes the interactions between quantitative and qualitative disclosures on the nature and extent of risks associated with financial instruments.

   

   January 1, 2011

   Applied retroactively.IAS 1 - "Presentation of Financial Statements"

   

   Clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements.

   

   January 1, 2011

   Applied retrospectively.IAS 27 - "Consolidated and Separate Financial Statements"

   

   Clarifies that consequential amendments from IAS 27 made to IAS 21 - "The Effects of Changes in Foreign Exchange Rates", IAS 28 - "Investments in Associates" and IAS 31 - "Interests inJoint Ventures", apply prospectively to annual periods beginning on or after July 1, 2009, or before this date, when IAS 27(R) is early applied.

   

   Applicable to annual periods beginning on or after July 1, 2010. Applied retrospectively.IAS 34 - "Interim Financial Reporting"

   

   Offers guidance to illustrate how to apply IAS 34 disclosure principles and adds disclosure requirements regarding:.circumstances that probably will affect the fair values of financial instruments and their classification;

   

   .transfers of financial instruments between different levels of hierarchy of fair value;

   

   .changes in classification of financial assets; and

   .changes in contingent assets and liabilities.

   

   January 1, 2011

   Applied retrospectively.
  F-31


---





TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  3             Critical Accounting Estimates and Judgments  Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have asignificant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.  3.1          Revenue recognition  The revenue related to the loyalty program is deferred based on the number of outstanding points and a historical average rate for non-redemption of points (breakage) in the last 12 months. The fair value of points issued to participants when flying with TAM or partnering airlines is determined based on the weighted average of points sold to trading partners and free tickets granted to passengers. Also, the deferral of revenue depends on the estimate of the quantity of points to be cancelled when they expire after two years from the issuance date.  3.2          Deferred taxes  TAM recognizes deferred income tax assets and liabilities based on the differences between the carrying amounts shown in the financial statements and the tax basis of the assets and liabilities, using prevailing tax rates. TAM regularly reviews deferred tax assets for recoverability, taking into account historical income generated and projected future taxable income based on a study of technical viability.  3.3          Contingencies  TAM is currently involved in various judicial and administrative proceedings, as described in Note 20. Provisions are recognized for all contingencies in judicial proceedings that represent probable losses (present obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount can be reliably estimated). The probability of loss is evaluated based on the available evidence, including the views of internal and external legal counsel. TAM believes that these contingencies are properly recognized in the financial statements.  3.4          Financial instruments used to mitigate the risks of variations in jet fuel prices  TAM records the financial instruments used to mitigate the risks of variations in jet fuel prices at their fair market value based on market quotations for similar instruments. Derivative financial instruments are used in order to mitigate the risk against variations in fuel prices. Sensitivity to movements in the price of oil is discussed in Note 5.  4.            Adjustments retroactive to the financial statements consolidated for the prior period  As mentioned in note 2.1, at December 31, 2010, the Company decided to change the accounting policy related to recognition of flight equipment revaluation in its consolidated financial statements, in order that the consolidated profit and equity may be equivalent to those presented in the parent company’s individual financial statements since the Brazilian corporate law does not permit the revaluation of assets. This change in accounting policy has effects on the consolidated financial statements presented for comparative purposes for the years ended December 31, 2009, 2008 and 2007 previously issued.  The effects of retroactive adjustments at December 31, 2009, 2008 and 2007 are as follows:  December 31,

   2009As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on balance sheetProperty, plant and equipment

   

   6,910,496

   

   1,223,532

   

   8,134,028Deferred income tax and social contribution asset

   

   621,788

   

   (427,912)

   

   193,876Total

   

   7,532,284

   

   795,620

   

   8,327,904Revaluation reserve

   

   116,504

   

   (116,504)Retained earnings (accumulated deficit) and other reserves

   

   (296,993)

   

   912,124

   

   615,131Total

   

   (180,489)

   

   795,620

   

   615,131
  F-32


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  December 31,

   2008As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on balance sheetProperty, plant and equipment

   

   9,663,452

   

   (1,566,101)

   

   8,097,351Deferred income tax and social contribution asset

   

   306,969

   

   532,474

   

   839,443Total

   

   9,970,421

   

   (1,033,627)

   

   8,936,794Revaluation reserve

   

   1,146,829

   

   (1,146,829)Accumulated deficit and other reserves

   

   (499,433)

   

   113,202

   

   (386,231)Total

   

   647,396

   

   (1,033,627)

   

   (386,231)
  December 31,2007As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on balance sheetProperty, plant and equipment

   

   5,781,076

   

   83

   

   5,781,159Deferred income tax and social contribution asset

   

   4,770

   

   (19)

   

   4,751Total

   

   5,785,846

   

   64

   

   5,785,910Revaluation reserve

   

   284,465

   

   (284,465)Accumulated deficit and other reserves

   

   946,125

   

   284,529

   

   1,230,654Total

   

   1,230,590

   

   64

   

   1,230,654
   December 31,2009As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on profit or lossOperating expenses

   

   (9,595,826)

   

   40,194

   

   (9,555,632)Gains (losses) on revaluation of aircraft

   

   (1,207,608)

   

   1,207,608Operating profit (loss) before income tax and social contribution

   

   650,196

   

   1,247,802

   

   1,897,998Income tax and social contribution

   

   (212,781)

   

   (436,758)

   

   (649,539)Profit for the year

   

   437,415

   

   811,044

   

   1,248,459Earnings per share – basic

   

   2.90

   

   

   

   8.30Earnings per share – diluted

   

   2.90

   

   

   

   8.29Effects on comprehensive income (loss) for the yearRevaluation of property, plant and equipment

   

   (1,017,255)

   

   1,017,255Profit for the year

   

   437,415

   

   811,044

   

   1,248,459Total comprehensive income (loss) for the year

   

   (599,944)

   

   1,828,299

   

   1,228,356
  F-33


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  December 31,2008As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on profit or lossOperating expenses

   

   (9,954,107)

   

   18,670

   

   (9,935,437)Gains (losses) on revaluation of aircraft

   

   242,370

   

   (242,370)Operating profit (loss) before income tax and social contribution

   

   (2,068,013)

   

   (223,700)

   

   (2,291,713)Income tax and social contribution

   

   634,243

   

   75,931

   

   710,174Profit for the year

   

   (1,433,770)

   

   (147,769)

   

   (1,581,539)Earnings per share – basic

   

   (9.54)

   

   

   

   (10.52)Earnings per share – diluted

   

   (9.54)

   

   

   

   (10.52)Effects on comprehensive income (loss) for the yearRevaluation of property, plant and equipment

   

   885,921

   

   (885,921)Profit for the year

   

   (1,433,770)

   

   (147,769)

   

   (1,581,539)Total comprehensive income (loss) for the year

   

   (534,697)

   

   (1,033,690)

   

   (1,568,387)
  December 31,2007As originally presented

   

   Retrospective adjustment

   

   AdjustedEffects on profit or lossOperating expenses

   

   (7,698,478)

   

   (11,009)

   

   (7,709,487)Gains (losses) on revaluation of aircraft

   

   (224,701)

   

   224.701Operating profit (loss) before income tax and social contribution

   

   477,720

   

   213,692

   

   691,412Income tax and social contribution

   

   (145,941)

   

   (67,808)

   

   (213,749)Profit for the year

   

   331,779

   

   145,884

   

   477,663Earnings per share – basic

   

   2.20

   

   

   

   3.17Earnings per share – diluted

   

   2.19

   

   

   

   3.15Effects on comprehensive income (loss) for the yearRevaluation of property, plant and equipment

   

   (17,370)

   

   17,370Profit for the year

   

   331,779

   

   145,884

   

   477,663Total comprehensive income (loss) for the year

   

   310,872

   

   163,254

   

   474,126
  5             Financial risk management  5.1         Financial risk management  TAM's activities expose it to a variety of financial risks: market risk (including currency risk, interest rate risk and price risk), credit risk and liquidity risk.   F-34


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 The Company has a formal Risk Management Policy that defines the rules to be followed and authorizes the Treasury Department to enter into derivative transactions in order to reduce the impact that possible fluctuations in fuel prices and foreign exchange and interest rates may have on its cash flows. The management of risk is monitored by the Risk Committee that is, responsible for, among other matters:  ·Decide on the increase in the hedge percentage levels, based on TAM strategic issues, and monitor the comparison between budgeted, TAM and market scenarios;  ·Manage and monitor the risk exposure;  ·Monitor the compliance with the financial risk;  ·Decide on the market risk exposure level;  ·Establish financial limits for all institutions authorized to carry out financial instruments derivatives transactions;  ·Monitor the performance of financial instruments derivatives transactions.  These derivatives are contracted in line with TAM's policies, considering liquidity, impact on cash flow and cost/benefit analysis of each position taken. The control over the use of derivatives includes ensuring that the rates in derivative contracts are compatible with market rates.  The Company does not enter into transactions involving financial instruments, including derivative financial instruments with speculative purposes.  5.1.1       Market risks  The Company is exposed to market risks arising from its normal business activities. These market risks principally relate to changes in interest rates, exchange rates or jet fuel prices, such variations can negatively affect its cash flow and future expenses. Market risk is the risk of a possible loss derived from variations in the prices of market prices (rates of exchange, interest rates, prices of commodities, or others) that may affect the Company’s cash flows or results. The Company entered into derivative contracts with the purpose of reducing the risks derived from variations in these factors. Policies and procedures have been implemented to evaluate these risks and to monitor the transactions with derivatives. The policies establish minimum and maximum levels of protection, and requires that counterparts have investment grade credit rating as condition for entering into the transactions.  (a)           Risks relating to variations in the price of jet fuel  One of the most important financial risks of airlines if the volatility of fuel price. The aviation kerosene (QAV) price is linked to the variation of the oil quotation in the international market. The Company has entered into derivative transactions in order to economically financial instruments derivatives itself against this risk. TAM's Risk Committee has established policies for achieving this. The policy establishes to carry out derivative transactions covering a maximum level of 60% of the fuel consumption projected for the following 24 months and minimum levels of 20% of the consumption projected for the first 12 months and 10% for the subsequent twelve months. Swaps, options, or a combination of these instruments, using market prices for crude oil, heating oil or jet fuel as the underlying may be used to achieve TAM’s aims.  TAM protects itself against the volatility in its kerosene price by using derivatives based mainly on crude oil (West Texas Intermediate or "WTI").The choice of this underlying item was based on studies that prove that the financial instruments derivatives of jet kerosene based on WTI is, historically, highly effective, in addition to the high liquidity of the financial instruments referenced in WTI.At December 31, 2010 all contracted financial instruments are over the counter.  The Company enters into derivative transactions only with counterparts, all counterparts are classified by the main risk rating agencies (Standard & Poors, FitchandMoody’s) as minimum investment grade.   F-35


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  As the consumed volume of kerosene is not fully protected by derivatives increases in the price of kerosene are not fully offset by adjustments of derivatives. In the same way, decreases in the price of kerosene will have a positive impact for the Company, considering that they will not be fully offset by changes in fair value of derivatives.  The aviation fuel consumed in 2010 and 2009 accounted for 33.2% and 28.7% of the cost of services provided by the Company (note 25).  (b)   Restructuring of derivatives during 2010  In 2010, the Company made a new restructuring of certain of its derivatives, whose market value was R$ (220,961) million at December 31, 2010. The restructuring comprised (i) extending the maturity date of derivatives and the spreading the new maturities over a longer period, extending the term of derivatives, and (ii) reducing the exercise prices. With this action, the Company sought to extend the coverage period of financial instruments derivatives  transactions, adjusting its level of derivatives to the minimum levels required by the policy.  The coverage profile was then distributed over 2011 and 2012, including a small coverage in the first quarter of 2013. For the 12 months from December 31, 2010 the coverage comprises 25% of the anticipated consumption. The average strike price for transactions currently outstanding maturing in the same period is US$ 87 per barrel. For the following period of 12 months the coverage will be 15% with the average strike price US$ 93 per barrel. The restructuring of the derivatives which occurred in 2010 and 2009 represented a reduction of approximately US$ 75 million of expected disbursements (unaudited).  Derivative financial instruments used as protection of changes in jet fuel prices were accounted for at fair value, with unrealized gains and losses recognized in the income statement. Restructured derivatives continue to be measured at fair value after the restructuring and, as a result, the impact of the restructuring has been recognized in gains and losses as part of the reassessment of the derivatives’ fair value.  (b.1)     Outstanding positions of derivatives  The following table presents the percentages of anticipated consumption covered for the next 12 months after each date and the average strike price for the transactions outstanding as of each of those dates:  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007% of coverage  anticipated for the next 12 months

   25%

   

   23 %

   

   47 %

   

   27%Average strike price for  outstanding derivatives

   US$ 87/bbl

   

   US$ 115/bbl

   

   US$ 104/bbl

   

   US$ 112/bblMarket price of WTI

   US$ 89/bbl

   

   US$ 79/bbl

   

   US$ 45/bbl

   

   US$ 95/bbl
  The following table presents both the notional amount and fair value of outstanding derivatives as of each date broken down by maturity:  2008

   

   2009

   

   2010

   

   2011

   

   2012

   

   2013

   

   TotalAt December 31, 2010Notional amount – thousands of barrels

   

   

   

   

   

   

   

   3,985

   

   2,710

   

   150

   

   6,845Fair value, net – R$ thousand

   

   

   

   

   

   

   

   (9,791)

   

   (8,536)

   

   (182)

   

   (18,509)At December 31, 2009Notional amount – thousands of barrels

   

   

   

   

   

   3,429

   

   145

   

   

   

   

   

   3,574Fair value – R$ thousand

   

   

   

   

   

   (214,673)

   

   (6,288)

   

   

   

   

   

   (220,961)At December 31, 2008Notional amount – thousands of barrels

   

   

   

   7,200

   

   800

   

   

   

   

   

   

   

   8,000Fair value – R$ thousand

   

   

   

   (1,021,928)

   

   (107,057)

   

   

   

   

   

   

   

   (1,128,985)December 31, 2007Notional amount – thousands of barrels

   

   5,500

   

   

   

   

   

   

   

   

   

   

   

   5,500Fair value – R$ thousand

   

   62,155

   

   

   

   

   

   

   

   

   

   

   

   62,155
  F-36


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  TAM only contracts derivatives with counterpartiess which have an investment grade rating issued by S&P, Moody’s or Fitch. The distribution of fair values by credit rating of counterparties is as follows:  Counterparts with external credit rating (Standard&Price, Moody ́s or Fitch)

   

   Trading place

   

   2010

   Fair value of derivativesAAA*

   

   Over the counter

   

   (23,342)AA+, AA or AA-*

   

   Over the counter

   

   3,671A+, A or A-*

   

   Over the counter

   

   274(19,397)Fuel derivative asset – WTI

   

   

   

   16,463Fuel derivative liability - WTI

   

   

   

   (34,972)Fuel derivative, net - WTI

   

   

   

   (18,509)Foreign exchange derivatives – see (c ) bellow

   

   

   

   (888)
  (*) The ratings can be expressed both on the global scale and in local currency. Each agency has a slightly different way to present rating; the table above unifies the presentations in that what we believe is the most well known rating international scale.  (c)           Exchange rate risk  A significant portion of the operating costs and expenses, such as aircraft and engine maintenance services, aircraft lease payments and aircraft insurance, are denominated in U.S. dollars. The Company may enter into derivative contracts to financial instruments derivatives against a possible appreciation or depreciation of the Real against the U.S. dollar.  The notional amount and fair value of the foreign currency derivatives outstanding are presented below:  2008

   

   2009

   

   2010

   

   2011

   

   2012At December 31, 2010Notional amount – US$ (thousand)

   

   

   

   

   

   

   

   

   

   31,000Fair value – R$ (note 4.4)

   

   

   

   

   

   

   

   

   

   (888)At December 31, 2009Notional amount – US$ (thousand)

   

   

   

   

   

   31,240Fair value – R$

   

   

   

   

   

   (21,054)At December 31, 2007Notional amount – US$ (thousand)

   

   35,500Fair value – R$

   

   812
  (d)           Interest rate risk **** **** F-37


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  TAM’s earnings are affected by changes in interest rates due to the impact these changes have on interest expense from variable-rate debt instruments, variable-rate lease contracts, and on interest income generated from its cash and short-term investment balances. To minimize possible impacts from interest rate fluctuations, TAM has adopted a policy of diversification, alternating between contracting fixed and variable rates (such as the London Interbank Offered Rate “LIBOR” and CDI - Certificate of Deposit Intermediate.  The Company does not have financial instruments to hedge its cash flows against fluctuations in interest rates.  (e)           Sensitivity analysis  The Company shall provide a sensitivity analysis of the financial instruments, that demonstrates the impact of changes in financial instruments on the Company’s result and its shareholders’equity by considering:  ·Increase and decrease of 10 percentage points  in fuel prices, by keeping constant all the  other variables;  Increase and decrease of 10 percentage points in dollar exchange rate, with all other variables remaining steady; and  ·Increase and decrease of one percentage point in interest rate, skeeping constant all the other variables.  Fuel price:  A hypothetical 10% increase/decrease in the price of WTI would lead to an increase/decrease of approximately US$ 10.4 million / US$ 11.5 million (equivalent to R$ 17.4 million / R$ 19.1 million at December 31, 2010) in the fair value of WTI derivatives. This increase/ decrease would directly affect the Company’s net income; in terms of cash flows, however, these changes in WTI price would be more than offset by a decrease/increase in the Company’s kerosene-type jet fuel costs. The cash payments for settling the derivatives are due at their respective maturities, distributed over 2011 until 2013.  Exchange rate – U.S. Dollar:  If there was a 10% depreciation/appreciation of the Brazilian against the U.S. dollar and all other variables remained constant, the financial result would have been approximately R$ 535 million / R$ 535 million, mainly as a result of foreign exchange gains/losses on the translation of U.S. dollar denominated trade receivables and U.S. dollar denominated financial assets at fair value through profit or loss, and foreign exchange losses/gains on the translation of U.S. dollar-denominated borrowings and finance leases.  Interest rate – LIBOR:  A hypothetical 100 basis point increase in foreign market (LIBOR) interest rates at December 31, 2010 would increase its aircraft rental and interest expense in 2010 by approximately US$ 26 million (equivalent to R$ 43 million).  A hypothetical 100 basis point increase in domestic market (CDI) interest rates at December 31, 2010 would increase loan and financing interest expenses in 2010 by approximately R$ 9 million.  5.2         Credit risk  Credit risk refers to the risk that a counterparty will not fulfill its contractual obligations, leading the Company to incur financial losses.Credit risk arises from the possibility of TAM not recovering amounts receivable from services provided to consumers and/or travel agencies, or from credits held from financial institutions generated by financial investment operations.  To reduce credit risk, TAM has adopted the practice of establishing credit limits and the permanent follow-up of its debtor balances (mainly from travel agencies).   F-38


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  TAM only deals with financial institution counterparts which have a credit rating of at least BBB-(Baa3) issued by S&P, Moody’s or Fitch. Each institution has a maximum limit for investments, as determined by the Company’s Risk Committee.  Currently, Management does not expect losses due to default of its counterparties and does not have significant exposure to any counterparty separately.  5.3          Liquidity risk  Prudent liquidity risk management implies maintaining sufficient cash and short-term investments, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions.  Excess cash is invested mainly in TAM’s exclusive investment funds. Each of these funds has a clear investment policy, with limits on concentration of risk in the underlying investments.  The table below analyses TAM's financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows and include interest, except for derivatives, for which the fair value is disclosed.   F-39


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  Less

   

   Between

   

   Between

   

   Morethan

   

   one and

   

   three and

   

   than

   

   

   

   Effect of

   

   Carryingone year

   

   two years

   

   five years

   

   five years

   

   Total

   

   discounting

   

   valueNon-derivative financial liabilitiesAt December 31, 2010Finance lease obligations

   684,006

   

   1,279,397

   

   1,140,715

   

   2,315,571

   

   5,419,689

   

   (661,766)

   

   4,757,923Borrowings

   617,525

   

   8,297

   

   2,199

   

   7,228

   

   635,249

   

   (20,209)

   

   615,040Debentures

   418,926

   

   339,085

   

   292,758

   

   237,014

   

   1,287,783

   

   (310,862)

   

   976,921Senior notes

   108,701

   

   164,241

   

   164,241

   

   1,238,874

   

   1,676,057

   

   (667,000)

   

   1,009,057Refinanced taxes payable under Fiscal Recovery Program

   31,156

   

   73,724

   

   146,360

   

   887,023

   

   1,138,263

   

   (698,436)

   

   439,827Other (i)

   989,195

   

   

   

   

   

   

   

   989,195

   

   

   

   989,195At  December 31, 2009Finance lease obligations

   616,179

   

   1,238,520

   

   1,575,462

   

   1,801,641

   

   5,231,802

   

   (710,857)

   

   4,520,945Borrowings

   466,687

   

   33,039

   

   3,625

   

   6,991

   

   510,342

   

   (13,054)

   

   497,288Debentures

   396,392

   

   826,373

   

   142,382

   

   

   

   1,365,147

   

   (253,683)

   

   1,111,464Senior notes

   81,418

   

   171,634

   

   259,782

   

   1,317,106

   

   1,829,940

   

   (790,215)

   

   1,039,725Refinanced taxes payable under Fiscal Recovery Program

   23,947

   

   54,644

   

   102,114

   

   529,055

   

   709,760

   

   (367,255)

   

   342,505Others (i)

   738,589

   

   

   

   

   

   

   

   738,589

   

   

   

   738,589At  December 31, 2008Finance lease obligations

   961,373

   

   1,764,576

   

   1,751,910

   

   3,751,912

   

   8,229,771

   

   (1,781,291)

   

   6,448,480Borrowings

   239,402

   

   228,621

   

   8,310

   

   12,468

   

   488,801

   

   (87,233)

   

   401,568Debentures

   51,464

   

   333,333

   

   166,667

   

   

   

   551,464

   

   (22,922)

   

   528,542Senior notes

   51,562

   

   103,269

   

   103,412

   

   882,215

   

   1,140,458

   

   (430,022)

   

   710,436Others (i)

   804,046

   

   

   

   

   

   

   

   804,046

   

   

   

   804,046
   F-40


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  Less

   

   Between

   

   Between

   

   Morethan

   

   one and

   

   three and

   

   than

   

   

   

   Effect of

   

   Carryingone year

   

   two years

   

   five years

   

   five years

   

   Total

   

   discounting

   

   valueNon-derivative financial liabilitiesAt December 31, 2007Finance lease obligations

   456,065

   

   821,927

   

   800,005

   

   1,781,126

   

   3,859,123

   

   (890,909)

   

   2,968,214Borrowings

   944,414

   

   237,340

   

   35,601

   

   10,217

   

   1,227,572

   

   (159,725)

   

   1,067,847Debentures

   57,393

   

   218,131

   

   333,333

   

   

   

   608,857

   

   (76,698)

   

   532,159Senior notes

   34,408

   

   78,162

   

   78,380

   

   707,854

   

   903,804

   

   (365,338)

   

   538,466Other (i)

   663,563

   

   

   

   

   

   

   

   663,563

   

   

   

   663,563Derivative financial liabilitiesAt  December 31, 2010Fuel price risk

   (19,686)

   

   (15,286)

   

   

   

   

   

   (34,972)

