##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 20-F
 
 o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
1934
 OR
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
 o
    
    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  TAM S.A.
  Not applicable
 The Federative Republic of Brazil
 Av. Jurandir, 856, Lote 4, 1° andar
04072-000, São Paulo, SP
Federative Republic of Brazil
  Title of each class
    
    Name of each exchange on which registeredPreferred Shares, without par value
    
    New York Stock Exchange*American Depositary Shares (as evidenced by
    
    New York Stock ExchangeAmerican Depositary Receipts), each representingone Preferred Share
 *
    
    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.
 None
 None
  59,792,055 Common Shares
90,771,286 Preferred Shares
 o þ
 o þ
 þ o
  o o þ
 o þ
 o þ




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##### Table of Contents



TABLE OF CONTENTS
 PageIntroduction
    
    
    1Presentation of Financial and Other Data
    
    
    2Forward-Looking Statements
    
    
    3ITEM 1. Identity of Directors, Senior Management and Advisers
    
    
    4ITEM 2. Offer Statistics and Expected Timetable
    
    
    4ITEM 3. Key Information
    
    
    4A. Selected Financial Data
    
    
    4B. Capitalization and Indebtedness
    
    
    9C. Reasons for the Offer and Use of Proceeds
    
    
    9D. Risk Factors
    
    
    9ITEM 4. Information on the Company
    
    
    18A. History and Development of the Company
    
    
    18B. Business Overview
    
    
    21C. Organizational Structure
    
    
    48D. Property, Plants and Equipment
    
    
    48ITEM 4A. Unresolved Staff Comments
    
    
    49ITEM 5. Operating and Financial Review and Prospects
    
    
    49A. Operating Results
    
    
    49B. Liquidity and Capital Resources
    
    
    66C. Research and Development, Patents and Licenses, etc
    
    
    68D. Trend Information
    
    
    69E. Off-balance sheet arrangements
    
    
    69F. Tabular Disclosure of Contractual Obligations
    
    
    70ITEM 6. Directors, Senior Management and Employees
    
    
    70A. Directors and Senior Management
    
    
    70B. Compensation
    
    
    73C. Board practices
    
    
    74D. Employees
    
    
    75E. Share Ownership
    
    
    77ITEM 7. Major Shareholders and Related Party Transactions
    
    
    77A. Major Shareholders
    
    
    77B. Related Party Transactions
    
    
    79C. Interests of experts and counsel
    
    
    80ITEM 8. Financial Information
    
    
    80A. Consolidated Statements and Other Financial Information
    
    
    80B. Significant Changes
    
    
    85ITEM 9. The Offer and Listing
    
    
    86A. Offer and Listing Details
    
    
    86B. Plan of distribution
    
    
    87C. Markets
    
    
    87
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TABLE OF CONTENTS
(continued)
 PageD. Selling Shareholders
    
    
    93E. Dilution
    
    
    93F. Expenses of the issue
    
    
    93ITEM 10. Additional Information
    
    
    93A. Share Capital
    
    
    93B. Memorandum and articles of association
    
    
    93C. Material Contracts
    
    
    98D. Exchange Controls
    
    
    99E. Taxation
    
    
    100F. Dividends and paying agents
    
    
    106G. Statement by experts
    
    
    106H. Documents on display
    
    
    106I. Subsidiary information
    
    
    107ITEM 11. Quantitative and Qualitative Disclosures About Market Risk
    
    
    107ITEM 12. Description of Securities Other than Equity Securities
    
    
    108ITEM 13. Defaults, Dividend Arrearages and Delinquencies
    
    
    109ITEM 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
    
    
    109ITEM 15. Controls and Procedures
    
    
    109ITEM 15T. Controls and Procedures
    
    
    109ITEM 16A. Audit Committee Financial Expert
    
    
    109ITEM 16B. Code of Ethics
    
    
    109ITEM 16C. Principal Accountant Fees and Services
    
    
    110ITEM 16D. Exemptions from the Listing Standards for Audit Committees
    
    
    110ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
    
    
    111ITEM 17. Financial Statements
    
    
    112ITEM 18. Financial Statements
    
    
    112ITEM 19. Exhibits
    
    
    113Signatures
    
    
    115Exhibit 8.1Exhibit 12.1Exhibit 12.2Exhibit 13.1Exhibit 13.2
   -ii-




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INTRODUCTION
 sociedade anônima
 Agência
Nacional de Aviação Civil real reais centavos real
  
    
    ASK means available seat kilometers, or the product of multiplying the number of seats
available in all the aircraft by the distance the seats are flown in kilometers.
 
    
    Average tariff means the quotient of dividing passenger transport revenue by the
number of paying passengers transported.
 
    
    BELF means the break-even load factor (or load factor in which revenue equals
operating costs and expenses).
 
    
    Block hours refers to the elapsed time between an aircrafts leaving an airport gate
and arriving at an airport gate.
 
    
    CASK means cost per ASK, or quotient of dividing total operating costs by the number
of available seat kilometers. The result is presented in this annual report in centavos
per ASK.
 
    
    Load factor means the percentage of aircraft occupied on flights, or quotient between
RPK and ASK.
 
    
    RASK means revenue per ASK, or quotient of dividing total operating revenue by the
number of available seat kilometers. The result is presented in this annual report in
centavosper ASK.
 
    
    RPK means revenue passenger kilometer corresponding to the product of multiplying the
number of paying passengers transported by the number of kilometers flown by such
passengers.
 
    
    Yield means the average amount paid per passenger to fly one kilometer.
  1




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PRESENTATION OF FINANCIAL AND OTHER DATA
 Instituto dos Auditores Independentes do Brasil
  reais
  real real real
    2




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##### Table of Contents



FORWARD-LOOKING STATEMENTS
  
    
    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;
 
    
    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 the real(with
respect to both potential depreciation and appreciation of the real);
 
    
    existing and future regulations;
 
    
    increases in fuel costs, maintenance costs and insurance premiums;
 
    
    changes in market prices, preferences of consumers and competitive conditions;
 
    
    cyclical and seasonal variations in our results of operations;
 
    
    defects or other mechanical problems in our aircraft;
 
    
    the implementation of our strategies and growth plans;
 
    
    changes in fiscal policy and tax laws; and
 
    
    other risk factors set forth in Item 3. Key Information  D. Risk Factors.
    3




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PART I
 
 ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
  
 ITEM 3. KEY INFORMATION
 
 A. Selected Financial Data
    real
   4




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At December 31,Brazilian GAAP
    
    2006
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(US$Balance sheet data
    
    millions)
    
    
    (R$ millions)Cash and banks
    
    
    57
    
    
    
    123
    
    
    
    93
    
    
    
    86
    
    
    
    71
    
    
    
    46Financial investments
    
    
    1,090
    
    
    
    2,331
    
    
    
    903
    
    
    
    211
    
    
    
    101
    
    
    
    Customer accounts receivable
    
    
    365
    
    
    
    781
    
    
    
    763
    
    
    
    553
    
    
    
    293
    
    
    
    240Total assets
    
    
    2,417
    
    
    
    5,168
    
    
    
    3,311
    
    
    
    2,203
    
    
    
    2,788
    
    
    
    3,537Debt(1)
    
    
    212
    
    
    
    453
    
    
    
    270
    
    
    
    151
    
    
    
    81
    
    
    
    203Finance lease and operating lease liabilities(1)
    
    
    76
    
    
    
    162
    
    
    
    218
    
    
    
    261
    
    
    
    1,235
    
    
    
    1,649Debentures(1)
    
    
    266
    
    
    
    569
    
    
    
    59
    
    
    
    75
    
    
    
    137
    
    
    
    89Advance ticket sales
    
    
    355
    
    
    
    759
    
    
    
    558
    
    
    
    367
    
    
    
    225
    
    
    
    181Shareholders equity
    
    
    678
    
    
    
    1,449
    
    
    
    760
    
    
    
    191
    
    
    
    42
    
    
    
    204
 (1)
    
    Refers to the total balance of current liabilities plus long-term liabilities.
 At December 31,U.S. GAAP
    
    2006
    
    
    2006
    
    
    2005(US$Balance sheet data
    
    millions)
    
    
    (R$ millions)Cash and cash equivalents
    
    
    140
    
    
    
    300
    
    
    
    93Marketable securities
    
    
    1,007
    
    
    
    2,153
    
    
    
    903Customer accounts receivable, net
    
    
    365
    
    
    
    781
    
    
    
    763Total assets
    
    
    3,582
    
    
    
    7,657
    
    
    
    6,057Debt(1)
    
    
    212
    
    
    
    453
    
    
    
    270Obligations under finance leases(1)
    
    
    1,108
    
    
    
    2,369
    
    
    
    2,845Debentures(1)
    
    
    266
    
    
    
    569
    
    
    
    59Advance ticket sales
    
    
    355
    
    
    
    759
    
    
    
    558Shareholders equity
    
    
    717
    
    
    
    1,532
    
    
    
    620
 (1)
    
    Refers to the total balance of current liabilities plus long-term liabilities.
  5




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##### Table of Contents



Year Ended December 31,Brazilian GAAP
    
    2006
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(US$millions)Statement of operations data
    
    (1)
    
    
    (R$ millions)(1)Gross operating revenue
    
    
    3,602
    
    
    
    7,700
    
    
    
    5,910
    
    
    
    4,744
    
    
    
    3,768
    
    
    
    3,472Air transportation revenues:Domestic
    
    
    2,414
    
    
    
    5,162
    
    
    
    4,192
    
    
    
    3,233
    
    
    
    2,688
    
    
    
    2,533International
    
    
    719
    
    
    
    1,538
    
    
    
    1,034
    
    
    
    893
    
    
    
    679
    
    
    
    587Cargo
    
    
    228
    
    
    
    487
    
    
    
    407
    
    
    
    319
    
    
    
    236
    
    
    
    220Other operating revenues
    
    
    241
    
    
    
    514
    
    
    
    277
    
    
    
    299
    
    
    
    165
    
    
    
    132Taxes and deductions
    
    
    (166
    )
    
    
    (355
    )
    
    
    (261
    )
    
    
    (224
    )
    
    
    (176
    )
    
    
    (142
    )Net operating revenue
    
    
    3,436
    
    
    
    7,345
    
    
    
    5,649
    
    
    
    4,520
    
    
    
    3,592
    
    
    
    3,330Operating expenses:Fuel
    
    
    (996
    )
    
    
    (2,130
    )
    
    
    (1,695
    )
    
    
    (1,067
    )
    
    
    (787
    )
    
    
    (748
    )Sales and marketing
    
    
    (409
    )
    
    
    (875
    )
    
    
    (855
    )
    
    
    (656
    )
    
    
    (527
    )
    
    
    (463
    )Aircraft and flight equipment leases
    
    
    (336
    )
    
    
    (719
    )
    
    
    (627
    )
    
    
    (651
    )
    
    
    (648
    )
    
    
    (574
    )Personnel
    
    
    (408
    )
    
    
    (873
    )
    
    
    (669
    )
    
    
    (546
    )
    
    
    (417
    )
    
    
    (435
    )Maintenance
    
    
    (181
    )
    
    
    (388
    )
    
    
    (356
    )
    
    
    (389
    )
    
    
    (372
    )
    
    
    (329
    )Services rendered by third parties
    
    
    (253
    )
    
    
    (540
    )
    
    
    (374
    )
    
    
    (360
    )
    
    
    (304
    )
    
    
    (337
    )Landing, take-off and navigational tariffs
    
    
    (147
    )
    
    
    (315
    )
    
    
    (233
    )
    
    
    (186
    )
    
    
    (151
    )
    
    
    (185
    )Depreciation and amortization
    
    
    (48
    )
    
    
    (102
    )
    
    
    (85
    )
    
    
    (91
    )
    
    
    (155
    )
    
    
    (133
    )Aircraft insurance
    
    
    (16
    )
    
    
    (35
    )
    
    
    (40
    )
    
    
    (53
    )
    
    
    (77
    )
    
    
    (66
    )Other
    
    
    (174
    )
    
    
    (372
    )
    
    
    (288
    )
    
    
    (227
    )
    
    
    (186
    )
    
    
    (296
    )Total operating expenses
    
    
    (2,967
    )
    
    
    (6,348
    )
    
    
    (5,222
    )
    
    
    (4,226
    )
    
    
    (3,624
    )
    
    
    (3,566
    )Gross income (loss)
    
    
    469
    
    
    
    997
    
    
    
    427
    
    
    
    294
    
    
    
    (32
    )
    
    
    (236
    )Financial income (expenses), net
    
    
    (13
    )
    
    
    (28
    )
    
    
    (92
    )
    
    
    (82
    )
    
    
    261
    
    
    
    (671
    )Other operating income (expenses), net
    
    
    (59
    )
    
    
    (126
    )
    
    
    (31
    )
    
    
    (14
    )
    
    
    (9
    )
    
    
    (10
    )Operating income (loss)
    
    
    397
    
    
    
    842
    
    
    
    304
    
    
    
    198
    
    
    
    220
    
    
    
    (917
    )Non-operating income (expenses), net
    
    
    5
    
    
    
    11
    
    
    
    (8
    )
    
    
    300
    
    
    
    15
    
    
    
    46Income (loss) before income tax and social
contribution
    
    
    402
    
    
    
    854
    
    
    
    296
    
    
    
    498
    
    
    
    235
    
    
    
    (871
    )Income tax and social contribution
    
    
    (139
    )
    
    
    (297
    )
    
    
    (109
    )
    
    
    (156
    )
    
    
    (61
    )
    
    
    265Income (loss) before minority interest
    
    
    263
    
    
    
    557
    
    
    
    187
    
    
    
    342
    
    
    
    174
    
    
    
    (606
    )Minority interest
    
    
    (1
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    0
    
    
    
    Income (loss) for the year
    
    
    262
    
    
    
    556
    
    
    
    187
    
    
    
    341
    
    
    
    174
    
    
    
    (606
    )Number of shares outstanding at year end,
excluding treasury shares (in thousands of
shares) (2):Common shares
    
    
    59,792
    
    
    
    59,792
    
    
    
    59,816
    
    
    
    29,908
    
    
    
    29,908
    
    
    
    29,110Preferred shares
    
    
    90,771
    
    
    
    90,771
    
    
    
    84,243
    
    
    
    31,457
    
    
    
    31,457
    
    
    
    31,457Total
    
    
    150,563
    
    
    
    150,563
    
    
    
    144,059
    
    
    
    61,365
    
    
    
    61,365
    
    
    
    60,567Net income (loss) per share (inreaisand US
dollars) (2)
    
    
    1.73
    
    
    
    3.69
    
    
    
    1.30
    
    
    
    2.78
    
    
    
    1.42
    
    
    
    (5.00
    )Net income (loss) per ADS (inreaisand US
dollars) (2)
    
    
    1.73
    
    
    
    3.69
    
    
    
    1.30
    
    
    
    2.78
    
    
    
    1.42
    
    
    
    (5.00
    )Dividends declared per share:Common shares (in reaisand US dollars)
    
    
    0.4186
    
    
    
    0.8949
    
    
    
    0.2041
    
    
    
    
    
    
    
    
    
    
    
    Preferred shares (in reaisand US dollars)
    
    
    0.4186
    
    
    
    0.8949
    
    
    
    0.2041
    
    
    
    
    
    
    
    
    
    
    
    Dividends declared per ADS (in reaisand US
dollars)
    
    
    0.4186
    
    
    
    0.8949
    
    
    
    0.2041
    
    
    
    
    
    
    
    
    
    
    
    
 (1)
    
    Except where indicated.(2)
    
    A share split took place on May 16, 2005, pursuant to which all holders of our existing shares
received two shares of the same class and type for each share held. All periods are presented
considering the share split effects.
  6




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Year ended December 31,U.S. GAAP
    
    2006
    
    
    2006
    
    
    2005
    
    
    2004(US$millions)Statement of operations data
    
    (1)
    
    
    (R$ millions)(1)Gross operating revenue
    
    
    3,595
    
    
    
    7,686
    
    
    
    5,895
    
    
    
    4,744Air transportation revenues:Domestic
    
    
    2,414
    
    
    
    5,162
    
    
    
    4,192
    
    
    
    3,233International
    
    
    719
    
    
    
    1,538
    
    
    
    1,034
    
    
    
    893Cargo
    
    
    228
    
    
    
    487
    
    
    
    407
    
    
    
    319Other operating revenues
    
    
    233
    
    
    
    499
    
    
    
    262
    
    
    
    299Taxes and deductions
    
    
    (167
    )
    
    
    (356
    )
    
    
    (261
    )
    
    
    (224
    )Net operating revenue
    
    
    3,428
    
    
    
    7,330
    
    
    
    5,634
    
    
    
    4,520Operating expenses:Fuel
    
    
    (996
    )
    
    
    (2,130
    )
    
    
    (1,695
    )
    
    
    (1,067
    )Sales and marketing
    
    
    (409
    )
    
    
    (875
    )
    
    
    (855
    )
    
    
    (656
    )Aircraft and flight equipment leases
    
    
    (178
    )
    
    
    (381
    )
    
    
    (300
    )
    
    
    (321
    )Personnel
    
    
    (411
    )
    
    
    (878
    )
    
    
    (666
    )
    
    
    (544
    )Maintenance
    
    
    (181
    )
    
    
    (388
    )
    
    
    (356
    )
    
    
    (389
    )Services rendered by third parties
    
    
    (248
    )
    
    
    (531
    )
    
    
    (357
    )
    
    
    (360
    )Landing, take-off and navigational tariffs
    
    
    (147
    )
    
    
    (315
    )
    
    
    (233
    )
    
    
    (186
    )Depreciation and amortization
    
    
    (104
    )
    
    
    (223
    )
    
    
    (206
    )
    
    
    (193
    )Aircraft insurance
    
    
    (16
    )
    
    
    (35
    )
    
    
    (40
    )
    
    
    (53
    )Other
    
    
    (226
    )
    
    
    (483
    )
    
    
    (314
    )
    
    
    (258
    )Total operating expenses
    
    
    (2,916
    )
    
    
    (6,239
    )
    
    
    (5,022
    )
    
    
    (4,027
    )Operating income
    
    
    512
    
    
    
    1,091
    
    
    
    612
    
    
    
    493Financial income (expenses), net
    
    
    71
    
    
    
    152
    
    
    
    32
    
    
    
    137Income before income tax and social contribution
    
    
    583
    
    
    
    1,242
    
    
    
    644
    
    
    
    630Income tax and social contribution
    
    
    (203
    )
    
    
    (433
    )
    
    
    (217
    )
    
    
    (199
    )Income before minority interest
    
    
    380
    
    
    
    809
    
    
    
    427
    
    
    
    431Minority interest
    
    
    (0
    )
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )Income for the year
    
    
    380
    
    
    
    808
    
    
    
    427
    
    
    
    430Income per share basic and diluted (weighted average) (2):Common shares (in reaisand US dollars)
    
    
    2.54
    
    
    
    5.42
    
    
    
    3.13
    
    
    
    3.33Previous preferred shares (in reaisand US dollars)
    
    
    
    
    
    
    
    
    
    
    1.35
    
    
    
    3.67Current preferred shares (in reaisand US dollars) (3)
    
    
    2.54
    
    
    
    5.42
    
    
    
    1.90
    
    
    
    Income per ADS basic and diluted (weighted average) (in
reaisand US dollars):
    
    
    2.54
    
    
    
    5.42
    
    
    
    3.25
    
    
    
    3.67
 (1)
    
    Except where indicated.(2)
    
    The data relating to both our preferred and common shares has been adjusted to reflect the
share split which took place on May 16, 2005, pursuant to which all holders of our existing shares
received two shares of the same class and type for each share held.(3)
    
    The rights of preferred shareholders were altered on May 16, 2005. Previously, preferred shares
had carried the rights to a dividend 10% higher than that distributed to holders of common shares.
From May 16, 2005 however preferred shares carried the same dividend rights as common shares. The
terms Previous and Current preferred shares used in the above table reflect this change in
entitlement.
 Operating Data Computed Using Financial
    
    Year Ended December 31,Information Under Brazilian GAAP
    
    2006
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(US$)
    
    
    (R$)
    
    
    (R$)
    
    
    (R$)
    
    
    (R$)
    
    
    (R$)Operating data
    
    (unaudited)RASK (cents/centavos)
    
    
    9.66
    
    
    
    20.65
    
    
    
    20.16
    
    
    
    21.53
    
    
    
    19.90
    
    
    
    15.10RASK scheduled domestic (cents/centavos)
    
    
    9.30
    
    
    
    19.88
    
    
    
    20.30
    
    
    
    20.84
    
    
    
    18.09
    
    
    
    13.78RASK scheduled international (cents/centavos)
    
    
    7.58
    
    
    
    16.21
    
    
    
    14.70
    
    
    
    17.13
    
    
    
    19.23
    
    
    
    13.11Yield scheduled domestic (cents/centavos)
    
    
    13.59
    
    
    
    29.05
    
    
    
    31.42
    
    
    
    35.21
    
    
    
    34.27
    
    
    
    27.77Yield scheduled international (cents/centavos)
    
    
    9.95
    
    
    
    21.28
    
    
    
    20.10
    
    
    
    23.96
    
    
    
    26.65
    
    
    
    21.67CASK (cents/centavos)
    
    
    8.35
    
    
    
    17.85
    
    
    
    18.63
    
    
    
    20.12
    
    
    
    19.10
    
    
    
    15.40CASK except fuel (cents/centavos)
    
    
    5.55
    
    
    
    11.86
    
    
    
    12.58
    
    
    
    15.04
    
    
    
    14.60
    
    
    
    11.90Average tariff (dollars/reais)
    
    
    125.23
    
    
    
    267.74
    
    
    
    267.05
    
    
    
    305.17
    
    
    
    286.50
    
    
    
    218.90
  7




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Operating Data Computed Using Financial
    
    Year Ended December 31,Information Under U.S. GAAP
    
    2006
    
    
    2006
    
    
    2005
    
    
    2004(US$)
    
    
    (R$)
    
    
    (R$)
    
    
    (R$)Operating data
    
    (unaudited)RASK (cents/centavos)
    
    
    9.66
    
    
    
    20.61
    
    
    
    20.10
    
    
    
    21.53RASK scheduled domestic (cents/centavos)
    
    
    9.30
    
    
    
    19.88
    
    
    
    20.30
    
    
    
    20.77RASK scheduled international (cents/centavos)
    
    
    7.58
    
    
    
    16.21
    
    
    
    14.70
    
    
    
    17.09Yield scheduled domestic (cents/centavos)
    
    
    13.59
    
    
    
    29.05
    
    
    
    31.42
    
    
    
    35.21Yield scheduled international (cents/centavos)
    
    
    9.95
    
    
    
    21.28
    
    
    
    20.10
    
    
    
    23.96CASK (cents/centavos)
    
    
    8.20
    
    
    
    17.54
    
    
    
    17.87
    
    
    
    19.18CASK except fuel (cents/centavos)
    
    
    5.40
    
    
    
    11.55
    
    
    
    11.82
    
    
    
    14.10Average tariff (dollars/reais)
    
    
    125.23
    
    
    
    267.74
    
    
    
    267.05
    
    
    
    305.17
 Year Ended December 31,Additional Operating Data
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002(unaudited)Paid passengers transported (thousands)
    
    
    25,022
    
    
    
    19,571
    
    
    
    13,522
    
    
    
    11,198
    
    
    
    13,756RPK (millions)
    
    
    26,289
    
    
    
    19,797
    
    
    
    13,854
    
    
    
    10,916
    
    
    
    12,075ASK (millions)
    
    
    35,564
    
    
    
    28,024
    
    
    
    20,999
    
    
    
    18,003
    
    
    
    22,017Load factor  %
    
    
    73.9
    %
    
    
    70.6
    %
    
    
    66.0
    %
    
    
    60.6
    %
    
    
    54.8
    %Break-even load factor (BELF)  %
    
    
    63.9
    %
    
    
    65.3
    %
    
    
    61.7
    %
    
    
    61.2
    %
    
    
    58.7
    %Block hours
    
    
    390,839
    
    
    
    323,729
    
    
    
    241,684
    
    
    
    210,282
    
    
    
    301,103Kilometers flown  km (thousands)
    
    
    226,344
    
    
    
    185,158
    
    
    
    139,367
    
    
    
    119,984
    
    
    
    161,099Liters of fuel
    
    
    1,336,917
    
    
    
    1,073,918
    
    
    
    820,335
    
    
    
    710,962
    
    
    
    922,936Number of employees
    
    
    13,195
    
    
    
    9,669
    
    
    
    8,215
    
    
    
    7,665
    
    
    
    8,181Average aircraft use during the period (hours per day)
    
    
    12.66
    
    
    
    11.36
    
    
    
    8.98
    
    
    
    7.62
    
    
    
    9.48Take-offs
    
    
    245,163
    
    
    
    209,831
    
    
    
    158,898
    
    
    
    147,122
    
    
    
    227,001Average leg (km)
    
    
    923
    
    
    
    882
    
    
    
    877
    
    
    
    816
    
    
    
    710
  Conselho Monetário Nacional Reais
   8




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reais
 Exchange Rates ofReaisper U.S. $1.00Year Ended
    
    Low
    
    
    High
    
    
    Average(1)
    
    
    Period EndDecember 31, 2002
    
    
    2.271
    
    
    
    3.955
    
    
    
    2.931
    
    
    
    3.533December 31, 2003
    
    
    2.822
    
    
    
    3.662
    
    
    
    3.072
    
    
    
    2.889December 31, 2004
    
    
    2.654
    
    
    
    3.205
    
    
    
    2.926
    
    
    
    2.654December 31, 2005
    
    
    2.163
    
    
    
    2.762
    
    
    
    2.285
    
    
    
    2.341December 31, 2006
    
    
    2.059
    
    
    
    2.371
    
    
    
    2.215
    
    
    
    2.138
 (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 EndDecember 2006
    
    
    2.138
    
    
    
    2.169
    
    
    
    2.138January 2007
    
    
    2.125
    
    
    
    2.156
    
    
    
    2.125February 2007
    
    
    2.077
    
    
    
    2.118
    
    
    
    2.118March 2007
    
    
    2.050
    
    
    
    2.139
    
    
    
    2.050April 2007
    
    
    2.023
    
    
    
    2.048
    
    
    
    2.034May 2007
    
    
    1.929
    
    
    
    2.031
    
    
    
    1.929
 Source: Central Bank.
 
 B. Capitalization and Indebtedness
  
 C. Reasons for the Offer and Use of Proceeds
  
 D. Risk Factors
  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 the notes.
 real
  9




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
    
    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.
   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.
 real real real real real real real
 reais real real
  10




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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.
  real Índice Geral de Preços-Mercado Índice Nacional de Preços ao Consumidor Amplo
   Developments and the perceptions of risks in other countries, especially emerging markets
countries, 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.
  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.
 Taxa de Juros de Longo Prazo reais
 Conselho Monetário Nacional Conselho Monetário Nacional
  11




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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.
 Departamento de Aviação Civil
  Comissão de Coordenação de Transporte Aéreo Civil Superintendência de Relações Internacionais
    12




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Competition in both the domestic and international civil aviation markets may increase and the
Brazilian government may intervene in the domestic market.
  Substantial increases in fuel prices or the availability of sufficient quantities of fuel may
harm the Brazilian civil aviation market and our businesses in the event that such increases
cannot be passed on to passengers in our fares.
   Airlines have significant fixed costs that may harm our ability to attain our strategic goals.
    13




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We depend significantly on automated systems and any breakdown in these systems may harm our
business and results of operations.
 e
 A failure to implement our growth strategy may harm our results of operations and the trading
price of our ADSs and preferred shares.
  Insurance costs for airlines may increase significantly because of a terrorist attack, harming
our financial condition and 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.
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The reputation and financial results of airlines may be harmed by any accident or incident
involving their aircraft.
  We are often affected by certain factors beyond our control, including airport congestion,
weather conditions and increased safety measures, which can affect our operations.
  Problems with air traffic control systems or other technical failures could interrupt our
operations and materially affect our business.
    15




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The successful execution of our strategy is partly dependent on us maintaining a high daily
aircraft utilization rate, which makes us especially vulnerable to delays.
  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 preferred shares do not carry general voting rights.
   The economic value of your investment may be diluted.
  The sale of significant quantities of ADSs or preferred shares may cause the stock market price
value of our ADSs and preferred shares to decline.
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##### Table of Contents



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.
  Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a
disposition of our preferred shares or ADSs.
   The Brazilian government may impose exchange controls and significant restrictions on
remittances of reais abroad, which would adversely affect your ability to convert and remit
dividends, distributions or the proceeds from the sale of our preferred shares, our capacity to
make dividend payments to non-Brazilian investors and would reduce the market price of our
preferred shares or ADSs.
 real
 If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit
foreign currency abroad and certain Brazilian tax advantages.
   17




---



##### Table of Contents



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.
  
 ITEM 4. INFORMATION ON THE COMPANY
 
 A. History and Development of the Company
 General
 CIT  Companhia de Investimentos
em Transportes TAM 
Companhia de Investimentos em Transportes
 sociedade anônima
  Brasil-Central Linha Aérea Regional S.A. Brasil-Central Linha Aérea Regional S.A. TAM Transportes
Aéreos Meridionais S.A.
  18




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##### Table of Contents



Itapemirim Transportes Aéreos Regionais Interexpress Transportes Aéreos Regionais S.A. Helisul Linhas Aéreas
S.A.
 Interexpress Transportes Aéreos Regionais TAM  Transportes Aéreos
Regionais S.A.
     Líneas Aéreas Paraguayas S.A. Transportes Aéreos del Mercosur S.A.
 sociedade limitada
   19




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##### Table of Contents



Capital Investments
   
    
    the loan agreement may be terminated early if the amount of TAM Linhas Aéreas earnings
before interest, depreciation and amortization (net of any income taxes, social
contribution taxes and any variations in working capital), divided by the amount of all
scheduled due payments during each six-month period, falls below certain specified ratios;
and
 
    
    the loan agreement may be terminated early in the event that we fail to replace
collateral or present additional collateral (so as to preserve the integrity of BNDES
security interest) within 30 days of BNDES requesting that we do so.
 reais
 
    
    it may not incur additional debt if the amount of its net income, due payments and
dividends divided by the amount of all scheduled due payments falls below certain specified
ratios;
 
    
    it may not prepay its debt under other contracts for indebtedness unless it prepays its
debt to IFC under the loan agreement in a proportionate amount; and
 
    
    it will automatically be a default under the loan agreement if TAM Linhas Aéreas is in
default in the aggregate amount of US$5,000,000 under its other contracts for indebtedness
(or if it is in default in the amount of US$2,500,000 under any single contract for
indebtedness).
 e
  20




---



##### Table of Contents



B. Business Overview
 Overview
    Growth rate (Index 2002)
 
 Source: ANAC.
   21




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##### Table of Contents



Total at December 31,Model
    
    2006
    
    
    2005
    
    
    2004Airbus A330
    
    
    10
    
    
    
    10
    
    
    
    9Airbus A320
    
    
    50
    
    
    
    36
    
    
    
    31Airbus A319
    
    
    14
    
    
    
    13
    
    
    
    13Fokker 100
    
    
    21
    
    
    
    25
    
    
    
    30Total
    
    
    95
    
    
    
    84
    
    
    
    83
 Competitive Advantages
  
    
    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 48
destinations in Brazil. Through our regional alliances with Oceanair Linhas Aéreas Ltda.
(Oceanair), Pantanal Linhas Aéreas
S.A.(Pantanal), Passaredo Transportes Aéreas Ltda.(Passaredo), Total Linhas Aéreas S.A.
(Total Linhas) and Trip Transporte Aéreo Regional do Interior Paulista Ltda.(Trip
Transporte), our network extends to a further 26 destinations in Brazil;
 
    
    convenient schedules with high on-time arrival rates:according to ANAC, we offer
more frequent flights than our domestic competitors and have achieved a high percentage
of on-time arrivals;
 
    
    efficient network of international destinations and supporting domestic service:we
currently serve 13 profitable international destinations (eight in Latin America and
five intercontinental destinations) 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;
 
    
    more direct flights:according to data from ANAC, at December 31, 2006 we operated
18% more direct flights than Gol and operated 29% more frequent daily flights than Gol;
and
 
    
    special services:we have developed special services to meet specific demands and
optimize the use of our aircraft, such as night and holiday flights offered at
promotional rates.
 
    
    Focus on cost management.We are an airline with low operating costs. In 2003, we
initiated the implementation of a restructuring project. The principal aim of this ongoing
project is to improve the use of our aircraft. We are currently implementing significant
cost reductions, focusing our efforts on reducing operating and administrative expenses in
particular. Our overall CASK decreased from R$18.63 in 2005 to R$17.85 in 2006. Some of
our principal cost savings arise from:
 
    
    efficient use of our aircraft:we have succeeded in significantly increasing 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 2006, the average load factor
of our aircraft was 73.9% and the block hours per aircraft was 12.7 hours, compared to
70.6% and 11.4 hours in 2005;
  22




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##### Table of Contents




    
    modern and flexible fleet:we have one of the newest fleets in the domestic market,
with an average age of 7.8 years at December 31, 2006. Our use of a modern fleet allows
us to reduce operating and maintenance costs. We primarily operate Airbus aircraft
(both narrow-and wide-bodied), in addition to Fokker aircraft, 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 2006, we announced that we had
placed a firm order with Boeing for the delivery of four new Boeing 777 aircraft to be
delivered in 2008, with further options for four more Boeing 777 aircraft;
 
    
    proprietary maintenance team:we have our own maintenance team, with a maintenance
center in the city of São Carlos (in the interior of the state of São Paulo), which is
trained to serve all aircraft in our fleet quickly and at a labor cost we believe is
lower than that of our competitors. Our maintenance center performs all hull
maintenance on our aircraft and also provides maintenance services for other airlines in
Latin America. 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:in addition to using globally renowned
systems to assist in activities such as network and fleet management, we are developing
proprietary internal management systems with innovative solutions that allow greater
flexibility and skill in performing our daily operations. During 2005, we finalized
implementation of the e-TAM portal, which consolidates sales made through indirect
channels and provides us with greater flexibility in decision-making and allocating
sales commissions.
 
    
    Innovative services and products combined with a strong brand and our espírito de
servir (spirit of service).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;
 
    
    a modern fleet equipped with interiors specifically designed to afford greater
comfort to our passengers, with more space between seats than the market average and the
widest middle seat of all the Airbus model aircraft;
 
    
    a polite approach to our passengers, including the aircraft captain personally
welcoming passengers during boarding, a courteous flight crew and attendants and our red
carpet welcome for passengers at airports;
 
    
    the only airline to offer video and audio entertainment on domestic flights, in
addition to offering 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 to offer a loyalty program in Brazil and
there are currently over 3.8 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. 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 partner
establishments. In addition, the TAM Loyalty Program strengthens lines of communications
with our passengers.
  23




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##### Table of Contents




    
    An experienced management team and motivated professionals.We have an experienced
management team, focused on realizing our mission and strategic vision. We understand that
our growth potential is directly related to our ability to attract and retain the best
professionals and, accordingly, our management invests significant funds and time in
selecting people with high potential and who fit well into our entrepreneurial culture.
Employee satisfaction surveys, followed by meetings, seminars, action plans, an internal
version of Talk to the President program and the entire incentive policy we offer (such
as our employee of the month award and breakfasts and lunches with our board of executive
officers) are important instruments of communication with and integration of our staff.
Our training center has the capacity to serve over 750 students each day with certification
and management courses. In 2004, we also implemented a variable compensation policy for
our officers and employees, aligned with our strategic goals for the company and an
aggressive policy of sharing profits. Following approval by both our board of directors
and shareholders, we implemented a share purchase option plan for our officers and
employees pursuant to which the first options were granted in December 2005.
 
    
    Liquidity and solvency.Our restructuring project initiated in 2003 has significantly
improved our liquidity and solvency indices (for example current assets, divided by current
liabilities, or the current liquidity ratio, increased from 0.80 at December 2003 to 1.90
at December 2006). This allows us flexibility in implementing our business plan, such as
in negotiating new lease agreements and expanding our fleet on more favorable terms.
 Strategy
  
    
    Continue providing superior customer service.One of our key strategies is to offer
differentiated and high-quality service. We consistently seek to make travel more
convenient and comfortable for our passengers, based on a strong and reliable network, to
perfect our service and to strengthen our commitment to passengers.
 
