As filed with the Securities and Exchange Commission on March 31, 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

OR

 

x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 

 

OR

 

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

OR

 

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

Commission file number 001-32221

Gol Linhas Aéreas Inteligentes S.A.

(Exact name of Registrant as specified in its charter)

Gol Intelligent Airlines Inc.

(Translation of Registrant’s name into English)

The Federative Republic of Brazil

(Jurisdiction of incorporation or organization)
Leonardo Porciúncula Gomes Pereira
+55 11 2128-4000
Fax: +55 11 5098-2341
E-mail: ri@golnaweb.com.br
Praça Comandante Linneu Gomes, S/N Portaria 3,
Jardim. Aeroporto
04626-020 São Paulo, São Paulo
Federative Republic of Brazil
 (+55 11 2128-4000)
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

___________________________________________

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Title of each class:  Name of each exchange on which registered: 
Preferred Shares, without par value  New York Stock Exchange* 
American Depositary Shares (as evidenced  New York Stock Exchange 
by American Depositary Receipts), each representing one share   
of Preferred Stock   

* 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. 

___________________________________________

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

___________________________________________

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
7.50% Senior Notes Due 2017

___________________________________________

The number of outstanding shares of each class of stock of Gol Linhas Aéreas Inteligentes S.A. as of December 31, 2009: 

133,199,658  Shares of Common Stock 
132,079,880  Shares of Preferred Stock 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x     No  ¨

If this is an annual or transition report, indicate by check mark if the registrant is not required to file pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. 

Large accelerated Filer  x   Accelerated Filer  ¨  

Non-accelerated Filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: 

U.S. GAAP ¨   International Financial Reporting Standards as issued by the 
International Accounting Standards Board x		  

Other ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes   ¨    No  x

Table of Contents

Presentation of Financial and Other Data 1 ITEM 9. The Offer and Listing 74
Cautionary Statements about Forward-Looking Statements 2           A. Offer and Listing Details 74
ITEM 1. Identity of Directors, Senior Management and Advisors 3           B. Plan of Distribution 76
ITEM 2. Offer Statistics and Expected Timetable 3           C. Markets 76
ITEM 3. Key Information 3           D. Selling Shareholders 81
          A. Selected Financial Data 3           E.Dilution 81
          B. Capitalization and Indebtedness 7           F. Expenses of the Issue 81
          C. Reasons for the Offer and Use of Proceeds 7 ITEM 10. Additional Information 81
          D. Risk Factors 7           A. Share Capital 81
ITEM 4. Information On The Company 16           B. Memorandum and Articles of Association . 82
          A. History and Development of the Company 16           C. Material Contracts 90
          B. Business Overview 16           D. Exchange Controls 90
          C. Organizational Structure 36           E. Taxation 90
          D. Property, Plant and Equipment 36           F. Dividends and Paying Agents 98
ITEM 4A. Unresolved Staff Comments 36           G. Statement by Experts 98
ITEM 5. Operating and Financial Review and Prospects 37           H. Documents on Display 98
          A. Operating Results 37           I. Subsidiary Information 99
          B. Liquidity and Capital Resources 51 ITEM 11. Quantitative and Qualitative Disclosures about Market Risk 99
          C. Research and Development, Patents and Licenses, etc. 59 ITEM 12. Description of Securities Other than Equity Securities 100
          D. Trend Information 59           D. American Depositary Shares 100
          E. Off-Balance Sheet Arrangements 59 ITEM 13. Defaults, Dividend Arrearages and Delinquencies 102
          F. Tabular Disclosure of Contractual Obligations 60 ITEM 14. Material Modifications To The Rights Of Security Holders And Use Of Proceeds 102
ITEM 6. Directors, Senior Management and Employees 60 ITEM 15. Controls And Procedures 102
          A. Directors and Senior Management 60 ITEM 16. [reserved] 103
          B. Compensation 64 ITEM 16A. Audit Committee Financial Expert 103
          C. Board Practices 65 ITEM 16B. Code of Ethics 103
          D. Employees 67 ITEM 16C. Principal Accountant Fees and Services 104
          E. Share Ownership 67 ITEM 16D. Exemptions from the Listing Standards for Audit Committees 104
ITEM 7. Major Shareholders and Related Party Transactions 68 ITEM 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 105
          A. Major Shareholders 68 ITEM 16F. Change in Registrant’s Certifying Accountant 105
          B. Related Party Transactions 68 ITEM 16G. Corporate Governance 106
          C. Interests of Experts and Counsel 69 ITEM 17. Financial Statements 108
ITEM 8. Financial Information 69 ITEM 18. Financial Statements 108
          A. Consolidated Statements and Other Financial Information 69 ITEM 19. Exhibits 109
          B. Significant Changes 74 Signature 112

Table of Contents

PRESENTATION OF FINANCIAL AND OTHER DATA

     The consolidated financial statements included in this annual report have been prepared in accordance with International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board (IASB), in reais.

     We have translated some of the real amounts contained in this annual report into U.S. dollars. The rate used to translate such amounts in respect of the year ended December 31, 2009 was R$1.7412 to US$1.00, which was the commercial rate for the purchase of U.S. dollars in effect on December 31, 2009, as reported by the Central Bank. The U.S. dollar equivalent information presented in this annual report is provided solely for the convenience of investors and should not be construed as implying that the real amounts represent, or could have been or could be converted into, U.S. dollars at the above rate. See “Exchange Rates” for more detailed information regarding the Brazilian foreign exchange system and historical data on the exchange rate of the real against the into U.S. dollars.

     In this annual report, we use the terms “the Registrant” to refer to Gol Linhas Aéreas Inteligentes S.A., and “Gol”, “Company”, “we,” “us” and “our” to refer to the Registrant and its consolidated subsidiaries together, except where the context requires otherwise. The term VRG refers to VRG Linhas Aéreas S.A., a wholly owned subsidiary of the Registrant. References to “preferred shares” and “ADSs” refer to non-voting preferred shares of the Registrant and American depositary shares representing those preferred shares, respectively, except where the context requires otherwise.

     The phrase “Brazilian government” refers to the federal government of the Federative Republic of Brazil, and the term “Central Bank” refers to the Banco Central do Brasil, or the Central Bank. The term “Brazil” refers to the Federative Republic of Brazil. The terms “U.S. dollar” and “U.S. dollars” and the symbol “US$” refer to the legal currency of the United States. The terms “real” and “reais” and the symbol “R$” refer to the legal currency of Brazil. “IFRS” refers to the international financial reporting standards issued by the International Accounting Standards Board, or IASB. “U.S. GAAP” refers to generally accepted accounting principles in the United States, and “Brazilian GAAP” refers to generally accepted accounting principles in Brazil, which are accounting principles derived from Law No. 6,404 of December 15, 1976, as amended by Law No. 11,638 of December 28, 2007, or the Brazilian corporation law and the rules of the CVM.

     We make statements in this annual report about our competitive position and market share in, and the market size of, the Brazilian and international airline industry. We have made these statements on the basis of statistics and other information from third party sources, governmental agencies or industry or general publications that we believe are reliable. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect, we have not verified the competitive position, market share and market size or market growth data provided by third parties or by industry or general publications. All industry and market data contained in this annual report is based upon the latest publicly available information as of the date of this annual report.

     Certain figures included in this annual report have been rounded. Accordingly, figures shown as totals in certain tables may not be an arithmetic sum of the figures that precede them.

     This annual report contains terms relating to operating performance in the airline industry that are defined as follows:

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CAUTIONARY STATEMENTS ABOUT FORWARD-LOOKING STATEMENTS

     This annual report includes forward-looking statements, principally under the captions “Risk Factors,” “Operating and Financial Review and Prospects” and “Business Overview.” We have based these forward-looking statements largely on our current beliefs, expectations and projections about future events and financial trends affecting our business. Many important factors, in addition to those discussed elsewhere in this annual report, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

2

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     The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, and the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and we undertake no obligation to update publicly or to revise any forward-looking statements after we distribute this annual report because of new information, future events or other factors. In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this annual report might not occur and are not guarantees of future performance.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A. Selected Financial Data

     We changed our financial reporting from U.S. GAAP to IFRS, beginning with the financial statements as of and for the year ended December 31, 2008. Therefore, we present in this section the following summary financial data:

     The summary financial data prepared in accordance with IFRS and U.S. GAAP is not comparable.

     The following tables present summary historical consolidated financial and operating data for us for each of the periods indicated. Solely for the convenience of the reader, real amounts as of and for the year ended December 31, 2009 have been translated into U.S. dollars at the commercial market rate in effect on December 31, 2009 as reported by the Central Bank of R$1.7412 to US$1.00.

3

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IFRS Summary Financial and Operating Data

    Year Ended December 31, 
   
    2007    2008    2009    2009 
         
    (in thousands)
Income Statement Data:                 
Net operating revenues:                 
   Passenger    R$4,566,691    R$5,890,104    R$5,306,530    US$3,047,628 
   Cargo and other    374,293    516,089    718,852    412,849 
         
Total net operating revenues    4,940,984    6,406,193    6,025,382    3,460,477 
Operating expenses:                 
   Salaries    (799,344)   (983,783)   (1,100,953)   (632,296)
   Aircraft fuel    (1,898,840)   (2,630,834)   (1,813,104)   (1,041,296)
   Aircraft rent    (525,785)   (645,089)   (650,683)   (373,698)
   Sales and marketing    (367,866)   (588,735)   (364,551)   (209,368)
   Landing fees    (273,655)   (338,370)   (312,637)   (179,553)
   Aircraft and traffic servicing    (348,732)   (422,177)   (381,721)   (219,229)
   Maintenance, materials and repairs    (339,281)   (388,030)   (417,212)   (239,612)
   Depreciation and amortization    (62,548)   (125,127)   (142,853)   (82,043)
   Other operating expenses    (315,068)   (372,696)   (428,376)   (246,023)
         
Total operating expenses    (4,931,119)   (6,494,841)   (5,612,090)   (3,223,116)
 
Operating profit (loss)   9,865    (88,648)   413,292    237,360 
 
Other income (expense):                 
Interest expense    (182,618)   (269,278)   (288,112)   (165,467)
Financial income (expense), net    373,636    (837,116)   630,956    362,368 
         
Profit (loss) before income taxes    200,883    (1,195,042)   756,136    434,261 
Income taxes    (33,595)   (44,305)   134,696    77,358 
         
Profit (loss) for the year    167,288    (1,239,347)   890,832    511,620 
 
Earnings (loss) per share, basic (1):    0.84    (6.16)   3.92    2.25 
Earnings (loss) per share, diluted (1):    0.84    (6.16)   3.91    2.25 
   Weighted average shares used in computing earnings per share basic (in thousands)(1)   198,609    201,193    227,472    227,472 
   Weighted average shares used in computing earnings per share, diluted (in thousands)(1)   198,657    201,193    227,583    227,583 
   Earnings per ADS, basic (1)   0.84    (6.16)   3.92    2.25 
   Earnings per ADS, diluted (1)   0.84    (6.16)   3.91    2.25 
   Dividends paid per share (net of withheld income tax) (1)   1.25    0.18    0.70    0.40 
   Dividends paid per ADS (net of withheld income tax) (1)   1.25    0.18    0.70    0.40 
 
    As of December 31, 
   
    2007    2008    2009    2009 
         
    (in thousands)
Balance Sheet Data:                 
   Cash and cash equivalents    R$573,121    R$169,330    R$1,382,408    US$793,940 
   Financial assets    820,343    245,585    40,444    23,228 
   Accounts receivable(2)   903,061    344,927    519,308    298,247 
   Deposits with lessors    641,164    731,374    855,569    491,367 
   Total assets    7,486,412    7,131,865    8,720,120    5,008,109 
   Short-term borrowings    891,543    967,452    591,695    339,820 
   Shareholders’ equity    2,392,448    1,071,608    2,609,986    1,498,958 
 
    Year Ended December 31, 
   
    2007    2008    2009    2009 
         
    (in thousands except percentages)
             
Other Financial Data:                 
   Operating margin(3)   0.02%    (1.4)%    6.9%    6.9% 
   Net cash (used in) provided by operating activities    R$(141,488)   R$151,700    R$457,259    US$262,611 
   Net cash (used in) investing activities    (190,339)   40,650    5,422    3,114 
   Net cash provided by (used in) financing activities    617,484    (611,301)   769,238    441,786 

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        Year Ended December 31, 
     
        2007    2008    2009 
         
Operating Data:             
   Revenue passengers (in thousands)   23,689    25,664    28,410 
   Revenue passenger kilometers (in millions)   22,670    25,308    26,092 
   Available seat kilometers (in millions)   34,349    41,107    39,988 
   Load-factor    66.0%    61.6%    65.2% 
   Break-even load-factor    65.9%    62.5%    60.8% 
   Aircraft utilization (block hours per day)   13.8    12.1    11.6 
   Average fare    198    262    191 
   Yield per passenger kilometer (cents)   20.1    23.3    20.3 
   Passenger revenue per available seat kilometer (cents)   13.3    14.3    13.3 
   Operating revenue per available seat kilometer (cents)   14.4    15.6    15.1 
   Operating expense per available seat kilometer (cents)   14.4    15.8    14.0 
   Operating expense less fuel expense per available seat kilometer (cents)   8.9    9.4    9.5 
   Departures    237,287    268,540    273,602 
   Departures per day    650    736    750 
   Destinations served    66    59    59 
   Average stage length (kilometers)   960    933    890 
   Average number of operating aircraft during period    88.6    106.4    108.7 
   Full-time equivalent employees at period end    15,722    15,911    17,963 
   Fuel liters consumed (in thousands)   1,177,300    1,364,719    1,291,412 
   Percentage of sales through website during period (4)   90.0%    92.4%    92.4% 
   Percentage of sales through website and call center during period    98.9%    99.2%    98.7% 
 
         
(1)   
Our preferred shares are not entitled to any fixed dividend preferences, but are instead entitled to receive dividends per share in the same amount of dividends per share paid to holders of our common shares. Consequently, our earnings (loss) per share are computed by dividing income by the weighted average number of all classes of shares outstanding during the year. 
(2)   
Trade and other receivables related to receivables from credit card administrators, travel agencies, installment sales from the Voe Fácil program, cargo agencies and others. These receivables are stated at cost less allowances for doubtful receivables, which approximates their fair value given their short term nature. 
(3)   
Operating margin represents operating income divided by net operating revenues. 
(4)   
Considering sales through our website and API (application programming interface) systems. 

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U.S. GAAP Summary Financial Data*

        Year Ended December 31, 
     
        2005    2006 
       
        (in thousands)
Income Statement Data:         
 
Net operating revenues:         
       Passenger    R$2,539,016    R$3,580,919 
       Cargo and other    130,074    221,098 
     
       Total net operating revenues    2,669,090    3,802,017 
Operating expenses:         
       Salaries, wages and benefits    260,183    413,977 
       Aircraft fuel    808,268    1,227,001 
       Aircraft rent    240,876    292,548 
       Sales and marketing    335,722    414,597 
       Landing fees    92,404    157,695 
       Aircraft and traffic servicing    91,599    199,430 
       Maintenance, materials and repairs    55,373    146,505 
       Depreciation    35,014    69,313 
       Other operating expenses    128,300    179,494 
       Total operating expenses    2,047,739    3,100,560 
Operating income (loss)   621,351    701,457 
Other income (expense):         
       Interest expense    (19,383)   (66,378)
       Financial income (expense), net    115,554    163,883 
     
Income (expense) benefits before         
income taxes    717,522    798,962 
       Income taxes    (204,292)   (229,825)
     
Net income    R$513,230    R$569,137 
     
Earnings per share, basic(1)   R$2.66    R$2.90 
Earnings per share, diluted(1)   R$2.65    R$2.90 
Weighted average shares used in computing earnings per share, basic (in thousands)(1)   192,828    196,103 
Weighted average shares used in computing earnings per share, diluted (in thousands)(1)   193,604    196,210 
Earnings per ADS, basic(1)   R$2.66    R$2.90 
Earnings per ADS, diluted(1)   R$2.65    R$2.90 
Dividends paid per share    R$0.60    R$0.92 
Dividends paid per ADS(1)   R$0.60    R$0.92 
 
        As of December 31, 
     
        2005    2006 
       
        (in thousands)
Balance Sheet Data:         
Cash and cash equivalents    R$106,347    R$280,977 
Short-term investments    762,688    1,425,369 
Accounts receivable(2)   563,958    659,306 
Deposits with lessors    408,776    537,835 
Total assets    2,555,843    4,258,454 
Short-term borrowings    54,016    128,304 
Long-term debt    —    949,006 
Shareholders’ equity    1,822,331    2,205,158 
 
         
*   
For a reconciliation of profit (loss) and shareholders’ equity of our audited financial statements in U.S. GAAP to our audited financial statements in IFRS at January 1, 2007 and December 31, 2007 and for the year then ended, see note 23 under the caption “Reconciliation between US GAAP and IFRS as of and for the year ended December 31, 2007” to our financial statements included in our annual report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
(1)  
Our preferred shares are not entitled to any fixed dividend preferences, but are instead entitled to receive dividends per share in the same amount of dividends per share paid to holders of our common shares. Consequently, our earnings (loss) per share are computed by dividing income by the weighted average number of all classes of shares outstanding during the year. 
(2)  
Trade and other receivables related to receivables from credit card administrators, travel agencies, installment sales from the Voe Fácil program, cargo agencies and others. These receivables are stated at cost less allowances for doubtful receivables, which approximates their fair value given their short term nature 

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Exchange Rates

     The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures. The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching an exchange rate of R$3.53 per US$1.00 at the end of 2002. Between 2003 and mid-2008, the real appreciated significantly against the U.S. dollar due to the stabilization of the macro-economic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per US$1.00 in August 2008. With the crisis in the global financial markets beginning in mid-2008, the real depreciated 31.9% against the U.S. dollar over the year 2008, reaching R$2.34 per US$1.00 on December 31, 2008. On December 31, 2009 the exchange rate was R$1.74 per US$1.00 and on March 26, 2010, the exchange rate was R$1.82 per US$1.00. The Central Bank has intervened occasionally to control instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may substantially depreciate or appreciate against the U.S. dollar.

     The following tables present the selling rate, expressed in reais per U.S. dollar (R$/US$), for the periods indicated.

    Period-End    Average for Period (1)   Low    High 
         
    (reais per U.S. dollar)
Year                 
2005    2.341    2.435    2.163    2.762 
2006    2.138    2.177    2.059    2.371 
2007    1.771    1.948    1.733    2.156 
2008    2.337    1.836    1.559    2.500 
2009    1.741    1.994    1.702    2.422 
2010 (through March 26, 2010)   1.823    1.801    1.723    1.877 
 
    Month-End    Average for Month(2)   Low    High 
         
    (reais per U.S. dollar)
Month                 
September 2009    1.778    1.820    1.778    1.904 
October 2009    1.744    1.738    1.704    1.784 
November 2009    1.751    1.726    1.702    1.759 
December 2009    1.741    1.750    1.710    1.788 
January 2010    1.875    1.780    1.723    1.875 
February 2010    1.811    1.842    1.805    1.878 
March 2010 (through March 26, 2010)   1.823    1.785    1.764    1.823 
 
         
Source: Central Bank 
(1) Represents the average of the exchange rates on the last day of each month during the period. 
(2) Average of the lowest and highest rates in the month. 

B. Capitalization and Indebtedness

     Not applicable.

C. Reasons for the Offer and Use of Proceeds

     Not applicable.

D. Risk Factors

     An investment in the ADSs or our preferred shares involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks. The trading price of the ADSs could decline due to any of these risks or other factors, and you may lose all or part of your investment. The risks described below are those that we currently believe may materially affect us.

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Risks Relating to Brazil

     The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement, as well as Brazilian political and economic conditions, could adversely affect our business and the trading price of our ADSs and our preferred shares.

     The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases in interest rates, changes in tax policies, price controls, currency devaluations, capital controls and limits on imports. Our business, financial condition and results of operations may be adversely affected by changes in policy or regulations at the federal, state or municipal levels involving or affecting factors such as:

     Exchange rate instability may adversely affect our financial condition and results of operations and the market price of the ADSs and our preferred shares.

     The Brazilian currency has during the last decades experienced frequent and substantial variations in relation to the U.S. dollar and other foreign currencies. Between 2000 and 2002, the real depreciated significantly against the U.S. dollar, reaching an exchange rate of R$3.53 per US$1.00 at the end of 2002. Between 2003 and mid-2008, the real appreciated significantly against the U.S. dollar due to the stabilization of the macro-economic environment and a strong increase in foreign investment in Brazil, with the exchange rate reaching R$1.56 per US$1.00 in August 2008. In the context of the crisis in the global financial markets after mid-2008, the real depreciated against the U.S. dollar over the year 2008 and reached R$2.337 per US$1.00 at year end 2008. During 2009 the real appreciated against the U.S. dollar 25.26% in the context of the economic recovery and reached 1.7412 per US$1.00 at year end 2009. On March 26, 2010, the exchange rate was R$1.8231 per US$1.00.

     Depreciation of the real against the U.S. dollar could create inflationary pressures in Brazil and cause increases in interest rates, which could negatively affect the growth of the Brazilian economy as a whole and harm our financial condition and results of operations, may curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciation of the real against the U.S. dollar can also, as in the context of the current economic slowdown, lead to decreased consumer spending, deflationary pressures and reduced growth of the economy as a whole. On the other hand, appreciation of the real relative to the U.S. dollar and other foreign currencies could lead to a deterioration of the Brazilian foreign exchange current accounts, as well as dampen export-driven growth. Depending on the circumstances, either depreciation or appreciation of the real could materially and adversely affect the growth of the Brazilian economy and our business, financial condition and results of operations.

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     Substantially all of our passenger revenue and cargo revenue and temporary investments are denominated in reais, and a significant part of our operating expenses, such as fuel, aircraft and engine maintenance services, aircraft rent payments and aircraft insurance, are denominated in, or linked to, U.S. dollars. We maintain U.S. dollar-denominated deposits and maintenance reserve deposits under the terms of some of our aircraft operating leases. For the year ended December 31, 2009, 52.3% of our operating expenses were either denominated in or linked to the U.S. dollar. In addition, the purchase price of the 90 Boeing 737 Next Generation aircraft for which we had placed firm purchase orders as of December 31, 2009 and the 40 Boeing 737 Next Generation aircraft for which we currently have purchase options are denominated in U.S. dollars. At the end of 2009, 81.3% of our indebtedness was denominated in U.S. dollars. While in the past we have generally adjusted our fares in response to, and to alleviate the effect of, depreciation of the real and increases in the price of jet fuel (which is priced in U.S. dollars) and have entered into hedging arrangements to protect us against the effects of such developments, there can be no assurance we will be able to continue to do so. To the extent we are unable to adjust our fares or effectively hedge against any such developments, this may lead to a decrease in our profit margins or to operating losses caused by increases in U.S. dollar-denominated costs, increases in interest expense or exchange losses on unhedged fixed obligations and indebtedness denominated in foreign currency. We had total U.S. dollar-denominated future operating lease payment obligations of R$2,498.6 million and R$2,530.0 million other U.S. dollar-denominated indebtedness at December 31, 2009. We may incur substantial additional amounts of U.S. dollar-denominated operating lease or financial obligations and U.S. dollar-denominated indebtedness and be subject to fuel cost increases linked to the U.S. dollar. At December 31, 2009, we had a short-term hedging program in place to cover part of our U.S. dollar-denominated expenses and our floating interest rate exposure.

     Depreciation of the real also reduces the U.S. dollar value of distributions and dividends on the ADSs and the U.S. dollar equivalent of the market price of our preferred shares and, as a result, the ADSs.

     Government efforts to combat inflation may hinder the growth of the Brazilian economy and could harm our business.

     Brazil has in the past experienced extremely high rates of inflation and has therefore followed monetary policies that have resulted in one of the highest real interest rates in the world. Between 2004 and 2009, the base interest rate (SELIC) in Brazil varied between 19.25% p.a. and 8.75% p.a. Inflation and the Brazilian government’s measures to fight it, principally through the Central Bank, have had and may have significant effects on the Brazilian economy and our business. Tight monetary policies with high interest rates may restrict Brazil’s growth and the availability of credit. Conversely, more lenient government and Central Bank policies and interest rate decreases may trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect our business. In addition, we may not be able to adjust the fares we charge our customers to offset the effects of inflation on our cost structure.

     Developments and the perception of risk in other countries, including the United States and emerging market countries, may adversely affect the market price of Brazilian securities, including the ADSs and our preferred shares.

     The market value of securities of Brazilian issuers is affected by economic and market conditions in other countries, including the United States, the European Union and emerging market countries. Although economic conditions in those countries may differ significantly from economic conditions in Brazil, investor’s reactions to developments in other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in the United States, the European Union or emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the trading price of the ADSs or our preferred shares, and could also make it more difficult for us to access the capital markets and finance our operations in the future on acceptable terms or at all.

     The global financial crisis which began during the second half of 2008 has had significant consequences, including in Brazil, such as stock and credit market volatility, unavailability of credit, higher interest rates, a general economic slowdown, volatile exchange rates and inflationary pressure, among others, which may, directly or indirectly, adversely affect us and the market price of Brazilian securities, including the ADSs and our preferred shares. Although the scenario has improved significantly since the second half of 2009, it is still not clear that the global economy has efficiently recovered.

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Risks Relating to Us and the Brazilian Airline Industry

     Changes to the Brazilian civil aviation regulatory framework may adversely affect our business and results of operations.

     Brazilian aviation supervisory authorities monitor and influence the developments in Brazil’s airline market. For example, the predecessor of the National Civil Aviation Agency (Agência Nacional de Aviação Civil), or ANAC, the DAC (Departamento de Aviação Civíl), had addressed overcapacity by establishing strict criteria that must be met before new routes or additional flight frequencies were awarded. Conversely, the ANAC (the successor of the DAC) has more recently pursued policies to loosen the market structures and increase competition. The policies of the ANAC and other aviation supervisory authorities may negatively affect our operations. For example, in 2008, ANAC enacted a regulation providing that the minimal ground time for aircraft between landing and take-off must be 40 minutes at the International Airport of São Paulo in Guarulhos, the international airport of Rio de Janeiro Galeão and at the Brasília airports, and 30 minutes at all other Brazilian airports. In addition, in December 2009, ANAC imposed a reduction in the number of landings per hour in Guarulhos International Airport (GRU) from 49 to 45 in order to avoid congestion in the airport during peak hours. These regulations negatively affected our ability to increase aircraft utilization by minimizing turnaround times between flights.

     Several legislative initiatives have been taken by the National Congress, including the preparation of a draft bill that would replace the current Brazilian Aeronautical Code (Código Brasileiro de Aeronáutica). In general, this draft bill deals with matters related to civil aviation, including airport concessions, consumer protection, limitation of airlines’ civil liability, compulsory insurance and fines. This draft bill is still under discussion in the House of Representatives and, if approved, must be submitted for approval to the Federal Senate, before being sent to the government for presidential approval. If the Brazilian civil aviation framework changes in the future, or ANAC implements increased restrictions, our growth plans and our business and results of operations could be adversely affected.

     Since 2009, the Brazilian government has been analyzing the privatization of airports or granting of rights for private concessionaries to operate currently existing airports or expansions of those airports. Although such measures may serve as a potential positive catalyst to accelerate investments in airport infrastructure, we are unable to foresee the effects of any such measures on our business and results of operations.

     The airline industry is particularly sensitive to changes in economic conditions and continued negative economic conditions would likely continue to negatively impact our results of operations and our ability to obtain financing on acceptable terms.

     Our operations and the airline industry in general are particularly sensitive to changes in economic conditions. Unfavorable general economic conditions, such as higher unemployment rates, a constrained credit market and increased business operating costs, can reduce spending for both leisure and business travel. Unfavorable economic conditions can also impact our ability to raise fares to counteract increased fuel, labor, and other costs. Any of these factors may negatively impact our results of operations.

     Unfavorable economic conditions, a significant decline in demand for air travel, or continued instability of the credit and capital markets could also result in pressure on our borrowing costs, operating results and financial condition and would affect our growth and investment plans. These factors could also negatively impact our ability to obtain financing on acceptable terms and our liquidity generally.

     Technical and operational problems in the Brazilian civil aviation infrastructure, including air traffic control systems, airspace and airport infrastructure may have a material adverse effect on our business, our results of operations and our strategy.

     We are dependent on improvements in the coordination and development of Brazilian airspace control and airport infrastructure, which, mainly due to the large growth in civil aviation in Brazil in recent years, require substantial improvements and government investments. This is further emphasized by the need for additional infrastructure investments in the context of the Soccer Confederations Cup (2013) and World Cup (2014) and the Summer Olympics (2016) in Brazil. If the measures taken and investments made by the Brazilian government and regulatory authorities do not prove sufficient or effective, air traffic control, airspace management and sector coordination-related difficulties might reoccur or worsen, which might have a material adverse effect on our business, our results of operations and our growth strategy.

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     We operate in a highly competitive industry.

     We face intense competition on domestic routes in Brazil from existing scheduled airlines and charter airlines and new entrants in our market. In addition to competition among scheduled airline companies and charter operators, the Brazilian airline industry faces competition from ground transportation alternatives, such as interstate buses. We may also face competition from international airlines as they introduce and expand flights between Brazil, other South American and Caribbean destinations.

     Our existing competitors or new entrants into the markets in which we operate have in the past and may again undercut our fares, increase capacity on their routes in an effort to increase their market share or attempt to conduct low-fare or low-cost airline operations of their own. In any such event, we cannot assure you that our level of fares or passenger traffic would not be adversely affected and would not have an adverse impact on our business and results of operations.