   

   

   

   (34,972)Exchange rate risk

   (888)

   

   

   

   

   

   

   

   (888)

   

   

   

   (888)At  December 31, 2009Fuel price risk

   (214,673)

   

   (6,288)

   

   

   

   

   

   (220,961)

   

   

   

   (220,961)Exchange rate risk

   (21,054)

   

   

   

   

   

   

   

   (21,054)

   

   

   

   (21,054)At  December 31, 2008Fuel price risk

   (1,021,928)

   

   (107,057)

   

   

   

   

   

   (1,128,985)

   

   

   

   (1,128,985)At  December 31, 2007Fuel price risk

   (62,155)

   

   

   

   

   

   

   

   (62,155)

   

   

   

   (62,155)Exchange rate risk

   (812)

   

   

   

   

   

   

   

   (812)

   

   

   

   (812)
  (i)   The amount is recorded under: Accounts payable and salaries and social charges.  F-41


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 5.4          Fair value estimation and fair value hierarchy  The Company discloses the fair value of for financial instruments by level of the following fair value measurement hierarchy below:   Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;  Level 2 - information, other than quoted prices, included within Level 1 that are adopted by the market for the asset or liability, either directly (such, as prices) or indirectly (that is, derived from prices);  Level 3 - inputs for assets or liabilities that are not based on the observable data in the market (such as unobservable inputs). None of the financial instruments carried at fair value by the Company of its subsidiaries fall into this category at December 31, 2010. The table below presents the Company's financial instruments measured at fair value in the balance sheet:   F-42


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007Level 1

   

   Level 2

   

   Total

   

   Level 1

   

   Level 2

   

   Total

   

   Level 1

   

   Level 2

   

   Total

   

   Level 1

   

   Level 2

   

   TotalFinancial assets at fair value through

   profit    and lossBrazilian government   securities (1)

   812,515

   

   

   

   812,515

   

   740,209

   

   

   

   740,209

   

   683,779

   

   

   

   683,779

   

   1,229,723

   

   

   

   1,229,723Corporate securities (2)

   

   

   297,424

   

   297,424

   

   

   

   93,234

   

   93,234

   

   

   

   222,990

   

   222,990

   

   

   

   173,026

   

   173,026Bank deposit certificate – CDB (3)

   

   

   34,199

   

   34,199

   

   

   

   46,696

   

   46,696

   

   

   

   11,164

   

   11,164Other bank deposits (3)

   

   

   263,560

   

   263,560

   

   

   

   130,883

   

   130,883

   

   

   

   324,338

   

   324,338

   

   

   

   737,590

   

   737,590812,515

   

   595,183

   

   1,407,698

   

   740,209

   

   270,813

   

   1,011,022

   

   683,779

   

   558,492

   

   1,242,271

   

   1,229,723

   

   910,616

   

   2,140,339Derivative financial assetsFuel hedge – WTI (4)

   

   

   16,463

   

   16,463

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   62,967

   

   62,96716,463

   

   16,463

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   62,967

   

   62,967Derivative financial         liabilitiesFuel hedge – WTI (4)

   

   

   (34,972)

   

   (34,972)

   

   

   

   (220,961)

   

   (220,961)

   

   

   

   (1,128,985)

   

   (1,128,985)Foreign exchange  derivatives (4)

   

   

   (888)

   

   (888)

   

   

   

   (21,054)

   

   (21,054)(35,860)

   

   (35,860)

   

   

   

   (242,015)

   

   (242,015)

   

   

   

   (1,128,985)

   

   (1,128,985)
   F-43


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 No transfer of assets or liabilities between the levels of the fair value hierarchy took place during in the period ended December 31, 2010.  The financial instruments recognized at fair value are determined as follows:  Financial assets measured at fair value through profit and loss:  ·(1) Brazilian Government securities – Corresponds to highly liquid Brazilian government securities that have prices available and correspond to transactions in an active market.  ·(2) Corporate securities – Corresponds, typically, to debt securities for which fair value has been determined based upon actual transactions observed in organized markets (when available) or discounted cash flow using interest rates when actual transactions are not available.  ·(3) Certificates of deposits and other bank deposits - Fair value has been estimated by discounting estimated cash flows using as input interest market rates.  ·(4) Derivative financial instruments not traded in an exchange, for example, over-the-counter derivatives. TAM estimates its fair value using a series of techniques such as Black&Scholes, Garman & Kohlhagen, Monte Carlo or even discounted cash flow models commonly used in the financial market, depending on the nature of the derivative. All models used are widely accepted in the market and reflect the contractual terms of the derivative. Those models do not contain a high level of subjectivity, since the methodologies used in the models do not require significant judgment, and all inputs to the model are readily observable from actively quoted markets.  5.5          Capital management  The objective of capital management is to ensure that TAM is able to continue as a going concern whilst delivering shareholder expectations of a strong capital basis as well as returning benefits to other stakeholders and optimizing the cost of capital.  Capital is managed by means of a leverage ratio. The Company’s capital structure is made up of its net indebtedness, defined as the total of loans, debentures and lease agreements (finance and operating), net of cash and cash equivalents and other short-term financial assets, and of the capital that is defined as the total net equity of shareholders and net indebtedness.  The Company is not subject to any externally imposed capital requirements.  We define total capital as the total of shareholders’ equity and net debt as defined above:   F-44


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 December 31,2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007Cash and cash equivalents (Note7)

   (1,012,220)

   

   (1,075,172)

   

   (671,785)

   

   (466,538)Financial assets at fair value through profit and loss (Note 8)

   (1,407,698)

   

   (1,011,022)

   

   (1,242,271)

   

   (2,140,339)Borrowings (Note 17.3)

   615,040

   

   497,288

   

   401,568

   

   1,067,847Debentures and senior notes

   1,985,978

   

   2,151,189

   

   1,238,978

   

   1,070,625Operating lease commitments (Note 33 (a))

   1,120,697

   

   1,512,986

   

   2,479,786

   

   1,843,358Finance lease obligations (Note 17.1)

   4,757,923

   

   4,520,945

   

   6,448,480

   

   2,968,214Net debt (1)

   6,059,720

   

   6,596,214

   

   8,654,756

   

   4,343,167Total equity

   2,627,391

   

   1,294,036

   

   293,500

   

   1,908,780Total capital (2)

   8,687,111

   

   7,890,250

   

   8, 948,256

   

   6,251,947Leverage ratio (1) / (2)

   69.8%

   

   83.6%

   

   96.7%

   

   69.4%
  The decrease in the leverage ratio during the period ended December 31, 2010 resulted from proceeds from: (a) the increase in equity resulting from profit for the period, and (b) the increase in equity resulting from issuance of shares of Multiplus and (c) from capital increase due to the acquisition of TAM Milor. Management believes that the resources available to the Company are sufficient for its present requirements and will be sufficient to meet its anticipated requirements for capital investments, which are approved annually by the Board of Directors, and other cash requirements for the 2011 fiscal year.  6             Financial instruments by category  Assets, per balance sheet  December 31,

   2010Loans and receivables

   

   Financial assets at fair value through profit and loss

   

   Derivatives

   

   TotalDerivative financial instruments

   

   

   

   

   

   16,463

   

   16,463Financial assets at fair value through profit and loss

   

   

   

   1,407,698

   

   

   

   1,407,698Accounts receivable and other receivables excluding pre-payments (*)

   

   1,556,781

   

   

   

   

   

   1,556,781Fianncial assets – bank deposits

   

   50,280

   

   

   

   

   

   50,280Cash and cash equivalents

   

   1,012,220

   

   

   

   

   

   1,012,220Total

   

   2,619,281

   

   1,407,698

   

   16,463

   

   4,043,442
  December 31,

   2009Loans and receivables

   

   Financial assets at fair value through profit and loss

   

   TotalFinancial assets at fair value through profit and loss

   

   

   

   1,011,022

   

   1,011,022Accounts receivable and other receivables excluding pre-payments (*)

   

   1,121,979

   

   

   

   1,121,979Cash and cash equivalents

   

   1,075,172

   

   

   

   1,075,172Total

   

   2,197,151

   

   1,011,022

   

   3,208,173
   F-45


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 December 31,

   2008Loans and receivables

   

   Financial assets at fair value through profit and loss

   

   TotalFinancial assets at fair value through profit and loss

   

   

   

   1,242,271

   

   1,242,271Accounts receivable and other receivables excluding pre-payments (*)

   

   1,157,239

   

   

   

   1,157,239Cash and cash equivalents

   

   671,785

   

   

   

   671,785Total

   

   1,829,024

   

   1,242,271

   

   3,071,295
  December 31,

   2007Loans and receivables

   

   Financial assets at fair value through profit and loss

   

   TotalFinancial assets at fair value through profit and loss

   

   

   

   2,140,339

   

   2,140,339Accounts receivable and other receivables excluding pre-payments (*)

   

   937,928

   

   

   

   937,928Cash and cash equivalents

   

   466,538

   

   

   

   466,538Total

   

   1,404,466

   

   2,140,339

   

   3,544,805
   Liabilities, per balance sheet  December 31,

   2010Liabilities measured at amortized cost

   

   Derivatives

   

   TotalFinance lease obligations

   

   4.757.923

   

   

   

   4.757.923Senior notes

   

   1.009.057

   

   

   

   1.009.057Borrowings

   

   615.040

   

   

   

   615.040Debentures

   

   976.921

   

   

   

   976.921Derivativefinancialinstruments

   

   

   

   35,860

   

   35,860Accounts payable and other obligations, excluding statutory liabilitites

   

   989,195

   

   

   

   989,195Total

   

   8,348,136

   

   35,860

   

   8,383,996
    F-46


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 December 31,

   2009Liabilities measured at amortized cost

   

   Derivatives

   

   TotalFinance lease obligations

   

   4,520,945

   

   

   

   4,520,945Senior notes

   

   1,039,725

   

   

   

   1,039,725Borrowings

   

   497,288

   

   

   

   497,288Debentures

   

   1,111,464

   

   

   

   1,111,464Derivativefinancialinstruments

   

   

   

   242,015

   

   242,015Accounts payable and other obligations, excluding statutory liabilitites

   

   738,589

   

   

   

   738,589Total

   

   7,908,011

   

   242,015

   

   8,150,026
  December 31,

   2008Liabilities measured at amortized cost

   

   Derivatives

   

   TotalFinance lease obligations

   

   6,448,480

   

   

   

   6,448,480Senior notes

   

   710,436

   

   

   

   710,436Borrowings

   

   401,568

   

   

   

   401,568Debentures

   

   528,542

   

   

   

   528,542Derivativefinancialinstruments

   

   

   

   1,128,985

   

   1,128,985Accounts payable and other obligations, excluding statutory liabilities

   

   804,046

   

   

   

   804,046Total

   

   8,893,072

   

   1,128,985

   

   10,022,057
  December 31,

   2007Liabilities measured at amortized cost

   

   Derivatives

   

   TotalFinance lease obligations

   

   2,968,214

   

   

   

   2,968,214Senior notes

   

   538,466

   

   

   

   538,466Borrowings

   

   1,067,847

   

   

   

   1,067,847Debentures

   

   532,159

   

   

   

   532,159Derivativefinancialinstruments

   

   

   

   62,967

   

   62,967Accounts payable and other obligations, excluding statutory liabilities

   

   663,563

   

   

   

   663,563Total

   

   5,770,249

   

   62,967

   

   5,833,216
    F-47


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 7             Cash and cash equivalents  December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007Cash and bank accounts

   

   279,280

   

   123,387

   

   105,251

   

   134,873Short-term deposits

   

   732,940

   

   951,785

   

   566,534

   

   331,665Total

   

   1,012,220

   

   1,075,172

   

   671,785

   

   466,538
  At December 31, 2010, 2009, 2008 and  2009 no amounts have been used as part of overdraft facilities.  8          Financial assets at fair value through profit and loss  December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007In local currencyExclusive investment fundBrazilian government securities

   

   812,515

   

   740,209

   

   683,779

   

   1,229,723Corporate securities

   

   297,424

   

   93,234

   

   222,990

   

   173,026Others

   

   8,839

   

   32

   

   1,246

   

   40,570Austrian government note

   

   

   

   

   

   84,124

   

   79,082Bank deposit certificates - CDB

   

   34,199

   

   46,696

   

   11,1641,152,977

   

   880,171

   

   1,003,303

   

   1,522,401In foreign currencyDual curreny bonds

   

   

   

   

   

   221,518

   

   617,938Other bank deposits

   

   254,721

   

   130,851

   

   17,450254,721

   

   130,851

   

   238,968

   

   617,9381,407,698

   

   1,011,022

   

   1,242,271

   

   2,140,339
  All financial investments are measured at their fair value through profit and loss and held for trading purposes.  Management of marketable securities in the domestic market is primarily performed via exclusive investment funds. This structure follows high transparency and corporate governance standards. The custody of securities and units of funds and the management of funds are carried out by an independent management institution. The mandates and regulations are consistent within each type of management and are subject to clear limits and measurement methods for market, credit and liquidity risks contracted. The average return on these funds in this quarter was 9.87% per annum for the period ended December 31, 2010 (2009 - 10.04% per annum, 2008 – 11.33 % per annum and 2007 – 11.77% per annum).  Investments in international markets essentially are comprised by time deposits, notes and overnight transactions, in US dollar, with first tier banks with which the Company maintains business relationships. At December 31, 2010the annual return contracted on these investments was 0.84% (2009 - 0.37%, 2008 – (4.89)% and 2007 – 11.82%).   F-48


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 9             Trade accounts receivable  (a)           Breakdown of balances  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007Domestic

   

   International

   

   Total

   

   %

   

   Total

   

   %

   

   Total

   

   %

   

   Total

   

   %Credit cards

   

   970,890

   

   68,686

   

   1,039,576

   

   62.9

   

   767,581

   

   63.8

   

   701,013

   

   56.9

   

   575,039

   

   58.2Travel agents

   

   194,354

   

   69,307

   

   263,661

   

   15.9

   

   225,590

   

   18.8

   

   273,939

   

   22.2

   

   239,747

   

   24,3Partners – Loyalty Program - Multiplus

   

   80,510

   

   581

   

   81,091

   

   4.8

   

   51,742

   

   4.3

   

   59,507

   

   4.8

   

   23,421

   

   2,4On current account

   

   76,049

   

   608

   

   76,657

   

   4.6

   

   46,016

   

   3.8

   

   39,687

   

   3.2

   

   36,561

   

   3,7Cargo

   

   5,492

   

   48,228

   

   53,720

   

   3.2

   

   61,198

   

   5.1

   

   79,973

   

   6.5

   

   52,810

   

   5,3Other

   

   121,532

   

   18,866

   

   140,397

   

   8.5

   

   50,261

   

   4.2

   

   77,796

   

   6.4

   

   60,590

   

   6,1Total

   

   1,448,826

   

   206,276

   

   1,655,102

   

   100.0

   

   1,202,388

   

   100.0

   

   1,231,915

   

   100.0

   

   988,168

   

   100.0Provision for impairment

   

   (68,656)

   

   (29,665)

   

   (98,321)

   

   

   

   (80,409)

   

   

   

   (74,676)

   

   

   

   (50,240)Total

   

   1,380,170

   

   176,611

   

   1,556,781

   

   

   

   1,121,979

   

   

   

   1,157,239

   

   

   

   937,928
  F-49


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 Trade accounts receivable are maintained in the following currencies:  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007Reais

   

   1,448,826

   

   1,038,906

   

   1,124,478

   

   841,269US dollars

   

   26,187

   

   57,638

   

   42,487

   

   20,875Euros

   

   81,028

   

   81,473

   

   40,344

   

   48,818Pounds sterling

   

   14,187

   

   11,308

   

   12,850Others

   

   84,874

   

   13,063

   

   11,756

   

   77,2061,655,102

   

   1,202,388

   

   1,231,915

   

   988,168
  (b)Aging list – Receivables by due date  Breakdown

   

   December 31,

   2010

   

   %

   

   December 31,

   2009

   

   %

   

   December 31,2008

   

   %

   

   December 31,

   2007

   

   %Not yet due

   

   1,329,848

   

   80.3

   

   1,063,035

   

   88.4

   

   1,119,068

   

   90.9

   

   892,581

   

   90.3OverdueUp to 60 days

   

   101,616

   

   6.2

   

   29,493

   

   2.5

   

   20,651

   

   1.7

   

   20,663

   

   2.1From 61 to 90 days

   

   61,418

   

   3.7

   

   5,740

   

   0.5

   

   3,796

   

   0.3

   

   11,582

   

   1.2From 91 to 180 days

   

   25,032

   

   1.5

   

   10,321

   

   0.9

   

   2,482

   

   0.2

   

   7,056

   

   0.7From 181 to 360 days

   

   19,515

   

   1.2

   

   12,093

   

   1.0

   

   27,572

   

   2.2

   

   10,332

   

   1.0Over 360 days

   

   117,673

   

   7.1

   

   81,706

   

   6.7

   

   58,346

   

   4.7

   

   45,954

   

   4.71,655,102

   

   100.0

   

   1,202,388

   

   100.0

   

   1,231,915

   

   100.0

   

   988,168

   

   100.0
  (c)           Provision for impairment of trade receivables  December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007Balance at the beginning of the year

   

   80,409

   

   74,676

   

   50,240

   

   38,387Charge for the period

   

   30,799

   

   10,398

   

   25,047

   

   12,399Amounts reversed

   

   (12,887)

   

   (4,665)

   

   (611)

   

   (546)Balance at the end of the year

   

   98,321

   

   80,409

   

   74,676

   

   50,240
  The additions and recovery of accrued receivables were included in "Cost of services rendered" in the statement of operations.  The maximum exposure to credit risk at the reporting date is the carrying value of each class of receivable mentioned above.  Based on the types of receivables and the related risk, Management understands that there is only one class of receivables.   F-50


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 10            Inventories  Breakdown  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,

   2007Spare parts and materials for repairs and maintenance

   

   188,726

   

   175,155

   

   149,062

   

   94,966Other inventories (*)

   

   10,034

   

   19,937

   

   20,360

   

   5,219Total

   

   198,760

   

   195,092

   

   169,422

   

   100,185
  (*) “Other inventories” is mainly composed of uniforms, stationery and catering items.  11Derivative Financial Instruments  December 31,2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007AssetsWest Texas Intermediate crude oil derivativesSwaps

   

   

   

   

   

   

   55,096Seagulls

   10,620

   

   

   

   

   

   7,059Collar

   5,84316,463

   

   

   

   

   

   62,155Foreign currency forwardsSwaps

   

   

   

   

   

   

   81216,463

   

   

   

   

   

   62,967Current

   (9,895)

   

   

   

   

   

   (62,967)Non-current

   6,568LiabilitiesWest Texas Intermediate crude oil derivativesForwards

   

   

   

   

   351,343Swaps

   

   

   138,208

   

   517,696Seagulls

   34,090

   

   52,974

   

   224,902Collar

   882

   

   29,779

   

   35,04434,972

   

   220,961

   

   1,128,985Foreign currency forwardsSwaps

   888

   

   21,05435,860

   

   242,015

   

   1,128,985Current

   (20,574)

   

   (235,727)

   

   (1,021,928)Non-current

   15,286

   

   6,288

   

   107,057
  The derivative financial instruments included above are described in Note 5.1.1 (b.1).  12Deposits in guarantee  Deposits and collateral relating to the lease of aircraft and engines are denominated in U.S. dollars and accrue interest based on LIBOR plus a spread of 1% per annum. The terms for redemption are defined in the lease contracts. At December 31, 2010the balance of deposits was R$ 51,778 (2009 –R$59,520, 2008 – R$ 116,135 and 2007 – R$ 161,488) corresponding toUS$ 31,076 (2009 - US$ 34,185, 2008 – US$ 49,694 and 2007 – US$ 91,169).  13           Deferred Income Tax and Social Contribution **** F-51


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  Deferred income tax and social contribution assets and liabilities are offset when there is a legal right of offsetting tax credits against tax debts and provided that they refer to the same tax authority.  The movement in deferred income tax and social contribution assets and liabilities during the period ended December 31, 2010, 2009, 2008 and 2007 without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:  F-52


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  Deferred income tax and social contribution asset

   

   December 31,

   2007

   

   Charged/(credited) to the income statement

   

   December 31, 2008

   

   Charged/(credited) to the income statement

   

   December 31, 2009

   

   Charged/(credited) to the incomestatement

   

   December 31, 2010Income tax loss carry forwards

   

   3,556

   

   7,136

   

   10,692

   

   71,726

   

   82,418

   

   (20,130)

   

   62,288Social contribution carry forwards

   

   2,507

   

   2,570

   

   5,077

   

   37,561

   

   42,638

   

   (20,090)

   

   22,548Temporary differences:Provision for derivatives loss

   

   

   

   383,855

   

   383,855

   

   (318,853)

   

   65,002

   

   (58,906)

   

   6,096Provision for contingencies

   

   134,121

   

   53,386

   

   187,507

   

   16,428

   

   203,935

   

   (109,927)

   

   94,008Allowance for losses on inventories and receivables accounts

   

   74,092

   

   (36,584)

   

   37,508

   

   (14,021)

   

   23,487

   

   15,678

   

   39,165Deferred income from sale and leaseback transaction

   

   61,039

   

   (10,909)

   

   50,130

   

   (10,909)

   

   39,221

   

   (10,909)

   

   28,312TAM loyalty program

   

   129,793

   

   26,860

   

   156,653

   

   46,831

   

   203,484

   

   (137,476)

   

   66,008Finance leases

   

   (344,665)

   

   397,370

   

   52,705

   

   (483,094)

   

   (430,389)

   

   (2,496)

   

   (432,885)Others

   

   (4,840)

   

   9,772

   

   4,932

   

   8,639

   

   13,571

   

   35,225

   

   48,796Total deferred income tax and social contribution asset (liability)

   

   55,603

   

   829,885

   

   889,059

   

   (645,692)

   

   243,367

   

   (309,031)

   

   (65,664)Deferred income tax and social contribution liabilityTotal deferred income tax and social contribution liability – property, plant and equipment

   

   (50,861)

   

   1,245

   

   (49,616)

   

   125

   

   (49,491)

   

   3,977

   

   (45,514)Total deferred income tax and social contribution

   

   4,751

   

   831,130

   

   839,443

   

   (645,567)

   

   193,876

   

   (305,054)

   

   ( 111,178)Deferred income tax and social contribution – intangible assets on acquisition of Pantanal

   

   

   

   

   

   

   

   

   

   

   

   

   

   (38,262)Total deferred income tax and social contribution

   

   

   

   

   

   

   

   

   

   

   

   

   

   (149,440)
  F-53


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
  December 31,

   2008

   

   December 31,

   2009

   

   December 31,

   2010Deferred income tax and social contribution expected to be recovered within 12 months – Netted

   

   58,761

   

   35,659

   

   (65,714)Deferred income tax and social contribution expected to be recovered within more than 12 months – Netted

   

   780,681

   

   158,217

   

   (45,464)Total deferred income tax and social contribution

   

   839,443

   

   193,876

   