    
    Increase revenue with profitability, serving a greater number of passengers at a
competitive price.We will seek to continue to provide what we believe is an overall
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 traveler market:consolidating and expanding our traditional
passenger base of business travelers, who we believe represent approximately 75% of
demand for our flights, through measures focusing on business travelers 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 travelers. In order to
more efficiently use our fleet, our strategy involves capturing additional demand in the
tourism and leisure market through specific promotions for holidays and local events
through 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). We believe that we are the largest charter
operator in Brazil, with gross revenues of R$249 million and R$250 million at December
31, 2005 and December 31, 2006, respectively, representing approximately 4.2% and 3.2%
of our consolidated revenues for the same periods. Through our subsidiary TAM Viagens,
we also own the second-largest tourism and leisure travel operator in the country;
  24




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##### Table of Contents




    
    selective expansion in international markets:consolidating our market share in major
destinations in Latin America and seeking to strengthen our intercontinental position
with more frequent flights and the addition of new destinations that support our
domestic strategy; and
 
    
    expansion of our cargo business:greater utilization of cargo space in our aircraft
to develop our cargo business line, while ensuring no negative effects on our commitment
to further improve service to our passengers. Our cargo transportation business line
represented R$407 million, or 6.9%, of our consolidated revenues at December 31, 2005
and R$487 million or 6.3% of our consolidated revenues at December 31, 2006.
 
    
    Reduce our operating costs, optimizing the use of our fleet and streamlining our
processes.We believe that the successful implementation of our strategy is closely linked
to cost reductions and improved application of applying capital invested. 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 costs 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. As a result of this decision, we will exclusively
use Airbus A320 family aircraft in the domestic market from mid-2008. We will seek to
maintain high aircraft utilization and will seek 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 apply a cost reduction
policy aimed at increasing our productivity through new information technology tools,
redesigning operational processes, 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.
 Products and Services
    25




---



##### Table of Contents



Year Ended December 31,2006
    
    
    2006
    
    
    2004(R$ millions)By type of service provided:Domestic revenueScheduled  Passengers
    
    
    4,936
    
    
    
    3,966
    
    
    
    3,020Charter  Passengers
    
    
    226
    
    
    
    226
    
    
    
    214Cargo
    
    
    322
    
    
    
    277
    
    
    
    193Total
    
    
    5,484
    
    
    
    4,469
    
    
    
    3,427International revenueScheduled  Passengers
    
    
    1,513
    
    
    
    1,011
    
    
    
    871Charter  Passengers
    
    
    24
    
    
    
    23
    
    
    
    22Cargo
    
    
    165
    
    
    
    130
    
    
    
    126Total
    
    
    1,702
    
    
    
    1,164
    
    
    
    1,019Other operating revenueCommissions
    
    
    15
    
    
    
    21
    
    
    
    17Partnership with the TAM Loyalty Program
    
    
    207
    
    
    
    85
    
    
    
    58Subleasing of aircraft
    
    
    34
    
    
    
    65
    
    
    
    126Other
    
    
    258
    
    
    
    106
    
    
    
    97Total
    
    
    514
    
    
    
    277
    
    
    
    298Gross operating revenue
    
    
    7,700
    
    
    
    5,910
    
    
    
    4,744By geographic region:Brazil
    
    
    5,998
    
    
    
    4,747
    
    
    
    3,726Europe
    
    
    617
    
    
    
    457
    
    
    
    449North America
    
    
    648
    
    
    
    368
    
    
    
    366South America (excluding Brazil)
    
    
    437
    
    
    
    338
    
    
    
    203Total
    
    
    7,700
    
    
    
    5,910
    
    
    
    4,744By product line:Scheduled  Passengers
    
    
    6,449
    
    
    
    4,977
    
    
    
    3,891Charter  Passengers
    
    
    250
    
    
    
    249
    
    
    
    235Cargo
    
    
    487
    
    
    
    407
    
    
    
    319Other revenue
    
    
    514
    
    
    
    277
    
    
    
    298Total
    
    
    7,700
    
    
    
    5,910
    
    
    
    4,744
 Sales and Distribution
 Promo Light Flex Max Top
   26




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##### Table of Contents



e e e
  Pricing Policy, Revenue and Yield Management
  e
      27




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##### Table of Contents



Air Transportation Operations
 Passenger transportation
 Scheduled domestic operations
     28




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##### Table of Contents



Average Numberof Departures perday with our
    
    
    PassengerRoute
    
    Aircraft(1)
    
    
    Departures(2)São Paulo (Congonhas)
    
    
    118.0
    
    
    
    3,016,323Brasília
    
    
    62.0
    
    
    
    1,070,939São Paulo (Guarulhos)
    
    
    31.0
    
    
    
    1,052,997Salvador
    
    
    31.0
    
    
    
    821,094Curitiba
    
    
    25.0
    
    
    
    646,933Rio de Janeiro (Santos Dumont)
    
    
    25.0
    
    
    
    762,600Rio de Janeiro (Galeão)
    
    
    32.0
    
    
    
    941,984Belo Horizonte (Confins)
    
    
    27.0
    
    
    
    791,353Recife
    
    
    24.0
    
    
    
    610,749Fortaleza
    
    
    19.0
    
    
    
    545,290Vitória
    
    
    14.0
    
    
    
    424,302Belem
    
    
    11.0
    
    
    
    349,813Porto Alegre
    
    
    14.0
    
    
    
    549,680Goiânia
    
    
    11.0
    
    
    
    329,379São Paulo (Viracopos)
    
    
    10.0
    
    
    
    167,309Campo Grande
    
    
    10.0
    
    
    
    209,656São Luiz
    
    
    8.0
    
    
    
    196,494Cuiabà
    
    
    9.0
    
    
    
    272,339Porto Seguro
    
    
    3.0
    
    
    
    84,139Florianópolis
    
    
    9.0
    
    
    
    285,702São José Do Rio Preto
    
    
    6.0
    
    
    
    122,644Londrina
    
    
    8.0
    
    
    
    147,610Ilheus
    
    
    5.0
    
    
    
    106,592Belo Horizonte (Pampulha)
    
    
    2.0
    
    
    
    101,755Natal
    
    
    6.0
    
    
    
    209,901Ribeirão Preto
    
    
    3.0
    
    
    
    122,723Maceió
    
    
    5.0
    
    
    
    166,507Uberlândia
    
    
    5.0
    
    
    
    143,396Manaus
    
    
    5.0
    
    
    
    188,227Teresina
    
    
    4.0
    
    
    
    102,092Aracaju
    
    
    5.0
    
    
    
    131,774Foz Do Iguaçu
    
    
    5.0
    
    
    
    200,522Joinville
    
    
    4.0
    
    
    
    92,594Navegantes
    
    
    3.0
    
    
    
    98,026Macapá
    
    
    3.0
    
    
    
    133,392João Pessoa
    
    
    3.0
    
    
    
    130,736Palmas
    
    
    2.0
    
    
    
    65,360Imperatriz
    
    
    2.0
    
    
    
    36,305Santarem
    
    
    3.0
    
    
    
    59,424Marabá
    
    
    2.0
    
    
    
    39,643Porto Velho
    
    
    3.0
    
    
    
    62,045Maringa
    
    
    2.0
    
    
    
    39,872Ji-Paranà
    
    
    1.0
    
    
    
    13,276Caxias Do Sul
    
    
    1.0
    
    
    
    26,506Corumbá
    
    
    1.0
    
    
    
    16,157Una (Ilha De Comandatuba)
    
    
    1.0
    
    
    
    7,836
 (1)
    
    Figures relate to departures on TAM aircraft only.(2)
    
    Figures relate to TAM Issued tickets (and include departures on non-TAM aircraft).
 Scheduled international operations
   29




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##### Table of Contents



Charter operations
  Cargo transportation operations
   Travel and tourism operations
 Instituto Brasileiro de Turismo  EMBRATUR
 Marketing
 TAM Loyalty Program
 Unibanco  União de Bancos Brasileiros S.A. Banco Itaú S.A.
  30




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##### Table of Contents



Communications with our passengers
   Fleet
 General
    31




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##### Table of Contents



Direction Générale de LAviation Civile  DGAC
   To be Returned/ Out ofIn Operation
    
    
    Subleased
    
    
    Operation
    
    
    TotalDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,Model
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2006
    
    
    2005
    
    
    2004Airbus A330
    
    
    10
    
    
    
    7
    
    
    
    5
    
    
    
    
    
    
    
    3
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    10
    
    
    
    9Airbus A320
    
    
    50
    
    
    
    36
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    36
    
    
    
    31Airbus A319
    
    
    14
    
    
    
    13
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    13
    
    
    
    13Fokker 100
    
    
    19
    
    
    
    20
    
    
    
    21
    
    
    
    
    
    
    
    0
    
    
    
    2
    
    
    
    2
    
    
    
    5
    
    
    
    7
    
    
    
    21
    
    
    
    25
    
    
    
    30Total
    
    
    93
    
    
    
    76
    
    
    
    70
    
    
    
    
    
    
    
    3
    
    
    
    6
    
    
    
    2
    
    
    
    5
    
    
    
    7
    
    
    
    95
    
    
    
    84
    
    
    
    83
  32




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##### Table of Contents



2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010(Number of aircraft)Airbus A330
    
    
    7
    
    
    
    10
    
    
    
    15
    
    
    
    16
    
    
    
    20
    
    
    
    20Airbus A319/A320(1)
    
    
    49
    
    
    
    64
    
    
    
    88
    
    
    
    103
    
    
    
    106
    
    
    
    112Fokker F100
    
    
    20
    
    
    
    19
    
    
    
    6
    
    
    
    0
    
    
    
    0
    
    
    
    0MD-11
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0Boeing 777
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    4
    
    
    
    4
    
    
    
    4Total
    
    
    76
    
    
    
    93
    
    
    
    112
    
    
    
    123
    
    
    
    130
    
    
    
    136
 (1)
    
    Our fleet projection is based on the following: we currently have firm orders with Airbus for
51 additional A320 family aircraft, six A330 aircraft and ten Airbus A350 aircraft, with options
with Airbus for up to 20 additional A320 family aircraft and five additional A350 aircraft. We
also have firm orders with Boeing to lease four Boeing 777 aircraft, with four additional options.
The projection also includes an additional four Airbus A320 aircraft that we may choose to add on a
spot basis in future depending on demand for our services.
    At December 31,Bodied
    
    2004
    
    
    2005
    
    
    2006Narrow-bodied aircraft
    
    
    10.1
    
    
    
    12.0
    
    
    
    12.3Wide-bodied aircraft
    
    
    14.0
    
    
    
    14.8
    
    
    
    15.1
 Leasing agreements
    33




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##### Table of Contents



Maintenance
    
    
    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 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;
 
    
    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 TAY650-15 aircraft engines. This
is complemented by a novation and amendment agreement to the TAY Agreement, between us and
Rolls-Royce Brazil Ltda., dated November 8, 2001 pursuant to which Rolls-Royce Brazil
Ltda., replaced MTU as contract counterparty. This agreement terminates on June 30, 2015;
 
    
    an engine maintenance agreement between TAM Linhas Aéreas and MTU Maintenance Hanover
GmbH, or MTU Hanover, pursuant to which MTU Hanover has agreed to provide certain
maintenance, refurbishment, repair and modification services with respect to certain
V2500-A5 engines. 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 PW4168A engines, engine
modules and the parts and components thereof. This agreement terminates on September 14,
2010.
    34




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##### Table of Contents



Fuel
    Safety
    35




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##### Table of Contents



Insurance
    Information Technology
  e e e
 e
  36




---



##### Table of Contents



e
    Seasonality
  Competition
 General
     37




---



##### Table of Contents



Domestic market share (RPKs)
 
 Source: ANAC.
   Overview of the Industry
 General
 Instituto Brasileiro de Geografia e
Estatística
  38




---



##### Table of Contents




    
    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 between smaller cities and 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.
    Total No. of
    
    
    MarketRoutes Between Pairs of Cities
    
    Passengers
    
    
    ShareSão Paulo
    
    Rio de Janeiro
    
    
    3,365,874
    
    
    
    8.9
    %São Paulo
    
    Brasília
    
    
    1,306,015
    
    
    
    3.5
    %São Paulo
    
    Belo Horizonte
    
    
    391,884
    
    
    
    1.0
    %Brasília
    
    Rio de Janeiro
    
    
    948,008
    
    
    
    2.5
    %Belo Horizonte
    
    Brasília
    
    
    121,923
    
    
    
    0.3
    %Belo Horizonte
    
    Rio de Janeiro
    
    
    620,759
    
    
    
    1.6
    %Total
    
    
    
    
    6,754,463
    
    
    
    17.9
    %
 Source: ANAC.
    39




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##### Table of Contents



Country/Region
    
    Passengers
    
    
    GDP
    
    
    Population(US$ billions)
    
    
    (millions)Argentina
    
    
    825,654
    
    
    
    183.2
    
    
    
    37.9Chile
    
    
    283,947
    
    
    
    115.2
    
    
    
    16.2Uruguay
    
    
    133,667
    
    
    
    16.8
    
    
    
    3.5Bolivia
    
    
    79,601
    
    
    
    9.7
    
    
    
    9.1Paraguay
    
    
    94,248
    
    
    
    7.5
    
    
    
    6.2Peru
    
    
    92,178
    
    
    
    79.4
    
    
    
    28Colombia
    
    
    52,845
    
    
    
    122.6
    
    
    
    45.6Venezuela
    
    
    47,566
    
    
    
    130.5
    
    
    
    26.6North America
    
    
    1,120,995
    
    
    
    13,585.4
    
    
    
    320.1Europe
    
    
    1,869,397
    
    
    
    15,633.0
    
    
    
    804.2
 Source: Euromonitor, IATA GABI (International Air Transport Association Global Aviation Business
Intelligence) and Bureau of Transportation Statistics.
  40




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##### Table of Contents



Trends In the Domestic Market
   1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006(In millions, except percentages)ASKs
    
    
    31,146
    
    
    
    38,121
    
    
    
    40,323
    
    
    
    41,437
    
    
    
    45,314
    
    
    
    47,013
    
    
    
    41,851
    
    
    
    43,034
    
    
    
    47,979
    
    
    
    55,971Change in ASKs(1)
    
    
    
    
    
    
    22.4
    %
    
    
    5.8
    %
    
    
    2.8
    %
    
    
    9.4
    %
    
    
    3.8
    %
    
    
    (11.0
    )%
    
    
    2.8
    %
    
    
    11.5
    %
    
    
    16.7
    %RPKs
    
    
    17,824
    
    
    
    22,539
    
    
    
    22,204
    
    
    
    24,284
    
    
    
    26,527
    
    
    
    26,711
    
    
    
    25,196
    
    
    
    28,214
    
    
    
    33,699
    
    
    
    40,079Change in RPKs(1)
    
    
    
    
    
    
    26.5
    %
    
    
    (1.5
    )%
    
    
    9.4
    %
    
    
    9.2
    %
    
    
    0.7
    %
    
    
    (5.7
    )%
    
    
    12.0
    %
    
    
    19.4
    %
    
    
    18.9
    %Load factor
    
    
    57.2
    %
    
    
    59.1
    %
    
    
    55.1
    %
    
    
    58.6
    %
    
    
    58.5
    %
    
    
    56.8
    %
    
    
    60.2
    %
    
    
    65.6
    %
    
    
    70.2
    %
    
    
    71.6
    %
 (1)
    
    Percentages refer to percentage change from previous year.
 Source: Anuário DAC (1997 to 2003) and Dados Comparativos Avançados ANAC (2004 to 2006).
      41




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##### Table of Contents



Regulation of the Brazilian Civil Aviation Industry
 Overview
      Air transportation services concession
    42




---



##### Table of Contents



Importation of aircraft into Brazil
  Aircraft registration
 certificado de navegabilidade
  Rights to Operate Air Routes
 Domestic routes
 hotran
  43




---



##### Table of Contents



hotran hotran
 International routes
    Policy on slots
 hotran hotran
 hotran
  Departmento de Controle do Espaço Aéreo
 Aviation infrastructure and the airport system
   44




---



##### Table of Contents



Prices
    45




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##### Table of Contents



Civil liability
   Environmental legislation and regulations
  Restrictions against the ownership of shares in airlines operating under concessions
   
    
    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
 
    
    based on the information in the chart described above, ANAC may determine that
subsequent transfers must be subject to its prior approval.
   46




---



##### Table of Contents



Future legislation
  Federal intervention
  New bankruptcy law
       47




---



##### Table of Contents



C. Organizational Structure
  
  
 D. Property, Plants and Equipment
      48




---



##### Table of Contents



ITEM 4A. UNRESOLVED STAFF COMMENTS
  
 ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
  
 A. Operating Results
 Principal Factors Affecting Our Financial Condition and Results of Operations
 Brazilian macroeconomic conditions
  real
  Effects of exchange rate variations and inflation on our financial condition and results of
operations
 reais real reais real
  49




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##### Table of Contents



real
 Year Ended December 31,2006
    
    
    2005
    
    
    2004Real growth in GDP
    
    
    3.7
    %
    
    
    2.3
    %
    
    
    4.9
    %Inflation (IGP-M)
    
    
    3.8
    %
    
    
    1.2
    %
    
    
    12.4
    %Inflation (IPCA)
    
    
    3.1
    %
    
    
    5.7
    %
    
    
    7.6
    %DI Rate(1)
    
    
    15.23
    %
    
    
    19.08
    %
    
    
    17.46
    %LIBOR(2)
    
    
    5.36
    %
    
    
    4.7
    %
    
    
    2.6
    %Appreciation of the Brazilian realin relation to the dollar
    
    
    9.5
    %
    
    
    13.4
    %
    
    
    8.8
    %Rate of exchange at end of period  US$1.00
    
    R$
    2.1380
    
    
    R$
    2.3407
    
    
    R$
    2.6544Average exchange rate(3)  US$1.00
    
    R$
    2.1761
    
    
    R$
    2.4341
    
    
    R$
    2.9257Increase in West Texas Intermediate oil price (per barrel)
    
    
    0.02
    %
    
    
    40.5
    %
    
    
    33.6
    %West Texas Intermediate oil (per barrel) (end of period)
    
    US$
    61.05
    
    
    US$
    61.04
    
    
    US$
    43.45West Texas Intermediate oil (per barrel) (average price
over period)
    
    US$
    66.07
    
    
    US$
    56.56
    
    
    US$
    41.43
 (1)
    
    The DI Rate corresponds to the average overnight interest rate for the interbank market in
Brazil (cumulative to the end of the monthly 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 ( , or FGV), Brazilian Geography and
Statistics Institute ( , or IBGE), Central Bank and
Bloomberg.
 Role of ANAC
  Flight sharing agreement (codeshare) with Varig
    50




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##### Table of Contents



Amendments to leasing arrangements
     
    
    R$227 million in income from 2004 as a result of reversal of the revaluation reserve;
 
    
    R$117 million as income as a result of the reversal of deferred tax effects;
 
    
    R$295 million as non-operating income; and
 
    
    R$59 million as financial income.
  
    
    a write-off of R$544 million in permanent assets; and
 
    
    a write-off of R$898 million in finance leases of flight equipment.
 Revenues
  
    
    83.8% and 84.2%, respectively, from scheduled passenger transportation service;
 
    
    9.6% and 11.1%, respectively, from cargo and charter service; and
 
    
    6.6% and 4.7%, 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.
 centavos
  51




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##### Table of Contents



Year Ended December 31,2006
    
    
    2005
    
    
    2004ASKs (millions)
    
    
    35,564
    
    
    
    28,024
    
    
    
    20,999RPKs (millions)
    
    
    25,022
    
    
    
    19,797
    
    
    
    13,854Load factor
    
    
    73.9
    %
    
    
    70.6
    %
    
    
    66.0
    %Scheduled domestic yield in centavos
    
    
    29.05
    
    
    
    31.42
    
    
    
    35.21Scheduled international yield in centavos
    
    
    21.28
    
    
    
    20.10
    
    
    
    23.96
  Taxes and deductions
  PIS and COFINS
 Programa de Integração Social Contribuição
para o Financiamento de Seguridade Social
  ICMS
 Imposto sobre Operações Relativas à Circulação de Mercadorias e sobre Serviços de
Transporte Interestadual e Intermunicipal e de Comunicação, ainda que as Operações se Iniciem no
Exterior
 ISS
 Imposto Sobre Serviços
  52




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Tariff surcharge
  Costs and expenses
      
    
    commission and discounts to travel, tourism and cargo agents, as compensation for the
sale of tickets, and cargo shipping (paid directly to the relevant agencies); and
 
    
    other sales and marketing expenses, principally credit card administration fees.
    53




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e e
     Net financial expenses
 Contribuição Provisória sobre Movimentação ou Transmissão de Valores e de Créditos e
Direitos de Natureza Financeira
  Taxes
 IRPJ and CSLL
 Imposto de Renda Pessoa Jurídica Contribuição Social Sobre Lucro Líquido
  54




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##### Table of Contents



Minority In erests
  Discussion of Critical Accounting Policies
  
    
    Revenue recognition and allowance for doubtful accounts.Tickets that are sold are
posted under advance ticket sales, in current liabilities, due to our obligation to
transport passengers. Flight revenue (passenger and cargo transportation) is recognized
when the transportation services are effectively rendered. Other revenue is effectively
recognized when the services are rendered. Tickets that are not used within 12 months of
the original scheduled travel date are cancelled in accordance with IATA regulations and we
recognize the corresponding amount as revenue each quarter in respect of such
cancellations. An allowance for doubtful accounts is established in an amount considered
sufficient by our management to cover any losses incurred in the collection of those
credits.
 
    
    Deferred taxes.We recognize deferred assets and liabilities based on the differences
between the carrying amounts shown in our financial statements and the tax basis of our
assets and liabilities, using prevailing tax rates. We regularly review deferred tax
assets for recoverability on a regular basis, taking into account historical income we have
generated and projected future taxable income based on a study of technical viability. In
the event that any one of our subsidiaries operates at a loss or is unable to generate
sufficient future taxable income, or in the event that there is a material change in the
actual effective tax rates or the time period within which the underlying temporary
differences become taxable or deductible, we evaluate the need to adjust the carrying value
of our deferred tax assets.
 
    
    Pension plans.For those defined benefit pension plans we sponsor, we calculate our
funding obligations based on calculations performed by independent actuaries who use
assumptions we provide regarding interest rates, investment returns, levels of inflation,
mortality rates and future employment levels. These assumptions directly impact our
liability for accrued pension costs and the amounts we record as pension costs.
 
    
    Contingencies.We are currently involved in various judicial and administrative
proceedings, as described in Item 8. Financial Information  A. Consolidated Statements
and Other Financial Information  Legal Proceedings. We record accrued liabilities for
all contingencies in judicial proceedings that represent probable losses. For this
purpose, we take into account the opinion of our external legal advisors. We believe that
these contingencies are properly recognized in our financial statements.
 
    
    Leases.We recognize as finance leases generating assets and financing liabilities
those contracts that contain a purchase option for TAM Linhas Aéreas to purchase the asset
being leased by it, recording them under a specific classification in our financial
statements. All other leases are recognized as operating leases, and the obligations and
respective expenses are recognized when they are incurred.
 
    
    Financial instruments used to mitigate the risks of variations in exchange rates
(including in relation to future fuel purchases) and interest rates.We record the
financial instruments we use to mitigate the risks of variations in exchange rates and
interest rates at their estimated fair market value based on market quotations for similar
instruments and assumptions relating to future foreign exchange rate variations and
variations in interests rates. We use derivative transactions in order to mitigate our
risk against variations in exchange rates, fuel prices, contracts for engine maintenance
services and loan agreements.
  55




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##### Table of Contents



reais centavos
 Year ended December 31, 2006 compared to year ended December 31, 2005
 Year Ended December 31,% of NetOperatingVariation
    
    
    
    
    
    
    
    
    
    
    Variation
    
    
    RevenueBrazilian GAAP
    
    2006
    
    
    2005
    
    
    (%)
    
    
    2006
    
    
    2005
    
    
    (%)
    
    
    (2006)(incentavos per ASK)
    
    
    
    
    
    
    (R$ millions)Gross operating revenue
    
    
    21.7
    
    
    
    21.1
    
    
    
    2.7
    
    
    
    7,700
    
    
    
    5,910
    
    
    
    30.3
    
    
    
    105Air transportation revenues
    
    
    20.2
    
    
    
    20.1
    
    
    
    0.5
    
    
    
    7,186
    
    
    
    5,633
    
    
    
    27.6
    
    
    
    98Domestic
    
    
    14.5
    
    
    
    15.0
    
    
    
    (3.0
    )
    
    
    5,162
    
    
    
    4,193
    
    
    
    23.1
    
    
    
    70International
    
    
    4.3
    
    
    
    3.7
    
    
    
    17.2
    
    
    
    1,538
    
    
    
    1,034
    
    
    
    48.8
    
    
    
    21Cargo
    
    
    1.4
    
    
    
    1.5
    
    
    
    (5.8
    )
    
    
    487
    
    
    
    407
    
    
    
    19.5
    
    
    
    7Other operating revenues
    
    
    1.4
    
    
    
    1.0
    
    
    
    46.4
    
    
    
    514
    
    
    
    277
    
    
    
    85.8
    
    
    
    7Taxes and Deductions
    
    
    (1.0
    )
    
    
    (0.9
    )
    
    
    7.2
    
    
    
    (355
    )
    
    
    (261
    )
    
    
    36.0
    
    
    
    (5
    )Net operating revenue
    
    
    20.7
    
    
    
    20.2
    
    
    
    2.5
    
    
    
    7,345
    
    
    
    5,649
    
    
    
    30.0
    
    
    
    100Operating expensesFuel
    
    
    (6.0
    )
    
    
    (6.0
    )
    
    
    (1.0
    )
    
    
    (2,130
    )
    
    
    (1,695
    )
    
    
    25.7
    
    
    
    (29
    )Sales and marketing
    
    
    (2.5
    )
    
    
    (3.0
    )
    
    
    (19.3
    )
    
    
    (875
    )
    
    
    (855
    )
    
    
    2.4
    
    
    
    (12
    )Aircraft and flight equipment
leasing
    
    
    (2.0
    )
    
    
    (2.2
    )
    
    
    (9.7
    )
    
    
    (719
    )
    
    
    (627
    )
    
    
    14.6
    
    
    
    (10
    )Personnel
    
    
    (2.5
    )
    
    
    (2.4
    )
    
    
    2.8
    
    
    
    (873
    )
    
    
    (669
    )
    
    
    30.5
    
    
    
    12Maintenance
    
    
    (1.1
    )
    
    
    (1.3
    )
    
    
    (14.2
    )
    
    
    (388
    )
    
    
    (356
    )
    
    
    8.9
    
    
    
    (5
    )Services rendered by third parties
    
    
    (1.5
    )
    
    
    (1.3
    )
    
    
    13.8
    
    
    
    (540
    )
    
    
    (374
    )
    
    
    44.4
    
    
    
    (7
    )Landing, take-off and
navigational tariffs
    
    
    (0.9
    )
    
    
    (0.8
    )
    
    
    6.5
    
    
    
    (315
    )
    
    
    (233
    )
    
    
    35.2
    
    
    
    (4
    )Depreciation and amortization
    
    
    (0.3
    )
    
    
    (0.3
    )
    
    
    (6.0
    )
    
    
    (102
    )
    
    
    (85
    )
    
    
    19.3
    
    
    
    (1
    )Aircraft insurance
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (30.3
    )
    
    
    (35
    )
    
    
    (40
    )
    
    
    (11.5
    )
    
    
    (0
    )Others
    
    
    (1.0
    )
    
    
    (1.0
    )
    
    
    1.7
    
    
    
    (372
    )
    
    
    (288
    )
    
    
    29.0
    
    
    
    (5
    )Total operating expenses
    
    
    (17.8
    )
    
    
    (18.6
    )
    
    
    (4.2
    )
    
    
    (6,348
    )
    
    
    (5,222
    )
    
    
    21.6
    
    
    
    (86
    )Gross profit
    
    
    2.8
    
    
    
    1.5
    
    
    
    83.9
    
    
    
    997
    
    
    
    427
    
    
    
    133.4
    
    
    
    14Financial income (expense)
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (75.9
    )
    
    
    (28
    )
    
    
    (93
    )
    
    
    (69.5
    )
    
    
    (0
    )Other operating expenses, net
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    222.8
    
    
    
    (126
    )
    
    
    (31
    )
    
    
    309.7
    
    
    
    (2
    )Operating income
    
    
    2.4
    
    
    
    1.1
    
    
    
    118.6
    
    
    
    842
    
    
    
    304
    
    
    
    177.4
    
    
    
    11Non-operating expenses, net
    
    
    0.0
    
    
    
    (0.0
    )
    
    
    
    
    
    
    11
    
    
    
    (8
    )
    
    
    
    
    
    
    0Income before income tax and social
contribution
    
    
    2.4
    
    
    
    1.1
    
    
    
    127.6
    
    
    
    854
    
    
    
    296
    
    
    
    188.8
    
    
    
    12Income tax and social contribution
    
    
    (0.8
    )
    
    
    (0.4
    )
    
    
    115.4
    
    
    
    (297
    )
    
    
    (108
    )
    
    
    173.4
    
    
    
    (4
    )Income before minority interest
    
    
    1.6
    
    
    
    0.7
    
    
    
    134.7
    
    
    
    557
    
    
    
    187
    
    
    
    197.7
    
    
    
    8Minority interest
    
    
    (0.0
    )
    
    
    0.0
    
    
    
    
    
    
    
    (1
    )
    
    
    0
    
    
    
    
    
    
    
    0Net income for the year
    
    
    1.6
    
    
    
    0.7
    
    
    
    133.8
    
    
    
    556
    
    
    
    187
    
    
    
    197.4
    
    
    
    8
 Gross operating revenues
 centavos
 
    
    our taking advantage of the market opportunities resulting from the significant decrease
in operations by Varig. This created opportunities for us in both the domestic and
international markets. According to ANAC data, Varigs domestic market share decreased
from 21.7% to 4.7% in 2006 and its international market share decreased from 75.0% to
15.4%. We took advantage of these opportunities by increasing our ASKs, which we achieved
by increasing our daily average block hours per aircraft, increasing the size of our fleet
and modifying our fleet mix;
  56




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
    
    an increase in domestic demand for our services, which grew 30.1% by RPKs in 2006,
compared to 2005, causing our load factor to increase from 69.9% in 2005 to 73.1% in 2006;
and
 
    
    an increase in international demand for our services, which grew 40.4% in RPKs in 2006,
compared to 2005, causing our load factor to increase from 72.9% in 2005 to 76.1% in 2006.
  centavos centavos
 centavos
   Taxes and deductions
  Net operating revenue
 centavos centavos centavos centavos
  57




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##### Table of Contents



Operating expenses
 centavos centavos real
 reais
  real
  real
 real
   58




---



##### Table of Contents



real real
   Net financial income (expense)
 real
  Income tax and social contributions
  Net income
   59




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Year ended December 31, 2005 compared to year ended December 31, 2004
 Year Ended December 31,% of NetOperatingVariation
    
    
    
    
    
    
    
    
    
    
    Variation
    
    
    RevenueBrazilian GAAP
    
    2005
    
    
    2004
    
    
    (%)
    
    
    2005
    
    
    2004
    
    
    (%)
    
    
    (2005)(incentavos per ASK)
    
    
    
    
    
    
    (R$ millions)Gross operating revenue
    
    
    21.1
    
    
    
    22.6
    
    
    
    (6.6
    )
    
    
    5,910
    
    
    
    4,744
    
    
    
    24.6
    
    
    
    105Air transportation revenues
    
    
    20.1
    
    
    
    21.2
    
    
    
    (5.0
    )
    
    
    5,633
    
    
    
    4,445
    
    
    
    26.7
    
    
    
    100Domestic
    
    
    15.0
    
    
    
    15.4
    
    
    
    (2.8
    )
    
    
    4,192
    
    
    
    3,233
    
    
    
    29.7
    
    
    
    74International
    
    
    3.7
    
    
    
    4.3
    
    
    
    (13.3
    )
    
    
    1,034
    
    
    
    893
    
    
    
    15.7
    
    
    
    18Cargo
    
    
    1.5
    
    
    
    1.5
    
    
    
    (4.3
    )
    
    
    407
    
    
    
    319
    
    
    
    27.7
    
    
    
    7Other operating revenues
    
    
    1.0
    
    
    
    1.4
    
    
    
    (30.6
    )
    
    
    277
    
    
    
    299
    
    
    
    (7.4
    )
    
    
    5Taxes and Deductions
    
    
    (0.9
    )
    
    
    (1.1
    )
    
    
    (12.5
    )
    
    
    (261
    )
    
    
    (224
    )
    
    
    16.7
    
    
    
    (5
    )Net operating revenue
    
    
    20.2
    
    
    
    21.5
    
    
    
    (6.4
    )
    
    
    5,649
    
    
    
    4,520
    
    
    
    25.0
    
    
    
    100Operating expensesFuel
    
    
    (6.1
    )
    
    
    (5.1
    )
    
    
    19.1
    
    
    
    (1,695
    )
    
    
    (1,067
    )
    
    
    58.9
    
    
    
    (30
    )Sales and marketing
    
    
    (3.1
    )
    
    
    (3.1
    )
    
    
    (2.4
    )
    
    
    (855
    )
    
    
    (656
    )
    
    
    30.2
    
    
    
    (15
    )Aircraft and flight equipment
leasing
    
    
    (2.2
    )
    
    
    (3.1
    )
    
    
    (27.8
    )
    
    
    (627
    )
    
    
    (651
    )
    
    
    (3.7
    )
    
    
    (11
    )Personnel
    
    
    (2.4
    )
    
    
    (2.6
    )
    
    
    (8.1
    )
    
    
    (669
    )
    
    
    (546
    )
    
    
    22.7
    
    
    
    (12
    )Maintenance
    
    
    (1.3
    )
    
    
    (1.9
    )
    
    
    (31.4
    )
    
    
    (356
    )
    
    
    (389
    )
    
    
    (8.4
    )
    
    
    (6
    )Services rendered by third parties
    
    
    (1.3
    )
    
    
    (1.7
    )
    
    
    (22.3
    )
    
    
    (374
    )
    
    
    (360
    )
    
    
    3.7
    
    
    
    (7
    )Landing, take-off and
navigational tariffs
    
    
    (0.8
    )
    
    
    (0.9
    )
    
    
    (6.0
    )
    
    
    (233
    )
    
    
    (186
    )
    
    
    25.4
    
    
    
    (4
    )Depreciation and amortization
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    (29.8
    )
    
    
    (85
    )
    
    
    (91
    )
    
    
    (6.3
    )
    
    
    (2
    )Aircraft insurance
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (43.6
    )
    
    
    (40
    )
    
    
    (53
    )
    
    
    (24.8
    )
    
    
    (1
    )Others
    
    
    (1.0
    )
    
    
    (1.1
    )
    
    
    (4.7
    )
    
    
    (288
    )
    
    
    (227
    )
    
    
    27.1
    
    
    
    (5
    )Total operating expenses
    
    
    (18.6
    )
    
    
    (20.1
    )
    
    
    (7.3
    )
    
    
    (5,222
    )
    
    
    (4,226
    )
    
    
    23.6
    
    
    
    (92
    )Gross profit
    
    
    1.5
    
    
    
    1.4
    
    
    
    8.6
    
    
    
    427
    
    
    
    294
    
    
    
    44.7
    
    
    
    8Financial income (expense)
    
    
    (0.3
    )
    
    
    (0.4
    )
    
    
    (15.9
    )
    
    
    (92
    )
    
    
    (82
    )
    
    
    12.2
    
    
    
    (2
    )Other operating expenses, net
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    58
    
    
    
    (31
    )
    
    
    (14
    )
    
    
    110.9
    
    
    
    (1
    )Operating income
    
    
    1.1
    
    
    
    0.9
    
    
    
    14.9
    
    
    
    304
    
    
    
    198
    
    
    
    53.4
    
    
    
    5Non-operating expenses, net
    
    
    (0.0
    )
    
    
    1.4
    
    
    
    (102
    )
    
    
    (8
    )
    
    
    300
    
    
    
    (102.7
    )
    
    
    0Income before income tax and social
contribution
    
    
    1.1
    
    
    
    2.4
    
    
    
    (55.7
    )
    
    
    296
    
    
    
    498
    
    
    
    (40.7
    )
    
    
    5Income tax and social contribution
    
    
    (0.4
    )
    
    
    (0.7
    )
    
    
    (47.9
    )
    
    
    (109
    )
    
    
    (156
    )
    
    
    (30.9
    )
    
    
    (2
    )Income before minority interest
    
    
    0.7
    
    
    
    1.6
    
    
    
    (58.9
    )
    
    
    187
    
    
    
    342
    
    
    
    (45.2
    )
    
    
    3Minority interest
    
    
    0
    
    
    
    0
    
    
    
    (147
    )
    
    
    