     In 2009 the National Civil Aviation Council (Conselho de Aviação Civil), or CONAC, announced that it would propose to the Brazilian Government a change to the regulatory limit of foreign ownership in Brazilian airline companies from 20% to 49%. This proposal may be accepted by the Brazilian Government and become a draft bill. We cannot foresee the effects of this regulation on the competitive environment on us and our industry.

     As a result of the competitive environment there may be further consolidation in the Brazilian and global airline industry, whether by means of acquisitions, joint ventures, partnerships or strategic alliances. We cannot predict the effects of further consolidation on the industry and, to the extent that we act as a consolidator, we may not be able to implement our growth strategy or make use of synergies, our costs may increase and our operational efficiency may be reduced.

     A failure to successfully implement our strategy would harm the market value of the ADSs and our preferred shares.

     Our strategy involves capitalizing on our strong market position in Brazil and Latin America with the highest number of routes at the most important airports in Brazil, our consolidated flight network, our e-commerce platform and our Smiles mileage program, to increase our penetration of all traveler segments.

     Slots at Congonhas Airport in São Paulo, the most important airport for our operations, are fully utilized. The Santos-Dumont airport in Rio de Janeiro, a highly utilized airport with half-hourly shuttle flights between São Paulo and Rio de Janeiro, has certain slot restrictions. Several other Brazilian airports, for example the Brasília International Airport and São Paulo International Airport in Guarulhos, have limited the number of slots per day due to infrastructural limitations at these airports. Any condition that would prevent or delay our access to airports or routes that are vital to our strategy, or our inability to maintain our existing slots, and obtain additional slots, could materially adversely affect our operations. In addition, we cannot assure that any investments will be made by the Brazilian government in the Brazilian aviation infrastructure to permit a capacity increase at busy airports and consequently additional concessions for new slots to airlines.

     Our strategy involves developing new products and businesses in order to increase our ancillary revenues and therefore our total net revenues. Any condition that would prevent or delay our ability to develop such additional revenue sources may significantly impact our operating margins. In addition, a large portion of such ancillary revenues relies on developing partnerships to sell products through our e-commerce platform and on our flights. We do not have any experience in the operation of these businesses and if any of our partners fails to properly deliver products or services it offers, our brand, reputation and results of operations may be significantly adversely impacted and we may be exposed to contingencies with regard to those activities.

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     We have significant recurring aircraft lease costs, and we will incur significantly more fixed costs that could hinder our ability to meet our strategic goals.

     We have significant costs, relating primarily to leases for our aircraft and engines, of which leases for 115 aircraft have floating-rate rent payments based on LIBOR or U.S. interest rates. As of December 31, 2009, we had commitments of R$10.9 billion to purchase additional Boeing 737-800 Next Generation aircraft, based on aircraft list prices, although the actual price payable by us for the aircraft will be lower due to supplier discounts. As of December 31, 2009, we had R$2.2 billion in long-term indebtedness, excluding our perpetual bonds in the amount of R$310.1 million. We expect that we will incur additional fixed obligations and debt as we take delivery of the new aircraft and other equipment to implement our strategy.

     Having significant fixed payment obligations could:

     Our ability to make scheduled payments on our fixed obligations, including indebtedness we will incur, will depend on our operating performance and cash flow, which will in turn depend on prevailing economic and political conditions and financial, competitive, regulatory, business and other factors, many of which are beyond our control. In addition, our ability to raise our fares to compensate for an increase in our fixed costs may be adversely affected by any imposition of fare control mechanisms by the Brazilian civil aviation authorities.

     We may have to use our cash resources to finance a portion of our firm purchase order aircraft. We may not have sufficient cash resources to do so.

     We currently finance our aircraft principally through operating leases. As a result of our firm purchase orders to purchase 40 Boeing 737-800 Next Generation aircraft as of December 31, 2009, we expect to own a larger portion of our fleet as well as continue to lease aircraft through principally long-term operating leases. The firm purchase orders represent a significant financial commitment for us. We have in recent years financed and intend to continue financing our new Boeing 737-800 NG aircraft with a commitment we received from the U.S. Export-Import Bank providing guarantees covering 85% of the aggregate purchase price for the firm purchase order aircraft. While we expect that the guaranty from the U.S. Export-Import Bank will help us in obtaining low-cost financing for the purchase of the firm purchase order aircraft, we may be required to use our own cash resources for the remaining 15% of the aggregate purchase price for the firm purchase order aircraft. As of December 31, 2009, we had R$1.4 billion of cash, cash equivalents, short-term investments in overnight deposits and deposit certificates of highly-rated Brazilian banks and marketable securities, mainly highly-rated Brazilian government bonds, including R$18.8 million in restricted cash. If the value or liquidity of these investments were to decrease, or we do not have sufficient cash resources, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our strategy and business and could have an adverse impact on our results of operations.

     Substantial fluctuations in fuel costs or the unavailability of fuel would harm our business.

     Historically, international and local fuel prices have been subject to wide price fluctuations based on geopolitical issues and supply and demand. Fuel costs, which at times in 2007 and 2008 were at historically high levels, constitute a significant portion of our total operating expenses, accounting for 32.2% of our operating expenses for the year ended December 31, 2009. Fuel availability is also subject to periods of market surplus and shortage and is affected by demand for both home heating oil and gasoline. In the event of an international or local fuel supply shortage, our fuel prices may increase. Although we enter into hedging arrangements to reduce our exposure to fuel price fluctuations and have historically passed on the majority of fuel price increases by adjusting our fare structure, the price and future availability of fuel cannot be predicted with any degree of certainty. Our hedging activities or the extent of our ability to adjust our fares may not be sufficient to protect us from fuel price increases.

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     In addition, substantially all of our fuel is supplied by one source, Petrobrás Distribuidora S.A. If Petrobrás Distribuidora is unable or unwilling to continue to supply fuel to us at the times and in the quantities that we require, our business and results of operations would be adversely affected.

     We rely on one supplier for our aircraft and engines.

     One of the key elements of our current business strategy is to save costs by operating a standardized aircraft fleet. After extensive research and analysis, we chose the Boeing 737-700/800 Next Generation aircraft and CFM 56-7B engines from CFM International. We expect to continue to rely on Boeing and CFM International into the foreseeable future. If either Boeing or CFM International were unable to perform its contractual obligations, we would have to find another supplier for a similar type of aircraft or engines.

     If we had to lease or purchase aircraft from another supplier, we could lose the benefits we derive from our current fleet composition. We cannot assure you that any replacement aircraft would have the same operating advantages as the Boeing 737-700/800 Next Generation aircraft or that we could lease or purchase engines that would be as reliable and efficient as the CFM engines. We may also incur substantial transition costs, including costs associated with retraining our employees, replacing our manuals and adapting our facilities, to the extent that such costs would not be covered by the alternate supplier. Our operations could also be disrupted by the failure or inability of Boeing or CFM International to provide sufficient parts or related support services on a timely basis.

     Our business would also be significantly harmed if a design defect or mechanical problem with the Boeing 737-700/800 Next Generation aircraft or the CFM engines used on our aircraft were discovered, causing our aircraft to be grounded while any such defect or problem is being corrected, assuming it could be corrected at all. The use of our aircraft could be suspended or restricted by the ANAC in the event of any actual or perceived mechanical, design or other problems while the ANAC conducts an investigation. Our business would also be significantly harmed if the public avoids flying on our aircraft due to an adverse perception of the Boeing 737-700/800 Next Generation aircraft or the CFM engines because of safety concerns or other problems, whether real or perceived, or in the event of an accident involving Boeing 737-700/800 Next Generation aircraft or the CFM engines.

     We may be unable to maintain our company culture as our business grows.

     We believe that our growth potential and the maintenance of our results-oriented corporate culture are directly linked to our capacity to attract and maintain the best professionals available in the Brazilian airline industry. We are dedicated to providing professional, high-quality service in a positive work environment and finding innovative ways to improve our business. We place great emphasis on the selection and training of enthusiastic employees with potential to add value to our business and who we believe fit in with and contribute to our company culture. As we grow domestically and internationally, we may be unable to identify, hire or retain enough people who meet these criteria, or we may have trouble maintaining this company culture as we become larger. Our company culture is crucial to our business plan, and failure to maintain that culture could adversely affect our business and results of operations.

     The loss of our senior management and key employees could disrupt our business.

     Our business depends significantly upon the efforts of our executive officers, especially our chief executive officer, who has played an important role in shaping our company culture. If the services of our chief executive officer or our key executives become unavailable to us, we may have difficulty finding suitable replacements, which could harm our business and results of operations.

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     We rely heavily on automated systems to operate our business, and any failure of these systems could harm our business.

     We depend on automated systems to operate our business, including our computerized airline ticket sales system, our telecommunication systems and our website. Our website and ticket sales system must be able to accommodate a high volume of traffic and deliver important flight information. Substantial or repeated website, ticket sales system or telecommunication systems failures could reduce the attractiveness of our services and could cause our customers to purchase tickets from another airline. Any disruption in these systems could result in the loss of important data, increase our expenses and generally harm our business.

     We rely on maintaining a high daily aircraft utilization rate to increase our revenues and reduce our costs. High aircraft utilization also makes us vulnerable to delays.

     One of the key elements of our business strategy is to maintain a high daily aircraft utilization rate. High daily aircraft utilization allows us to generate more revenue from our aircraft and dilute our fixed costs, and is achieved in part by operating with quick turnaround times at airports so we can fly more hours on average in a day. Our rate of aircraft utilization could be adversely affected by a number of different factors that are beyond our control, including, among others, air traffic and airport congestion, adverse weather conditions and delays by third-party service providers relating to matters such as fueling and ground handling.

     High aircraft utilization increases the risk that if an aircraft falls behind schedule during the day, it could remain behind schedule during the remainder of that day and potentially the next day, which can result in disruption in operating performance, leading to passenger dissatisfaction related to delayed or cancelled flights and missed connections, which may negatively affect our reputation, results of operation and the market price of our ADSs and preferred shares

     The airline industry is dynamic and volatile and our reputation, financial results and the market price of our ADSs and preferred shares could be harmed by events out of our control

     Accidents or incidents involving our aircraft could involve significant claims by injured passengers and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent loss from service. We are required by ANAC and lessors of our aircraft under our operating lease agreements to carry liability insurance. Although we believe we currently maintain liability insurance in amounts and of the type generally consistent with industry practice, the amount of such coverage may not be adequate and we may be forced to bear substantial losses in the event of an accident. Substantial claims resulting from an accident in excess of our related insurance coverage would harm our business and financial results. Moreover, any aircraft accident or incident involving our aircraft, even if fully insured, or an accident or incident involving Boeing 737 Next Generation aircraft or the aircraft of any major airline could cause negative public perceptions about us or the air transport system, which would harm our business and results of operations as well as the market price of our ADSs and preferred shares.

     We may also be affected by other events that affect travel behavior, such as the potential of epidemics or acts of terrorism. These events are out of our control and may affect us even if occurring in markets where we do not operate and/or in connection with other airlines. For example, in the second quarter of 2009, there was an outbreak of the H1N1 virus which had an adverse impact on global air travel and on our operations to and from Argentina. In addition, in the past there have been concerns about outbreaks or potential outbreaks of other diseases, such as avian flu and Severe Acute Respiratory Syndrome, or SARS, which had an adverse impact on global air travel. Any outbreak of a disease that affects travel behavior could have a material adverse impact on us and the trading price of shares of companies in the worldwide airline industry, including our ADRs and preferred shares. Outbreaks of disease could also result in quarantines of our personnel or an inability to access facilities or our aircraft, which could adversely affect our operations. The trading price of shares of companies in the worldwide airline industry are relatively volatile and investors’ perception of the market value of these shares, including our ADSs and preferred shares, may also be negatively impacted with additional volatility and decreases in the price of our ADSs and preferred shares.

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     Our controlling shareholder has the ability to direct our business and affairs and its interests could conflict with yours.

     Our controlling shareholder has the power to, among other things, elect a majority of our directors and determine the outcome of any action requiring shareholder approval, including transactions with related parties, corporate reorganizations, dispositions, and the timing and payment of any future dividends, subject to minimum dividend payment requirements imposed under the Brazilian corporation law. Although you are entitled to tag-along rights in connection with a change of control of our company and you will have specific protections in connection with transactions between our controlling shareholder and related parties, our controlling shareholder may have an interest in pursuing acquisitions, dispositions, financings or similar transactions that could conflict with your interests as a holder of the ADSs or our preferred shares.

Risks Relating to the ADSs and Our Preferred Shares

     The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the price and time you desire.

     Investing in securities that trade in emerging markets, such as Brazil, often involves greater risk than investing in securities of issuers in the United States, and such investments are generally considered to be more speculative in nature. The Brazilian securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States. Accordingly, although you are entitled to withdraw the preferred shares underlying the ADSs from the depositary at any time, your ability to sell the preferred shares underlying the ADSs at a price and time at which you wish to do so may be substantially limited. There is also significantly greater concentration in the Brazilian securities market than in major securities markets in the United States. The ten largest companies in terms of market capitalization represented 52.5% of the aggregate market capitalization of the BM&FBOVESPA S.A. Bolsa de Valores, Mercadorias & Futuros (“BM&FBOVESPA”) as of December 31, 2009. The top ten stocks in terms of trading volume accounted for 41.5%, 53.2% and 49.7% of all shares traded on the BM&FBOVESPA in 2007, 2008 and 2009, respectively.

     Holders of the ADSs and our preferred shares may not receive any dividends.

     According to our by-laws, we must generally pay our shareholders at least 25% of our annual net income as dividends, as determined and adjusted under Brazilian corporate law. This adjusted income may be capitalized, used to absorb losses or otherwise appropriated as allowed under the Brazilian corporation law and may not be available to be paid as dividends. We may not pay dividends to our shareholders in any particular fiscal year if our board of directors determines that such distributions would be inadvisable in view of our financial condition.

     If you surrender your ADSs and withdraw preferred shares, you risk losing the ability to remit foreign currency abroad and certain Brazilian tax advantages.

     As an ADS holder, you benefit from the electronic certificate of foreign capital registration obtained by the custodian for our preferred shares underlying the ADSs in Brazil, which permits the custodian to convert dividends and other distributions with respect to the preferred shares into non-Brazilian currency and remit the proceeds abroad. If you surrender your ADSs and withdraw preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for only five business days from the date of withdrawal. Thereafter, upon the disposition of or distributions relating to the preferred shares, you will not be able to remit abroad non-Brazilian currency unless you obtain your own electronic certificate of foreign capital registration or you qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on Brazilian stock exchanges without obtaining separate electronic certificates of foreign capital registration. If you do not qualify under the foreign investment regulations you will generally be subject to less favorable tax treatment of dividends and distributions on, and the proceeds from any sale of, our preferred shares.

     If you attempt to obtain your own electronic certificate of foreign capital registration, you may incur expenses or suffer delays in the application process, which could delay your ability to receive dividends or distributions relating to our preferred shares or the return of your capital in a timely manner. The depositary’s electronic certificate of foreign capital registration may also be adversely affected by future legislative changes.

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     Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares.

     We may not be able to offer our preferred shares to U.S. holders of ADSs pursuant to preemptive rights granted to holders of our preferred shares in connection with any future issuance of our preferred shares unless a registration statement under the Securities Act is effective with respect to such preferred shares and preemptive rights, or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement relating to preemptive rights with respect to our preferred shares, and we cannot assure you that we will file any such registration statement. If such a registration statement is not filed and an exemption from registration does not exist, The Bank of New York Mellon, as depositary, will attempt to sell the preemptive rights, and you will be entitled to receive the proceeds of such sale. However, these preemptive rights will expire if the depositary does not sell them, and U.S. holders of ADSs will not realize any value from the granting of such preemptive rights.

ITEM 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

General

     The Registrant was formed on March 12, 2004 as a sociedade por ações, a stock corporation duly incorporated under the laws of Brazil with unlimited duration. The Registrant’s material assets consist of the shares of VRG, three offshore finance subsidiaries, cash and cash equivalents and short-term investments. The Registrant owns all of VRG’s shares, except for shares held by members of VRG’s boards of directors for eligibility purposes. Our principal executive offices are located at Praça Comandante Linneu Gomes, S/N, Portaria 3, Jardim Aeroporto, CEP: 04626-020, São Paulo, SP, Brazil, and our general telephone number is +55 11 2128-4000. The telephone number of our investor relations department is +55 11 2128-4700. Our website address is www.voegol.com.br. Investor information can be found on our website www.voegol.com.br/ir. Information contained on our website is not incorporated by reference in, and shall not be considered a part of, this annual report.

Capital Expenditures

     For a description of our capital expenditures, see below “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

B. Business Overview

     We are one of the largest low-cost low-fare airlines in the world in terms of passengers transported in 2009, and the largest low-cost low-fare airline in Latin America providing frequent service on routes connecting all of Brazil’s major cities and from Brazil to major cities in South America and select touristic destinations in the Caribbean. With our young and standardized operating fleet of 108 Boeing 737 aircraft, we serve the largest number of destinations of any airline in the Brazilian air passenger transportation market.

     Since the beginning of our operations in 2001, our affordable, reliable and simple service and our focus on markets that were either underserved or did not have a lower-fare alternative have led to a strong awareness of our brand and a rapid increase in our market share. We were the first company to successfully introduce low-cost carrier industry practices and technologies in Latin America. We have a diversified revenue base, with customers ranging from business passengers to leisure passengers traveling throughout Brazil and other South American and Caribbean destinations. Our strategy is to increase the size of the market by attracting new passengers as well as to diversify our revenue portfolio through our consolidated flight network, a modern aircraft fleet, targeted marketing and our loyalty program Smiles (the largest loyalty program in Latin America with more than 6.6 million members), a variety of attractive ancillary businesses such as our air cargo services (Gollog), and through a variety of payment mechanisms designed to make the purchase of our tickets easier for customers in lower income classes. Passenger transportation revenues represented 88.1% and ancillary revenues represented 11.9%, of our net revenues of R$6.0 billion in 2009.

     As of March 31, 2010, we offered approximately 800 daily flights per day to 61 destinations connecting the most important cities in Brazil as well as key destinations in Argentina, Bolivia, Curacao, Aruba, Chile, Colombia, Paraguay, Uruguay and Venezuela. We strategically focus on the Brazilian and South American markets, and will continue to carefully evaluate opportunities to continue growing by increasing the frequency of flights to our existing high-demand markets and adding new routes in these markets (for example, in the Caribbean region), all of which can be reached with our Boeing 737 Next Generation (NG) aircraft.

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     Our Competitive Strengths

     We Have a Strong Market Position Based on Slots at the Most Important Airports in Brazil. Since the VRG acquisition, we have been the carrier with the most flights connecting the busiest airports in Brazil: Congonhas (São Paulo), Santos Dumont and Galeão (Rio de Janeiro), Juscelino Kubitschek (Brasília), Confins (Belo Horizonte) Salvador (Bahia), Porto Alegre (Rio Grande do Sul), Recife (Pernambuco) and Curitiba (Paraná). Routes between these airports are among the most profitable routes in our markets, with higher yields achieved mostly from business travelers. In Congonhas, an airport with slot restrictions, we were the leading airline in terms of the number of departures for these routes in 2009.

     We Have a Strong Brand Recognition. We believe that the Gol brand has become synonymous with innovation and value in the airline industry. Our customers identify Gol as being safe, accessible, friendly, fair, intelligent and reliable and distinguish Gol in Brazil’s domestic airline industry on the basis of its modern and simplified approach to air travel services. Our Smiles, Gollog and Voe Fácil brands give us valuable customer recognition in various businesses and create a tool for brand diversification for us. Our Varig brand is widely known in the Brazilian and Latin American markets in which we operate.

     We Keep Our Operating Costs Low. Our operating expense per available seat kilometer (CASK) for the year ended December 31, 2009 was R$14.0 cents. We believe that our CASK for the year ended December 31, 2009, adjusted for the average number of kilometers flown per flight, was over the year the lowest in the domestic market and one of the lowest among international low-cost carriers, based upon our analysis of data collected from publicly available information. Our business model is based on innovation and best practices adopted to improve our operating efficiency, including:

     We Stimulate Demand for Our Service. As a result of our low cost structure, we believe that through our differentiated services we create demand for air travel services. Our average fares are lower than the average fares of most of our domestic competitors. We identify and stimulate demand among both business and leisure passengers for air travel that is safe, convenient, simple and a reasonably priced alternative to traditional air, bus and car travel. By combining low fares with simple and reliable service, we have successfully improved our brand awareness, product quality, punctuality and regularity as well as strengthened customer loyalty and are attracting new groups of air travelers in our markets. We estimate that, on average, approximately 10% of the customers on our flights are either first-time flyers or have not flown for more than a year.

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     We Have the Largest Loyalty Program in Latin America. Since the VRG acquisition, we have a loyalty program (Smiles), which is available to all our passengers and which we consider a strong relationship tool. The Smiles loyalty program serves as a source of revenue for us, as it enables us to sell miles directly to corporate clients for marketing purposes or utilize them for co-branded credit cards. It supports partnerships with more than 160 partners, including hotel chains, car rental companies, restaurants, insurance companies, publishers and schools and also forms the basis for partnerships with some of Brazil and South America’s largest banks and credit card companies. The Smiles loyalty program had over 6.6 million members at December 31, 2009. On June 30, 2009, we entered into a partnership with Banco Bradesco and Banco do Brasil for the issuance and management of co-branded credit cards, enabling these banks to issue credit cards under the Smiles brand. As part of the agreement, we received an aggregate of R$252.7 million (i) from the sale of miles under the Smiles loyalty program to these two institutions, (ii) from a share of the revenue generated by the cards, and (iii) for granting the banks the right to access and use the program’s database.

     We are one of the largest e-commerce companies in Brazil. Our effective use of technology helps us to keep our costs low and our operations highly scalable and efficient. We seek to keep our distribution channels streamlined and convenient so as to allow our customers to interact with us via the Internet. In 2009, we booked a significant majority (92.4%) of our ticket sales through a combination of our website and application programming interface, or API, systems and our call center (6.3%) . In addition, our customers can check in online and through web-enabled cell phones. As a result of our emphasis on low-cost distribution channels, in 2009 we were one of the largest e-commerce companies in Brazil and Latin America, with R$5.7 billion in net ticket sales through the internet, more than any other airline and publicly-held e-commerce company in Brazil. Our platform also has strong traffic statistics, with more than six million visitors per month. We enjoy significant cost savings associated with automated ticket sales, which also makes the selection of travel options more convenient for our customers. Our e-commerce platform is starting to allow us to cross-sell other travel-related products to our customers.

     We Offer Innovative and Flexible Payment Mechanisms. We have developed and will further develop flexible payment mechanisms such as debit payments and long-term installment payments (Voe Fácil), with which we expect to increase our potential market and customer base to broader income classes and which enable us to further penetrate markets and capture customers.

     We Have Proven Management. Our controlling shareholders have been operating in the Brazilian passenger transportation market for over 50 years, and our top managers have broad experience in many sectors of the Brazilian economy, including air and ground transportation, telecommunications and home appliances and consumer products. This experience has helped us to develop the most effective elements of our low-cost model and we expect will help us to further penetrate the Brazilian middle class and to generate ancillary revenues through Voe Fácil and our e-commerce platform www.voegol.com.

     We Have High Corporate Governance Standards. Our corporate governance practices go beyond those of most issuers in the transportation industry and emerging markets issuers, with the efficient and active use of specialized committees with highly qualified professionals and senior managers that add value to decisions made in the day-to-day management of our business. We have four independent board members, including the chairman of our board of directors. All members of our board of directors have broad and internationally recognized skills in the areas of corporate finance, business management, banking and in the transportation industry.

     We Have a Strong Liquidity and Cash Position. We believe that a strong liquidity and cash position is key to our success. Our strong balance sheet increases our capacity to establish partnerships, negotiate with suppliers and to mitigate impacts of financial markets volatility on our results, to strengthen our financial resilience and to ensure the execution of our growth strategy. We have a strong balance sheet, especially our cash and cash equivalents position which amount to approximately 24% of our trailing twelve months’ net operating revenues. We are also committed to not having any significant financial debt coming due within any three-year horizon. In this view we believe that a stronger balance sheet, combined with our operating cash flow generation will further improve our operating flexibility in order to allow us to rapidly respond to market changes and to explore opportunities.

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Our Strategies

     Our strategy is to capitalize on our competitive advantages while further strengthening our financial resilience, based on four main strategic pillars: increase passenger revenue, expand ancillary revenues, further reduce costs and improve our financial resilience. In order to implement our strategies we intend to:

     Capitalize on Our Strong Market Position in Brazil and Latin America. We intend to capitalize on our strong market position, with our high brand recognition, the highest number of routes and frequencies between the most important airports in Brazil, our consolidated flight network and our Smiles loyalty program and to increase penetration across all segments of travelers. We will focus on Brazilian operations and selected South American destinations that are, or we expect to become, profitable and fit into our flight network. In addition, we believe that the airline industry may experience further consolidation in the future and therefore partnerships and alliances are key success factors. In this environment we intend play a leading role and strengthen our position as a long-term player.

     Expand Our Customer Base. In planning the growth of our business, we will continue to select our routes and build the frequency of our service based on the extent and type of demand in the areas we serve in Brazil and Latin America. We are committed to providing air travel to a wide range of travelers. We will continue to popularize air travel, making low-fare flights more accessible to a larger portion of the population, including all types of business travelers, including with the following measures:

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     Further Establish and Increase Our Ancillary Revenue Businesses. Our ancillary revenues are derived from Voe Fácil, our e-commerce platform www.voegol.com.br and Gollog as well as ticket change fees, excess baggage charges and other incidental services. We expect further growth in these businesses, which will provide us with additional revenue at low incremental cost by:

     Improve Operating Efficiency and Financial Resilience. Continuing to reduce our operating expense per available seat kilometer is key to increased profitability. We aim to maintain our position as one of the lowest cost airlines in the world. We intend to further reduce the average age of our fuel-efficient fleet, while optimizing the size of our fleet to ensure high utilization rates. In 2005, we became the first airline in Latin America to use winglets on our aircraft and in 2009, we became the first airline in Latin America to implement electrostatic painting in our aircraft reducing significant aircraft weight and savings in paintings and environmental emissions. We are currently working on implementation of GPS Landing system, installation of winglets to our Boeing 737-700 fleet and a tankering strategy, among other initiatives to further increase our fuel efficiency and lower our operating costs.

     We seek to continue to reduce our operating expense per available seat kilometer by using our aircraft efficiently, concentrating on minimizing our turnaround times at airports and maintaining a high number of daily flights per aircraft. We will continue to utilize technological innovations wherever possible to reduce our distribution costs and improve our operating efficiency. We expect to benefit from economies of scale and reduce our average cost per available seat kilometer as we add aircraft to an established and efficient operating infrastructure.

     We have a strong balance sheet and we seek to continuously set financial targets in order to further improve our financial resilience to support our growth strategy. We currently seek to maintain a cash position equivalent to more than 20% of our net revenues recorded in the last twelve months, to continuously improve debt ratios and to avoid significant debt maturities in a three-year range.

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     Routes and Schedules

     Our operating model is a highly integrated, multiple-hub route network that is different from the point-to-point model used by other low-cost carriers worldwide. The high level of integration of flights at selected airports permits us to offer frequent, non-stop flights at low fares between Brazil’s most important economic centers and ample interconnections through our network linking city pairs through a combination of two or more flights with little connecting or stop-over time. Our network also allows us to increase our load factors on our strongest city pair routes by using the airports in those cities to connect our customers to their final destinations. This strategy increases our load factor by attracting customers traveling to secondary markets who prefer to pay lower fares even if this means making one or more stops before reaching their final destination. Over 40% of our passengers connect or fly through one or more destinations before reaching their final travel destination. Our operating model allows us to build our flight routes to add destinations to cities that would not, individually, be economically viable to serve in the traditional point-to-point model, but that are feasible to serve when simply added as additional points on our multiple-stop route network. We do this by offering low-fare, early-bird, minimum stay or night (red-eye) flights to lower-traffic destinations, which can be the first or last stops on our routes, allowing us to increase our aircraft utilization and generate additional revenues. By offering international flights to South American and Caribbean destinations, and with stops integrated in our network, we create opportunities for incremental traffic, feeding our network and increasing our overall load factor and our competitive advantage and supporting our strategy of expanding our network and stimulating demand for our services.

     We have been increasing the number of flights to and through the major Brazilian airports and prudently adding more routes to Caribbean destinations, which we expect to give us additional growth opportunities in the Brazilian and international markets.

     At March 31, 2009, we offered over 800 daily flights to 61 destinations connecting the most important cities in Brazil as well as the main destinations in Argentina, Bolivia, Chile, Paraguay, Uruguay, Colombia, Venezuela and Caribbean Region.

Services

Passenger Transportation

     We recognize that we must offer excellent services to our customers. Since April 2009, we have offered lower priced seats to price-sensitive leisure travelers and more flexible tickets with higher Smiles miles allocation to our corporate customers. We pay particular attention to the details that help to make for a pleasant, complication-free flying experience, including:

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     We seek to achieve punctual operations, which are of primary importance to our customers. According to our internal data, which are corrected for delays out of our control and pre-advised changes in flight schedules, our punctuality rate in December 2009 was 85.3%, as compared to 72.0% in 2008.

Smiles Loyalty Program.