   (111,178)
  Deferred tax assets resulting from income tax and social contribution losses and temporary differences are recognizedto the extent that the realization of the related tax benefit through the future taxable profits is probable. Tax loss carryforwards do not expire.  At December 31, 2010, no deferred tax assets were recognized on the tax losses of foreign subsidiaries in the amount of R$ 66,183 (2009 – R$ 38,655, 2008 – 11,328).  Deferred income tax and social contribution are presented at their net amounts as if the entire reported amount corresponded to a single legal entity.  14                  Prepaid aircraft maintenance  Prepaid aircraft maintenance reserves are guarantees to the lessor of the aircraft and/or engines that when the aircraft/engine is returned it can be restored to its original condition. Certain aircraft leasing agreements require that advance deposits be made on behalf of the lessor, in maintenance reserve funds, at a restricted bank account in the lessor’s name. The lessor may withdraw funds from this account if the required maintenance is not carried out upon return of the aircraft.Should TLA perform the maintenance of the aircraft or its parts, such as fuselage, engines, landing gear, among others, it can request that the lessor return the related amount, which will otherwise revert to the owner.  At December 31, 2010, amounts maintained into maintenance reserves, are R$ 410,306 (2009 – R$ 408,628, 2008 – R$ 383,593 and 2007 – R$ 119,633).   F-54


---



TAM S.A. Notes to the consolidated financial statements (Amounts expressed in thousands of R$, unless otherwise indicated)
 15           Property, Plant and Equipment  Flight equipment (i)

   

   Land and buildings

   

   Computer equipment

   

   Machinery and equipment

   

   Construction in progress

   (ii)

   

   Pre-delivery payments (iii)

   

   Other (iv)

   

   TotalNet book amount January 01, 2007 – adjusted (*)

   

   3,284,610

   

   207,467

   

   55,522

   

   33,049

   

   43,406

   

   383,165

   

   33,546

   

   4,040,765Cost

   

   4,524,897

   

   219,930

   

   98,158

   

   64,303

   

   43,406

   

   383,165

   

   83,917

   

   5,417,776Accumulated depreciation

   

   (1,240,287)

   

   (12,463)

   

   (42,636)

   

   (31,254)

   

   

   

   

   

   (50,371)

   

   (1,377,011)Net book amount January 01, 2007 – adjusted  (*)

   

   3,284,610

   

   207,467

   

   55,522

   

   33,049

   

   43,406

   

   383,165

   

   33,546

   

   4,040,765Additions (v)

   

   1,405,670

   

   

   

   13,112

   

   14,988

   

   16,322

   

   924,375

   

   35,609

   

   2,410,076Reclassification

   

   (83,951)

   

   

   

   

   

   

   

   

   

   

   

   

   

   (83,951)Transfer of pre-delivery payments (v)

   

   

   

   

   

   

   

   

   

   

   

   (313,964)

   

   

   

   (313,964)Disposals/write-offs

   

   (23,379)

   

   (13,816)

   

   (2,617)

   

   (3,225)

   

   (78)

   

   

   

   (1,734)

   

   (44,849)Capitalized interest

   

   

   

   

   

   

   

   

   

   

   

   30,721

   

   

   

   30,721Depreciation

   

   (220,929)

   

   (4,876)

   

   (18,004)

   

   (6,525)

   

   (7,305)

   

   

   

   

   

   (257,639)Net book amount December 31, 2008 – adjusted (*)

   

   4,362,021

   

   188,775

   

   48,013

   

   38,287

   

   59,650

   

   1,024,297

   

   60,116

   

   5,781,159Cost

   

   5,823,237

   

   206,114

   

   108,653

   

   76,066

   

   59,650

   

   1,024,297

   

   117,792

   

   7,415,809Accumulated depreciation

   

   (1,461,216)

   

   (17,339)

   

   (60,640)

   

   (37,779)

   

   

   

   

   

   (57,676)

   

   (1,634,650)Net book amount

   

   4,362,021

   

   188,775

   

   48,013

   

   38,287

   

   59,650

   

   1,024,297

   

   60,116

   

   5,781,159
    F-55


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 Flight equipment (i)

   

   Land and buildings

   

   Computer equipment

   

   Machinery and equipment

   

   Construction in progress

   (ii)

   

   Pre-delivery payments (iii)

   

   Other (iv)

   

   TotalNet book amount January 01, 2008 – adjusted (*)

   

   4,362,021

   

   188,775

   

   48,013

   

   38,287

   

   59,650

   

   1,024,297

   

   60,116

   

   5,781,159Cost

   

   5,823,237

   

   206,114

   

   108,653

   

   76,066

   

   59,650

   

   1,024,297

   

   117,792

   

   7,415,809Accumulated depreciation

   

   (1,461,216)

   

   (17,339)

   

   (60,640)

   

   (37,779)

   

   

   

   

   

   (57,676)

   

   (1,634,650)Net book amount January 01, 2008 – adjusted  (*)

   

   4,362,021

   

   188,775

   

   48,013

   

   38,287

   

   59,650

   

   1,024,297

   

   60,116

   

   5,781,159Additions (v)

   

   3,228,970

   

   6,631

   

   31,408

   

   39,005

   

   26,402

   

   401,653

   

   42,530

   

   3,776,599Reclassification

   

   (16,322)

   

   49,790

   

   

   

   

   

   (49,790)

   

   

   

   

   

   (16,322)Transfer of pre-delivery payments (v)

   

   

   

   

   

   

   

   

   

   

   

   (1,046,110)

   

   

   

   (1,046,110)Disposals/write-offs

   

   (3,553)

   

   

   

   

   

   (4,582)

   

   (56)

   

   (8,838)

   

   

   

   (17,029)Capitalized interest

   

   

   

   

   

   

   

   

   

   

   

   46,384

   

   

   

   46,384Depreciation

   

   (370,074)

   

   (17,044)

   

   (20,739)

   

   (8,713)

   

   

   

   

   

   (10,760)

   

   (427,330)Net book amount December 31, 2008 – adjusted (*)

   

   7,201,042

   

   228,152

   

   58,682

   

   63,997

   

   36,206

   

   426,224

   

   83,048

   

   8,097,351Cost

   

   9,032,153

   

   262,535

   

   140,061

   

   110,489

   

   36,206

   

   426,224

   

   151,484

   

   10,159,152Accumulated depreciation

   

   (1,831,111)

   

   (34,383)

   

   (81,379)

   

   (46,492)

   

   

   

   

   

   (68,436)

   

   (2,061,801)Net book amount

   

   7,201,042

   

   228,152

   

   58,682

   

   63,997

   

   36,206

   

   426,224

   

   83,048

   

   8,097,351
   (*) See note 4.  F-56


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 Flight equipment (i)

   

   Land and buildings

   

   Computer equipment

   

   Machinery and equipment

   

   Construction in progress

   (ii)

   

   Pre-delivery payments (iii)

   

   Other (iv)

   

   TotalNet book amount January 01, 2009 – adjusted (*)

   

   7,201,042

   

   228,152

   

   58,682

   

   63,997

   

   36,206

   

   426,224

   

   83,048

   

   8,097,351Cost

   

   9,032,153

   

   262,535

   

   140,061

   

   110,489

   

   36,206

   

   426,224

   

   151,484

   

   10,159,152Accumulated depreciation

   

   (1,831,111)

   

   (34,383)

   

   (81,379)

   

   (46,492)

   

   

   

   

   

   (68,436)

   

   (2,061,801)Net book amount January 01, 2009 – adjusted (*)

   

   7,201,042

   

   228,152

   

   58,682

   

   63,997

   

   36,206

   

   426,224

   

   83,048

   

   8,097,351Additions (v)

   

   462,966

   

   2,488

   

   10,219

   

   25,953

   

   5,973

   

   172,185

   

   39,149

   

   718,933Transfers

   

   30,025

   

   

   

   

   

   

   

   (30,025)Transfer of pre-delivery payments (v)

   

   

   

   

   

   

   

   

   

   

   

   (138,287)

   

   

   

   (138,287)Disposals/write-offs

   

   (7,947)

   

   (5,164)

   

   (453)

   

   (883)

   

   

   

   

   

   (365)

   

   (14,812)Capitalized interest

   

   

   

   

   

   

   

   

   

   

   

   30,557

   

   

   

   30,557Depreciation

   

   (506,622)

   

   (5,506)

   

   (20,702)

   

   (11,346)

   

   

   

   

   

   (15,538)

   

   (559,714)Net book amount December 31, 2009 – adjusted (*)

   

   7,179,464

   

   219,970

   

   47,746

   

   77,721

   

   12,154

   

   490,679

   

   106,294

   

   8,134,028Cost

   

   9,517,197

   

   259,859

   

   149,827

   

   135,559

   

   12,154

   

   490,679

   

   190,268

   

   10,755,543Accumulated depreciation

   

   (2,337,733)

   

   (39,889)

   

   (102,081)

   

   (57,838)

   

   

   

   

   

   (83,974)

   

   (2,621,515)Net book amount

   

   7,179,464

   

   219,970

   

   47,746

   

   77,721

   

   12,154

   

   490,679

   

   106,294

   

   8,134,028
  (*) See note 4.  F-57


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 Flight equipment (i)

   

   Land and buildings

   

   Computer equipment

   

   Machinery and equipment

   

   Construction in progress

   (ii)

   

   Pre-delivery payments (iii)

   

   Other (iv)

   

   TotalNet book amount January1, 2010 – adjusted (*)

   

   7,179,464

   

   219,970

   

   47,746

   

   77,721

   

   12,154

   

   490,679

   

   106,294

   

   8,134,028Acquired on acquisition of Pantanal at fair value  (vi)

   

   13,208

   

   

   

   90

   

   71

   

   

   

   

   

   612

   

   13,981Transfers of pre-delivery payments (v)

   

   155,577

   

   

   

   

   

   

   

   

   

   (306,066)

   

   3

   

   (150,486)Additions (v)

   

   1,038,528

   

   3,296

   

   3,748

   

   9,385

   

   3,969

   

   282,815

   

   14,899

   

   1,356,640Transfers

   

   

   

   

   

   

   

   (8,628)

   

   (5)

   

   

   

   8,633Disposals/write-offs

   

   (2,241)

   

   (8,633)

   

   (996)

   

   (522)

   

   

   

   

   

   (277)

   

   (12,669)Capitalized interest /other

   

   

   

   50

   

   (4)

   

   8

   

   3

   

   9,086

   

   

   

   9,143Depreciation

   

   (584,088)

   

   (5,012)

   

   (18,853)

   

   (11,779)

   

   

   

   

   

   (19,055)

   

   (638,787)Net book amount December 31, 2010

   

   7,800,448

   

   209,671

   

   31,731

   

   66,256

   

   16,121

   

   476,514

   

   111,109

   

   8,711,850At December 31, 2010Cost

   

   10,722,269

   

   254,572

   

   152,665

   

   135,873

   

   16,121

   

   476,514

   

   214,138

   

   11,966,415Accumulated depreciation

   

   (2,921,821)

   

   (44,901)

   

   (120,934)

   

   (69,617)

   

   

   

   

   

   (103,029)

   

   (3,260,302)Net book amount December 31, 2010

   

   7,800,448

   

   209,671

   

   31,731

   

   66,256

   

   16,121

   

   476,514

   

   111,109

   

   8,711,850
    (*) See note 4.  F-58


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (i)  Includes aircraft, engines and spare parts. Aircraft includes aircraft leased under finance leases, according to IAS 17 - Leases. As of December 31, 2010 TAM has 79 aircraft under finance leases (2009 – 66 aircraft, 2008 – 64 aircraft and 2007 – 47 aircraft).  During the year ended December 31, 2010, the Company received 14 aircraft. Twelve aircraft lease were classified as finance leases and one A320 aircraft and one A319 aircraft were classified as operational leases.  (ii)   Mainly composed by improvements carried out at the São Carlos Technology Center.  (iii) Amounts disbursed from the aircraft acquisition program are recorded as advances, since upon the disbursement the form of lease agreement that will be used is not yet defined. The Company's past experience shows that the refund of prepaid amounts upon the delivery of aircraft by manufacturers is probable. Note 2.12 (a).  (vi)  Basically furniture and vehicles.  (v)   Transfers occur when the aircraft are delivered and amounts are either returned to TAM or capitalized within flight equipment as “Additions”.  (vi)   Refers to the initial balance of Pantanal. The movements after the date of acquisition are included in the corresponding line items.  The Properties and improvements of TLA are pledged as collateral for loans in the total amount of R$ 110,499 (2009 – R$ 110,499, 2008 – R$ 110,499 and 2007 – R$ 110,499).  Other than aircraft, there are no significant amounts of property, plant and equipment outside of Brazil. Aircraft are based in Brazil but fly both domestically and internationally.  As described in note 2.12, the Company adopts the policy of reviewing the estimated useful life of property, plant and equipment items annually at the end of each year. The Company analyzed the remaining economic useful life of property, plant and equipment items. As a consequence of the review of this accounting estimate that was intended to realign the useful life and the residual value of assets and, consequently, the remaining depreciation to the residual life of assets, an impact was recorded as a credit to the 2010 depreciation result, in the comparison with the depreciation recorded in the prior period, of R$ 346.  The depreciation expenseis recorded in the statement of income within Operating expensesas follows:  December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,2007Cost of services rendered

   

   554,127

   

   480,232

   

   376,709

   

   228,583Selling expenses

   

   1,344

   

   1,262

   

   838

   

   1,443General and administrative expenses

   

   83,316

   

   78,220

   

   49,783

   

   27,613638,787

   

   559,714

   

   427,330

   

   257,639
   (*) See note 4.  F-59


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 16           Intangible Assets  IT Projects (i)

   

   Software

   

   Other intangibles (ii)

   

   License – Slots (iii)

   

   Trademarks and patents (iv)

   

   Goodwill (v)

   

   TotalAt January 1, 2007CostAccumulated amortizationNet book amountAt December 31, 2007Additions

   

   22,723

   

   14,348

   

   

   

   

   

   

   

   

   

   34,248Write-offAmortization

   

   

   

   (2,823)

   

   

   

   

   

   

   

   

   

   (2,823)Net book amount

   

   22,723

   

   14,348

   

   

   

   

   

   

   

   

   

   34,248At January 1, 2008

   

   22,723

   

   14,348

   

   

   

   

   

   

   

   

   

   34,248Cost

   

   22,723

   

   14,348

   

   

   

   

   

   

   

   

   

   37,071Accumulated amortization

   

   

   

   (2,823)

   

   

   

   

   

   

   

   

   

   (2,823)Net book amount

   

   22,723

   

   14,348

   

   

   

   

   

   

   

   

   

   34,248At December 31, 2008Additions

   

   80,044

   

   23,527

   

   29,897

   

   

   

   

   

   

   

   133,468Write-off

   

   (431)

   

   (278)

   

   

   

   

   

   

   

   

   

   (709)Amortization

   

   

   

   (14,915)

   

   

   

   

   

   

   

   

   

   (14,915)Net book amount

   

   102,336

   

   19,859

   

   29,897

   

   

   

   

   

   

   

   152,092
   F-60


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 IT Projects (i)

   

   Software

   

   Other intangibles (ii)

   

   License – Slots (iii)

   

   Trademarks and patents (iv)

   

   Goodwill (iii)

   

   TotalAt January 1, 2009

   

   102,336

   

   19,859

   

   29,897

   

   

   

   

   

   

   

   152,092Cost

   

   102,336

   

   37,597

   

   29,897

   

   

   

   

   

   

   

   169,830Accumulated amortization

   

   

   

   (17,738)

   

   

   

   

   

   

   

   

   

   (17,738)Net book amount

   

   102,336

   

   19,859

   

   29,897

   

   

   

   

   

   

   

   152,092At December 31, 2009Additions

   

   115,777

   

   18,287

   

   1,232

   

   

   

   

   

   

   

   135,296Write-off

   

   (3,015)

   

   

   

   

   

   

   

   

   

   

   

   (3,015)Amortization

   

   (28,232)

   

   (14,440)

   

   

   

   

   

   

   

   

   

   (42,672)Net book amount

   

   186,866

   

   23,706

   

   31,129

   

   

   

   

   

   

   

   241,701At January 1, 2010Cost

   

   215,098

   

   55,884

   

   31,129

   

   

   

   

   

   

   

   302,111Accumulated amortization

   

   (28,232)

   

   (32,178)

   

   

   

   

   

   

   

   

   

   (60,410)Net book amount

   

   186,866

   

   23,706

   

   31,129

   

   

   

   

   

   

   

   241,701At December 31, 2010Additions

   

   118,187

   

   3,155

   

   16,555

   

   124,927

   

   168,312

   

   38,262

   

   469,398Write-off

   

   (7,831)

   

   

   

   

   

   

   

   

   

   

   

   (7,831)Transfers

   

   349

   

   (349)Amortization

   

   (40,484)

   

   (20,498)

   

   

   

   

   

   

   

   

   

   (60,982)Net book amount

   

   257,087

   

   6,014

   

   47,684

   

   124,927

   

   168,312

   

   38,262

   

   642,286At December 31, 2010Cost

   

   325,803

   

   58,690

   

   47,684

   

   124,927

   

   168,312

   

   38,262

   

   763,678Accumulated amortization

   

   (68,716)

   

   (52,676)

   

   

   

   

   

   

   

   

   

   (121,392)Net book amount

   

   257,087

   

   6,014

   

   47,684

   

   124,927

   

   168,312

   

   38,262

   

   642,286
  F-61


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (i)     IT projects in progress and computer software are recorded at cost less accumulated amortization and impairment. Expenditure for development of projects and software, including the costs of materials, third-parties’ worked hours and other direct costs, are recognized when it is probable that they will be successful, taking into account their commercial and technological feasibility, and only when their cost can be reliably measured. Such expenses are amortized on the straight-line method over the period of the expected benefits. The anticipated amortization period is five years, depending on the useful life of each project.  (ii)   Other intangible are recorded at cost less accumulated amortization and impairment and correspond to payments made to the Star Alliance international airline network.  (iii)  See “Acquisition Pantanal”.  (iv)  See “Acquisition TAM Milor”  The amortization expenseis recorded in the statement of income within operating expensesas follows:  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Cost of services rendered

   

   59,560

   

   41,677

   

   672Selling expenses

   

   317

   

   222

   

   235General and administrative expenses

   

   1,105

   

   773

   

   14,008

   

   2,82360,982

   

   42,672

   

   14,915

   

   2,823
  (i) Impairment test  Upon the acquisition of Pantanal, the Company identified as intangible asset with indefinite useful life airport slots.Due to the nature of this asset, the Company conducted an impairment test of those intangible assets and of goodwill and did not identify changes in the initial assumptions, not resulting in adjustments to the recognized amount.  We considered for impairment calculation the value in use anddiscounted cash flows projections based on EBIT (Earnings before Interest and Tax) projected for Pantanal for the next 5 years, and from the sixth year based on perpetuity.  Key assumptions used for projection were: growth limited to the load factor (occupancy rate) of 72.5%, (b) discount rate of 13.4% p.a. determined by the Company (Weighted Average Cost of Capital – WACC) and (c) perpetuity for projected cash flows from the sixth year on.  17         Financial Liabilities  The carrying value of financial liabilities, all of which are measured at amortized cost, and their corresponding fair values are shown in the following table:    F-62


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  Fair value

   

   Carrying valueDecember 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007CurrentFinance lease obligations

   

   567,419

   

   497,147

   

   680,440

   

   298,478

   

   567,419

   

   497,147

   

   680,440

   

   298,478Senior notes

   

   25,477

   

   12,064

   

   4,372

   

   6,041

   

   24,350

   

   13,040

   

   9,336

   

   7,076Borrowings

   

   581,323

   

   523,989

   

   202,172

   

   891,346

   

   600,382

   

   458,602

   

   191,835

   

   860,273Debentures

   

   399,604

   

   281,738

   

   27,601

   

   32,419

   

   379,942

   

   275,896

   

   28,542

   

   32,1591,573,823

   

   1,314,938

   

   914,585

   

   1,228,284

   

   1,572,093

   

   1,244,685

   

   910,153

   

   1,197,986Non-currentFinance lease obligations

   

   4,190,502

   

   4,023,798

   

   5,768,040

   

   2,669,736

   

   4,190,504

   

   4,023,798

   

   5,768,040

   

   2,669,736Senior notes

   

   1,030,287

   

   949,846

   

   328,335

   

   453,694

   

   984,707

   

   1,026,685

   

   701,100

   

   531,390Borrowings

   

   14,193

   

   44,202

   

   221,034

   

   214,043

   

   14,658

   

   38,686

   

   209,733

   

   207,574Debentures

   

   627,873

   

   853,256

   

   483,517

   

   504,043

   

   596,979

   

   835,568

   

   500,000

   

   500,0005,862,855

   

   5,871,102

   

   6,800,926

   

   3,841,516

   

   5,786,848

   

   5,924,737

   

   7,178,873

   

   3,908,700
   F-63


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 17.1        Finance lease obligations  Monthly payments expiring

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Local currencyIT equipment

   

   2012

   

   21,261

   

   34,832

   

   27,551Foreign currency –Aircraft

   

   2022

   

   4,596,119

   

   4,319,859

   

   6,176,550

   

   2,894,317Engines

   

   2017

   

   136,601

   

   160,657

   

   244,379

   

   41,409Machinery and equipment

   

   2012

   

   3,942

   

   5,597

   

   

   

   32,4884,757,923

   

   4,520,945

   

   6,448,480

   

   2,968,214Current

   

   

   

   (567,419)

   

   (497,147)

   

   (680,440)

   

   (298,478)Non-current

   

   

   

   4,190,504

   

   4,023,798

   

   5,768,040

   

   2,669,736
  TAM has provided letters of guarantee and deposits in guarantee with respect to finance leases.  The minimum payments under finance leases are classified:  Year

   

   December 31,2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,2008No later than one year

   

   684,008

   

   616,179

   

   961,373

   

   456,065Later than one year and no later than five years

   

   2,420,112

   

   2,813,982

   

   3,516,486

   

   1,621,932Later than five years

   

   2,315,571

   

   1,801,641

   

   3,751,912

   

   1,781,126Effect of discounting

   

   (661,768)

   

   (710,857)

   

   (1,781,291)

   

   (890,909)4,757,923

   

   4,520,945

   

   6,448,480

   

   2,968,214
  At December 31, 2010, the Company through its subsidiaries TLA, Mercosur and Pantanal, has 79 aircraft (2009 – 66 aircraft, 2008 – 64 aircraft and 2007 – 47 aircraft) under finance leases.  17.2         Senior Notes  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007TAM Capital, Inc. (i)

   

   499,380

   

   520,681

   

   710,436

   

   538,466TAM Capital 2, Inc. (ii)

   

   509,677

   

   519,0441,009,057

   

   1,039,725

   

   710,436

   

   538,466Current

   

   (24,350)

   

   (13,040)

   

   (9,336)

   

   (7,076)Non-current

   

   984,707

   

   1,026,685

   

   701,100

   

   531,390
   F-64


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (i)     On April 25, 2007, TAM Capital Inc. concluded the offering of 3,000 senior notes, with unit nominal value of US$ 100 thousand each, in the total amount of US$ 300 million (equivalent to R$ 710.4 million using the exchange rate as of the date of the transaction), incurring debt issuance costs of R$ 13.7 million, carrying interest at 7.375% p.a. (resulting in an effective interest rate of 7.70%). Interest is payable semiannually and with principal payable in a bullet payment, in 2017. The notes were issued outside Brazil under an exemption from registration with the Brazilian CVM. The Company registered the notes with the United States Securities and Exchange Commission (“SEC”) on October 30, 2007. (ii)     On October 22, 2009, TAM Capital 2 Inc. concluded the offering of 3,000 senior notes, with unit nominal value of US$ 100 thousand each, in the total amount of US$ 300 million (equivalent to R$ 523.2 million using the exchange rate as of the date of the transaction), carrying interest at 9.5% p.a. (resulting in an effective interest rate of 9.75%). The notes were issued outside Brazil under an exemption from registration with the Brazilian CVM and with the SEC. TAM Capital 2 has the option to early redeem the Senior Notes at any time prior to January 29, 2015 and at specified redemption dates thereafter. In the event of early prepayment, a redemption price must be paid. Management has concluded that the redemption price compensates the lender for loss of interest and, as such the redemption option is considered clearly and closely related to the Senior Notes.  F-65


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 17.3        Borrowings (a)Balance composition Guarantee

   

   Interest rate (effective rates for 2010 and 2009)

   

   Payment term and the year of last payment

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Local currencyFINEM – Sub credit A (i)

   

   Mortgage of assets and accounts receivable

   

   TJLP + 4.5% p.a. (10.5% p,a. and 10.8%p.a.)