    
    
    
    (1
    )
    
    
    (162.7
    )
    
    
    0Net income for the year
    
    
    0.7
    
    
    
    1.6
    
    
    
    (58.6
    )
    
    
    187
    
    
    
    341
    
    
    
    (45.1
    )
    
    
    3
 Gross operating revenue
 centavos
 
    
    our taking advantage of the market opportunities resulting from the cessation of VASPs
operations as of September 2004 (which, according to the ANAC, had an average of 8.8% of
the domestic market share in 2004), causing our domestic market share, according to ANAC,
to reach 43.5% in 2005, compared to 35.8% in 2004; and
 
    
    an increase in domestic demand, which grew 19.4% in 2005, compared to 2004, causing our
load factor to increase from 66.0% to an average load factor of 70.6% in 2005.
  60




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centavos centavos
 centavos centavos real
   Taxes and deductions
  Net operating revenues
 centavos centavos
  61




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Operating expenses
 centavos centavos real
   real
  real
     62




---



##### Table of Contents



real
  Net financial income (expense)
 real
 Net non-operating income (expense)
  Income tax and social contribution
  Net income
  Quarterly operational data
   63




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20052006
    
    
    Three-month PeriodThree-month Period Ended
    
    
    EndedDecember
    
    
    September
    
    
    June
    
    
    March
    
    
    December
    
    
    SeptemberBrazilian GAAP
    
    31
    
    
    30
    
    
    30
    
    
    31
    
    
    31
    
    
    30(R$ millions)(1)
    
    
    (R$ millions)(1)Statement of operations data
    
    (unaudited)
    
    
    (unaudited)Gross operating revenue
    
    
    2,037
    
    
    
    2,175
    
    
    
    1,824
    
    
    
    1,664
    
    
    
    1,657
    
    
    
    1,611Air transportation revenues
    
    
    1,899
    
    
    
    2,038
    
    
    
    1,670
    
    
    
    1,578
    
    
    
    1,589
    
    
    
    1,540Domestic
    
    
    1,285
    
    
    
    1,461
    
    
    
    1,228
    
    
    
    1,188
    
    
    
    1,175
    
    
    
    1,157International
    
    
    468
    
    
    
    453
    
    
    
    329
    
    
    
    287
    
    
    
    292
    
    
    
    284Cargo
    
    
    146
    
    
    
    124
    
    
    
    113
    
    
    
    103
    
    
    
    122
    
    
    
    99Other operating revenues
    
    
    138
    
    
    
    137
    
    
    
    154
    
    
    
    86
    
    
    
    68
    
    
    
    71Taxes and Deductions
    
    
    (90
    )
    
    
    (100
    )
    
    
    (91
    )
    
    
    (74
    )
    
    
    (75
    )
    
    
    (71
    )Net operating revenue
    
    
    1,947
    
    
    
    2,075
    
    
    
    1,733
    
    
    
    1,590
    
    
    
    1,582
    
    
    
    1,540Operating expensesFuel
    
    
    (551
    )
    
    
    (602
    )
    
    
    (508
    )
    
    
    (470
    )
    
    
    (500
    )
    
    
    (462
    )Sales and marketing
    
    
    (235
    )
    
    
    (242
    )
    
    
    (196
    )
    
    
    (203
    )
    
    
    (215
    )
    
    
    (233
    )Aircraft and flight equipment
leases
    
    
    (176
    )
    
    
    (193
    )
    
    
    (186
    )
    
    
    (164
    )
    
    
    (161
    )
    
    
    (160
    )Personnel
    
    
    (270
    )
    
    
    (207
    )
    
    
    (205
    )
    
    
    (190
    )
    
    
    (195
    )
    
    
    (171
    )Maintenance
    
    
    (103
    )
    
    
    (105
    )
    
    
    (102
    )
    
    
    (78
    )
    
    
    (88
    )
    
    
    (82
    )Services rendered by third parties
    
    
    (140
    )
    
    
    (156
    )
    
    
    (119
    )
    
    
    (125
    )
    
    
    (98
    )
    
    
    (94
    )Landing, take-off and
navigational tariffs
    
    
    (88
    )
    
    
    (85
    )
    
    
    (73
    )
    
    
    (70
    )
    
    
    (66
    )
    
    
    (59
    )Depreciation and amortization
    
    
    (29
    )
    
    
    (26
    )
    
    
    (24
    )
    
    
    (23
    )
    
    
    (22
    )
    
    
    (21
    )Aircraft insurance
    
    
    (8
    )
    
    
    (9
    )
    
    
    (8
    )
    
    
    (9
    )
    
    
    (10
    )
    
    
    (10
    )Other
    
    
    (113
    )
    
    
    (102
    )
    
    
    (86
    )
    
    
    (70
    )
    
    
    (89
    )
    
    
    (78
    )Total operating expenses
    
    
    (1,713
    )
    
    
    (1,727
    )
    
    
    (1,507
    )
    
    
    (1,402
    )
    
    
    (1,444
    )
    
    
    (1,370
    )Gross income
    
    
    234
    
    
    
    348
    
    
    
    226
    
    
    
    188
    
    
    
    138
    
    
    
    170Financial income (expenses), net
    
    
    42
    
    
    
    1
    
    
    
    (60
    )
    
    
    (11
    )
    
    
    (9
    )
    
    
    (23
    )Other operating expenses, net
    
    
    (65
    )
    
    
    (25
    )
    
    
    (26
    )
    
    
    (11
    )
    
    
    (17
    )
    
    
    (7
    )Operating income
    
    
    211
    
    
    
    324
    
    
    
    140
    
    
    
    166
    
    
    
    112
    
    
    
    140Non-operating income (expenses),
net
    
    
    
    
    
    
    2
    
    
    
    5
    
    
    
    5
    
    
    
    1
    
    
    
    3Income (loss) before income tax and
social contribution
    
    
    211
    
    
    
    326
    
    
    
    145
    
    
    
    171
    
    
    
    113
    
    
    
    143Income tax and social contribution
    
    
    (74
    )
    
    
    (114
    )
    
    
    (48
    )
    
    
    (60
    )
    
    
    (48
    )
    
    
    (50
    )Income (loss) before minority interest
    
    
    137
    
    
    
    212
    
    
    
    97
    
    
    
    111
    
    
    
    65
    
    
    
    93Minority interest
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) for the period
    
    
    136
    
    
    
    212
    
    
    
    97
    
    
    
    111
    
    
    
    65
    
    
    
    93Income (loss) per thousand shares (in
reais)
    
    
    0.89
    
    
    
    1.41
    
    
    
    0.64
    
    
    
    0.75
    
    
    
    0.45
    
    
    
    0.65
 (1)
    
    Except where indicated.
  64




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##### Table of Contents



20052006
    
    
    Three-month PeriodThree-month Period Ended
    
    
    EndedDecember
    
    
    September
    
    
    June
    
    
    March
    
    
    December
    
    
    SeptemberU.S. GAAP
    
    31
    
    
    30
    
    
    30
    
    
    31
    
    
    31
    
    
    30(R$ millions)(1)
    
    
    (R$ millions)(1)Statement of operations data
    
    (unaudited)
    
    
    (unaudited)Gross operating revenue
    
    
    2,037
    
    
    
    2,176
    
    
    
    1,813
    
    
    
    1,660
    
    
    
    1,642
    
    
    
    1,611Air transportation revenues
    
    
    1,899
    
    
    
    2,039
    
    
    
    1,670
    
    
    
    1,578
    
    
    
    1,589
    
    
    
    1,540Domestic
    
    
    1,285
    
    
    
    1,461
    
    
    
    1,228
    
    
    
    1,188
    
    
    
    1,175
    
    
    
    1,156International
    
    
    467
    
    
    
    454
    
    
    
    329
    
    
    
    287
    
    
    
    293
    
    
    
    284Cargo
    
    
    147
    
    
    
    124
    
    
    
    113
    
    
    
    103
    
    
    
    121
    
    
    
    100Other operating revenues
    
    
    138
    
    
    
    137
    
    
    
    143
    
    
    
    82
    
    
    
    53
    
    
    
    71Taxes and Deductions
    
    
    (90
    )
    
    
    (100
    )
    
    
    (92
    )
    
    
    (74
    )
    
    
    (75
    )
    
    
    (71
    )Net operating revenue
    
    
    1,947
    
    
    
    2,076
    
    
    
    1,721
    
    
    
    1,586
    
    
    
    1,567
    
    
    
    1,540Operating expensesFuel
    
    
    (550
    )
    
    
    (602
    )
    
    
    (508
    )
    
    
    (470
    )
    
    
    (500
    )
    
    
    (462
    )Sales and marketing
    
    
    (234
    )
    
    
    (242
    )
    
    
    (196
    )
    
    
    (203
    )
    
    
    (228
    )
    
    
    (233
    )Aircraft and flight equipment
leases
    
    
    (90
    )
    
    
    (109
    )
    
    
    (102
    )
    
    
    (80
    )
    
    
    (78
    )
    
    
    (76
    )Personnel
    
    
    (275
    )
    
    
    (208
    )
    
    
    (206
    )
    
    
    (189
    )
    
    
    (192
    )
    
    
    (170
    )Maintenance
    
    
    (103
    )
    
    
    (105
    )
    
    
    (102
    )
    
    
    (78
    )
    
    
    (88
    )
    
    
    (82
    )Services rendered by third parties
    
    
    (139
    )
    
    
    (156
    )
    
    
    (117
    )
    
    
    (119
    )
    
    
    (98
    )
    
    
    (92
    )Landing, take-off and
navigational tariffs
    
    
    (88
    )
    
    
    (85
    )
    
    
    (73
    )
    
    
    (69
    )
    
    
    (66
    )
    
    
    (60
    )Depreciation and amortization
    
    
    (55
    )
    
    
    (57
    )
    
    
    (56
    )
    
    
    (55
    )
    
    
    (53
    )
    
    
    (51
    )Aircraft insurance
    
    
    (9
    )
    
    
    (9
    )
    
    
    (8
    )
    
    
    (9
    )
    
    
    (11
    )
    
    
    (10
    )Other
    
    
    (176
    )
    
    
    (121
    )
    
    
    (110
    )
    
    
    (76
    )
    
    
    (100
    )
    
    
    (77
    )Total operating expenses
    
    
    (1,719
    )
    
    
    (1,694
    )
    
    
    (1,478
    )
    
    
    (1,348
    )
    
    
    (1,414
    )
    
    
    (1,313
    )Operating income
    
    
    228
    
    
    
    382
    
    
    
    243
    
    
    
    238
    
    
    
    153
    
    
    
    227Financial income (expenses), net
    
    
    27
    
    
    
    (30
    )
    
    
    (21
    )
    
    
    176
    
    
    
    (227
    )
    
    
    60Income (loss) before income tax and
social contribution
    
    
    255
    
    
    
    352
    
    
    
    222
    
    
    
    414
    
    
    
    (74
    )
    
    
    287Income tax and social contribution
    
    
    (90
    )
    
    
    (123
    )
    
    
    (75
    )
    
    
    (145
    )
    
    
    21
    
    
    
    (93
    )Income (loss) before minority interest
    
    
    165
    
    
    
    229
    
    
    
    147
    
    
    
    269
    
    
    
    (53
    )
    
    
    194Minority interest
    
    
    (1
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income (loss) for the period
    
    
    164
    
    
    
    229
    
    
    
    147
    
    
    
    269
    
    
    
    (53
    )
    
    
    194
 (1)
    
    Except where indicated.
 Reconciliation to U.S. GAAP
    
    
    revaluation of fixed assets;
  65




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##### Table of Contents




    
    leases;
    
    pension plans;
    
    business combinations;
    
    deferred assets;
    
    revenue recognition with partnerships with the TAM Loyalty Program;
    
    dividends;
    
    stock options plan;
    
    the TAM Loyalty Program;
    
    earnings per share;
    
    derivatives instruments; and
    
    earnings from sale-leaseback transactions.
  
 B. Liquidity and Capital Resources
      66




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##### Table of Contents



reais reais reais reais
  Net cash generated by operating activities
   Net cash used in investing activities
   Net cash generated by (used in) financing activities
   Sources of financing
   67




---



##### Table of Contents



Indebtedness
     reais
 Banco Nacional de Desenvolvimento Econômico e Social
   
 C. Research and Development, Patents and Licenses, etc.
 Instituto
Nacional da Propriedade Industrial
  68




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##### Table of Contents



Taxi Aéreo, Representações, Marcas e
Patentes S.A.
  e
 
 D. Trend Information
  
 E. Off-balance Sheet Arrangements
   69




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##### Table of Contents



F. Tabular Disclosure of Contractual Obligations
  Payments Due per Period (R$ thousands)Principal
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Moreand
    
    
    Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    than 5interest
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsDebentures
    
    
    568,664
    
    
    
    60,588
    
    
    
    8,076
    
    
    
    333,333
    
    
    
    166,667Finance leases
    
    
    52,106
    
    
    
    10,396
    
    
    
    15,950
    
    
    
    12,746
    
    
    
    13,014Operating leases
    
    
    4,691,033
    
    
    
    711,845
    
    
    
    1,248,827
    
    
    
    1,093,560
    
    
    
    1,636,801Operating leases renegotiated
    
    
    109,957
    
    
    
    58,713
    
    
    
    39,630
    
    
    
    9,576
    
    
    
    2,038Loans
    
    
    452,772
    
    
    
    221,908
    
    
    
    169,529
    
    
    
    47,366
    
    
    
    13,969Reorganization of the Fokker 100 fleet
    
    
    74,619
    
    
    
    11,813
    
    
    
    29,513
    
    
    
    33,293
    
    
    
    Interest on debentures, finance leases and loans(1)
    
    
    437,754
    
    
    
    69,576
    
    
    
    191,464
    
    
    
    147,095
    
    
    
    29,619Total contractual obligations
    
    
    6,386,905
    
    
    
    1,144,839
    
    
    
    1,702,989
    
    
    
    1,676,968
    
    
    
    1,862,108
 (1)
    
    Consists of estimated future payment of interest, calculated based on interest rates and
foreign exchange rates applicable at December 31, 2006, assuming that all amortization payments and
payments at maturity will be made on their scheduled payment dates.
  
 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
 A. Directors and Senior Management
 Conselho
de Administração Diretoria Conselho Fiscal
 Board of Directors
      70




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##### Table of Contents



Name
    
    Position
    
    Election dateMaria Cláudia Oliveira Amaro Demenato
    
    Chairman
    
    09/18/2003Maurício Rolim Amaro
    
    Vice-Chairman
    
    12/20/2004Noemy Almeida Oliveira Amaro
    
    Board Member
    
    08/27/2001Luiz Antônio Corrêa Nunes Viana Oliveira
    
    Board Member
    
    06/27/2003Adalberto de Moraes Schettert
    
    Board Member
    
    08/31/2005Roger Ian Wright
    
    Board Member
    
    04/30/2003Waldemar Verdi Júnior
    
    Board Member
    
    01/23/2006Pedro Pullen Parente
    
    Board Member
    
    04/27/2007
  Maria Cláudia Oliveira Amaro Demenato, Chairman of the Board of Directors.
 Maurício Rolim Amaro, Vice-Chairman of the Board of Directors.
 Noemy Almeida Oliveira Amaro, Board Member.
 Luiz Antônio Correa Nunes Viana Oliveira, Board Member. Banco Denasa BNDES IFC Grupo Ultra Grupo Pão de Açúcar Petrobrás Distribuidora S.A NET Serviços de Comunicação S.A. Aracruz Arafertil Copesul Riocell Perdigão Pão de Açúcar ABTA
 Adalberto de Moraes Schettert, Board Member. Unibanco Crefidata  Processamento de Dados do Banco Crefisul
S.A. Prefeitura Municipal de Porto Alegre Banco Industrial de Investimento do Sul S.A. Unibanco Universidade Federal do Rio
Grande do Sul Universidade Católica de Pelotas Instituto Educacional São Judas Tadeu Companhia Siderúrgica Tubarão
 Roger Ian Wright, Board Member Adubos Trevos Garantia Administração de Investimentos
S.A. Banco de Investimentos Credit Suisse (Brasil) S.A. Bassini Playfair Wright Ltda. BPW
Wealth Management Ltda.
 Waldemar Verdi Júnior, Board Member. GRUPO VERDI  GV Holding S.A. Banco Rodobens Companhia Hipotecária Unibanco  Rodobens Centro das Indústrias do Estado de São Paulo  CIESP Associação Comercial de São Paulo, COMGÁS 
Companhia de Gás de São Paulo CDES  Conselho do Desenvolvimento Econômico e Social do
Presidente Luiz Inácio Lula da Silva ASSOBENS 
Associação Brasileira dos Distribuidores Mercedes-Benz ABRAD  Associação
Brasileira das Administradoras de Consórico dos Distribuidores de Veículos Automotores FENABRAVE  Federação Nacional da Distribuição de Veículos Automotores
  71




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##### Table of Contents



Pedro Pullen Parente, Board Member. Rede Brasil Sul
  Executive Officers
     Name
    
    Position
    
    Election dateMarco Antonio Bologna
    
    Chief Executive Officer
    
    01/14/2004Líbano Miranda Barroso
    
    Chief Financial Officer
    
    05/17/2004Alberto Fajerman
    
    Operations Officer
    
    09/14/2006José Wagner Ferreira
    
    Commercial and Marketing Officer
    
    09/19/2001Ruy Antônio Mendes Amparo
    
    Technical Officer
    
    11/26/1997Paulo Cezar Bastos Castello Branco
    
    Fleet and Revenue Administration Officer
    
    02/28/2007
  Marco Antonio Bologna, Director and Chief Executive Officer. Banco Itamarati Banco Inter American Express Universidade de São Paulo
  72




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##### Table of Contents



Líbano Miranda Barroso, Chief Financial Officer Banco Nacional S.A. Banco Real S.A. Banco Safra S.A. Companhia de Concessões Rodoviárias Fundação Getúlio Vargas
 Alberto Fajerman, Operations Officer Rio-Sul Pluna Universidade Federal do Rio de Janeiro
 José Wagner Ferreira, Commercial and Marketing Officer.
 Ruy Antônio Mendes Amparo, Technical Officer. Embraer Aermacchi Embraer Órbita Sistemas
Aeroespaciais
 Paulo Cezar Bastos Castello Branco, Fleet and Revenue Administration Officer. Varig
Logística ECT  Empresa Brasileira de Correios e Telégrafos Casa da Moeda do Brasil INFRAERO 
Empresa Brasileira de Infra-Estrutura Aéroviária Universidade Federal do Rio de Janeiro
 Fiscal Council
   
 B. Compensation
    73




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##### Table of Contents



C. Board Practices
  Swearing-In of Members of Our Board of Directors, Board of Executive Officers and Fiscal Council
  Audit Committee
  Compensation Committee
  Strategic Committee
  Risk Management Committee
   74




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##### Table of Contents



D. Employees
   December 31,
    
    
    December 31,
    
    
    December 31,2006
    
    
    2005
    
    
    2004TAM Linhas AéreasAssistants, secretaries and dispatchers
    
    
    4,647
    
    
    
    2,773
    
    
    
    2,093Analysts and assistants
    
    
    1,532
    
    
    
    1,220
    
    
    
    1,133Supervisors/coordinators
    
    
    412
    
    
    
    316
    
    
    
    265Chairman, vice chairmen, directors and managers
    
    
    176
    
    
    
    171
    
    
    
    143Mechanics, electricians and technicians
    
    
    1,271
    
    
    
    1,127
    
    
    
    972Attendants
    
    
    2,929
    
    
    
    2,198
    
    
    
    1,708Captains and co-pilots
    
    
    1,343
    
    
    
    1,034
    
    
    
    853Interns
    
    
    34
    
    
    
    25
    
    
    
    162Total
    
    
    12,344
    
    
    
    8,864
    
    
    
    7,329TAM ViagensAssistants/receptionists/secretaries/interns
    
    
    29
    
    
    
    32
    
    
    
    38Analysts/assistants/secretaries
    
    
    50
    
    
    
    53
    
    
    
    52Attendants, promoters/issuers/sales reps
    
    
    81
    
    
    
    88
    
    
    
    114Attorneys/coordinators/leaders/supervisors
    
    
    17
    
    
    
    30
    
    
    
    32Directors/managers/advisors
    
    
    15
    
    
    
    10
    
    
    
    10Total
    
    
    192
    
    
    
    213
    
    
    
    246TAM MercosurParaguay
    
    
    493
    
    
    
    439
    
    
    
    382Chile
    
    
    61
    
    
    
    49
    
    
    
    35Argentina
    
    
    32
    
    
    
    37
    
    
    
    148Uruguay
    
    
    23
    
    
    
    22
    
    
    
    35Bolivia
    
    
    46
    
    
    
    41
    
    
    
    40São Paulo
    
    
    4
    
    
    
    4
    
    
    
    Total
    
    
    659
    
    
    
    592
    
    
    
    640Grand Total
    
    
    13,195
    
    
    
    9,669
    
    
    
    8,215
    75




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##### Table of Contents



Supplementary Retirement Plan
    76




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##### Table of Contents



E. Share Ownership
  Number of
    
    
    Number ofCommon Shares
    
    
    Preferred SharesHeld
    
    
    HeldNoemy Almeida Oliveira Amaro
    
    
    1
    
    
    
    Maria Cláudia Oliveira Amaro Demenato
    
    
    1
    
    
    
    Maurício Rolim Amaro
    
    
    1
    
    
    
    Luiz Antônio Corrêa Nunes Viana Oliveira
    
    
    1
    
    
    
    Waldemar Verdi Júnior
    
    
    1
    
    
    
    Adalberto de Moraes Schettert
    
    
    
    
    
    
    1Roger Ian Wright
    
    
    
    
    
    
    1Pedro Pullen Parente
    
    
    1
    
    
    
    
 Share Purchase Option Plan
  
 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 
 A. Major Shareholders
   77




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##### Table of Contents



Shares Beneficially OwnedCommon Shareholders
    
    Number
    
    
    PercentTAM  Empreendimentos e Participações S.A.(1)
    
    
    58,180,631
    
    
    
    97.31
    %Aerosystem S.A. Empreendimentos e Participações(2)
    
    
    1,515,656
    
    
    
    2.53
    %Agropecuária Nova Fronteira Ltda.(3)
    
    
    79,516
    
    
    
    0.13
    %Minority Shareholders
    
    
    16,146
    
    
    
    0.03
    %Noemy Almeida Oliveira Amaro
    
    
    1
    
    
    
    0
    %Maria Cláudia Oliveira Amaro Demenato
    
    
    1
    
    
    
    0
    %Maurício Rolim Amaro
    
    
    1
    
    
    
    0
    %Luiz Antônio Corrêa Nunes Viana Oliveira
    
    
    1
    
    
    
    0
    %Waldemar Verdi Júnior
    
    
    1
    
    
    
    0
    %Adalberto de Moraes Schettert
    
    
    0
    
    
    
    0
    %Roger Ian Wright
    
    
    0
    
    
    
    0
    %Pedro Pullen Parente
    
    
    1
    
    
    
    0
    %Treasury shares
    
    
    0
    
    
    
    0
    %Total
    
    
    59,791,955
    
    
    
    100
    %
 Shares Beneficially OwnedPreferred Shareholders
    
    Number
    
    
    PercentTAM  Empreendimentos e Participações S.A.(1)
    
    
    20,370,930
    
    
    
    22.44
    %Aerosystem S.A. Empreendimentos e Participações(2)
    
    
    1,923,882
    
    
    
    2.12
    %Agropecuária Nova Fronteira Ltda.(3)
    
    
    0
    
    
    
    0
    %Minority shareholders
    
    
    68,476,572
    
    
    
    75.44
    %Noemy Almeida Oliveira Amaro
    
    
    0
    
    
    
    0
    %Maria Cláudia Oliveira Amaro Demenato
    
    
    0
    
    
    
    0
    %Maurício Rolim Amaro
    
    
    0
    
    
    
    0
    %Luiz Antônio Corrêa Nunes Viana Oliveira
    
    
    0
    
    
    
    0
    %Waldemar Verdi Júnior
    
    
    0
    
    
    
    0
    %Adalberto de Moraes Schettert
    
    
    1
    
    
    
    0
    %Roger Ian Wright
    
    
    1
    
    
    
    0
    %Pedro Pullen Parente
    
    
    0
    
    
    
    0
    %Treasury shares
    
    
    0
    
    
    
    0
    %Total
    
    
    90,771,386
    
    
    
    100
    %
 (1)
    
    TAM  Empreendimentos e Participações S.A., is owned by the Amaro family and has its principal
offices at Avenida Monsenhor Antonio Pepe, 331, São Paulo, SP, Brazil. Noemy Almeida Oliveiro Amaro
whose business address is at Avenida Monsenhor Antonio Pepe, 331, São Paulo, SP, Brazil; Maria
Claudia Oliveira Amaro Demenato whose business address is at Avenida Monsenhor Antonio Pepe, 331,
São Paulo, SP, Brazil; Maurcio Rolim Amaro whose business address is at Avenida Monsenhor Antonio
Pepe, 331, São Paulo, SP, Brazil; Marcos Adolfo Tadeu Senamo Amaro whose business address is at Rua
Silvio Tramontano, 231, house 15, São Paulo, SP, Brazil; and João Francisco Amaro whose business
address is at Avenida Monsenhor Antonio Pepe, 387, São Paulo, SP, Brazil own all of the shares in
the company and exercise all of the voting rights and investment power.(2)
    
    Aerosystem S.A. Empreendimentos e Participações is owned by the Amaro family and has its
principal offices at Ava Monsenhor Antônio Pepe, No. 94, São Paulo, SP, Brazil. Noemy Almeida
Oliveiro Amaro whose business address is at Avenida Monsenhor Antonio Pepe, 331, São Paulo, SP,
Brazil; Maria Claudia Oliveira Amaro Demenato whose business address is at Avenida Monsenhor
Antonio Pepe, 331, São Paulo, SP, Brazil; Maurcio Rolim Amaro whose business address is at Avenida
Monsenhor Antonio Pepe, 331, São Paulo, SP, Brazil; Marcos Adolfo Tadeu Senamo Amaro whose business
address is at Rua Silvio Tramontano, 231, house 15, São Paulo, SP, Brazil; and João Francisco Amaro
whose business address is at Avenida Monsenhor Antonio Pepe, 387, São Paulo, SP, Brazil own all of
the shares in the company and exercise all of the voting rights and investment power.(3)
    
    Agropecuária Nova Fronteira Ltda. is owned by the Amaro family and has it principal offices at
Fazenda Jaguarundy, Rodovia BR 463-KM 109, Ponta Porá, Mato Grosso do Sul, Brazil. Noemy Almeida
Oliveiro Amaro whose business address is at Avenida Monsenhor Antonio Pepe, 331, São Paulo, SP,
Brazil; Maria Claudia Oliveira Amaro Demenato whose business address is at Avenida Monsenhor
Antonio Pepe, 331, São Paulo, SP, Brazil; Maurcio Rolim Amaro whose business address is at Avenida
Monsenhor Antonio Pepe, 331, São Paulo, SP, Brazil; Marcos Adolfo Tadeu Senamo Amaro whose business
address is at Rua Silvio Tramontano, 231, house 15, São Paulo, SP, Brazil; and João Francisco Amaro
whose business address is at Avenida Monsenhor Antonio Pepe, 387, São Paulo, SP, Brazil own all of
the shares in the company and exercise all of the voting rights and investment power.
   78




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B. Related Party Transactions
  License For Use of Trademark
   Service Agreement  TAM Marília
   79




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C. Interests of Experts and Counsel
  
 ITEM 8. FINANCIAL INFORMATION
 
 A. Consolidated Statements and Other Financial Information
  Legal Proceedings
  Total Estimated
    
    
    Provision forAmount Claimed
    
    
    Contingencies
    
    
    Court DepositsDecember 31, 2006
    
    
    December 31, 2006
    
    
    December 31, 2006(R$ thousands)
    
    
    (R$ thousands)
    
    
    (R$ thousands)Tax proceedings
    
    
    950,000
    
    
    
    696,246
    
    
    
    41,025Labor proceedings
    
    
    144,158
    
    
    
    4,815
    
    
    
    8,660Civil proceedings
    
    
    130,000
    
    
    
    21,700
    
    
    
    5,892Total
    
    
    1,224,158
    
    
    
    722,761
    
    
    
    55,577
  Proceedings filed against us
 Civil proceedings
  Damage claims relating to accidents
 Unibanco Seguros S.A.
  80




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Tax proceedings
  PIS and COFINS
  Tariff surplus
  ICMS on the importation of aircraft
 Supremo Tribunal Federal
  81




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Airline worker fund
  Labor actions
  Proceedings instituted by us
 Damages relating to price freezes
   82




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Claims on amounts paid in error relating to ICMS
  Additional airport tariffs  ATAERO
 Adicional das Tarifas Aeroportuárias
 Dividends and Dividend Policy
 Amounts available for distribution
  
    
    less the amount allocated to the legal reserve; and
    
    less the amount allocated to the contingency reserve, if any.
      83




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Mandatory dividend
   Distribution of dividends
   84




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Interest on shareholders equity
  
    
    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.
   Our dividend policy
    
 B. Significant Changes
   85




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ITEM 9. THE OFFER AND LISTING
 
 A. Offer and Listing Details
   US$ per ADSQuarter
    
    Low
    
    
    Average(1)
    
    
    HighSecond quarter 2006
    
    
    19.29
    
    
    
    23.95
    
    
    
    28.43Third quarter 2006
    
    
    23.90
    
    
    
    28.95
    
    
    
    33.75Fourth quarter 2006
    
    
    27.05
    
    
    
    31.07
    
    
    
    34.76First quarter 2007
    
    
    24.80
    
    
    
    29.95
    
    
    
    33.55
 (1)
    
    Calculated as the average of closing prices for the period.
 US$ per ADSMonth
    
    Low
    
    
    Average(1)
    
    
    HighDecember 2006
    
    
    27.05
    
    
    
    30.45
    
    
    
    32.88January 2007
    
    
    28.96
    
    
    
    31.62
    
    
    
    33.16February 2007
    
    
    28.16
    
    
    
    31.53
    
    
    
    33.55March 2007
    
    
    24.80
    
    
    
    27.06
    
    
    
    28.75April 2007
    
    
    25.33
    
    
    
    25.80
    
    
    
    26.40May 2007
    
    
    25.56
    
    
    
    29.27
    
    
    
    33.98
 (1)
    
    Calculated as the average of closing prices for the period.
  R$ per Preferred Share(1)Year
    
    Low
    
    
    Average(2)
    
    
    High2002
    
    
    0
    
    
    
    0
    
    
    
    02003
    
    
    3.60
    
    
    
    3.92
    
    
    
    4.202004
    
    
    3.70
    
    
    
    16.94
    
    
    
    33.002005
    
    
    15.75
    
    
    
    27.31
    
    
    
    47.502006
    
    
    40.15
    
    
    
    57.15
    
    
    
    75.00
 (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 2005
    
    
    27.00
    
    
    
    38.18
    
    
    
    45.90Second quarter 2005
    
    
    12.50
    
    
    
    20.32
    
    
    
    23.50Third quarter 2005
    
    
    15.75
    
    
    
    22.68
    
    
    
    27.00Fourth quarter 2005
    
    
    24.51
    
    
    
    34.42
    
    
    
    47.50First quarter 2006
    
    
    40.15
    
    
    
    46.75
    
    
    
    53.75Second quarter 2006
    
    
    41.45
    
    
    
    52.30
    
    
    
    59.50Third quarter 2006
    
    
    52.90
    
    
    
    63.01
    
    
    
    73.10Fourth quarter 2006
    
    
    58.70
    
    
    
    66.75
    
    
    
    75.00First quarter 2007
    
    
    51.16
    
    
    
    63.13
    
    
    
    70.80
 (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.
  86




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R$ per Preferred ShareMonth
    
    Low
    
    
    Average(1)
    
    
    HighDecember 2006
    
    
    58.70
    
    
    
    65.40
    
    
    
    70.50January 2007
    
    
    61.60
    
    
    
    67.39
    
    
    
    70.80February 2007
    
    
    60.10
    
    
    
    66.20
    
    
    
    69.90March 2007
    
    
    51.16
    
    
    
    56.56
    
    
    
    61.00April 2007
    
    
    51.15
    
    
    
    52.36
    
    
    
    53.48May 2007
    
    
    52.60
    
    
    
    58.52
    
    
    
    65.60
 (1)
    
    Calculated as the average of closing prices for the period.
 
 B. Plan of Distribution
  
 C. Markets
 Trading on BOVESPA
  Novo
Mercado
 Novo Mercado
     Regulation of Brazilian Securities Markets
   87




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companhia aberta companhia fechada
   BOVESPAS Differentiated Corporate Governance Practices
 Novo Mercado
   BOVESPA Level 2
 Preferred shares with restricted voting rights
  Tag along rights
   88




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Free float
  Public offers of shares through mechanisms that favor broad distribution
  Introduction of improvements in financial statements
           89




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Compliance with transparency rules on the part of controlling shareholders and managers in
transactions involving our shares
   Shareholders agreement, stock option programs and contracts with companies in the same economic
group
   de facto de jure
 Resolution of disputes through arbitration
 Câmara de
Arbitragem do Mercado
 Cancellation of Level 2 registration
   90




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Divestment of control following abandonment of Level 2 listing
   Significant Differences Between Our Corporate Governance Practices and NYSE Corporate Governance
Standards
   91




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##### Table of Contents



Majority of Independent Directors
  Executive Sessions
  Nominating/Corporate Governance Committee
  Compensation Committee
  Audit Committee
 Conselho Fiscal
 Shareholder Approval of Equity Compensation Plans
   92




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Code of Business Conduct and Ethics
  Internal Audit Function
  Sarbanes-Oxley Act of 2002
  
 D. Selling Shareholders
  
 E. Dilution
  
 F. Expenses of the Issue
  
 ITEM 10. ADDITIONAL INFORMATION
 
 A. Share Capital
  
 B. Memorandum and Articles of Association
   93




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General
   Corporate purpose
  Rights of our common and preferred 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
  
    
    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;
  94




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
    
    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 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).
         95




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##### Table of Contents



Increases in capital and preemptive rights
   Shareholders meetings
 Diário Oficial do
Estado Valor Econômico and Gazeta Mercantil
 Voting rights
   
    
    any direct conversion, consolidation, spin-off or merger of TAM;
    
    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;
  96




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##### Table of Contents




    
    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 BOVESPA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 BOVESPAs Level 2 regulation. See Item 9. The Offer
and Listing  C. Markets  BOVESPAs Differentiated Corporate Governance Practices.
     Registration of Our Shares; Form and Transfer
     97




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American Depositary Receipts
     
 C. Material Contracts
  Airbus Purchase Contracts
  TAY Engine Maintenance Contract
  V2500 Engine Maintenance Contract
   98




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##### Table of Contents



PW4168A Engine Maintenance Contract
  GE Contract
  Sabre Contract
  
 D. Exchange Controls
    
    
    appoint a representative in Brazil with powers to take actions relating to the investment;
    
    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.
    
    
    register as a foreign direct investor with the Central Bank;
  99




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##### Table of Contents




    
    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.
      
 E. Taxation
   Brazilian Tax Considerations
    100




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Taxation of Dividends
  Taxation of Gains
     101




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##### Table of Contents



reais
  reais
  Distributions of Interest Attributable to Shareholders Equity.
  
    
    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 profits reserves.
  102




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##### Table of Contents



Other Relevant Brazilian Taxes
 Imposto Sobre Operãçoes Financeiras  IOF/Câmbio
 IOF/Títulos
 Contribuição Provisória sobre Movimentação Financeira reais
 United States
  
    
    a financial institution;
    
    a dealer or trader in securities or currencies;
    
    a regulated investment company;
  103




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##### Table of Contents




    
    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.
   