     We have a loyalty program (Smiles), which we consider as a strong relationship tool and which is available to all our passengers. We intend to increase the Smiles penetration through creating marketing initiatives and additional benefits to our customers (e.g., double miles promotions and the launch of several miles redemption options, allowing our customers to use part of their miles to complete the payment) increasing and establishing partnerships with affiliated credit cards or using services and products at partner establishments. There are four tiers in our Smiles program (Diamond, Gold, Silver and Blue) and qualification for a particular tier is based on the miles flown. The Smiles program serves as a source of revenue for us, since we can sell miles directly to corporate clients for marketing purposes or utilize them for co-branded credit cards. It maintains partnerships with hotel chains, car rental companies, restaurants, insurance companies, publishers and schools and also maintains a partnership with some of Brazil and South America’s largest banks and credit card companies. In 2009, the program offered a number of marketing promotions aimed at re-engaging its existing members and expanding its client base. We have received our IOSA certification during the first half of 2009, which we believe will make us, combined with the integration of the Smiles loyalty program in our consolidated flight network, the preferred partner of major international airlines in Brazil, with which we do not compete on intercontinental routes. We expect that, through these partnerships, our customers could use their miles accumulated under the Smiles program to fly to international destinations in North America, Europe and Asia. For example, in April 2009, we entered into a commercial cooperation agreement with Air France-KLM, which will be implemented in two phases and will allow for the integration of our Smiles and Air France-KLM’s Flying Blue programs and lays the groundwork for a future code-share agreement. The Smiles program had over 6.6 million members at the end of 2009.

Ancillary revenues

     Ancillary revenues such as revenues from our Gollog services, our Voe Fácil program, as well as baggage excess and ticket change fees and buy on board revenues are an increasingly important part of our revenues. The further development and growth of our Gollog services and Voe Fácil program is part of our strategy, and they represented 11.9% of our consolidated revenues in 2009, compared to 8.1% in 2008.

     We are constantly evaluating opportunities to generate additional ancillary revenues such as sales of travel insurance, marketing activities and other services which may help us to better capitalize on the large number of passengers on our flights and the high volumes of customers using our website.

     We believe that integrating travel-related products in our e-commerce platform to be key to a faster increase in our ancillary revenues. We intend to provide comfort and convenience to our clients by upgrading our current e-commerce platform into a fully-integrated portal that provides a wide range of integrated travel-related products to be charged in a single invoice. In addition, we plan to integrate the Smiles and Gollog platforms into our air travel portal to further provide convenience and simplicity to our customers.

Gollog Cargo Transportation

     In addition to our passenger service, we make efficient use of extra capacity in the stronghold of our aircraft by carrying cargo, through our cargo transport service – Gollog. Gollog’s success is the result of the unique service we offer to the market: the Electronic Air Waybill that can be completed via the Internet. The Gollog system provides online access to air waybills and allows customers to track their shipment from any computer with Internet access. Our 61 destinations throughout Brazil, South America and Caribbean provide access to multiple locations in the region. With our capacity of over 800 daily flights we can guarantee quick and reliable delivery. Packages are shipped in the freighthold of our passenger aircraft.

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Voe Fácil Installment Program

     In 2005 we launched the Voe Fácil (“Fly Easy”) program, an innovative new way to purchase airline tickets, which allows selected customers based on their credit history to pay for airline tickets in up to 36 monthly installments. The program is especially designed for highly price-sensitive customers, many of which do not hold credit cards. Installment payments are a typical sales strategy in the Brazilian retail market and we are applying this sales technique to passenger transportation to increase our market and stimulate demand for our tickets. In 2009, the Voe Fácil program decreased its ticket sales by 43% compared to 2008 to R$112.6 million in 2009 from R$198.4 million in 2008, corresponding to a decrease in tickets sold by 51.6% to 140,661 in 2009 from 290,850 in 2008. This decrease was due to reduced promotion and exposure of the Voe Fácil product during the first half of 2009.

Aircraft Fleet

     In line with our strategy of combining the renovation of our fleet with disciplined growth in our seat supply, we concluded the following operating agreements and initiatives in 2009:

     As a result of the above, on December 31, 2009 we had an operational fleet of 108 operational aircraft and a total fleet of 127. We expect to have 111 aircraft in our operating fleet by the end of 2010.

     As of March 31, 2010, one of our Boeing 767 aircrafts was subleased to a charter company in the United States until 2013, one is under final formalization process for a wet lease to a Brazilian company for flights connecting Brazil to Angola and three are under final stages of negotiation to be chartered to operate intercontinental flights.

The following table sets forth the composition of our fleet at the dates indicated:

Operating Fleet    At December 31, 
   
    Seats(1)   2008    2009 
       
B737-300    141    13    3 
B737-700 NG    144    38    43 
B737-800 NG    177    23    18 
B737-800 NG Short-Field Performance    187    32    44 
       
Sub Total    -    106    108 
       
 
Non-Operating Fleet    At December 31, 
   
    Seats(1)   2008    2009 
       
 
B737-300    141    2    8 

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Non-Operating Fleet    At December 31, 
   
    Seats(1)   2008    2009 
       
B737-800 NG    177    -    5 
B767-300 ER    218    7    6 
       
Sub Total    -    9    19 
       
Total    -    115    127 
       

  (1) As of December 31, 2009. 

     At December 31, 2009, we had a total of 127 aircraft, 94 of which were under operating leases and 33 were under finance leases.

     The average age of our operating aircraft at December 31, 2009 was 6.3 years. The average daily utilization rate of our operating fleet in 2009 was 11.6 block hours (12.1 block hours in 2008).

     Each Boeing 737 aircraft in our fleet is powered by two CFM International Model CFM 56-7B22 engines or two CFM International Model CFM 56-7B24 engines.

The following table sets forth our year-end projected operating fleet through 2015:

Operating Fleet Plan    2010    2011    2012    2013    2014    2015 
             
B737-700 NG    40    40    40    40    40    40 
B737-800 NG *    71    75    79    81    85    91 
             
Total    111    115    119    121    125    131 
         * Includes SFP aircrafts (Short Field Performance)                        

     We will revise this fleet plan according to our expectations for the growth potential in the markets in which we operate.

     The Boeing 737-700 Next Generation and Boeing 737-800 Next Generation aircraft currently comprising our fleet are fuel-efficient and very reliable. They suit our cost efficient operations well for the following reasons:

     In addition to being cost-efficient, the Boeing 737-700/800 Next Generation aircraft are equipped with advanced technology that promotes flight stability, providing a more comfortable flying experience for our customers. We use a single type of aircraft to preserve the simplicity of our operations. As a result, the introduction of any new aircraft type to our fleet will only be done if, after careful consideration, we determine that such a step will reduce our operating costs. Most of our leased Boeing 737-800 Next Generation aircraft are equipped with blended winglets and all Boeing 737-800 Next Generation aircraft from our purchase order will be equipped with winglets, which reduce our fuel and maintenance costs. Our experience with the new winglets has shown operating fuel consumption reductions from 3% to 5%. In addition, the winglets improve airplane performance during take-off and landing on short runways. The new Boeing 737-800 NG aircraft will be delivered with short-field performance (SFP) with technical modifications that we expect to significantly improve flight performance, the ability to operate non-stop flights, reduce noise during take-off and to enable us to fly with our Boeing 737-800 Next Generation aircraft to the airport of Santos Dumont in Rio de Janeiro, an important link to the most important routes in Brazil.

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     At the end of 2009, we leased 94 of our 127 aircraft under operating lease agreements that have an average remaining term of 42 months. We believe that leasing our aircraft fleet under operating leases provides us with flexibility to adjust our fleet size. We make monthly rental payments, some of which are based on floating rates. We but are not required to make termination payments at the end of our leases. Under our operating lease agreements, we do not have purchase options and for some of our lease agreements we are required to maintain maintenance reserve deposits and to return the aircraft and engine in the agreed condition at the end of the lease term. Title to the aircraft remains with the lessor. We are responsible for the maintenance, servicing, insurance, repair and overhaul of the aircraft during the term of the lease. As of December 31, 2009, our operating leases had terms of up to 144 months from the date of delivery of the relevant aircraft.

     At the end of 2009, we had 33 aircraft acquired under our firm purchase order with Boeing under finance lease arrangements that had an average remaining term of 121 months.

Sales and Distribution

     Our customers can purchase tickets directly from us through a number of different channels, such as our website including our Booking Web Services (BWS), GDS – Global Distribution System, our call center and at airport ticket counters.

     Our low cost low fare business model utilizes website ticket sales as its main distribution channel especially in the local market. For the year ended December 31, 2009, 23.2% of our passenger revenues, whether directly to the customer or through travel agents, were booked via the Internet, making us one of the worldwide industry leaders in this area. In the same period, 6.3% of our passenger revenues were booked through call centers, airport sales counters, and our BWS and 1.3% of our total sales were made through the GDS, respectively.

     Our customers can purchase tickets indirectly through travel agents, who are a widely-used travel service resource in Brazil and South America, Europe, North America and other regions. For the year ended December 31, 2009, travel agents provide us with more than 20,000 distribution outlets throughout these regions.

     GDSs allows us access to a large number of tourism professionals who are able to sell our tickets to customers throughout the globe, and enables us to enter into interline agreements with other airlines to offer more flights and connection options to our passengers and add incremental international passenger traffic, especially to our international network. In 2009 we made additional investments to expand our presence with Amadeus, Sabre and TravelPort.

     On October 21, 2009 we became an issuer of cards for Universal Air Travel Plan, or UATP, a payment network owned and operated by several foreign airlines. UATP allows us access to a payment network with lower costs than those offered by credit cards and other means of payment. In addition, as an UATP card issuer we are able to maintain a closer relationship with our corporate customers.

     During 2009 we have invested in increasing the number of distribution channels: we have opened Gol stores outside the traditional airport areas in Buenos Aires, Cordoba, Rosário (Argentina); Asunción (Paraguay); Santiago (Chile); Santa Cruz de la Sierra, La Paz, Cochabamba (Bolivia); Montevideo (Uruguay); Caracas (Venezuela), Bogota (Colombia). We also opened the first airline store in São Paulo (Brazil) 100% designed to sell to the Brazilian middle class. All stores are strategically located in high density population regions.

Partnerships and Alliances

     Our market positioning enables us to successfully negotiate a number of arranged partnerships with supplementary major carriers worldwide, mostly in the form of code share agreements and interline agreements. Strategically, the additional passenger inflows generated from those partnerships aim to improve revenues at low incremental costs.

     At March 31, 2010, we had a code share agreement with American Airlines, Iberia, Air France KLM, Aero Mexico and Copa Airlines. We are also launching a frequent flyer tie between our Smiles program and the code share partners enabling travelers to accrue and redeem miles between our Smiles and the each of the partners (however, the partnerships are not integrated among themselves). In addition, passengers will be able to connect with Gol operated flights within Brazil, marketed as a code-share partner flight. We intend to enter into similar agreements with other long haul airlines serving or intending to serve Brazil.

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     At December 31, 2009 we had interline agreements with 63 airlines, including Korean Airlines, Delta Airlines, Emirates Airlines, Avianca, Continental Airlines, Japan Airlines, TAP Air Portugal, and others. An interline agreement is a commercial agreement between individual airlines to handle passengers traveling on itineraries that require multiple airlines and allow its customers to utilize a single ticket, and to check their baggage through to the customers final destination. Interline agreements differ from code sharing agreements in that code sharing agreements usually refer to numbering a flight with the airline’s code (abbreviation) even though the flight is operated by another airline. This provides for better marketing and customer recognition of the links between the airlines.

     An important element of our business strategy is to cater to the corporate client. To further develop our business relationship with our corporate customers, we have entered into partnerships with hotel chains, rental car service and insurance providers to offer our corporate customers the convenience of the combination of transportation and accommodation arrangements.

Pricing

     Brazilian airlines are permitted to establish their own domestic fares without previous government approval. However, domestic fares are monitored on a regular basis by the ANAC in order to prevent airlines, which are public concessionaires, from engaging in predatory pricing. Airlines are free to offer price discounts or follow other promotion activities. Airlines must submit, with a minimum of five working days’ advance notice, fares that are set at greater than a 65% discount to the per kilometer reference fares index curve published by the ANAC. The reference fares index curves are based on industry average operating costs, according to ANAC calculations.

     Airlines are permitted to establish fares for international tickets sold in Brazil without previous government approval, subject only to registration with the ANAC.

Yield Management

     Yield management involves the use of historical data and statistical forecasting models to produce knowledge about our markets and guidance on how to compete to maximize our operating revenues. Yield management forms the backbone of our revenue generation strategy and is strongly linked to our route and schedule planning and our sales and distribution methods. Our yield management practices enable us to react quickly in response to market changes. For example, our yield management systems are instrumental in helping us to identify the flight times and routes for which we offer promotions. By offering lower fares for seats that our yield management indicates would otherwise remain unsold, we capture additional revenue and also stimulate customer demand.

Maintenance

     According to ANAC regulation, we are directly responsible for the execution and control of all maintenance services performed on our aircraft. The maintenance performed on our aircraft can be divided into two general categories: line and heavy maintenance. Line maintenance consists of routine, scheduled maintenance checks on our aircraft, including pre-flight, daily and overnight checks and any diagnostics and routine repairs. All of our line maintenance is performed by our own highly experienced technicians at our line maintenance service bases throughout Brazil and South America. We believe that our practice of performing daily preventative maintenance helps to maintain a high aircraft utilization rate and reduces maintenance costs. Heavy maintenance consists of more complex inspections and servicing of the aircraft that cannot be accomplished overnight. Heavy maintenance checks are performed following a pre-scheduled agenda of major overhauls defined by the aircraft’s manufacturer, based on the number of hours and flights flown by the aircraft. Our continued high aircraft utilization rate will result in shorter periods of time between heavy maintenance checks for our aircraft in comparison to carriers with lower aircraft utilization rates. In addition, engine maintenance services are rendered in different MRO (Maintenance, Repair and Operations) facilities. We do not believe that our high aircraft utilization rate will necessarily result in the need to make more frequent repairs to our aircraft, given the durability of the aircraft type in our fleet. Our aircraft are covered by warranties that have an average term of three to five years. The warranties on the aircraft we received in 2009 under our firm purchase order with Boeing will start expiring in 2013.

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     We internalized heavy maintenance on our Boeing 737 aircraft in our Aircraft Maintenance Center at the Tancredo Neves International Airport in Confins, in the State of Minas Gerais. We use this facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment. We started the first of a two-stage expansion project in 2008, when the facility had a capacity to service 60 aircraft. The second stage was inaugurated in March, 2010 and we now have a total capacity to perform full maintenance services for more than 120 Boeing 737 aircraft per year.

     With our system of phased maintenance for our Boeing Next Generation 737-700 and 737-800 aircraft fleet, we are able to perform maintenance work every day without sacrificing aircraft revenue time and to schedule preventive maintenance with more regularity and around the utilization of our aircraft, which helps to maintain high levels of block hours per day and reduces costs. We are one of the few airlines in the world that takes full advantage of the Boeing 737 Next Generation phased maintenance philosophy, supported by extensive investments we made in personnel, material, tools and equipment.

     We have also been certified by the ANAC under the Brazilian Aeronautical Certification Regulations to perform heavy maintenance services for third parties. We expect to utilize this certification, a potential source for ancillary revenues, now that the construction of an additional maintenance facility has been completed.

Fuel

     Our fuel costs totaled R$1,813.1 million in 2009, representing 32.2% of our operating expenses for the year. In 2009, we purchased substantially all of our fuel from Petrobrás Distribuidora S.A., a retail subsidiary of Petrobrás, principally under an into-plane contract under which the supplier supplies fuel and also fills our aircraft tanks. In 2009, fuel prices under our contracts were re-set every 30 days and were composed of a variable and a fixed component. The variable component is defined by the refinery and follows international crude oil price fluctuations and the real/U.S. dollar exchange rate. The fixed component is a spread charged by the supplier and is usually a fixed cost per liter during the term of the contract. We currently operate a tankering program under which we fill the fuel tanks of our aircraft in regions where fuel prices are lower. We also provide our pilots with training in fuel management techniques, such as carefully selecting flight altitudes to optimize fuel efficiency.

     Fuel costs are extremely volatile, as they are subject to many global economic and geopolitical factors that we can neither control nor accurately predict. Because international prices for jet fuel are denominated in U.S. dollars, our fuel costs, though payable in reais, are subject not only to price fluctuations but also to exchange rate fluctuations. We maintain a fuel and foreign exchange hedging program, based upon policies which define volume, price targets and instruments for multi-year periods, under which we enter into fuel and currency hedging agreements with various counterparties providing for price protection in connection with the purchase of fuel. Our hedging positions cover short-term periods, and are adjusted weekly or more frequently as conditions require. Our hedging practices are executed by our internal risk management committee and overseen by the risk policies committee of our board of directors. The risk policies committee of our board of directors meets quarterly or more often, if called, and its main responsibilities are to assess the effectiveness of our hedging policies, recommend amendments when and where appropriate and establish its views regarding fuel price trends. We use risk management instruments that have a high correlation with the underlying assets so as to reduce our exposure. We require that all of our risk management instruments be liquid so as to allow us to make position adjustments and have prices that are widely disclosed. We also avoid concentration of credit and product risk. We have not otherwise entered into arrangements to guarantee our supply of fuel and we cannot provide assurance that our hedging program is sufficient to protect us against significant increases in the price of fuel. As of December 31, 2009, we had hedged 22% on average for our projected fuel requirements for 2010 and 5.5% in average for our projected expenditures in foreign currency. The fuel hedges are based on call options and the foreign currency hedges are divided in 67% in call options and 33% in futures contracts.

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The following chart summarizes our fuel consumption and costs for the periods indicated:

    Year Ended December 31, 
   
    2008    2009 
     
Liters consumed (in thousands)   1,364,719    1,291,412 
Total cost (in thousands)   R$2,630,834    R$1,813,104 
Average price per liter    R$1.93    R$ 1.40 
% change in price per liter    53.7    (27.26)
Percent of operating expenses    40.5%    32.3% 

Safety and Security

     Our most important priority is the safety of our passengers and employees. We maintain our aircraft in strict accordance with manufacturer specifications and all applicable safety regulations, and perform routine line maintenance every day. Our pilots have extensive experience, with flight captains having more than 10,000 hours of career flight time, and we conduct ongoing courses, extensive flight simulation training and seminars addressing the latest developments in safety and security issues. We closely follow the standards established by the Air Accident Prevention Program of the ANAC and we have installed the Flight Operations Quality Assurance System, which maximizes proactive prevention of incidents through the systematic analysis of the flight data recorder system. All of our aircraft are also equipped with Maintenance Operations Quality Assurance, a troubleshooting program that monitors performance and aircraft engine trends. The Brazilian civil aviation market follows the highest recognized safety standards in the world. We are also an active member of the Flight Safety Foundation, a foundation for the exchange of information about flight safety. In June 2009, we created the office of Safety Officer which reports directly to our board of directors and whose main goal is to oversee flight safety and report directly to our highest management level.

Environmental Sustainability

     We constantly invest in becoming more environmentally sustainable and have recently implemented the following actions:

In addition in recent years we have also implemented the following actions:

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Insurance

     We maintain passenger liability insurance in an amount consistent with industry practice and we insure our aircraft against losses and damages on an “all risks” basis. We are required by the ANAC to maintain insurance coverage for general liability against terrorist acts or acts of war with a minimum amount of US$0.8 billion. We have obtained all insurance coverage required by the terms of our leasing agreements. We believe our insurance coverage is consistent with airline industry standards in Brazil and is appropriate to protect us from material loss in light of the activities we conduct. No assurance can be given, however, that the amount of insurance we carry will be sufficient to protect us from material loss.

Competition

Domestic

     Airlines in Brazil compete primarily on the basis of routes, fare levels, frequency of flights, capacity, airport operating rights and presence, reliability of services, brand recognition, frequent flyer programs and customer service.

     Our main competitor in Brazil is TAM Linhas Aéreas S.A., or TAM, which is a full-service scheduled carrier offering flights on domestic routes and international routes. We also face domestic competition from other domestic scheduled carriers, regional airlines and charter airlines, which mainly have regional networks.

     As the growth in the Brazilian airline sector evolves, we may face increased competition from our primary competitors and charter airlines as well as other entrants into the market that reduce their fares to attract new passengers in some of our markets.

     The following table sets forth the historical market shares on domestic routes, based on revenue passenger kilometers, of the significant airlines in Brazil for each of the periods indicated:

                                   Domestic Market Share— Scheduled Airlines    2006    2007    2008    2009 
         
Gol    34.0%    43.0%    42.4%    41.4% 
TAM    47.8%    48.8%    50.4%    45.6% 
Others    18.2%    8.2%    7.2%    13.0% 
         
Source: Advanced Comparative Data (Dados Comparativos Avançados) 2006—2009                 

     Domestically, we also face competition from ground transportation alternatives, primarily interstate bus companies. In 2007, interstate bus companies transported over 131 million passengers, according to preliminary data from the National Ground Transportation Agency (Agência Nacional de Transportes Terrestres), and given the absence of meaningful passenger rail services in Brazil, travel by bus has traditionally been the only low-cost option for long-distance travel for a significant portion of Brazil’s population. We believe that our low-cost business model has given us flexibility in setting our fares to stimulate demand for air travel among passengers who in the past have traveled long distances primarily by bus. In particular, the highly competitive fares we have offered for travel on our night flights, which have often been comparable to bus fares for the same destinations, have had the effect of providing direct competition for interstate bus companies on these routes.

International

     As we expand our international services in South America and the Caribbean, our pool of competitors will increase and we will face competition from Brazilian and South American airlines that are already established in the international market and that participate in strategic alliances and code sharing arrangements.

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Industry Overview

     Since air transportation has historically been affordable only to the higher income segment of Brazil’s population, resulting in a comparatively low level of air travel, we believe that the low-cost, low-fare business model has the potential to significantly increase the use of air transportation in Brazil. Brazil is the fifth largest domestic aviation market in the world and, according to the ANAC, there were 50.1 million domestic enplanements and 6.0 million international enplanements on Brazilian carriers in Brazil in 2008, out of a total population of approximately 185 million, according to IBGE. In contrast, according to the U.S. Department of Transportation, the United States had 652 million domestic enplanements and 158 million international enplanements in 2008, out of a total population of approximately 308 million, based on the latest U.S. census estimates.

     The business travel segment is the largest component of Brazilian air transportation demand and the most profitable in the market. According to company data, business travel represented more than 60% of the total demand for domestic air travel in 2009, which we believe is significantly higher than the business travel portion of domestic air travel in the global aviation sector. According to data collected from the ANAC, flights between Rio de Janeiro and São Paulo accounted for 13.2% of all domestic passengers in 2008. The ten busiest routes accounted for 27.8% of all domestic air passengers in 2008, while the ten busiest airports accounted for 74.2% and 72.6% of all domestic passenger traffic through INFRAERO airports in terms of arrivals and departures in 2008 and 2009, respectively.

     In light of economic growth, the domestic market has significantly increased in the last years from 76 million in 2003 to more than 128 million in 2009, according to FGV and IBGE, due to increased passenger volumes and both the soccer confederations and world cup scheduled for 2013 and 2014, respectively, in Brazil and the summer Olympics scheduled for 2016 in Rio de Janeiro, the Brazilian airport infrastructure will need substantial improvements.

     In parts of 2006 and 2007, technical and operational problems in the Brazilian civil aviation system, including air traffic control, airspace coordination and airport administration adversely affected airline operations. Various measures, such as hiring and training of additional air-traffic control personnel, investments in new systems and additional terminal and runway capacity in congested airports, have been taken by the relevant governmental authorities and discussions are currently ongoing with a view to possible additional changes in the organizational structure of the aviation infrastructure system.

     In 2009 the CONAC announced that it would propose to the Brazilian Government a change to the regulatory limit of foreign ownership in Brazilian airline companies from 20% to 49%. This proposal may be accepted by the Brazilian Government and become a draft bill during 2011.

     Since 2009, the Brazilian government has been analyzing the privatization of airports or granting of rights for private concessionaries to operate currently existing airports or expansions of those airports but has not yet made any formal announcements as to its decision.

Brazilian Civil Aviation Market Evolution

     Since 1970, Brazil has for the most part had stable growth in revenue passenger kilometers. From 1970 to 2009 domestic revenue passenger kilometers grew at a compound annual rate of 8.9% . In the past 9 years, the domestic market generally experienced year-over-year growth in revenue passenger kilometers except in times of significant economic or political distress, such as the petroleum crisis in the 1970s, the Brazilian sovereign debt crisis in the early 1980s and the economic and political distress in Brazil in the early 1990s.

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     From 2005 to 2009, the compound annual growth rate in industry passenger traffic, in terms of domestic revenue passenger kilometers, was 13.7%, versus a compound annual growth rate in available industry capacity, in terms of available seat kilometers, of 15.1% . Domestic industry load factors, calculated as revenue passenger kilometers divided by available seat kilometers, have averaged 66.7% over the same period. The table below shows the figures of domestic industry passenger traffic and available capacity for the periods indicated:

    2005    2006    2007    2008    2009 
           
     (in millions, except percentages)
 Available Seat Kilometers    50,182    55,608    64,597    72,841    84,283 
 Available Seat Kilometers Growth    11.5%    10.8%    16.2%    12.8%    15.7% 
 Revenue Passenger Kilometers    35,429    39,802    44,446    47,838    56,255 
 Revenue Passenger Kilometers Growth    19.4%    12.3%    11.7%    7.4%    17.6% 
 
 Load Factor    70.2%    71.6%    68.8%    65.5%    66.7% 
           
Source: ANAC, Dados Comparativos Avançados.                     

Regulation of the Brazilian Civil Aviation Market

The Brazilian Aviation Authorities and Regulation Overview

     Air transportation services are considered a public service and are subject to extensive regulation and monitoring by the CONAC and the ANAC. Air transportation services are also regulated by the Brazilian Federal Constitution and the Brazilian Aeronautical Code. The Brazilian civil air transportation system is controlled by several authorities. The ANAC is responsible for the regulation of the airlines, the DECEA is responsible for airspace control and INFRAERO is responsible for airport administration.

     The following chart illustrates the main regulatory bodies, their responsibilities and reporting lines within the Brazilian governmental structure.


     The ANAC is currently responsible for guiding, planning, stimulating and supporting the activities of public and private civil aviation companies in Brazil, and also regulates flying operations generally and economic issues affecting air transportation, including matters relating to air safety, certification and fitness, insurance, consumer protection and competitive practices.

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     On October 5, 2001, the Department of Air Space Control (Departamento de Controle do Espaço Aéreo), or DECEA, was created. It reports indirectly to the Brazilian Minister of Defense. The DECEA is responsible for planning, administrating and controlling activities related to airspace, aeronautical telecommunications and technology. This includes approving and overseeing the implementation of equipment as well as of navigation, meteorological and radar systems. The DECEA also controls and supervises the Brazilian Airspace Control System.

     INFRAERO, a state-controlled corporation reporting to the High Command of Aeronautics, is in charge of managing, operating and controlling federal airports, including control towers and airport safety operations. See “Airport Infrastructure” below.

     The CONAC is an advisory body of the President of Brazil and its upper level advisory board is composed of the Minister of Defense, the Minister of Foreign Affairs, the Minister of Treasury, the Minister of Development, Industry and International Trade, the Minister of Tourism, the Minister Chief of the Civil Cabinet, the Minister of Justice and the Commandant of the Air Force. The CONAC has the authority to establish national civil aviation policies that may be adopted and enforced by the High Command of Aeronautics and by the ANAC. The CONAC establishes guidelines relating to the proper representation of Brazil in conventions, treaties and other actions related to international air transportation, airport infrastructure, the granting of supplemental funds to be used for the benefit of airlines and airports based on strategic, economic or tourism-related aspects, the coordination of civil aviation, air safety, the granting of air routes and concessions, as well as permission for the provision of commercial air transportation services.

     The Brazilian Aeronautical Code provides for the main rules and regulations relating to airport infrastructure and operation, flight safety and protection, airline certification, lease structuring, burdening, disposal, registration and licensing of aircraft; crew training; concessions, inspection and control of airlines; public and private air carrier services; civil liability of airlines; and penalties in case of infringements.

     Recently, in February 2009, the Federal Government approved the new Civil Aviation National Policy (Política Nacional de Aviação Civil), or PNAC. Although the PNAC does not establish any immediate measure, it contains the main guidelines for the national civil aviation system. It encourages the Ministry of Defense, CONAC and ANAC to issue regulations on strategic matters such as safety, competition, environmental, and consumers’ issues, as well as to inspect, review and valuate the activities of all operating companies.

     The Brazilian government recognized and ratified, and must comply with, the Warsaw Convention of 1929, the Chicago Convention of 1944, and the Geneva Convention of 1948, the three leading international conventions relating to worldwide commercial air transportation activities.

Route Rights

     Domestic routes. For the granting of new routes and changes to existing ones, the ANAC evaluates the actual capacity of the airport infrastructure where such route is or would be operated. In addition, route frequencies are granted subject to the condition that they are operated on a frequent basis. Any airline’s route frequency rights may be terminated if the airline (a) fails to begin operation of a given route for a period exceeding 15 days, (b) fails to maintain at least 75% of flights provided for in its air transportation schedule (Horário de Transporte Aéreo), or HOTRAN, for any 90-day period or (c) suspends its operation for a period exceeding 30 days. The ANAC approval of new routes or changes to existing routes is given in the course of an administrative procedure and requires no changes to existing concession agreements.

     Once routes are granted, they must be immediately reflected in the HOTRAN, which is the official schedule report of all routes that an airline can operate. The HOTRAN provides not only for the routes but also the times of arrival at and departure from certain airports, none of which may be changed without the prior consent of the ANAC. According to Brazilian laws and regulations, an airline cannot sell, assign or transfer its routes to another airline.