   

   Monthly until 2011

   

   13,704

   

   28,655

   

   43,554

   

   58,040FINEM –Sub credit B (ii)

   

   Mortgage of assets and accounts receivable

   

   Basket of currencies BNDES + 3.0% p.a. (12.2% p.a. 10.5% p.a.)

   

   Monthly until 2012

   

   2,026

   

   4,023

   

   7,984

   

   8,149Compor

   

   No guarantee

   

   100% p.a 101.5% of the CDI (12.8% p. a and 11.3% p.a)

   

   Monthly until 2008

   

   

   

   

   

   

   

   223,573Others

   

   

   

   

   

   Monthly until 2013

   

   3,640

   

   6,533

   

   9,261

   

   7,56119,370

   

   39,211

   

   60,799

   

   297,323Foreign currencyFINIMP (iii)

   

   Promissory notes from a minimum of US$ 1,338 thousand  to a maximum at US$ 32,605 thousand

   

   Annual LIBOR + 1.05% p.a. to 6.7% p.a. (4.3% p.a. and 5.3% p.a.)

   

   Annual until 2011

   

   506,913

   

   284,760

   

   167,289

   

   84,883International Finance Corporation – IFC (iv)

   

   Deposits in guarantee US$ 2,500 thousand

   

   6 months LIBOR1.6% p.a.(1.1% p.a. and 3.0% p.a.)

   

   Half-yearly until 2010

   

   

   

   7,247

   

   28,900

   

   51,414International Finance Corporation – IFC (Working capital) (iv)

   

   Deposits in guarantee US$ 2,500 thousand

   

   6 months LIBOR + 3% p.a. (3.4% p.a. and 6.6%p.a.)

   

   Half-yearly until 2012

   

   7,272

   

   12,476

   

   23,493Leasing renegotiation  (v)

   

   Letter of guarantee

   

   Fixed installments of US$ 55 thousand

   

   Monthly until 2022

   

   8,921

   

   9,898

   

   14,013

   

   11,137Financing – Pre-delivery payment  (vi)

   

   Unconditional guarantee

   

   Monthly LIBOR+ 2.65% p.

   

   Monthly until 2011

   

   68,649

   

   

   

   107,074

   

   621,734Others (vii)

   

   

   

   

   

   

   

   3,915

   

   3,826

   

   

   

   1,356595,670

   

   458,077

   

   340,769

   

   770,524615,040

   

   497,288

   

   401,568

   

   1,067,847Current

   

   

   

   

   

   

   

   (600,382)

   

   (458,602)

   

   (191,835)

   

   (860,273)Non -current

   

   

   

   

   

   

   

   14,658

   

   38,686

   

   209,733

   

   207,574
  F-66


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 FINIMP – Import Financing, FINEM – Government agency financing for machinery and equipment, TJLP – Long term interest rate and CDI – Interbank deposit rate,  Non-current maturities are as follows:  Year

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,20072009

   

   

   

   

   

   

   

   119,5232010

   

   

   

   

   

   60,573

   

   56,0152011

   

   

   

   24,791

   

   132,559

   

   22,9502012

   

   6,027

   

   5,697

   

   5,531

   

   2,4862013

   

   1,068

   

   860

   

   1,221

   

   6602014

   

   696

   

   727

   

   976

   

   1,0122015

   

   739

   

   

   

   

   

   4,928After 2015

   

   6,128

   

   6,611

   

   8,87314,658

   

   38,686

   

   209,733

   

   207,574
  (b)  Description of the loans and financings:  (i)       Loan obtained in order to finance the investment plan of 2004 and  2005 focused on expanding the São Carlos technological center, the acquisition of equipment and materials made in Brazil, the development of software technical and managerial training and environmental projects.  (ii)       TAM signed financing agreements for the acquisition of machines and equipment.The transaction was entered into to 2006, with Unibanco – União de Bancos Brasileiros, Banco Bradesco S.A. and Banco do Brasil S.A.  (iii)   TAM obtained loans of the FINIMP-type, to finance imports of aircraft parts. Among currently active transactions, loans from banks Safra, Banco do Brasil, Santander, Itaú and Bradesco have maturities through December 2011.  (iv)    On December 16, 2005, TLA entered into a loan agreement with the International Finance Corporation (IFC) to finance up to US$ 33 million of PDP (pre-delivery payment) to Airbus aircraft.  (v)       Debt resulting from, renegotiation of a contact for airplanes and parts between TAM and Fokker Aircraft BV entered into in June 25, 1982.  (vi)      On December 28, 2007, TLA entered into a loan agreement of loan with Banco BNP Paribas to finance up to US$ 117.1 million of PDP (pre-delivery payment) with respect to Airbus aircraft.  (vii)   Contract for acquisition of IT equipment software and related services.     F-67


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 17.4        Debentures  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007TAM S.A. (i)

   

   347,800

   

   517,306

   

   528,542

   

   523,147TAM Linhas Aéreas S.A. (ii)

   

   629,121

   

   594,158

   

   

   

   9,012976,921

   

   1,111,464

   

   528,542

   

   532,159Current

   

   (379,942)

   

   (275,896)

   

   (28,542)

   

   (32,159)Non-current

   

   596,979

   

   835,568

   

   500,000

   

   500,000
  Non-current maturities are as follows:  Year

   

   December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,20072010

   

   

   

   

   

   166,667

   

   166,6672011

   

   

   

   349,057

   

   166,667

   

   166,6672012

   

   98,092

   

   349,162

   

   166,666

   

   166,6662013

   

   98,887

   

   137,3492014

   

   100,0002015

   

   100,000After 2015

   

   200,000596,979

   

   835,568

   

   500,000

   

   500,000
  (i)    TAM S.A.  On July 7, 2006 the Board of Directors approved the issuance for public distribution of simple, nonconvertible and unsecured debentures, with no preference but with a guarantee provided by the subsidiary TLA.  On August 1, 2006, TAM S.A. concluded the offering of 50,000 simple debentures in a single series, with nominal value of R$ 10 each, totaling an amount of R$ 500,000, incurring debt issue costs of R$ 1,906. The debentures expire in six (6) years. Principal is repayable in 3 annual payments, the first installment was paid on August 1, 2010.  Interest is payable on a semiannual basis, at the rate equivalent of 104.5% of the CDI (effective interest rate at the date of issuance of 15.38%) calculated and published by CETIP (the custodian and liquidation agent). At December 31, 2010 the effective interest rate was 10.19% (2009 – 10.32%, 2008 – 14.29% and 2007 – 11.7%).  The debenture indenture provides for the compliance with certain covenants based on financial ratios calculated based on Brazilian accounting practices in effect up to 2007. With the application of the new accounting practices defined by IFRS, especially the one that requires the recognition in the Company's financial statements of finance lease agreements, the coverage ratio of the company's debt has increased. It should be noted that this ratio has breached in the fiscal year ended December 31, 2010, failing to reach the limit now agreed. In this sense these


debentures would be subject to early maturity, athough this not automatic as this is subject to the completion and approval at a General Meeting of Debenture holders.  F-68


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  Due to the issuer's failure to comply with a debt coverage ratio of at least 130%, adebenture holders’ meeting was heldon February 7, 2011. The issuer proposed authorizing the trustee not to proceed with the accelerated maturity and this proposalwas approved solely for the year ended December 31, 2010. In connection with this waiver of accelerated maturity, the issuer agreed to pay a waiver award to debenture holders, equivalent to 1.70% of the unit price at the payment date. This waiver award was paid on March 1, 2011. Therefore, at the Company's balance sheet reporting date, it is not in default of its obligations under the indenture for these debentures. Additionally, the Company evaluated its other financing agreements, including leases, and concluded that there is no other funding thatshould be reclassified as current liabilities.  In compliance with the IFRS, the Company reclassified the long-term portion with maturity scheduled for 2012 to current, in the amount of R$ 166,376.  (ii)   TAM Linhas Aéreas S.A.  On July 16, 2009 the Board of Directors approved the issuance for public distribution of simple and nonconvertible debentures, with a guarantee provided by TAM S.A.  On July 24, 2009 TAM Linhas Aéreas S.A. concluded the offering of 600 simple debentures in a single series, with a nominal value of R$ 1,000 each for a total amount of R$ 600,000 and debt issue costs of R$ 7,631. On July 22, 2010 the Extraordinary Shareholders Meeting approved the change in the maturity dates. The final maturity was changed from July 24, 2013 to July 24, 2017, the principal repayments were changed from quarterly payments to semi-annual payments with the date for the first repayment of principal originally due on July 24, 2010 to January 24, 2012. The cost of this renegotiation was R$ 3,000.  Payment of interest has been modified from monthly payments to semiannual payment, at a rate equivalent to 124% of the CDI (interest rate at the date of issuance of 13.2%), calculated and published by CETIP (The custodian and liquidation agent). The effective interest rate was 12.09% p.a for period ended December 31, 2010 (2009 –12.5%).  The Company may exercise early redemption at any time, at its discretion, by sending or publishing a notice to debenture holders 10 days in advance. The early redemption can be total or partial. The debentures subject to this procedure are mandatorily canceled. Management has concluded that the amount payable upon early redemption is approximately equal to the amortized cost of the debentures and, as such, the redemption option is considered clearly and closely related to the debentures.  18           Deferred Income  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Advance ticket sales

   

   942,167

   

   1,008,308

   

   819,780

   

   807,101TAM loyalty program (i)

   

   825,265

   

   656,266

   

   507,708

   

   420,656Sale and leaseback  – deferred gains (ii)

   

   100,169

   

   133,916

   

   147,441

   

   179,5261,867,601

   

   1,798,490

   

   1,474,929

   

   1,407,283Current

   

   (1,801,181)

   

   (1,698,321)

   

   (1,105,719)

   

   (1,049,514)Non-current

   

   66,420

   

   100,169

   

   369,210

   

   357,769
  F-69


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  (i) As from January 1, 2010, the subsidiary Multiplus assumed the exclusive management of TAM Loyalty Program. The deferred revenue of TAM Loyalty Program is recorded based on the number of outstanding points and a historical average rate for non redemption of points (breakage) in the last 12 months.  (ii) The deferred gains on sale and leaseback transactions relate to sales of aircraft in 2001 and 2003. The gains are being recognized in the income statement on a straight-line basis through to 2013.  19           Other Liabilities  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Reorganization of Fokker 100 Fleet (i)

   

   13,860

   

   24,154

   

   51,186

   

   53,024Maintenance provision –“Power by the hour”

   

   252,534

   

   164,255

   

   142,421

   

   75,179Other liabilities

   

   106,736

   

   109,233

   

   238,477

   

   187,839373,130

   

   297,642

   

   432,084

   

   316,042Current

   

   (135,658)

   

   (123,696)

   

   (149,091)

   

   (130,765)Non-current

   

   237,472

   

   173,946

   

   282,993

   

   185,277
  (i) Pursuant to the agreement to return the Fokker 100 fleet, on December 19, 2003, TLA cancelled 19 lease agreements then outstanding, of which ten were finance leases and nine were operating leases. As a result, TLA agreed to pay a contractual rescission penalty in 30 consecutive quarterly installments, between April 2004 and July 2011 for an original amount of R$ 94,188. This amount was recognized in the statement of operations in the year ended December 31, 2003. The Company issued letters of guarantee as Security. TLA also renegotiated the reschedule of overdue installments for an original amount of R$ 49,599.  On December 31, 2010, the total commitment under the Fokker 100 fleet operating leases arrangements amounted to R$ 13,860 (December 31, 2009 – R$ 24,154, 2008 – R$ 51,186 and 2007 – R$ 53,024) equivalent to US$ 8,318 thousand (December 31, 2009 – US$ 13,871 thousand, 2009 – US$ 21,903 thousand and 2007 – US$ 29,935 thousand ).  20           Provisions  (a)    Changes in the reserve for contingencies  Management of the Company and its subsidiaries recorded provisions for contingencies in all cases where loss by the Company is deemed probable based on advice provided by the Company’s internal and external legal counsel. As at December 31, 2010, the value of provisions and the corresponding judicial deposits recognized were as follows:    F-70


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 December 31,2007

   

   Additional Provisions (Deposits)

   

   (Reversals)

   

   Payments

   

   Financial charges

   

   December 31,2008Pis and Cofins

   

   396,532

   

   4,722

   

   (33,744)

   

   

   

   24,640

   

   392,150Additional tariff (i)

   

   323,691

   

   63,832

   

   

   

   

   

   32,815

   

   420,338Airline staff fund (ii)

   

   71,552

   

   21,718

   

   

   

   

   

   7,150

   

   100,420Labor contingencies

   

   12,811

   

   18,253

   

   (2,089)

   

   (5,517)

   

   742

   

   24,180Civil litigation

   

   22,658

   

   49,300

   

   

   

   (9,130)

   

   694

   

   57,412Other tax contingencies

   

   17,469

   

   15,137

   

   (1,592)

   

   (210)

   

   1,314

   

   38,228Total

   

   844,713

   

   172,942

   

   (37,425)

   

   (14,857)

   

   67,355

   

   1,032,728(-) Judicial deposits

   

   (75,017)

   

   (38,928)

   

   25,588

   

   5,750

   

   (2,321)

   

   (84,928)Total

   

   769,696

   

   134,014

   

   (11,837)

   

   (9,107)

   

   65,034

   

   947,800
  December 31,2008

   

   Additional Provisions (Deposits)

   

   (Reversals)

   

   Payments

   

   Financial charges

   

   REFIS (Note 24)

   

   December 31,2009Pis and Cofins

   

   392,150

   

   

   

   (70,812)

   

   

   

   21,167

   

   (342,505)Additional tariff (i)

   

   420,338

   

   55,062

   

   

   

   

   

   40,063

   

   

   

   515,463Airline staff fund (ii)

   

   100,420

   

   24,448

   

   

   

   

   

   10,221

   

   

   

   135,089Labor contingencies

   

   24,180

   

   3,564

   

   

   

   (9,068)

   

   

   

   

   

   18,676Civil litigation

   

   57,412

   

   21,231

   

   

   

   (11,115)

   

   (149)

   

   

   

   67,379Other tax contingencies

   

   38,228

   

   1,721

   

   

   

   (799)

   

   1,072

   

   

   

   40,222Total

   

   1,032,728

   

   106,026

   

   (70,812)

   

   (20,982)

   

   72,374

   

   (342,505)

   

   776,829(-) Judicial deposits

   

   (84,928)

   

   (28,408)

   

   

   

   3,066

   

   14

   

   

   

   (110,256)Total

   

   947,800

   

   77,618

   

   (70,812)

   

   (17,916)

   

   72,388

   

   (342,505)

   

   666,573
  December 31,2009

   

   Recognized on acquisition of Pantanal

   

   Additional Provisions (Deposits)

   

   (Reversals)

   

   Financial charges

   

   December 31,

   2010Additional tariff (i)

   

   515,463

   

   

   

   39,895

   

   (585,914)

   

   30,556Airline staff fund (ii)

   

   135,089

   

   

   

   28,473

   

   

   

   10,664

   

   174,226Labor contingencies

   

   18,676

   

   1,200

   

   1,087

   

   (33)

   

   

   

   20,930Civil litigation

   

   67,379

   

   

   

   18,892

   

   

   

   

   

   86,271Other tax contingencies

   

   40,222

   

   9,190

   

   7,713

   

   (10,119)

   

   1,125

   

   48,131Total

   

   776,829

   

   10,390

   

   96,060

   

   (596,066)

   

   42,345

   

   329,558(-) Judicial deposits

   

   (110,256)

   

   (267)

   

   (14,768)

   

   4

   

   

   

   (125,287)Total

   

   666,573

   

   10,123

   

   81,292

   

   (596,062)

   

   42,345

   

   204,271
  (b)      Summary of the main reserve for contingencies  (i)     Corresponds to the collection of 1% on the amount of fares of all tickets sold for regular domestic routes. TLA


management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and non-payment is supported by a judicial order. In September 2010, the Supremo Tribunal de Justiça (Superior Court of Justice) confirmed the decision that definitively releases the Company from paying the additional tariff, calculated at 1% on the air fare for all tickets sold by the regular domestic airlines.  F-71


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  In the light of such event, the Company reversed the accounting provision thereof on R$ 585,914 (R$ 439,437 net of income tax), related to the period from June 2001 up to August 2010. The reversal has been recognized in the statement of income in the following line items and for the following amounts:  December 31,2010Revenue - Sales taxes and other deductions

   

   39,895Operating expenses - General and administrative expenses (note 29)

   

   364,854Finance costs

   

   181,166Deferred income tax

   

   (146,478)439,437
  (ii)  Corresponds to the collection of 2.5% on the monthly payroll for private social welfare and professional training entities. TLA management, based on the opinion of its external legal counsel, is contesting the constitutionality of this collection, and the non-payment is supported by a judicial order.  The Company and its subsidiaries are also parties to tax, labor and civil lawsuits, involving risks of loss that Management, based on the assessment made by its legal counsel, classified as possible and, therefore, no provision at that date was required. The estimated amounts are as follows:  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Tax contingenciesICMS – Tax on the circulation of merchandise and services

   

   383,374

   

   286,799

   

   185,033

   

   109,607IRPJ and CSLL – Income tax and Social contribution on net income

   

   136,216

   

   114,519

   

   103,046

   

   5,831PIS and Cofins – Social Integration Program and  Contribution for the financing of social security

   

   

   

   

   

   

   

   38,718Special customs regime for temporary

   

   102,594

   

   102,644

   

   102,644

   

   11,692Others

   

   134,026

   

   186,808

   

   172,843

   

   75,743756,210

   

   690,770

   

   563,566

   

   241,691Civil litigation

   

   30,911

   

   31,915

   

   32,001

   

   15,749Labor contingencies

   

   316,485

   

   231,257

   

   192,353

   

   165,6851,103,606

   

   953,942

   

   787,920

   

   423,125
    F-72


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 21           Refinanced taxes payable under fiscal recovery program (REFIS)  In November 2009, TLA applied to the Fiscal Recovery Program (REFIS), established by Law n° 11,941/09 and Provisional Measure, N° 449/2009, REFIS has the purpose of allowing to settle tax debt through a special mechanism for paying and refinancing tax and social security liabilities.  The general conditions of the effects of applying in the REFIS programare summarized below:  (a)Payment will be made in 180 monthly installments of tax debt amounting to R$ 342,505 and payment in one single installment of tax debts of R$ 10,426 out for which judicial deposits exists in the amount of R$ 9,484.  (b)Tax debts included into the REFIS:  December 31,2010

   

   December 31,2009Original amount

   

   Penalties

   

   Interest

   

   Total

   

   TotalPIS (i)

   

   42,757

   

   3,464

   

   42,640

   

   89,861

   

   77,846COFINS (i)

   

   192,743

   

   1,784

   

   114,296

   

   308,823

   

   264,659Others

   

   20,209

   

   2,548

   

   18,386

   

   41,143255,709

   

   7,796

   

   176,322

   

   439,827

   

   342,505Current (*)

   

   

   

   

   

   

   

   (23,152)

   

   (22,834)Non-current

   

   

   

   

   

   

   

   416,675

   

   319,671
 (*)The amount is recorded under “Taxes, charges and contribution” in current liabilities.  (i)    As further explained in Note 20 corresponds to the increase in the tax base of the PIS tax and the increase in the contribution and basis of calculation of COFINS tax. In accordance with the requirements of the REFIS the Company has already filed a dismissal of the lawsuits it had begun challenging the unconstitutionality of such increases.  (c)  In 2009, a gain was recognized for the reduction of penalties and interest previously, provided for amounting to    R$ 70,812.Of the total amount, R$ 24,448 were recognized under “operating expenses – Other” and the amount of R$ 46,364was recorded as a reduction in Finance costs both in the income statement for the year ended December 31, 2009. The gain corresponds to the reductions established by Law 11941/09 for payment of the taxes in 180 months consisting of reduction of 60% of the amount of  penalties and 25% of the amount of late payment interest.  (d)  By applying to the REFIS, the Company commits to make the monthly payments and not become overdue more than 90 days and to withdraw all lawsuits (and any resulting legal rights) it has begun with respect to the taxes included in REFIS. If those commitments are not honored the Company will be excluded from the REFIS and a new tax debt will be determined based on the amounts originally due.  22          Share Capital and Reserves  (a)          Authorized capital   F-73


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 At December 31, 2010, 2009, 2008 and 2007 the authorized capital was R$ 1,200,000 and can be increased by means of the issuance of common and preferred shares, as resolved by the Board of Directors.  (b)          Subscribed share capital  At December 31, 2010 the subscribed share capital is comprised of 156,206,781 shares (2009 – 150,585,147, 2008 – 150,585,147 and 2007 – 150,585,147) fully paid nominative shares without nominal value, of which 55,816,683 (2009 – 50,195,049, 2008 – 50,195,049 and 2007 – 59,791,955) are common shares and 100,390,098 (2009 – 100,390,098, 2008– 103,390,098 and 2007 – 90,793,192) are preferred shares.  Common shares confer to their holder the right to vote in general meetings.  The preferred shares do not have the right to vote in general meetings, except in relation to certain matters while the Company is listed in Level 2 of BOVESPA. However, they have priority in the distribution of dividends, and in capital reimbursement, without any premium, in the event the Company is liquidated and the right to participate, under the same terms as the common shares, in the distribution of any benefits to the stockholders.  As per the Adhesion Agreement executed with BOVESPA, the Company complies with the requirement to have a free float in the market of 25% of its shares. Since August, 2007 the free float has been 53.85% (unaudited).  The change in capital is summarized as follows:  Number of shares

   

   Common shares

   

   Preferred shares

   

   CapitalAt December 31, 2007

   

   150,585,147

   

   59,791,955

   

   90,793,192

   

   675,497Transfer

   

   

   

   (9,596,906)

   

   9,596,906At December 31, 2008

   

   150,585,147

   

   50,195,049

   

   100,390,098

   

   675,497At December 31, 2009

   

   150,585,147

   

   50,195,049

   

   100,390,098

   

   675,497Capital increase as per BDM (*) of 11/05/2010

   

   5,621,634

   

   5,621,634

   

   

   

   144,395At December 31, 2010

   