    
    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).
     104




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Taxation of dividends
   reais reais reais reais reais reais reais
  Taxation of capital gains
    105




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##### Table of Contents



Passive foreign investment company rules
  Other Brazilian taxes
  Information reporting and backup withholding
  
 F. Dividends and Paying Agents
  
 G. Statement by Experts
  
 H. Documents on Display
   106




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##### Table of Contents



I. Subsidiary Information
  
 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Interest rate risk
 reais
   107




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##### Table of Contents



Exchange rate risk
 real real
 real real
 real
 Risks relating to variations in the price of oil
   
 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
   108




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PART II
 
 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  
 ITEM 15. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Managements Annual Report on Internal Control over Financial Reporting and Attestation Report of
Registered Public Accounting Firm
  Changes in Internal Control over Financial Reporting
  
 ITEM 15T. CONTROLS AND PROCEDURES
  
 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B. CODE OF ETHICS
   109




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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2006
    
    
    2005(R$ millions)Audit Fees
    
    
    4.1
    
    
    
    2.1Audit-Related Fees
    
    
    2.3
    
    
    
    1.0Tax Fees
    
    
    
    
    
    
    All Other Fees
    
    
    
    
    
    
    Total
    
    
    6.4
    
    
    
    3.1
 Audit Fees
  Audit-Related Fees
  Tax Fees
  All Other Fees
  Pre-Approval Policies and Procedures
 de minimis de minimis
 
 ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
   110




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ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
   111




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PART III
 
 ITEM 17. FINANCIAL STATEMENTS
  
 ITEM 18. FINANCIAL STATEMENTS
   112




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ITEM 19. EXHIBITS
 1.1
    
    By-laws of the Registrant (English translation), incorporated herein
by reference from our fourth pre-effective amendment to our
Registration Statement on Form F-1, filed February 17, 2006, File No.
333-131938.2.1
    
    Form of Deposit Agreement among the Registrant, JPMorgan Chase Bank,
N.A., as depositary, and the Holders from time to time of American
Depositary Shares issued there under, 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. 333-131938.4.1
    
    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.
333-131938.8.1
    
    List of subsidiaries.12.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
  113




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12.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.13.1
    
    Section 1350 Certification of Chief Executive Officer.13.2
    
    Section 1350 Certification of Chief Financial Officer.
  114




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SIGNATURES
  TAM S.A.
 By:
    
    /s/ Marco Antonio BolognaName:
    
    Marco Antonio BolognaTitle:
    
    Chief Executive OfficerDate:
    
    June 1, 2007
  115




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TAM S.A. AND ITS SUBSIDIARIES
   Managements Report on Internal Control over Financial Reporting
    
    
    F-2Report of Independent Registered Public Accounting Firm (including Report on Internal
Control over Financial Reporting)
    
    
    F-3Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-5Consolidated Statement of Operations for the years ended December 31, 2006,2 005 and 2004
    
    
    F-7Statement of Changes in Stockholders Equity for the years ended December 31, 2006, 2005
and 2004
    
    
    F-8Consolidated Statement of Changes in Financial Position for the years ended December 31,
2006, 2005 and 2004
    
    
    F-9Consolidated Statement of Cash Flows for the years ended December 31, 2006, 2005 and 2004
    
    
    F-11Notes to Consolidated Financial Statements
    
    
    F-13
  F-1




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Managements Report on Internal Control over Financial Reporting
      Chief Executive Officer
 Chief Financial Officer
   F-2




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
   Consolidated financial statements
    F-3




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Internal control over financial reporting
 Internal
Control Integrated Framework Internal
ControlIntegrated Framework
   
 
  F-4




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##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Balance Sheets
at December 31
In thousands of reais
 Assets
    
    Note
    
    
    2006
    
    
    2005CurrentCash and banks
    
    
    
    
    
    
    122,458
    
    
    
    92,935Financial investments
    
    
    5
    
    
    
    2,330,520
    
    
    
    902,517Customer accounts receivable
    
    
    6
    
    
    
    780,972
    
    
    
    763,165Inventories
    
    
    7
    
    
    
    113,875
    
    
    
    104,565Taxes recoverable
    
    
    
    
    
    
    67,345
    
    
    
    43,035Advances to aircraft manufacturers
    
    
    8
    
    
    
    221,793
    
    
    
    100,995Deferred income tax and social contribution
    
    
    19
    
    
    
    33,050
    
    
    
    23,782Prepaid expenses
    
    
    
    
    
    
    119,940
    
    
    
    129,479Other
    
    
    
    
    
    
    72,765
    
    
    
    21,7583,862,718
    
    
    
    2,182,231Non-currentLong-term assetsDeposits in guarantee
    
    
    9
    
    
    
    144,444
    
    
    
    118,660Deferred income tax and social contribution
    
    
    19
    
    
    
    109,277
    
    
    
    166,236Judicial deposits
    
    
    17
    
    
    
    55,577
    
    
    
    55,877Advances to aircraft manufacturers
    
    
    8
    
    
    
    130,915Advances for aircraft maintenance
    
    
    
    
    
    
    46,596Other
    
    
    
    
    
    
    26,346
    
    
    
    12,466513,155
    
    
    
    353,239Permanent assetsOther investments
    
    
    
    
    
    
    70
    
    
    
    70Property, plant and equipment
    
    
    11
    
    
    
    791,685
    
    
    
    768,606Deferred charges
    
    
    
    
    
    
    717
    
    
    
    6,662792,472
    
    
    
    775,3381,305,627
    
    
    
    1,128,577Total assets
    
    
    
    
    
    
    5,168,345
    
    
    
    3,310,808
  F-5




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Balance Sheetsat December 31In thousands of reais
    
    (continued)
 Liabilities and stockholders equity
    
    Note
    
    
    2006
    
    
    2005Current liabilitiesSuppliers
    
    
    
    
    
    
    346,817
    
    
    
    282,048Short-term debt including current portion of long-term debt
    
    
    12
    
    
    
    221,908
    
    
    
    118,448Financial lease and operating lease liabilities
    
    
    13
    
    
    
    69,108
    
    
    
    62,049Debentures
    
    
    18
    
    
    
    60,588
    
    
    
    26,109Salaries and payroll charges
    
    
    
    
    
    
    194,128
    
    
    
    134,048Advance ticket sales
    
    
    16
    
    
    
    759,210
    
    
    
    557,647Taxes and tariffs payable
    
    
    
    
    
    
    63,783
    
    
    
    35,156Income tax and social contribution payable
    
    
    
    
    
    
    1,993
    
    
    
    27,073Interest on own capital and dividends payable
    
    
    20
    
    
    
    137,629
    
    
    
    29,405Other
    
    
    
    
    
    
    174,125
    
    
    
    121,1462,029,289
    
    
    
    1,393,129Non-currentLong-term liabilitiesLong-term debt
    
    
    12
    
    
    
    230,864
    
    
    
    151,405Financial lease and operating lease liabilities
    
    
    13
    
    
    
    92,954
    
    
    
    155,703Debentures
    
    
    18
    
    
    
    508,076
    
    
    
    33,244Deferred income tax and social contribution
    
    
    19
    
    
    
    56,306
    
    
    
    63,287Provision for contingent liabilities and tax obligations under judicial dispute
    
    
    17
    
    
    
    722,761
    
    
    
    654,101Return of Fokker 100 fleet
    
    
    15
    
    
    
    62,806
    
    
    
    85,004Other
    
    
    
    
    
    
    2,060
    
    
    
    1,9061,675,827
    
    
    
    1,144,650Deferred income
    
    
    
    
    
    
    11,099
    
    
    
    11,099Minority interest
    
    
    
    
    
    
    2,744
    
    
    
    1,843Stockholders equityCapital (representing 59,791,955 common shares and 90,771,386 preferred shares
at December 31, 2006 and 59,816,248 common shares and 84,243,214 preferred shares
at December 31, 2005)
    
    
    20
    
    
    
    675,000
    
    
    
    153,909Capital reserve
    
    
    20
    
    
    
    102,855
    
    
    
    350,782Revaluation reserve
    
    
    20
    
    
    
    147,874
    
    
    
    161,196Retained earnings
    
    
    20
    
    
    
    523,657
    
    
    
    94,2001,449,386
    
    
    
    760,087Total liabilities and stockholders equity
    
    
    
    
    
    
    5,168,345
    
    
    
    3,310,808
   F-6




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Statement of Operations
Years ended December 31
In thousands of reais, except amounts per thousand shares
 Note
    
    
    2006
    
    
    2005
    
    
    2004RevenueAir transportation revenuesDomestic
    
    
    21
    
    
    
    5,161,935
    
    
    
    4,192,698
    
    
    
    3,233,300International
    
    
    21
    
    
    
    1,537,461
    
    
    
    1,033,556
    
    
    
    893,140Cargo
    
    
    21
    
    
    
    486,493
    
    
    
    407,146
    
    
    
    318,953Other operating revenues
    
    
    21
    
    
    
    514,202
    
    
    
    276,735
    
    
    
    298,8887,700,091
    
    
    
    5,910,135
    
    
    
    4,744,281Taxes and deductions
    
    
    
    
    
    
    (355,441
    )
    
    
    (261,370
    )
    
    
    (223,910
    )Net operating revenues
    
    
    
    
    
    
    7,344,650
    
    
    
    5,648,765
    
    
    
    4,520,371Cost of services rendered
    
    
    22
    
    
    
    (4,730,669
    )
    
    
    (3,796,886
    )
    
    
    (3,010,070
    )Gross profit
    
    
    
    
    
    
    2,613,981
    
    
    
    1,851,879
    
    
    
    1,510,301Operating income (expenses)Selling
    
    
    22
    
    
    
    (1,186,276
    )
    
    
    (1,078,181
    )
    
    
    (890,957
    )General and administrative
    
    
    22
    
    
    
    (410,360
    )
    
    
    (324,699
    )
    
    
    (310,627
    )Executive management fees
    
    
    22
    
    
    
    (20,764
    )
    
    
    (22,088
    )
    
    
    (13,998
    )Financial expenses
    
    
    23
    
    
    
    (282,418
    )
    
    
    (192,947
    )
    
    
    (112,857
    )Financial income
    
    
    23
    
    
    
    254,178
    
    
    
    100,386
    
    
    
    30,282Other operating expenses, net
    
    
    24
    
    
    
    (126,199
    )
    
    
    (30,806
    )
    
    
    (14,610
    )(1,771,839
    )
    
    
    (1,548,335
    )
    
    
    (1,312,767
    )Operating income
    
    
    
    
    
    
    842,142
    
    
    
    303,544
    
    
    
    197,534Non-operating income (expense), net
    
    
    
    
    
    
    11,356
    
    
    
    (8,046
    )
    
    
    300,126Income before income tax and social contribution
    
    
    
    
    
    
    853,498
    
    
    
    295,498
    
    
    
    497,660Income tax and social contributionCurrent
    
    
    19
    
    
    
    (269,642
    )
    
    
    (153,636
    )
    
    
    (81,292
    )Deferred
    
    
    19
    
    
    
    (26,892
    )
    
    
    45,159
    
    
    
    (74,673
    )Income before minority interest
    
    
    
    
    
    
    556,964
    
    
    
    187,021
    
    
    
    341,695Minority interest
    
    
    
    
    
    
    (1,010
    )
    
    
    353
    
    
    
    (563
    )Net income for the year
    
    
    
    
    
    
    555,954
    
    
    
    187,374
    
    
    
    341,132Number of share at the end of the year (in thousand)
    
    
    20
    
    
    
    150,563
    
    
    
    144,059
    
    
    
    61,635Net income per thousand shares at the end of the
year (considering the retroactive effects of share
split for 2004 described in Note 20(a))
    
    
    
    
    
    
    3.69
    
    
    
    1.30
    
    
    
    5.56
   F-7




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Statement of Changes in Stockholders Equity
Years ended December 31
In thousands of reais
 RetainedCapital
    
    
    Revaluation
    
    
    
    
    
    
    
    
    EarningsCapital
    
    
    reserve
 
    

 Reserve
    
    
   Revenue Reserves
    
    
    (Deficit)
    
    
    TotalLegal
    
    
    RetentionReserve
    
    
    of ProfitsAt December 31, 2003
    
    
    120,749
    
    
    
    
    
    
    
    337,514
    
    
    
    
    
    
    
    
    
    
    
    (416,337
    )
    
    
    41,926Reversal of tax effects on revaluation
    
    
    
    
    
    
    
    
    
    
    7,046
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,046Reversal of revaluation reserve upon change
in type of aircraft engines
    
    
    
    
    
    
    
    
    
    
    (4,023
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,023
    )Reversal of revaluation reserve upon change
in type of aircrafts lease
    
    
    
    
    
    
    
    
    
    
    (226,560
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (226,560
    )Realization of revaluation reserve, net
    
    
    
    
    
    
    
    
    
    
    (7,584
    )
    
    
    
    
    
    
    
    
    
    
    7,584Revaluation, net of tax effects
    
    
    
    
    
    
    
    
    
    
    31,276
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,276Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341,132
    
    
    
    341,132At December 31, 2004
    
    
    120,749
    
    
    
    
    
    
    
    137,669
    
    
    
    
    
    
    
    
    
    
    
    (67,621
    )
    
    
    190,797Reversal of deferred income tax
    
    
    
    
    
    
    
    
    
    
    1,163
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,163Capital increase (Note 20 (a))
    
    
    33,160
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    33,160Premium on subscription of shares
    
    
    
    
    
    
    350,782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    350,762Reversal of revaluation reserve upon
disposal of aircraft engines
    
    
    
    
    
    
    
    
    
    
    (1,405
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,405
    )Realization of revaluation reserve, net
Note 20 (c))
    
    
    
    
    
    
    
    
    
    
    (3,852
    )
    
    
    
    
    
    
    
    
    
    
    3,852Revaluation, net of tax effects
(Note 20 (c))
    
    
    
    
    
    
    
    
    
    
    27,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,621Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,374
    
    
    
    187,374Appropriation of net income: (Note 20 (d))Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,988
    
    
    
    
    
    
    
    (5,988
    )Dividends proposed (R$0.20414391 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,405
    )
    
    
    (29,405
    )Retention of profits (unappropriated
retained earnings)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,212
    
    
    
    (88,212
    )At December 31, 2005
    
    
    153,909
    
    
    
    350,782
    
    
    
    161,196
    
    
    
    5,988
    
    
    
    88,212
    
    
    
    
    
    
    
    760,087Capital increase (Note 20 (a))
    
    
    34,316
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    34,316Premium on subscription of shares
    
    
    
    
    
    
    238,848
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    238,848Effect of change in accounting practice
for maintenance (Note 20(g))
    
    
    
    
    
    
    
    
    
    
    (10,194
    )
    
    
    
    
    
    
    
    
    
    
    15,445
    
    
    
    5,251Capital increase
    
    
    486,775
    
    
    
    (486,775
    )Loyalty program
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,919
    )
    
    
    (8,919
    )Realization of revaluation reserve, net
(Note 20 (c))
    
    
    
    
    
    
    
    
    
    
    (4,246
    )
    
    
    
    
    
    
    
    
    
    
    4,246Reversal of revaluation reserve upon
disposal of aircraft engines/aircrafts
    
    
    
    
    
    
    
    
    
    
    (5,613
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,613
    )Revaluation, net of tax effects (Note 20 (c))
    
    
    
    
    
    
    
    
    
    
    6,731
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,731Net income for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555,954
    
    
    
    555,954Appropriation of net income: (Note 20 (d)):Legal reserve
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,798
    
    
    
    
    
    
    
    (27,798
    )Interest on own capital
(R$0.11231965 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,911
    )
    
    
    (16,911
    )Dividends proposed (R$0.7993215 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (120,358
    )
    
    
    (120,358
    )Retention of profits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    401,659
    
    
    
    (401,659
    )At December 31, 2006
    
    
    675,000
    
    
    
    102,855
    
    
    
    147,874
    
    
    
    33,786
    
    
    
    489,871
    
    
    
    
    
    
    
    1,449,386
   F-8




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##### Table of Contents



TAM S.A. and Subsidiaries
 Statement of Changes in Financial Position
Years ended December 31
In thousands of reais
 Note
    
    
    2006
    
    
    2005
    
    
    2004Financial resources were generated byOperationsNet income for the year
    
    
    
    
    
    
    555,954
    
    
    
    187,374
    
    
    
    341,132Expenses (income) not affecting working capitalAmortization of goodwill
    
    
    24
    
    
    
    717
    
    
    
    1,341
    
    
    
    2,291Depreciation and amortization
    
    
    
    
    
    
    101,855
    
    
    
    85,353
    
    
    
    91,426Residual value of long lived assets disposals
    
    
    
    
    
    
    17,512
    
    
    
    7,920
    
    
    
    577,443Finance leases modified to operating leases
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (833,523
    )Deferred income tax and social contribution
    
    
    19
    
    
    
    22,381
    
    
    
    (40,675
    )
    
    
    96,792Provision for contingencies and tax obligations under judicial dispute
    
    
    
    
    
    
    68,660
    
    
    
    204,588
    
    
    
    87,648Indexation charges on long-term receivables and liabilities
    
    
    
    
    
    
    (14,811
    )
    
    
    (16,745
    )
    
    
    13,608Minority interest
    
    
    
    
    
    
    1,010
    
    
    
    (353
    )
    
    
    563Adjusted income for the year
    
    
    
    
    
    
    753,278
    
    
    
    428,803
    
    
    
    377,380StockholdersCapital increase
    
    
    20
    
    
    
    34,316
    
    
    
    33,160Premium on subscription of shares
    
    
    20
    
    
    
    238,848
    
    
    
    350,782273,164
    
    
    
    383,942Third partiesTransfer from long-term to current assets
    
    
    
    
    
    
    32,775
    
    
    
    19,431Increase in long-term liabilities
    
    
    
    
    
    
    659,376
    
    
    
    144,538
    
    
    
    29,870692,151
    
    
    
    163,969
    
    
    
    29,870Total funds generated
    
    
    
    
    
    
    1,718,593
    
    
    
    976,714
    
    
    
    407,250
  F-9




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Statement of Changes in Financial PositionYears ended December 31In thousands of reais
    
    continued
 Note
    
    
    2006
    
    
    2005
    
    
    2004Financial resources were used forIncrease in long-term assets
    
    
    
    
    
    
    223,661
    
    
    
    15,768
    
    
    
    9,272Property, plant and equipment
    
    
    
    
    
    
    136,136
    
    
    
    109,543
    
    
    
    122,285Transfer from long-term to current liabilities
    
    
    
    
    
    
    168,281
    
    
    
    95,219
    
    
    
    21,438Prior year adjustment
    
    
    20
    
    
    
    8,919Interest on own capital and dividends payable
    
    
    20
    
    
    
    137,269
    
    
    
    29,405Total funds used
    
    
    
    
    
    
    674,266
    
    
    
    249,935
    
    
    
    152,995Increase in working capital
    
    
    
    
    
    
    1,044,327
    
    
    
    726,779
    
    
    
    254,255Changes in working capitalCurrent assetsAt end year
    
    
    
    
    
    
    3,862,718
    
    
    
    2,182,231
    
    
    
    1,143,990At beginning of year
    
    
    
    
    
    
    (2,182,231
    )
    
    
    (1,143,990
    )
    
    
    (774,411
    )1,680,487
    
    
    
    1,038,241
    
    
    
    369,579Current liabilitiesAt end year
    
    
    
    
    
    
    2,029,289
    
    
    
    1,393,129
    
    
    
    1,081,667At beginning of year
    
    
    
    
    
    
    (1,393,129
    )
    
    
    (1,081,667
    )
    
    
    (966,343
    )636,160
    
    
    
    311,462
    
    
    
    115,324Increase in working capital
    
    
    
    
    
    
    1,044,327
    
    
    
    726,779
    
    
    
    254,255
   F-10




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Statement of Cash Flow
Years ended December 31
In thousands of reais
 2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income for the year
    
    
    555,954
    
    
    
    187,374
    
    
    
    341,132Adjustments to reconcile net income to cash provided by operating activitiesDepreciation and amortization
    
    
    101,855
    
    
    
    85,353
    
    
    
    91,426Amortization of goodwill
    
    
    717
    
    
    
    1,341
    
    
    
    2,291Deferred income tax and social contribution
    
    
    26,892
    
    
    
    (45,159
    )
    
    
    74,673Provision for contingencies and tax obligations under judicial dispute
    
    
    68,660
    
    
    
    204,588
    
    
    
    87,648Residual value of long lived assets disposals
    
    
    17,512
    
    
    
    7,920
    
    
    
    577,443Indexation charges and exchange variations, net
    
    
    33,514
    
    
    
    14,920
    
    
    
    9,893Finance leases modified to operating leases
    
    
    
    
    
    
    
    
    
    
    (833,523
    )Minority interest
    
    
    1,010
    
    
    
    (353
    )
    
    
    563Other provisions
    
    
    8,878
    
    
    
    (4,243
    )
    
    
    9,043(Increase) decrease in assetsTrade accounts receivable
    
    
    (30,045
    )
    
    
    (205,586
    )
    
    
    (266,910
    )Inventories
    
    
    (7,738
    )
    
    
    (10,470
    )
    
    
    (9,251
    )Taxes recoverable
    
    
    (24,310
    )
    
    
    (16,192
    )
    
    
    25,510Prepaid expenses
    
    
    9,539
    
    
    
    (42,631
    )
    
    
    5,004Deposits in guarantee
    
    
    (31,861
    )
    
    
    (9,991
    )
    
    
    6,844Judicial deposits
    
    
    270
    
    
    
    (8,172
    )
    
    
    (6,155
    )Deferred income tax and social contribution
    
    
    23,593
    
    
    
    42,311Advances to aircraft manufacturers
    
    
    (247,879
    )
    
    
    (71,910
    )
    
    
    2,573Advances for aircraft maintenance
    
    
    (46,596
    )Other
    
    
    (65,566
    )
    
    
    (4,617
    )
    
    
    1,034Increase (decrease) in liabilitiesSuppliers
    
    
    64,769
    
    
    
    17,832
    
    
    
    64,427Financial and operating lease
    
    
    (28,752
    )
    
    
    (46,117
    )
    
    
    (25,658
    )Advance from ticket sales
    
    
    201,563
    
    
    
    190,312
    
    
    
    142,102Taxes and tariffs payable
    
    
    28,627
    
    
    
    (14,189
    )
    
    
    (12,140
    )Salaries and payroll charges
    
    
    60,080
    
    
    
    12,944
    
    
    
    63,628Income tax and social contribution payable
    
    
    (25,080
    )
    
    
    24,001
    
    
    
    3,072Other
    
    
    26,564
    
    
    
    20,133
    
    
    
    13,756Net cash provided by operating activities
    
    
    722,170
    
    
    
    329,399
    
    
    
    368,425
  F-11




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##### Table of Contents



TAM S.A. and Subsidiaries
 Consolidated Statement of Cash FlowYears ended December 31In thousands of reais
    
    continued
 2006
    
    
    2005
    
    
    2004Cash flows from investing activitiesAcquisition of property, plant and equipment
    
    
    (136,136
    )
    
    
    (109,543
    )
    
    
    (122,285
    )Net cash provided by (used in) investing activities
    
    
    (136,136
    )
    
    
    (109,543
    )
    
    
    (122,285
    )Cash flows from financing activitiesCapital increase
    
    
    273,164
    
    
    
    383,942Dividends paid
    
    
    (29,045
    )Finance lease:Issuance
    
    
    1,248,331
    
    
    
    626,819
    
    
    
    214,872Repayments (interests included)
    
    
    (1,088,626
    )
    
    
    (516,976
    )
    
    
    (269,686
    )Operating lease:Issuance
    
    
    
    
    
    
    23,144
    
    
    
    20,212Repayments (interests included)
    
    
    (15,310
    )
    
    
    (12,758
    )
    
    
    (16,258
    )Debentures:Issuance
    
    
    508,486
    
    
    
    
    
    
    
    6,388Repayments (interests included)
    
    
    (25,508
    )
    
    
    (25,436
    )
    
    
    (77,130
    )Net cash provided by (used in) financing activities
    
    
    871,492
    
    
    
    478,735
    
    
    
    (121,602
    )Increase in cash and banks and financial investments
    
    
    1,457,526
    
    
    
    698,591
    
    
    
    124,538Cash and banks and financial investments at the end of the year
    
    
    2,452,978
    
    
    
    995,452
    
    
    
    296,861Cash and banks and financial investments at the beginning of the year
    
    
    (995,452
    )
    
    
    (296,861
    )
    
    
    (172,323
    )Change in cash and banks and financial investments
    
    
    1,457,526
    
    
    
    698,591
    
    
    
    124,538Interest paid
    
    
    37,385
    
    
    
    21,943
    
    
    
    15,797Income tax paid
    
    
    226,278
    
    
    
    70,629
    
    
    
    42,873
 Non cash transactions
   F-12




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements  In thousands of reais, unless otherwise indicated
 1
    
    OperationsTAM S.A. (TAM or Company) was incorporated in 1997, to invest in companies which carry out
air transportation activities. The Companys principal subsidiary, TAM Linhas Aéreas S,A, (TLA),
operates in the transportation of passengers and cargo within Brazil and on international routes.
In September, 2003, the Company acquired Transportes Aéreos del Mercosur S.A. (Mercosur), an
airline headquartered in Asunción, Paraguay, which operates in Paraguay, Argentina, Brazil, Chile,
Uruguay and Bolivia.From 2004, TLA began consolidating its subsidiary Fidelidade Viagens e Turismo Ltda
(Fidelidade), which had previously been recorded at historical cost. Fidelidade operates in the
travel and tourism agency sector.In 2004, management began implementing programs to enhance the Companys cash flows including the
implementation of a web based distribution channel, e-TAM, which generated a significant costs
saving as well as other actions that resulted in reductions in costs and generated productivity
gains.Beginning in 2003, and consistent with the agreed schedule which runs through 2007, a number of
Fokker 100 aircraft, were returned to the lessors.On June 13, 2005 the Company concluded a public offering of its shares on the São Paulo Stock
Exchange (BOVESPA), which raised funds for the acquisition/lease of narrow bodied aircraft
(predominantly the Airbus A320), to renovate and expand its fleet, in line with its strategy to
consolidate its leadership in the domestic market and further our participation in the
international market. On July 15, 2005, the over-allotment option was exercised by underwriters of
the public offering. With the same objective, on March 10, 2006 the Company made an additional
Public Offering  this time on the BOVESPA and the New York Stock Exchange  NYSE, which was
concluded on April 6, 2006, with the exercise of a supplementary lot of shares as permitted by the
Preferential Share Distribution agreement.2
    
    Presentation of the Financial StatementsThe financial statements have been prepared in accordance with the accounting practices adopted in
Brazil (Brazilian GAAP) which are based on:
 
    
    Brazilian Law No. 6.404/76, as amended by Brazilian Law No. 9.457/97 and Brazilian Law No. 10.303/01;
    
    the rules and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários,or CVM); and
    
    the accounting standards issued by the Brazilian Institute of Independent Accountants (Instituto dos Auditores
Independentes do Brasil,or IBRACON).
 The Company also utilizes the chart of accounts issued by the Civil Aviation National Agency
(Agência Nacional de Aviação Civil,or ANAC).These financial statements therefore contain information that differs from the financial statements
prepared for statutory purposes which were filed with the CVM in February 2006, as follows:
 i.
    
    exclusion of parent companys financial statements;ii.
    
    inclusion of three years of consolidated statements of operations, changes in stockholders
equity, changes in financial position and cash flows;
  F-13




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements  In thousands of reais, unless otherwise indicated
 iii.
    
    (presentation of financial information and additional disclosures required by the
accounting principles generally accepted in the United States of America (U.S. GAAP), as
well as a reconciliation of the net income and stockholders equity.
 All net income per thousand shares, earnings per share and share amounts presented herein for 2004
and 2003 have been conformed to take account of retroactive effects of the share split, (Note 20
(a)).The Company presents its statement of cash flows as supplementary information. The statement of
cash flows was prepared in accordance with the relevant IBRACON standard (which is similar to IAS
7, except for the definition of cash and cash equivalents), and reflects the main operations that
affected the Companys cash and banks and financial investments. Cash and banks consist of highly
liquid cash deposits and financial investments are described in Note 5.3
    
    Significant accounting practices(a)
    
    Determination of results of operationsResults of operations are determined on the accrual basis of accounting. Revenue is recognized, as
follows:
 i.
    
    air transportation revenues (passengers and cargo) is recognized when transportation
services are rendered;ii.
    
    tickets sold but not yet used related to advances ticket sales are registered as current
liabilitiesiii.
    
    revenue for unused tickets is recognized on the ticket expiration date, which is one year
after the issuance date of the ticket; andiv.
    
    other operating revenues represented by fees arising from alterations to flight
reservations, sub-lease of aircraft and other services are recognized when the service is
provided. Other operating revenues also includes revenue from partnerships with the Fidelity
program for frequent flyers (TAM Fidelidade Program) which is recognized when the points
are issued to participants.
 (b)
    
    Accounting estimatesThe preparation of consolidated financial statements in conformity with Brazilian GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates are used for, but not limited to: the useful
life of property, plant and equipment, allowance for doubtful accounts, allowance for inventories,
deferred income tax assets, provision for contingencies and tax obligations under judicial dispute,
valuation of derivative instruments, and assets and liabilities related to employees benefits.(c)
    
    Foreign currencyMonetary assets and liabilities denominated in foreign currencies were translated into reais at the
foreign exchange rate ruling at the balance sheet date. Foreign exchange differences arising on
translation are recognized in the statements of operations.
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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (d)
    
    Current and long-term assets
 (i)
    
    Financial investmentsFinancial investments are initially recorded at acquisition cost and subsequently at market
value. Investment funds are recorded at market value and are classified under financial
investments under Brazilian GAAP(ii)
    
    Allowance for doubtful accounts receivableThe allowance for doubtful accounts receivable is established in an amount considered sufficient
by management to cover expected losses incurred in the collection of those credits.(iii)
    
    InventoriesInventories, consisting of parts and materials to be used in maintenance and repair services,
are stated at the average purchase cost, which is lower than replacement cost. Additionally,
inventories are reduced by a provision for obsolete items, when applicable.(iv)
    
    Advances for aircraft maintenanceAdvances for aircraft maintenance represents prepayment of maintenance to lessors under some
of our operating lease agreements. As the Company presents proof of the performance of such
maintenance, the related advances are reimbursed.(v)
    
    Other current receivables and long-term assetsOther current receivables and long-term assets are presented at net realizable values.
 (e)
    
    Permanent assets
 (i)
    
    Goodwill and negative goodwillGoodwill related to the purchase of a minority interest in TLA, is based substantially on
expected future profitability, and is being amortized over ten years, as from the date at
which benefits are first generated.Negative goodwill will be amortized upon the divestiture or write-off of this investment, and
is recorded in the balance sheet as Deferred income.(ii)
    
    Property, plant and equipmentProperty, plant and equipment is recorded at the cost of acquisition, formation or
construction, plus annual revaluation of aircraft, flight equipment land and building to their
fair market values. Depreciation is recorded using the straight-line method (Note 11), and
takes into account the estimated useful lives of assets.Maintenance expenses are recorded using the built-in overhaul method and are amortized through
the next scheduled maintenance. Amortization of capitalized maintenance is recorded within
cost of services rendered.
 (f)
    
    Current and long-term liabilitiesCurrent and long-term liabilities are stated at the known or estimated amounts, including, when
applicable, accrued indexation charges and exchange rate variations.
  F-15




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements  In thousands of reais, unless otherwise indicated
 (g)
    
    ProvisionsProvisions are recognized when the Company has a legal or constituted obligation as a result of a
past event, and it is probable that an outflow of economic benefits will be required to settle the
obligation. Provisions are recorded considering the best estimates of the risk specific to the
liability.(h)
    
    Advance from ticket salesAdvances for ticket sales represent our obligations to transport passengers related to tickets sold
and not yet used.(i)
    
    Pension plan and benefits to employeesTLA sponsors private defined contribution and defined benefit pension plans, In accordance with CVM
Deliberation No. 371/00, the Company recognizes the actuarial liability, which was initially
calculated in 2001, in the statements of operations, over a five year period. For subsequent
periods, obligations are actuarially determined and accrued in the statement of operation. On
November 21, 2006, the Supplementary Retirement Secretariat (the SPC) approved the proposal to
migrate participants from the defined benefits plan to the defined contribution plan.(j)
    
    Income tax and social contributionCurrent and deferred income tax and social contribution are recorded based on composite statutory
rates.Deferred tax loss carryforwards are recorded in accordance with CVM Instruction No. 371/02, and
consider past profitability and expectations of future taxable income. Income tax and social
contribution available for offset against tax payable are limited to 30% of annual taxable income
in any single year.The Company also recognized deferred income tax and social contribution on temporary differences,
including liabilities over the surplus generated by the revaluation of assets.(k)
    
    Leases
 (i)
    
    Finance leaseRecorded in a specific account to reflect our liability in relation to lease contracts where the
lessee holds a bargain purchase option to acquire the asset.(ii)
    
    Operating leaseOperating leases are all leases other than finance leases. Liabilities and the respective
expenses of this type of lease are recognized as incurred.
 (l)
    
    Financial instrumentsTLA contracts operations involving financial instruments with the objective of mitigating exposure
to interest rate risk, exchange rate risk and fuel price variations. These risks are managed by
defining operational strategies and
establishing control systems. Income is accrued based on the yield curve of the respective
instruments and, when applicable adjusted to reduce the carrying value to market.
  F-16




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements  In thousands of reais, unless otherwise indicated
 (m)
    
    TAM Loyalty ProgramThe Company sponsors a program (the TAM Loyalty Program) to award frequent flyers, whereby points
are accumulated from TAM flights or flights with partner airline companies, or upon making
purchases using the TAM Loyalty Program credit card, or using the services and products of partner
entities.During the year ended at December 31, 2006 the Company, pursuing on-going improvements in best
corporate governance practices and financial controls, changed its accounting practice and accrued
a provision for future liabilities relating to the Loyalty Program.The Company adopts the incremental cost method to recognize its obligation to honor the program
benefits, by estimating total expenses of redeeming these tickets, taking into account the current
average capacity levels of the flights and marginal cost, per passenger transported (basically
insurance and catering).The effect of this change  in the amount of R$ 8,919 was recorded directly to Stockholders Equity
under Retained Earnings, net of the tax effect of R$ 4,597.Revenue resulting from the TAM Loyalty Program partnerships, from credit cards, hotels, rental car
and others are recorded when the points are issued to participants.4
    
    Consolidated Financial StatementsThe accounting policies have been consistently applied by the consolidating companies and are
consistent with those used in previous years.The consolidated financial statements include the financial statements of TAM and its subsidiaries,
as listed below:
 Date of consolidated
    
    
    Economic ownership (%)Company
    
    Financial Statements
    
    
    2006
    
    
    2005
    
    
    2004TLA
    
    December 31, 2006
    
    
    100.00
    
    
    
    100.00
    
    
    
    100.00Mercosur
    
    November 30, 2006
    
    
    94.98
    
    
    
    94.98
    
    
    
    94.98Fidelidade
    
    December 31, 2006
    
    
    99.99
    
    
    
    99.99
    
    
    
    99.99
  Description of main consolidation procedures
 
    
    Elimination of intercompany asset and liability account balances.
    
    Elimination of investment in the subsidiaries capital, reserves and retained earnings.
    
    Elimination of intercompany income and expense balances.
    
    Identification of minority interests in subsidiaries.
    
    Additionally, the revaluation of Mercosurs property, plant and equipment has been
considered in the consolidated financial statement, in order to assure consistency with the
Companys accounting practices, without having adjusted the corporate books in the country
of origin.
    