     International routes. In general, requests for new international routes, or changes to existing routes, must be filed by each interested Brazilian airline that has been previously qualified by the ANAC to provide international services, with the SRI (Superintendence of International Relations of the ANAC), which, based on the provisions of the applicable bilateral agreement and general policies of the Brazilian aviation authorities, submits the request to the ANAC for approval. International route rights for all countries, as well as the corresponding transit rights, derive from

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bilateral air transport agreements negotiated between Brazil and foreign governments. Under such agreements, each government grants to the other the right to designate one or more of its domestic airlines to operate scheduled service between certain destinations in each country. Airlines are only entitled to apply for new international routes when they are made available under these agreements. For the granting of new routes and changes to existing ones, the ANAC has the authority to approve Brazilian airlines to operate new routes, subject to the airline having filed studies satisfactory to the ANAC demonstrating the technical and financial viability of such routes and fulfilling certain conditions in respect of the concession for such routes. Any airline’s international route frequency rights may be terminated if the airline fails to maintain at least 80% of flights provided for in its air transportation schedule HOTRAN for any 180-day period or suspends its operation for a period exceeding 180 days.

Slots Policy

     Domestic. Under Brazilian law, a domestic slot is a concession of the ANAC, which is reflected in the airline’s HOTRAN. Each HOTRAN represents the authorization for an airline to depart from and arrive at specific airports within a predetermined timeframe. Such period of time is known as an “airport slot” and provides that an airline can operate at the specific airport at the times established in the HOTRAN. An airline must request an additional slot from the ANAC with a minimum of two months’ prior notice.

     Congonhas airport in the city of São Paulo is a coordinated airport, where slots must be allocated to an airline company before it starts its operations there. Although it is difficult to obtain a slot in Congonhas airport, on March 8, 2010 ANAC reallocated 202 Congonhas’ slots that were idle. When the capacity at the airport increases and more slots become available, 20% of those slots must be distributed to new entrants who will have a preference to their assignment. The remaining slots will be allocated to the other airline companies, including us. The Santos-Dumont airport in Rio de Janeiro, a highly utilized airport with half-hourly shuttle flights between São Paulo and Rio de Janeiro, is also a coordinated airport with certain slot restrictions. Several other Brazilian airports, for example the Brasília International Airport and São Paulo International Airport in Guarulhos have limited the number of slots per day due to infrastructural limitations at these airports.

     Recently, ANAC has imposed schedule restrictions to several Brazilian airports from which we operate. Operating restrictions, including the prohibition of international flights’ operations and the prohibition of civil aircraft’s operation after 11:00 p.m. and before 6:00 a.m., were imposed for Congonhas Airport, one of the busiest Brazilian airports and the most important airport for our operations. No assurance can be given that these or other government measures will not have a material adverse effect on our business and results of operations.

     CONAC has recently taken measures to minimize the recent technical and operational problems in the São Paulo airports, redistributing air traffic from the Congonhas airport to the airports of Guarulhos and has mentioned its intention to adjust tariffs for the use of busy airport hubs to encourage further redistribution of air traffic.

     In the last quarter of 2008, the ANAC proposed a new regulation for the allocation of slots to domestic airlines. This regulation governs the manner of allocation of slots, by organizing rotations among the concessionaires, determining the procedures for registration, qualification, judgment and homologation of a request for slot concessions in coordinated airports. Additionally, such regulation also establishes the rules permitting transfers of slots between concessionaires. ANAC’s resolution has not yet been released.

     Also, in 2008, the ANAC enacted a regulation providing that the minimum ground time for aircraft between landing and take-off must be 40 minutes at the International Airport of Sao Paulo in Guarulhos, the international airport of Rio de Janeiro Galeão and at the Brasília airports, and 30 minutes at all other Brazilian airports. This regulation negatively affected our ability to increase aircraft utilization by minimizing turnaround times between flights.

Airport Infrastructure

     INFRAERO, a state-controlled corporation reporting to the Ministry of Defense, is in charge of managing, operating and controlling federal airports, including control towers and airport safety operations.

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     Smaller, regional airports may belong to states or municipalities within Brazil and, in such cases, are often managed by local governmental entities. At most important Brazilian airports, INFRAERO performs safety and security activities, including passenger and baggage screening, cargo security measures and airport security.

     The use of areas within federal airports, such as hangars and check-in counters, is subject to a concession by INFRAERO. If there is more than one applicant for the use of a specific airport area, INFRAERO may conduct a public bidding process for the granting of the concession.

     We have renewable concessions with terms varying from one to five years from INFRAERO to use and operate all of our facilities at each of the major airports that we serve. Our concession agreements for our terminals’ passenger service facilities, which include check-in counters and ticket offices, operations support area and baggage service offices, contain provisions for periodic adjustments of the lease rates and the extension of the concession term.

     Of the 67 Brazilian airports managed by INFRAERO, approximately 20 airports are receiving infrastructure investments and upgrades. The airport upgrade plan does not require contributions or investments by the Brazilian airlines and is not expected to be accompanied by increases in landing fees or passenger taxes on air travel.

Concession for Air Transportation Services

     According to the Brazilian Federal Constitution, the Brazilian government is responsible for public services related to airspace as well as airport infrastructure, and may provide these services directly or through third parties under concessions or authorizations. According to the Brazilian Aeronautical Code and regulations issued by the CONAC, the application for a concession to operate regular air transportation services is subject to a license granted by the ANAC to operate an airline and to explore regular air transportation services. The applicant is required by the ANAC to have met certain economic, financial, technical, operational and administrative requirements in order to be granted such license. Additionally, a concession applicant must be an entity incorporated in Brazil, duly registered with the Brazilian Aeronautical Registry (Registro Aeronáutico Brasileiro), or RAB, must have a valid airline operating certificate (Certificado de Homologação de Empresa de Transporte Aéreo), or CHETA, and must also comply with certain ownership restrictions. See “—Restrictions to the Ownership of Shares Issued by Concessionaires of Air Transportation Services.” The ANAC has the authority to revoke a concession for failure by the airline to comply with the terms of the Brazilian Aeronautical Code, the complementary laws and regulations and the terms of the concession agreement.

     Our concession was granted on January 2, 2001 by the High Command of Aeronautics of the Ministry of Defense. The concession agreement can be terminated if, among other things, we fail to meet specified service levels, cease operations or declare bankruptcy.

     The Brazilian Aeronautical Code and the regulations issued by the CONAC and ANAC do not expressly provide for public bidding processes and currently it is not necessary to conduct public bidding processes prior to granting of concessions for the operation of air transportation services. Due to the intense growth of the civil aviation sector, this rule may be changed by the government, in order to allow more competition or to achieve other political purposes.

Import of Aircraft into Brazil

     The import of civil or commercial aircraft into Brazil is subject to prior authorization by the COTAC, which is a sub-department of the ANAC. Such import authorizations usually follow the general procedures for import of goods into Brazil, after which the importer must request the registration of the aircraft with the RAB.

Registration of Aircraft

     The registration of aircraft in Brazil is governed by the Brazilian Aeronautical Code, under which no aircraft is allowed to fly in Brazilian airspace, or land in or take off from Brazilian territory, without having been properly registered. In order to be registered and continue to be registered in Brazil, an aircraft must have a certificate of registration (certificado de matrícula) and a certificate of airworthiness (certificado de aeronavegabilidade), both of which are issued by the RAB after technical inspection of the aircraft by the ANAC. A certificate of registration attributes Brazilian nationality to the aircraft and is evidence of its enrollment with the competent aviation authority. A certificate of airworthiness is generally valid for six years from the date of the ANAC’s inspection and authorizes

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the aircraft to fly in Brazilian airspace, subject to continuing compliance with certain technical requirements and conditions. The registration of any aircraft may be cancelled if it is found that the aircraft is not in compliance with the requirements for registration and, in particular, if the aircraft has failed to comply with any applicable safety requirements specified by the ANAC or the Brazilian Aeronautical Code.

     All information relating to the contractual status of an aircraft, including purchase and sale agreements, operating leases and mortgages, must be filed with the RAB in order to provide the public with an updated record of any amendments made to the aircraft certificate of registration.

Restrictions on the Ownership of Shares Issued by Concessionaires of Air Transportation Services

     According to the Brazilian Aeronautical Code, in order to be eligible for a concession for operation of regular services, the entity operating the concession must have at least 80% of its voting stock held directly or indirectly by Brazilian citizens and must have certain management positions entrusted to Brazilian citizens. The Brazilian Aeronautical Code also imposes certain restrictions on the transfer of capital stock of concessionaires of air transportation services, such as VRG, including the following:

     The Registrant holds substantially all of the shares of VRG, which are public concessionaires of air transportation services in Brazil. Under the Brazilian Aeronautical Code, the restrictions on the transfer of shares described above apply only to companies that hold concessions to provide regular air transportation services. Therefore, the restrictions do not apply to the Registrant.

Environmental Regulation

     Brazilian airlines are subject to various federal, state and municipal laws and regulations relating to the protection of the environment, including the disposal of materials and chemical substances and aircraft noise. These laws and regulations are enforced by various governmental authorities. The non-compliance with such laws and regulations may subject the violator to administrative and criminal sanctions, in addition to the obligation to repair or to pay damages caused to the environment and third parties. As far as civil liabilities are concerned, Brazilian environmental laws adopt the strict liability regime. Moreover, pursuant to Brazilian environmental laws and regulations, the piercing of the corporate veil of a company may occur in order to ensure enough financial resources to the recovery of damages caused against the environment. For example, according to an ANAC ordinance, the operation of scheduled commercial flights to and from the Congonhas airport is subject to a noise curfew from 11:00 p.m. to 6:00 a.m. because of its proximity to residential areas in São Paulo. Our scheduled flights to Congonhas airport are in full compliance with the noise curfew limits.

     We adopted several Environmental Management System (EMS) procedures with our suppliers and use technical audits to enforce compliance. We exercise caution, and may reject goods and services from companies that do not meet our environmental protection parameters unless confirmation of compliance is received.

     We are monitoring and analyzing the developments regarding amendments to Kyoto protocol and emissions regulations in the United States and Europe and may in the future be obliged to acquire carbon credits for the operation of our business. No legislation on this matter has yet been enacted in Brazil.

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Pending Legislation

      In March 2001, CONAC published for public consultation a draft of a bill to replace the Brazilian Aeronautical Code and modernize the basic laws and regulations relating to the industry. In general, this draft deals with matters related to civil aviation, including airport concessions, consumer protection, increased foreign shareholding participation in airlines, limitation of airlines’ civil liability, compulsory insurance and fines. This draft bill is still under discussion in the House of Representatives and, if approved, must be submitted to the Federal Senate, for new approval, before being sent to the government in order to receive the presidential approval.

     In addition, the Brazilian government has been analyzing granting of rights for private concessionaries to build new airports, expand or operate currently existing airports.

Cape Town Convention

     The Cape Town Convention aims at promoting investments in aircraft by facilitating the granting of guarantees on aircraft lease and purchase transactions. The Brazilian government has not yet ratified the Cape Town Convention.

     The Export-Import Bank of the United States (“Ex-Im”) has extended its offer to reduce by one-third the premium it charges in connection with guarantees of large commercial aircraft financings for those countries that ratify the Cape Town Convention. If the Cape Town Convention is ratified by the government of Brazil, future guarantee premiums charged to Gol by Ex-Im (“Exposure Fees”) may be reduced by as much as one percent for aircraft that are scheduled for delivery prior to December 31, 2010; provided that the underlying purchase contract was a firm contract as of April 30, 2007.

     Ex-Im has also agreed on a common approach with European export-credit agencies on offering export credits for commercial aircraft. Among other things, the new Sector Understanding on Export Credits for Civil Aircraft (the “ASU”) sets forth minimum guarantee premium rates applicable to aircraft delivered on or after January 1, 2011, or under a firm contract entered into after April 30, 2007. While subject to modification, the exposure fees paid by Gol on applicable aircraft are likely to increase, the amount of any such increase will depend upon the credit risk assigned to Gol by the participating export-agencies pursuant to the protocols of the ASU. In addition, Gol will no longer be able to finance the amortization payments of loans guaranteed by Ex-Im with SOAR loan facilities.

C. Organizational Structure

     The Registrant is a holding company, which owns directly or indirectly shares of five subsidiaries: VRG and four offshore finance subsidiaries Gol Finance Cayman and GAC Inc., which owns Sky Finance and Sky Finance II. VRG is the Registrant’s operating subsidiary, under which we conduct our business. Gol Finance, GAC Inc., Sky Finance and Sky Finance II are off-shore companies established for the purpose of facilitating cross-border general and aircraft financing transactions.

D. Property, Plant and Equipment

     Our primary corporate offices are located in two buildings in São Paulo. Our commercial, operations, technology, finance and administrative staff is based primarily at our headquarters. We have concessions to use other airport buildings and hangars throughout Brazil, including a part of a hangar at Congonhas airport where we perform aircraft maintenance. We own a state-of-the-art Aircraft Maintenance Center in Confins, in the State of Minas Gerais. The certification authorizes maintenance services for Boeing 737-300s and Boeing Next Generation 737-700 and 800s. We use the new facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment. See also “Item 4—Business Overview—Aircraft” and note 6 to our financial statements as of and for the year ended December 31, 2009.

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     You should read this discussion in conjunction with our consolidated financial statements and the related notes and the other financial information included elsewhere in this annual report.

A. Operating Results

Revenues

     We derive our revenues primarily from transporting passengers on our aircraft. In 2009, 88.1% of our revenues were derived from passenger fares, and the remaining 11.9% of our revenues were derived from ancillary revenues principally from our cargo business, which utilizes available cargo space on our passenger flights. Nearly all of our passenger revenue and cargo revenue is denominated in reais. Passenger revenue, including revenue from our Smiles loyalty program, is recognized either when transportation is provided or when the ticket expires unused. Cargo revenue is recognized when transportation is provided. Other ancillary revenue consists primarily of ticket change fees, excess baggage charges, interest on installment sales and other incidental services. Passenger revenues are based upon our capacity, load factor and yield. Our capacity is measured in terms of available seat kilometers, which represents the number of seats we make available on our aircraft multiplied by the number of kilometers the seats are flown. Load factor, or the percentage of our capacity that is actually used by paying customers, is calculated by dividing revenue passenger kilometers by available seat kilometers. Yield is the average amount that one passenger pays to fly one kilometer.

The following table demonstrates our main financial and operating performance indicators in 2008 and 2009.

         Year Ended 
       December 31, 
   
    2008    2009 
     
Financial and Operating Data:         
Load-factor    61.6%    65.2% 
Break-even load-factor    62.5%    60.8% 
Aircraft utilization (block hours per day)   12.1    11.6 
Yield per passenger kilometer (cents)   23.3    20.3 
Passenger revenue per available seat kilometer (cents)   14.3    13.3 
Operating revenue per available seat kilometer (cents)   15.6    15.1 
Number of departures    268,540    273,602 
Operating aircraft    106    108 

     Our revenues are net of certain taxes, including state-value added taxes, Imposto sobre Circulação de Mercadorias e Serviços, or ICMS; federal social contribution taxes, including Programa de Integração Social, or PIS; and the Contribuição Social para o Financiamento da Seguridade Social, or COFINS. ICMS does not apply to passenger revenues. The average rate of ICMS on cargo revenues varies by state from 4% to 12%. As a general rule, PIS and COFINS are imposed at rates of 1.65% and 7.6%, respectively, of total revenues.

     Generally, the revenues from and profitability of our flights reach their highest levels during the January (summer) and July (winter) vacation periods and in the final two weeks of December during the Christmas holiday season. The week during which the annual Carnival celebrations take place in Brazil is generally accompanied by a decrease in load factors. Given our high proportion of fixed costs, this seasonality is likely to cause our results of operations to vary from quarter to quarter. We generate most of our revenue from ticket sales through our website, and we are one of the largest and leading e-commerce companies in Brazil in terms of net sales through the Internet.

     The ANAC and the aviation authorities of the other countries in which we operate may influence our ability to generate revenues. In Brazil, the ANAC approves the concession of slots, entry of new companies, launch of new routes, increases in route frequencies and lease or acquisition of new aircraft. Our ability to grow and to increase our revenues is dependent on the receipt of approvals for new routes, increased frequencies and additional aircraft from the ANAC.

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Operating Expenses

     We seek to lower our operating expenses by operating a standardized fleet with a single-class of service, having one of the newest fleets in the industry, utilizing our aircraft efficiently, using and encouraging low-cost ticket sales and distribution processes.

     The main components of operating expenses include those related to aircraft fuel, aircraft rent, aircraft maintenance, sales and marketing, and salaries, wages and benefits provided to employees, including provisions for our profit sharing plan.

     Our aircraft fuel expenses are higher than those of low-cost airlines in the United States and Europe because the Brazilian infrastructure to produce, transport and store fuel is expensive and underdeveloped, especially in the north and northeast regions of the country. In addition, taxes applicable to the sale of jet fuel are high and are passed along to us. Our aircraft fuel expenses are variable and fluctuate based on global oil prices. Since global oil prices are U.S. dollar-based, our aircraft fuel costs are also linked to fluctuations in the exchange rate of the real versus the U.S. dollar. In 2009, fuel expenses represented 32.2% of our total operating expenses, as compared to 40.5% in 2008. In 2008, the price of West Texas Intermediate crude oil, a benchmark widely used for crude oil prices that is measured in barrels and quoted in U.S. dollars, varied significantly, reaching an all-time high of US$ 145 in March, 2008 and decreasing to US$44.60 per barrel at the end of 2008. At year end 2009 the price per barrel was US$79.36. We currently enter into short-term arrangements to hedge against increases in oil prices and foreign exchange fluctuations. We believe that we have an advantage compared to industry peers in Brazil in aircraft fuel expenses because we mainly use Boeing 737 Next Generation aircraft that are more fuel efficient than other aircraft in the industry. We expect these advantages to improve in the future due to the increase of our fleet of fuel efficient new Boeing 737-800 Next Generation aircraft.

     Our aircraft rent expenses are in U.S. dollars and have increased in line with the expansion of our operations. We use short-term arrangements to hedge against exchange rate exposure related to our lease payment obligations. In addition, leases for 20 of our aircraft are subject to floating-rate payment obligations that are based on fluctuations in international interest rates. We currently have hedging policies in place to manage our interest rate exposure.

     Our maintenance, material and repair expenses consist of light (line) and scheduled heavy (structural) maintenance of our aircraft. Line maintenance and repair expenses are charged to operating expenses as incurred. Structural maintenance for aircraft leased under finance leases is capitalized and amortized over the life of the maintenance cycle. Once the maintenance is performed, accrual does not commence again until the maintenance status is reduced below the return condition. Since the average age of our operating fleet was 6 years at December 31, 2009 and most of the parts on our aircraft are under multi-year warranties, our aircraft have required a low level of maintenance and therefore we have incurred low maintenance expenses. Our aircraft are covered by warranties that have an average term of three to five years. The warranties on the aircraft we received in 2009 under our firm purchase order with Boeing will start expiring in 2013. Thus, with regard to the accounting for aircraft maintenance and repair costs, our current and past results of operations may not be indicative of future results. Our Aircraft Maintenance Center in Confins, in the State of Minas Gerais is certificated for the maintenance services for Boeing 737-300s and Boeing Next Generation 737-700 and 800s. We currently use the new facility for airframe heavy checks, line maintenance, aircraft painting and aircraft interior refurbishment. We believe that we have an advantage compared to industry peers in maintenance, materials and repairs expenses due to the use of Boeing 737 Next Generation aircraft that allows for phased maintenance as described in this annual report, and due to the internalization of our maintenance. We believe that this advantage will remain in the future.

     Our sales and marketing expenses include commissions paid to travel agents, fees paid for our own and third-party reservation systems and agents, fees paid to credit card companies and advertising. Our distribution costs are lower than those of other airlines in Brazil on a per available seat kilometer basis because a higher proportion of our customers purchase tickets from us directly through our website instead of through traditional distribution channels, such as ticket offices, and we have comparatively fewer sales made through higher cost global distribution systems. We generated 92.4% of our consolidated passenger revenues through our website and API systems in the years ended December 31, 2008 and 2009, including internet sales through travel agents. For these reasons, we believe that we have an advantage compared to industry peers in sales and marketing expenses and expect this advantage will remain in the future.

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     Salaries, wages and benefits paid to our employees include annual cost of living adjustments and provisions made for our profit sharing plan. We have no seniority-related increases in these costs due to our salary structure. We believe that we have an advantage compared to industry peers in salaries, wages and benefits expenses due to generally lower labor costs in Brazil as compared to other countries. We believe that these advantages will continue to exist in the future.

     Aircraft and traffic servicing expenses include ground handling and the cost of airport facilities. Other operating expenses consist of general and administrative expenses, purchased services, equipment rentals, passenger refreshments, communication costs, supplies and professional fees.

     Our break-even load factor, which is the passenger load factor that will result in operating revenues being equal to operating expenses, decreased from 62.5% to 60.8% between 2008 and 2009. This decrease has been primarily due to an increase in yield, which resulted in an increase in revenues per available seat kilometer, partially offset by the decrease in utilization, which increased our cost per available seat kilometer, and spreading of fixed costs over a greater number of available seat kilometers which benefited also our cost per available seat kilometer.

Brazilian Economic Environment

     As a company with most of its operations currently in Brazil, we are affected by general economic conditions in the country. While our growth since 2001 has been primarily driven by our expansion into new markets and increased flight frequencies, we have also been affected by macroeconomic conditions in Brazil. Our growth outpaced that of our primary competitors because of strong demand for our lower fare service. In 2009, we grew 14.9% in terms of revenue passenger kilometers in the domestic market and considering both international and domestic market 3.1% . The relatively lower consolidated growth rate compared to the domestic market is due to the discontinuation of intercontinental flights operated in the first half of 2008, and the negative impact from the swine flu on our routes to Argentina and Chile. We believe the rate of growth in Brazil is important in determining our future growth capacity and our results of operations.

     Our results of operations are affected by currency fluctuations. The vast majority of our revenues are denominated in reais (with a small portion of our revenues from our international flights being denominated in other currencies), but a significant part of our operating expenses are either payable in or affected by the U.S. dollar, such as our aircraft operating lease payments, related maintenance reserves and deposits, and jet fuel expenses. Based on a statistical analysis of our first seven years of operations, we believe that our revenues are highly correlated with the real/U.S. dollar exchange rate and jet fuel prices because real fluctuations and increases in jet fuel prices are generally incorporated into the fare structures of Brazilian airlines. In 2009, 52.3% of our operating expenses (including aircraft fuel) are denominated in, or linked to, U.S. dollars and therefore vary with the real/U.S. dollar exchange rate. We believe that our foreign exchange and fuel hedging programs protect us against short-term swings in the real/U.S. dollar exchange rate and jet fuel prices. Overall, we believe that the combination of our revenue stream, with its correlation to movements in the real/U.S. dollar exchange rate, and short-term hedges on the U.S. dollar-linked portion of our expenses, will mitigate the adverse effect on our operating expenses of abrupt movements in the real/ U.S. dollar exchange rate.

     Inflation has also had, and may continue to have, effects on our financial condition and results of operations. In 2009, 47.7% of our operating expenses (excluding aircraft fuel) were denominated in reais, and the suppliers and service providers of these expense items generally attempt to increase their prices to reflect Brazilian inflation.

     In the second half of 2008, the Brazilian economy began to reflect the effects of the global financial markets and economic crisis, with slower GDP growth, a weakening real, increasing unemployment rates, decreasing liquidity and reduced consumer spending. This led to a slow down in the air transportation industry growth rate during the first half of 2009, which was offset by a strong growth observed during the second half of 2009 due to (i) an improved and more stable macroeconomic scenario and a stimulating demand and pricing environment, and (ii) an improved consumer confidence in Brazil driven by the election of Brazil to host the soccer 2013 Confederations Cup and 2014 World Cup, and the election of Rio de Janeiro as the host of the Summer Olympic Games in 2016.

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     The following table shows data for real GDP growth, inflation, interest rates, the U.S. dollar exchange rate and crude oil prices for and as of the periods indicated.

    December 31, 
   
    2007    2008    2009 
       
 Real growth in gross domestic product    5.4%    5.1%    (0.2)% 
 Inflation (IGP-M)(1)   7.7%    9.8%    (1.7)% 
 Inflation (IPCA)(2)   4.5%    5.9%    4.3% 
 CDI rate(3)   11.1%    13.5%    8.6% 
 LIBOR rate(4)   4.7%    1.4%    0.3% 
 Depreciation (appreciation) of the real vs. U.S. dollar    (20.7)%    32.2%    (25.5)% 
 Period-end exchange rate—US$1.00    R$1.7713    R$ 2.337    R$1.7412 
 Average exchange rate—US$1.00(5)   R$1.9483    R$1.8364    R$1.9946 
 Period-end West Texas intermediate crude (per barrel)   US$96.00    US$ 44.6    US$79.36 
 Period-end Increase (decrease) in West Texas intermediate crude             
         (per barrel)   57.2%    (53.5)%    (77.9)% 
 West Texas Intermediate crude (average per barrel during period)   US$72.23    US$99.92    US$62.09 
 Average Increase (decrease) in West Texas Intermediate crude (per barrel)   9.3%    (38.3)%    (37.8)% 
             
       
Sources: Fundação Getúlio Vargas, the Central Bank and Bloomberg             
           (1)Inflation (IGP-M) is the general market price index measured by the Fundação Getúlio Vargas. 
           (2)Inflation (IPCA) is a broad consumer price index measured by the Instituto Brasileiro de Geografia e Estatística. 
           (3)The CDI rate is average of inter-bank overnight rates in Brazil (accumulated for period-end month, annualized). 
           (4)Three-month U.S. dollar LIBOR rate as of the last date of the period. The LIBOR rate is the London inter-bank offer rate, which is the 
           (5)Represents the average of the exchange rates on the last day of each month during the period. 

Critical Accounting Policies

     The preparation of our consolidated financial statements in conformity with IFRS requires our management to adopt accounting policies and make estimates and judgments to develop amounts reported in our consolidated financial statements and related notes. We strive to maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the estimates that are required to prepare our consolidated financial statements. We believe that our estimates and judgments are reasonable; however, actual results and the timing of recognition of such amounts could differ from those estimates. In addition, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information.

     Critical accounting policies and estimates are those that are reflective of significant judgments and uncertainties, and potentially result in materially different outcomes under different assumptions and conditions. For a discussion of these and other accounting policies, see Note 2 to our consolidated financial statements.

     Accounting for Property, Plant and Equipment. Property, plant and equipment, including rotable parts, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method. Each component of property, plant and equipment that has a cost that is significant in relation to the overall cost of the item is depreciated separately. Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as fixed assets and generally depreciated in line with the fleet to which they relate. Pre-delivery deposits refer to prepayments made based on the agreements entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft and includes interest and finance charges incurred during the manufacture of aircraft and the leasehold improvements.

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     The following table shows a breakdown of our property, plant and equipment along with information about their respective estimated useful lives and residual values:

    Estimated Useful Life 
   
Leasehold improvements to flight equipment    Lower of lease term or useful life 
Aircraft flight equipment    25 years 
Rotables    25 years 
Maintenance and engineering equipment.    10 years 
Major overhaul expenditures    5 years 
Communication and meteorological equipment    10 years 
Computer hardware and software    5 years 

     Under IAS 16 “Property, Plant and Equipment,” major engine overhauls including replacement spares and labor costs, are treated as a separate asset component with the cost capitalized and depreciated over the period to the next major overhaul. All other replacement spares and costs relating to maintenance of fleet assets are charged to the income statement on consumption or as incurred. Interest costs incurred and exchange differences on borrowings that fund progress payments on assets under construction, including pre-delivery deposits to acquire new aircraft, are capitalized and included as part of the cost of the assets through the earlier of the date of completion or aircraft delivery. Exchange differences are capitalized to the extent that they are regarded as an adjustment to interest costs.

     In estimating the lives and expected residual values of its aircraft, the Company primarily has relied upon actual experience with the same or similar aircraft types and recommendations from Boeing, the manufacturer of the Company’s aircraft. Aircraft estimated useful lives are based on the number of “cycles” flown (one-take-off and landing). The Company has made a conversion of cycles into years based on both its historical and anticipated future utilization of the aircraft. Subsequent revisions to these estimates, which can be significant, could be caused by changes to the Company’s maintenance program, changes in utilization of the aircraft (actual cycles during a given period of time), governmental regulations related to aging aircraft, and changing market prices of new and used aircraft of the same or similar types. The Company evaluates its estimates and assumptions each reporting period and, when warranted, adjusts these estimates and assumptions. These adjustments are accounted for on a prospective basis through depreciation and amortization expense, as required by IFRS. The Company revised the depreciation rates used for aircraft under financial leases, aircraft reconfiguration and spare parts, from 5% to 4%, to reflect better compatibility with the useful life of these assets, supported on technical studies approved by the Company’s management. This change in economic useful life was applied prospectively in the financial statements since April 1, 2009. The related reduction of depreciation arising from the change in economic useful life in the year ended December 31, 2009 amounted to R$12.0 million and an increase of 1.6% in our net income before taxes for the year ended December 31, 2009.

     We evaluate annually whether there is an indication that our property, plant and equipment may be impaired. Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of the long-lived asset(s), a significant change in the long-lived asset’s physical condition, and operating or cash flow losses associated with the use of the long-lived assets. We have not identified any impairments related to our existing aircraft fleet. As of 31 December 2009 and 2008, no impairment on property, plant and equipment assets was recognized.