   156,206,781

   

   55,816,683

   

   100,390,098

   

   819,892
  (*) Board of Directors’ Meeting. See “Acquistion TAM Milor” Note 1.3.  At December 31, 2010, the market value of shares is R$ 39.14 per share, while the book value of shares at the same date is R$ 17.36 per share.  (c)          Payment of dividends and interest on own capital  Under TAM S.A.’s bylaws, shareholders are entitled to a mandatory minimum dividend equivalent to 25% of the net profit for the year, as per the parent company’s individual financial statements, prepared in conformity with accounting practices adopted in Brazil. Interest on capital, deductible for tax purposes, that have haven paid or credited, may be deducted from the mandatory dividends. Preferred shares have priority in capital reimbursement and to right to dividends in the minimum amount equivalent to those paid on common shares. Dividends are subject to approval at the Annual General Meeting and are as follows:  F-74


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  December 31,

   2010Profit for the year

   

   637,420(-) Legal reserve- 5% (Note 24 (d))

   

   (31,871)(=) Profit to be distributed

   

   605,549Minimum mandatory dividends

   

   (151,387)Number of shares

   

   151,185Dividends per share – R$

   

   (1. 00)Minimum mandatory dividends proposed per share

   

   (1. 00)Minimum mandatory dividends proposed

   

   (151,387)
  23          Other reserves  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Share Premium (a)

   

   74,946

   

   74,946

   

   74,946

   

   74,946Treasury shares (b)

   

   (6,008)

   

   (11,370)

   

   (11,370)Stock option plan (c)

   

   51,667

   

   35,668

   

   25,207

   

   18,031Legal reserve (d)

   

   81,005

   

   49,134

   

   

   

   40,231Profit retention

   

   814,587

   

   353,007

   

   

   

   1,113,204Carrying value adjustment (e)Cummulative translation adjustment

   

   (17,263)

   

   (16,794)

   

   3,309

   

   (9,843)Revaluation reserve for assets valued at deemed cost

   

   113,972

   

   130,540

   

   132,371

   

   135,134Transfer from non-controlling interest

   

   489,1151,602,021

   

   615,131

   

   224,463

   

   1,371,703
  (a)Share premium  The share premium reserve arose on the subscription of shares in TAM, due to the fair value of net assets received being greater than the nominal amount of the share capital issued.  (b)           Treasury shares  The movement of treasury shares during the year ended December 31, 2010 is presented below.  Quantity of shares

   

   Thousands of reais

   

   Average price per share -  ReaisAt December 31, 2007Purchase of shares

   601,900

   

   17,703

   

   29.41Reductions

   (199,589)

   

   (6,333)

   

   31.73At December 31, 2008

   402,311

   

   (11,370)

   

   28.26At December 31, 2009

   402,311

   

   (11,370)

   

   28.26Resale of treasury shares

   (189,731)

   

   5,362

   

   28.26At December 31, 2010

   212,580

   

   (6,008)

   

   28.26
  F-75


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  During the period ended December 31, 2010, 189,731 shares held in treasury were sold to be issued to beneficiaries of the stock option plan. The shares sold relate to the executive compensation plan approved at the Extraordinary General Meeting (AGE) of May 16, 2005.  The market value of the share based on the closing quote in the São Paulo stock exchange for the period ended December 31, 2010, is R$ 39.14 (2009 – R$ 38.21, 2008 – R$ 19.09 and 2007 – R$ 42.65) per preferred share.  (c)           Stock options  The credit relating to the expense for stock options is recorded in this reserve, and is released to retained earnings when options are exercised or expire refer to Note 26.2.  (d)           Legal reserve  Brazilian law requires that a legal reserve is constituted by appropriating 5% of profit for the year until the legal reserve reaches 20% of the amount of share capital.  (e)         Carrying value adjustments  (i)         Currency translation adjustment  The effects of exchange rate changes during the year on net assets of foreign operations at the beginning of the year and the difference between their profit for the year at average and year-end exchange rates are recorded in the currency translation adjustment reserve.   F-76


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (ii)          Revaluation reserve for assets valued at deemed cost  On transition to IFRS the Company adopted the revalued amounts as the deemed cost for certain assets that were revalued under BR GAAP in years prior to the transition date to IFRS. The revaluation reserve corresponds to the revaluation reserve for those asset and the reserve is realized in the same proportion of the depreciation, write-off or sale of the revalued asset, with a contra entry to the retained earnings (accumulated deficit) account. In the year ended December 31, 2010 realization totaled R$ 9,299, net of tax effects (2009 - R$ 1,831, 2008 – R$ 2,763 and 2007 – R$ 3,665). Of the total amount of the reserve, R$ 28,733 (2009 - R$ 335,327, 2008 – R$32,225 and 2007 – R$ 33,034) corresponds to the revaluation of land and buildings, which will only be realized upon the eventual write-off of assets.  (iii)         Transfer from non-controlling interests  Refers to the transfer from non-controlling interests on the issuance of shares representing 26.83% of Multiplus. As required by IAS 27 “Consolidated  and Separated Financial Statements”, the changes in the Company’s ownership interest in Multiplus did not result in loss of control and, therefore, it was recognized as a capital transaction, directly in the Company’s shareholders’ equity. See note 1.1.  24           Revenue **** TAM had no major customers which represented more than 10% of revenues in any of the periods presented. The Company utilizes its gross revenue information by type of service rendered and by region, as follows:   F-77


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (a)By type of service rendered  December 31,2010

   

   %

   

   December 31,2009

   

   %

   

   December 31,2008

   

   %

   

   December 31,2007

   

   %

   

   Variation (%)

   2010 - 2009

   

   Variation (%)

   2009 - 2008

   

   Variation (%)

   2008 - 2007DomesticPassenger

   

   5,870,880

   

   49.8

   

   5,468,612

   

   53.9

   

   6.162.472

   

   56.4

   

   4,833,903

   

   58.0

   

   7.4

   

   (11.3)

   

   27.5Cargo

   

   510,785

   

   4.3

   

   446,983

   

   4.4

   

   459,487

   

   4.2

   

   360,149

   

   4.3

   

   14.3

   

   (2.7)

   

   27.66,381,665

   

   54.1

   

   5,915,595

   

   58.3

   

   6,621,959

   

   60.6

   

   5,194,052

   

   62.3

   

   7.9

   

   (10.7)

   

   27.5InternationalPassenger

   

   3,284,473

   

   27.8

   

   2,684,009

   

   26.5

   

   2,822,618

   

   25.8

   

   2,129,741

   

   25.6

   

   22.4

   

   (4.9)

   

   32.5Cargo

   

   601,898

   

   5.1

   

   489,305

   

   4.8

   

   549,595

   

   5.0

   

   416,668

   

   5.0

   

   23.0

   

   (11.0)

   

   31.93,886,371

   

   32.9

   

   3,173,314

   

   31.3

   

   3,372,213

   

   30.9

   

   2,546,409

   

   30.5

   

   22.5

   

   (5.9)

   

   32.4OthersLoyalty Program (TAM)

   

   381,519

   

   3.2

   

   538,950

   

   5.3

   

   441,202

   

   4.0

   

   144,183

   

   1.8

   

   (29.2)

   

   22.1

   

   206Loyalty Program (Multiplus)

   

   444,893

   

   3.8

   

   

   

   

   

   

   

   

   

   

   

   

   

   100.0Travel and tourism agencies

   

   61,531

   

   0.5

   

   59,635

   

   0.6

   

   64,132

   

   0.6

   

   30,242

   

   0.4

   

   3.2

   

   (7.0)

   

   112.1Others (includes expired tickets)

   

   642,804

   

   5.4

   

   451,647

   

   4.5

   

   420,682

   

   3.9

   

   413,220

   

   5.0

   

   42.3

   

   7.4

   

   1.81,530,747

   

   13.0

   

   1,050,232

   

   10.4

   

   926,016

   

   8.5

   

   587,645

   

   7.2

   

   45.8

   

   13.4

   

   57.6Total gross

   

   11,798,783

   

   100.0

   

   10,139,141

   

   100.0

   

   10,920,188

   

   100.0

   

   8,328,106

   

   100.0

   

   16.4

   

   (7.2)

   

   31.1Sales taxes and other deductions

   

   (420,092)

   

   

   

   (373,635)

   

   

   

   (407,144)

   

   

   

   (309,287)Revenue

   

   11,378,691

   

   

   

   9,765,506

   

   

   

   10,513,044

   

   

   

   8,018,819
  F-78


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (b)By geographic location of the Company’s destinations  December 31,2010

   

   %

   

   December 31,2009

   

   %

   

   December 31,2008

   

   %

   

   December 31,2007

   

   Variation (%)2010 -2009

   

   Variation (%)2009 -2008

   

   Variation (%)2008 -2007Brazil

   

   7,912,412

   

   67.0

   

   6,965,826

   

   68.7

   

   7,547,976

   

   69.2

   

   5,781,698

   

   13.6

   

   (7.7)

   

   30.5Europe

   

   1,958,730

   

   16.6

   

   1,440,352

   

   14.2

   

   1,543,350

   

   14.1

   

   1,047,726

   

   36.0

   

   (6.7)

   

   47.3North America

   

   1,057,091

   

   9.0

   

   862,529

   

   8.5

   

   943,137

   

   8.6

   

   1,000,102

   

   22.5

   

   (8.5)

   

   (5.7)South America (excluding Brazil)

   

   870,550

   

   7.4

   

   870,434

   

   8.6

   

   885,725

   

   8.1

   

   498,580

   

   0.1

   

   (1.7)

   

   77.6Total gross

   

   11,798,783

   

   100.0

   

   10,139,141

   

   100.0

   

   10,920,188

   

   100.0

   

   8,328,106

   

   16.4

   

   (7.2)

   

   31.1Sales taxes and other deductions

   

   (420,092)

   

   

   

   (373,635)

   

   

   

   (407,144)

   

   

   

   (309,287)Revenue

   

   11,378,691

   

   

   

   9,765,506

   

   

   

   10,513,044

   

   

   

   8,018,819
   F-79


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 25           Costs and operating expenses by nature  December 31,2010Cost of services rendered

   

   Selling

   

   General and administrative

   

   Total

   

   %Personnel

   

   1,881,905

   

   247,283

   

   191,220

   

   2,320,408

   

   22.3Directors’ fees

   

   1,895

   

   

   

   6,125

   

   8,020

   

   0.1Fuel

   

   3,451,198

   

   

   

   

   

   3,451,198

   

   33.2Depreciation and amortization

   

   613,687

   

   1,661

   

   84,421

   

   699,769

   

   6.7Maintenance and repairs (excluding personnel)

   

   612,262

   

   

   

   

   

   612,262

   

   5.9Aircraft insurance

   

   51,982

   

   

   

   

   

   51,982

   

   0.5Take-off, landing and navigation aid charges

   

   609,447

   

   

   

   

   

   609,447

   

   5.9Leasing of aircraft, engines and equipment under operating leases

   

   447,112

   

   7,252

   

   16,619

   

   470,983

   

   4.5Third party services

   

   166,691

   

   262,696

   

   343,907

   

   773,294

   

   7.4Marketing and related expenses

   

   

   

   959,843

   

   

   

   959,843

   

   9.2Reversal of additional tariff (Note 20 (b))

   

   

   

   

   

   (364,854)

   

   (364,854)

   

   (3.5)Other

   

   353,788

   

   274,966

   

   180,572

   

   809,326

   

   7.88,189,967

   

   1,753,701

   

   458,010

   

   10,401,678

   

   100.0
  December 31,2009Cost of services rendered

   

   Selling

   

   General and administrative

   

   Total

   

   %(Adjusted (*))Personnel

   

   1,614,109

   

   183,955

   

   168,510

   

   1,966,574

   

   20.5Directors’ fees

   

   5,181

   

   

   

   13,415

   

   18,596

   

   0.2Fuel

   

   2,741,253

   

   

   

   

   

   2,741,253

   

   28.7Depreciation and amortization

   

   521,909

   

   1,484

   

   78,993

   

   602,386

   

   6.3Maintenance and repairs (excluding personnel)

   

   640,433

   

   

   

   

   

   640,433

   

   6.7Aircraft insurance

   

   63,681

   

   

   

   

   

   63,681

   

   0.7Take-off, landing and navigation aid charges

   

   585,890

   

   

   

   

   

   585,890

   

   6.1Leasing of aircraft, engines and equipment under operating leases

   

   525,200

   

   9,352

   

   15,213

   

   549,765

   

   5.8Third party services

   

   167,556

   

   301,096

   

   318,913

   

   787,565

   

   8.2Marketing and related expenses

   

   

   

   854,701

   

   

   

   854,701

   

   9.0Other

   

   355,732

   

   182,164

   

   206,892

   

   744,788

   

   7.87,220,944

   

   1,532,752

   

   801,936

   

   9,555,632

   

   100.0
    F-80


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  December 31,2008Cost of services rendered

   

   Selling

   

   General and administrative

   

   Total

   

   %(Adjusted (*))Personnel

   

   1,477,381

   

   158,954

   

   128,857

   

   1,765,192

   

   17.8Directors’ fees

   

   4,545

   

   

   

   12,288

   

   16,833

   

   0.2Fuel

   

   3,927,888

   

   

   

   

   

   3,927,888

   

   39.5Depreciation and amortization

   

   377,202

   

   1,073

   

   63,791

   

   442,066

   

   4.4Maintenance and repairs (excluding personnel)

   

   518,347

   

   

   

   

   

   518,347

   

   5.2Aircraft insurance

   

   47,781

   

   

   

   

   

   47,781

   

   0.5Take-off, landing and navigation aid charges

   

   495,426

   

   

   

   

   

   495,426

   

   5.0Leasing of aircraft, engines and equipment under operating leases

   

   424,637

   

   7,720

   

   11,074

   

   443,431

   

   4.5Third party services

   

   150,538

   

   223,817

   

   327,429

   

   701,784

   

   7.1Marketing and related expenses

   

   

   

   988,579

   

   

   

   988,579

   

   10.0Other

   

   337,563

   

   16,469

   

   234,078

   

   588,110

   

   5.97,761,308

   

   1,396,612

   

   777,517

   

   9,935,437

   

   100.0
  December 31,2007Cost of services rendered

   

   Selling

   

   General and administrative

   

   Total

   

   %(Adjusted(*))Personnel

   

   1,051,324

   

   118,514

   

   112,150

   

   1,281,988

   

   16.6Directors’ fees

   

   7,490

   

   

   

   20,249

   

   27,739

   

   0.4Fuel

   

   2,536,398

   

   

   

   

   

   2,536,398

   

   32.9Depreciation and amortization

   

   228,583

   

   1,443

   

   30,436

   

   260,462

   

   3.4Maintenance and repairs (excluding personnel)

   

   445,816

   

   

   

   

   

   445,816

   

   5.8Aircraft insurance

   

   33,560

   

   

   

   

   

   33,560

   

   0.4Take-off, landing and navigation aid charges

   

   421,021

   

   

   

   

   

   421,021

   

   5.5Leasing of aircraft, engines and equipment under operating leases

   

   488,514

   

   4,077

   

   8,547

   

   501,138

   

   6.5Third party services

   

   126,406

   

   174,711

   

   249,834

   

   548,951

   

   7.1Marketing and related expenses

   

   

   

   975,149

   

   

   

   975,149

   

   12.6Other

   

   351,303

   

   173,763

   

   152,199

   

   677,265

   

   8.85,690,415

   

   1,447,657

   

   573,415

   

   7,709,487

   

   100.0
  26           Employee Benefits  Personnel costs are composed of the following amounts:  F-81


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  December 31,2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,2007Salaries and bonuses

   

   1,844,562

   

   1,527,390

   

   1,380,304

   

   1,014,222Defined contribution pension plan

   

   27,090

   

   23,619

   

   19,803

   

   13,025Share based payment

   

   15,999

   

   11,407

   

   16,512

   

   11,230Taxes and social contributions

   

   440,777

   

   422,754

   

   365,406

   

   271,2502,328,428

   

   1,985,170

   

   1,782,025

   

   1,309,727
  26.1        Profit-sharing and bonuses  In accordance with the annual union agreement, the Company’s management will pay a share of its profits when it reaches certain performance indicators established according to the annual budget. Consequently, management recorded a provision for payment of this benefit within “Salaries and social charges” totaling R$ 103,358 at December 30, 2010 (2009 – R$ 26,955, 2008 – R$ 60,939 and 2007 – R$ 36,140).  26.2        Share-based payment  (a)          TAM Linhas Aéreas  The Extraordinary Stockholders’ Meeting held on May 16, 2005 authorized that the Board of Directors may grant stock options to employees up to 2% of outstanding shares.  These transactions can be summarized as follows:  Number of stock options outstanding

   

   Weighted average exercise price - R$At December 31, 2007

   

   1,943,510

   

   32.10Exercised

   

   (199,589)

   

   17.21Unvested options forfeited

   

   (42,593)

   

   22.36At December 31, 2008

   

   1,701,328

   

   37.31Unvested options forfeited

   

   (33,888)

   

   42.81At December 31, 2009

   

   1,667,440

   

   36.55Exercised

   

   (165,868)

   

   14.40Unvested options forfeited

   

   (343,924)

   

   39.67Granted

   

   1,051,467

   

   23.99At December 31, 2010

   

   2,209,115

   

   114.61
   F-82


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
   Under the terms of the Plan, the options granted are divided into three equal amounts and employees may exercise one third of their options after three, four and five years, respectively, if still employed by the Company at that time. The options have a contractual term of seven years.
  The options contain a "service condition" as vesting and exercisability of the options depends only on the rendering of a defined period of services by the employee. Dismissed employees have the obligation to satisfy certain conditions in order to maintain their options rights. The options are valued using the Black-Scholes option pricing model. The following table shows details of the various option grants, together with the variables used in valuing the options granted. The exercise price is adjusted by the IGP-M (General Price Index), from the award grant date up to the exercise date.   F-83


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  1st grant

   

   2nd grant

   

   3rd grant

   

   4th grant

   

   1st Specialgrant

   

   2nd Specialgrant

   

   3rd Specialgrant

   

   4th Special grant

   

   Total or weightedaverageDate

   

   12/28/2005

   

   11/30/2006

   

   12/14/2007

   

   05/28/2010

   

   09/27/2007

   

   02/29/2008

   

   04/01/2010

   

   11/03/2010Number of options granted

   

   715,255

   

   239,750

   

   780,311

   

   591,467

   

   230,000

   

   11,595

   

   230,000

   

   230,000Exercise price at grant date

   

   14.40

   

   43.48

   

   39.67

   

   25.11

   

   38.36

   

   30.24

   

   24.59

   

   20.53Risk free interest rate - %

   

   17.93%

   

   13.13%

   

   10.95%

   

   9.38%

   

   10.82%

   

   10.82%

   

   8.34%

   

   10.69%Average term

   

   5.5

   

   5.5

   

   5.5

   

   5.5

   

   4.5

   

   4.5

   

   4.5

   

   4.5Expected dividend yield - %

   

   0.00%

   

   0.32%

   

   0.58%

   

   0.55%

   

   0.58%

   

   0.56%

   

   0.55%

   

   0.55%Share price volatility - %

   

   34.24%

   

   41.29%

   

   42.30%

   

   51.47%

   

   40.48%

   

   43.66%

   

   51.32%

   

   52.14%Market share price - R$

   

   45.00

   

   61.00

   

   44.03

   

   24.30

   

   50.10

   

   35.48

   

   30.31

   

   41.92Fair value at grant date – R$

   

   39.64

   

   41.11

   

   25.09

   

   13.57

   

   28.28

   

   19.33

   

   17.95

   

   29.91Number of options outstanding (i)

   

   266,719

   

   154,724

   

   494,610

   

   591,467

   

   230,000

   

   11,595

   

   230,000

   

   230,000

   

   2,209,115Number of options exercisable (i)

   

   266,719

   

   103,149

   

   248,203

   

   

   

   230,000

   

   11,595

   

   

   

   

   

   859,666Exercise price (adjusted by IGP-M) (i)

   

   19.36

   

   56.89

   

   48.50

   

   26.99

   

   48.33

   

   51.68

   

   49.23

   

   21.81Remaining average term  (i)

   

   0.28

   

   1.28

   

   2.38

   

   5.13

   

   

   

   

   

   2.38

   

   4.50

   

   3.06
  (i) At December 31, 2010.  Share price volatility is determined based on historical share price volatility of the company's quoted shares.   F-84


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (b)       Multiplus  The Extraordinary Stockholders’ Meeting held on October 4, 2010 authorized that the Board of Directors may grant stock options to employees up to 3% of outstanding shares.  These transactions can be summarized as follows:  Number of stock options outstanding

   

   Weighted average exercise price - R$At December 31, 2009Options granted

   1,660,759

   

   18.07At December 31, 2010

   1,660,759

   

   18.07
  Under the plan, options assigned for regular grant are divided into three equal parts and employees can exercise one third of their options of two, three and four years, respectively, if they are still employed by the Company on the occasion. The contractual life of options is of seven years afer the grant of option. The 1st extraordinary grant was divided into two equal parts that can be exercised as follows: half of the options after three years, and another half after four years. The 2nd extraordinary grant was also divided into two equal parts that can be exercised after one year and two years, respectively.  1st grant

   

   2nd grant

   

   1st extraordinary granta

   

   2nd extraordinary granta

   

   Total or weighted averageDate

   

   10/04/2010

   

   11/08/2010

   

   10/04/2010

   

   10/04/2010Number of options granted

   

   98,391

   

   36,799

   

   1,370,999

   

   154,570Exercise price at grant date

   

   27.33

   

   31.55

   

   27.33

   

   27.33Risk free interest rate - %

   

   10,16

   

   10,16

   

   10,16

   

   10,16Average term

   

   5.0

   

   5.0

   

   5.25

   

   4.25Expected dividend yield - %

   

   0.67

   

   0.57

   

   0.67

   

   0.67Share price volatility - %

   

   30.25

   

   31.21

   

   30.25

   

   30.25Market share price - R$

   

   26.90

   

   31.55

   

   26.90

   

   26.90Fair value at grant date – R$

   

   11.58

   

   14.06

   

   16.91

   

   10.53Number of options outstanding (i)

   

   98,391

   

   36,799

   

   1,370,999

   

   154,570

   

   1,660,759Number of options exercisable (i)Exercise price (adjusted by IGP-M) (i)

   

   28.20

   

   32.23

   

   16.51

   

   28.20Remaining average term  (i)

   

   5.0

   

   5.0

   

   5.25

   

   4.25
  (i) At December 31, 2010.  Share price volatility is determined based on historical share price volatility of the company's quoted shares.     F-85


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 27           Net Finance Result  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007Finance incomeInterest income from financial investments

   

   136,642

   

   82,106

   

   192,765

   

   263,291Exchange gains

   

   1,439,709

   

   2,303,737

   

   1,182,239

   

   673,414Other (i)

   

   198,138

   

   26,843

   

   35,357

   

   70,1631,774,489

   

   2,412,686

   

   1,410,361

   

   1,006,868Financial expensesExchange losses

   

   (1,196,576)

   

   (582,192)

   

   (2,440,322)

   

   (280,618)Interest expense (ii)

   

   (416,364)

   

   (421,851)

   

   (535,773)

   

   (438,641)Other

   

   (59,163)

   