    The financial statements of the company headquartered abroad (Mercosur) were translated
into reais at the exchange rate at the balance sheet date.
  F-17




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 5
    
    Financial investments
 2006
    
    
    2005Denominated in local currencyInvestment funds (cash and cash equivalents)
    
    
    177,049Bank Deposit Certificates
    
    
    2,962
    
    
    
    2,497Investment funds (trading)
    
    
    2,054,368
    
    
    
    885,417Others
    
    
    84,846
    
    
    
    8082,319,255
    
    
    
    888,722Denominated in foreign currencyInvestment funds (trading)
    
    
    11,295
    
    
    
    13,7952,330,520
    
    
    
    902,517
  6
    
    Customers accounts receivable(a)
    
    Composition of balances
 2006
    
    
    2005Domestic
    
    
    International
    
    
    Total
    
    
    TotalCredit cards
    
    
    421,890
    
    
    
    15,737
    
    
    
    437,627
    
    
    
    406,107Travel agencies
    
    
    185,911
    
    
    
    32,835
    
    
    
    218,746
    
    
    
    244,476Account holders
    
    
    24,608
    
    
    
    1,309
    
    
    
    25,917
    
    
    
    21,310Other airlines
    
    
    1,417
    
    
    
    28,382
    
    
    
    29,799
    
    
    
    33,885Cargo agencies
    
    
    4,590
    
    
    
    15,993
    
    
    
    20,583
    
    
    
    12,290Prepaid checks
    
    
    13,412
    
    
    
    
    
    
    
    13,412
    
    
    
    18,506Others
    
    
    50,450
    
    
    
    22,825
    
    
    
    73,275
    
    
    
    58,127Total
    
    
    702,278
    
    
    
    117,081
    
    
    
    819,359
    
    
    
    794,701Allowance for doubtful accounts
    
    
    (33,666
    )
    
    
    (4,721
    )
    
    
    (38,387
    )
    
    
    (31,536
    )Total
    
    
    668,612
    
    
    
    112,360
    
    
    
    780,972
    
    
    
    763,165
  F-18




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (b)
    
    Change in the allowance for doubtful accounts
 2006
    
    
    2005
    
    
    2004Balance at the beginning of the year
    
    
    48,029
    
    
    
    30,400
    
    
    
    21,210Increases (recorded as sales expenses)
    
    
    20,955
    
    
    
    5,802
    
    
    
    11,754Recoveries
    
    
    (30,597
    )
    
    
    (4,666
    )
    
    
    (2,564
    )Balance at the end of the year
    
    
    38,387
    
    
    
    31,536
    
    
    
    30,400
 7
    
    Inventories(a)
    
    Composition of balances
 2006
    
    
    2005Spare parts and material for repairs and maintenance
    
    
    114,194
    
    
    
    108,672Other inventories
    
    
    10,635
    
    
    
    8,420Total
    
    
    124,829
    
    
    
    117,092Provision for loss on realization
    
    
    (10,954
    )
    
    
    (12,527
    )Total
    
    
    113,875
    
    
    
    104,565
  (b)
    
    Change in provision for loss on realization of inventory
  2006
    
    
    2005
    
    
    2004Balance at January, 1
    
    
    12,527
    
    
    
    12,520
    
    
    
    10,022Additions (recorded as cost of services rendered)
    
    
    548
    
    
    
    3,394
    
    
    
    3,451Reversal
    
    
    (2,121
    )
    
    
    (3,387
    )
    
    
    (953
    )Balance at December, 31
    
    
    10,954
    
    
    
    12,527
    
    
    
    12,520
 8
    
    Advances to aircraft manufacturersAt December 31, 2006, advances to aircraft manufactures are represented by U.S. dollar denominated
contractual prepayments of Airbus A320 aircraft, made to the manufacturer, of R$ 352,708 (2005  R$
100,995), equivalent to US$ 164,971 thousand (2005  US$ 43,147 thousand). Of this amount, R$
130,915 refers to aircraft which will be delivered in long-term.
  F-19




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  9
    
    Deposits in guaranteeDeposits and collaterals in guarantee relating to the lease of aircraft and engines serve mainly to
guarantee payments of operating lease installments. Such deposits and collaterals are denominated
in U.S. dollars, and accrue interest based on the London Interbank Offered Rate (LIBOR) plus a
spread of 1% per annum (p.a.). The terms for redemption are defined in the lease contracts.10
    
    Related-party transactionsDuring 2006, TLA received from Táxi Aéreo Marília S.A. (Marília), a company under common control,
R$ 1,244 (2005  R$ 2,143 and 2004  R$ 2,107), relating to services provided, such as the use of
its importations area and aircraft insurance.The Company and its subsidiaries signed a contract on March, 2005 with TAM Milor Táxi Aéreo,
Representações, Marcas e Patentes S.A. (TAM Milor) for the right to use the TAM brand. This
contract establishes a monthly fee, adjusted annually by IGPM, which totaled to R$ 14,051 in 2006
(2005- R$ 11,559), recorded as Administrative expenses.11
    
    Property, plant and equipment(a)
    
    Composition of balances
 2006
    
    
    2005
    
    
    Annual averageAccumulated
    
    
    
    
    
    
    
    
    
    depreciationCost
    
    
    depreciation
    
    
    Net
    
    
    Net
    
    
    rate - %Flight equipment
    
    
    760,107
    
    
    
    (341,412
    )
    
    
    418,695
    
    
    
    443,131
    
    
    
    8.96Land and Buildings
    
    
    219,930
    
    
    
    (12,463
    )
    
    
    207,467
    
    
    
    177,210
    
    
    
    2.31Computers and software
    
    
    98,158
    
    
    
    (42,636
    )
    
    
    55,522
    
    
    
    44,883
    
    
    
    20.00Machinery and equipment
    
    
    64,303
    
    
    
    (31,254
    )
    
    
    33,049
    
    
    
    34,044
    
    
    
    10.00Furniture, fixtures and
facilities
    
    
    23,767
    
    
    
    (11,930
    )
    
    
    11,837
    
    
    
    9,711
    
    
    
    10.00Vehicles
    
    
    34,332
    
    
    
    (27,040
    )
    
    
    7,292
    
    
    
    5,867
    
    
    
    20.00Construction in progress
    
    
    43,406
    
    
    
    
    
    
    
    43,406
    
    
    
    42,150Other
    
    
    25,818
    
    
    
    (11,401
    )
    
    
    14,417
    
    
    
    11,610
    
    
    
    6.651,269,821
    
    
    
    (478,136
    )
    
    
    791,685
    
    
    
    768,606
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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
   (b)
    
    Revaluation (Note 20 (c))TLA, updated its revaluation of aircraft engines and properties at November 30, 2006, based on an
independent revaluation report issued by Engeval Engenharia de Avaliações S/C Ltda,, which was
approved at the Extraordinary Board Meeting held on December 29, 2006. This revaluation resulted in
an increase in stockholders equity of R$ 9,541 or R$ 7,332 net of tax (2005  R$ 25,577, net of
tax). The revaluation was based on the current fair market value of the assets. When applicable,
new estimates of useful lives of these items were determined.Mercosur, revalued it aircraft engines and property at November 30, 2006, based on an independent
revaluation report. This revaluation resulted in a decrease in the Companys stockholders equity,
of R$601 (2005- R$ 2,152). The revaluation was based on the current fair market value of the
assets.As required by CVM Deliberation No. 183/95, upon realization of the revaluation reserve R$ 4,246
was appropriated to the Retained earnings in the year ended December 31, 2006 (2005  R$ 3,852;
2004  R$ 7,584).
  F-21




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 12
    
    Short and long-term debt
 Payment terms andGuarantees

    
    Interest rates (weighted average)

    
    year of last payment

    
    2006
    
    
    2005Local currencyLeasing of IT equipment
    
    Promissory note of R$5,429
    
    2.42% to 19.07% p.a (17.09% p.a.)
    
    Monthly until 2009
    
    
    7,534
    
    
    
    29,393Leasing of IT equipment
    
    Promissory note of R$18,108
    
    CDI + 0.36% p.a to 3.5% p.a. (3.83% p.a.)
    
    Monthly until 2009
    
    
    32,269FINEM  Sub credit A
    
    Lien over  assets and accounts receivable
    
    TJLP + 4.5% p.a. (6.45% p.a.)
    
    Monthly until 2011
    
    
    72,979
    
    
    
    63,515FINEM  Sub credit B
    
    Lien over  assets and accounts receivable
    
    Basket of currencies BNDES + 3.50% p.a.(3.54% p.a.)
    
    Monthly until 2012
    
    
    11,762Compror
    
    Credit card receivable
    
    
    14.21% p.a.
    
    Monthly until 2007
    
    
    129,952
    
    
    
    46,848Others
    
    Promissory notes of R$6,995
    
    TJLP + 10% p.a to 10.5% p.a. (12.20% p.a.)
    
    Monthly until 2011
    
    
    6,006
    
    
    
    8,474Total in local currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    260,502
    
    
    
    148,230Foreign currencyFINIMP
    
    Promissory note of  US$21,520 thousand
    
    12 months LIBOR + 0.72% to 6.32% p.a.(6.1% p.a.)
    
    Annual until 2009
    
    
    134,113
    
    
    
    102,361International Finance Corporation - IFC
    
    Guarantee deposit
    
    6 months LIBOR+ 3%p.a. (8.4% p.a.)
    
    Six-monthly until 2012
    
    
    42,083Leasing renegotiation
    
    Letter of guarantee
    
    Fixed instalments of (US$55 thousand)
    
    Monthly  until 2022
    
    
    14,014
    
    
    
    15,922Financing - Machinery and equipment
    
    Guarantee deposit
    
    1 month LIBOR + 5% p.a. (10.32% p.a.)
    
    Monthly  until 2008
    
    
    1,308
    
    
    
    2,974Others
    
    Promissory notes of  US$3,165 thousand
    
    Fixed interest 8.5% p.a. (8.5% p.a.)
    
    Six-monthly until 2007
    
    
    406Others
    
    Promissory notes of  US$2,252 thousand
    
    6 months LIBOR + 2.5% p.a.(7.8%p.a.)
    
    Six-monthly until 2007
    
    
    330Others
    
    Lien on goods
    
    Fixed rate of 8.5% p.a
    
    Monthly  until 2007
    
    
    16
    
    
    
    366Total in foreign currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192,270
    
    
    
    121,623Total in local and foreign currency
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    452,772
    
    
    
    269,853Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (221,908
    )
    
    
    (118,448
    )Non-Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    230,864
    
    
    
    151,405
  F-22




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 
  Year
    
    2006
    
    
    20052007
    
    
    
    
    
    
    58,8322008
    
    
    79,092
    
    
    
    41,7642009
    
    
    90,437
    
    
    
    13,3772010
    
    
    24,548
    
    
    
    13,4192011
    
    
    22,818
    
    
    
    12,4132012
    
    
    3,997
    
    
    
    869After 2012
    
    
    9,972
    
    
    
    10,731230,864
    
    
    
    151,405
    F-23




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 13
    
    Leases Payable(a)
    
    Composition of balances
 Monthlypaymentswith finalRates (Weighted average)

    
    due date
    
    
    2006
    
    
    2005Foreign currency denominatedAirbus A319/A320 engines
    
    6-Months LIBOR + 1.5% p.a. to 2.5% p.a. (7.2%) p.a.
    
    
    2015
    
    
    
    46,166
    
    
    
    60,347Airbus A330 engines and spare parts
    
    1-Month LIBOR + 1.5% (6.8%)
    
    
    2009
    
    
    
    5,939
    
    
    
    8,467Fokker 100 engines
    
    Fixed interest of 1.2% p.a.
    
    
    2006
    
    
    
    
    
    
    
    255Refinancing of operational lease installments
    
    1-Month LIBOR (5.5% p.a.)
    
    
    2016
    
    
    
    24,365
    
    
    
    32,9846-Months LIBOR + 1.25% p.a. to 2.25% p.a. (6.8% p.a.)
    
    
    2011
    
    
    
    73,465
    
    
    
    95,9423-Months LIBOR + 1.75% p.a. (7.2%)
    
    
    2009
    
    
    
    8,247
    
    
    
    8,430Fixed interest of from 1.12% p.a.
    
    
    2007
    
    
    
    3,880
    
    
    
    11,327162,062
    
    
    
    217,752Current
    
    
    
    
    
    
    
    
    
    
    (69,108
    )
    
    
    (62,049
    )Non-current
    
    
    
    
    
    
    
    
    
    
    92,954
    
    
    
    155,703
  Year
    
    2006
    
    
    20052007
    
    
    
    
    
    
    45,9832008
    
    
    27,814
    
    
    
    32,1372009
    
    
    27,765
    
    
    
    30,3572010
    
    
    13,691
    
    
    
    14,7232011
    
    
    8,631
    
    
    
    13,9742012
    
    
    5,845
    
    
    
    7,868After 2012
    
    
    9,208
    
    
    
    10,66192,954
    
    
    
    155,703
 (b)
    
    Modification to termsDuring the second quarter of 2004 the Company agreed with the lessors to modify the lease contracts
for ten Fokker 100, four Airbus A319, two Airbus A320 and one Airbus A330, among others things,
eliminating TLAs a purchase option. This resulted in the leases being reclassified for accounting
purposed from finance leases to operating leases. Accordingly, these finance lease contracts are no
longer reflected on the balance sheet as assets with a corresponding lease obligation.
  F-24




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  14
    
    Commitments(a)
    
    Operating leasesTLA has obligations arising from operating lease commitments. The obligations under these lease
commitments are not reflected in the balance sheet because the contracts do not include purchase
options for the aircraft subject to the lease agreements. These operating leases cover: 21
Fokkers-100, 14 Airbus A319, 50 Airbus A320 and 10 Airbus A330 (December 31, 2005  25 Fokkers-100,
13 Airbus A319, 36 Airbus A320 and 10 Airbus A330). These contracts are for periods of up to 192
months and are denominated in U.S. dollar and accrue six-monthly LIBOR. For the year ended December
31, 2006, the cost of aircraft leases, recognized in the consolidated statement of operations in
Costs of services rendered, totaled R$ 704,523 (2005  R$ 613,817), equivalent to US$ 323,606
thousand (2005  US$ 254,432 thousand).Future disbursements due on these contracts (expressed for purpose of convenience in U.S. dollars,
at the balance sheet exchange rates) are as follows:
 Monthlypayments withfinal due
    
    
    Thousands of US dollarsRates (weighted average)
    
    payment in
    
    
    2006
    
    
    2005Airbus A319
    
    1-Month Libor (5.3% p.a.)
    
    
    2014
    
    
    
    115,713
    
    
    
    97,0263-Months Libor (5.5% p.a.)
    
    
    2009
    
    
    
    15,279
    
    
    
    19,3606-Months Libor (6.9% p.a.)
    
    
    2020
    
    
    
    177,065
    
    
    
    187,927Airbus A320
    
    Fixed interest to 4.0% p.a.
    
    
    2012
    
    
    
    65,708
    
    
    
    4,6401-Month Libor (5.8% p.a.)
    
    
    2013
    
    
    
    124,924
    
    
    
    138,2733-Months Libor (5.8% p.a.)
    
    
    2021
    
    
    
    419,584
    
    
    
    224,4456-Months Libor (6.0% p.a.)
    
    
    2020
    
    
    
    505,146
    
    
    
    358,225Airbus A330
    
    6-Months Libor (7.1% p.a.)
    
    
    2017
    
    
    
    443,196
    
    
    
    725,540Fixed interest to 4.6% p.a. to 5.6% p.a. (5.2% p.a.)
    
    
    2020
    
    
    
    231,110Fokker 100
    
    Fixed interest 1.12% p.a. to 2.0% p.a. (1.2% p.a.)
    
    
    2011
    
    
    
    73,934
    
    
    
    101,5536-Months Libor (5.5% p.a.)
    
    
    2007
    
    
    
    6,961
    
    
    
    13,459Airbus engines
    
    Fixed interest 0.92% p.a. to 1.01% p.a. (0.96% p.a.)
    
    
    2011
    
    
    
    7,143
    
    
    
    1,6966 Months Libor (5.2% p.a.)
    
    
    2014
    
    
    
    8,359
    
    
    
    9,6322,194,122
    
    
    
    1,881,776
   F-25




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
   Thousands of US dollarsYear
    
    2006
    
    
    20052006
    
    
    
    
    
    
    261,2052007
    
    
    332,949
    
    
    
    238,7782008
    
    
    307,169
    
    
    
    213,3582009
    
    
    276,941
    
    
    
    197,4702010
    
    
    264,053
    
    
    
    188,2012011
    
    
    247,434
    
    
    
    204,7772012
    
    
    231,711
    
    
    
    164,657After 2012
    
    
    533,865
    
    
    
    413,3302,194,122
    
    
    
    1,881,776
 (b)
    
    Commitments for future aircraft acquisitionTLA has commitments to purchase 4 new Airbus 320 aircraft, which have delivery schedules between
2007 and 2008.During the first quarter of 2005, the Company signed an amendment to the contract with Airbus for
the firm purchase of 20 Airbus A320 with an additional 20 options for the same aircraft family
(including A319, A320 and A321). The delivery of the A320 family aircraft are scheduled between
2007 and 2010.In the second semester of 2006 the Company finalized the contract to acquire a further 37 Airbus
aircraft (15 A319, 16 A320 and 6 A330) for delivery by 2010. The Company also signed a Memorandum of
Understanding signaling its intention to purchase 10 A350-900 with 5 options subject to future
operational conditions, the A350 will start to be delivered at the end of 2012.Also in 2006, the Company contracted the purchase of 4 new Boeing 777-300 ER with 4 options for the
same aircraft.The Company and the Boeing had also signed a short leasing operation for 3 aircrafts MD-11, that
will serve as a bridge lean until the delivery of the 4 B777-300 ER.15
    
    Return of the Fokker 100 fleetAs a result of the agreement to return of the Fokker 100 fleet, on December 19, 2003, TLA cancelled
19 lease contracts, of which ten were finance leases and nine were operating leases. These
aircraft, as from the date of the renegotiated lease contracts up to their return, are under
operating leases.TLA agreed to pay a contractual rescission penalty in 30 consecutive quarterly installments,
between April 2004 and July 2011 in the original amount of R$ 94,188. This amount was recognized in
the statement of operations in the year ended December 31, 2003. TLA also renegotiated the
rescheduled overdue installments in the original amount of R$ 49,599.
  F-26




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
    Year
    
    2006
    
    
    20052007
    
    
    
    
    
    
    12,3112008
    
    
    12,659
    
    
    
    14,5502009
    
    
    16,854
    
    
    
    19,3712010
    
    
    19,101
    
    
    
    21,9542011
    
    
    14,192
    
    
    
    16,81862,806
    
    
    
    85,004
 16
    
    Advance from ticket sales
  17
    
    Provision for contingencies and judicial depositsManagement of TLA and Mercosur recorded provisions for the estimated loss for amounts being
disputed in court for those cases, as judged by the Companys outside legal counsel, where loss to
the Company is deemed probable, and for those amounts considered legal obligations under laws or
decrees despite the Companys questioning legislation.
  F-27




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  2006
    
    
    2005Provisions for
    
    
    Judicialcontingencies
    
    
    deposits
    
    
    Net
    
    
    NetTax obligationsContribution for Social Security -
COFINS (i)
    
    
    300,232
    
    
    
    (25,397
    )
    
    
    274,835
    
    
    
    250,119Social Integration Program PIS (i)
    
    
    81,773
    
    
    
    (8,450
    )
    
    
    73,323
    
    
    
    68,981Additional tariff (ii)
    
    
    247,790
    
    
    
    
    
    
    
    247,790
    
    
    
    168,045Withholding income tax (IRRF) on leases
    
    
    11,910
    
    
    
    
    
    
    
    11,910
    
    
    
    10,932Staff fund (iii)
    
    
    50,514
    
    
    
    
    
    
    
    50,514
    
    
    
    35,978Airport tariffs (iv)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,931Income tax
    
    
    
    
    
    
    (3,164
    )
    
    
    (3,164
    )
    
    
    (3,164
    )Others
    
    
    4,027
    
    
    
    (4,014
    )
    
    
    13
    
    
    
    (583
    )696,246
    
    
    
    (41,025
    )
    
    
    655,221
    
    
    
    592,239Labor contingencies (v)
    
    
    4,815
    
    
    
    (8,660
    )
    
    
    (3,845
    )
    
    
    (3,158
    )Civil contingencies
    
    
    21,700
    
    
    
    (5,892
    )
    
    
    15,808
    
    
    
    9,143722,761
    
    
    
    (55,577
    )
    
    
    667,184
    
    
    
    598,224
 (i)
    
    Corresponds to the discussion of the constitutionality of the change in the tax base of the
PIS and the increase in the contribution and basis of calculation of COFINS, introduced under
Law no 9718/98. Judicial deposits were made for certain months, and others TLA is supported
by judicial measures. These amounts, net of judicial deposits, are updated based on the SELIC.On November 9, 2005, the Supreme Federal Court ruled that the change in the tax base was
unconstitutional. During 2006, the Company has been successful in obtaining favorable ruling on
one process which has enabled the partial reversal of established provision in the amount of R$
45,962, where R$ 26,243 has been deducted from administrative expenses and R$ 19,719 from
financial expenses. At December 31, 2006, eight processes are yet to be judged.(ii)
    
    Corresponds to the collection of 1% on the amount of fares of all tickets sold for regular
domestic routes which are not supplemented. TLA management, based on the opinion of its
outside legal counsel, is contesting the constitutionality of this collection, and non-payment
is supported by a judicial order.(iii)
    
    Corresponds to the collection of 2.5% on the payroll for on the payroll for private social
service and professional formation entities. TLA management, based on the opinion of its
outside legal counsel, is contesting the constitutionality of this collection, and the
non-payment is supported by a judicial order.(iv)
    
    Corresponds to a claim to challenge the charges for use of communication and navigational
support, the use of communications, visual and radio support at aircraft traffic terminals and
charges for landing and on-ground time. The non-payment is supported by a judicial order. On
March 2006, the preliminary injunction which granted TLA the right not to pay these charges
was revoked. Due to this, TLA paid the accrued amount (R$ 94,726) up to that date on single
installment and started to pay regularly these charges.(v)
    
    Judicial deposits have a value in excess of the contingency provision because of judicial
withholding orders and judicial deposits for contingencies not included within the provision
which is recorded in accordance with the CVMs Orientation no. 15/87.
  F-28




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  2006
    
    
    2005
    
    
    2004At beginning of the year
    
    
    654,101
    
    
    
    449,999
    
    
    
    362,351Increase (recorded as administrative expenses)
    
    
    324,818
    
    
    
    212,065
    
    
    
    109,146Reversals
    
    
    (48,004
    )
    
    
    (1,567
    )
    
    
    (17,677
    )Payments
    
    
    (208,154
    )
    
    
    (6,396
    )
    
    
    (3,821
    )At the end of the year
    
    
    722,761
    
    
    
    654,101
    
    
    
    449,999
  18
    
    DebenturesThe outstanding balance per issue is set out below:
 AmountIssue Date
    
    Series
    
    
    Quantity
    
    
    issued
    
    
    2006
    
    
    2005TAMAugust 01, 2006
    
    Exclusive
    
    
    50,000
    
    
    
    10,000
    
    
    
    528,573TLAApril 22, 2003
    
    First
    
    
    473,006
    
    
    
    47,301
    
    
    
    21,282
    
    
    
    31,826April 22, 2003
    
    Second
    
    
    222,835
    
    
    
    22,284
    
    
    
    10,026
    
    
    
    14,994May 16, 2003
    
    Third
    
    
    177,165
    
    
    
    17,717
    
    
    
    8,783
    
    
    
    12,533873,006
    
    
    
    87,302
    
    
    
    40,091
    
    
    
    59,353Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568,664
    
    
    
    59,353Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,588
    )
    
    
    (26,109
    )Non-current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508,076
    
    
    
    33,244
 TAM
     F-29




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 TLA
    19
    
    Income tax and Social Contribution(a)
    
    Reconciliation between nominal and effective income and social contribution taxes
 2006
    
    
    2005
    
    
    2004Income before income tax and
social contribution
    
    
    853,498
    
    
    
    295,498
    
    
    
    497,660Composite statutory rate - %
    
    
    34
    
    
    
    34
    
    
    
    34Nominal income tax and social contribution
    
    
    (290,189
    )
    
    
    (100,470
    )
    
    
    (169,204
    )Non deductibles/non taxables items
    
    
    (6,345
    )
    
    
    (8,007
    )
    
    
    13,239(296,534
    )
    
    
    (108,477
    )
    
    
    (155,965
    )Income tax and social contributionCurrent expense
    
    
    (269,642
    )
    
    
    (153,636
    )
    
    
    (81,292
    )Deferred (expense) benefit
    
    
    (26,892
    )
    
    
    45,159
    
    
    
    (74,673
    )(296,534
    )
    
    
    (108,477
    )
    
    
    (155,965
    )
  F-30




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (b)
    
    Composition deferred income tax and social contribution assets
 2006
    
    
    2005Income tax loss carryforwards
    
    
    
    
    
    
    660Social contribution carryfowards
    
    
    5,184
    
    
    
    28,118Temporary differences
    
    
    137,143
    
    
    
    161,240142,327
    
    
    
    190,018Current
    
    
    (33,050
    )
    
    
    (23,782
    )Non-current
    
    
    109,277
    
    
    
    166,236
  (c)
    
    Deferred income tax and social contribution tax liabilitiesAs prescribed by CVM Deliberation 273/98, the revaluation reserve recorded by TLA at December 31,
2006 is net of income and social contribution charges of R$ 56,306 at December 31, 2006 (2005  R$
63,287).20
    
    Shareholders equity(a)
    
    CapitalAs at December 31, 2006, subscribed and paid-in capital is comprised of 150,563,341 shares (2005 
144,059,462, taking into account the retroactive effects of the share split), of which 59,791,955
are common shares (2005  59,816,248, taking into account the retroactive effects of the share
split) and 90,771,386 are preferred shares (2005  84,243,214, taking into account the retroactive
effects of share split). Authorized capital amounts to R$ 1,200,000 (2005  R$ 1,200,000) and can
be increased upon issuance of common and preferred share with the Board of Directors (Conselho de
Administração) approval.At December 31, 2006 the Company did not hold any shares in treasury.Common share confer to its bearer the right to vote in general meetings.The preferred shares do not have the right to vote in general meetings, except in limited matters,
however, they have priority in the distribution of dividends, priority 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.At the Extraordinary Stockholders Meeting held on May 16, 2005, the stockholders approved the
split of the shares issued by the Company, whereby holders of each share received two shares of the
same type. As a result, the total number of shares increased from 61,364,671 at March 31, 2005 to
122,729,342, of which 59,816,248 are common shares and 62,913,094 are preferred shared, all with no
par value. At that same date, the following was approved:
 
    
    Increase in the limit of the Companys authorized capital to R$1,200,000.
  F-31




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 
    
    Revision of the Bylaws to reflect the corporate governance practices requirements set forth by BOVESPA Level 2.
 
    
    The maximum effect to the Companys stockholders is 2% of outstanding shares in the event of a share purchase plan that
might be approved in the future.
       (b)
    
    Capital reserve  share premium accountThe premium on the subscription of shares is allocated to all stockholders equally.(c)
    
    Revaluation reserve (Note11(b))The amount realized is in proportion to the depreciation of the revalued assets and is transferred
to the accumulated deficit in 2006, amounted to R$ 4,246 (2005  R$ 3,852). Of the total reserve,
R$ 35,948 corresponds to the revaluation of land, which will only be realized upon sale.In accordance with CVM Instruction No. 197/93, the deferred tax charges on the revaluation reserve,
which at December 31, 2006 amounted to R$ 56,306 (2005  R$ 63,287), are recognized in the
statement of operations to the extent that the reserve is realized.(d)
    
    Dividends and interest on stockholders equityPursuant to the Companys statutes, stockholders are assured a minimum dividend of 25% of adjusted
net income for the year, after deducting 5% appropriated to the legal reserve, up to a maximum of
20% of capital. The preferred shares have priority in capital reimbursement and the right to a
dividend at least equal to that distributed to the common shares.
  F-32




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  2006
    
    
    2005Net income for the year
    
    
    555,954
    
    
    
    187,374Offset of prior year adjustment and of accumulated losses
    
    
    (8,919
    )
    
    
    (67,621
    )Technical Interpretation of Ibracon pronouncement No 01/06
    
    
    15,445Constitution of legal reserve - 5%
    
    
    (27,798
    )
    
    
    (5.988
    )Realization of revaluation reserve
    
    
    4,246
    
    
    
    3,852Basis for calculating dividends
    
    
    538,928
    
    
    
    117,617Percentage
    
    
    25
    %
    
    
    25
    %Obligatory minimum dividend (R$0. 89485262 per share  2005 R$0.20414391)
    
    
    134,732
    
    
    
    29,405Interest on stockholders equity, net of tax (R$0.09547170 per share)
    
    
    14,374Complementary dividend (R$0.79938215 per share)
    
    
    120,358
 (e)
    
    Retained income reserveArticle 196 of Corporation Law requires that the balance of net income after dividend distribution
and other statutory appropriations is transferred to this reserve in order to finance the Companys
capital budget and working capital requirements. Future investments include the leasing of
additional aircraft.(f)
    
    Stock option planAt the Extraordinary Stockholders Meeting held on May 16, 2005, the stockholders approved the
stock option plan. The maximum dilution effect to the Companys stockholders is 2% of outstanding
shares, or 2,857,247 shares, for a share options to be granted to full time employees by the Board
of Directors.The Board of Directors meeting held on December 21, 2005 and November 30, 2006, granted 715,255 and
239,750 preferred share options under the plan, respectively.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 Board of Directors granted the release of 955,005 preferred shares to be used as options under
the plan bellow:
 1st grant
    
    2nd grantDate
    
    December 28, 2005
    
    November 30, 2006Number of share
    
    
    715,255
    
    
    239,750Year price  R$  per share
    
    
    14.40
    
    
    43.48Readjustment index
    
    IGPM
    
    IGPM
 (g)
    
    Change in accounting practice for maintenanceIn 2006, IBRACON issued the Technical Interpretation 01/2006, which requires the adoption of the
built-in overhaul method for maintenance expenses. Until December 31, 2005, the Company recorded
maintenance expenses as incurred. Accordingly, the Company reverted depreciation expenses
previously recognized related to maintenance totaling R$ 15,445 (R$ 10,194 net of taxes), and
recorded such impact in the stockholders equity.
  F-33




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 21
    
    Gross Sales ReportThe Company presents its gross sales information segmented by type of service rendered and
geographic area:(a)
    
    By type of service rendered
 Variation
    
    
    Variation2006 to
    
    
    2005 to2006
    
    
    V (%)
    
    
    2005
    
    
    V (%)
    
    
    2004
    
    
    V (%)
    
    
    2005  (%)
    
    
    2004  (%)Domestic revenueScheduled  Passenger
    
    
    4,935,599
    
    
    
    64.1
    
    
    
    3,966,429
    
    
    
    67.1
    
    
    
    3,019,725
    
    
    
    63.6
    
    
    
    24.4
    
    
    
    31.4Charter  Passenger
    
    
    226,336
    
    
    
    2.9
    
    
    
    226.269
    
    
    
    3.8
    
    
    
    213,575
    
    
    
    4.5
    
    
    
    0.03
    
    
    
    5.9Cargo
    
    
    321,817
    
    
    
    4.2
    
    
    
    277,403
    
    
    
    4.7
    
    
    
    193,545
    
    
    
    4.1
    
    
    
    16.0
    
    
    
    43.35,483,752
    
    
    
    71.2
    
    
    
    4,470,101
    
    
    
    75.6
    
    
    
    3,426,845
    
    
    
    72.2
    
    
    
    22.7
    
    
    
    30.4International revenueScheduled  Passenger
    
    
    1,513,334
    
    
    
    19.7
    
    
    
    1,010,701
    
    
    
    17.1
    
    
    
    871,248
    
    
    
    18.4
    
    
    
    49.7
    
    
    
    16.0Charter  Passenger
    
    
    24,125
    
    
    
    0.3
    
    
    
    22,855
    
    
    
    0.4
    
    
    
    21,892
    
    
    
    0.5
    
    
    
    5.6
    
    
    
    4.4Cargo
    
    
    164,678
    
    
    
    2.1
    
    
    
    129,743
    
    
    
    2.2
    
    
    
    125,408
    
    
    
    2.6
    
    
    
    26.9
    
    
    
    3.51,702,137
    
    
    
    22.1
    
    
    
    1,163,299
    
    
    
    19.7
    
    
    
    1,018,548
    
    
    
    21.5
    
    
    
    46.3
    
    
    
    14.2Other operating revenueCommission
    
    
    14,941
    
    
    
    0.2
    
    
    
    21,004
    
    
    
    0.4
    
    
    
    17,189
    
    
    
    0.4
    
    
    
    -28.9
    
    
    
    22.2Partnerships with
TAM Loyalty
Program
    
    
    207,255
    
    
    
    2.7
    
    
    
    85,051
    
    
    
    1.4
    
    
    
    58,251
    
    
    
    1.2
    
    
    
    143.7
    
    
    
    46.0Aircraft sub-lease
    
    
    33,657
    
    
    
    0.4
    
    
    
    65,228
    
    
    
    1.1
    
    
    
    126,320
    
    
    
    2.7
    
    
    
    -48.4
    
    
    
    -48.4Travel and tourism
Agencies
    
    
    20,858
    
    
    
    0.3
    
    
    
    16,235
    
    
    
    0.3
    
    
    
    27,322
    
    
    
    0.5
    
    
    
    28.5
    
    
    
    -40,6Others (including
expired tickets)
    
    
    237,491
    
    
    
    3.1
    
    
    
    89,217
    
    
    
    1.5
    
    
    
    69,806
    
    
    
    1.5
    
    
    
    166.3
    
    
    
    27.8514,202
    
    
    
    6.7
    
    
    
    276,735
    
    
    
    4.7
    
    
    
    298,888
    
    
    
    6.3
    
    
    
    85.8
    
    
    
    -7.4Gross sales
    
    
    7,700,091
    
    
    
    100.0
    
    
    
    5,910,135
    
    
    
    100.0
    
    
    
    4,744,281
    
    
    
    100.0
    
    
    
    30.3
    
    
    
    24.6
 (b)
    
    By region
 Variation
    
    
    Variation2006 to
    
    
    2005 to2006
    
    
    V (%)
    
    
    2005
    
    
    V (%)
    
    
    2004
    
    
    V (%)
    
    
    2005  (%)
    
    
    2004  (%)Brazil
    
    
    5,997,954
    
    
    
    77.9
    
    
    
    4,746,835
    
    
    
    80.4
    
    
    
    3,725.694
    
    
    
    78.5
    
    
    
    26.4
    
    
    
    27.4Europe
    
    
    616,941
    
    
    
    8.0
    
    
    
    457,190
    
    
    
    7.7
    
    
    
    449,218
    
    
    
    9.5
    
    
    
    34.9
    
    
    
    1.8North América
    
    
    647,788
    
    
    
    8.4
    
    
    
    367,674
    
    
    
    6.2
    
    
    
    366,016
    
    
    
    7.7
    
    
    
    76.2
    
    
    
    0.5South America (excluding Brazil)
    
    
    437,408
    
    
    
    5.7
    
    
    
    338,436
    
    
    
    5.7
    
    
    
    203,353
    
    
    
    4.3
    
    
    
    29.2
    
    
    
    66.47,700,091
    
    
    
    100.0
    
    
    
    5,910,135
    
    
    
    100.0
    
    
    
    4,744,281
    
    
    
    100.0
    
    
    
    30.3
    
    
    
    24.6
  F-34




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 22
    
    Main costs and expenses
 2006
    
    
    2005
    
    
    2004ExpensesGeneralCosts of
    
    
    
    
    
    
    andservice
    
    
    
    
    
    
    adminis-
    
    
    Directorsrendered
    
    
    Sales
    
    
    trative
    
    
    fees
    
    
    Total
    
    
    %
    
    
    Total
    
    
    %
    
    
    Total
    
    
    %Personnel
    
    
    672,304
    
    
    
    78,523
    
    
    
    101,007
    
    
    
    20,764
    
    
    
    872,598
    
    
    
    13.7
    
    
    
    668,648
    
    
    
    12.8
    
    
    
    545,725
    
    
    
    12.9Fuel
    
    
    2,129,856
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,129,856
    
    
    
    33.6
    
    
    
    1,694,980
    
    
    
    32.5
    
    
    
    1,066,731
    
    
    
    25.3Depreciation and amortization
    
    
    80,651
    
    
    
    1,337
    
    
    
    19,867
    
    
    
    
    
    
    
    101,855
    
    
    
    1.6
    
    
    
    85,353
    
    
    
    1.6
    
    
    
    91,426
    
    
    
    2.2Maintenance and repairs (except personnel)
    
    
    387,972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    387,972
    
    
    
    6.1
    
    
    
    356,322
    
    
    
    6.8
    
    
    
    389,186
    
    
    
    9.2Aircraft insurance
    
    
    35,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,077
    
    
    
    0.6
    
    
    
    39,644
    
    
    
    0.8
    
    
    
    52,714
    
    
    
    1.2Landing, take-off and navigation tariff
    
    
    314,977
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    314,977
    
    
    
    5.0
    
    
    
    233,012
    
    
    
    4.5
    
    
    
    185,773
    
    
    
    4.4Leasing of aircraft and equipment
    
    
    711,761
    
    
    
    2,015
    
    
    
    5,021
    
    
    
    
    
    
    
    718,797
    
    
    
    11.3
    
    
    
    627,248
    
    
    
    12.0
    
    
    
    651,034
    
    
    
    15.4Services rendered by third parties
    
    
    197,207
    
    
    
    167,881
    
    
    
    174,548
    
    
    
    
    
    
    
    539,636
    
    
    
    8.5
    
    
    
    373,721
    
    
    
    7.2
    
    
    
    360,461
    
    
    
    8.5Selling and marketing
    
    
    
    
    
    
    875,254
    
    
    
    
    
    
    
    
    
    
    
    875,254
    
    
    
    13.8
    
    
    
    854,602
    
    
    
    16.4
    
    
    
    656,326
    
    
    
    15.5Other
    
    
    200,864
    
    
    
    61,266
    
    
    
    109,917
    
    
    
    
    
    
    
    372,047
    
    
    
    5.8
    
    
    
    288,324
    
    
    
    5.5
    
    
    
    226,276
    
    
    
    5.44,730,669
    
    
    
    1,186,276
    
    
    
    410,360
    
    
    
    20,764
    
    
    
    6,348,069
    
    
    
    100.0
    
    
    
    5,221,854
    
    
    
    100.0
    
    
    
    4,225,652
    
    
    
    100.0
 
  F-35




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 23
    
    Financial income and expense
 2006
    
    
    2005
    
    
    2004Financial incomeInterest from investments
    
    
    222,857
    
    
    
    59,915
    
    
    
    2,111Exchange variation
    
    
    10,944
    
    
    
    25,020
    
    
    
    6,956Interest income
    
    
    15,080
    
    
    
    11,024
    
    
    
    3,896Discounts obtained
    
    
    4,550
    
    
    
    4,413
    
    
    
    15,552Other
    
    
    747
    
    
    
    14
    
    
    
    1,767254,178
    
    
    
    100,386
    
    
    
    30,282Financial expenseInterest expense
    
    
    (115,118
    )
    
    
    (89,576
    )
    
    
    (57,342
    )Tax on Bank Account Transactions  CPMF
    
    
    (27,344
    )
    
    
    (20,007
    )
    
    
    (14,287
    )Financial instruments losses
    
    
    (122,894
    )
    
    
    (69,981
    )
    
    
    (33,334
    )Other
    
    
    (17,062
    )
    
    
    (13,383
    )
    
    
    (7,894
    )(282,418
    )
    
    
    (192,947
    )
    
    
    (112,857
    )Financial income (expense), net
    
    
    (28,240
    )
    
    
    (92,561
    )
    
    
    (82,575
    )
 24
    
    Other operating expenses, net
 2006
    
    
    2005
    
    
    2004Cancellation of third party contracts
    
    
    (43,993
    )Other losses
    
    
    (34,394
    )
    
    
    (16,870
    )
    
    
    (1,210
    )Other taxes
    
    
    (23,969
    )
    
    
    (4,669
    )
    
    
    (843
    )ICMS
    
    
    (1,729
    )
    
    
    (2,856
    )
    
    
    (5,315
    )Amortization of goodwill
    
    
    (717
    )
    
    
    (1,341
    )
    
    
    (2,291
    )Others
    
    
    (21,397
    )
    
    
    (5,070
    )
    
    
    (4,951
    )(126,199
    )
    
    
    (30,806
    )
    
    
    (14,610
    )
  25
    
    Benefits to employees(a)
    
    Supplementary pension planTLA sponsors three private pension plans TAM Prev I, II and III which supplement retirement
benefits. On November 21, 2006, the Supplementary Retirement Secretariat (the SPC) approved the
proposal to migrate participants from the TAM Prev I, II and III to a PGBL, a defined contribution
plan. At December 31, 2006, there are still 7 participants which have not
transferred into the PGBL. The sponsors contribution paid during 2006 amounted to R$ 2,905.
  F-36




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 The independent actuarys evaluation, dated January 29, 2007, shows a pension asset of R$ 621, not
included in the Companys financial statements.
  The Projected Unit Credit Method was applied by an independent actuary based on the following
actuarial assumptions (nominal rates, including inflation):
 Annual percentage2006
    
    
    2005EconomicDiscount rate
    
    
    11.83
    
    
    
    11.83Expected return on plan assets
    
    
    13.72
    
    
    
    13.72Future salary increases
    
    
    7.10
    
    
    
    7.10Inflation
    
    
    5.00
    
    
    
    5.00Future increase in Social Security benefits
    
    
    5.00
    
    
    
    5.00
 (b)
    
    Profit sharing
 In accordance with the annual Union agreement, the Company will pay a share of its profits as a
result of it reaching certain performance indicators established in line with the annual budget.
Consequently, management recorded as Salaries and payroll charges at December 31, 2006, the
provision for payment of this benefit in the amount of R$ 82,390 (2005  R$ 42,465).
 26
    
    Insurance coverage
 The subsidiaries contract insurance coverage for amounts considered above the minimum mandatory
amounts deemed as necessary for possible claims, considering the nature of the assets and the risks
of the activity. At December 31, 2006, considering the aircraft fleet of the TLA and Mercosur, the
coverage for the aviation activity (aircraft and civil responsibility together) will give a maximum
indemnity amount of up to US$ 1.5 billion.
 Following the September 11, 2001 terrorist attacks in the USA, insurance companies established
surcharges on the insurance of aircraft bodies and on civil liabilities generated by acts of war or
terrorism.
 The insurance companies limited worldwide coverage to US$ 150.000 thousand per claim, and for
higher amounts, the premiums must be paid in cash for the total term of the policies, which has
made an increase in the coverage by any amount, unviable.
 As a consequence, the Brazilian Government, through Law 10744 of October 9, 2003 and Decree no 5035
of April 05, 2004, assumed the commitment to match up eventual expenses of civil liabilities for
third parties generated by war or terrorist attacks that the Company may be required to pay. As
regulated by this law, expenses for civil responsibilities assumed by the Federal Government are
limited to the equivalent in Reais of one billion U.S. dollars.
  F-37




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 27
    
    Contingent assets
 (a)
    
    Value-Added Tax  ICMS
 i.
    