     Lease accounting. Aircraft lease agreements are accounted as either operating or capital leases (finance leases). When the risks and benefits of the lease are transferred to us, as lessee, the lease is classified as capital lease. Capital leases are accounted as an acquisition obtained through a financing, with the aircraft recorded as a fixed asset and a corresponding liability recorded as a loan. Capital leases are recorded based on the lesser of the fair value of the aircraft or the present value of the minimum lease payments, discounted at an implicit interest rate, when it is clearly identified in the lease agreement, or market interest rate. The aircraft is depreciated through the lesser of its useful life or the lease term. Interest expense is recognized through the effective interest rate method, based on the implicit interest rate of the lease. Lease agreements that do not transfer de risks and benefits to us are classified as operating leases. Operating leases are accounted as a rent, and the lease expense is recognized when incurred through the straight line method.

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     Sale-lease back transactions that result in a subsequent operating lease have different accounting treatments depending on the fair value of the fair value, the price and the cost of the sale. If the fair value is less than the carrying amount of the asset, the difference is recognized as a loss immediately. When the sale gives rise to a gain it is recognized up to the fair value, the excess is deferred and amortized throughout the term of the lease. When the sale results in a loss and the carrying amount is not greater than fair value, the loss is deferred if compensated by future lease payments. If the carrying amount is greater than fair value it is written down to fair value, and if there is still a loss it is deferred if compensated by future lease payments.

     Lease accounting is critical for us because it requires an extensive analysis of the lease agreements in order to classify and measure the transactions in our financial statements and significantly impacts our financial position and results of operations. Changes in the terms of our outstanding lease agreements and the terms of future lease agreements may impact the accounting for the lease transactions and our future financial position and results of operations.

     Goodwill and Intangible Assets. We have allocated goodwill and intangible assets with indefinite lives acquired through business combinations for the purposes of impairment testing to a single cash-generating unit, the operating subsidiary VRG. Goodwill is tested for impairment annually by comparing the carrying amount to the recoverable amount of the cash-generating unit level that has been measured on the basis of its value-in-use, by applying cash flow projections in the functional currency based on the Company’s approved business plan covering a five-year period followed by the long-term growth rate of 3%. The pre-tax discount rate applied to the cash flow projections is 23.1% . Considerable judgment is necessary to evaluate the impact of operating and macroeconomic changes to estimate future cash flows and to measure the recoverable amount. Assumptions in the Company’s impairment evaluations are consistent with internal projections and operating plans. Airport operating rights were acquired as part of the acquisition of VRG and were capitalized at fair value at that date and are not amortized. Those rights are considered to have indefinite useful lives due to several factors and considerations, including requirements for necessary permits to operate within Brazil and limited slot availability in the most important airports in terms of traffic volume. VRG tradenames were acquired as part of the VRG acquisition and were capitalized at fair value at that date. The tradenames are considered to have an indefinite useful life (and are not amortized) due to several factors and considerations, including the brand awareness and market position, customer recognition and loyalty and the continued use of the VARIG tradenames. The carrying values of the airport operating rights and tradenames are reviewed for impairment at each reporting date and are subject to impairment testing when events or changes in circumstances indicate that carrying values may not be recoverable. No impairment has been recorded to date. Costs related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over a period not exceeding five years on a straight-line basis. The carrying value of these intangibles is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable. The Company assesses at each balance sheet date whether intangibles with indefinite useful lives are impaired using discounted cash flow analyses, which considers the creditworthiness of the issuer of the security, as further described in Note 8 to our financial statements. As of 31 December 2009 and 2008, no impairment on goodwill and other intangible assets was recognized.

     Derivative Financial Instruments. The Company accounts for derivative financial instruments in accordance with IAS 39. In executing the risk management program, management uses a variety of financial instruments, including petroleum call options, interest fixed-price swap agreements, and foreign currency forward contracts to protect against sharp changes in market prices and to mitigate the volatility of its expenditures related to these prices. The Company does not hold or issue derivative financial instruments for speculative purposes.

     Derivative financial instruments are initially recognized at fair value and subsequently the change in fair value is recorded in profit or loss, unless the derivative meets the strict criteria for hedge accounting which are accounted for as cash flow hedges.

     For hedge accounting purposes, according to IAS 39, the hedge instrument is classified as a cash flow hedge when it protects against the exposure to fluctuations in cash flow that are attributable to a particular risk associated with an asset or liability recognized regarding an operation that is highly likely to occur or to an exchange rate risk for an unrecognized firm commitment.

     At the beginning of a hedge transaction, the Company designates and formally documents the item covered by the hedge, as well as the objective of the hedge and the risk policy strategy. Documentation includes identification of the hedge instrument, the item or transaction to be protected, the nature of the risk to be hedged and how the entity will determine the effectiveness of the hedge instrument in offsetting exposure to variations in the fair value of the item covered or the cash flows attributable to the risk covered. The purpose is that such hedge instruments will be effective in offsetting the changes in fair value or cash flows and they are constantly appraised to determine if they really have been effective throughout the entire period for which they have been designated.

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     According to the provisions of IAS 39, the effective portion of the gain or loss on change in the fair value of the hedging instrument is recognized directly in equity, while any ineffective portion is recognized immediately in profit or loss.

     Amounts classified in equity are transferred to profit or loss each period in which the hedged transaction affects profit or loss. If the hedged item is the cost of a non-financial asset, the amounts classified in equity are transferred to the initial carrying amount of the non-financial asset.

     If the forecast transaction or the firm commitment is no longer expected to occur, amounts previously recognized in equity are transferred to profit or loss. If the hedging instrument expires, is terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in equity are recognized in profit or loss.

     The Company measures quarterly the effectiveness of the hedge instruments in offsetting changes in prices. Derivative financial instruments are effective if they offset between 80% and 125% of the changes in price of the item for which the hedge has been contracted. Any gain or loss resulting from changes in the fair value of the derivative financial instruments during the quarter in which they are not qualified for hedge accounting, as well as the ineffective portion of the instruments designated for hedge accounting are recognized as other finance income (expenses).

     The Company had the following derivative financial instruments classified as cash flow hedges: petroleum call options, foreign currency call options denominated in U.S. Dollars, forward contracts for U.S. Dollars and interest fixed-price swap agreements for Libor.

     Aircraft maintenance and repair costs. Our aircraft lease agreements specifically provide that we, as lessee, are responsible for maintenance of the leased aircraft and engines, and we must meet specified airframe and engine return conditions upon lease expiration. Under certain of our existing lease agreements, we pay maintenance deposits to aircraft and engine lessors that are to be applied to future maintenance events. These deposits are calculated based on a performance measure, such as flight hours or cycles, and are available for reimbursement to us upon the completion of the maintenance of the leased aircraft. If there are sufficient funds on deposit to reimburse us for our maintenance costs, such funds are returned to us. The maintenance deposits paid under our lease agreements do not transfer either the obligation to maintain the aircraft or the cost risk associated with the maintenance activities to the aircraft lessor. In addition, we maintain the right to select any third-party maintenance provider or to perform such services in-house. Therefore, we record these amounts as a deposit on our balance sheet and recognize maintenance expense when the underlying maintenance is performed, in accordance with our maintenance accounting policy. Certain of our lease agreements provide that excess deposits at the end of the lease term are not refundable to us. Such excess could occur if the amounts ultimately expended for the maintenance events were less than the amounts on deposit. Any excess amounts held by the lessor or retained by the lessor upon the expiration of the lease, which are not expected to be significant, would be recognized as additional aircraft rental expense at the time it is no longer probable that such amounts will be used for maintenance for which they were deposited. The amount of aircraft and engine maintenance deposits expected to be utilized in the next twelve months is classified in current assets.

     At the inception of the leases, our initial estimates of the maintenance expenses are equal to or in excess of the amounts required to be deposited. This demonstrates it is probable the amounts will be utilized for the maintenance for which they are to be deposited and the likelihood of an impairment of the balance is remote. There has been no impairment of our maintenance deposits.

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A summary of activity in the Aircraft and Engine Maintenance Deposits is as follows:

    2008    2009 
     
    (in thousands of reais)
Beginning of year    322,354    391,989 
Amounts paid in    142,282    103,480 
Reimbursement of expense incurred    (72,647)   (48,939)
     
End of year    391,989    446,530 
     

     Additionally, some of our lessors agreed that we replace the deposits with letters of credit and use the deposited funds to settle other amounts owed under the leases. As of December 31, 2009, the balance of deposits released amounted to R$76.1 million, as compared to R$129.7 million as of December 31, 2008. Many of our new aircraft leases do not require maintenance deposits.

     Our fleet plan contemplates the replacement of some operating leases with financing lease agreements, in line with our plan to further standardize our fleet, especially by replacing our Boeing 737-300 aircraft by Boeing Next Generation 737-700 and 737-800 aircraft.  Due to the performance advantages of Boeing Next Generation 737-700 and 737-800 aircraft, we believe these aircraft should sustain attractive market valuations over the next years.  We therefore intend to increase the number of financing leases. In light of this trend, our maintenance deposit accounts should to decrease in the near term, subject to significant potential variations, including the actual cost of maintenance, the timing of the maintenance, aircraft cycles and potential new maintenance requirements 

     Revenue Recognition and Mileage Program. Passenger revenue is recognized either when transportation is provided or when the unused ticket expires. Tickets sold but not yet used are recorded as advance ticket sales that represents primarily deferred revenue for tickets sold for future travel dates and also estimated refunds and exchanges of tickets sold for past travel dates. Estimated refunds and exchanges included in the advance ticket sales account are compared with actual refund and exchange activities every month to monitor their reasonableness. These estimates are based on historical data and experience.

     Since the acquisition of VRG, the Company operates a frequent flyer program, (“Smiles Program”) that provides travel and other awards to members based on accumulated mileage credits. The obligations assumed under the Smiles Program were valued at the acquisition date at estimated fair value that represents the estimated price the Company would pay to a third party to assume the obligation for miles expected to be redeemed under the Smiles Program.

     The sale of passenger tickets by the Company includes air transportation and mileage credits. The Company sales of miles to business partners includes marketing and mileage credits. The fair value of the mileage credit, net of breakage is determined based (i) on weighted-average price of passenger tickets sold by VRG considering the mileage amount necessary to issue a ticket when VRG offers mileage for flying and, (ii) on weighted-average price at which the Company sells mileage credits to business partners. The fair value of the mileage credits sold and the mileage component of passenger ticket sales is deferred and recognized as revenue when miles are redeemed and services are provided based on the weighted-average price of all miles that have been deferred. The portion of the revenue received in excess of the fair value of mileage credits sold (the “marketing premium”) is recognized in income when the related marketing services are provided and classified as cargo and other revenue.

     Share-Based Payments. The Company measures the fair value of equity-settled transactions with employees at the grant date using an appropriate valuation model. The resulting amount, as adjusted for forfeitures is charged to income over the period in which the options vest. At each balance sheet date before vesting, the cumulative expense is calculated; representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The change in cumulative expense since the previous balance sheet date is recognized in the income statement with a corresponding entry in equity.

     Provisions. For certain operating leases, the Company is contractually obligated to return aircraft in a defined condition. The Company accrues for restitution costs related to aircraft held under operating leases at the time the asset does not meet the return condition criteria throughout the duration of the lease. Other provisions are recorded for probable losses and are reviewed based on the development of lawsuits and the background of losses on labor and civil claims, based on the best current estimate.

     Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

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     Deferred taxes. Deferred taxes are calculated based on tax losses, temporary differences arising on differences between tax bases and carrying amounts for financial reporting purposes of our assets and liabilities.

     Even though unused tax losses and temporary differences have no expiration date in Brazil, deferred tax assets are recorded when there is evidence that future taxable profit will be available to use such tax credits. We record our deferred tax assets based on projections for future taxable profits, which considers a number of assumptions for revenue increase, for operating costs such as jet fuel prices, leasing expenses and etc. Our business plan is revised annually in order to revaluate the amounts to be recorded as deferred tax assets.

     Deferred taxes is a critical accounting policy for us because it requires a number of assumptions and is based on our best estimate of our projections related to future taxable profit. In addition, because the preparation of our business plan is subject to a variety of market conditions, the results of our operations may vary significantly from our projections and as such, the amounts recorded as deferred tax assets may be impacted significantly in the future.

Results of Operations

Year 2009 Compared to Year 2008

     Our results of operations in 2009 were affected by the following key drivers:

     VRG Merger: Our corporate restructuring, which allowed us to fully integrate VRG into our operations, was concluded in the last quarter of 2008 and therefore we were operating on a fully integrated basis since January 2009. The merger was the key driver to the cost reduction and optimization of our route network, enabling us to gather the expected synergies from the VRG acquisition in 2007 (including the revamp of our Smiles loyalty program), benefit from our high frequency route network and generate operating profits in all quarters of 2009.

     Better market positioning and focus on our competitive strengths: since the merger of VRG into our operations, we have focused on our core competitive strengths. We discontinued our intercontinental flights to the EU in mid-2008 and relied on our operations in Brazil and South America. According to TMC Brasil and Favecc, the largest business travel agency associations in Brazil, our market share among business passengers increased by 6.1 and 8.3 percentage points, from 34.5% to 40.7% and from 25.7% to 33.8%, respectively. These advantages combined with our low cost structure and dynamic yield management enabled us to also continue to offer low fares to compete against airlines and interstate buses and stimulate demand from the growing Brazilian middle class, resulting in a 6% increase in market share among first time travelers.

     Positive macroeconomic scenario: demand in the Brazilian airline industry was, during the recent global financial crisis, not as significantly affected as worldwide air travel demand and demand in other consumer based industries in Brazil or worldwide. In 2009, volatility in the financial and oil markets was relatively low, which benefited our yield management and cost structure. The second half of 2009 was particularly positive, principally due to improved consumer confidence levels and an ongoing change in customer behavior, shifting towards a relative increase in leisure expenditures in the disposable income share of wallet. According to the Brazilian Ministry of Tourism, the Brazilian middle class will increase their share in the leisure segment from 35.5% between 2007 and 2009 to 58.5% between 2009 and 2011. In light of the combination of these factors, demand grew 17.7% in 2009 in the domestic market, the vast majority of which was generated during the second half, when the industry experienced domestic growth averaging more than 30% year over year from the last quarter 2008 as compared to the last quarter 2009. These positive factors were partially offset by a highly competitive scenario in the domestic market, principally during the months of September and October 2009.

     We present in the following table information regarding our results of operations in IFRS in 2009 and 2008.

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    Year Ended December 31, 
   
    2008    2009 
     
    (in R$, except where indicated)
    (in thousands)
Income Statement Data:         
Net operating revenues:         
   Passenger    5,890,104    5,306,530 
   Cargo and other    516,089    718,852 
     
Total net operating revenues    6,406,193    6,025,382 
Operating expenses:         
   Salaries, wages and benefits    (983,783)   (1,100,953)
   Aircraft fuel    (2,630,834)   (1,813,104)
   Aircraft rent    (645,089)   (650,683)
   Sales and marketing    (588,735)   (364,551)
   Landing fees    (338,370)   (312,637)
   Aircraft and traffic servicing    (422,177)   (381,721)
   Maintenance, materials and repairs    (388,030)   (417,212)
   Depreciation and amortization    (125,127)   (142,853)
   Other operating expenses    (372,696)   (428,376)
     
Total operating expenses    (6,494,841)   (5,612,090)
     
Operating income (loss)   (88,648)   413,292 

     We had operating income of R$413.2 million in 2009 compared to operating losses of R$88.6 million in 2008. Our operating margin was 6.9% in 2009, and a negative 1.4% in 2008. We reported net income in 2009 of R$890.8 million compared to a net loss of R$1,239.3 million for 2008. Income before income tax was R$756.1 million in 2009 compared to losses before income tax of R$1,195.0 million in 2008.

     Net Operating Revenues. Net operating revenues decreased 5.9% to R$6,025.4 million in 2009 as a result of our decision to discontinue intercontinental flights since the second half of 2008, focusing our operations in the domestic market, South America and deploying new routes to the Caribbean Region (Aruba and Curacao). Consolidated demand increased 3.1% . Domestic market demand increased by 14.9%, while in the international market dropped 44.2% as a result of the discontinuation of our intercontinental flights to the EU in mid 2008 and the low demand to our routes to Argentina and Chile, due to the swine flu, especially during the second and third quarter of 2009. The higher demand was partially offset by a 12.6% decrease in yields to R$20.34 cents in 2009 from R$23.27 cents in 2008 due to a variety of factors: (i) more stable capital markets scenario, (ii) lower selling expenses in the domestic market due to a gradual decrease during 2009 of commissions paid to travel agencies in the domestic market (valid for all players in the industry) which were fully extinguished in February 2010, (iii) a highly competitive scenario in the domestic market, principally during the months of September and October 2009 and (iv) high demand growth from Brazilian consumers during the second half of 2009, mainly due to the positive economic scenario and improved consumer confidence.

     Despite the 1.8% increase in the average number of operating aircraft from 106.4 in 2008 to 108.7 in 2009, our operating capacity decreased 2.7% in terms of available seat kilometers, from 41,107 million in 2008 to 39,998 million in 2009. The lower capacity was mainly due to the discontinuation of the long haul flights and our focus on fine tuning our capacity to demand growth by adjusting our aircraft utilization rate, especially during the first half of 2009, when the macroeconomic environment was still not as positive as during the second half of 2009. As a consequence, our utilization rate dropped 4.1% from 12.2 in 2008 to 11.6 in 2009. The number of departures increased 1.9% from 268,540 in 2008 to 273,602 in 2009 driven by our strategy to focus our operations in Brazil, South America and Caribbean markets, reflecting our average stage length to decrease by 4.7% from 933 km in 2008 to 890 km in 2009.

     Our load factor increased 3.7 percentage points from 61.6% in 2008 to 65.3% in 2009, mainly due a 2.7% decrease in available seat kilometers and a 3.1% increase in revenue passenger kilometers.

     Our ancillary revenues are derived from the Gollog and Voe Fácil businesses as well as ticket change fees, excess baggage charges, Smiles co-branded credit card and other incidental services, and are an increasingly important part of our revenue composition. Our ancillary and other revenues increased 39.3% from R$516.1 million in 2008 to R$718.9 million in 2009, representing 11.9% of our total net revenues, mainly due to one off revenues of R$48.1 million related to image rights and rental of our Smiles client database as part of the co-branded credit card contract, higher revenues from cargo transportation and other fees related to flight rescheduling and excess baggage.

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     Operating Expenses. Operating expenses per available seat kilometer decreased 11.2% to R$14.03 in 2009, primarily due to (i) a 29.2% decrease in fuel cost from R$6.40 cents in 2008 to R$4.53 cents in 2009, (ii) a more favorable macroeconomic scenario in Brazil and (iii) the better cost structure after fully integrated VRG into our operations in the last quarter of 2008. Operating expenses per available seat kilometer excluding fuel increased by 1.2% to R$9.50 in 2009, mainly due to non-recurring expenses related to (i) the fleet renewal carried out in 2009 in order to further standardize our fleet, which, since January 2010, has been fully comprised of Boeing Next Generation aircraft Boeing 737-700, and 737-800, and (ii) non-recurring expenses related to VRG merger concentrated in the first half of 2009, and recurring expenses related to Boeing 767 aircrafts.

     Our breakeven load factor decreased 1.6% percentage points to 60.8% in 2009 compared to 62.4% in 2008, primarily due the lower fuel cost per liter and lower cost structure, a 3.7 percentage points increase in load factor, partially offset by a 12.6% decline in yields.

     The breakdown of our operating expenses on a per available seat kilometer basis for 2009 compared to 2008 is as follows.

    Year Ended December 31, 
   
    2008    2009 
     
    (cost per available seat kilometer in R$ cents)
Operating expenses:         
Salaries, wages and benefits    2.39    2.75 
Aircraft fuel    6.40    4.53 
Aircraft rent    1.57    1.63 
Sales and marketing    1.43    0.91 
Landing fees    0.82    0.78 
Aircraft and traffic servicing    1.03    0.95 
Maintenance materials and repairs    0.94    1.04 
Depreciation and amortization    0.30    0.36 
Other operating expenses    0.91    1.08 
     
Total operating expenses    15.80    14.03 
     
Cost per flight hour    16.84    14.88 

     Salaries, wages and benefits increased 11.9%, or R$117.2 million, due to a 8% cost of living increase on salaries effected in December 2008, a 12.9% increase in the number of employees from 15,911 in 2008 to 17,963 in 2009 (mainly due to the internalization of our call center) and a provision for our profit sharing plan of R$71 million, due to the company’s return to profitability. Salaries, wages and benefits per available seat kilometer increased 15.2% due to the same reasons, although less diluted due to the decrease in available seat kilometers in 2009.

     Aircraft fuel expense decreased 31.1%, or R$817.7 million, primarily due to a 37.9% decrease in average oil (WTI) prices, partially offset by an 8.5% average appreciation of the U.S. dollar against the real. Aircraft fuel expense per available seat kilometer decreased 29.2% due to the same reasons, although less diluted by the decrease in available seat kilometers in 2009.

     Aircraft rent, which we incur in U.S. dollars, increased 0.9%, or R$5.6 million, due to a 4.4% increase in the total fleet under operational leases from 90 in 2008 to 94 in 2009. This tendency was partially offset by an 8.5% average appreciation of the U.S. dollar against the real. Aircraft rent per available seat kilometer increased 3.6%, reflecting a lower expense dilution due to the lower available seat kilometers in 2009.

     Sales and marketing expense decreased 38.1%, or R$224.2 million, resulting from the integration of VRG’s reservation systems that optimized selling expenses as well as the progressive decrease in travel agent commissions for domestic market sales. Sales and marketing per available seat kilometer decreased 36.2% due to the same reasons, although diluted by the decrease in available seat kilometers in 2009.

     Landing fees decreased 7.6%, or R$25.7 million, mainly due to the discontinuation of intercontinental flights in the second half of 2008 resulting in lower fares, partially offset by the 1.9% increase in the number of departures. Landing fees per available seat kilometer increased 4.7% due to the same reasons, although less diluted by the decrease in available seat kilometers in 2009. Aircraft and traffic servicing expense increased 9.6%, or R$40.5 million, primarily due to same reasons that impacted landing fees. Aircraft and traffic servicing expense per available seat kilometer decreased 7.3% due to the decrease in the total capacity as a result of our decision to discontinue intercontinental flights as of July 2008.

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     Maintenance, materials and repairs increased 7.5%, or R$29.2 million, due to increased maintenance expenses related to the return of part the Boeing 737-300 fleet as part of the further fleet standardization and renovation plan, partially offset by a 8.8% decrease in engine overhauls from 58 in 2008 to 51 in 2009. Maintenance, materials and repairs per available seat kilometer decreased 11.0% primarily due to the same reasons, although less diluted by the decrease in available seat kilometers in 2009.

     Depreciation and amortization increased 14.2% or R$17.7 million, due primarily to the increase in fixed assets resulting from the addition of 8 aircraft as finance leases during 2009. Depreciation and amortization per available seat kilometer increased 19.1% due to the same reasons, although less diluted by the decrease in available seat kilometers in 2009.

     Other operating expenses increased 14.9%, or R$55.7 million, due to expenses of R$73.0 million related to the integration of accounting systems that provided further automation of our consolidation process and adherence to the Brazilian Federal Taxes Installment Payment Program (REFIS), to finance past due taxes in up 180 installments. Other operating expenses per available seat kilometer decreased 18.7% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Financial Income. Financial income totaled R$342.8 million as of December 31, 2009, compared to a financial expense of R$1.106.4 million in 2008, mainly as a result of non-cash foreign exchange variation gain on our assets and liabilities of R$713.4 million due to the impact of the appreciation of the real against the U.S. dollar during 2009.

     Income Taxes. We recorded and income tax benefit of R$134.7 million in 2009, compared to an expense of R$44.3 million, mainly due to the use of tax credits in the amount of R$135.3 million from tax losses generated by VRG, acquired in 2007. This change was possible due to our positive operating profit for the last six quarters and we expect that this trend will continue in the next years

Year 2008 Compared to Year 2007

     Our results of operations in 2008 were affected by the following key drivers:

     Macro-economic conditions: Record-high fuel prices in the first half of 2008 and a strong devaluation of the real against the U.S. dollar in the second half of 2008 have negatively affected our results of operations in 2008. Average crude oil WTI was up 38.3% year-over-year, from US$72.23 per barrel in 2007 against US$99.92 per barrel in 2008. In March 2008, crude oil WTI peaked at a historical record of US$145.29 per barrel. In the context of the global financial markets and credit crisis oil prices sharply decreased in the fourth quarter of 2008, with crude oil WTI closing in 2008 at US$44.60 per barrel. While the average exchange rate of the real against the U.S. dollar year over year decreased 5.6% from R$ 1.95 per US$1.00 in 2007 to R$1.84 per US$1.00 in 2008, the real depreciated 31.9% in absolute terms in the second half of 2008, from an all time high of R$1.56 per US$1.00 in July, 2008 to R$2.34 at year end 2008.

     VRG acquisition: In April 2007, we acquired VRG as part of our strategy to strengthen our market position with VRG’s route rights, airport operating rights and the largest passenger loyalty program in South America. The acquisition was approved by the ANAC on April 3, 2007 and by the Brazilian antitrust authority CADE on June 25, 2008. Until the CADE approval and the subsequent corporate restructuring, we had to operate two fully separate airlines until September 30, 2008, which resulted in lower overall load factors, an overlap in flight networks, increased operating and overhead costs and therefore lower efficiency for the year. In addition, the operational and technological integration of VRG caused substantial costs in 2008. The launch and cancellation of our long-haul operations to European destinations, a business we opportunistically entered into at the end of 2007, did not prove successful and resulted in lower than expected revenues and higher than expected operating and administrative costs. Meanwhile, we were not able to return or sublease all of the seven Boeing 767 wide-body aircraft, all of which we stopped operating during the second half of 2008. Our corporate restructuring took place in September 2008, which allowed us, commencing in the last quarter of 2008, to consolidate our flight network, standardize our aircraft maintenance and optimize employee allocation by standardizing job positions, responsibilities and salaries. We were, as a consequence, able to achieve operating income of R$53.9 million for the last quarter of 2008.

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     Low fleet utilization and higher fares: Due to the above factors, our results of operations in 2008 were atypical, with a 32.2% increase in average fares and a reduction in block hours from 13.8 in 2007 to 12.1 in 2008. The cancellation of our long-haul operations and the increase in the minimum turnaround time for our aircraft led to the 1.7 block hours reduction in our aircraft utilization and a reduction from nine flight legs per day in 2007 to seven flight legs per day in 2008. On a cost per available seat kilometer basis, this effect was partially offset by our 19.7% increase in available seat kilometers in 2008. Increased fuel expenses led us to increase average fares by 32.3%, which increased our yields and revenues per available seat kilometers.

We present in the following table information regarding our results of operations in IFRS in 2008 and 2007.

    Year Ended December 31, 
   
    2007    2008 
     
    (in R$, except where indicated)
    (in thousands)
Income Statement Data:         
Net operating revenues:         
   Passenger    4,566,691    5,890,104 
   Cargo and other    374,293    516,089 
     
Total net operating revenues    4,940,984    6,406,193 
Operating expenses:         
   Salaries, wages and benefits    (799,344)   (983,783)
   Aircraft fuel    (1,898,840)   (2,630,834)
   Aircraft rent    (525,785)   (645,089)
   Sales and marketing    (367,866)   (588,735)
   Landing fees    (273,655)   (338,370)
   Aircraft and traffic servicing    (348,732)   (422,177)
   Maintenance, materials and repairs    (339,281)   (388,030)
   Depreciation and amortization    (62,548)   (125,127)
   Other operating expenses    (315,068)   (372,696)
     
Total operating expenses    (4,931,119)   (6,494,841)
     
Operating income (loss)   9,865    (88,648)

     We incurred operating losses of R$88.6 million in 2008, compared to operating profit of R$9.9 million in 2007. Our operating margin in 2008 was a negative 1.4%, and break-even in 2007. We reported a net loss for the year 2008 of R$1,239.3 million compared to profit of R$167.3 million for 2007. Losses before income tax were R$1.195.0 million in 2008 compared to income before income tax of R$200.9 million in 2007.

     Net Operating Revenues. Net operating revenues increased 29.7% to R$6,406.2 million in 2008, due primarily to a 15.5% increase in yield from R$20.14 cents in 2007 to R$23.27 cents in 2008. The increase in yield was mainly due to a 32.3% increase in average fares from R$198 in 2007 to R$262 in 2008, reflecting higher fuel prices during the first nine months of 2008. For the fourth quarter, yields remained at high levels due to better yield management under our new integrated route network that eliminated overlapping routes and schedules between the former Gol and Varig route networks. For the same reasons, our operating revenue per available seat kilometer increased by 8.3% from R$14.38 cents in 2007 to R$15.58 cents in 2008.

     Revenue passenger kilometers increased 11.6% from 22,670 million in 2007 to 25,308 million in 2008, while the number of enplaned passengers increased 8.3% from 23,689 in 2007 to 25,664 in 2008. Our revenue passenger kilometers growth in 2008 was mainly driven by a 13.2% increase in the number of departures from 237,287 in 2007 to 268,540 in 2008.

     A 20.1% increase in the average number of operating aircraft from 88.6 in 2007 to 106.4 in 2008 resulted in a 19.7% increase in operating capacity, or available seat kilometers, from 34,349 million in 2007 to 41,107 million in 2008 and a 13.2% growth in departures from 237,287 in 2007 to 268,540 in 2008.

     Our load factor decreased 4.4 percentage points from 66.0 in 2007 to 61.6 in 2008, mainly due a 19.7% increase in available seat kilometers and the inefficiency resulting from our parallel operation of two airline companies with partly overlapping route networks until October 2008.