   (37,371)

   

   (30,125)

   

   (35,939)(1,672,103)

   

   (1,041,414)

   

   (3,006,220)

   

   (755,198)Finance result, net

   

   102,386

   

   1,371,272

   

   (1,595,859)

   

   251,670
  (i) Includes the reversal of interest expense from the additional tariff of R$ 181,166 occurred in September 2010 (Note 20 (b)).  (ii) The average monthly average for interest capitalization at December 31, 2010 was 0.16% (2009 – 0.18%, 2008 – 0.83% and 2007 1.64%)  The exchange gain recognized at December 31, 2010 with respect to finance lease liabilities amounted to R$ 231,738 (2009 – R$ 1,404,895, 2008 – loss of R$ 1,316,035 and 2007 – gain of R$ 441,266) while interest expense on such finance lease liabilities amounted to R$ 106,103 (2009 - R$ 166,839, 2008 – R$ 122,927 and 2007 – R$ 142,130).  28           Income Tax Expense  (a)Income tax and social contribution expense  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Current tax

   

   (142,000)

   

   (3,972)

   

   (120,956)

   

   (138,956)Deferred tax

   

   (305,054)

   

   (645,567)

   

   831,130

   

   (74,793)(447,054)

   

   (649,539)

   

   710,174

   

   (213,749)
  The tax on TAM's profit before tax differs from the theoretical amount that would arise using the tax rate applicable to earnings of consolidated entities as follows:     (*) See note 4.  F-86


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Profit (loss) before income tax and social contribution

   

   1,115,984

   

   1,897,998

   

   (2,291,713)

   

   691,412Tax calculated at Brazilian tax rates applicable to profits

   

   34%

   

   34%

   

   34%

   

   34%Taxes calculated at statutory rates

   

   (379,434)

   

   (645,319)

   

   779,182

   

   (235,080)Tax effects on permanent (additions) deductionsNon deductible expenses

   

   (34,104)

   

   (24,091)

   

   (7,572)

   

   (5,138)Tax credit on interest paid on own capital

   

   29,080

   

   

   

   

   

   12,612Tax payable on interest received on own capital

   

   (17,654)Unrecognized deferred tax assets on tax losses

   

   (1,539)

   

   (43)Unrecognized tax debits/credits on profits earned abroad

   

   (34,759)

   

   29,876

   

   (67,650)

   

   (1,587)Tax credits related to social contribution on taxes with suspended payment

   

   (3,583)Share-based compensation

   

   (5,580)

   

   (3,879)Other

   

   519

   

   (6,083)

   

   6,214

   

   (15,444)Income tax and social contribution tax credit

   

   (447,054)

   

   (649,539)

   

   710,174

   

   (213,749)Effectiverate %

   

   40.1

   

   34.2

   

   31.0

   

   30.9
  The years from 2005 to 2009 are open to review by Brazilian tax authorities.  (b)           Transitional Tax Regime - RTT  The Transitional Tax Regime has established by Law 11638/07 in order to maintain the same tax rules for determining taxable income irrespective of any changes introduced to accounting practices adopted in Brazil.  The RTT was option for the tax years ended December 31, 2008 and 2009 and the Company opted to apply it and it was used to determine taxable income for those years.  29           Earnings per Share  (a)           Basic  Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company by the weighted average number of shares (common and preferred) issued and outstanding during the year excluding shares purchased by the Company and held as treasury shares.      (*) See note 4.   F-87


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Profit attributable to equity holders of the company

   

   637,420

   

   1,246,778

   

   (1,581,539)

   

   477,663Weighted average number of shares issued (in thousands)

   

   151,448

   

   150,585

   

   150,585

   

   150,585Weighted average Treasury shares (in thousands)

   

   (263)

   

   (402)

   

   (205)Weighted average number of shares outstanding (in thousands)

   

   151,185

   

   150,183

   

   150,380

   

   150,585Basic earnings per share (Reais per share)

   

   4.22

   

   8.30

   

   (10.52)

   

   3.17
  (b)           Diluted  Diluted earnings per share is calculated by adjusting the weighted average number of shares outstanding to assume conversion of all dilutive potential shares. The company has only one category of dilutive potential ordinary shares: stock options.  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2009(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Profit attributable to equity holders of the company

   

   637,420

   

   1,246,778

   

   (1,581,539)

   

   477,663Weighted average number of shares outstanding  (in thousands)

   

   151,185

   

   150,183

   

   150,380

   

   150,585Adjustments for share options  (in thousands)

   

   425

   

   263

   

   

   

   1,046Weighted average number of shares for diluted earnings per share calculation  (in thousands)

   

   151,610

   

   150,446

   

   150,380

   

   151,631Diluted earnings per share (Reais per share)

   

   4.20

   

   8.29

   

   (10.52)

   

   3.15
     (*) See note 4.  F-88


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 30           Cash from operations  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007(Adjusted (*))

   

   (Adjusted (*))

   

   (Adjusted (*))Profit for the year

   

   668,930

   

   1,248,459

   

   (1,581,539)

   

   477,663Adjustments forDeferred income tax and social contribution (Note 30 (a))

   

   305,054

   

   645,567

   

   (831,130)

   

   74,793Depreciation and amortization (Note 25)

   

   699,769

   

   602,386

   

   442,066

   

   260,462(Profit)/loss on disposal of property, plant and equipment / intangible (see below)

   

   (13,671)

   

   (19,918)

   

   8,825

   

   40,291Foreign exchange losses/(gains) and interest expense

   

   97,473

   

   (1,580,891)

   

   1,760,992

   

   (200,508)Other provisions

   

   298,352

   

   (1,598)

   

   68,018

   

   132,118Provision  for contingencies

   

   85,908

   

   69,128

   

   113,119

   

   46,289Reversal of provision of contingencies  (Note 20 (b))

   

   (585,914)Stock options plan

   

   15,999

   

   11,409

   

   16,512

   

   11,230Changes in working capital (excluding the effects of acquisition and exchange differences on consolidation)Financial assets measurement through profit and loss

   

   (446,956)

   

   231,249

   

   898,068

   

   13,132Inventories

   

   14,501

   

   (25,887)

   

   (69,237)

   

   11,171Assets held for sale

   

   

   

   29,274

   

   (17,150)

   

   (69,431)Trade account receivables

   

   (469,709)

   

   24,862

   

   (243,747)

   

   (184,347)Taxes recoverable

   

   (85,681)

   

   21,444

   

   (33,695)

   

   (19,672)Prepaid expenses

   

   (13,878)

   

   371

   

   50,599

   

   (78,560)Judicial deposits

   

   (14,764)Prepaid aircraft maintenance

   

   (1,678)

   

   (25,035)

   

   (165,433)

   

   (53,407)Other assets

   

   67,889

   

   97,876

   

   (77,035)

   

   (93,543)Accounts payable

   

   85,942

   

   (55,113)

   

   59,239

   

   80,039Salaries and social charges

   

   45,622

   

   (10,342)

   

   81,243

   

   42,580Taxes, charges and contributions

   

   323,403

   

   (9,414)

   

   116,367

   

   118,699Deferred income

   

   88,527

   

   323,345

   

   67,646

   

   161,653Other liabilities

   

   59,938

   

   (103,037)

   

   48,800

   

   26,995Financial instruments derivatives

   

   (222,618)

   

   (886,970)

   

   1,191,949

   

   (72,887)Cash generated from  operations

   

   1,002,438

   

   587,165

   

   1,904,477

   

   724,760
  In the cash flow statement, proceeds from sale of property, plant and equipment and intangible comprise:  December 31,

   2010

   

   December 31,

   2009

   

   December 31,

   2008

   

   December 31,

   2007Net book amount – property, plant and equipment / intangible

   

   13,357

   

   15,951

   

   17,029

   

   44,849Profit/(loss) on disposal of property, plant and equipment / intangible

   

   13,671

   

   19,918

   

   (8,825)

   

   (40,291)Proceeds from disposal of property, plant and equipment / intangible

   

   27,028

   

   35,869

   

   8,204

   

   4,558
  Non-cash transactions  The principal non-cash transactions and acquisitions of flight equipment under finance leases discussed in Note 15.   (*) See note 4.  F-89


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 During the period, the Company and its subsidiaries acquired property, plants and equipment in the amount of R$ 1,356,642 of which R$ 1,013,587 was  through financial leases.  31           Commitments and contingencies  (a)           Operating lease commitments  TLA has obligations arising under operating lease contracts. The amounts of these commitments are not recorded in the financial statements. TLA has obligations arising under 69 aircraft under operating lease (2009 – 66 aircraft, 2008 – 65 aircraft and 2007 – 68 aircraft). These agreements have an average term of 96 months and are denominated in U.S. dollars with interest rates based on LIBOR.The lease expense, recognized in the consolidated statement of income in "Cost of services rendered", was R$ 447,112 for the period ended December 31, 2010 (2009 – R$ 525,200, 2008 – R$ 424,637 and 2007 – R$ 488,514), equivalent to approximately US$ 268,342 thousand (2009 – US$ 263.3 thousand, 2008 – US$ 231.5 thousand and  2007 – US$ 250.5 thousand).  For most of the transactions, TAM has given letters of guarantee or deposits as a guarantee.  In addition, to meet the payment conditions established by contract, promissory notes guaranteed by Company were issued, totaling R$ 21,033 for the period ended December 31, 2010 (2009 – R$ 44,540, 2008 – R$  and 2007 – R$ 87,187).  Future aggregate payments denominated in US dollars under these contracts are as follows:  Monthly payments maturing in

   

   December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007Aircraft (*)

   

   2017

   

   1,093,507

   

   1,478,308

   

   2,419,036

   

   1,811,117Engines  (*)

   

   2014

   

   27,190

   

   34,678

   

   60,750

   

   32,241Total

   

   

   

   1,120,697

   

   1,512,986

   

   2,479,786

   

   1,843,358
  (*)Operating leases are denominated in U.S. dollars and the future aggregate payments are presented in R$ translated at the period-end exchange rate.  Operating lease obligations fall due as follows:  Year

   

   December 31,

   2010

   

   December 31,

   2009

   

   December 31,2008

   

   December 31,

   2007No later than one year

   

   348,454

   

   364,915

   

   540,784

   

   412,369Later  than one year and no later than five years

   

   702,206

   

   840,993

   

   1,670,864

   

   1,185,189Later  than five years

   

   70,037

   

   307,078

   

   268,138

   

   245,8001,120,697

   

   1,512,986

   

   2,479,786

   

   1,843,358
  (b)           Commitments for future aircraft leases  (i)      Airbus  In 2005, the Company executed an amendment to an existing contract with Airbus for the firm order of 20 Airbus A320, the remaining nine of which are to be delivered in 2010, with an option for an additional 20 of the same aircraft family (including A319, A320 and A321). In 2006, the Company finalized a contract to acquire a further 37


Airbus aircraft (31 aircraft narrow body aircraft family A320 and six A330 aircraft),with the option for an additional 20, to be delivered in 2012 and 2013.  (*) See note 4.   F-90


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  On June 28, 2007, the Company also executed a Memorandum of Understanding for the purchase of 22 Airbus A350XWB models 800 and 900, with ten more options, for delivery between 2013 and 2018.  Additionally, TLA confirmed the exercise of four options for Airbus A330, two delivered in the first half in 2010, and the other two to be delivered in 2011, related to the agreement signed at the end of 2006. TAM also confirmed the twenty options that had been postponed from 2005 to 2006 anticipated delivery before the end of 2014.  On June 8, 2010, TLA, announced the order of additional 20 brand-new Airbus A320 family aircraft and five A350-900, thus increasing the total number of orders for Airbus aircraft to 176 – including 134 aircraft of A320 family, 15 A330-200 and 27 A350 WXB. The objective of this order is to meet the fleet plan already disclosed by the Company in the year 2009. In respect of the 20 orders for the A320 family (A319, A320 and A321), ten shall be delivered in 2014 and the remaining ten in 2015.  (ii)          Boeing:  In 2006, the Company ordered four Boeing 777-300ERs with options for four aircraft, which were converted to firm orders in 2007. Upon receipt of the four aircraft in 2008, the Company has signedan amendment to an existing contract for two more aircraft and has six firm orders outstanding contracted with Boeing for this type of aircraft, of which four are expected to be delivered in 2012 and two in 2013.  (c)           Insurance  TAM maintains adequate insurance for risks which are expected to cover any liabilities generated by the accident on July 17, 2007, of an Airbus A320 aircraft, considering the agreements already made with and paid to the victims’ families by the insurance company. As of December 31, 2010, 192 (2009 – 192, 2008 – 160) compensation payments were paid to families of the victims and others are under negotiation with the Company’s insurance firm. Management understands that the insurance coverage of these liabilities is adequate to cover all related costs. The Company believes that it will not incur additional or unexpected expenses outside the scope of the insurance agreement which would be TAM’s direct responsibility.  (d)           Contingent liabilities  Contingencies for which it is probable that TAM will be required to make payments are provided for and are discussed in Note 20.  (e)           Contingent assets  (i)            ICMS  On December 17, 2001 the Federal Supreme Court ruled that domestic and international air passenger transportation revenue, as well as international air cargo transportation revenue was no longer subject to ICMS.  However, based on this ruling, ICMS taxation on domestic air cargo transportation revenue is still due. At December 31, 2010, the provision maintained by the Company totaled R$ 4,355 (2009 – R$ 4,772, 2008 – R$ 6,187 and 2007 – R$ 6,059), recorded in “Taxes, charges and contributions”. On December 31, 2010, the installments due in more than one year totaled R$ 16 (2009 – R$ 60, 2008 – R$ 98 and 2007 – R$ 136), classified within “Other liabilities”.  We consider payments of ICMS made between 1989 and 1994 to be amounts paid in error because we believe it was unconstitutional to charge ICMS on air navigation services. TAM Linhas Aéreas has filed claims against various


states in Brazil to claim the amounts paid in error. Rulings on these claims are pending. The total value involved in these claims is R$ 55 million (unaudited). Our policy is to only adjust the value of these claims for inflation at the time that payment is recorded in our financial statements.  F-91


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  (ii)          Indemnification for losses on regulated fares  We are plaintiffs in an action filed against the Brazilian government in 1993 seeking damages for breaking-up of the economic-financial equilibrium of an air transport concession agreement as a result of having to freeze our prices from 1988 to September 1993 in order to maintain operations with the prices set by the Brazilian government during that period. The process is currently being heard before the Federal Regional Court and we are awaiting judgment on appeals we have lodged requesting clarification of the initial decision (which we challenged). The estimated value of the action is R$ 245 million (unaudited), based on a calculation made by an expert witness of the court. This sum is subject to interest accruing from September 1993 and inflation since November 1994. Based on the opinion of our legal advisors and recent rulings handed down by the Supreme Court of Justice in favor of airlines in similar cases (specifically, actions filed by Transbrasil and Varig) we believe that our chance of success is probable. We have not recognized these amounts as receivable in these financial statements and will only do so when the decision is made final.  (iii)Additional airport tariffs (“ATAERO”)  At 2001, TLA filed a claim addressing the legality of the additional airport tariffs (“ATAERO”), which represent an additional 50% on the tariff amount. On December 31, 2010, the amount under discussion totaled approximately R$ 918,492 (2009 - R$ 777,328, 2008 – R$ 641,393 and 2007 – R$ 525,716), (unaudited) not recognized in the financial statements.  32          Segment reporting  As from January 1, 2010 and as result of the creation of Multiplus as a separate company the reporting structure of TAM has been revised and as from that date Company has two operating and reportable segments: Aviation operations and Loyalty Program operations (“Multiplus”). Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker (“CODM”). The note is not being presented on a comparative basis because  the manner in which Multiplus was managed in 2010 is significantly different than the information and the manner in which TAM Loyalty Program was managed up to 2009, therefore the information presented in the 2010 segment would not be comparable to tha TAM Loyalty Program information that existed in the past.   F-92


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 Aviation

   

   Loyalty Program (Multiplus)

   

   Total reported – Information segment

   

   Eliminations

   

   ConsolidatedTotal assets at December, 2010

   

   17,821,680

   

   1,437,896

   

   19,259,576

   

   (4,824,972)

   

   14,459,063
   December 31,2010Aviation

   

   Loyalty Program (Multiplus)

   

   Total reported – Information segment

   

   Eliminations

   

   ConsolidatedRevenuePassenger

   

   9,535,936

   

   504,916

   

   10,040,852

   

   (885,499)

   

   9,155,353Cargo

   

   1,112,683

   

   

   

   1,112,683

   

   

   

   1,112,683Other

   

   1,254,918

   

   12,959

   

   1,267,877

   

   262,870

   

   1,530,747Revenue, gross

   

   11,903,537

   

   517,875

   

   12,421,412

   

   (622,629)

   

   11,798,783Sale taxes and other deductions

   

   (372,060)

   

   (48,032)

   

   (420,092)

   

   

   

   (420,092)Revenue, net

   

   11,531,477

   

   469,843

   

   12,001,320

   

   (622,629)

   

   11,378,691Operating incomeCost of services rendered

   

   (6,956,348)

   

   (274,258)

   

   (7,230,606)

   

   (345,674)

   

   (7,576,280)Depreciation and amortization

   

   (599,184)

   

   

   

   (599,184)

   

   

   

   (599,184)Selling

   

   (2,015,072)

   

   (422)

   

   (2,015,494)

   

   261,799

   

   (1,753,695)General and administrative

   

   (438,314)

   

   (64,891)

   

   (503,205)

   

   30,686

   

   (472,519)Movements in fair value of fuel derivatives

   

   36,585

   

   

   

   36,585

   

   

   

   36,585Operating profit

   

   1,559,144

   

   130,272

   

   1,689,416

   

   (675,818)

   

   1,013,598Financial income

   

   1,739,115

   

   35,374

   

   1,774,489

   

   

   

   1,774,489Financial expenses

   

   (1,669,988)

   

   (2,115)

   

   (1,672,103)

   

   

   

   (1,672,103)Profit (loss) before income tax and social contribution

   

   1,628,271

   

   163,531

   

   1,791,802

   

   (675,818)

   

   1,115,984Income tax and social contribution

   

   (401,909)

   

   (45,145)

   

   (447,054)

   

   

   

   (447,054)Profit/(loss) for the year (all continuing operations)

   

   1,226,362

   

   118,386

   

   1,344,748

   

   (675,818)

   

   668,930
  33          Related-party transactions  The company is controlled by TAM - Empreendimentos e Participações S.A. (incorporated in Brazil), which is owned by the Amaro family, and which owns 89.42% of the Company's common shares and 24.67% of the Company's preferred shares. The remaining shares are widely held.  Purchases and sales of goods and services were carried out as follows:  (i)   Sale and purchases of goods and services  For the period ended December 31, 2010, TAM received from TAM Viação Executiva S.A. ("Marília"), a company under common control, R$ 153 (2009 - R$ 65, 2008 – R$ 130 and 2007 – R$ 820), as reimbursement for the use of its infra-structure being mainly the importation areas and human resources. This amount was credited to "cost of services rendered". TAM Marília and TAM have common indirect stockholders.  On May 11, 2007, TLA and TAM Marília agreed to share the use of a hangar located by Congonhas airport São Paulo, for a period of 10 years. TLA paid R$ 15,500 upfront to TAM Marília and is entitled to use the facilities and


the infra-structure of the hangar, providing the same cargo services, as those previously provided in the cargo terminal. The total amount was established based on valuation reports performed by independent companies, reflecting the economic premium obtained by the use of such a location in TAM's cargo activities. The amount recognized in the income statement for the period ended December 31, 2010 amounted to R$ 1,550 (2009 - R$ 1,550, 2008 – R$ 1,550 and 2007- R$ 903).  F-93


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  The Company signed a contract in March 2005 with TAM Milor Taxi Aéreo, Representações, Marcas e Patentes S.A. (“TAM Milor”) for the right to use the “TAM” brand. This contract is valid for a term equal to the current passenger air transport concession of TAM and establishes a monthly fee, adjusted annually by  the IGP-M inflation index, totaling R$ 11,151 (December 31, 2009 – R$ 16,665, 2008 – R$ 15,429 and 2007 – R$ 14,331) for the the income statement up to June 30,2010 , recorded as “Operating expenses”. With the acquisition of TAM Milor by its subsidiary TLA, on July 13, 2010, this expense is no longer incurred.  (ii) Key management compensation  The key management personnel of TAM include the members of the Board of Directors, the president, vice presidents and statutory directors. Their remuneration was as follows:  December 31,2010

   

   December 31,2009

   

   December 31,2008

   

   December 31,2008Salaries

   

   7,681

   

   9,497

   

   9,031

   

   9,262Profit share and bonuses

   

   12,515

   

   9,875

   

   7,326

   

   18,197Share-based payment

   

   15,999

   

   11,409

   

   16,512

   

   11,230Other long-term benefits

   

   

   

   810

   

   476

   

   28036,195

   

   31,591

   

   33,345

   

   38,969
  34           Events occurring after the reporting period  (a)           LATAM  On January 18, 2011, the Company published a significant event, informing that TAM S.A. and LAN Airlines S.A. signed two agreements namedImplementation AgreementandExchange Offer Agreement, regulating the final terms and conditions for the association contemplated in the Memorandum of Understanding entered into on August 13, 2010. The agreements define the new structure that will be formed by the association of the two companies for formation of the Group LATAMAirlinesS.A., as well as the form of corporate management that will coordinate this new structure. The operation agreed between the parties depends on the approval of proper authorities from Brazil and Chile.  (b)           Maintenance agreements (Power-by-the-hour)  On October 21, 2010, the Company entered into an agreement withIAE International Aero Engines AGfor inclusion of 34 V2500 engines in the engine maintenance agreement namedPower-by-the-houreffective as from January  2011.  (c)           Reduction of capital - Multiplus  On March 18, 2011, the Company approved the capital reduction, currently considered  to be excessive, from R$ 692,384 to R$ 92,370, resulting in a reduction of R$ 600,013. The capital will be reduced without the cancellation of any shares and without the alteration of the percentage of interest held by shareholders in the Company’s capital


stock, with the resulting amendment of Article5 of the Bylaws (“Capital Reduction”). As a result of the reduction, the  shareholders of Multiplus will be reimbursed a total  of R$ 3.72 per share payable in cash. The total amount to be reimbursed to shareholders will be paid at the end of the period during which creditors may oppose the capital reduction.  F-94


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  (d)           TAM Milor – Merger  On February 28, 2011, the Company merged its subsidiary TAM Milor, acquired on July 13, 2010 (see Note 1.1).  (e)           TRIP Linhas Aéreas S/A. – “TRIP”  On March 29,2011, the Company and TRIP Linhas Aéreas S/A. signed a Term Sheet, with  no binding effect, in order to identify possible opportunities for strengthening and expanding their business through the development of a strategic alliance  complementary to the existing Codeshare Agreement. Pursuant to the Term Sheet signed,  once executed the binding documents and verified the precedent conditions to be mutually agreed (including the approval by the applicable authorities), TAM will acquire at the end a minority stake in TRIP representative of 31% of its total capital stock and 25% of its voting capital stock and the remaining in preferred shares.  (f)           Payment of dividends  On April 4, 2011, the Annual General Meeting has approved to distribute complementary dividends in the amount  of R$ 30,277. The total of amount dividends distributed with respect to 2010 was R$ 181,664.  35           Consolidation schedules  In accordance with SEC rule SX 3-10 the Company is presenting the consolidation schedules for the following entities: TAM S.A. (parent company and guarantor), TAM Linhas Aéreas S.A. (guarantor), TAM Capital (subsidiary issuer), TAM Financial 1, TAM Financial 2, TP Franchising, TAM Mercosur, TAM Fidelidade (non guarantors) and Multiplus.  F-95


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (a) Income statement  (i) For the year ended December 31, 2010  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedRevenue

   

   

   

   11,207,997

   

   

   

   469,843

   

   323,481

   

   (622,630)

   

   11,378,691Operating expenses

   

   (18,894)

   

   (10,504,186)

   

   (4)

   

   (339,571)

   

   (308,804)

   

   769,781

   

   (10,401,678)Share of earnings of subsidiaries

   

   675,821

   

   73,575

   

   

   

   

   

   

   

   (749,396)Operating profit/(loss) before movements in fair value of fuel derivatives

   

   656,927

   

   777,386

   

   (4)

   

   130,272

   

   14,677

   

   (602,245)

   

   977,013Movements in fair value of fuel derivatives

   

   

   

   36,585

   

   

   

   

   

   

   

   

   

   36,585Operating profit/(loss)

   

   656,927

   

   813,971

   

   (4)

   

   130,272

   

   14,677

   

   (602,245)

   

   1,013,598Finance income

   

   33,776

   

   1,513,246

   

   148,746

   

   35,374

   

   250,561

   

   (207,214)

   

   1,774,489Finance costs

   

   (49,123)

   

   (1,305,620)

   

   (177,868)

   

   (2,115)

   

   (308,006)

   

   170,629

   

   (1,672,103)Profit before income tax and social contribution

   

   641,580

   

   1,021,597

   

   (29,126)

   

   163,531

   

   (42,768)

   

   (638,830)

   

   1,115,984Income tax and social contribution

   

   (4,160)

   

   (395,011)

   

   

   

   (45,145)

   

   (2,738)

   

   

   

   (447,054)Profit for the year

   

   637,420

   

   626,586

   

   (29,126)

   

   118,386

   

   (45,506)

   

   (638,830)

   

   668,930Attributable toEquity shareholders of TAM S.A.