    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
were no longer subject to ICMS.ICMS taxation on domestic air cargo transportation revenue is still due. Management recorded a
provision of R$ 7,467 (2005  R$ 9,952), in Taxes and tariffs payable. The installments due in
more than one year totaling R$ 171 (2005  R$ 547) are classified as long term liabilities under
Other liabilities.
 ii.
    
    Collected of certain ICMS payments made from 1989 to 1994 were later ruled to have been
unconstitutional. TLA has filled several suits, in different states of the country, to claim
the amount paid in error. The Company will recognize the credits, estimated at approximately
R$ 55,000 and corresponding indexation adjustments, when final recovery is assured.
 (b)
    
    Indemnification for losses on regulated fares
 TLA filed a lawsuit against the Federal Government demanding indemnity for losses arising in the
period from 1988 to 1993, when the fares were regulated by the Federal Government.
 In In April 1998, the lawsuit was ruled in the Companys favor by lower court of the Federal
Justice, and an indemnity of R$ 245 million was determined based on a calculation made by an
expert. This amount is subject to delinquent interest since September 1993, and inflation
adjustment since November 1994. The First Panel of Higher Court of Justice accepted the special
appeal made by the Company determining that the Federal Court of Appeals judge the merit of the
case without intervention from the Public Prosecutor.
 Management has not recognized in the financial statements any amount for this indemnity and will do
so only when the lawsuit is legally confirmed in its final instance
 (c)
    
    Additional tariff ATAERO
 TLA filed a claim for questioning the legality of an additional charge of 50% over and above the
normal tariff. On December 31, 2006, the amount under discussion totaled R$ 430,537.
 TLA filed a claim for anticipated custody addressing the legality of the additional amount to
tariffs (ATAERO), which rate is 50% on the tariff amount. On December 31, 2006, the amount under
discussion totaled R$ 430,537 (unaudited), (2005, R$ 457,000 (unaudited)), not recognized in the
financial statements.
 28
    
    Financial instruments
 (a)
    
    General considerations
 The Company enters into transactions involving financial instruments in order to reduce the
exposure of its risks. In addition, temporary cash surpluses are applied in line with current
treasury policies, which are continuously reviewed, besides minimizing the impact of fuel price
volatility.
 The management of these financial instruments is made pursuant to operational strategies, pursuing
liquidity, return and security. Management policy consists in monitoring contracted rates against
current market rates. The Company does not invest in derivatives or any other high-risk assets of a
speculative nature.
  F-38




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (i)
    
    Risk from the price of fuel
 Airline companies are exposed to the volatility in fuel prices. Fuel represented in 2006 and 2005,
33.6% and 32.5% respectively of cost of services rendered, commercial, sales and administrative
expenses.
 At December 31, 2006, these operations, with maturity up to May 2007, represented an off balance
sheet notional amount of approximately R$ 148,825 (2005  R$ 82,912), equivalent to approximately
1,150 thousand barrels (2005  585 thousand barrels).
 If settled at December 31, 2006, the above operations would represent losses of R$ 1,888 (2005  R$
47).
 (ii)
    
    Foreign exchange rate risk
 This risk is related to possible foreign exchange rates volatility, affecting the financial expense
(or income) and the outstanding liabilities (or assets) balances indexed to a foreign currency.
Part of this risk is mitigated given the fact that the Company operates overseas and revenues from
these transactions are denominated in hard currency.
 The existing policy for hedging foreign exchange risk is to cover of hard currency cash flow for
the subsequent 12 months. At December 31, 2006 the period protected against the foreign exchange
rate risk amounted to the following three months, based on scenarios and volatility.
 The Company contracts derivative financial operations, aimed mainly to protect its foreign currency
exposure from fuel, engine maintenance services and financing related to its operational
activities.
 On December 31, 2006, contracts with options, acquired to hedge risks with liabilities to suppliers
and financing, amounted to R$ 1,137,416  US$ 532,000 thousands (2005  R$ 816,904  US$ 349,000
thousands) and have various maturity dates, up to September 28, 2007.
 The above mentioned operations, if settled on December 31, 2006, would represent a loss of R$
7,133, (2005 R$ 93,514).
 (iii)
    
    Interest rate risk
 This risk arises from possible losses (or gains) as a result of fluctuations of the interest rates
to which the Companys liabilities and assets are linked.
 To minimize possible impacts from interest rate volatility, the Company has adopted a policy of
diversification, alternating between contracting fixed and variable rates (such as LIBOR and CDI),
and periodically renegotiates its contracts, in order to adapt them to current market conditions.
 (iv)
    
    Credit risk
 Credit risk arises from the possibility of the Company not recovering amounts receivable from
services provided to consumers and/or travel agencies, or from credits held by financial
institutions generated for financial investment operations.
 To reduce this risk the Company has adopted the practice of establishing credit limits and
permanently accompanying its debtor balance (mainly from travel agencies). With respect to
marketable securities, the Company only invests with institutions with low credit risk as evaluated
by rating agencies. In addition, each institution has a maximum limit for investments, as
determined by the Companys Risk Committee.
  F-39




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (b)
    
    Financial investments
 Represented by funds designed to invest in quotas of various classes of investment funds and/or in
multimarket investment funds with the objective of obtaining an interest yield in excess of the
Brazilian interbank interest rate  also known as DI.
 (c)
    
    Investments
 TLA and Mercosur are non-public companies and, therefore, there is no information readily available
to evaluate their fair market values.
 29
    
    Loyalty Program
 At December 31, 2006, the TAM Loyalty Program carried 1,782,397 (unaudited) (2005  1,161,477
(unaudited)) one way domestic trip tickets earned by its clients but not redeemed. The Company
currently records the incremental costs when awards are earned. Through the year ended December 31,
2005 the Company recorded the incremental cost when awards were redeemed. During 2006, 756,040
(unaudited) (2005  546,452 (unaudited)) free tickets were granted and used by our clients. The
incremental costs of points earned nder the loyalty program for the years ended December 31, 2006
was R$ 19,039. The incremental costs include amount paid to other airlines for points redeemed on
other airlines and passenger ticketing, food and beverages, insurance and estimated fuel costs for
points redeemed on our flights.
 The points earned by our clients from the TAM Loyalty Program are valid for two years for the
redemption into tickets. This limits any growth in the liability from the program, which has tended
to stabilize in relation to the number of passengers transported.
 30
    
    Subsequent events
 On February 27, 2007, the Board of Directors approved the annual dividends payment and interest on
stockholders equity based on the 2006 net income to be paid on March 30, 2007.
 31
    
    Summary of the Principal Differences between Brazilian GAAP and U.S. GAAP
 (a)
    
    Description of the GAAP differences
 The accounting practices of the Company are in accordance with Brazilian GAAP with differ
significantly from U.S. GAAP, as are summarized below.
 (b)
    
    Supplementary inflation restatement in 1996 and 1997 for U.S. GAAP
 Brazilian GAAP discontinued inflation accounting effective January 1, 1996, Brazilian GAAP
statements included indexation adjustments which partially accounted for the effects of inflation
on property, plant and equipment, investments, deferred charges (together, denominated Permanent
assets) and stockholders equity, which reported the net charge or credit in the statement of
operations. However, under U.S. GAAP, Brazil ceased to be treated as a highly inflationary economy
only from January 1, 1998. Therefore the financial information for purposes of U.S. GAAP include
additional inflation restatement adjustments in 1996 and 1997, made by applying the General Price
Index  Internal Availability (IGP-DI) to the Company permanent assets and stockholders equity.
The IGP-DI index increased by 9.3% in 1996 and by 7.5% in 1997.
  F-40




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For purposes of the reconciliation, stockholders equity under U.S. GAAP was increased by R$ 68
(2005  R$ 156), due to the additional inflation restatement adjustments, net of depreciation.
These amounts generate differences in depreciation charges of R$ 88, R$ 102 and R$ 116,
respectively for years ended December 31, 2006, 2005 and 2004.
 (c)
    
    Property, plant and equipment
 (i)
    
    Revaluation of property, plant and equipment
 Brazilian GAAP permits the revaluation of assets. The revaluation increment, net of deferred tax
effects after 1991, is credited to a reserve account in stockholders equity. Depreciation of the
revaluation increments is charged to income and an offsetting amount is transferred from the
revaluation reserve in stockholders equity to retained earnings as the related assets are
depreciated or upon disposal.
 Under U.S. GAAP, revaluation of property, plant and equipment is not accepted and the revaluation
increments and related deferred tax effects have therefore been eliminated in order to present
property, plant and equipment at historical cost less accumulated depreciation. Accordingly, the
depreciation expense on revaluation has also been reversed in the statement of operations.
 For the purposes of the reconciliation, under U.S. GAAP the revaluation reserve was reversed, net
of depreciation and deferred tax effects, totaling R$ 147,874 at December 31, 2006 ( 2005  R$
161,196). In the statement of operations, these effects totaled R$ 4,246, R$ 3,852, and R$ 7,584
for the years ended December 31, 2006, 2005 and 2004 respectively.
 (ii)
    
    Lease agreements
 Brazilian GAAP does not have a specific requirement on accounting for leases and TAM recognizes as
financial leases only contracts where the lessee has a bargain purchase option for the asset, All
other leases are treated as operating leases.
 Under U.S. GAAP, Statement of Financial Accounting Standards (SFAS) No. 13, Accounting for
Leases defines financial leases as those leases that meet at least one of the following criteria:
 
    
    The lease transfers ownership of the property to the lessee by the end of the lease.
    
    The lease contains a bargain purchase option, for price below market value.
    
    The lease term is equal to 75 percent or more of the estimated economic life of the leased asset.
    
    The present value at the beginning of the lease term of the minimum lease payments,
excluding that portion of the payments representing executory costs such as insurance,
maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or
exceeds 90 percent of the fair value of the leased asset at the inception of the lease.
 Additionally, on renegotiation of lease terms, regardless as to whether the lessor is changed, the
new lease is maintained as a financing lease by the lessee if under the amended lease terms, the
lease would have been classified a finance lease either initially or at the renegotiation date.
 At December 31, 2006, TAM had 39 aircraft recorded as operating leases under Brazilian GAAP (Airbus
A319  9 units, Airbus A320  12 units; Airbus A330  8 units and Fokker 100  10 units), which,
considering the rule set out above, were considered as financial leases under U.S. GAAP because the
present value of the minimum payments of these contracts exceed 90% of the fair value of the asset
leased.
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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 Under U.S. GAAP, the acquisition cost of these aircraft and the related liability at the inception
of the lease contract, totaling, at December 31, 2006, R$ 3,507,150, has been recorded in the
balance sheet, while accumulated depreciation at December 31, 2006 amounts to R$ 694,735. The asset
is being depreciated over the estimated useful life of 25 years for the aircraft Airbus A319,
Airbus A320 and Fokker 100 and 30 years for the aircraft Airbus A330.
 The obligations are recorded in short and long-term liabilities, including accrued interest and
foreign exchange gains or losses. Depreciation expense on these aircraft recognized in the U.S.
GAAP financial statements totaled R$ 133,942, R$ 127,810 and R$ 115,652, for the year ended
December 31, 2006, 2005 and 2004, respectively. Foreign exchange gains (losses) on financial lease
payables totaled R$ 226,879, R$ 329,638 and R$ 288,557 for the year ended December 31, 2006, 2005
and 2004, respectively. Interest expenses on the financial lease obligation of theses aircraft
totaled R$ 151,928, R$ 139,876 and R$ 130,068, for the years ended December 31, 2006, 2005 and
2004, respectively. The operating lease expense recognized under Brazilian GAAP for these aircraft
were reversed during all periods and totaled R$ 337,774, R$ 327,543 and R$ 329,558 for the year
ended December 31, 2006, 2005 and 2004, respectively. The residual value of aircrafts returned have
been written off upon return and totaled R$ 4,023 at December 31, 2006 (2005  R$ 4,499).
 For reconciliation purposes, the accumulated effects in stockholders equity totaled R$ 605,454 at
December 31, 2006 (2005  R$ 330,694).
 Additionally, in 2004, TAM modified the lease for some aircraft and for Brazilian GAAP purposes
these contracts were no longer recorded as financial leases. As a consequence the financial lease
obligations and the underlying aircraft were eliminated generating a gain of R$ 353,279 for the
year ended December 31, 2004. For U.S. GAAP purposes, these contracts were included in the context
of the 39 contracts aforementioned, and therefore they were maintained as financial leases. For
reconciliation purposes, the gain recognized under Brazilian GAAP was reversed, totaling R$ 353,279
for the year ended December 31, 2004.
 Considering the aforementioned adjustments, the lease obligations under U.S. GAAP totaled:
 Rates (weighted average)
    
    2006
    
    
    2005Foreing currencyFokker 100 aircraft and engines
    
    Fixed interest of 1.2% p.a.
    
    
    161,035
    
    
    
    316,792Airbus A319/Airbus A320 aircraft and engines
    
    6-Months LIBOR + 1.5% p.a. to 2.5% p.a. (7.2% p.a.)
    
    
    1,200,799
    
    
    
    1,414,170Airbus A330 aircraft, engines and spare parts
    
    1-Month LIBOR + 1.5% p.a. (6.8% p.a.)
    
    
    979,389
    
    
    
    1,076,742Lease obligations
    
    1-Month (5.5% p.a.)
    
    
    4,526
    
    
    
    6,8656-Months LIBOR + 1.25% p.a. to 2.25% p.a. (6.8% p.a.)
    
    
    16,436
    
    
    
    16,4093-Months LIBOR + 1.75% p.a. (7.2% p.a.)
    
    
    3,998
    
    
    
    3,152Fixed interest of from 1.12% p.a.
    
    
    2,842
    
    
    
    11,2772,369,025
    
    
    
    2,845,407Current
    
    
    
    
    
    
    (335,254
    )
    
    
    (342,983
    )Non-current
    
    
    
    
    
    
    2,033,771
    
    
    
    2,502,424
 The lease obligations above are secured by letters of credit issued by the Company.
  F-42




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 Long-term amounts mature as follows:
 Year
    
    2006
    
    
    20052007
    
    
    
    
    
    
    273,0192008
    
    
    242,411
    
    
    
    268,3422009
    
    
    253,952
    
    
    
    277,9882010
    
    
    236,641
    
    
    
    296,1312011
    
    
    228,747
    
    
    
    254,9592012
    
    
    230,414
    
    
    
    245,860After 2012
    
    
    841,606
    
    
    
    886,1252,033,771
    
    
    
    2,502,424
 (iii)
    
    Impairment
 Under Brazilian GAAP, companies are required to determine if operating income is sufficient to
absorb the depreciation or amortization of long-lived assets in order to assess potential asset
impairment. In the event such operating income is insufficient to recover the depreciation, the
assets, or groups of assets, are written-down to recoverable values, preferably based on the
projected discounted cash flows of future operations. In the event of a planned substitution of
assets prior to the end of the original estimated useful life of the asset, depreciation of such
asset is accelerated to ensure the asset is depreciated according to estimated net realizable value
at the estimated date of substitution.
 Under U.S. GAAP, SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets,
requires companies to evaluate the carrying value of long-lived assets to be held and used, and for
long-lived assets to be disposed of, when events and circumstances require such a review. The
carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash
flow, representing the lowest level in which identifiable cash flow is less than their carrying
value. In that event, a loss is recognized based on the amount by which the carrying value exceeds
the fair market value of the assets or discounted cash flows generated by the assets.
 In the case of TAM, there were no impairment indicators and, therefore, no differences between U.S.
GAAP and Brazilian GAAP related to impairment provision criteria were recorded for the years
presented.
 (iv)
    
    Gains on sale-leaseback
 Brazilian GAAP does not have specific requirements on sale-leaseback transactions. All gains
arising from sale-leaseback transactions were recognized at the time of the transaction.
 Under U.S. GAAP, SFAS No, 28, Accounting for Sales with Leaseback, establishes a sale-leaseback
as a single financing transaction in which any profit or loss on the sale shall be deferred and
amortized by the seller, who becomes the lessee, in proportion to rental payments over the period
of time the asset is expected to be used. This is obligatory even where the sale-lease-back
transaction is considered legally perfect in the Companys country of origin.
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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 2006
    
    
    2005
    
    
    2004Gains on sale-
    
    
    Accumulatedleaseback
    
    
    amortization
    
    
    Net
    
    
    Net
    
    
    NetTransaction Airbus A330 (i)
    
    
    319,073
    
    
    
    (141,810
    )
    
    
    177,263
    
    
    
    203,852
    
    
    
    230,441Transaction Airbus A320 (ii)
    
    
    54,957
    
    
    
    (20,609
    )
    
    
    34,348
    
    
    
    39,844
    
    
    
    45,339Transaction Fokker 100 (iii)
    
    
    76,815
    
    
    
    (76,815
    )
    
    
    
    
    
    
    1,749
    
    
    
    9,424450,845
    
    
    
    (239,234
    )
    
    
    211,611
    
    
    
    245,445
    
    
    
    285,204
 The amortization of gains on sale-leaseback transactions appropriated in the statements of
operations for the year ended December 31, 2006, 2005 and 2004, as Financial income (expenses),
net totaled R$ 18,941, R$ 24,895 and R$ 65,382, respectively and as Other operating expenses,
net totaled R$ 14,893, R$ 14,864 and R$ 34,096, respectively.
 For reconciliation of gains on sale-leaseback purposes, the effects in stockholders at December
31, 2006 totaled R$ 211,611 (2005  R$ 245,445).
     (v)
    
    Sub-leasing of aircraft
 The Company sub-leased three Airbus A 330 aircraft and one engine under operating leases to other
airline company. The contract matured in November 2006 and the aircrafts and engines has returned.
  F-44




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (d)
    
    Deferred charges
 Brazilian GAAP permits deferral of leasehold improvements.
 Under U.S.GAAP, amounts related to leasehold improvements should be treated as additions to
property, plant and equipment and reclassified for balance sheet disclosure purposes. As from the
second quarter of 2006 such improvements were reclassified in the Brazilian GAAP financials to
Property, plant & equipment and therefore the adjustment is no longer applicable. The amount
reclassified in the balance sheet at December 31, 2005 amounted to R$5,228.
 (e)
    
    Business combinations
 (i)
    
    Goodwill
 Under Brazilian GAAP, goodwill arises from the difference between the amount paid and the book
value of the net assets acquired. This goodwill is normally attributed to the market value of
assets acquired or justified based on expectation of future profitability and is amortized over the
remaining useful lives of the assets or up to 10 years. Negative goodwill arises under Brazilian
GAAP when the book value of assets acquired exceeds the purchase consideration; negative goodwill
is not generally amortized.
 Under U.S. GAAP, fair values are assigned to acquired assets and liabilities in business
combinations, including intangible assets and unallocated goodwill, applicable to each specific
transaction. Upon the adoption of SFAS No. 142, Goodwill and Other Intangible Assets, as from
January 1, 2002 goodwill is no longer amortized but, instead, is assigned to an entitys reporting
units and tested for impairment at least annually. Additionally, according to the U.S. GAAP,
goodwill generated in transactions under common control should not be recorded but, instead, the
difference between amounts paid and book values of net assets acquired should be recorded as a
capital contribution or distribution.
 The differences related to the Brazilian GAAP applicable to TAM derive mainly from (i)
non-amortization of goodwill as from January 1, 2002 and (ii) non-recognition of negative goodwill
arising from transactions of companies under common control, (Note (ii) below).
 For Brazilian GAAP purposes, the net balance of goodwill at December 31, 2006 was R$ 717 (2005  R$
1,434), which is being amortized to income over a period of five to 10 years; negative goodwill at
December 31, 2006 was R$ 11,099 (2005  R$ 11,099).
 For reconciliation purposes, amortization of goodwill as from January 1, 2003 was reversed,
totaling R$ 717, R$ 1,341 and R$ 2,291 in the statement of operations for 2006, 2005 and 2004,
respectively. In stockholders equity, for reconciliation purposes these effects totaled R$ 8,963
and R$ 8,246 in 2006 and 2005, respectively. For U.S. GAAP purposes, the net balance of goodwill at
December 31, 2006 is R$ 9,680 (2005  R$ 9,680).
 (ii)
    
    Common control and negative goodwill  Mercosur
 For Brazilian GAAP purposes, TAM Mercosur was acquired and consolidated by the Company in September
2003 through an exchange of shares.
 For U.S. GAAP purposes, Mercosur has been considered under common control since 1996, because
Mercosur has the same controlling stockholders as TAM and therefore, it was consolidated
retroactively for all periods presented. The effects of the retroactively consolidation in the
changes in stockholders equity have been recorded as additional paid-in capital.
  F-45




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 Additionally, in this transaction, the negative goodwill for Brazilian GAAP purposes was generated
by the difference between book value and the amount paid in the transaction for the acquisition of
Mercosur. As this transaction was considered to be under common control, for U.S. GAAP purposes the
difference between the amount paid and the book value of Mercosur was recognized in stockholders
equity as a capital contribution.
 Also, for Brazilian GAAP purposes, the effects of the exchange variation on this subsidiarys
stockholders equity are distributed among the lines of the statement of operations. For U.S. GAAP
purposes, the effect of this exchange variation was recognized in stockholders equity in
cumulative translation adjustments, in accordance with SFAS No. 52, Foreign Currency Translation.
 For reconciliation purposes, the effects described above totaled R$ (5,183), R$ 8,870 and R$ 2,045,
in the statement of operations for year ended December 31, 2006, 2005 and 2004, respectively, and
R$ 11,828 in stockholders equity at December 31, 2006 and 2005.
 (f)
    
    Pension and other post-retirement benefits
 In determining the pension and other post-retirement benefit obligations for Brazilian GAAP
purposes, NPC No. 26 is effective for financial statements ended from December 31, 2002. As
permitted by the Standard, the transitional gain (being the difference between the plan net assets
and the projected benefit obligation (PBO)) at that date will be charged to income over five
years.
 Under U.S. GAAP, SFAS No. 87, Employers Accounting for Pensions, is effective for fiscal years
beginning after 1988. As from such dates, when an initial transition obligation determined based on
an actuarial valuation was booked, actuarial gains and losses, as well as unexpected variations in
plan assets and the PBO and the effects of amendments, settlements and other events, have been
recognized in accordance with this standard and therefore results in deferral differences, Until
1997, these amounts were treated as non-monetary items and indexed by the inflation, the U.S. GAAP
also requires the recognition of an additional minimum liability.
 Although the calculation of the sufficiency of the funded status has been the same since December
31, 2001, differences arise in (i) actuarial gains and losses, as initially there is no gain or
actuarial loss on December 31, 2001, and (ii) recognition of the initial transition obligation and
(iii) minimum liability, according to U.S. GAAP.
 On November 21, 2006, the Supplementary Retirement Secretariat (the SPC) approved the proposal to
migrate participants from the TAM Prev I, II and III to a PGBL, a defined contribution plan. At
December 31, 2006, there are still 7 participants which have not transferred into the PGBL. As the
migration of the employees to PGBL represents an irrevocable action, relieving the Company of
primary responsibility for the pension obligation and eliminated significant risks related to the
obligation and assets of the plan (which have already been transferred to PGBL) the participants
transferred have been accounted for as partial settlement in accordance with SFAS No. 88,
Employers Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits . The 7 participants not yet transferred to the PGBL had their benefits frozen
in November 2006 and therefore have been accounted for as curtailment.
 Based on the report of our independent actuary, the summary of sufficiency of funds and amounts
recorded in the U.S. GAAP condensed balance sheet at December 31, 2006 and 2005 and the condensed
statement of income for the years ended December 31, 2006, 2005 and 2004 of the TAM pension
liabilities to retired beneficiaries, in accordance with SFAS no. 132 Employers Disclosures For
Pensions and Post-Retirement Benefits  revised, is as follows:
  F-46




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 2006
    
    
    2005
    
    
    2004Change in benefit obligationNet liability of benefits projected at beginning of year
    
    
    56,539
    
    
    
    57,978
    
    
    
    59,058Service cost
    
    
    445
    
    
    
    2,784
    
    
    
    3,495Interest cost
    
    
    3,080
    
    
    
    6,690
    
    
    
    7,065Actuarial gain
    
    
    
    
    
    
    (6,474
    )
    
    
    (237
    )Gross benefits paid
    
    
    (1,871
    )
    
    
    (2,777
    )
    
    
    (2,337
    )Effect from changes to plans  curtailment and
partial settlement
    
    
    (56,774
    )
    
    
    (1,662
    )
    
    
    (9,066
    )Net liability of benefit obligation projected at end of year
    
    
    1,419
    
    
    
    56,539
    
    
    
    57,978
 2006
    
    
    2005
    
    
    2004Change in fair value of plan assetsAt beginning of year
    
    
    41,987
    
    
    
    36,630
    
    
    
    40,654Actual return on assets
    
    
    8,441
    
    
    
    6,917
    
    
    
    6,078Employers contributions
    
    
    241
    
    
    
    2,421
    
    
    
    1,245Employees contributions
    
    
    195
    
    
    
    240
    
    
    
    506Effects from changes in plans- curtailment and
partial settlement
    
    
    (46,895
    )
    
    
    (1,444
    )
    
    
    (9,516
    )Gross benefits paid
    
    
    (1,871
    )
    
    
    (2,777
    )
    
    
    (2,337
    )At end of year
    
    
    2,098
    
    
    
    41,987
    
    
    
    36,630
 2006
    
    
    2005
    
    
    2004Funded statusFunded status at end of year
    
    
    679
    
    
    
    (14,552
    )
    
    
    (21,348
    )Unrecognized net actuarial gain
    
    
    
    
    
    
    (9,187
    )
    
    
    (827
    )Cost of unrecognized past services
    
    
    
    
    
    
    2,805
    
    
    
    1,748unrecognized net transition assets
    
    
    
    
    
    
    189
    
    
    
    331Accrued benefit cost
    
    
    679
    
    
    
    (20,745
    )
    
    
    (20,096
    )
 Plan data was measured at December 31, 2006.
  F-47




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 The amounts recognized in the balance sheet consist of:
 2006
    
    
    2005
    
    
    2004Accrued benefit cost
    
    
    679
    
    
    
    (20,745
    )
    
    
    (20,096
    )Additional minimum liability
    
    
    
    
    
    
    
    
    
    
    (2,231
    )Intangible assets
    
    
    
    
    
    
    
    
    
    
    172Net amount recognized
    
    
    679
    
    
    
    (20,745
    )
    
    
    (22,155
    )Weighted average assumptions at December 31Discount rate- %
    
    
    11.83
    
    
    
    11.83
    
    
    
    12.36Expected return on plan assets- %
    
    
    13.72
    
    
    
    13.72
    
    
    
    14.28Rate of compensation increase- %
    
    
    7.10
    
    
    
    7.10
    
    
    
    8.12
 The accumulated benefit liability for the pension plan at December 31, 2006 amounted to R$ 1,406
(2005  R$ 53,554).
 2006
    
    
    2005
    
    
    2004Components of net periodic benefit costService cost
    
    
    255
    
    
    
    2,553
    
    
    
    2,839Interest cost
    
    
    3,080
    
    
    
    6,690
    
    
    
    7,065Expected return on assets
    
    
    (3,228
    )
    
    
    (4,934
    )
    
    
    (5,536
    )Effects from changes in plans-
curtailment and partial settlement
    
    
    (21,321
    )
    
    
    (1,493
    )
    
    
    (1,076
    )Amortization of transition obligation
    
    
    26
    
    
    
    81
    
    
    
    274Amortization of actuarial losses (gains)
    
    
    (236
    )
    
    
    173
    
    
    
    (37
    )Net periodic benefit cost
    
    
    (21,424
    )
    
    
    3,070
    
    
    
    3,529
 The asset allocation for the Companys pension plans at the end of 2006 and 2005, and the target
allocation for 2006, by asset category, follows. The fair value of plan assets for these plans is
R$ 2,098 and R$ 41,987 at December 31, 2006 and 2005, respectively. The expected long term rates of
return on these plan assets were 13.72% and 14.28% for 2006 and 2005, respectively.
 Percentage of assets ateTarget allocation
    
    
    the end of the yearAsset category
    
    For 2007 %
    
    
    2006
    
    
    2005Equity securities
    
    
    5
    
    
    
    5
    
    
    
    5Fixed income
    
    
    95
    
    
    
    95
    
    
    
    95Total
    
    
    100
    
    
    
    100
    
    
    
    100
 The plan investment strategy is based on a long-term macroeconomic scenario. This scenario presents
low sovereign risk, moderate economic growth, stable inflation and exchange rates, and moderate
interest rates.
 The devised asset mix is composed by fixed income investments and equities. The fixed income target
allocation is 95% and equities target allocation is 5%. The investment return from this mix of
investments is 13.72%  greater than the discount rate of 11.83%.
  F-48




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For reconciliation purposes the following effects were recognized:
 Pension expense
 2006
    
    
    2005
    
    
    2004Reversal of pension expense recorded under BR GAAP
    
    
    (16,837
    )
    
    
    5,518
    
    
    
    5,649Recognition of pension expense under U.S. GAAP
    
    
    21,424
    
    
    
    (3,070
    )
    
    
    (3,529
    )U.S. GAAP adjustment on net income
    
    
    4,587
    
    
    
    2,448
    
    
    
    2,120
 Pension liability
 2006
    
    
    2005
    
    
    2004U.S. GAAP opening balance
    
    
    (20,745
    )
    
    
    (22,155
    )
    
    
    (19,205
    )U.S. GAAP pension expense
    
    
    21,424
    
    
    
    (3,070
    )
    
    
    (3,529
    )Employers contributions
    
    
    241
    
    
    
    2,421
    
    
    
    1,245Change in additional minimum liability/SFAS 158
    
    
    (241
    )
    
    
    2,231
    
    
    
    (615
    )Change in intangible assets
    
    
    
    
    
    
    (172
    )
    
    
    (51
    )U.S. GAAP closing balance
    
    
    679
    
    
    
    (20,745
    )
    
    
    (22,155
    )
 Stockholders equity
 2006
    
    
    2005Pension liability under Brazilian GAAP
    
    
    0
    
    
    
    17,078Other comprehensive income under U.S. GAAP
    
    
    679Pension liability under U.S. GAAP
    
    
    
    
    
    
    (20,745
    )U.S. GAAP adjustment on stockholders equity
    
    
    679
    
    
    
    (3,667
    )
 Other changes in plan assets and benefit obligations recognized in other comprehensive income:
 2006
    
    
    2005
    
    
    2004Net transition obligation
    
    
    6Prior service cost
    
    
    28Unrecognized loss
    
    
    (275
    )Change in additional minimum liability
    
    
    
    
    
    
    2,059
    
    
    
    (666
    )Total recognized in other comprehensive income
    
    
    (241
    )
    
    
    2,059
    
    
    
    (666
    )
 (g)
    
    Derivative instruments
 Under Brazilian GAAP, there is no specific requirement for accounting for derivative instruments.
The Company records its financial instruments based on contractual rates, recognized on the accrual
basis of accounting.
  F-49




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 Under U.S. GAAP, SFAS No. 133, as amended and interpreted, Accounting for Derivative Instruments
and Hedging Activities, requires that the Company recognizes all derivatives as assets or
liabilities and measures these instruments to fair market value. Changes in market value are
included in the Companys results of operations. No derivative financial instrument of the Company
qualified as hedges.
 For reconciliation purposes, the valuation of instruments (forwards and options) at fair market
value totaled R$84,540, R$ (85,606) and R$ (3,985) in results of operations for 2006, 2005 and
2004, respectively. The appropriated effect in the shareholders equity at December 31, 2006 was R$
(9,021) (December 31, 2005  R$ (93,561)).
 (h)
    