     Our ancillary revenues are derived from the Gollog and Voe Fácil businesses as well as ticket change fees, excess baggage charges, charter service revenues and other incidental services, and are an increasingly important part of our revenue composition. Our ancillary and other revenues increased 37.9% from R$374.3 million in 2007 to R$516.1 million in 2008 representing 8.1% of our total revenues, mainly due to higher revenues from cargo transportation.

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     Operating Expenses. Operating expenses per available seat kilometer increased 10.1% to R$15.80 in 2008, primarily due to (i) the costs related to the integration of VRG in 2008, mostly related to non-recurring costs for closing of inter-continental long haul routes, aircraft return (Boeing 737-300 and Boeing 767 aircraft) and downtime (Boeing 767 aircraft) expenses and the implementation of a new integrated sales system and (ii) unfavorable macro-economic conditions. Operating expenses per available seat kilometer excluding fuel increased by 6.5% to R$9.40 in 2008.

     Our breakeven load factor decreased 3.4 percentage points to 62.5% in 2008 compared to 65.9% in 2007, primarily due to an increase in yield, which resulted in an increase in revenue per available seat kilometer, partially offset by the decrease in utilization, which increased our cost per available seat kilometer. Our breakeven load factor was also impacted by the spreading of fixed costs over a greater number of available seat kilometers which benefited our cost per available seat kilometer.

     The breakdown of our operating expenses on a per available seat kilometer basis in IFRS for 2008 compared to 2007 is as follows.

    Year Ended December 31, 
   
    2007    2008 
     
    (cost per available seat kilometer in R$ cents)
Operating expenses:         
Salaries, wages and benefits    2.33    2.39 
Aircraft fuel    5.53    6.40 
Aircraft rent    1.53    1.57 
Sales and marketing    1.07    1.43 
Landing fees    0.80    0.82 
Aircraft and traffic servicing    1.02    1.03 
Maintenance materials and repairs    0.99    0.94 
Depreciation and amortization    0.18    0.30 
Other operating expenses    0.92    0.91 
     
Total operating expenses    14.36    15.80 
     
Cost per flight hour    14.62    16.84 

      Salaries, wages and benefits increased 23.1%, or R$184.4 million, due to a 5% cost of living increase on salaries effected in December 2007, the 20.1% increase in the average number of operating aircraft from 88.6 in 2007 to 106.4 in 2008, and the 1.2% increase in the number of employees in the year over year comparison. Salaries, wages and benefits per available seat kilometer increased 2.6% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Aircraft fuel expense increased 38.5%, or R$732.0 million, primarily due to a 38% increase in WTI fuel prices, a 16% increase in fuel consumption derived from the increase in departures and capacity, and the devaluation of the real against the U.S. dollar in the second half of 2008. Aircraft fuel expense per available seat kilometer increased 15.7% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Aircraft rent, which we incur in U.S. dollars, increased 22.7%, or R$119.3 million, due to a 20.1% increase in the average number operating aircraft from 88.6 in 2007 to 106.4 in 2008 and the devaluation of the real against the U.S. dollar in the second half of 2008. During the second half of 2008, we stopped operating our seven Boeing 767 aircraft, which we expect to return or sublease during 2009. Aircraft rent per available seat kilometer increased only 2.6% as the cost increase was offset by the 19.7% increase in available seat kilometers in 2008.

     Sales and marketing expense increased 60.0%, or R$220.9 million, resulting from (i) expenses incurred in operating both Gol and Varig as separate airlines until our corporate reorganization, (ii) the launch in 2008 of a new integrated sales system that improved the purchasing process, identifies operating and performance synergies and improves the performance and quality of the online sales service, and (iii) an increase in sales incentives mainly during the first nine months of 2008. Sales and marketing per available seat kilometer increased 34.0% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

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     Landing fees increased 23.6%, or R$64.7 million, mainly due to the 13.2% increase in departures. Landing fees per available seat kilometer increased 2.5% due to the same reasons, although diluted by the increase in available seat kilometers in 2008. Aircraft and traffic servicing expense increased 21.0%, or R$73.4 million, primarily due to an increase of 20.1% in the average operating fleet, from 88.6 in 2007 to 106.4 in 2008, higher departures and lower average stage length. Aircraft and traffic servicing expense per available seat kilometer remained flat reflecting the full dilution of these expenses by the increase in available seat kilometers.

     Maintenance, materials and repairs increased 14.4%, or R$48.7 million, due to an increase in scheduled aircraft maintenance events during the year, reflecting (i) the larger average operating fleet and lower average stage length, which reduced scheduled maintenance periods and (ii) extraordinary expenses related to returned aircrafts during the second half of 2008. Maintenance, materials and repairs per available seat kilometer decreased 5.1% primarily due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Depreciation and amortization increased 100% or R$62.6 million, due primarily to the increase in fixed assets resulting from the addition of 12 aircraft to our consolidated fleet during the last quarter of 2007, including four 767-300 ERs operated under finance leases. This increased our total fixed assets to be depreciated during 2008, and also caused an increase in rotables and other parts and inventories for maintenance purposes. Depreciation and amortization per available seat kilometer increased 66.7% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Other operating expenses increased 14.9%, or R$55.7 million, due to costs related to closing of international bases in 2008, an increase in insurance expenses and expenses related to cancelled flights and crew lodging expenses, especially during the first nine months of 2008. Other operating expenses per available seat kilometer decreased 3.2% due to the same reasons, although diluted by the increase in available seat kilometers in 2008.

     Financial expenses totaled R$1,106.4 million, compared to a financial income of R$191.0 million in 2007, mainly as a result of non-cash foreign exchange variation loss of R$757.5 million due to the devaluation of the real against the U.S. dollar in the second half of 2008, and to fuel and currency hedge losses of R$131.8 million in the year.

     Income Taxes. Income tax expenses increased 31.9%, or R$10.7 million in 2008, as compared to 2007, mainly due to the fact that, in 2008, our prior operating subsidiary GTA had taxable profits for the nine months ended September 30, 2008, which could not be offset against losses in the operations of VRG, a separate legal entity until the execution of our corporate restructuring in September 2008. For further detail on our income tax expenses, see note 5 to our financial statements as of and for the year ended December 31, 2008 included herein.

B. Liquidity and Capital Resources

Liquidity

     In managing our liquidity, we take into account our cash and cash equivalents and short-term investments as well as our accounts receivable balances. Our accounts receivable balance is affected by the payment terms of our credit card receivables. Our customers can purchase seats on our flights using a credit card and pay in installments, typically creating a one-or two-month lag between the time that we pay our suppliers and expenses and the time that we receive payment for our services. When necessary, we obtain working capital loans, which can be secured by our receivables, to finance the sale-to-cash collection cycle. We have a strong balance sheet, especially our cash and cash equivalents position which amount to at least 20% of our trailing twelve months’ net operating revenues. We are also committed to have no significant financial debt maturities coming due within any three-year horizon.

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The following table sets forth certain key liquidity data in IFRS at the dates indicated:

    At December 31, 
   
     2008    2009    % Change 
       
    (in millions of reais)
Real Denominated    936.5    1,960.9    109.39% 
Cash and Cash Equivalents, Short Term             
Investments and Restricted Cash    591.6    1,441.6    143.68% 
Short-term Receivables    344.9    519.3    50.57% 
Foreign Exchange Denominated    957.2    804,6    (15.94)% 
Pre-Delivery Deposit Advances    957.2    804,6    (15.94)% 
Total Cash Deposits    1,893,7    2,765,5    46.04% 

     At December 31, 2009, cash and investments were R$1,441.6 million, including R$18.8 million in restricted deposits that guarantee a portion of BNDES, BDMG and hedge operations. The balance of R$40.4 million in cash and cash equivalents represents of immediate liquid assets. The increase in total liquidity as compared to 2008 is mostly due to the operating cash flow generation and the several measures in 2009 taken towards increasing our liquidity such as a rights offering of R$203.5 million, the issuance of a debenture of R$400 million, the receipt of R$252.7 million related to the Smiles co-branded credit card and a follow-on equity offering of R$600.3 million.

     Short-term receivables include credit card sales, the Voe Fácil installment payment program, accounts receivables from travel agencies and cargo transportation. At the end of 2009, we had significantly increased the volume of short-term receivables as compared to 2008, due to our better operating performance in 2009, which resulted in a 50.6% increase in our short-term receivables on December 31, 2009 as compared to December 31, 2008.

     At December 31, 2009, we had R$804.6 million deposited with Boeing as advances for aircraft acquisitions, a decrease of 12.1% as compared to December 31, 2008, mainly due to the return of approximately R$40 million from the contracting of a PDP Facility in December 2009 and the lower number of new aircraft deliveries scheduled to be delivered from Boeing under our fleet plan in the next 18 months as compared to the same period in 2008.

     As a result, our total cash deposits was R$2,765.5 million at December 31, 2009 as compared to R$1,893.7 million at December 31, 2008

Cash Flow Analysis

     Operating Activities. Our strategy is to rely primarily on cash flows from operations to provide working capital for current and future operations. In 2009, we generated R$457.3 million cash from our operating activities. Excluding, however, the prepayment of a R$467 million working capital loan with short-term receivables, we would have a use of operating cash of R$300.1 million in 2008 (instead of the operating cash provided of R$151.7 million), mainly due to our operating losses in 2008. In 2007, the year in which we acquired VRG, we used cash of R$141.5 million in our operating activities due to net operating losses in 2007.

     Our operating cash flows are affected by the requirement under the terms of certain of our aircraft operating lease agreements that we establish maintenance reserve deposit accounts for our aircraft that must be funded at specified levels. At December 31, 2009, we had R$522.7 million of deposits under our aircraft operating leases for maintenance. Funds will be drawn from the maintenance reserve accounts to reimburse for certain structural maintenance expenditures incurred. We believe the amounts deposited and to be deposited plus our own cash resources will be sufficient to service our future aircraft and maintenance costs for the duration of the applicable operating leases.

     Investing Activities. During 2009, capital expenditures were R$130.5 million, due to investments in airport infrastructure and stores, especially in South American destinations, information technology, rotables and spare parts. In 2008, capital expenditures were R$346.0 million related to acquisitions of property, plant and equipment and cash generated was R$40.6 million. During 2007, capital expenditures were R$742.7 million, which included expenditures of R$201.5 million for the VRG acquisition (net of cash acquired), R$541.2 million related to acquisitions of property and equipment which included R$255.3 million of pre-delivery deposits for aircraft acquisitions. Cash used in our investing activities in 2007 was R$190.3 million, which included the capital expenditures described above and R$566.9 million of net investments in liquid financial assets.

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     Financing Activities. Net cash provided by financing activities totaled R$769.2 million in 2009, as compared to net cash used in financing activities of R$611.3 millions in 2008, mainly due to receipt of net proceeds from a follow-on offering of common and preferred shares in the amount of R$600.3 million concluded in October 2009 and receipt of net proceeds from a rights offering in the amount of R$203.5 million concluded in the second quarter of 2009.

Indebtedness

The following table sets forth our loans and financings at December 31, 2008 and 2009:

    At December 31 
   
    2008    2009    % Change 
       
    (in millions of reais)
Loans and Financing    695.0    1,003.1    44.33% 
Aircraft Financing    2,284,9    1,800.8    (21,19)% 
Interest    25.6    19,9    (22,27)% 
Perpetual Bonds    414.4    310.1    (25.17)% 
       
Total Loans and Financing    3,419,9    3,133.9    (8.36)% 
       

     At the close of fiscal year 2009, our total debt was R$3.1 billion, with an average term of 4.0 years (excluding finance leases and perpetual notes) and an average rate of 10.1% for obligations in local currency and of 7.1% for U.S. dollar denominated obligations. Excluding our perpetual bonds, which have no maturity date, total loans and financing totaled R$2.8 billion at December 31, 2009, with a positive foreign exchange effect generating a decrease of 5.6% in reais at the end of 2009 as compared to year end 2008, partially offset by an additional working capital line in the amount of R$110 million contracted in September 2009.

Loans

     The following table sets forth our short- term and long-term loans (excluding aircraft financings) as of December 31, 2008 and 2009:

    At December 31 
   
    2008*    2009*    % Change 
       
    (in millions of reais)
Short-term             
Real Denominated Loans    66.8    177.2    165.27% 
Working Capital    50.0    160.0    220.00% 
BNDES(1)   14.2    14.4    1.41% 
BDMG(2)   2.6    2.8    7.69% 
Foreign Currency Denominated Loans    19.5    14.5    (25.64)% 
IFC(3)   19.5    14.5    (25.64)% 
Total Short-term    86.3    191.7    122.14% 
 
Long-term             
Real Denominated Loans    49.2    406.8    726.83% 
BNDES(1)   36.6    22.7    (37.98)% 
BDMG(2)   12.6    10.1    (19.84)% 
Debentures    —    374.0    100.0% 

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Foreign Currency Denominated Loans    559.5    404.5    (27.70)% 
IFC(3)   77.9    43.5    (44.16)% 
Senior Notes    481.6    361.0    (25.04)% 
Total Long-term    608.7    811.3    33.28% 
Total Loans ex-perpetual bonds    695.0    1,003.0    44.32% 
Perpetual Bonds**    414.4    310.1    (25.17)% 
Loans - including perpetual bonds    1,109.4    1,313.1    18.36% 
 
* Does not include interest 
** No maturity term bonds 
(1) Credit line with Banco Nacional de Desinvolvimento Econômico e Social (the Brazilian Development Bank)
(2) Credit line with Banco de Desinvolvimento Minas Gerais (Minas Gerais State Development Bank)
(3) Credit line with International Finance Corporation)

Aircraft Financings:

The following table sets forth our aircraft financings as of December 31, 2008 and 2009:

    At December 31, 
   
    2008*    2009*    % Change 
       
    (in millions of reais)
Short-term (Foreign Currency)            
PDP Facility    697.7    243.4    (65.11)% 
Financial Leasings    157.9    136.7    (13.43)% 
Total Short-term (Foreign Currency)   855.6    380.1    (55.58)% 
Long-term (Foreign Currency)            
PDP Facility    —    —     
Financial Leasings    1,429.2    1,420.7    (0.59)% 
Total Long-term (Foreign Currency)   1,429.2    1,420.7    (0.59)% 
Total Aircraft Financings*    2,284.8    1,800.8    (21.18)% 
* Does not include interest             

On December 31, 2009, aircraft financing debt totaled R$1.8 billion, including:

     Total short-term debt at December 31, 2009 (excluding the Pre-Delivery Deposit Facility) consisting of finance leases of R$136.7 million, working capital of R$160.0 million, interest of R$19.9 million and loans of R$31.7 million, was R$348.2 million.

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The following table sets forth the maturities and interest rates of our indebtedness:

        Contractual    Effective    Currency 
    Maturity    Interest    Interest p.a.     
Working Capital    Mar/10    100% -128% of CDI    10.89%    Real 
BNDES    Jul/12    TJLP +2.65%    8.90%    Real 
BDMG    Jan/14    IPCA +6%    8.88%    Real 
Debentures    Nov/14    126.5% of CDI    11.03%    Real 
IFC Loan    Jul/13    Libor +1.875%    4.72%    U.S. dollar 
Senior Notes    Apr/17    7.50%    7.50%    U.S. dollar 
PDP Facility I    Feb/10    Libor + 0.5%    1.99%    U.S. dollar 
PDP Facility II    Dec/10    Libor + 2.45%    2.68%    U.S. dollar 
Perpetual Bonds    n/a    8.75%    8.75%    U.S. dollar 

The following table sets forth the loans and financings amortization schedule:

    2010    2011    2012    2013    2013    After 2014    Total 
    (in R$ millions)
Real Denominated    177.1    110.9    105.1    96.6    94.3    -    584.0 
       BDMG    2.8    3.1    3.1    3.1    0.8    -    12.9 
       BNDES    14.3    14.3    8.5    -    -    -    37.1 
       Debentures    -    93.5    93.5    93.5    93.5    -    374.0 
       Working Capital    160.0    -    -    -    -    -    160.0 
Foreign Currency Denominated    14.5    14.5    14.5    14.5    -    361.0    419.0 
       IFC    14.5    14.5    14.5    14.5    -    -    58.0 
       Senior Notes    -    -    -    -    -    361.0    361.0 
Total*    191.6    125.4    119.6    111.1    94.3    361.0    1,003.0 
*excluding interest expenses and aircraft financing                             

     For further information on our financing activities, see note 23 to our consolidated financial statements as of December 31, 2009.

Covenant Compliance

     Our long term financings, excluding the perpetual bonds and aircraft financings, in the aggregate amount of R$811.3 million at December 31, 2009 contain customary covenants and restrictions, including but not limited to those that require us to maintain defined debt liquidity and interest expense coverage ratios.

     We are subject to certain financial and performance indicators (covenants) based on consolidated financial statements such as: (1) net debt/EBITDAR, (2) current assets/current liabilities, (3) EBITDA/debt service, (4) short-term debt/EBITDA, (5) current ratio and (6) debt coverage index (DCI). At December 31, 2009, we had not met the minimum parameters established with BNDES and presented a letter of consent in compliance with the obligations established in the contract. We were in compliance with all other covenants at December 31, 2009.

     The debentures we issued during the second quarter of 2009 require the maintenance of certain debt service coverage index, which is defined as the ratio between our cash flow and debt service (total of the principal amortized plus interest paid) for any given fiscal year. VRG must obtain an index of at least 100% in 2009 and 130% in 2010, to be in compliance at the end of each respective period. In addition, VRG must also maintain its financial leverage ratio, which is defined as net adjusted debt divided by EBITDAR, below 7.0x. At December 31, 2009, we met the minimum required performance indicators for the debentures.

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Other Financing Sources and Measures

     We declared aggregate dividends of R$185.8 million, for the fiscal year 2009 and will offer our shareholders to reinvest the dividends and subscribe for new shares in a R$185.8 million capital increase approved on March 11, 2010. We intend to extend these rights to holders of our ADRs. We declared dividends of R$ 36.3 million for the fiscal year 2008.

     On March 20, 2009, our board of directors approved a capital increase of a total of 26,093,722 shares comprising 6,606,366 common and 19,487,356 non-voting preferred shares to improve the company’s cash position and capital structure and to ensure the level of investments planned. The issue price for all shares was fixed issued at R$7.80 per share. Our controlling shareholders fully subscribed and paid for their portion of the capital increase in an amount of R$150.0 million. On June 2, 2009, our board of directors authorized the subscription of all shares and approved the capital increase in an amount of R$203.5 million.

     On October 8, 2009, our board of directors approved the capital increase of R$627.1 million in the context of a primary public offering of a total of 38,005,000 shares, comprising 19,002,500 common shares and 19,002,500 preferred shares. The issue price of the common and preferred shares was set at R$16.50 per share, as defined in a bookbuilding procedure.

Capital Resources

     We typically finance our leased aircraft through operating and finance lease financings. Although we believe that debt and/or operating lease financings should be available for our future aircraft deliveries, we cannot assure you that we will be able to secure financings on terms attractive to us, if at all. To the extent we cannot secure financing, we may be required to modify our aircraft acquisition plans or incur higher than anticipated financing costs. We expect to continue to require working capital investment due to the use of credit card installment payments by our customers. We expect to meet our operating obligations as they become due through available cash and internally generated funds, supplemented as necessary by short-term credit lines.

     Our growth plans contemplate operating 119 aircraft by the end of 2012. As of December 31, 2009, we had firm purchase orders with The Boeing Company for 90 737-800 Next Generation aircraft and we have options to purchase an additional 40 737-800 Next Generation aircraft. Committed expenditures for these aircraft, based on aircraft list price and including estimated amounts for contractual price escalations and pre-delivery deposits, are US$91.6 million in 2010, US$115.0 million in 2011, US$233.3 million in 2012, US$246.7 million in 2013 and US$127.0 million in 2014 and US$90.1 beyond 2014. We expect to meet our pre-delivery deposits by using long term loans from private financial institutions guaranteed by triple A rated institutions and capital markets financings such as long term and perpetual bonds.

     The firm aircraft orders represent a significant financial commitment for us. Pending the application of the proceeds from financing activities, we have invested these proceeds in overnight deposits and deposit certificates with highly-rated Brazilian banks and short-term investments, mainly highly-rated Brazilian government bonds.

     We expect that the continuance of the commitment to us from the Export-Import Bank of the United States to provide guarantees covering 85% of the aggregate purchase price for the firm order aircraft will assist us in obtaining low-cost financing for the purchase of the firm order aircraft. The remaining 15% of the aggregate purchase price for the firm order aircraft is expected to be funded by our cash or other financing alternatives. To the extent that we do not have sufficient cash resources to do so, we may be required to modify our aircraft acquisition plans or to incur higher than anticipated financing costs, which would have an adverse impact on the execution of our strategy and business. The Company believes that it has and will in the future have appropriate funding resources available with the combination of U.S. Eximbank supported financing, local development bank funding and sale and leaseback transactions.

Recent Accounting Pronouncements

     As of the date of our consolidated financial statements included elsewhere in this annual report, the following new and revised standards and interpretations were adopted by us and affected our consolidated financial statements:

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     The following new and revised standards and interpretations have had no impact on our consolidated financial statements:

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     As of the date of this annual report, the following new and revised standards and interpretations were issued but not yet adopted by us since adoption was not yet mandatory:

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C. Research and Development, Patents and Licenses, etc.

     We believe that the Gol brand has become synonymous with innovation and value in the Brazilian airline industry. We have filed requests for registration of the trademarks “GOL” and “GOL LINHAS AÉREAS INTELIGENTES” with trademark offices in Brazil and in other countries, and have already been granted final registration of these trademarks in Argentina, Bolivia, Chile, Colombia, the European Union, the United States, Paraguay and Uruguay. VRG holds trademarks for its “Varig” and “Smiles” brands in various countries.

D. Trend Information

     We believe in a strong recovery in the Brazilian economy, specially in the growth of the Brazilian middle class in the next years. We are forecasting demand for the Brazilian domestic airline industry to remain above the growth of the Brazilian GDP. We also plan to continue to add capacity in a conservative basis by following demand growth and believe that yields in our network should remain stable as compared to 2009. This positive macroeconomic and operating scenario, combined with our strategy to continue to grow passenger revenue while further reducing and diluting unitary costs, should further improve operating margins.

E. Off-Balance Sheet Arrangements

     None of our operating lease obligations are reflected on our balance sheet. At December 31, 2009, we had 33 aircraft recognized as finance leases on our balance sheet. We are responsible for all maintenance, insurance and other costs associated with operating these aircraft; however, we have not made any residual value or other guarantees to our lessors.

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F. Tabular Disclosure of Contractual Obligations

Our non-cancelable contractual obligations at December 31, 2009 included the following:

                            Beyond 
    Total     2010     2011     2012     2013     2014    2014 
    (in thousands of reais)
Non-derivative financial instruments                             
       Aircraft and engine operating leases    2,498,571    515,936    489,655    466,315    402,497    245,792    378,376 
       Aircraft capital leases    2,003,583    207,877    206,823    204,907    204,053    204,053    975,870 
       Short-term borrowing    455,016    455,016    -    -    -    -    - 
       Long-term borrowings(1)   1,121,428    -    125,448    119,469    111,096    94,343    671,072 
               
Total non-derivative financial instruments    6,078,598    1,178,829    821,926    790,691    717,646    544,188    2,025,318 
 
Derivative financial instruments                             
       Fuel derivative    18,588    18,588    -    -    -    -    - 
       Foreign exchange derivative    982    982    -    -    -    -    - 
       Interest rate swaps    (6,593)   (6,593)   -    -    -    -    - 
               
Total derivative financial instruments    12,977    12,977    -    -    -    -    - 
 
Aircraft commitments                             
       Pre-delivery deposits    1,574,659    159,536    200,228    406,147    429,396    222,477    156,875 
       Aircraft purchase commitments    10,990,377    1,091,624    966,897    417,312    2,273,215    3,352,360    2,888,969 
               
Total aircraft commitments    12,565,036    1,251,160    1,167,125    823,459    2,702,611    3,574,837    3,045,844 
 
TOTAL    18,656,611    2,442,966    1,989,051    1,614,150    3,420,257    4,119,025    5,071,162 
 
(1) Does not include short-term finance leases.                             

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and Senior Management

     Under our by-laws, we are managed by our Conselho de Administração, or board of directors, which is composed of at least five members and at most eleven members, and a Diretoria, or board of executive officers, which is composed of at least two and at most seven members. According to the Differentiated Corporate Governance Practices Level 2 introduced by BM&FBOVESPA, at least 20% of the members of our board of directors shall be “independent directors,” as defined by the BM&FBOVESPA.

     Our management and board of directors is supported and advised by a number of committees which comprise highly specialized and qualified individuals. These committees actively participate in the strategic and other key decisions of our management and we believe they add substantial value to our business. We currently have audit, personnel and corporate governance, financial and risk policy, and accounting committees, comprised of members of our board of directors and non-board members. We also have a tax and financial statement policy subcommittee.

     We are committed to achieving and maintaining high standards of corporate governance. In working towards this goal, we have established a personnel and corporate governance committee to monitor and make recommendations with respect to corporate governance “best practices” to our board of directors. In addition, in connection with listing as a Level 2 company on the BM&FBOVESPA, we have entered into an agreement with the BM&FBOVESPA to grant certain additional rights not required of Level 2 companies to our shareholders, such as tag-along rights offering our preferred shareholders 100% of the price paid per common share of controlling block shareholders. We conduct our business with a view towards transparency and the equal treatment of all of our shareholders. We have implemented policies to help to ensure that all material information that our shareholders require to make informed investment decisions is made available to the public promptly and that we at all times accurately reflect the state of our operations and financial position through press releases, filings with the SEC and Brazilian Securities Commission (“CVM”), and by keeping the investor relations section of our website current and complete. We have also adopted formal policies that restrict trading in our preferred shares by company insiders.

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     In addition, according to the Level 2 practices, the company shall cause all new members of the board of directors, board of executive officers and fiscal committee must sign a statement of consent in which they undertake to comply with the regulations of the Differentiated Corporate Governance Practices Level 2. Their taking office is conditioned to signing of such document. Also the members of the board of directors, board of executive officers and fiscal committee must sign a statement of consent, in which they undertake to refer to arbitration under the auspices of the BM&FBOVESPA Arbitration Chamber any disputes and/or controversies arising out of the application of the listing rules of the Differentiated Corporate Governance Practices Level 2, the listing agreement with BM&FBOVESPA, the regulations of the BM&FBOVESPA, the provisions of the Brazilian corporation law, guidelines issued by the Brazilian authorities and the other rules applicable to the capital markets in general, involving the company, the shareholders, the managers and the members of the fiscal committee.

Board of Directors

     Our board of directors is dedicated to providing our overall strategic guidelines and, among other things, is responsible for establishing our general business policies and for electing our executive officers and supervising their management. Currently, our board of directors is comprised of nine members. Four of the board members qualify as independent based upon New York Stock Exchange criteria. The board of directors meets an average of five times per year or whenever requested by the president or three members of our board of directors.

     Under the Brazilian corporation law, each director must hold at least one of our common or preferred shares and be a Brazilian resident, and is elected by the holders of our common shares at the Assembléia Geral Ordinária, or the annual general meeting of shareholders. There are no provisions in our by-laws restricting (i) a director’s power to vote on a proposal, arrangement or contract in which such director is materially interested, or (ii) the borrowing powers exercisable by our directors from us. However, under the Brazilian corporation law, a director is prohibited from voting on any matter in which such director has a conflict of interest with our company.

     Additionally, under the Brazilian corporation law, shareholders of publicly traded companies, such as we are, who together hold non-voting or voting-right restricted preferred shares representing at least 10% of our total share capital for at least three months are entitled to appoint one member of our board of directors.

     Under our by-laws, the members of the board of directors are elected by the holders of our common shares at the annual general meeting of shareholders. Members of our board of directors serve simultaneous one-year terms and may be re-elected. The terms of our current directors expire in April 2010. Our by-laws do not provide for a mandatory retirement age for our directors.

      The following table sets forth the name, age and position of each member of our board of directors. A brief biographical description of each member of our board of directors follows the table.

Name    Age    Position 
     
Alvaro de Souza    61    Chairman 
Constantino de Oliveira Junior    41    Director 
Henrique Constantino    38    Director 
Joaquim Constantino Neto    45    Director 
Ricardo Constantino    47    Director 
Antonio Kandir    56    Director 
Luiz Kaufmann    64    Director 
Richard F. Lark, Jr.    43    Director 
Paulo Kakinoff.    35    Director 

     Alvaro de Souza has been a member of our board of directors since August 2004 and became our chairman of the board in April 2009. Mr. Souza is an officer of AdS—Gestão, Consultoria e Investimentos Ltda., member of the board of directors of Unidas S/A, chairman of the board of directors of World Wildlife Group (WWF), co-chairman of the board of directors of Quinsa (Argentina) and member of the audit committee of AMBEV. He was Chief Executive Officer of Citibank Brazil from 1991 to 1994 and an Executive Vice-President of Citigroup in New York from 1995 to

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2003. Mr. Souza holds a bachelor’s degree in Economics and Business Administration from Pontifícia Universidade Católica de São Paulo. Mr. Souza is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards and is a member of our audit committee and personnel and corporate governance committee.