   

   637,420

   

   626,586

   

   (29,126)

   

   118,386

   

   (45,506)

   

   (670,340)

   

   637,420Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   31,510

   

   31,510
     F-96


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (ii) For the year ended December 31, 2009  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedRevenue

   

   

   

   9,557,732

   

   

   

   

   

   242,378

   

   (34,604)

   

   9,765,506Operating expenses

   

   (4,020)

   

   (7,934,199)

   

   (12)

   

   (128)

   

   (210,020)

   

   (1,407,253)

   

   (9,555,632)Share of earnings of subsidiaries

   

   1,271,134

   

   

   

   

   

   

   

   

   

   (1,271,134)Operating profit/(loss) before movements in fair value of fuel derivatives

   

   1,267,114

   

   1,622,993

   

   (12)

   

   (128)

   

   32,358

   

   (2,712,451)

   

   209,874Movements in fair value of fuel derivatives

   

   

   

   295,797

   

   

   

   

   

   

   

   21,055

   

   316,852Operating profit/(loss)

   

   1,267,114

   

   1,918,790

   

   (12)

   

   (128)

   

   32,,358

   

   (1,420,262)

   

   526,726Finance income

   

   33,755

   

   1,959,353

   

   235,992

   

   

   

   183,586

   

   

   

   2,412,686Finance costs

   

   (53,704)

   

   (615,818)

   

   (231,014)

   

   

   

   (119,823)

   

   (21,055)

   

   (1,041,414)Profit before income tax and social contribution

   

   1,247,165

   

   3,262,325

   

   4,966

   

   (128)

   

   96,121

   

   (2,712,451)

   

   1,897,998Income tax and social contribution

   

   (387)

   

   (644,723)

   

   

   

   

   

   (4,429)

   

   

   

   (649,539)Profit for the year

   

   1,246,778

   

   2,617,602

   

   4,966

   

   (128)

   

   91,692

   

   (2,712,451)

   

   1,248,459Attributable toEquity shareholders of TAM S.A.

   

   1,246,778

   

   2,617,602

   

   4,966

   

   (128)

   

   91,692

   

   (2,712,451)

   

   1,248,459Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   1,681

   

   1,681
     F-97


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (iii) For the year ended December 31, 2008  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedRevenue

   

   

   

   10,253,235

   

   

   

   

   

   293,990

   

   (34,181)

   

   10,513,044Operating expenses

   

   (4,006)

   

   (9,721,788)

   

   (134)

   

   

   

   (243,824)

   

   34,315

   

   (9,935,437)Share of earnings (loss) of subsidiaries

   

   (1,348,470)

   

   18,221

   

   

   

   

   

   

   

   1,330,249Operating profit/(loss) before movements in fair value of fuel derivatives

   

   (1,352,476)

   

   549,668

   

   (134)

   

   

   

   50,166

   

   1,330,383

   

   577,607Movements in fair value of fuel derivatives

   

   

   

   (1,273,461)

   

   

   

   

   

   

   

   

   

   (1,273,461)Operating profit/(loss)

   

   (1,352,476)

   

   (723,793)

   

   (134)

   

   

   

   50,166

   

   134

   

   (678,849)Finance income

   

   48,940

   

   1,335,626

   

   213,804

   

   

   

   23,086

   

   (211,095)

   

   1,410,361Finance costs

   

   (66,265)

   

   (2,907,168)

   

   (393,064)

   

   

   

   (30,080)

   

   390,357

   

   (3,006,220)Profit before income tax and social contribution

   

   (1,369,801)

   

   (2,295,335)

   

   (179,394)

   

   

   

   43,172

   

   1,509,645

   

   (2,291,713)Income tax and social contribution

   

   9,694

   

   708,276

   

   

   

   

   

   (7,796)

   

   

   

   710,174Profit for the year

   

   (1,360,107)

   

   (1,587,059)

   

   (179,394)

   

   

   

   35,376

   

   1,509,645

   

   (1,581,539)Attributable toEquity shareholders of TAM S.A.

   

   (1,360,107)

   

   (1,587,059)

   

   (179,394)

   

   

   

   35,376

   

   1,508,777

   

   1,582,407Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   868

   

   868
    F-98


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (iv) For the year ended December 31, 2007  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedRevenue

   

   

   

   7,823,163

   

   

   

   

   

   225,876

   

   (30,220)

   

   8,018,819Operating expenses

   

   (7,341)

   

   (7,518,660)

   

   (401)

   

   

   

   (215,352)

   

   32,267

   

   (7,709,487)Share of earnings (loss) of subsidiaries

   

   510,057

   

   3,577

   

   (583)

   

   

   

   (9,842)

   

   (503,209)Operating profit/(loss) before movements in fair value of fuel derivatives

   

   502,716

   

   308,080

   

   (984)

   

   

   

   682

   

   (501,162)

   

   309,332Movements in fair value of fuel derivatives

   

   

   

   130,410

   

   

   

   

   

   

   

   

   

   130,410Operating profit/(loss)

   

   502,716

   

   438,490

   

   (984)

   

   

   

   682

   

   (501,162)

   

   439,742Finance income

   

   59,561

   

   942,082

   

   45,105

   

   

   

   16,027

   

   (55,907)

   

   1,006,868Finance costs

   

   (62,048)

   

   (722,547)

   

   (29,024)

   

   

   

   (31,585)

   

   90,006

   

   (755,198)Profit before income tax and social contribution

   

   500,229

   

   658,025

   

   15,097

   

   

   

   (14,876)

   

   (467,063)

   

   691,412Income tax and social contribution

   

   4,900

   

   (222,255)

   

   

   

   

   

   3,606

   

   

   

   (213,749)Profit for the year

   

   505,129

   

   435,770

   

   15,097

   

   

   

   (11,270)

   

   (467,063)

   

   477,663Attributable toEquity shareholders of TAM S.A.

   

   505,129

   

   435,770

   

   15,097

   

   

   

   (16,117)

   

   (462,393)

   

   477,486Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   177

   

   177
    F-99


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
   (b)Balance sheet  (i)    As at December 31, 2010
  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedAssetsCurrent assetsCash and cash equivalents

   

   113,913

   

   129,656

   

   182,610

   

   111,235

   

   474,979

   

   (174)

   

   1,012,220Financial assets at fair value through profit and loss

   

   125,905

   

   464,519

   

   

   

   757,781

   

   56,177

   

   3,317

   

   1,407,698Trade accounts  receivable

   

   2,000

   

   1,408,058

   

   

   

   68,699

   

   121,385

   

   (43,361)

   

   1,556,781Inventories

   

   

   

   196,089

   

   

   

   

   

   2,671

   

   

   

   198,760Taxes recoverable

   

   42,790

   

   76,540

   

   

   

   3,769

   

   9,080

   

   (74,621)

   

   57,557Income tax and social contribution  recoverable

   

   

   

   18,424

   

   

   

   

   

   

   

   

   

   18,424Interest on own capital and dividends

   

   141,103

   

   

   

   

   

   

   

   

   

   (141,103)Prepaid expenses

   

   343

   

   160,553

   

   

   

   

   

   1,892

   

   162,788

   

   162,788Related parties

   

   

   

   

   

   

   

   388,507

   

   1,300

   

   (389,807)Derivative financial instruments

   

   

   

   9,895

   

   

   

   

   

   

   

   

   

   9,895Other receivables

   

   

   

   60,154

   

   

   

   853

   

   28,926

   

   (8,700)

   

   81,234Total current assets

   

   426,054

   

   2,523,888

   

   182,610

   

   1,330,844

   

   696,411

   

   (654,450)

   

   4,505,357Non-current assetsRestricted cash

   

   

   

   94,492

   

   

   

   

   

   

   

   3,813

   

   98,305Financial assets at fair value through profit and loss

   

   

   

   

   

   

   

   50,280

   

   3,813

   

   (3,813)

   

   50,280Deposits in guarantee

   

   

   

   51,778

   

   

   

   

   

   2,554

   

   (2,554)

   

   51,778Related parties

   

   16,504

   

   30,406

   

   

   

   

   

   246,412

   

   (293,322)Deferred income tax and social contribution

   

   15,531

   

   

   

   

   

   1,217

   

   

   

   (16,748)Prepaid aircraft maintenance

   

   

   

   410,306

   

   

   

   

   

   

   

   

   

   410,306Subsidiaries

   

   

   

   

   

   128,400

   

   

   

   

   

   (128,400)Other non-current assets

   

   

   

   39,918

   

   

   

   

   

   116

   

   (19,429)

   

   20,595Derivative financial instruments

   

   

   

   6,568

   

   

   

   

   

   

   

   

   

   6,568Investments

   

   2,478,464

   

   124,095

   

   

   

   

   

   

   

   (2,602,559)Property, plant and equipment

   

   

   

   8,675,544

   

   

   

   935

   

   35,371

   

   

   

   8,711,850Intangible assets

   

   38,262

   

   458,810

   

   

   

   20,273

   

   124,941

   

   

   

   642,2862,548,935

   

   9,891,917

   

   128,400

   

   72,706

   

   413,198

   

   (3,063,186)

   

   9,991,968Total assets

   

   2,974,989

   

   12,415,805

   

   311,010

   

   1,403,550

   

   1,109,608

   

   (3,717,637)

   

   14,497,325
  F-100


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedLiabilitiesCurrent liabilitiesAccounts payable

   

   22

   

   458,725

   

   

   

   16,579

   

   109,977

   

   (62,938)

   

   522,364Financial liabilities

   

   347,800

   

   1,199,500

   

   5,529

   

   

   

   19,264

   

   

   

   1,572,093Salaries and social charges

   

   2,848

   

   452,524

   

   

   

   5,961

   

   5,498

   

   

   

   466,831Deferred income

   

   

   

   1,169,096

   

   

   

   614,550

   

   17,536

   

   

   

   1,801,181Taxes, charges and contributions

   

   

   

   353,663

   

   

   

   2,328

   

   26,819

   

   (74,621)

   

   308,189Income tax and social contribution

   

   12,036

   

   2,303

   

   

   

   

   

   

   

   

   

   14,339Interest on own capital and dividends

   

   152,047

   

   140,125

   

   

   

   1,223

   

   

   

   (141,102)

   

   152,293Related parties

   

   

   

   331,878

   

   

   

   3,923

   

   

   

   (335,801)Derivative financial instruments

   

   

   

   19,105

   

   

   

   

   

   1,469

   

   

   

   20,574Other current liabilities

   

   19

   

   132,926

   

   

   

   382

   

   4,887

   

   (2,556)

   

   135,658514,770

   

   4,259,845

   

   5,529

   

   644,946

   

   185,449

   

   (617,018)

   

   4,993,522Non-current liabilitiesFinancial liabilities

   

   

   

   4,802,140

   

   493,850

   

   

   

   490,858

   

   

   

   5,786,848Derivative financial instruments

   

   

   

   15,286

   

   

   

   

   

   

   

   

   

   15,286Deferred income

   

   

   

   66,420

   

   

   

   

   

   

   

   

   

   66,420Provisions

   

   30

   

   193,797

   

   

   

   

   

   10,618

   

   (174)

   

   204,271Provion for loss  on investments

   

   

   

   241,933

   

   

   

   

   

   

   

   (241,933)Refinanced taxes payable under Fiscal Recovery Program

   

   

   

   333,141

   

   

   

   

   

   83,534

   

   

   

   416,675Related parties

   

   

   

   261,678

   

   

   

   

   

   222,438

   

   (484,116)Deferred income tax and social contribution

   

   38,282

   

   127,925

   

   

   

   

   

   

   

   (16,747)

   

   149,440Other non-current liabilities

   

   13

   

   234,533

   

   

   

   

   

   

   

   2,926

   

   237,47238,325

   

   6,276,853

   

   493,850

   

   

   

   807,448

   

   (740,045)

   

   6,876,412Total liabilities

   

   553,095

   

   10,536,699

   

   499,380

   

   644,946

   

   992,897

   

   (1,357,063)

   

   11,869,934EquityCapital and reserves attributable to equity share holders of TAM S.A.Share capital

   

   819,892

   

   752,727

   

   88

   

   692,385

   

   187,174

   

   (1,632,375)

   

   819,892Capital reserve

   

   120,605

   

   194,937

   

   

   

   (21,784)

   

   

   

   (173,153)

   

   120,605Profit reserve

   

   895,592

   

   815,935

   

   

   

   88,002

   

   (13,697)

   

   (890,240)

   

   895,592Carrying value adjustment

   

   585,824

   

   115,508

   

   

   

   

   

   (17,633)

   

   (97,875)

   

   585,824Accumulated deficit

   

   

   

   

   

   (188,458)

   

   

   

   (39,133)

   

   (227,590)2,421,913

   

   1,879,107

   

   (188,458)

   

   758,603

   

   116,711

   

   (2,566,052)

   

   2,421,913Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   205,478

   

   205,478Total equity

   

   2,421,913

   

   1,879,107

   

   (188,458)

   

   758,603

   

   116,711

   

   (2,360,574)

   

   2,627,391Total liabilities and equity

   

   2,975,008

   

   12,415,805

   

   311,010

   

   1,403,549

   

   1,109,608

   

   (3,717,637)

   

   14,497,325
  F-101


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (ii)          As at December 31, 2009  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedAssetsCurrent assetsCash and cash equivalents

   

   316

   

   979,448

   

   22,812

   

   

   

   72,596

   

   

   

   1,075,172Financial assets at fair value through profit and loss

   

   420,655

   

   (115,498)

   

   159,175

   

   

   

   546,690

   

   

   

   1,011,022Trade accounts  receivable

   

   

   

   1,087,560

   

   

   

   

   

   77,486

   

   (43,067)

   

   1,121,979Inventories

   

   

   

   194,029

   

   

   

   

   

   1,063

   

   

   

   195,092Taxes recoverable

   

   35,852

   

   55,597

   

   

   

   

   

   7,819

   

   

   

   99,268Income tax and social contribution  recoverable

   

   

   

   (1,418)

   

   

   

   

   

   1,418Prepaid expenses

   

   223,404

   

   147,650

   

   

   

   858

   

   

   

   (223,002)

   

   148,910Other receivables

   

   

   

   139,004

   

   

   

   

   

   45,305

   

   (42,332)

   

   141,997Total current assets

   

   680,227

   

   2,486,372

   

   181,987

   

   858

   

   752,377

   

   (308,401)

   

   3,793,420Non-current assetsRestricted cash

   

   

   

   79,370

   

   

   

   

   

   2,593

   

   (2,593)

   

   79,730Deposits in guarantee

   

   

   

   59,520

   

   

   

   

   

   

   

   

   

   59,520Deferred income tax and social contribution

   

   15,164

   

   178,712

   

   

   

   

   

   

   

   

   

   193,876Prepaid aircraft maintenance

   

   

   

   408,628

   

   

   

   

   

   

   

   

   

   408,628Investiments

   

   1,681,229

   

   (45,887)

   

   

   

   

   

   

   

   (1,635,342)Related parties

   

   18,714

   

   9,101

   

   179,450

   

   

   

   26,518

   

   (233,783)Other non-current assets

   

   

   

   29,541

   

   

   

   

   

   

   

   1

   

   29,542Property, plant and equipment

   

   

   

   7,858,137

   

   

   

   

   

   275,891

   

   

   

   8,134,028Intangible assets

   

   

   

   237,909

   

   

   

   3,783

   

   9

   

   

   

   241,7011,715,107

   

   8,815,031

   

   179,450

   

   3,783

   

   305,011

   

   (1,871,717)

   

   9,146,665Total assets

   

   2,395,334

   

   11,301,412

   

   361,437

   

   4,641

   

   1,057,379

   

   (2,180,118)

   

   12,940,085
  F-102


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedLiabilitiesCurrent liabilitiesAccounts payable

   

   

   

   396,608

   

   

   

   852

   

   76,548

   

   (43,026)

   

   430,982Financial liabilities

   

   184,502

   

   969,392

   

   5,778

   

   

   

   85,013

   

   

   

   1,244,685Salaries and social charges

   

   39

   

   304,091

   

   

   

   

   

   3,477

   

   

   

   307,607Deferred income

   

   

   

   1,685,910

   

   

   

   

   

   10,749

   

   1,662

   

   1,698,321Taxes, charges and contributions

   

   9,654

   

   164,695

   

   

   

   

   

   5,313

   

   

   

   179,662Interest on own capital and dividends

   

   233,985

   

   223,001

   

   

   

   

   

   

   

   (223,001)

   

   233,985Derivative financial instruments

   

   

   

   207,160

   

   

   

   

   

   28,567

   

   

   

   235,727Related parties

   

   

   

   47,024

   

   

   

   

   

   

   

   (47,024)Other current liabilities

   

   

   

   123,696

   

   

   

   

   

   

   

   

   

   123,696428,180

   

   4,121,577

   

   5,778

   

   852

   

   209,667

   

   (311,389)

   

   4,454,665Non-current liabilitiesFinancial liabilities

   

   332,804

   

   4,565,248

   

   514,902

   

   

   

   511,783

   

   

   

   5,924,737Derivative financial instruments

   

   

   

   5,077

   

   

   

   

   

   1,211

   

   

   

   6,288Deferred income

   

   

   

   100,169

   

   

   

   

   

   

   

   

   

   100,169Provisions

   

   (95)

   

   661,817

   

   

   

   

   

   4,851

   

   

   

   666,573Refinanced taxes payable under Fiscal Recovery Program

   

   

   

   319,671

   

   

   

   

   

   

   

   

   

   319,671Related parties

   

   

   

   79,657

   

   

   

   3,916

   

   149,810

   

   (233,384)Other non-current liabilities

   

   

   

   162,848

   

   

   

   

   

   

   

   11,099

   

   173,946332,709

   

   5,894,487

   

   514,902

   

   3,916

   

   667,655

   

   (222,285)

   

   7,191,384Total liabilities

   

   760,889

   

   10,016,064

   

   520,680

   

   4,768

   

   877,322

   

   (533,674)

   

   11,646,049EquityCapital and reserves attributable to equity share holders of TAM S.A.Share capital

   

   675,497

   

   752,730

   

   88

   

   1

   

   161,891

   

   (914,710)

   

   675,497Other reserves

   

   615,131

   

   523,680

   

   

   

   

   

   35,071

   

   (558,751)

   

   615,131Accumulated deficit

   

   

   

   

   

   (159,331)

   

   (128)

   

   

   

   159,4591,290,628

   

   1,276,410

   

   (159,243)

   

   (127)

   

   196,962

   

   (1,314,002)

   

   1,290,628Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   3,408

   

   3,408Total equity

   

   1,290,628

   

   1,276,410

   

   (159,243)

   

   (127)

   

   196,962

   

   (1,310,594)

   

   1,294,036Total liabilities and equity

   

   2,051,517

   

   11,292,474

   

   361,437

   

   4,641

   

   1,074,284

   

   (1,844,268)

   

   12,940,085
  F-103


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (iii)         As at December 31, 2008  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedAssetsCurrent assetsCash and cash equivalents

   

   251,269

   

   372,496

   

   385

   

   

   

   33,568

   

   14,067

   

   671,785Financial assets at fair value through profit and loss

   

   156,837

   

   1,060,274

   

   435,653

   

   

   

   39,582

   

   (450,075)

   

   1,242,271Trade accounts  receivable

   

   

   

   1,113,338

   

   

   

   

   

   96,401

   

   (52,500)

   

   1,157,239Inventories

   

   

   

   168,091

   

   

   

   

   

   1,331

   

   

   

   169,422Taxes recoverable

   

   26,650

   

   84,529

   

   

   

   

   

   9,533

   

   

   

   120,712Prepaid expenses

   

   419

   

   86,559

   

   1,580

   

   

   

   

   

   60,723

   

   149,281Other receivables

   

   47,447

   

   153,005

   

   

   

   

   

   40,516

   

   (143,024)

   

   97,944482,622

   

   3,038,292

   

   437,618

   

   

   

   220,931

   

   (570,809)

   

   3,608,654Non-current assets held for sale

   

   

   

   62,134

   

   

   

   

   

   

   

   

   

   62,134Total current assets

   

   482,622

   

   3,100,426

   

   437,618

   

   

   

   220,931

   

   (570,809)

   

   3,670,788Non-current assetsDeposits in guarantee

   

   

   

   116,135

   

   

   

   

   

   

   

   

   

   116,135Deferred income tax and social contribution

   

   15,769

   

   823,674

   

   

   

   

   

   

   

   

   

   839,443Prepaid aircraft maintenance

   

   

   

   432,839

   

   

   

   

   

   

   

   (49,246)

   

   383,593Other non-current assets

   

   847

   

   108,347

   

   108,608

   

   

   

   2,147

   

   (62,045)

   

   157,904Investments

   

   664,549

   

   

   

   

   

   

   

   

   

   (664,549)Property, plant and equipment

   

   798

   

   8,081,888

   

   

   

   

   

   14,665

   

   

   

   8,097,351Intangible assets

   

   

   

   152,078

   

   

   

   

   

   

   

   14

   

   152,092681,963

   

   9,714,961

   

   108,608

   

   

   

   16,812

   

   (775,826)

   

   9,746,518Total assets

   

   1,164,585

   