    Revenue recognition  Revenues from partners in the Loyalty Program
 Under Brazilian GAAP, revenues related partnership with Programa Fidelidade for frequent flyers are
recorded when the points are issued to participants.
 Under U.S. GAAP, as from 2005, the Company is recognizing revenue earned from selling points into
two components, the first component represents the revenue for air transportation sold, which are
being valued at current market rate. This revenue is being deferred and recognized over the period
the points are expected to be used. The second revenue component, represents the services deemed to
have been provided associated with operating the program, which is being recognized when the points
are sold.
 For reconciliation purposes, the Company deferred revenue for the year ended December 31, 2006
totaling R$ 15,013 (2005  R$ 15,185). The accumulated effect on stockholders equity at December
31, 2006 amounted to R$ 30,198 (2005  R$15,185).
 (i)
    
    Stock options plan
 SFAS Statement 123 (R) Share Based Payment, requires the measuring and recording of the cost of
employee services in exchange for awards of equity instruments based on the grant-date fair value
of those awards (with limited exceptions). Awards granted with other than market condition, shall
be classified as liability awards. . That cost will be recognized over the period during which the
employee is required to provide the service in exchange for the award. No compensation cost is
recognized for equity instruments for which employees do not render the requisite service. SFAS no.
123R requires entities to initially measure the cost of employee services received in exchange for
an award of liability instruments based on its current fair value. Changes in fair value during the
requisite service period will be recognized as compensation cost over that period. The grant date
fair value and the fair value of each reporting period of employee share options are estimated
using the Black-Scholes option-pricing model. SFAS no. 123R is effective as of the beginning of the
first interim or annual reporting period that begins after June 15, 2005. As described in further
details below, the Company has granted options to certain employees to purchase stock at prices
below market. The market value of the options granted will be recognized for U.S. GAAP purposes as
expense over the period in which the services are rendered. The fair value of the options
classified as liability award will be reassessed each reporting date. Under Brazilian GAAP the
stock options do not generate any expense and are recorded as a capital increase only when
exercised, in the amount of the exercise price paid.
 The Extraordinary Stockholders Meeting held on May 16, 2005, the stockholders approved that a
maximum of up to 2% of outstanding shares, or 2,857,247 shares, could be used for share options to
be granted to full time employees by the Board of Directors.
 The Board of Directors meeting held on December 20, 2005, granted the release of 715,255 preferred
shares and, on June 26, 2006, granted the release of 239,750 preferred shares as a second award to
be used as options under the plan.
  F-50




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, 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 7 years.
 As of December 31, 2006, 955,005 stock options were outstanding, and none had been cancelled. The
options contain a service condition as vesting and exercisability of the options depending only
on the rendering of a defined period of services by the employee. The dismissed employees have the
obligation to satisfy conditions in order to maintain their options right. At each reporting period
the fair value of the options granted are remeasured as well as the compensation cost and
recognized for the options awarded.
 Stock options were granted initially with an exercise price of R$ 14.40 per share, for the first
grant and R$ 43.48 for the second grant. The exercise price is adjusted by the IGPM (General Price
Index), from the award date up to the date of the financial statements.
 For Brazilian GAAP no value registered the expenses for the yielded options.
 The average remaining contractual life is demonstrated below.
 Under U.S. GAAP, the Company accounts for participation in the Plan in accordance with FASB
Statement 123 (R) Share Based Payment, since 2005. Accordingly, as the plan is a classified as a
liability award, compensation cost has been recognized as the fair value of the options at each
reporting date. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average assumptions :
 At December 31, 2006
    
    1st grant
    
    
    2nd grantRisk-free interest rates
    
    
    11.83
    %
    
    
    11.83
    %Exercise price (adjusted by IGPM)
    
    R$
    14.95
    
    
    R$
    43.62Dividend yield
    
    
    1.41
    %
    
    
    1.41
    %Volatility factors of the market
    
    
    46.28
    %
    
    
    46.28
    %Stock market price
    
    R$
    66.50
    
    
    R$
    66.50Expected life of the option
    
    3.5 years
    
    
    4.5 years
 At December 31, 2006, the fair value of the stock options granted in 2005 was R$ 53.35 per share
resulting in a total fair value of options granted of R$ 38,156.
 The fair value of the stock options granted in 2006 was R$ 39.23 per share resulting in a total
fair value of options granted of R$ 9,406 at December 31, 2006.
 For U.S. GAAP purposes, the company registered expenses of R$ 10,168 for the year ended December
31, 2006, with a corresponding credit to liabilities, considering that the exercise price is
indexed to an inflation index (IGPM). This adjustment has no impact for purposes of deferred income
tax and social contribution because such expense is a permanent difference.
 The Black-Scholes option valuation model was developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable. In addition, option
valuation models require the input of highly subjective assumption including the expected stock
price volatility. Because the Companys employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in managements option, the existing models do not
necessarily provide a reliable single measure of the fair value of its employee stock options.
  F-51




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (j)
    
    Dividends and interest on stockholders equity
 Under U.S. GAAP, the Company records dividends and interest on stockholders equity up to the limit
of the minimum mandatory dividends. At December 31, 2006, there is no difference between Brazilian
GAAP and U.S. GAAP for dividends and interest on stockholders equity.
 (k)
    
    Loyalty Program
 Under Brazilian GAAP, at December 31,2005, the incremental costs arising from the utilization of
free tickets were expensed as incurred. As from 2006, the Company changed its practice and began to
accrue future costs related to the utilization of accrued points (Note 3 (m)), thus eliminating
this difference between BR GAAP and U.S. GAAP.
 (l)
    
    Maintenance
 Under Brazilian GAAP, through December 31, 2005 the Company recorded maintenance expenses as
incurred. As from January 1, 2006, in accordance with Technical Interpretation of IBRACON 01/2006,
the Company changed its accounting policy under Brazilian GAAP to the built-in overhaul method
 Under U.S. GAAP, the Company records maintenance expenses as incurred. For reconciliation purposes,
the Company reversed the effects caused by the change in accounting policy under BR GAAP in 2006.
Accordingly, capitalized maintenance costs amounting to R$ 15,445 was reversed from stockholders
equity at December 31, 2006 and the depreciation expenses recorded in 2006 amounting to R$ 6,752,
has been reversed from the income statement, generating a net effect in stockholders equity of R$
8,693.
 (m)
    
    Earnings per share
 Under Brazilian GAAP, net income (loss) per share is calculated on the number of shares outstanding
at the balance sheet date. Information is disclosed per lot of one thousand shares because,
generally, this is the minimum number of shares that can be traded on the Brazilian stock
exchanges. The 10% premium to which preferred stockholders were entitled until May 16, 2005 on
distributed earnings is not allocated in calculating EPS under Brazilian GAAP.
 Under U.S. GAAP, since the preferred and common stockholders have different voting and liquidation
rights, basic and diluted earnings per share have been calculated using the two-class method,
pursuant to SFAS No. 128, Earnings per Share, which provides computation, presentation and
disclosure requirements for earnings per share.
The two-class method is an earnings allocation formula that determines earnings per share for
preferred and common stock according to the dividends to be paid as required by the Companys
by-laws and participation rights in undistributed earnings. Basic earnings per common share is
computed by dividing net income by the weighted-average number of common and preferred shares
outstanding during the period, including up to May 16, 2005, the 10% premium allocated to
preferred stockholders. Earnings may be capitalized used to absorb losses or otherwise
appropriated; consequently, such earnings would no longer be available to be paid as dividends.
Therefore, no assurance can be made that preferred stockholders will receive distributed earnings.
  F-52




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 As from May 16, 2005 the preferred shares receive the same dividends as common shares and no longer
have the previous preferred share right to a dividend 10% higher than that distributed to common
stockholders. In compensation current preferred shares have the right to vote in stockholders
meetings on limited matters and the right to receive the same price paid to common stockholders in
the event of transfer of the Companys control. The earnings per share information for the years
ended December 31, 2006 and 2005 reflects a proportionate profit allocation based on the period the
previous preferred shares were in existence and the balance of the profits are allocated to the
current preferred shares:
 2006Common
    
    
    Preferredshare
    
    
    share
    
    
    TotalBasic and diluted numeratorUndistributed earnings allocation
    
    
    324,072
    
    
    
    484,687
    
    
    
    808,759Total undistributed earnings
    
    
    324,072
    
    
    
    484,687
    
    
    
    808,759Weighted average number of outstanding shares -
basic and diluted (thousands)
    
    
    59,794
    
    
    
    89,429Basic and diluted earnings per thousand shares
U.S. GAAP  (whole reais)  R$
    
    
    5.42
    
    
    
    5.42
 2005Preferred
    
    
    PreferredCommon
    
    
    share
    
    
    shareshare
    
    
    current
    
    
    previous
    
    
    TotalBasic and diluted numerator10% premium to preferred stockholders
    
    
    
    
    
    
    
    
    
    
    7,749
    
    
    
    7,749Undistributed earnings allocation
    
    
    187,086
    
    
    
    154,195
    
    
    
    77,495
    
    
    
    418,776Total undistributed earnings
    
    
    187,086
    
    
    
    154,195
    
    
    
    85,244
    
    
    
    426,525Weighted average number of outstanding shares -
Basic and diluted (thousands)
    
    
    59,816
    
    
    
    81,331
    
    
    
    62,913Basic and diluted earnings per thousand shares 
U.S. GAAP  (whole reais)  R$
    
    
    3.13
    
    
    
    1.90
    
    
    
    1.35
 The stock options which were granted at end of the years 2006 and 2005 (Note 31 (i)) were
considered to have an anti-dilutive effect on earnings per share.
  F-53




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 2004Common
    
    
    Preferredshare
    
    
    share
    
    
    TotalBasic and diluted numerator
    
    
    
    
    
    
    20,970
    
    
    
    20,970Undistributed earnings allocation
    
    
    199,372
    
    
    
    209,695
    
    
    
    409,067Total undistributed earnings
    
    
    199,372
    
    
    
    230,665
    
    
    
    430,037Weighted average number of outstanding shares -
basic and diluted (thousands) (*)
    
    
    59,816
    
    
    
    62,913Basic and diluted earnings per thousand shares 
U.S. GAAP  (whole reais)  R$ (*)
    
    
    3.33
    
    
    
    3.67
 (*)
    
    Considering the retroactive effect of share split.
 (n)
    
    Comprehensive income
 Under Brazilian GAAP, the concept of comprehensive income is not recognized.
 Under U.S. GAAP, SFAS 130, Reporting Comprehensive Income, requires the disclosure of
comprehensive income. Comprehensive income is comprised of net income/loss and other comprehensive
income that include charges or credits directly to equity which are not the result of transactions
with owners. In the case of TAM, components of comprehensive income are its net income or loss,
changes in additional minimum pension liability (SFAS no. 158) and cumulative translation
adjustments (Note 31 (r (iii)).
 (o)
    
    Deferred income tax and social contribution
 Under Brazilian GAAP, deferred income tax recorded in assets represents the estimated amount to be
recovered.
 Under U.S. GAAP, deferred taxes on all temporary tax differences are accrued. Deferred tax assets
and liabilities are classified as current or long term, according to the classification of the
asset or liability that originates the temporary difference. Deferred income tax assets and
liabilities in the same tax jurisdiction are offset among themselves and are not presented at the
gross value.
 Up to 2004, for purposes of U.S. GAAP, management had determined that a valuation allowance for TAM
S.A. (the holding company), because of the reputable assumption of the three years taxable income
was not met. During 2005, TAM S.A. met the assumptions of the three years taxable income, and the
projections are sufficient to justify recording the assets. Therefore, management believes that TAM
S.A. will more likely than not, realize the associated benefits. For purposes of reconciliation,
management has reversed the valuation allowance previously recognized.
 In addition for the purpose of reconciliation to U.S. GAAP, the benefits (expenses) of income tax
related to U.S. GAAP adjustments were recognized.
 Together, these adjustments amounted to R$ (134,623), R$ (107,167) and R$ (39,628) in 2006, 2005
and 2004, respectively in the statements of operations. The aggregate net deferred tax assets
reflected in the shareholders equity at December 31, 2005 was R$ (126,186) (December 31, 2004  R$
13,038). No valuation allowance has been provided on the deferred tax assets because management
believes that these benefits will, more likely than not, be realized.
  F-54




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (p)
    
    Classification of statement of operations line items
 Under Brazilian GAAP, the classification of certain income and expense items is presented
differently from U.S. GAAP. The consolidated statement of operations under Brazilian GAAP has
therefore been reclassified to present a condensed consolidated statement of operations in
accordance with U.S. GAAP (Note 31 (r(i)), Reclassifications are summarized as follows:
 Reclassifications are summarized as follows:
     (q)
    
    Classification of balance sheet line items
 Under Brazilian GAAP, the classification of certain balance sheet items is presented differently
from U.S. GAAP. The Company recast our consolidated balance sheet prepared in accordance with BR
GAAP to present a condensed consolidated balance sheet in accordance with U.S. GAAP (Note 31 (s)).
The reclassifications are summarized as follows:
 
    
    Under BR GAAP, according to Normas e Procedimentos de
Contabilidade No, 20  Demonstração dos Fluxos de Caixacash and
cash equivalents consist principally of highly liquid cash
deposits and marketable securities, but there is no requirement
that there is insignificant potential changes in value because of
interest rate change nor is there a maximum 90 day original period
to maturity.
    
    Under U.S. GAAP, the Companys funds are considered to be subject
to potential change in value due to changes in interest rates or
have underlying securities with original maturities greater than
90 days. Therefore, under U.S. GAAP, such multi market funds were
classified under marketable securities in the balance sheet.
    
    Under U.S. GAAP, certain deferred charges were reclassified to
property, plant and equipment, according to their nature.
    
    Under BR GAAP, deferred income taxes are not netted and assets are
presented separately from liabilities. For U.S. GAAP purposes,
deferred tax assets and liabilities are netted and classified as
current or non-current based on the classification of the
underlying temporary difference.
  F-55




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 
    
    Cost of public equity offering under U.S. GAAP was reclassified to
Capital in the Shareholders equity at December 31, 2006 in the
amount of R$8,444 (2005  R$19,465).
 (r)
    
    Reconciliation of the differences between BR GAAP and U.S. GAAP
 (i)
    
    Net income
 Note 31
    
    2006
    
    
    2005
    
    
    2004Net income under Brazilian GAAP
    
    
    
    
    555,954
    
    
    
    187,374
    
    
    
    341,132Reversal of revaluation depreciation
    
    (c) (i)
    
    
    4,246
    
    
    
    3,852
    
    
    
    7,584Lease contractsDepreciation of capitalized financial lease
    
    (c) (ii)
    
    
    (133,942
    )
    
    
    (127,810
    )
    
    
    (115,652
    )Foreign exchange variation on finance lease
    
    (c) (ii)
    
    
    226,879
    
    
    
    329,638
    
    
    
    288,557Interest expense on financial lease
    
    (c) (ii)
    
    
    (151,928
    )
    
    
    (139,876
    )
    
    
    (130,068
    )Write-off of capitalized finance lease
    
    (c) (ii)
    
    
    (4,023
    )
    
    
    (4,499
    )Reversal of gains on change in type of lease
    
    (c) (ii)
    
    
    
    
    
    
    
    
    
    
    (353,279
    )Reversal of operating lease expense
    
    (c) (ii)
    
    
    337,774
    
    
    
    327,543
    
    
    
    329,558Total lease contracts
    
    
    
    
    274,760
    
    
    
    384,996
    
    
    
    19,116Amortization of gain on sale-leaseback transactions, net
    
    (c) (iv)
    
    
    33,834
    
    
    
    39,759
    
    
    
    99,478Depreciation of additional indexation of permanent
assets for 1996 and 1997
    
    (b)
    
    
    (88
    )
    
    
    (102
    )
    
    
    (116
    )Reversal of goodwill amortization
    
    (e) (i)
    
    
    717
    
    
    
    1,341
    
    
    
    2,291Common control  Mercosur
    
    (e) (ii)
    
    
    (5,183
    )
    
    
    8,870
    
    
    
    2,045Pension Plan
    
    (f)
    
    
    4,587
    
    
    
    2,448
    
    
    
    2,120Fair value of derivative instruments
    
    (g)
    
    
    84,540
    
    
    
    (85,606
    )
    
    
    (3,985
    )Maintenance
    
    (l)
    
    
    6,752Loyalty Program
    
    (k)
    
    
    
    
    
    
    (13,520
    )Revenue recognition on partnership with loyalty Program
    
    (h)
    
    
    (15,013
    )
    
    
    (15,185
    )Stock option plan
    
    (i)
    
    
    (10,168
    )Public equity offering
    
    (q)
    
    
    8,444
    
    
    
    19,465Deferred income tax and social contribution
on adjustment above
    
    (o)
    
    
    (134,623
    )
    
    
    (107,167
    )
    
    
    (39,628
    )Net income under U.S. GAAP
    
    
    
    
    808,759
    
    
    
    426,525
    
    
    
    430,037
  F-56




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (ii)
    
    Stockholders equity
 Note 31
    
    2006
    
    
    2005Stockholders equity as reported under
Brazilian GAAP
    
    
    
    
    1,449,386
    
    
    
    760,087Reversal of revaluation, net
    
    (c) (i)
    
    
    (147,874
    )
    
    
    (161,196
    )Additional indexation of permanent assets for 1996 and
1997, net of depreciation
    
    (b)
    
    
    68
    
    
    
    156Lease contracts
    
    (c) (ii)
    
    
    605,454
    
    
    
    330,694Deferral of gain on sale-leaseback transaction
    
    (c) (iv)
    
    
    (211,611
    )
    
    
    (245,445
    )Reversal of goodwill amortization
    
    (e) (i)
    
    
    8,963
    
    
    
    8,246Business combination (Mercosur)
    
    (e) (ii)
    
    
    11,828
    
    
    
    11,828Pension plan
    
    (f)
    
    
    679
    
    
    
    (3,667
    )Fair value of derivative instruments
    
    (g)
    
    
    (9,021
    )
    
    
    (93,561
    )Revenue recognition on partnerships with Loyalty Program
    
    (h)
    
    
    (30,198
    )
    
    
    (15,185
    )Loyalty Program
    
    (k)
    
    
    
    
    
    
    (13,520
    )Stock options program
    
    (i)
    
    
    (10,168
    )Maintenance
    
    (l)
    
    
    (8,693
    )Reversal of dividends
    
    (j)
    
    
    
    
    
    
    29,405Deferred income tax and social contribution on
adjustments above
    
    (o)
    
    
    (126,186
    )
    
    
    13,038Minority interest on adjustments above
    
    
    
    
    (729
    )
    
    
    (729
    )Stockholders equity as reported under U.S. GAAP
    
    
    
    
    1,531,898
    
    
    
    620,151
 (s)
    
    Condensed consolidated financial statements under U.S. GAAP
 Based on the reconciliation items and description above, the condensed consolidated balance sheet,
condensed consolidated statement of operations and condensed statement of changes in stockholders
equity of TAM, under U.S. GAAP, were presented as follows:
  F-57




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (i)
    
    Consolidated balance sheet under U.S. GAAP
 Based on the reconciliation items and description above, the condensed consolidated balance sheet,
condensed consolidated statement of operations and condensed statement of changes in stockholders
equity of TAM, under U.S. GAAP, are as follows:
 Assets
    
    2006
    
    
    2005Current assetsCash and cash equivalents
    
    
    299,507
    
    
    
    92,935Marketable securities
    
    
    2,153,471
    
    
    
    902,517Customers accounts receivable (net of allowance for doubtful
accounts  R$38,387 and R$48,029, respectively)
    
    
    780,972
    
    
    
    763,165Inventories
    
    
    113,875
    
    
    
    104,565Taxes recoverable
    
    
    67,345
    
    
    
    43,035Prepaid expenses
    
    
    117,327
    
    
    
    120,013Deferred income tax and social contribution
    
    
    25,425
    
    
    
    80,061Advances to aircraft manufacturers
    
    
    221,793
    
    
    
    100,995Other
    
    
    72,765
    
    
    
    21,7583,852,480
    
    
    
    2,229,044Long-term assetsIncome tax and social contribution
    
    
    
    
    
    
    122,995Deposits in guarantee
    
    
    144,444
    
    
    
    118,660Judicial deposits
    
    
    55,577
    
    
    
    55,877Advances to aircraft manufactures
    
    
    130,915Advances for aircraft maintenance
    
    
    46,596Other
    
    
    26,346
    
    
    
    12,466403,878
    
    
    
    309,998InvestmentsGoodwill
    
    
    9,680
    
    
    
    9,680Other investments
    
    
    70
    
    
    
    70Property, plant and equipment
    
    
    3,391,292
    
    
    
    3,507,8553,401,042
    
    
    
    3,517,605Total assets
    
    
    7,657,400
    
    
    
    6,056,647
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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 Liabilities and stockholders equity
    
    2006
    
    
    2005Current liabilitiesSuppliers
    
    
    346,817
    
    
    
    282,048Obligations under finance lease and lease payable
    
    
    335,254
    
    
    
    342,983Short-term debt, including current portion of long-term debt
    
    
    221,908
    
    
    
    118,448Debentures
    
    
    60,588
    
    
    
    26,109Taxes and tariffs payable
    
    
    63,783
    
    
    
    35,156Advance from ticket sales
    
    
    759,210
    
    
    
    557,647Salaries and payroll charges
    
    
    194,128
    
    
    
    134,048Deferred gain on sale-leaseback
    
    
    32,085
    
    
    
    32,085Provision for income tax and social contribution
    
    
    1,993
    
    
    
    27,073Interest on own capital and dividends payable
    
    
    137,269Other
    
    
    210,409
    
    
    
    237,6132,363,444
    
    
    
    1,793,210Long-term liabilitiesObligation under financial lease
    
    
    2,033,771
    
    
    
    2,502,424Long-term debt
    
    
    230,864
    
    
    
    151,405Debentures
    
    
    508,076
    
    
    
    33,244Return of Fokker 100 fleet
    
    
    62,806
    
    
    
    85,004Provision for contingencies
    
    
    722,761
    
    
    
    654,101Deferred income tax and social contribution
    
    
    9,284Deferred gain on sale-leaseback
    
    
    179,526
    
    
    
    213,360Other
    
    
    12,226
    
    
    
    1,9053,759,314
    
    
    
    3,641,443Minority interest
    
    
    2,744
    
    
    
    1,843Stockholders equity
    
    
    1,531,898
    
    
    
    620,151Total liabilities and stockholders equity
    
    
    7,657,400
    
    
    
    6,056,647
  F-59




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (ii)
    
    Consolidated Statement of Operations under U.S. GAAP
 2006
    
    
    2005
    
    
    2004Net operating revenue
    
    
    7,329,637
    
    
    
    5,633,580
    
    
    
    4,520,371Operating expensesPersonnel
    
    
    878,179
    
    
    
    666,243
    
    
    
    543,605Fuel
    
    
    2,129,856
    
    
    
    1,694,980
    
    
    
    1,066,731Aircraft and flight equipment lease
    
    
    381,024
    
    
    
    299,819
    
    
    
    321,476Selling and marketing
    
    
    875,254
    
    
    
    854,602
    
    
    
    656,326Landing, take-off and navigational tariffs
    
    
    314,977
    
    
    
    233,010
    
    
    
    185,773Depreciation and amortization
    
    
    222,555
    
    
    
    206,215
    
    
    
    193,238Maintenance (except personnel)
    
    
    387,972
    
    
    
    356,322
    
    
    
    389,186Services rendered by third parties
    
    
    530,994
    
    
    
    356,416
    
    
    
    360,461Aircraft insurance
    
    
    35,077
    
    
    
    39,644
    
    
    
    52,714Other
    
    
    483,201
    
    
    
    314,432
    
    
    
    258,133(6,239,089
    )
    
    
    (5,021,683
    )
    
    
    (4,027,643
    )Operating income
    
    
    1,090,548
    
    
    
    611,897
    
    
    
    492,728Financial income (expenses), net
    
    
    151,911
    
    
    
    32,345
    
    
    
    137,308Income before income tax and social contribution
    
    
    1,242,459
    
    
    
    644,242
    
    
    
    630,036Income tax and social contribution
    
    
    (432,964
    )
    
    
    (217,602
    )
    
    
    (199,328
    )Income before minority interest
    
    
    809,495
    
    
    
    426,640
    
    
    
    430,708Minority interest
    
    
    (736
    )
    
    
    (115
    )
    
    
    (671
    )Net income for the year
    
    
    808,759
    
    
    
    426,525
    
    
    
    430,037
  F-60




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (iii)
    
    Condensed statement of stockholders equity movement under U.S. GAAP
 2006
    
    
    2005
    
    
    2004At beginning of the year
    
    
    620,151
    
    
    
    (164,040
    )
    
    
    (591,366
    )Capital increase
    
    
    34,316
    
    
    
    33,160Share issuance cost
    
    
    (8,444
    )
    
    
    (19,465
    )Premium on subscription of shares
    
    
    238,848
    
    
    
    350,782Dividends
    
    
    (29,405
    )Interest on own capital and dividends payable
    
    
    (137,269
    )Effect of applying SFAS 158 to pension plan
    
    
    (241
    )Cumulative translation adjustment
    
    
    5,183
    
    
    
    (8,870
    )
    
    
    (2,045
    )Changes in minimum pension liability
    
    
    
    
    
    
    2,059
    
    
    
    (666
    )Net income for the year
    
    
    808,759
    
    
    
    426,525
    
    
    
    430,037Comprehensive income
    
    
    813,942
    
    
    
    419,714
    
    
    
    427,326At end of the year
    
    
    1,531,898
    
    
    
    620,151
    
    
    
    (164,040
    )
 (t)
    
    Business segments
 Under BR GAAP, no separate segment reporting is required.
 Under U.S. GAAP, SFAS 131, Disclosures about Segments of an Enterprise and Related Information,
defines operating segments as components of an enterprise for which separate financial information
is available and evaluated regularly for assessing segment performance and allocating resources to
segments. Measures of profit or loss, total assets and other related information are required to be
disclosed for each operating segment. In addition, this standard requires the annual disclosure of
information concerning revenues derived from the enterprises products or services, countries in
which revenues or assets are generated and major customers.
 SFAS 131 requires that segment data be presented in the U.S. GAAP financial statements in
accordance with the internal information that is used by management for operating decision making,
including allocation of resources among segments, and segment performance. This information results
from the statutory accounting records kept under U.S. GAAP and BR GAAP, the Company considers that
it has only one reportable segment.
 (u)
    
    Additional disclosure  Advertising and Publicity expenses
 Advertising and publicity expenses totaled R$ 46,495, R$ 58,705 and R$ 40,836 for the year ended
December 31, 2006, 2005 and 2004, respectively, and are being classified as selling and marketing
expenses.
 The Company is analyzing the disclosure requirements of this new requirement and believes that its
adoption will not have any significant impact on its financial position, operating result or cash
flows.
  F-61




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (v)
    
    Recently issued accounting pronouncements
 In March 2006, the FASB issued SFAS No. 156  Accounting for Servicing of Financial Assets. SFAS
156 amends SFAS No. 140  Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, that establishes, among other things, the accounting for all
separately recognized servicing assets and servicing liabilities. SFAS 156 amends Statement 140 to
require that all separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable. SFAS 156 permits, but does not require, the subsequent
measurement of separately recognized servicing assets and servicing liabilities at fair value. An
equity that uses derivative instruments to mitigate the risks inherent in servicing assets and
servicing liabilities is required to account for those derivative instruments at fair value. Under
this Statement, an entity can elect subsequent fair value measurement to account for its separately
recognized servicing assets and servicing liabilities.
 By electing that option, an entity may simplify its accounting because this Statement permits
income statement recognition of the potential offsetting changes in fair value of those servicing
assets and servicing liabilities and derivative instruments in the same accounting period. The
Company is currently evaluating the impact that the application of this new standard will have on
its financial statements.
 In July 2006, the FASB issued FIN 48, Accounting for uncertainty in income taxes, which
prescribes a comprehensive model for how a Company should recognize, measure, present, and disclose
in its financial statements uncertain tax positions that the Company has taken or expects to take
on a tax return. Currently, the Company has no uncertain tax positions that will affect its tax
return and therefore, the Company has concluded that the adoption of this standard will have no
significant impact on its financial statements.
 In September 2006, the FASB issued FAS 157, Fair Value Measurement, which clarifies and set up a
framework for measuring fair value and expands disclosure about fair value measurement. The Company
is currently evaluating the impact that the application of this new standard will have on its
financial statements, as of January 1, 2008.
 In February, 2007, the FASB issued FAS 159 The fair value option for financial assets and
financial liabilities including an amendment of FASB Statement 115 Accounting for certain
investments in debt and equity securities, permits the company to choose to measure many financial
instruments and certain other itens at fair value. The Company is currently evaluation the impact
that the application of this new standard will have on its financial statements, as of 2007.
 32
    
    Consolidation schedules
 In accordance to 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 Mercosur and TAM Fidelidade (non guarantors). All U.S. GAAP adjustments presented in Note 31
are related to TAM Linhas Aéreas S.A., except for the adjustments (e) Business Combinations  (ii)
Common control and negative goodwill  Mercosur, and (q) Classification of balance sheet items 
Cost of public equity offeringwhich relate to TAM S.A.
  F-62




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (a)
    
    Balance sheet
 As of December 31, 2006TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(ParentCompany and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)AssetsCurrentCash and banks
    
    
    146
    
    
    
    59,998
    
    
    
    62,222
    
    
    
    92
    
    
    
    122,458Financial investments
    
    
    668,505
    
    
    
    1,667,741
    
    
    
    
    
    
    
    (5,726
    )
    
    
    2,330,520Customer accounts receivable
    
    
    
    
    
    
    791,990
    
    
    
    29,937
    
    
    
    (40,955
    )
    
    
    780,972Inventories
    
    
    
    
    
    
    113,233
    
    
    
    642
    
    
    
    
    
    
    
    113,875Taxes recoverable
    
    
    6,769
    
    
    
    53,801
    
    
    
    6,775
    
    
    
    
    
    
    
    67,345Advances to aircraft manufacturers
    
    
    
    
    
    
    221,793
    
    
    
    
    
    
    
    
    
    
    
    221,793Dividends receivable
    
    
    44,495
    
    
    
    
    
    
    
    
    
    
    
    (44,495
    )Deferred income tax and social contribution
    
    
    1,164
    
    
    
    31,886
    
    
    
    
    
    
    
    
    
    
    
    33,050Prepaid expenses
    
    
    1,800
    
    
    
    109,700
    
    
    
    2,147
    
    
    
    6,293
    
    
    
    119,940Other
    
    
    
    
    
    
    52,805
    
    
    
    7,951
    
    
    
    12,009
    
    
    
    72,765722,879
    
    
    
    3,102,947
    
    
    
    109,674
    
    
    
    (72,782
    )
    
    
    3,862,718Non-currentLong-term assetsDeposits in guarantee
    
    
    
    
    
    
    144,444
    
    
    
    1,607
    
    
    
    (1,607
    )
    
    
    144,444Related parties
    
    
    
    
    
    
    536
    
    
    
    197
    
    
    
    (733
    )Deferred income tax and social contribution
    
    
    
    
    
    
    109,277
    
    
    
    
    
    
    
    
    
    
    
    109,277Judicial deposits
    
    
    14
    
    
    
    54,743
    
    
    
    820
    
    
    
    
    
    
    
    55,577Advances to aircraft manufacturers
    
    
    
    
    
    
    130,915
    
    
    
    
    
    
    
    
    
    
    
    130,915Advances for aircraft maintenance
    
    
    
    
    
    
    46,596
    
    
    
    
    
    
    
    
    
    
    
    46,596Other
    
    
    
    
    
    
    26,346
    
    
    
    
    
    
    
    
    
    
    
    26,34614
    
    
    
    512,857
    
    
    
    2,624
    
    
    
    (2,340
    )
    
    
    513,155Permanent assetsOther investments
    
    
    1,394,939
    
    
    
    70
    
    
    
    
    
    
    
    (1,394,939
    )
    
    
    70Property, plant and equipment
    
    
    
    
    
    
    775,559
    
    
    
    16,126
    
    
    
    
    
    
    
    791,685Deferred charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717
    
    
    
    7171,394,939
    
    
    
    775,629
    
    
    
    16,126
    
    
    
    (1,394,222
    )
    
    
    792,4721,394,953
    
    
    
    1,288,486
    
    
    
    18,750
    
    
    
    (1,396,562
    )
    
    
    1,305,627Total assets
    
    
    2,117,832
    
    
    
    4,391,433
    
    
    
    128,424
    
    
    
    (1,469,344
    )
    
    
    5,168,345
  F-63




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 As of December 31, 2006TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(ParentCompany and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Liabilities and Stockholders EquityCurrent liabilitiesSuppliers
    
    
    
    
    
    
    321,981
    
    
    
    66,898
    
    
    
    (42,062
    )
    
    
    346,817Short-term debt including current portion
of long-term debt
    
    
    
    
    
    
    221,908
    
    
    
    
    
    
    
    
    
    
    
    221,908Finance lease and operating lease liabilities
    
    
    
    
    
    
    69,108
    
    
    
    
    
    
    
    
    
    
    
    69,108Debentures
    
    
    28,573
    
    
    
    32,015
    
    
    
    
    
    
    
    
    
    
    
    60,588Salaries and payroll charges
    
    
    115
    
    
    
    189,705
    
    
    
    4,308
    
    
    
    
    
    
    
    194,128Advance ticket sales
    
    
    
    
    
    
    743,975
    
    
    
    15,235
    
    
    
    
    
    
    
    759,210Taxes and tariffs payable
    
    
    25
    
    
    
    62,494
    
    
    
    1,264
    
    
    
    
    
    
    
    63,783Income tax and social contribution payable
    
    
    
    
    
    
    1,993
    
    
    
    
    
    
    
    
    
    
    
    1,993Interest on own capital and dividends payable
    
    
    137,629
    
    
    
    44,495
    
    
    
    
    
    
    
    (44,495
    )
    
    
    137,629Others
    
    
    4
    
    
    
    180,387
    
    
    
    8,478
    
    
    
    (14,744
    )
    
    
    174,125166,346
    
    
    
    1,868,061
    
    
    
    96,183
    
    
    
    (101,301
    )
    
    
    2,029,289Non-currentLong-term liabilitiesLong-term debt
    
    
    
    
    
    
    230,864
    
    
    
    
    
    
    
    
    
    
    
    230,864Finance lease and operating lease liabilities
    
    
    
    
    
    
    92,954
    
    
    
    
    
    
    
    
    
    
    
    92,954Debentures
    
    
    500,000
    
    
    
    8,076
    
    
    
    
    
    
    
    
    
    
    
    508,076Deferred income taxes and social contribution
    
    
    
    
    
    
    56,306
    
    
    
    
    
    
    
    
    
    
    
    56,306Provision for contingent liabilities and tax
obligations under judicial dispute
    
    
    
    
    
    
    718,466
    
    
    
    4,295
    
    
    
    
    
    
    
    722,761Return of Fokker 100 fleet
    
    
    
    
    
    
    62,806
    
    
    
    
    
    
    
    
    
    
    
    62,806Related parties
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    (536
    )Others
    
    
    1,565
    
    
    
    495
    
    
    
    
    
    
    
    
    
    
    
    2,060502,101
    
    
    
    1,169,967
    
    
    
    4,295
    
    
    
    (536
    )
    
    
    1,675,827Deferred income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,099
    
    
    
    11,099Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,744
    
    
    
    2,744Stockholders equityCapital
    
    
    675,000
    
    
    
    123,632
    
    
    
    36,605
    
    
    
    (160,237
    )
    
    
    675,000Advance for future capital increase
    
    
    
    
    
    
    508,486
    
    
    
    
    
    
    
    (508,486
    )Capital reserve
    
    
    102,855
    
    
    
    
    
    
    
    250
    
    
    
    (250
    )
    
    
    102,855Revaluation reserve
    
    
    147,874
    
    
    
    137,360
    
    
    
    10,342
    
    
    
    (147,702
    )
    
    
    147,874Retained earnings
    
    
    523,656
    
    
    
    583,927
    
    
    
    (19,251
    )
    
    
    (564,675
    )
    
    
    523,6571,449,385
    
    
    
    1,353,405
    
    
    
    27,946
    
    
    
    (1,381,350
    )
    
    
    1,449,386Total liabilities and stockholders equity
    
    
    2,117,832
    
    
    
    4,391,433
    
    
    
    128,424
    
    
    
    (1,469,344
    )
    
    
    5,168,345
  F-64




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 As of December 31, 2005TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(ParentCompany and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)AssetsCurrentCash and banks
    
    
    1,124
    
    
    