     Constantino de Oliveira Junior has been a member of GOL’s board of directors and its Chief Executive Officer since the Company was founded in 2001. Mr. de Oliveira introduced the “low-cost, low-fare” concept to the Brazilian airline industry and was named “Most Valuable Executive” by the Brazilian newspaper Valor Econômico in 2001 and 2002. He was also elected the Leading Executive in the logistics sector by the readers of Gazeta Mercantil, a Brazilian financial newspaper, in 2003, and in 2008, was named a “Distinguished Executive” in the Air Transportation category at the GALA (Latin American Aeronautics Gallery) awards, sponsored by IATA. Prior to joining GOL, Mr. de Oliveira served as an officer of the Áurea group (1994-2000). Mr. de Oliveira studied Business Administration at the Universidade do Distrito Federal and attended the Executive Program on Corporate Management for Brazil conducted by the Association for Overseas Technical Scholarships.

     Henrique Constantino has been a member of our board of directors since March 2004. Mr. Constantino has also been a member of the board of directors of Gol since 2003. He has been the chief financial officer of the Áurea group since 1994 and is an officer of Comporte S.A. He participated in the creation of Gol and served as its chief financial officer from January 2001 to March 2003, when he became a member of the board. Mr. Henrique Constantino is also a member of the board of directors of Providência S.A. and BR Vias S.A. Mr. Constantino has a law degree from CEUB—Centro de Ensino Unificado de Brasília and has a post-graduate degree in Business Administration from EAESP—FGV (Fundação Getúlio Vargas—São Paulo). Mr. Constantino is a member of our financial and risk policy committee and personnel and corporate governance committee.

     Joaquim Constantino Neto has been a member of our board of directors since March 2004. Mr. Constantino has been a member of the board of directors of Gol since 2001. He has been the chief operations officer of the Áurea group since 1994. From 1984 to 1990, he was in charge of operations of Reunidas Paulista. Since 1990 to the present, he has been the President of Breda Serviços, a bus transportation company. Mr. Joaquim Constantino Neto is also member of the board of directors of Providência S.A.

     Ricardo Constantino has been a member of our board of directors since March 2004. Mr. Constantino has been a member of the board of directors of Gol since 2001. He has been the chief technical and maintenance officer of the Áurea group since 1994.

     Antonio Kandir has been a member of our board of directors since August 2004. Mr. Kandir is an economic consultant Mr. Kandir is also partner of Governança e Gestão and is a member of the board of directors of Medial Saúde and Providência S.A. Mr. Kandir served in the Brazilian government as a Federal Lower House Representative for two terms of office, and served as Planning and Budget Minister and Secretary of Economic Policy and President of the Privatization Council. He has a bachelor degree in production engineering from the Escola Politécnica at USP and bachelors, masters and doctoral degrees in Economics from Unicamp. Mr. Kandir is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards and is a member of our audit committee.

     Luiz Kaufmann has been a member of our board of directors since December 2004. Mr. Kaufmann is the Managing Partner of L. Kaufmann Consultores Associados, member of the board of directors of Providência S.A. and the CEO of Kroton Educacional S.A. Mr. Kaufmann has presided over several companies such as Aracruz Celulose S.A., Vésper, Petropar, Grupo Multiplic, Arthur D. Little, and was a partner at GP Investimentos. He was a member of several companies’ board of directors, including Pioneer Hi-Bred International, América Latina Logística and Lojas Americanas. He was a member of the Global Corporate Governance Advisory Board, which was comprised of 20 internationally renowned business leaders from 16 different countries, created to advance knowledge on the roles and responsibilities of boards of directors of international companies. Mr. Kaufmann is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards. He is a member of our audit committee and our audit committee financial expert as defined by the current SEC rules.

     Richard F. Lark, Jr. has been a member of our board of directors since June 2008. Mr. Lark served as our executive vice president, chief financial and investor relations officer from April 2003 to June 2008. He is a director of Endurance Capital Partners, an investment management firm, and a member of the board of directors of several public and private companies. From 2000 to 2003, Mr. Lark served as chief financial officer of Americanas.com, one of the leading Brazilian e-commerce companies. Prior to joining Americanas.com, Mr. Lark was an executive in the investment banking divisions of Morgan Stanley & Co., Citicorp and The First Boston Corporation. Mr. Lark is a member of the Board of Governors of the American Society of São Paulo since 2003, having served as its president during 2005-2007. Mr. Lark holds a Master in Business Administration degree from the Anderson School at UCLA and bachelor degrees in finance and business economics and philosophy from the University of Notre Dame. Mr. Lark is a member of our financial and risk policy committee and accounting, tax and financial statement policy subcommittee.

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     Paulo Kakinoff has been a member of our Board of Directors since January 2010. Mr. Kakinoff is currently CEO of Audi Brasil and vice president of the Brazilian Automobile Importers Association (Associação Brasileira de Importadores de Veículos Automotores – ABEIVA). Mr. Kakinoff has 17 years of experience in the auto industry, having served as Sales & Marketing Director at Volkswagen do Brasil and as Executive Director for South America at the Volkswagen Group’s head offices in Germany. He holds a bachelor’s degree in Business Administration from Mackenzie University. Mr. Kakinoff is an independent member of our board of directors under the requirements of the SEC and NYSE listing standards.

     Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino are brothers. Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino control our major shareholder Fundo de Investimento em Participações Asas on an equal basis.

Executive Officers

     Our executive officers have significant experience in the domestic and international passenger transportation industries, and we have been able to draw upon this extensive experience to develop our low-cost operating structure. The executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities established in our by-laws and by our board of directors. The business address of each of our executive officers is the address of our principal executive office.

     Under our by-laws, we must have at least two and at most seven executive officers that are elected by the board of directors for a one-year term. Any executive officer may be removed by the board of directors before the expiration of his term. The current term of all our executive officers ends in March 2011.

     The following table sets forth the name, age and position of each of our executive officers elected in March 2008. A brief biographical description of each of our executive officers follows the table.

Name    Age    Position 
 
Constantino de Oliveira Junior    41    President and Chief Executive Officer 
Fernando Rockert de Magalhães    59    Executive Vice President-Technical 
Leonardo Porciúncula Gomes Pereira.    51    Executive Vice President Chief Financial Officer Information Technology and Investor Relations Officer 
Cláudia Jordão Ribeiro Pagnano.    43    Executive Vice President – Marketing 

     Constantino de Oliveira Junior. See “—Board of Directors.”

     Fernando Rockert de Magalhães has been an officer since August 2007. Mr. Rockert joined Gol in January 2004 and assumed the role of Gol’s Director of Flight Operations in March 2005. He is an experienced pilot with more than 16,000 flight hours. Mr. Rockert holds a law degree and a graduate degree in Administration. He also earned a Master in Business Administration degree from the Fundação Getúlio Vargas (FGV). Mr. Rockert is also a professor of Aeronautical Law. Mr. Rockert began his career in the 1970s as a pilot for Rio Sul, a regional airline in Brazil. He also worked as a VASP pilot for more than 18 years, his last position being MD-11 Captain and Instructor. During three years Capt Rockert was a simulator instructor based in Seoul, South Korea for Flight Safety Boeing (now Alteon), where he trained pilots for Korean Airlines.

     Leonardo Pereira has been an officer since February 2009. Prior to joining Gol, Mr. Pereira served two years as the Director President of Companhia do Vale do Araguaia, a Brazilian commercial foresting company, and six years as the Executive Director Finance and Investor Relations of NET Serviços, a leading cable provider in Latin America listed on the BM&FBOVESPA (Level II), NASDAQ and Latibex. He previously served five years as Planning Director at Globopar, a media industry holding company, and 13 years in a number of roles at Citibank Corporate Finance Bank in Brazil, Asia, Latin America and the United States, including leader of the Latin American Aviation team. He is member of the Corporate Governance Committee of the São Paulo chapter of the American Chamber of Commerce. Mr. Pereira holds degrees in Production Engineering from the Universidade Federal do Rio de Janeiro (UFRJ) and Economics from the Universidade Candido Mendes; he received his MBA from Warwick University (England). Pereira has also studied Finance at IMD in Switzerland and General Management at Wharton Business School, attended The Association for Overseas Technical Scholarship (AOTS) in Japan, and completed Columbia University’s Senior Executive Education Program.

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     Cláudia Jordão Ribeiro Pagnano has been an officer since March 2010. Before joining Gol, Mrs. Pagnano worked for two years as Perdigão’s Business Unit Officer of BRF Brasil Foods. Mrs. Pagnano also served for two years as Business Unit Officer of Grupo Pão de Açucar and worked as Bussiness and Marketing Officer of several consumer and financial services companies, such as Boston, Unibanco, Kodak and Colgate. Mrs. Pagnano holds a bachelor’s degree in marketing from Escola Superior de Propaganda Marketing (ESPM) and specialization in Finances from Fundação Getúlio Vargas (FGV-SP).

Other Officers

     In addition to our Executive Officers, who are appointed by our Board of Directors and perform certain statutory roles under Brazilian laws and our by-laws, Ricardo Khauaja, our Vice-President of Customers, Employees and Management, is also part of our senior management team. Following is his brief biographical description. Ricardo Khauaja has been Gol’s Vice-President of Customers, Employees and Management since July 2009. Mr. Khauaja worked for beverage company Ambev for ten years, where he served in several positions, including Corporate Human Resources manager (2001 to 2003). After this, he worked for six years at home appliance manufacturer Whirlpool, first as the Human Resources Officer for Latin America (three years), followed by vice-president (three years). Mr. Khauaja has a degree in Production Engineering from the Federal University of Rio de Janeiro (UFRJ) and a MBA in Finance from the Brazilian Capital Market Institute (IBMEC/RJ). He also completed “The Transition from Functional to General Management” course at Columbia University in the United States.

B. Compensation

     Under our by-laws, our shareholders are responsible for establishing the aggregate amount we pay to the members of our board of directors and our executive officers. Once our shareholders establish an aggregate amount of compensation for our board of directors and executive officers, the members of our board of directors are then responsible for setting individual compensation levels in compliance with our by-laws.

     For the fiscal year ended December 31, 2009, the aggregate compensation, including cash and benefits-in-kind but excluding stock options, that we paid to the members of our board of directors and executive officers was R$13.8 million.

Stock Option Plan

     Our stock option plan was approved at a special shareholders’ meeting held on December 9, 2004. The stock option plan is aimed at promoting our interests by encouraging management employees to contribute substantially to our success, by motivating them with stock options. The plan is managed by both our personnel and corporate governance committee and our board of directors.

     Participants in the plan are selected by the personnel and corporate governance committee, provided that they have been either president, vice-president, officer, advisor to the president or to the vice-president, general manager or manager. The stock options to be granted under the plan confer rights related only to our preferred shares, and over a number of preferred shares that does not, at any time, exceed 5% of our shares. The personnel and corporate governance committee establishes each year the strike price of the options to be granted, which must be equal to the average price of the preferred shares recorded in the last 60 trading sessions prior to the granting date, adjusted pursuant to the IGP-M inflation index. One fifth of the total options granted to a participant vests in each anniversary of the option grant

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     The plan is valid for a ten-year term. In case of termination of our legal relationship with the option holder, with or without cause (except in the case of retirement, permanent disability or death) all options that have been granted to the participant, and which were not yet exercisable, automatically expire.

     In 2008, we issued stock options of up to 190,296 at a weighted average exercise price of R$45.46 per share. In 2009, we issued 925,800 stock options, of which only 485,150 are still outstanding after the cancellation of 418,000 stock options due to the departure of their respective holders from the company and the exercise of 22,650 stock options. These stock options were issued at a weighted average exercised price of R$10.52 per share. On February 2, 2010, our board of directors approved the granting of 2,672,746 options to purchase preferred Company stock at the price of R$20.65 per share for the year 2010. The total number of options granted in the last three years, excluding the 418,000 options cancelled and the 22,650 options exercised, is 3,348,192, or 1.3% of our total shares. The vesting period of the stock options is 5 years for the options granted until 2009 and 3 years for the optionsgranted until 2010, and options can be exercised up to 10 years after the grant date. The purpose of our stock option plan is to align shareholder and top management interests.

C. Board Practices

     Currently, our board of directors is comprised of nine members. The terms of our current directors will expire in 2010. See “—Board of Directors.”

Fiscal Committee

     Under the Brazilian corporation law, the Conselho Fiscal, or fiscal committee, is a corporate body independent of management and of our external auditors. The fiscal committee may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year. A fiscal committee is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal committee is to review management’s activities and a company’s financial statements, and to report its findings to the company’s shareholders. The Brazilian corporation law requires fiscal committee members to receive as remuneration at least 10% of the average annual amount paid to a company’s executive officers. The Brazilian corporation law requires a fiscal committee to be composed of a minimum of three and a maximum of five members and their respective alternates.

     Under the Brazilian corporation law, the fiscal committee may not contain members that (i) are on our board of directors, (ii) are on the board of executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree. Our by-laws provide for a non-permanent fiscal committee to be elected only by our shareholders’ request at a general shareholders’ meeting. The fiscal committee, when elected, will be comprised of a minimum of three and a maximum of five members and an equal number of alternate members. In 2009, our shareholders did not request the election of a fiscal committee.

Committees of the Board of Directors and Board of Executive Officers

     Our board of directors also has audit, personnel and corporate governance, and financial and risk policy committees and an accounting, tax and financial statement policy subcommittee. Our board of executive officers has management, executive policy, budget, investment, corporate governance and risk policies committees. In most cases, members of the committees do not need to be members of our board of directors or board of executive officers. The responsibilities and composition of these committees are described below.

     Audit Committee. Our audit committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our board of directors on matters involving accounting, internal controls, financial reporting and compliance. The audit committee recommends the appointment of our independent auditors to our board of directors and reviews the compensation of our independent auditors and helps coordinate their activities. It also evaluates the effectiveness of our internal financial and legal compliance controls. The audit committee comprises three members elected by the board of directors for a one-year term with the right to re-election, all three of which are independent. The current members of our audit committee are Álvaro de Souza, Antônio Kandir and Luiz Kaufmann. All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements. Luiz Kaufmann is the committee’s “financial expert” within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.

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     Personnel and Corporate Governance Committee. The personnel and corporate governance committee is responsible for the coordination, implementation and periodic review of best corporate governance practices and for monitoring and keeping our board of directors informed of legislation and market recommendations addressing corporate governance. It also reviews and recommends to our board of directors human resources policies, forms of compensation, including salary, bonus and stock options, to be paid to our employees, as well as analyzing management’s career and succession plans. The committee consists of up to five members elected by our board of directors for a one-year term, with the right to re-election, comprising the chairman of the board of directors, one member of the board of directors, two outside specialists and the management and personnel officer. The personnel and corporate governance committee currently consists of Henrique Constantino, a member of our board of directors, Betânia Tanure de Barros, Álvaro de Souza, Paulo César Aragão and Ricardo Khauaja.

     Financial and Risk Policy Committee. The financial and risk policy committee conducts periodic reviews of the measures we take to protect the company against foreign exchange, jet fuel price and interest rate changes and analyzes the effect of these changes on our revenues and expenses, cash flow and balance sheet. It also prepares and approves our corporate finance policies, examines their efficiency and oversees their implementation, periodically examines our investment and financing plans and makes recommendations to our board of directors, determines the parameters for maintaining the desired liquidity and capital structures, monitors their execution and approves the policies to be adopted in the following quarter. It further assesses the effectiveness of hedging measures taken during the previous quarter, approves recommendations for future changes and also conducts reviews of cash management activities. The financial and risk policy committee meets on a quarterly basis and consists of seven members elected by the board of directors for a one-year term with the right to re-election, comprising three members of our board of directors, our chief financial officer, an internal auditor and two outside specialists. The committee currently consists of Henrique Constantino, Richard F. Lark, Jr., Luiz Kauffman, all members of our board of directors, Leonardo P. Gomes Pereira, our chief financial and investor relations officer, Charles B. Holland, Barry Siler, a fuel hedging specialist and chief executive officer of Kodiak Fuels, and Marcos Provetti.

     Accounting, Tax and Financial Statement Policy Subcommittee. The accounting, tax and financial statement policy subcommittee conducts periodic reviews of, and evaluates and monitors the company’s accounting policies and financial statements and makes observations and recommendations to the board of directors on these matters. The subcommittee meets on a quarterly basis and consists of three members elected by the board of directors for a one-year term with the right to re-election, comprising the company’s chief financial officer, a member of the board of directors or a member of the audit committee, and an independent member. The committee currently consists of Richard F. Lark, Jr., a member of our board of directors, Leonardo Pereira, our chief financial and investor relations officer, Charles B. Holland and Marcos da Cunha Carneiro.

     Our board of directors had a strategy committee that was dissolved in January 2010 upon completing its task of preparing our five year business plan. The strategy committee made recommendations to the board of directors concerning the company’s basic strategy and institutional positioning, as well as the periodic revision of its mission and values and the revision of the strategic plan proposed by the board of executive officers. It also made recommendations to the board of directors regarding the revision of the company’s annual business plan, targets and budget, and advised the board of executive officers on the methodology used to prepare the business plan in order to ensure that it was both participatory and comprehensive. The strategy committee consisted of up to nine members elected by the board of directors for a six-month term of office, comprising the chairman of the board of directors. the chief executive officer, the chief financial officer, the management and personnel officer, the marketing officer; the information technology and planning officer and three members of the board of directors. The last committee members were Constantino de Oliveira Junior, Henrique Constantino, Luiz Kaufmann, Álvaro de Souza and Antônio Kandir, all members of our board of directors, Leonardo Pereira, our chief financial and investor relations officer, and Ricardo Khauaja, our Vice-President of Customers, Employees and Management.

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D. Employees

     We believe that our growth potential and the achievement of our results-oriented corporate goals are directly linked to our ability to attract and maintain the best professionals available in the airline business. We place great emphasis on the selection and training of enthusiastic employees with potential to add value to our business and who we believe fit in with and contribute to our business culture.

     As of December 31, 2009, we had 17,963 active employees.

     We invest significant resources promoting the well being of our employees. In 2009, we spent R$394.2 million on health and safety matters, training, social contributions, employee meals, transportation and profit sharing.

     We train our own pilots. We also provide extensive ongoing training for our pilots, flight attendants and customer service representatives. In addition to the required technical training, which follows the strictest international standards, we also provide comprehensive managerial training to our pilots and flight attendants through Crew Resource Management and Line Oriented Flight Training programs, emphasizing the importance of resource management to provide the best service to our passengers.

     In order to help retain our employees, we encourage open communication channels between our employees and management and offer career development opportunities in the company and periodic evaluations. We offer in-house post-graduate business school training in conjunction with the Fundação Getúlio Vargas, a leading Brazilian business school, to provide management training to selected employees. Our compensation strategy reinforces our determination to retain talented and highly motivated employees and is designed to align the interests of our employees with our shareholders. Our compensation packages include competitive salaries and participation in our profit sharing program. We have agreements with medical and insurance companies to offer affordable health and pension plan options to our employees.

     A national aviators’ union represents Brazil’s pilots and flight attendants, and seven other regional aviation unions represent ground employees of air transportation companies. Approximately 6% of our employees are members of unions. Negotiations in respect of cost of living wage and salary increases are conducted annually between the workers’ unions and a national association of airline companies. There is no salary differential or seniority pay escalation among our pilots. Work conditions and maximum work hours are regulated by government legislation and are not the subject of labor negotiations. Since the commencement of our operations, we have not had a work stoppage by our employees and we believe that our relationship with our employees is good.

     To motivate our employees and align their interests with our results of operations, we provide an annual profit sharing program to all of our employees. Under Brazilian law, companies may provide profit sharing programs that define mechanisms for distributing a portion of a company’s profits based upon the achievement of pre-defined targets established by the company. Our annual profit sharing programs are negotiated with a commission formed by our employees and approved by labor unions for the benefit of all of our unionized and non-unionized employees. For the purposes of our profit sharing program, a portion of profit sharing distributions are based upon the achievement of corporate profit targets and a portion of the distributions are based on the achievement of operational targets set for each of our departments. We have established a stock option plan for our management and employees vesting over a 3 year period. As of February, 2010, a total of 52 of our management and employees were granted stock options under this plan.

E. Share Ownership

     The members of our board of directors and our executive officers, on an individual basis and as a group, directly own approximately 1.6% of our preferred stock. See “Item 7A. Major Shareholdings and Related Party Transactions—Major Shareholders.” Fundo de Investimento em Participações Asas is a fund directly controlled by Messrs. Constantino de Oliveira Júnior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino, respectively.

     For a description of stock options granted to our board of directors and our executive officers, see “—Compensation—Executive Stock Options” and “—Compensation—Stock Option Plan.”

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major Shareholders

     The following table sets forth information relating to the beneficial ownership of our common shares and preferred shares as of December 31, 2009, by each person known by us to beneficially own 5% or more of our common shares or preferred shares and all our directors and officers as a group.

     Each shareholder’s percentage ownership in the following table is based on the 133,199,658 common shares and 132,079,880 preferred shares outstanding as of December 31, 2009.

    Common Shares    Preferred Shares    Total Shares 
       
    Shares    (%)   Shares    (%)   Shares    (%)
             
                         
Fundo de Investimento em Participações ASAS (1)   133,199,642    100.0%    35,610,617    27.0%    168,810,259    63.6% 
                         
Executive officers and directors    16    0%    2,066,787    1.6%    2,066,803    0.8% 
                         
Stock Held in Treasury    -    -    454,425    0.3%    454,425    0.2% 
                         
Free Float    -    -    93,948,051    71.1%    93,948,051    35.4% 
             
                         
Total    133,199,658    100.0%    132,079,880    100.0%    265,279,538    100.0% 
 
(1) Fundo de Investimento em Participações Asas is controlled equally by Constantino de Oliveira Junior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino. 

     According to our internal share record, which contains information regarding the ownership of our shares and the ADSs as filed by the holders of such shares and ADS, there were, at December 31, 2009, 33 record holders of ADSs in the United States.

     On March 20, 2009, our board of directors approved a capital increase of a total of 26,093,722 shares comprising 6,606,366 common and 19,487,356 non-voting preferred shares to improve the company’s cash position and capital structure and to ensure the level of investments planned. The issue price for all shares was set and issued at R$7.80 per share. Our controlling shareholders fully subscribed and paid for their portion of the capital increase in an amount of R$150.0 million. On June 2, 2009, our board of directors authorized the subscription of all shares and approved the capital increase in an amount of R$203.5 million.

     On October 8, 2009, our board of directors approved the capital increase of R$627.1 million in the context of a primary public offering of a total of 38,005,000 shares, comprising 19,002,500 common shares and 19,002,500 preferred shares. The issue price of the common and preferred shares was set at R$16.50 per share, as defined in a bookbuilding procedure.

     In December 2009 our board of directors approved the cancellation of 1,119,775 preferred shares held as treasury stock. We still hold 454,425 preferred shares in treasury.

     On March 11, 2010, our board of directors authorized the dividends distribution for 2009 year, through a capital increase in the same amount of dividends declared for the 2009 year in the amount of R$185.8 million by means of a private offering of 7,622,584 shares, of which 3,833,077 are common shares and 3,789,507 are preferred shares. The issuance price was R$24.38 per share, based on the closing price of our preferred shares on March 11, 2010 at the BM&FBOVESPA.

Shareholders’ Agreement

     No shareholders’ agreements have been filed with us.

B. Related Party Transactions

     According to the Level 2 regulations, the company shall forward and disclose to BM&FBOVESPA the information regarding every and any agreement entered by and between Gol and its affiliates and associate companies, its administrators, its controlling shareholder, as the case may be, as well as other corporations that make a group with any such persons, whether factual or by law, whenever they reach, with a single agreement or with successive agreements, with or without the same purpose, at any period of one year, an amount of R$0.2 million or more, or a value of 1% or more over the net equity of the company, whichever is higher.

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     Such announced information shall describe the scope of the agreement, the term, the price, the termination or completion conditions and any possible influence of the agreement upon administration or company business conducting.

     We have engaged in a number of transactions with related parties, none of which have involved the issuance of guarantees.

Transportation, Graphic and Consultancy Agreements with Comporte Participações S.A.

     We have exclusive bus transportation agreements with Expresso União Ltda. and Breda Serviços for the transportation of our passengers, their luggage and our employees. We also have operating agreements with Serviços Gráficos Ltda. and HK Consultoria e Participações, for graphic and consultancy services, respectively. We are the tenant of a property located at Rua Tamoios, 246, in São Paulo, SP, owned by an affiliate, Patrimony Administradora de Bens. The entities mentioned above belong to the same economic group and are all controlled by Comporte Participações S.A.

     In 2008 and 2009, we made total payments of R$8.6 million and R$10.5 million, under these operating agreements.

Commercial Agreement with Unidas Rent a Car

     In May, 2009, we entered into a commercial agreement with Unidas Rent a Car, a Brazilian car rental company, which gives Unidas’ customers a 50% discount on the daily car rental charges when these customers purchase their Gol tickets through our website. Gol’s chairman, Álvaro de Souza, is also a member of Unidas Rent a Car board of directors.

C. Interests of Experts and Counsel

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A. Consolidated Statements and Other Financial Information

     See “Item 3. Key Information—Selected Financial Data” and “Item 18. Financial Statements.”

Legal Proceedings

     In the ordinary course of our business, we are party to various legal actions, which we believe are incidental to our operations, in large part linked to the routine demands related to the rights of consumers. At December 31, 2009, we were parties in 17,446 judicial lawsuits and administrative proceedings, including 12,425 civil claims, of which 1,257 were administrative proceedings, and 5,021 labor claims, of which 97 were administrative proceedings. We believe that the outcome of the proceedings to which we are currently a party will not have a material adverse effect on our financial position, results of operations and cash flows. We have established provisions for all amounts in dispute that represent a probable loss in the view of our legal advisors and in relation to those disputes that are covered by laws, administrative decrees, decrees or court rulings that have proven to be unfavorable.

     We are party to approximately 11,590 civil proceedings arising from the normal course of our business, which includes flight delays or cancellations and baggage loss or damage, and 5,856 civil proceedings against Varig S.A. in which plaintiffs claim we would be a successor in interest of Varig S.A. The vast majority of these proceedings involve minor cases relating to customer relations. At December 31, 2009, we had established provisions to address these contingencies in the total amount of R$34.8 million.

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     We are party to approximately 1,089 labor proceedings arising from the normal course of our business, which includes overtime, hazardous work premium, health exposure allowance and differences in salary, and 3,932 labor proceedings against Varig S.A. in which plaintiffs claim we would be a successor in interest of Varig S.A.. At December 31, 2009, we have established provisions to address these contingencies in the total amount of R$35.5 million. We are subject to 19 labor proceedings related to employees’ claims against Varig S.A. in Spain. We established provisions in the amount of R$21.1 million for these proceedings.

     In 2001, we commenced proceedings against the Brazilian state revenue service, in which we claim an exemption from the payment of Brazilian value added tax (ICMS) due on imported aircraft, parts and engines. On May 30, 2007, the Supremo Tribunal Federal (Federal Supreme Court) ruled in our favor in respect of one of these cases. Various of the proceedings relating to this matter are still pending. We have not established any provisions for the amounts in question, which were, as of December 31, 2009, R$210.2 million.

     We are party in indemnification lawsuits regarding the collision of our new Boeing 737-800 NG aircraft on September 26, 2006. We believe that any potential liability arising out of such lawsuits will be covered by our insurance policies. We continue to cooperate fully with all regulatory and investigatory agencies to determine the cause of this accident and have reached agreements regarding 112 of the 148 passengers. The payments for the hull to the lessor were made by the insurance company. We have provisioned the amount insured as a liability on our balance sheet, and recorded a corresponding receivable for the insurance claim under “Other assets”.

     We commenced an arbitration before the International Chamber of Commerce against the sellers of VRG and its controlling shareholders relating to the purchase price adjustments for our acquisition of VRG. In the arbitral proceeding, we are seeking a price adjustment of R$164.0 million from the sellers of VRG. The amount owed by the sellers of VRG will be determined by the arbitral tribunal. In conjunction with the arbitral proceedings, we have brought legal action and joined certain lawsuits in Brazilian courts with a view to preserving the ability of the sellers to satisfy our claims. We have provisioned all amounts subject to these proceedings.

     For further information on our legal proceedings and contingencies, see note 18 to our consolidated financial statements.

Dividends and Dividend Policy

Amounts Available for Distribution

     At each annual general shareholders’ meeting, our board of directors is required to propose how our earnings for the preceding fiscal year are to be allocated. For purposes of Brazilian corporation law, a company’s non-consolidated net income after federal income tax and social contribution on net income for such fiscal year, net of any accumulated losses from prior fiscal years and amounts allocated to employees’ and management’s participation in earnings, represents its “income” for such fiscal year. In accordance with the Brazilian corporation law, an amount equal to the company’s “income,” as adjusted (the “distributable amount”), will be available for distribution to shareholders in any particular year. The distributable amount will be affected by the following:

     Our by-laws do not provide for statutory or contingency reserves. Under the Brazilian corporation law and according to our by-laws, we are required to maintain a “legal reserve” to which we must allocate 5% of our “income” for each fiscal year until the amount of the reserve equals 20% of paid-in capital. We are not required to make any allocations to our legal reserve in respect of any fiscal year in which such reserve, when added to our capital reserves, exceeds 30% of our capital. Accumulated losses, if any, may be charged against the legal reserve. Other than that, the legal reserve can only be used to increase our capital. The legal reserve is subject to approval by the shareholders voting at the annual shareholders’ meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years. Our calculation of net income and allocations to reserves for any fiscal year are determined on the basis of our non-consolidated financial statements prepared in accordance with the Brazilian corporation law.