   12,815,387

   

   546,226

   

   

   

   237,743

   

   (1,346,635)

   

   13,417,306
    F-104


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedLiabilitiesCurrent liabilitiesAccounts payable

   

   

   

   395,966

   

   

   

   

   

   98,726

   

   (8,597)

   

   486,095Financial liabilities

   

   28,542

   

   881,611

   

   9,336

   

   

   

   

   

   (9,336)

   

   910,153Salaries and social charges

   

   6,013

   

   353,469

   

   

   

   

   

   24,873

   

   (66,404)

   

   317,951Deferred income

   

   

   

   1,084,544

   

   

   

   

   

   21,175

   

   

   

   1,105,719Taxes, charges and contributions

   

   

   

   245,910

   

   

   

   

   

   427

   

   

   

   246,337Interest on own capital and dividends

   

   599

   

   47,057

   

   

   

   

   

   

   

   (47,057)

   

   599Derivative financial instruments

   

   

   

   1,021,928

   

   

   

   

   

   

   

   

   

   1,021,928Other current liabilities

   

   6

   

   159,160

   

   

   

   

   

   167,317

   

   (18,226)

   

   149,09135,160

   

   4,189,645

   

   9,336

   

   

   

   153,352

   

   (149,620)

   

   4,237,874Non-current liabilitiesFinancial liabilities

   

   500,000

   

   6,678,873

   

   701,100

   

   

   

   

   

   (701,100)

   

   7,178,873Derivative financial instruments

   

   

   

   107,057

   

   

   

   

   

   

   

   

   

   107,057Deferred income

   

   

   

   369,210

   

   

   

   

   

   

   

   

   

   369,210Provisions

   

   (30)

   

   942,039

   

   

   

   

   

   5,791

   

   

   

   947,800Other non-current liabilities

   

   (10,563)

   

   282,992

   

   

   

   

   

   

   

   10,564

   

   282,992489,407

   

   8,380,171

   

   701,100

   

   

   

   5,791

   

   (690,536)

   

   8,885,932Total liabilities

   

   524,567

   

   12,569,816

   

   710,436

   

   

   

   159,143

   

   (840,156)

   

   13,123,806EquityCapital and reserves attributable to equity share holders of TAM S.A.Share capital

   

   675,497

   

   752,727

   

   88

   

   

   

   43,728

   

   (796,543)

   

   675,497Other reserves

   

   224,463

   

   149,467

   

   

   

   

   

   8,749

   

   (158,216)

   

   224,463Retained earnings/ (Accumulated deficit)

   

   (260,740)

   

   (655,825)

   

   (164,298)

   

   

   

   26,123

   

   444,046

   

   (610,694)639,220

   

   246,369

   

   (164,210)

   

   

   

   78,600

   

   (510,713)

   

   289,266Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   4,234

   

   4,234Total equity

   

   639,220

   

   246,369

   

   (164,210)

   

   

   

   78,600

   

   (506,479)

   

   293,500Total liabilities and equity

   

   1,163,787

   

   12,816,185

   

   546,226

   

   

   

   237,743

   

   (1,346,635)

   

   13,417,306
   F-105


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (ii)          As at December 31, 2007  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedAssetsCurrent assetsCash and cash equivalents

   

   386,295

   

   20,407

   

   518

   

   

   

   60,759

   

   (1,441)

   

   466,538Financial assets at fair value through profit and loss

   

   125,470

   

   2,020,057

   

   541,950

   

   

   

   

   

   (547,138)

   

   2,140,339Trade accounts  receivable

   

   

   

   939,050

   

   

   

   

   

   63,373

   

   (64,495)

   

   937,928Inventories

   

   

   

   99,459

   

   

   

   

   

   726

   

   

   

   100,185Taxes recoverable

   

   16,150

   

   62,213

   

   

   

   

   

   8,654

   

   

   

   87,017Prepaid expenses

   

   438

   

   144,551

   

   1,200

   

   

   

   

   

   49,697

   

   195,886Derivative financial instruments

   

   

   

   62,967

   

   

   

   

   

   

   

   

   

   62,967Other receivables

   

   55,359

   

   109,350

   

   

   

   

   

   

   

   (90,605)

   

   74,104583,712

   

   3,458,054

   

   543,668

   

   

   

   133,513

   

   (653,982)

   

   4,064,964Non-current assets held for sale

   

   

   

   62,286

   

   

   

   

   

   

   

   

   

   62,286Total current assets

   

   583,712

   

   3,520,340

   

   543,668

   

   

   

   133,512

   

   (653,982)

   

   4,127,250Non-current assetsDeposits in guarantee

   

   

   

   148,565

   

   

   

   

   

   12,923

   

   

   

   161,488Deferred income tax and social contribution

   

   2,629

   

   2,122

   

   

   

   

   

   

   

   

   

   4,751Prepaid aircraft maintenance

   

   

   

   119,633

   

   

   

   

   

   

   

   

   

   119,633Other non-current assets

   

   1,164

   

   117,004

   

   9,983

   

   

   

   1,964

   

   (9,746)

   

   104,709Investments

   

   1,992,691

   

   

   

   

   

   

   

   

   

   (1,992,691)Property, plant and equipment

   

   

   

   5,754,374

   

   

   

   

   

   (1,785)

   

   12,910

   

   5,781,159Intangible assets

   

   

   

   34,236

   

   

   

   

   

   

   

   12

   

   34,2481,996,484

   

   6,175,934

   

   9,983

   

   

   

   13,102

   

   (1,989,515)

   

   6,205,988Total assets

   

   2,580,196

   

   9,696,274

   

   553,651

   

   

   

   146,614

   

   (2,643,497)

   

   10,333,238
    F-106


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedLiabilitiesCurrent liabilitiesAccounts payable

   

   

   

   407,156

   

   

   

   

   

   66,894

   

   (47,193)

   

   426,856Financial liabilities

   

   23,147

   

   1,174,839

   

   7,076

   

   

   

   

   

   (7,076)

   

   1,197,986Salaries and social charges

   

   43

   

   345,559

   

   

   

   

   

   1,131

   

   (110,026)

   

   236,707Deferred income

   

   

   

   1,027,616

   

   

   

   

   

   21,898

   

   

   

   1,049,514Taxes, charges and contributions

   

   11

   

   128,495

   

   

   

   

   

   629

   

   

   

   129,135Interest on own capital and dividends

   

   

   

   55,361

   

   

   

   

   

   

   

   (23,308)

   

   32,052Other current liabilities

   

   72,618

   

   34,817

   

   

   

   

   

   23,330

   

   

   

   130,76595,819

   

   3,173,843

   

   7,076

   

   

   

   113,882

   

   (187,604)

   

   3,203,016Non-current liabilitiesFinancial liabilities

   

   500,000

   

   3,408,700

   

   531,390

   

   

   

   

   

   (531,390)

   

   3,908,700Deferred income

   

   

   

   357,769

   

   

   

   

   

   

   

   

   

   357,769Provisions

   

   (14)

   

   761,077

   

   

   

   

   

   3,514

   

   5,119

   

   769,696Other non-current liabilities

   

   (5,442)

   

   185,277

   

   

   

   

   

   

   

   5,442

   

   185,277494,544

   

   4,712,823

   

   531,390

   

   

   

   3,514

   

   (520,829)

   

   5,221,442Total liabilities

   

   590,363

   

   7,886,666

   

   538,466

   

   

   

   117,396

   

   (708,433)

   

   8,424,458EquityCapital and reserves attributable to equity share holders of TAM S.A.Share capital

   

   675,497

   

   659,701

   

   88

   

   

   

   34,288

   

   (694,077)

   

   675,497Other reserves

   

   1,020,517

   

   145,176

   

   

   

   

   

   8,345

   

   197,665

   

   1,371,703Retained earnings/ (Accumulated deficit)

   

   297,254

   

   1,005,000

   

   15,097

   

   

   

   (13,415)

   

   (1,444,985)

   

   (141,049)1,993,268

   

   1,809,877

   

   15,185

   

   

   

   29,218

   

   (1,941,397)

   

   1,906,151Non-controlling interest

   

   

   

   

   

   

   

   

   

   

   

   2,629

   

   2,629Total equity

   

   1,993,268

   

   1,809,877

   

   15,185

   

   

   

   29,218

   

   (1,938,768)

   

   1,908,780Total liabilities and equity

   

   2,583,631

   

   9,696,543

   

   553,651

   

   

   

   146,614

   

   (2,647,201)

   

   10,333,238
   F-107


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
   (c)           Cash flow statement  (i)For the year ended December 31, 2010
  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedCash flows generated from operating activities

   

   174,042

   

   949,357

   

   198,098

   

   (470,094)

   

   151,035

   

   

   

   1,002,438Taxes paid

   

   

   

   (53,409)

   

   

   

   (30,170)

   

   

   

   

   

   (83,579)Interest paid

   

   (45,406)

   

   (159,513)

   

   (38,299)

   

   

   

   (38,840)

   

   

   

   (282,058)Net cash generated from operating activities

   

   128,636

   

   736,435

   

   159,798

   

   (500,264)

   

   112,195

   

   

   

   636,801Cash flows from investing activitiesInvestments in restricted cash

   

   

   

   (15,122)

   

   

   

   

   

   (3,813)

   

   

   

   (18,935)Cash flows from investment acquired – Pantanal (Note 1.2)

   

   (10,000)

   

   

   

   

   

   

   

   956

   

   

   

   (9,044)Related partiesLoans

   

   (20,051)

   

   (27,285)

   

   

   

   

   

   47,336Receipt

   

   18,327

   

   5,769

   

   

   

   

   

   (24,096)Dividends and interest on own capital received

   

   261,673

   

   

   

   

   

   

   

   

   

   (261,673)Proceeds from sale of property, plant and equipment (PPE) / intangible assets

   

   

   

   27,028

   

   

   

   

   

   

   

   

   

   27,028Equtity investments

   

   

   

   (1,564)

   

   

   

   

   

   

   

   1,564Acquisition of other investments

   

   

   

   (59)

   

   

   

   

   

   

   

   59Purchases of property, plant and equipment

   

   

   

   (71,255)

   

   

   

   (958)

   

   (12,400)

   

   

   

   (84,613)Purchases of intangible assets

   

   

   

   (118,067)

   

   

   

   (17,558)

   

   (14)

   

   

   

   (135,639)Purchases of assets of TAM Milor including TAM Brands (Note 1.3)

   

   

   

   (25,481)

   

   

   

   

   

   

   

   

   

   (98,444)Deposits in guaranteeReimbursements

   

   

   

   15,657

   

   

   

   

   

   

   

   

   

   15,657Deposits made

   

   

   

   (9,485)

   

   

   

   

   

   

   

   

   

   (9,485)Pre delivery paymentsReimbursements

   

   

   

   100,137

   

   

   

   

   

   50,349

   

   

   

   150,486Payments

   

   

   

   (216,264)

   

   

   

   

   

   10

   

   

   

   (216,254)Net cash used in investing activities

   

   249,949

   

   (335,991)

   

   

   

   (18,516)

   

   58,328

   

   

   

   (379,243)Cash flows from financing activitiesProceeds from sale of treasury shares including exercise of stock options

   

   3,355

   

   

   

   

   

   

   

   

   

   

   

   3,355Advance for future capital increase

   

   12Net cash received in a public offering of shares of subsidiary Multiplus (Note 1.1)

   

   

   

   

   

   

   

   657,048

   

   

   

   

   

   657,048Cash proceeds from issuance of shares in connection with acquisition of assets of TAM Milor    (Note 1.3)

   

   

   

   

   

   

   

   

   

   

   

   72,963

   

   72,963Dividends paid – TAM S.A.

   

   (233,325)

   

   (223,001)

   

   

   

   

   

   

   

   223,001

   

   (233,325)Dividends paid and interest on capital  own to non-controlling shareholders of Multiplus and Mercosur

   

   

   

   

   

   

   

   (29,033)

   

   (1,288)

   

   21,243

   

   (9,078)Related partiesLoans

   

   

   

   624,144

   

   

   

   2,000

   

   (626,144)Receipt

   

   

   

   (292,266)

   

   

   

   

   

   292,266Short and long-term borrowingsIssuance

   

   

   

   69,602

   

   

   

   

   

   

   

   

   

   69,602Repayment

   

   

   

   (101,713)

   

   

   

   

   

   (78,266)

   

   

   

   (179,939)DebenturesRepayment

   

   (166,666)

   

   

   

   

   

   

   

   

   

   

   

   (166,666)Capital element of finance leases

   

   

   

   (534,470)

   

   

   

   

   

   

   

   

   

   (534,470)Net cash (used in) generated  from financing activities

   

   (396,624)

   

   (457,704)

   

   

   

   630,015

   

   (413,392)

   

   311,195

   

   (320,510)Net increase (decrease) in cash and cash equivalents

   

   (18,039)

   

   (57,260)

   

   159,798

   

   111,235

   

   (242,869)

   

   (21,818)

   

   (62,952)Cash and cash equivalents at beginning of the year

   

   131,952

   

   923,375

   

   181,988

   

   

   

   616,209

   

   (778,351)

   

   1,075,172Cash and cash equivalents at end of the year

   

   113,913

   

   866,115

   

   341,786

   

   111,235

   

   373,340

   

   (800,169)

   

   1,012,220
  F-108


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (ii)For the year ended December 31, 2009  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedCash flows generated from operating activities

   

   91,342

   

   448,821

   

   (220,596)

   

   3,782

   

   69,558

   

   194,258

   

   587,165Taxes paid

   

   

   

   (83,429)

   

   

   

   

   

   

   

   

   

   (83,429)Interest paid

   

   (61,055)

   

   (251,631)

   

   (43,387)

   

   

   

   (1,652)

   

   45,092

   

   (312,633)Net cash generated from operating activities

   

   30,287

   

   113,761

   

   (263,983)

   

   3,782

   

   67,906

   

   239,350

   

   191,103Cash flows from investing activitiesInvestments in restricted cash

   

   

   

   (79,370)

   

   

   

   

   

   

   

   

   

   (79,370)Interest on capital and dividends payable

   

   74,693

   

   

   

   

   

   

   

   

   

   (74,693)Related parties

   

   (19,250)

   

   47,456

   

   

   

   

   

   

   

   (28,206)Proceeds from sale of property, plant and equipment (PPE) / intangible assets

   

   

   

   35,869

   

   

   

   

   

   

   

   

   

   35,869Purchases of property, plant and equipment

   

   

   

   (335,627)

   

   

   

   

   

   731

   

   

   

   (334,896)Purchases of intangible assets

   

   

   

   (131,513)

   

   

   

   

   

   (3,783)

   

   

   

   (135,296)Deposits in guaranteeReimbursements

   

   

   

   60,697

   

   

   

   

   

   3,645

   

   (3,645)

   

   60,697Deposits made

   

   

   

   (27,922)

   

   

   

   

   

   (20,835)

   

   20,835

   

   (27,922)Pre delivery paymentsReimbursements

   

   

   

   

   

   

   

   

   

   38,818

   

   (38,818)Net cash used in investing activities

   

   55,443

   

   (430,410)

   

   

   

   (3,783)

   

   22,359

   

   (124,527)

   

   (480,918)Cash flows from financing activitiesInterest on capital and dividends payable

   

   

   

   (47,057)

   

   

   

   

   

   (27,636)

   

   74,693Short and long-term borrowingsIssuance

   

   

   

   236,581

   

   

   

   

   

   

   

   

   

   236,581Repayment

   

   

   

   (70,714)

   

   

   

   

   

   (56,563)

   

   56,563

   

   (70,714)DebenturesIssuance

   

   

   

   592,686

   

   

   

   

   

   

   

   

   

   592,686Senior notesIssuance

   

   

   

   502,298

   

   

   

   

   

   511,122

   

   (511,122)

   

   502,298Capital element of finance leases

   

   

   

   (567,649)

   

   

   

   

   

   

   

   

   

   (567,649)Net cash (used in) generated  from financing activities

   

   

   

   646,145

   

   

   

   

   

   426,923

   

   (379,866)

   

   693,202Net increase (decrease) in cash and cash equivalents

   

   85,730

   

   329,496

   

   (263,983)

   

   (1)

   

   517,188

   

   (265,043)

   

   403,387Cash and cash equivalents at beginning of the year

   

   46,222

   

   593,879

   

   445,971

   

   

   

   99,021

   

   (513,308)

   

   671,785Cash and cash equivalents at end of the year

   

   131,952

   

   923,375

   

   181,988

   

   (1)

   

   616,209

   

   (778,351)

   

   1,075,172
  F-109


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (iii)For the year ended December 31, 2008  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedCash flows generated from operating activities

   

   349

   

   1,905,969

   

   (167,402)

   

   

   

   (19,015)

   

   184,576

   

   1,904,477Taxes paid

   

   

   

   (58,443)

   

   

   

   

   

   

   

   

   

   (58,443)Interest paid

   

   (57,393)

   

   (246,132)

   

   

   

   

   

   

   

   

   

   (303,525)Net cash generated from operating activities

   

   (57,044)

   

   1,601,394

   

   (167,402)

   

   

   

   (19,015)

   

   184,576

   

   1,542,509Cash flows from investing activitiesProceeds from sale of property, plant and equipment (PPE) / intangible assets

   

   

   

   8,204

   

   

   

   

   

   

   

   

   

   8,204Purchases of property, plant and equipment

   

   

   

   (627,523)

   

   

   

   

   

   4,326

   

   (14,286)

   

   (637,483)Purchases of intangible assets

   

   

   

   (133,454)

   

   

   

   

   

   

   

   (15)

   

   (133,469)Deposits in guaranteeReimbursements

   

   

   

   106,292

   

   

   

   

   

   

   

   

   

   106,292Deposits made

   

   

   

   (30,503)

   

   

   

   

   

   (12,502)

   

   12,502

   

   (30,503)Pre delivery paymentsReimbursements

   

   

   

   261,302

   

   

   

   

   

   

   

   

   

   261,302Payments

   

   

   

   (217,688)

   

   

   

   

   

   

   

   

   

   (217,688)Net cash used in investing activities

   

   

   

   (633,370)

   

   

   

   

   

   (8,176)

   

   (1,799)

   

   (643,345)Cash flows from financing activitiesRepurchase / sale of treasury shares

   

   (14,269)

   

   

   

   

   

   

   

   

   

   

   

   (14,269)Dividends paid to TAM’s stockholders

   

   (63,713)

   

   (8,352)

   

   

   

   

   

   

   

   

   

   (72,065)Short and long-term borrowingsIssuance

   

   

   

   208,692

   

   

   

   

   

   

   

   

   

   208,692Repayment

   

   

   

   (471,390)

   

   

   

   

   

   

   

   

   

   (340,092)DebenturesRepayment

   

   

   

   (4,793)

   

   

   

   

   

   

   

   

   

   (4,793)Senior notesIssuance

   

   

   

   

   

   167,269

   

   

   

   

   

   (167,269)Capital element of finance leases

   

   

   

   (340,092)

   

   

   

   

   

   

   

   

   

   (340,092)Net cash (used in) generated  from financing activities

   

   (77,982)

   

   (615,935)

   

   167,269

   

   

   

   

   

   (167,269)

   

   (693,917)Net increase (decrease) in cash and cash equivalents

   

   (135,026)

   

   352,089

   

   (133)

   

   

   

   (27,191)

   

   15,508

   

   205,247Cash and cash equivalents at beginning of the year

   

   386,295

   

   20,407

   

   518

   

   

   

   60,749

   

   (1,441)

   

   466,538Cash and cash equivalents at end of the year

   

   251,269

   

   372,496

   

   385

   

   

   

   33,568

   

   14,067

   

   671,785
  F-110


---



TAM S.A. Notes to the financial statements for the year ended December 31, 2010 (Amounts expressed in thousands of – R$, unless otherwise indicated)
 (iv)For the year ended December 31, 2007  TAM S.A.

   (parent company and guarantor)

   

   TAM Linhas Aéreas S.A. (guarantor)

   

   TAM Capital (subsidiary issuer)

   

   Multiplus

   

   Others(non guarantors)

   

   Consolidationadjustment

   

   ConsolidatedCash flows generated from operating activities

   

   199,651

   

   568,717

   

   (34,832)

   

   

   

   (38,282)

   

   (47,058)

   

   724,760Taxes paid

   

   

   

   (65,528)

   

   

   

   

   

   

   

   

   

   (65,528)Interest paid

   

   (65,620)

   

   (220,939)

   

   

   

   

   

   

   

   

   

   (220,939)Net cash generated from operating activities

   

   134,031

   

   282,250

   

   (34,832)

   

   

   

   38,282

   

   (47,058)

   

   372,673Cash flows from investing activitiesProceeds from sale of property, plant and equipment (PPE) / intangible assets

   

   

   

   4,558

   

   

   

   

   

   

   

   

   

   4,558Investments in subsidiaries

   

   (30)

   

   

   

   

   

   

   

   

   

   30Purchases of property, plant and equipment

   

   

   

   (311,818)

   

   

   

   

   

   4,988

   

   (5,022)

   

   (311,852)Purchases of intangible assets

   

   

   

   (37,071)

   

   

   

   

   

   

   

   

   

   (37,071)Deposits in guaranteeReimbursements

   

   

   

   21,011

   

   

   

   

   

   

   

   

   

   21,011Deposits made

   

   

   

   (65,383)

   

   

   

   

   

   

   

   

   

   (65,383)Pre delivery paymentsReimbursements

   

   

   

   401,977

   

   

   

   

   

   

   

   

   

   401,977Payments

   

   

   

   (451,456)

   

   

   

   

   

   

   

   

   

   (451,456)Net cash used in investing activities

   

   (30)

   

   (438,182)

   

   

   

   

   

   (4,988)

   

   (4,992)

   

   (438,216)Cash flows from financing activitiesRepurchase / sale of treasury shares

   

   497

   

   

   

   

   

   

   

   

   

   

   

   497Dividends paid to TAM’s stockholders

   

   (137,106)

   

   

   

   

   

   

   

   

   

   (523)

   

   (137,629)Short and long-term borrowingsIssuance

   

   

   

   638,105

   

   

   

   

   

   

   

   

   

   638,105Repayment

   

   

   

   (591,857)

   

   

   

   

   

   

   

   

   

   (591,857)DebenturesRepayment

   

   

   

   (19,957)

   

   

   

   

   

   

   

   

   

   (19,957)Senior notesIssuance

   

   

   

   607,080

   

   

   

   

   

   

   

   

   

   607,080Funds obtained

   

   

   

   

   

   607,080

   

   

   

   

   

   (607,080)Capital element of finance leases

   

   

   

   (263,664)

   

   

   

   

   

   

   

   

   

   (263,664)Net cash (used in) generated  from financing activities

   

   (136,609)

   

   369,707

   

   607,080

   

   

   

   

   

   (607,603)

   

   232,575Net increase (decrease) in cash and cash equivalents

   

   (2,608)

   

   213,775

   

   572,248

   

   

   

   43,270

   

   (659,633)

   

   167,032Cash and cash equivalents at beginning of the year

   

   173,157

   

   22,919

   

   (571,730)

   

   

   

   (29,037)

   

   704,197

   

   299,506Cash and cash equivalents at end of the year

   

   170,549

   

   236,694

   

   518

   

   

   

   14,233

   

   44,544

   

   466,538
  * * *  F-111


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