    65,503
    
    
    
    26,307
    
    
    
    1
    
    
    
    92,935Financial investments
    
    
    368,550
    
    
    
    556,650
    
    
    
    198
    
    
    
    (22,881
    )
    
    
    902,517Customer accounts receivable
    
    
    
    
    
    
    761,414
    
    
    
    37,505
    
    
    
    (35,754
    )
    
    
    763,165Inventories
    
    
    
    
    
    
    103,896
    
    
    
    669
    
    
    
    
    
    
    
    104,565Taxes recoverable
    
    
    7,697
    
    
    
    37,668
    
    
    
    5,565
    
    
    
    (7,895
    )
    
    
    43,035Advances to aircraft manufacturers
    
    
    
    
    
    
    100,995
    
    
    
    
    
    
    
    
    
    
    
    100,995Dividends receivable
    
    
    27,584
    
    
    
    
    
    
    
    
    
    
    
    (27,584
    )Deferred income tax and social contribution
    
    
    3,012
    
    
    
    20,770
    
    
    
    
    
    
    
    
    
    
    
    23,782Prepaid expenses
    
    
    
    
    
    
    100,324
    
    
    
    1,787
    
    
    
    27,368
    
    
    
    129,479Other
    
    
    
    
    
    
    15,474
    
    
    
    8,074
    
    
    
    (1,790
    )
    
    
    21,758407,967
    
    
    
    1,762,694
    
    
    
    80,105
    
    
    
    (68,535
    )
    
    
    2,182,231Non-currentLong-term assetsDeposits in guarantee
    
    
    
    
    
    
    118,660
    
    
    
    1,639
    
    
    
    (1,639
    )
    
    
    118,660Related parties
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    (197
    )
    
    
    Deferred income tax and social contribution
    
    
    
    
    
    
    166,236
    
    
    
    
    
    
    
    
    
    
    
    166,236Judicial deposits
    
    
    
    
    
    
    55,026
    
    
    
    851
    
    
    
    
    
    
    
    55,877Other
    
    
    
    
    
    
    12,466
    
    
    
    
    
    
    
    
    
    
    
    12,466352,388
    
    
    
    2,687
    
    
    
    (1,836
    )
    
    
    353,239Permanent assetsOther investments
    
    
    385,067
    
    
    
    70
    
    
    
    
    
    
    
    (385,067
    )
    
    
    70Property, plant and equipment
    
    
    
    
    
    
    752,073
    
    
    
    16,533
    
    
    
    
    
    
    
    768,606Deferred charges
    
    
    
    
    
    
    5,228
    
    
    
    
    
    
    
    1,434
    
    
    
    6,662385,067
    
    
    
    757,371
    
    
    
    16,533
    
    
    
    (383,633
    )
    
    
    775,338385,067
    
    
    
    1,109,759
    
    
    
    19,220
    
    
    
    (385,469
    )
    
    
    1,128,577Total assets
    
    
    793,034
    
    
    
    2,872,453
    
    
    
    99,325
    
    
    
    (454,004
    )
    
    
    3,310,808
  F-65




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##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 As of December 31, 2005TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(ParentCompany and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Liabilities and Stockholders EquityCurrent liabilitiesSuppliers
    
    
    
    
    
    
    269,747
    
    
    
    49,843
    
    
    
    (37,542
    )
    
    
    282,048Short-term debt including current portion
of long-term debt
    
    
    
    
    
    
    118,448
    
    
    
    
    
    
    
    
    
    
    
    118,448Finance lease and operating lease liabilities
    
    
    
    
    
    
    62,049
    
    
    
    
    
    
    
    
    
    
    
    62,049Debentures
    
    
    
    
    
    
    26,109
    
    
    
    
    
    
    
    
    
    
    
    26,109Salaries and payroll charges
    
    
    96
    
    
    
    131,942
    
    
    
    2,014
    
    
    
    (4
    )
    
    
    134,048Advance ticket sales
    
    
    
    
    
    
    546,003
    
    
    
    11,644
    
    
    
    
    
    
    
    557,647Taxes and tariffs payable
    
    
    37
    
    
    
    34,591
    
    
    
    528
    
    
    
    
    
    
    
    35,156Income tax and social contribution payable
    
    
    3,409
    
    
    
    27,073
    
    
    
    
    
    
    
    (3,409
    )
    
    
    27,073Interest on own capital and dividends payable
    
    
    29,405
    
    
    
    27,584
    
    
    
    
    
    
    
    (27,584
    )
    
    
    29,405Others
    
    
    
    
    
    
    128,349
    
    
    
    4,417
    
    
    
    (11,620
    )
    
    
    121,14632,947
    
    
    
    1,371,895
    
    
    
    68,446
    
    
    
    (80,159
    )
    
    
    1,393,129Non-currentLong-term liabilitiesLong-term debt
    
    
    
    
    
    
    151,405
    
    
    
    
    
    
    
    
    
    
    
    151,405Finance lease and operating lease liabilities
    
    
    
    
    
    
    155,703
    
    
    
    
    
    
    
    
    
    
    
    155,703Debentures
    
    
    
    
    
    
    33,244
    
    
    
    
    
    
    
    
    
    
    
    33,244Deferred income taxes and social contribution
    
    
    
    
    
    
    63,287
    
    
    
    
    
    
    
    
    
    
    
    63,287Provision for contingent liabilities and
tax obligations under judicial dispute
    
    
    
    
    
    
    650,150
    
    
    
    3,951
    
    
    
    
    
    
    
    654,101Return of Fokker 100 fleet
    
    
    
    
    
    
    85,004
    
    
    
    
    
    
    
    
    
    
    
    85,004Others
    
    
    
    
    
    
    1,906
    
    
    
    
    
    
    
    
    
    
    
    1,9061,140,699
    
    
    
    3,951
    
    
    
    
    
    
    
    1,144,650Deferred income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,099
    
    
    
    11,099Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,843
    
    
    
    1,843Stockholders equityCapital
    
    
    153,909
    
    
    
    123,632
    
    
    
    32,853
    
    
    
    (156,485
    )
    
    
    153,909Capital reserve
    
    
    350,782
    
    
    
    
    
    
    
    224
    
    
    
    (224
    )
    
    
    350,782Revaluation reserve
    
    
    161,196
    
    
    
    147,869
    
    
    
    13,216
    
    
    
    (161,085
    )
    
    
    161,196Retained earnings
    
    
    94,200
    
    
    
    88,358
    
    
    
    (19,365
    )
    
    
    (68,993
    )
    
    
    94,200760,087
    
    
    
    359,859
    
    
    
    26,928
    
    
    
    (386,787
    )
    
    
    760,087Total liabilities and stockholders equity
    
    
    793,034
    
    
    
    2,872,453
    
    
    
    99,325
    
    
    
    (454,004
    )
    
    
    3,310,808
  F-66




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (b)
    
    Statement of Operations
 For the year ended December 31, 2006TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent Company and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)RevenueAir transportation revenues
    
    
    
    
    
    
    7,026,105
    
    
    
    159,784
    
    
    
    
    
    
    
    7,185,889Other operating revenues
    
    
    
    
    
    
    485,815
    
    
    
    48,126
    
    
    
    (19,739
    )
    
    
    514,202Taxes and deductions
    
    
    
    
    
    
    (351,948
    )
    
    
    (3,493
    )
    
    
    
    
    
    
    (355,441
    )Net operating revenues
    
    
    
    
    
    
    7,159,972
    
    
    
    204,417
    
    
    
    (19,739
    )
    
    
    7,344,650Cost of services rendered
    
    
    
    
    
    
    (4,634,257
    )
    
    
    (116,151
    )
    
    
    19,739
    
    
    
    (4,730,669
    )Gross profit
    
    
    
    
    
    
    2,525,715
    
    
    
    88,266
    
    
    
    
    
    
    
    2,613,981Operating income (expenses)Selling
    
    
    
    
    
    
    (1,129,282
    )
    
    
    (56,994
    )
    
    
    
    
    
    
    (1,186,276
    )General and administrative
    
    
    (12,597
    )
    
    
    (382,033
    )
    
    
    (15,730
    )
    
    
    
    
    
    
    (410,360
    )Executive management fees
    
    
    (1,374
    )
    
    
    (18,686
    )
    
    
    (704
    )
    
    
    
    
    
    
    (20,764
    )Financial expenses
    
    
    (43,231
    )
    
    
    (256,936
    )
    
    
    (5,576
    )
    
    
    23,325
    
    
    
    (282,418
    )Financial income
    
    
    107,435
    
    
    
    167,661
    
    
    
    2,407
    
    
    
    (23,325
    )
    
    
    254,178Equity
    
    
    521,564
    
    
    
    (16,928
    )
    
    
    
    
    
    
    (504,636
    )Other operating expenses, net
    
    
    (717
    )
    
    
    (111,584
    )
    
    
    (13,898
    )
    
    
    
    
    
    
    (126,199
    )Operating income
    
    
    571,080
    
    
    
    777,927
    
    
    
    (2,229
    )
    
    
    (504,636
    )
    
    
    842,142Non-operating income (expense), net
    
    
    
    
    
    
    5,938
    
    
    
    5,418
    
    
    
    
    
    
    
    11,356Income before income tax and
social contribution
    
    
    571,080
    
    
    
    783,865
    
    
    
    3,189
    
    
    
    (504,636
    )
    
    
    853,498Income tax and social contribution
    
    
    (15,126
    )
    
    
    (281,408
    )
    
    
    
    
    
    
    
    
    
    
    (296,534
    )Income before minority interest
    
    
    555,954
    
    
    
    502,457
    
    
    
    3,189
    
    
    
    (504,636
    )
    
    
    556,964Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,010
    )
    
    
    (1,010
    )Net income for the year
    
    
    555,954
    
    
    
    502,457
    
    
    
    3,189
    
    
    
    (505,646
    )
    
    
    555,954
  F-67




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For the year ended December 31, 2005TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent Company and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)RevenueAir transportation revenues
    
    
    
    
    
    
    5,499,075
    
    
    
    134,326
    
    
    
    
    
    
    
    5,633,401Other operating revenues
    
    
    265
    
    
    
    264,172
    
    
    
    32,908
    
    
    
    (20,611
    )
    
    
    276,734Taxes and deductions
    
    
    (13
    )
    
    
    (258,463
    )
    
    
    (2,894
    )
    
    
    
    
    
    
    (261,370
    )Net operating revenues
    
    
    252
    
    
    
    5,504,784
    
    
    
    164,340
    
    
    
    (20,611
    )
    
    
    5,648,765Cost of services rendered
    
    
    
    
    
    
    (3,716,126
    )
    
    
    (101,105
    )
    
    
    20,345
    
    
    
    (3,796,886
    )Gross profit
    
    
    252
    
    
    
    1,788,658
    
    
    
    63,235
    
    
    
    (266
    )
    
    
    1,851,879Operating income (expenses)Selling
    
    
    
    
    
    
    (1,028,129
    )
    
    
    (50,052
    )
    
    
    
    
    
    
    (1,078,181
    )General and administrative
    
    
    (15,797
    )
    
    
    (292,913
    )
    
    
    (16,255
    )
    
    
    266
    
    
    
    (324,699
    )Executive management fees
    
    
    (454
    )
    
    
    (19,805
    )
    
    
    (1,829
    )
    
    
    
    
    
    
    (22,088
    )Financial expenses
    
    
    (1,621
    )
    
    
    (187,829
    )
    
    
    (3,965
    )
    
    
    468
    
    
    
    (192,947
    )Financial income
    
    
    33,061
    
    
    
    65,266
    
    
    
    2,527
    
    
    
    (468
    )
    
    
    100,386Equity
    
    
    174,344
    
    
    
    (10,147
    )
    
    
    
    
    
    
    (164,197
    )Other operating expenses, net
    
    
    (2,015
    )
    
    
    (27,982
    )
    
    
    (809
    )
    
    
    
    
    
    
    (30,806
    )Operating income
    
    
    187,770
    
    
    
    287,119
    
    
    
    (7,148
    )
    
    
    (164,197
    )
    
    
    303,544Non-operating income (expense), net
    
    
    
    
    
    
    1,998
    
    
    
    (10,044
    )
    
    
    
    
    
    
    (8,046
    )Income before income tax and
social contribution
    
    
    187,770
    
    
    
    289,117
    
    
    
    (17,192
    )
    
    
    (164,197
    )
    
    
    295,498Income tax and social contribution
    
    
    (396
    )
    
    
    (108,081
    )
    
    
    
    
    
    
    
    
    
    
    (108,477
    )Income before minority interest
    
    
    187,374
    
    
    
    181,036
    
    
    
    (17,192
    )
    
    
    (164,197
    )
    
    
    187,021Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353
    
    
    
    353Net income (loss) for the year
    
    
    187,374
    
    
    
    181,036
    
    
    
    (17,192
    )
    
    
    (163,844
    )
    
    
    187,374
  F-68




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For the year ended December 31, 2004TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent Company and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)RevenueAir transportation revenues
    
    
    
    
    
    
    4,322,446
    
    
    
    122,947
    
    
    
    
    
    
    
    4,445,393Other operating revenues
    
    
    1,346
    
    
    
    249,874
    
    
    
    47,668
    
    
    
    
    
    
    
    298,888Taxes and deductions
    
    
    (67
    )
    
    
    (219,604
    )
    
    
    (4,239
    )
    
    
    
    
    
    
    (223,910
    )Net operating revenues
    
    
    1,279
    
    
    
    4,352,716
    
    
    
    166,376
    
    
    
    
    
    
    
    4,520,371Cost of services rendered
    
    
    
    
    
    
    (2,923,726
    )
    
    
    (86,344
    )
    
    
    
    
    
    
    (3,010,070
    )Gross profit
    
    
    1,279
    
    
    
    1,428,990
    
    
    
    80,032
    
    
    
    
    
    
    
    1,510,301Operating income (expenses)Selling
    
    
    
    
    
    
    (844,967
    )
    
    
    (45,990
    )
    
    
    
    
    
    
    (890,957
    )General and administrative
    
    
    (158
    )
    
    
    (294,258
    )
    
    
    (16,211
    )
    
    
    
    
    
    
    (310,627
    )Executive management fees
    
    
    (835
    )
    
    
    (11,232
    )
    
    
    (1,931
    )
    
    
    
    
    
    
    (13,998
    )Financial expenses
    
    
    (216
    )
    
    
    (110,118
    )
    
    
    (4,049
    )
    
    
    1,526
    
    
    
    (112,857
    )Financial income
    
    
    30
    
    
    
    27,951
    
    
    
    3,827
    
    
    
    (1,526
    )
    
    
    30,282Equity
    
    
    343,339
    
    
    
    306
    
    
    
    
    
    
    
    (343,645
    )Other operating expenses, net
    
    
    (2,291
    )
    
    
    (11,594
    )
    
    
    (725
    )
    
    
    
    
    
    
    (14,610
    )Operating income
    
    
    341,148
    
    
    
    185,078
    
    
    
    14,953
    
    
    
    (343,645
    )
    
    
    197,534Non-operating income (expense), net
    
    
    
    
    
    
    303,447
    
    
    
    (3,321
    )
    
    
    
    
    
    
    300,126Income before income tax and
social contribution
    
    
    341,148
    
    
    
    488,525
    
    
    
    11,632
    
    
    
    (343,645
    )
    
    
    497,660Income tax and social contribution
    
    
    (16
    )
    
    
    (155,834
    )
    
    
    (115
    )
    
    
    
    
    
    
    (155,965
    )Income before minority interest
    
    
    341,132
    
    
    
    332,691
    
    
    
    11,517
    
    
    
    (343,645
    )
    
    
    341,695Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (563
    )
    
    
    (563
    )Net income for the year
    
    
    341,132
    
    
    
    332,691
    
    
    
    11,517
    
    
    
    (344,208
    )
    
    
    341,132
  F-69




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 (c)
    
    Statement of cash flows
 For the year ended December 31, 2006TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent Company and
    
    
    
    
    
    
    (Nonguarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from operating
activitiesNet income for the year
    
    
    555,954
    
    
    
    502,458
    
    
    
    3,188
    
    
    
    (505,646
    )
    
    
    555,954Adjustments to reconcile net
income to cash provided by
operating activitiesDepreciation and amortization
    
    
    
    
    
    
    100,894
    
    
    
    961
    
    
    
    
    
    
    
    101,855Deferred income tax and
social contribution
    
    
    
    
    
    
    26,892
    
    
    
    
    
    
    
    
    
    
    
    26,892Provision for contingencies and
tax obligations under judicial
deposits
    
    
    
    
    
    
    68,316
    
    
    
    344
    
    
    
    
    
    
    
    68,660Equity
    
    
    (521,564
    )
    
    
    16,928
    
    
    
    
    
    
    
    504,636Amortization of goodwill
    
    
    717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    717Residual value of long lived
assets disposals
    
    
    
    
    
    
    17,850
    
    
    
    (338
    )
    
    
    
    
    
    
    17,512Indexation charges and
exchange variations, net
    
    
    20,087
    
    
    
    12,720
    
    
    
    707
    
    
    
    
    
    
    
    33,514Other provisions
    
    
    
    
    
    
    10,195
    
    
    
    (1,317
    )
    
    
    
    
    
    
    8,878Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,010
    
    
    
    1,01055,194
    
    
    
    756,253
    
    
    
    3,545
    
    
    
    
    
    
    
    814,992(Increase) decrease in assetsTrade accounts receivable
    
    
    
    
    
    
    (44,131
    )
    
    
    8,885
    
    
    
    5,201
    
    
    
    (30,045
    )Inventories
    
    
    
    
    
    
    (7,765
    )
    
    
    27
    
    
    
    
    
    
    
    (7,738
    )Taxes recoverable
    
    
    928
    
    
    
    (16,133
    )
    
    
    (1,210
    )
    
    
    (7,895
    )
    
    
    (24,310
    )Prepaid expenses
    
    
    (1,800
    )
    
    
    (9,376
    )
    
    
    (360
    )
    
    
    21,075
    
    
    
    9,539Advances to aircraft manufacturers
    
    
    
    
    
    
    (247,879
    )
    
    
    
    
    
    
    
    
    
    
    (247,879
    )Deposits in guarantee
    
    
    
    
    
    
    (31,861
    )
    
    
    32
    
    
    
    (32
    )
    
    
    (31,861
    )Related parties
    
    
    
    
    
    
    (536
    )
    
    
    
    
    
    
    536Deferred income tax and
social contribution
    
    
    1,848
    
    
    
    21,745
    
    
    
    
    
    
    
    
    
    
    
    23,593Judicial deposits
    
    
    (14
    )
    
    
    283
    
    
    
    1
    
    
    
    
    
    
    
    270Advances for aircraft maintenance
    
    
    
    
    
    
    (46,596
    )
    
    
    
    
    
    
    
    
    
    
    (46,596
    )Other
    
    
    
    
    
    
    (51,211
    )
    
    
    (556
    )
    
    
    (13,799
    )
    
    
    (65,566
    )Increase (decrease) in liabilitiesSuppliers
    
    
    
    
    
    
    52,234
    
    
    
    17,055
    
    
    
    (4,520
    )
    
    
    64,769Salaries and payroll charges
    
    
    19
    
    
    
    57,763
    
    
    
    2,294
    
    
    
    4
    
    
    
    60,080Advance from ticket sales
    
    
    
    
    
    
    197,972
    
    
    
    3,591
    
    
    
    
    
    
    
    201,563Taxes and tariffs payable
    
    
    (12
    )
    
    
    27,903
    
    
    
    736
    
    
    
    
    
    
    
    28,627Financial and operating lease
    
    
    
    
    
    
    (28,752
    )
    
    
    
    
    
    
    
    
    
    
    (28,752
    )Income tax and
social contribution payable
    
    
    (3,409
    )
    
    
    (25,080
    )
    
    
    
    
    
    
    3,409
    
    
    
    (25,080
    )Related parties
    
    
    536
    
    
    
    
    
    
    
    
    
    
    
    (536
    )Other
    
    
    1,568
    
    
    
    7,129
    
    
    
    4,064
    
    
    
    13,803
    
    
    
    26,564Net cash provided by operating
activities
    
    
    54,858
    
    
    
    611,962
    
    
    
    38,104
    
    
    
    17,246
    
    
    
    722,170
  F-70




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  For the year ended December 31, 2006TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent company
    
    
    
    
    
    
    (Nonand guarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from investing activitiesAdvance for future capital increase
in consolidated subsidiary
    
    
    (508,486
    )
    
    
    
    
    
    
    
    
    
    
    508,486Acquisition of property, plant and
equipment
    
    
    
    
    
    
    (133,747
    )
    
    
    (2,389
    )
    
    
    
    
    
    
    (136,136
    )Net cash used in investing activities
    
    
    (508,486
    )
    
    
    (133,747
    )
    
    
    (2,389
    )
    
    
    508,486
    
    
    
    (136,136
    )Cash flows from financing activitiesCapital increase
    
    
    273,164
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    273,164Dividends paid
    
    
    (29,045
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29,045
    )Advance for future capital increase
from parent company
    
    
    
    
    
    
    508,486
    
    
    
    
    
    
    
    (508,486
    )Finance lease  issuance
    
    
    
    
    
    
    1,248,331
    
    
    
    
    
    
    
    
    
    
    
    1,248,331Finance lease  repayments
    
    
    
    
    
    
    (1,088,626
    )
    
    
    
    
    
    
    
    
    
    
    (1,088,626
    )Operating lease  issuanceOperating lease  repayments
    
    
    
    
    
    
    (15,310
    )
    
    
    
    
    
    
    
    
    
    
    (15,310
    )Debentures  issuance
    
    
    508,486
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    508,486Debentures  repayments
    
    
    
    
    
    
    (25,510
    )
    
    
    2
    
    
    
    
    
    
    
    (25,508
    )Net cash provided by financing
activities
    
    
    752,605
    
    
    
    627,371
    
    
    
    2
    
    
    
    (508,486
    )
    
    
    871,492Increase in cash and banks and
financial investments
    
    
    298,977
    
    
    
    1,105,586
    
    
    
    35,717
    
    
    
    17,246
    
    
    
    1,457,526Cash and banks and financial
investments at the end of the year
    
    
    668,651
    
    
    
    1,727,739
    
    
    
    62,222
    
    
    
    (5,634
    )
    
    
    2,452,978Cash and banks and financial
investments at the beginning of the
year
    
    
    (369,674
    )
    
    
    (622,153
    )
    
    
    (26,505
    )
    
    
    22,880
    
    
    
    (995,452
    )Change in cash and banks and
financial investments
    
    
    298,977
    
    
    
    1,105,586
    
    
    
    35,717
    
    
    
    17,246
    
    
    
    1,457,526
  F-71




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For the year ended December 31, 2005TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent company
    
    
    
    
    
    
    (Nonand guarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from operating activitiesNet income (loss) for the year
    
    
    187,374
    
    
    
    181,036
    
    
    
    (17,192
    )
    
    
    (163,844
    )
    
    
    187,374Adjustments to reconcile net income to
cash provided by operating activitiesDepreciation and amortization
    
    
    
    
    
    
    84,503
    
    
    
    850
    
    
    
    
    
    
    
    85,353Deferred income tax and
social contribution
    
    
    (4,483
    )
    
    
    (40,675
    )
    
    
    (1
    )
    
    
    
    
    
    
    (45,159
    )Provision for contingencies and
tax obligations under judicial deposits
    
    
    (4
    )
    
    
    202,548
    
    
    
    2,044
    
    
    
    
    
    
    
    204,588Equity
    
    
    (174,344
    )
    
    
    10,147
    
    
    
    
    
    
    
    164,197Amortization of goodwill
    
    
    1,341
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,341Residual value of long lived assets
disposals
    
    
    
    
    
    
    3,903
    
    
    
    4,017
    
    
    
    
    
    
    
    7,920Indexation charges and
exchange variations, net
    
    
    
    
    
    
    15,068
    
    
    
    (148
    )
    
    
    
    
    
    
    14,920Other provisions
    
    
    
    
    
    
    (5,298
    )
    
    
    1,055
    
    
    
    
    
    
    
    (4,243
    )Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    (353
    )9,884
    
    
    
    451,232
    
    
    
    (9,375
    )
    
    
    
    
    
    
    451,741(Increase) decrease in assetsTrade accounts receivable
    
    
    50
    
    
    
    (222,950
    )
    
    
    21,580
    
    
    
    (4,266
    )
    
    
    (205,586
    )Inventories
    
    
    
    
    
    
    (10,463
    )
    
    
    (7
    )
    
    
    
    
    
    
    (10,470
    )Taxes recoverable
    
    
    (7,007
    )
    
    
    (16,171
    )
    
    
    (909
    )
    
    
    7,895
    
    
    
    (16,192
    )Prepaid expenses
    
    
    
    
    
    
    (16,028
    )
    
    
    765
    
    
    
    (27,368
    )
    
    
    (42,631
    )Advances to aircraft manufacturers
    
    
    
    
    
    
    (71,910
    )
    
    
    
    
    
    
    
    
    
    
    (71,910
    )Deposits in guarantee
    
    
    
    
    
    
    (11,915
    )
    
    
    285
    
    
    
    1,639
    
    
    
    (9,991
    )Related parties
    
    
    
    
    
    
    22,592
    
    
    
    16
    
    
    
    (22,608
    )Deferred income tax and
social contribution
    
    
    1,470
    
    
    
    40,839
    
    
    
    2
    
    
    
    
    
    
    
    42,311Judicial deposits
    
    
    
    
    
    
    (8,295
    )
    
    
    123
    
    
    
    
    
    
    
    (8,172
    )Advances for aircraft maintenance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    (8,032
    )
    
    
    1,625
    
    
    
    1,790
    
    
    
    (4,617
    )Increase (decrease) in liabilitiesSuppliers
    
    
    
    
    
    
    26,815
    
    
    
    (11,254
    )
    
    
    2,271
    
    
    
    17,832Salaries and payroll charges
    
    
    53
    
    
    
    13,094
    
    
    
    (199
    )
    
    
    (4
    )
    
    
    12,944Advance from ticket sales
    
    
    
    
    
    
    191,114
    
    
    
    (803
    )
    
    
    1
    
    
    
    190,312Taxes and tariffs payable
    
    
    13
    
    
    
    (14,262
    )
    
    
    60
    
    
    
    
    
    
    
    (14,189
    )Financial and operating lease
    
    
    
    
    
    
    (46,117
    )
    
    
    
    
    
    
    
    
    
    
    (46,117
    )Income tax and
social contribution payable
    
    
    3,393
    
    
    
    24,017
    
    
    
    
    
    
    
    (3,409
    )
    
    
    24,001Related parties
    
    
    (22,592
    )
    
    
    
    
    
    
    
    
    
    
    22,592Other
    
    
    (2
    )
    
    
    34,877
    
    
    
    (13,329
    )
    
    
    (1,413
    )
    
    
    20,133Net cash provided by (used in) operating
activities
    
    
    (14,738
    )
    
    
    378,437
    
    
    
    (11,420
    )
    
    
    (22,880
    )
    
    
    329,399
  F-72




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  For the year ended December 31, 2005TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent company
    
    
    
    
    
    
    (Nonand guarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from investing activitiesAcquisition of property, plant and
equipment
    
    
    
    
    
    
    (118,423
    )
    
    
    8,880
    
    
    
    
    
    
    
    (109,543
    )Net cash provided by (used in)
investing activities
    
    
    
    
    
    
    (118,423
    )
    
    
    8,880
    
    
    
    
    
    
    
    (109,543
    )Cash flows from financing activitiesCapital increase
    
    
    383,942
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    383,942Dividends paidAdvance for future capital increase
from parent companyFinance lease  issuance
    
    
    
    
    
    
    626,819
    
    
    
    
    
    
    
    
    
    
    
    626,819Finance lease  repayments
    
    
    
    
    
    
    (516,778
    )
    
    
    (198
    )
    
    
    
    
    
    
    (516,976
    )Operating lease  issuance
    
    
    
    
    
    
    23,144
    
    
    
    
    
    
    
    
    
    
    
    23,144Operating lease  repayments
    
    
    
    
    
    
    (12,758
    )
    
    
    
    
    
    
    
    
    
    
    (12,758
    )Debentures  issuance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Debentures  repayments
    
    
    
    
    
    
    (25,436
    )
    
    
    
    
    
    
    
    
    
    
    (25,436
    )Net cash provided by (used in)
financing activities
    
    
    383,942
    
    
    
    94,991
    
    
    
    (198
    )
    
    
    
    
    
    
    478,735Increase in cash and banks and
financial investments
    
    
    369,204
    
    
    
    355,005
    
    
    
    (2,738
    )
    
    
    (22,880
    )
    
    
    698,591Cash and banks and financial
investments at the end of the year
    
    
    369,674
    
    
    
    622,153
    
    
    
    26,505
    
    
    
    (22,880
    )
    
    
    995,452Cash and banks and financial
investments at the beginning of the
year
    
    
    (470
    )
    
    
    (267,148
    )
    
    
    (29,243
    )
    
    
    
    
    
    
    (296,861
    )Change in cash and banks and
financial investments
    
    
    369,204
    
    
    
    355,005
    
    
    
    (2,738
    )
    
    
    (22,880
    )
    
    
    698,591
  F-73




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
 For the year ended December 31, 2004TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent company
    
    
    
    
    
    
    (Nonand guarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from operating activitiesNet income for the year
    
    
    341,132
    
    
    
    332,691
    
    
    
    11,517
    
    
    
    (344,208
    )
    
    
    341,132Adjustments to reconcile net income to
cash provided by operating activitiesDepreciation and amortization
    
    
    101
    
    
    
    90,509
    
    
    
    816
    
    
    
    
    
    
    
    91,426Deferred income tax and
social contribution
    
    
    
    
    
    
    39,879
    
    
    
    34,794
    
    
    
    
    
    
    
    74,673Provision for contingencies and
tax obligations under judicial deposits
    
    
    (6
    )
    
    
    85,261
    
    
    
    2,393
    
    
    
    
    
    
    
    87,648Equity
    
    
    (343,339
    )
    
    
    (306
    )
    
    
    
    
    
    
    343,645Amortization of goodwill
    
    
    2,291
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,291Residual value of long lived assets
disposals
    
    
    
    
    
    
    577,388
    
    
    
    55
    
    
    
    
    
    
    
    577,443Finance leases modified to operating
leases, long-term portion
    
    
    
    
    
    
    (833,046
    )
    
    
    (477
    )
    
    
    
    
    
    
    (833,523
    )Indexation charges and
exchange variations, net
    
    
    
    
    
    
    9,861
    
    
    
    32
    
    
    
    
    
    
    
    9,893Other provisions
    
    
    
    
    
    
    9,043
    
    
    
    
    
    
    
    
    
    
    
    9,043Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563
    
    
    
    563179
    
    
    
    311,280
    
    
    
    49,130
    
    
    
    
    
    
    
    360,589(Increase) decrease in assetsTrade accounts receivable
    
    
    159
    
    
    
    (260,918
    )
    
    
    (46,171
    )
    
    
    40,020
    
    
    
    (266,910
    )Inventories
    
    
    
    
    
    
    (9,409
    )
    
    
    158
    
    
    
    
    
    
    
    (9,251
    )Taxes recoverable
    
    
    
    
    
    
    26,634
    
    
    
    (1,124
    )
    
    
    
    
    
    
    25,510Prepaid expenses
    
    
    
    
    
    
    7,038
    
    
    
    (2,034
    )
    
    
    
    
    
    
    5,004Advances to aircraft manufacturers
    
    
    
    
    
    
    2,573
    
    
    
    
    
    
    
    
    
    
    
    2,573Deposits in guarantee
    
    
    
    
    
    
    7,834
    
    
    
    (990
    )
    
    
    
    
    
    
    6,844Related parties
    
    
    
    
    
    
    (188
    )
    
    
    (213
    )
    
    
    401Deferred income tax and
social contribution
    
    
    
    
    
    
    34,794
    
    
    
    (34,794
    )Judicial deposits
    
    
    
    
    
    
    (4,949
    )
    
    
    (1,206
    )
    
    
    
    
    
    
    (6,155
    )Advances for aircraft maintenanceOther
    
    
    5
    
    
    
    9,446
    
    
    
    (8,417
    )
    
    
    
    
    
    
    1,034Increase (decrease) in liabilitiesSuppliers
    
    
    
    
    
    
    53,279
    
    
    
    50,961
    
    
    
    (39,813
    )
    
    
    64,427Salaries and payroll charges
    
    
    (103
    )
    
    
    61,676
    
    
    
    2,055
    
    
    
    
    
    
    
    63,628Advance from ticket sales
    
    
    
    
    
    
    138,590
    
    
    
    3,512
    
    
    
    
    
    
    
    142,102Taxes and tariffs payable
    
    
    (32
    )
    
    
    (12,064
    )
    
    
    (44
    )
    
    
    
    
    
    
    (12,140
    )Financial and operating lease
    
    
    
    
    
    
    (25,658
    )
    
    
    
    
    
    
    
    
    
    
    (25,658
    )Income tax and
social contribution payable
    
    
    16
    
    
    
    3,056
    
    
    
    
    
    
    
    
    
    
    
    3,072Related parties
    
    
    188
    
    
    
    
    
    
    
    
    
    
    
    (188
    )Other
    
    
    2
    
    
    
    7,884
    
    
    
    6,290
    
    
    
    (420
    )
    
    
    13,756Net cash provided by operating activities
    
    
    414
    
    
    
    350,898
    
    
    
    17,113
    
    
    
    
    
    
    
    368,425
  F-74




---



##### Table of Contents



TAM S.A. and Subsidiaries
 Notes to the Consolidated Financial Statements
In thousands of reais, unless otherwise indicated
  For the year ended December 31, 2004TAM Linhas
    
    
    
    
    
    
    ConsolidationTAM S.A
    
    
    Aéreas S.A.
    
    
    Others
    
    
    adjustments
    
    
    Consolidated(Parent company
    
    
    
    
    
    
    (Nonand guarantor)
    
    
    (Guarantor)
    
    
    guarantors)(In thousand of reais)Cash flows from investing activitiesAcquisition of property, plant and
equipment
    
    
    
    
    
    
    (121,651
    )
    
    
    (634
    )
    
    
    
    
    
    
    (122,285
    )Net cash provided by (used in)
investing activities
    
    
    
    
    
    
    (121,651
    )
    
    
    (634
    )
    
    
    
    
    
    
    (122,285
    )Cash flows from financing activitiesFinance lease  issuance
    
    
    
    
    
    
    214,872
    
    
    
    
    
    
    
    
    
    
    
    214,872Finance lease  repayments
    
    
    
    
    
    
    (269,566
    )
    
    
    (120
    )
    
    
    
    
    
    
    (269,686
    )Operating lease  issuance
    
    
    
    
    
    
    20,212
    
    
    
    
    
    
    
    
    
    
    
    20,212Operating lease  repayments
    
    
    
    
    
    
    (16,258
    )
    
    
    
    
    
    
    
    
    
    
    (16,258
    )Debentures  issuance
    
    
    
    
    
    
    6,388
    
    
    
    
    
    
    
    
    
    
    
    6,388Debentures  repayments
    
    
    
    
    
    
    (77,130
    )
    
    
    
    
    
    
    
    
    
    
    (77,130
    )Net cash used in financing activities
    
    
    
    
    
    
    (121,482
    )
    
    
    (120
    )
    
    
    
    
    
    
    (121,602
    )Increase in cash and banks and
financial investments
    
    
    414
    
    
    
    107,765
    
    
    
    16,359
    
    
    
    
    
    
    
    124,538Cash and banks and financial
investments at the end of the year
    
    
    470
    
    
    
    267,148
    
    
    
    29,243
    
    
    
    
    
    
    
    296,861Cash and banks and financial
investments at the beginning of the
year
    
    
    (56
    )
    
    
    (159,383
    )
    
    
    (12,884
    )
    
    
    
    
    
    
    (172,323
    )Change in cash and banks and
financial investments
    
    
    414
    
    
    
    107,765
    
    
    
    16,359
    
    
    
    
    
    
    
    124,538
   F-75




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description1.1
    
    By-laws of the Registrant (English translation), incorporated herein
by reference from our fourth pre-effective amendment to our
Registration Statement on Form F-1, filed February 17, 2006, File No.
333-131938.2.1
    
    Form of Deposit Agreement among the Registrant, JPMorgan Chase Bank,
N.A., as depositary, and the Holders from time to time of American
Depositary Shares issued there under, 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. 333-131938.4.1
    
    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.
333-131938.8.1
    
    List of subsidiaries.12.1
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.12.2
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.13.1
    
    Section 1350 Certification of Chief Executive Officer.13.2
    
    Section 1350 Certification of Chief Financial Officer.