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     Under the Brazilian corporation law, a portion of a corporation’s “income” may be allocated for discretionary appropriations for plant expansion and other fixed or working capital investment projects, the amount of which is based on a capital budget previously presented by management and approved by the shareholders in a general shareholders’ meeting. After completion of the relevant capital projects, the company may retain the appropriation until shareholders vote to transfer all or a portion of the reserve to capital or retained earnings. The Brazilian corporation law provides that, if a project to which the reserve for investment projects account is allocated has a term exceeding one year, the budget related to the project must be submitted to the shareholders’ meeting each fiscal year until the relevant investment is completed.

     Under the Brazilian corporation law, the amount by which the mandatory distribution exceeds the “realized” portion of net income for any particular year may be allocated to the unrealized profits reserve and the mandatory distribution may be limited to the “realized” portion of net income. The “realized” portion of net income is the amount by which “income” exceeds the sum of (a) our net positive results, if any, from the equity method of accounting for earnings and losses of our subsidiaries and certain affiliates, and (b) the profits, gains or income obtained on transactions maturing after the end of the following fiscal year. As amounts allocated to the unrealized income reserve are realized in subsequent years, such amounts must be added to the dividend payment relating to the year of realization.

     Under Brazilian tax legislation, a portion of the income taxes payable may also be transferred to a general “fiscal incentive reserve” in amounts equivalent to the reduction in the company’s income tax liability which results from the option to deposit part of that liability into investment in approved projects in investment incentive regions established by government.

     Under the Brazilian corporation law, any company may create a “statutory” reserve, which reserve must be described in the company’s by-laws. Those by-laws which authorize the allocation of a percentage of a company’s net income to the statutory reserve must also indicate the purpose, the criteria for allocation and the maximum amount of the reserve. The Brazilian corporation law provides that all discretionary allocations of “income,” including the unrealized profits reserve and the reserve for investment projects, are subject to approval by the shareholders voting at the general shareholders’ meeting and may be transferred to capital or used for the payment of dividends in subsequent years. The fiscal incentive reserve and the legal reserve are also subject to approval by the shareholders voting at the general shareholders’ meeting and may be transferred to capital or used to absorb losses, but are not available for the payment of dividends in subsequent years.

     The amounts available for distribution may be further increased by a reversion of the contingency reserve for anticipated losses constituted in prior years but not realized. Allocations to the contingency reserve are also subject to approval by the shareholders voting at the general shareholders meeting. The amounts available for distribution are determined on the basis of our non-consolidated financial statements prepared in accordance with Brazilian GAAP.

     The balance of the profit reserve accounts, except for the contingency reserve and unrealized profits reserve, may not exceed the share capital. If this happens, a shareholders’ meeting must resolve whether the excess will be applied to pay in the subscribed and unpaid capital, to increase and pay in the subscribed stock capital or to distribute dividends.

     Pursuant to Law No. 10,303, net income unallocated to the accounts mentioned above must be distributed as dividends.

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Mandatory Distribution

     The Brazilian corporation law generally requires that the by-laws of each Brazilian corporation specify a minimum percentage of the amounts available for distribution by such corporation for each fiscal year that must be distributed to shareholders as dividends, also known as the mandatory distribution.

     The mandatory distribution is based on a percentage of adjusted non-consolidated net income, not lower than 25%, rather than a fixed monetary amount per share. If the by-laws of a corporation are silent in this regard, the percentage is deemed to be 50%. Under our by-laws, at least 25% of our adjusted non-consolidated net income, as calculated under Brazilian GAAP and adjusted under the Brazilian corporation law (which differs significantly from net income as calculated under IFRS), for the preceding fiscal year must be distributed as a mandatory annual dividend. Adjusted net income means the net income after any deductions for the legal reserve and contingency reserves and any reversals of the contingency reserves created in previous fiscal years. The Brazilian corporation law, however, permits a publicly held company, such as we are, to suspend the mandatory distribution of dividends in any fiscal year in which the board of directors reports to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. The suspension is subject to the approval at the shareholders’ meeting and review by members of the fiscal committee. While the law does not establish the circumstances in which payment of the mandatory dividend would be “inadvisable” based on the company’s financial condition, it is generally agreed that a company need not pay the mandatory dividend if such payment threatens the existence of the company as a going concern or harms its normal course of operations. In the case of publicly held corporations, the board of directors must file a justification for such suspension with the CVM within five days of the relevant general meeting. If the mandatory dividend is not paid and funds are available, those funds shall be attributed to a special reserve account. If not absorbed by subsequent losses, those funds shall be paid out as dividends as soon as the financial condition of the company permits.

     The board of directors can also decide to make the mandatory dividend distribution in the form of interest attributable to shareholders’ equity, which is deductible when calculating income and social contribution taxes.

Payment of Dividends

     We are required by the Brazilian corporation law to hold an annual general shareholders’ meeting by no later than April 30 of each year, at which time, among other things, the shareholders have to decide on the payment of an annual dividend. Additionally, interim dividends may be declared by the board of directors. Any holder of record of shares at the time of a dividend declaration is entitled to receive dividends. Dividends on shares held through depositaries are paid to the depositary for further distribution to the shareholders.

     Under the Brazilian corporation law, dividends are generally required to be paid to the holder of record on a dividend declaration date within 60 days following the date the dividend was declared, unless a shareholders’ resolution sets forth another date of payment, which, in either case, must occur prior to the end of the fiscal year in which such dividend was declared. Pursuant to our by-laws, unclaimed dividends do not bear interest, are not monetarily adjusted and revert to us three years after dividends were declared. See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock.”

     Our board of directors may declare interim dividends or interest attributable to shareholders’ equity based on income verified in semi-annual financial statements. The board of directors may also declare dividends based on financial statements prepared for shorter periods, provided that the total dividends paid in each six-month period do not exceed the capital reserves amount required by Brazilian corporation law. The board of directors may also pay interim dividends or interest attributable to shareholders’ equity out of retained earnings or income reserves recorded in the last annual balance sheet. Any payment of interim dividends may be set off against the amount of mandatory dividends relating to the net income earned in the year in which the interim dividends were paid.

     Our by-laws do not require that we adjust the amount of any dividend payment to inflation.

     In general, shareholders who are not residents of Brazil must register their equity investment with the Central Bank to have dividends, sales proceeds or other amounts with respect to their shares eligible to be remitted outside Brazil. The preferred shares underlying the ADSs are held in Brazil by Banco Itaú S.A., also known as the custodian, as agent for the depositary, that is the registered owner on the records of the registrar for our shares. The current registrar is Banco Itaú. The depositary registers the preferred shares underlying the ADSs with the Central Bank and, therefore, is able to have dividends, sales proceeds or other amounts with respect to registered preferred shares remitted outside Brazil.

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     Payments of cash dividends and distributions, if any, are made in reais to the custodian on behalf of the depositary, which then converts such proceeds into U.S. dollars and causes such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. In the event that the custodian is unable to convert immediately the Brazilian currency received as dividends into U.S. dollars, the amount of U.S. dollars payable to holders of ADSs may be adversely affected by depreciation of the Brazilian currency that occur before the dividends are converted. Under the current Brazilian corporation law, dividends paid to persons who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding tax, except for dividends declared based on profits generated prior to December 31, 1995, which will be subject to Brazilian withholding income tax at varying tax rates. See “Item 10. Taxation—Material Brazilian Tax Considerations.”

     Holders of ADSs have the benefit of the electronic registration obtained from the Central Bank, which permits the depositary and the custodian to convert dividends and other distributions or sales proceeds with respect to the preferred shares represented by ADSs into foreign currency and remits the proceeds outside Brazil. In the event the holder exchanges the ADSs for preferred shares, the holder will be entitled to continue to rely on the depositary’s certificate of registration for five business days after the exchange. Thereafter, in order to convert foreign currency and remit outside Brazil the sales proceeds or distributions with respect to the preferred shares, the holder must obtain a new certificate of registration in its own name that will permit the conversion and remittance of such payments through the commercial rate exchange market. See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock—Regulation of Foreign Investment and Exchange Controls.”

     If the holder is not a duly qualified investor and does not obtain an electronic certificate of foreign capital registration, a special authorization from the Central Bank must be obtained in order to remit from Brazil any payments with respect to the preferred shares through the commercial rate exchange market. Without this special authorization, the holder may currently remit payments with respect to the preferred shares through the floating rate exchange market, although no assurance can be given that the floating rate exchange market will be accessible for these purposes in the future.

     Under current Brazilian legislation, the federal government may impose temporary restrictions of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments.

Interest Attributable to Shareholders’ Equity

     Under Brazilian tax legislation effective January 1, 1996, Brazilian companies are permitted to pay “interest” to holders of equity securities and treat such payments as an expense for Brazilian income tax purposes and, beginning in 1998, for social contribution purposes. The purpose of the tax law change is to encourage the use of equity investment, as opposed to debt, to finance corporate activities. Payment of such interest may be made at the discretion of our board of directors, subject to the approval of the shareholders at a general shareholders’ meeting. The amount of any such notional “interest” payment to holders of equity securities is limited in respect of any particular year to the daily pro rata variation of the Long-Term Interest Rate (Taxa de Juros de Longo Prazo), or TJLP, as determined by the Central Bank from time to time, and may not exceed the greater of:

     Payment of interest to a holder that is not domiciled in Brazil for Brazilian tax and regulatory purposes (a “non-Brazilian holder”) is subject to withholding income tax at the rate of 15%, or 25% if the Non Brazilian Holder is domiciled in a country or location that does not impose income tax or where the income tax rate is lower than 20% (“Low or Nil Tax Jurisdiction”). These payments may be included, at their net value, as part of any mandatory dividend. To the extent payment of interest on net equity is so included, the corporation is required to distribute to shareholders an additional amount to ensure that the net amount received by them, after payment of the applicable withholding income tax, plus the amount of declared dividends is at least equal to the mandatory dividend.

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     Under current Brazilian legislation, the sum of the amount distributed as interest on shareholders’ equity and as dividends must be at least equal to the mandatory dividend. For Brazilian GAAP accounting purposes, although the interest charge must be reflected in the statement of operations to be tax deductible, the charge is reversed before calculating net income in the statutory financial statements and deducted from shareholders’ equity in a manner similar to a dividend. Any payment of interest in respect of preferred shares (including the ADSs) is subject to Brazilian withholding income tax at the rate of 15%, or 25% in the case of a shareholder domiciled in a tax haven jurisdiction (see “Item 10. Taxation—Material Brazilian Tax Considerations”). If such payments are accounted for, at their net value, as part of any mandatory dividend, the tax is paid by the company on behalf of its shareholders, upon distribution of the interest. In case we distribute interest attributed to shareholders’ equity in any year, and that distribution is not accounted for as part of mandatory distribution, Brazilian income tax would be borne by the shareholders. For IFRS accounting purposes, interest attributable to shareholders’ equity is reflected as a dividend payment.

     Under our by-laws, interest attributable to shareholders’ equity may be treated as a dividend for purposes of the mandatory dividend.

     In 2008 we distributed R$36.3 million to our shareholders, equivalent to a payment of R$0.18 per share or ADS. In 2009 we distributed R$185.8 million to our shareholders, equivalent to a payment of R$0.70 per share or ADS. We will offer our shareholders to reinvest these dividends and subscribe for new shares in a R$185.8 million capital increase approved on March 11, 2010. We intend to extend these rights to holders of our ADRs.

Dividend Policy

     We intend to declare and pay dividends and/or interest attributed to shareholders’ equity, as required by the Brazilian corporation law and our by-laws. The declaration of annual dividends, including dividends in excess of the mandatory distribution, requires approval by the vote of the majority of the holders of our common shares. The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and shareholders. Within the context of our tax planning, we may in the future continue determining that it is to our benefit to distribute interest attributed to shareholders’ equity.

B. Significant Changes

     None.

ITEM 9. THE OFFER AND LISTING

A. Offer and Listing Details

     In the United States, our preferred shares trade in the form of ADS. Since December 2005 each ADS represents one preferred share, issued by The Bank of New York, as Depositary pursuant to a Deposit Agreement. On December 13, 2005, we executed a 2:1 ADS split, changing to ratio of one ADS representing two preferred shares to one ADS representing one preferred share, as approved by a meeting of the Board of Directors of the Company on November 8, 2005. The ADSs commenced trading on the NYSE on June 24, 2004. As of December 31, 2009, the ADSs represented 23.0% of our preferred shares and 32.3% of our current global public float.

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     The following table sets forth the reported high and low closing sales prices for the ADSs on the NYSE for the periods indicated.

    US$ per ADS 
   
    Low    High    Average(1)
       
2007             
Annual    19.19    34.30    27,38 
2008             
Annual    3.06    23.94    11.51 
First quarter    14.76    23.99    18.40 
Second quarter    11.26    17.83    14.83 
Third Quarter    5.95    12.00    9.04 
Fourth Quarter    2.93    6.97    4.14 
2009             
Annual    2.88    15.59    7.44 
First quarter    2.88    5.26    4.13 
Second quarter    2.88    5.98    4.30 
Third Quarter    5.59    11.20    8.78 
Fourth Quarter    9.80    15.59    12.56 
Last Six Months    5.59    15.59    10.61 
September 2009    9.32    10.43    10.08 
October 2009    9.80    11.45    10.35 
November 2009    10.49    14.27    12.45 
December 2009    13.66    15.59    14.75 
January 2010    12.20    16.48    14.61 
February 2010    12.05    13.97    13.25 
 
March 2010 (through March 26, 2010)   12.10    13.96    13.14 
________________
 Source: Bloomberg 
 (1) Calculated as average of closing prices for the period. 

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     Our preferred shares began trading on the São Paulo Stock Exchange on June 24, 2004. The following table sets forth the reported high and low closing sale prices for our preferred shares on the BM&FBOVESPA, for the periods indicated.

    Reais per Preferred Share 
   
    Low    High    Average(1)
       
2007             
Annual    36.61    67.26    53.52 
2008             
Annual    6.90    42.40    20.02 
First quarter    25.40    42.40    31.84 
Second quarter    17.92    29.12    24.51 
Third Quarter    11.51    19.10    14.96 
Fourth Quarter    6.90    13.05    9.37 
2009             
Annual    6.58    27.34    14.13 
First quarter    6.65    11.96    9.56 
Second quarter    6.58    11.62    8.82 
Third Quarter    10.93    20.50    16.40 
Fourth Quarter    17.06    27.34    21.85 
Last Six Months    10.93    27.34    18.99 
September 2009    17.58    18.80    18.33 
October 2009    17.06    19.69    18.38 
November 2009    18.32    25.01    21.51 
December 2009    24.37    27.34    25.82 
January 2010    23.10    28.03    25.93 
February 2010    22.62    25.33    24.23 
March 2010 (through March 26, 2010)   22.10    25.20    23.41 
_________________
     Source: Bloomberg 
        (1) Calculated as average of closing prices for the period. 

B. Plan of Distribution

     Not applicable.

C. Markets

Trading on the BM&FBOVESPA

     In 2000, the São Paulo Stock Exchange was reorganized through the execution of memoranda of understanding by the Brazilian stock exchanges. Under the memoranda, all securities are now traded only on the São Paulo Stock Exchange, with the exception of electronically traded public debt securities and privatization auctions, which are traded on the Rio de Janeiro Stock Exchange.

     On May 8, 2008, the São Paulo Stock Exchange and the Brazilian Mercantile and Futures Exchange merged, creating BM&FBOVESPA. Together, the companies have formed one of the largest exchanges worldwide in terms of market value, the second largest in the Americas, and the leading exchange in Latin America.

     When shareholders trade in common and preferred shares on the BM&FBOVESPA, the trade is settled in three business days after the trade date without adjustment of the purchase price for inflation. The seller is ordinarily required to deliver the shares to the exchange on the second business day following the trade date. Delivery of and payment for shares are made through the facilities of the clearinghouse, Companhia Brasileira de Liquidação e Custódia, or CBLC.

     The BM&FBOVESPA is a for-profit listed company that has regulatory authority over its trading markets. Trading on the BM&FBOVESPA is limited to member brokerage firms and a limited number of authorized nonmembers. The BM&FBOVESPA has two open outcry trading sessions each day from 10:00 a.m. to 5:00 p.m., São Paulo time, for all securities traded on all markets, except during daylight savings time in Brazil. During daylight savings time in Brazil, usually the sessions are from 11:00 a.m. to 6:00 p.m., São Paulo time, to closely mirror the NYSE trading hours. Trading is also conducted between 11:00 a.m. and 6:00 p.m., or between 10:00 a.m. and 5:00 p.m. during daylight savings time in the United States, on an automated system known as the Computer Assisted Trading System (Sistema de Negociação Assistida por Computador) on the BM&FBOVESPA and on the National Electronic Trading System (Sistema Eletrônico de Negociação Nacional). This system is a computerized system that links electronically with the seven smaller regional exchanges. The BM&FBOVESPA also permits trading from 5:45 p.m. to 7:00 p.m., São Paulo time, or from 6:45 p.m. to 7:30 p.m. during daylight savings time in Brazil, on an online system connected to traditional and Internet brokers called the “after market.” Trading on the after market is subject to regulatory limits on price volatility and on the volume of shares transacted through Internet brokers. There are no specialists or officially recognized market makers for our shares in Brazil.

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     In order to better control volatility, the BM&FBOVESPA adopted a “circuit breaker” system pursuant to which trading sessions may be suspended for a period of 30 minutes or one hour whenever the indices of the BM&FBOVESPA falls below the limits of 10% or 15%, respectively, in relation to the index registered in the previous trading session.

     The BM&FBOVESPA is significantly less liquid than the NYSE or other major exchanges in the world. As of December 2009, the aggregate market capitalization of the BM&FBOVESPA was equivalent to R$2.3 trillion and the 10 largest companies listed on the BM&FBOVESPA represented 52.5% of the total market capitalization of all listed companies. In contrast, as of December 2009, the aggregate market capitalization of the NYSE was US$18.9 trillion. Although any of the outstanding shares of a listed company may trade on the BM&FBOVESPA, in most cases fewer than half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by government entities or by one principal shareholder. See “Item 3. Risk Factors—Risks Relating to the ADSs and Our Preferred Shares—The relative volatility and illiquidity of the Brazilian securities markets may substantially limit your ability to sell the preferred shares underlying the ADSs at the time and price you desire.”

     Trading on the BM&FBOVESPA by a non-Brazilian holder, is subject to certain limitations under Brazilian foreign investment legislation. With limited exceptions, non-Brazilian holders may only trade on Brazilian stock exchanges in accordance with the requirements of Resolution No. 2,689, of January 26, 2000, of the National Monetary Council (Conselho Monetário Nacional), or CMN, or Resolution No. 2,689. Resolution No. 2,689 requires that securities held by non-Brazilian holders be maintained in the custody of, or in deposit accounts with, financial institutions and be registered with a clearinghouse. Such financial institutions and clearinghouses must be duly authorized to act as such by the Central Bank and the CVM. In addition, Resolution No. 2,689 requires non-Brazilian holders to restrict their securities trading to transactions on Brazilian stock exchanges or qualified over-the-counter markets. With limited exceptions, non-Brazilian holders may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through a private transaction. See “Item 10. Taxation—Material Brazilian Tax Considerations—Taxation on Gains” for a description of certain tax benefits extended to non-Brazilian holders who qualify under Resolution No. 2,689.

Corporate Governance Practices

     In 2000, the São Paulo Stock Exchange introduced three special listing segments, known as Level 1 and 2 of Differentiated Corporate Governance Practices and New Market (Novo Mercado), aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the BM&FBOVESPA, by prompting such companies to follow good practices of corporate governance. The listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements in addition to those already imposed by Brazilian law. These rules generally increase shareholders’ rights and enhance the quality of information provided to shareholders.

     To become a Level 1 (Nível 1) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (a) ensure that shares of the issuer representing 25% of its total capital are effectively available for trading, (b) adopt offering procedures that favor widespread ownership of shares whenever making a public offering, (c) comply with minimum quarterly disclosure standards including cash flow statements, (d) follow stricter disclosure policies with respect to transactions made by controlling shareholders, directors and officers involving securities issued by the issuers; (e) submit any existing shareholders’ agreements and stock option plans to the BM&FBOVESPA and (f) make an annual calendar announcing scheduled corporate events, bringing information on the company, the event, date and time it is going to take place; any changes in the schedule shall be promptly forwarded to BM&FBOVESPA and published.

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     To become a Level 2 (Nível 2) company, in addition to the obligations imposed by current Brazilian law, an issuer must agree to (a) comply with all of the listing requirements for Level 1 companies, (b) grant tag-along rights for all shareholders in connection with a transfer of control of the company, offering the same price paid per share for controlling block common shares and 80% of the price paid per share for controlling block preferred shares, (c) grant voting rights to holders of preferred shares in connection with certain corporate restructurings and related party transactions, such as: (i) any transformation of the company into another corporate form, (ii) any merger, consolidation or spin-off of the company, (iii) approval of any transactions between the company and its controlling shareholder, including parties related to the controlling shareholder, (iv) approval of any valuation of assets to be delivered to the company in payment for shares issued in a capital increase, (v) appointment of an independent company, with renowned expertise, to ascertain the economic value of the company in connection with any deregistration and delisting tender offer, and (vi) any changes to these voting rights, (d) have a board of directors comprised of at least five members, of which at least 20% shall be “independent,” as defined by the BM&FBOVESPA, with a term limited to two years, (e) if it elects to delist from the Level 2 segment, hold a tender offer by the company’s controlling shareholder (the minimum price of the shares to be offered will be the economic value determined by an appraisal process), and, for the same purposes, in the case of companies with diffuse control (controlling power exercised by the shareholder holding less than 50% of the voting capital and per group of shareholders who are not signatories of voting agreements and which is not under a common control and does not act as a representative of a common interest) to comply with complementary rules to be issued by BM&FBOVESPA, (f) disclose: (i) quarterly financial statements in English or prepared in accordance with U.S. GAAP or IFRS and (ii) annual financial statements in English, including cash flow statements, prepared in accordance with U.S. GAAP or IFRS, in U.S. dollars or reais and (g) adhere exclusively to the rules of the BM&FBOVESPA Arbitration Chamber for resolution of disputes involving the controlling shareholders, the managers and the members of the fiscal committee.

     To be listed in the Novo Mercado, an issuer must meet all of the requirements described above, in addition to (a) issuing only voting shares and ensure that all the shares will be composed exclusively of common shares, (b) granting tag-along rights for all shareholders in connection with a transfer of control of the company, offering the same price paid per share for controlling block common shares.

     In May 2004, we entered into an agreement with the BM&FBOVESPA to comply with the requirements to become a Level 2 company. In addition to complying with Level 2 requirements, we have granted tag-along rights that entitle our preferred shareholders to receive 100% of the price paid per common share of controlling block shareholders in connection with a transaction resulting in a transfer of control of our company. Furthermore, we prepare quarterly financial statements in accordance with IFRS. We were included in the following indexes (a) since 2005: IbrX-100 (¥ndice Brasil, Index Brazil), IGC (¥ndice de Ações com Governança Corporativa Diferenciada, Special Corporate Governance Index), ITAG (¥ndice de Ações com Tag Along Diferenciado, Special Tag Along Stock Index) and MSCI (Morgan Stanley Capital International Index), (b) since 2006: IbrX-50 (¥ndice Brasil 50, Index Brazil 50): and (c) since 2007: ¥ndice BM&FBOVESPA, all of which reflect our increased market capitalization and liquidity of our preferred shares.

Regulation of the Brazilian Securities Market

     The Brazilian securities markets are regulated by the CVM, which has regulatory authority over the stock exchanges and securities markets, as well as by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions. The Brazilian securities markets are governed by Law No. 10,198 dated February 14, 2001, Law No. 10,303 dated October 31, 2001, known as Law No. 10,303 and Law No. 10,411 dated February 26, 2002, which introduced new concepts and several changes to Law No. 6,385 dated December 7, 1976, as amended and supplemented, the principal law governing the Brazilian securities markets, by Brazilian corporation law, and by regulations issued by the CVM, the CMN and the Central Bank. These laws and regulations, among others, provide for disclosure requirements applicable to issuers of traded securities, criminal sanctions for insider trading and price manipulation, and protection of minority shareholders. They also provide for licensing and oversight of brokerage firms and governance of Brazilian stock exchanges. However, the Brazilian securities markets are not as highly regulated and supervised as U.S. securities markets.

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     Under the Brazilian corporation law, a company is either publicly held, a companhia aberta, or privately held, a companhia fechada. All listed companies are registered with the CVM and are subject to reporting and regulatory requirements. A company registered with the CVM may trade its securities either on the BM&FBOVESPA or in the Brazilian over-the-counter market. Shares of companies listed on the BM&FBOVESPA may not simultaneously trade on the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to several limitations. To be listed on the BM&FBOVESPA, a company must apply for registration with the BM&FBOVESPA and the CVM.

     The trading of securities on the BM&FBOVESPA may be halted at the request of a company in anticipation of a material announcement. Trading may also be suspended on the initiative of the BM&FBOVESPA or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a significant event or has provided inadequate responses to inquiries by the CVM or the BM&FBOVESPA.

     Trading on the BM&FBOVESPA by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for the preferred shares underlying the ADSs must, on behalf of the depositary for the ADSs, obtain registration from the Central Bank to remit U.S. dollars abroad for payments of dividends, any other cash distributions, or upon the disposition of the shares and sales proceeds thereof. If you exchange your ADSs for preferred shares, you will be entitled to continue to rely on the custodian’s electronic certificate of foreign capital registration for five business days after the exchange. Thereafter, you may not be able to obtain and remit abroad non-Brazilian currency upon the disposition of or distributions relating to the preferred shares, and will be subject to a less favorable tax treatment on gains with respect to the preferred shares, unless you obtain a new electronic certificate of foreign capital registration or qualify under Brazilian foreign investment regulations that entitle some foreign investors to buy and sell shares on the BM&FBOVESPA without obtaining separate electronic certificates of foreign capital registration. See “Item 10.B. Memorandum of Articles of Association—Description of Capital Stock—Regulation of Foreign Investment.”

Disclosure Requirements

     According to Law No 6,385, a publicly held company must submit to CVM and BM&FBOVESPA certain periodic information, including annual and quarterly reports prepared by management and independent auditors. This legislation also requires us to file with CVM our shareholders’ agreements, notices of shareholders’ meetings and copies of the related minutes.

     Pursuant to CVM Rule No. 358, of January 3, 2002, the CVM revised and consolidated the requirements regarding the disclosure and use of information related to material facts and acts of publicly held companies, including the disclosure of information in the trading and acquisition of securities issued by publicly held companies.

     Such requirements include provisions that:

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     In addition to the disclosure requirements under the Brazilian corporate law and the CVM regulations, we must also observe the following disclosure requirements:

Changes in Brazilian Corporation Law

     On July 13, 2007, the CVM issued CVM Rule No. 457 to require listed companies to publish their consolidated financial statements according to IFRS starting with the year ending December 31, 2010.

     On December 28, 2007, Law No. 11,638 was enacted and amended numerous provisions of the Brazilian corporate law relating to accounting principles and authority to issue accounting standards. Law No. 11,638 sought to enable greater convergence between Brazilian GAAP and IFRS. To promote convergence, Law No. 11,638 modified certain accounting principles of the Brazilian corporate law and mandated the CVM to issue accounting rules conforming to the accounting standards adopted in international markets. Additionally, the statute acknowledged a role in the setting of accounting standards for the Comitê de Pronunciamentos Contábeis (the Committee for Accounting Pronouncements), or CPC, which is a committee of officials from the BM&FBOVESPA, industry representatives and academic bodies that has issued accounting guidance and pursued the improvement of accounting standards in Brazil. Law No. 11,638 permits the CVM and the Central Bank to rely on the accounting standards issued by the CPC in establishing accounting principles for regulated entities.

     On December 07, 2009, CVM issued Rule No. 480 in order to, among other provisions: 1) create two different categories of securities issuers (categories A and B) in accordance with the securities that those issuers are authorized to negotiate in the Brazilian regulated markets (i.e., a category A issuer is authorized to negotiate any and all securities - which is our classification - and a category B issuer is authorized to negotiate any and all securities, except for shares, shares certificates, and other securities issued by the issuer of such shares or shares certificates or by a company of its group that grants to their holders the right to acquire such shares or shares certificates) and establishing different disclosure requirements for each category, where category A companies are subject to stricter disclosure requirements; 2) create a new CVM form (Formulário de Referência) to substitute the previous one (Formulário de Informações Anuais or IAN) with a significantly higher level of disclosure requirement in several areas, including management discussion and analysis of the financial statements, management compensation, risk controls, derivative policies, among others, which shall be signed by the company’s Chief Executive Officer and Investor Relations Officer and which covers the previous three years; 3) replace the former prospectus requirement for a public securities offering prepared in accordance with Annex III of CVM Rule No. 400 with the new form (Formulário de Referência) and an offering note with information on the securities offering (but not on the issuer); 4) classify as Well Known Seasoned Issuers or WKSI (Emissor de Grande Exposição ao Mercado or EGEM) the companies: (i) that have had securities traded in the Brazilian stock exchange for at least three years, (ii) that are in compliance with the CVM rules on current and periodical obligations on the previous 12 months, and (iii) which market value of the shares negotiated in the market is equal or greater than R$5 billion. WKSIs shall be able to register public securities offerings much faster than the other issuers, which depends on additional regulation to be issued by CVM.

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     On December 17, 2009, the CVM issued Rule No. 481 which sets forth (i) the procedures relating to the public solicitation of proxies for the exercise of voting rights at shareholders’ meetings of public held companies; and (ii) disclosure requirements to be followed by public held companies before the shareholders meetings.

     CVM Rule No. 481 provides that: (i) shareholders that own 0.5% or more of the company’s corporate capital may indicate members to the Board of Directors and to the Fiscal Council in public solicitation of proxies conducted by the company’s management, being thus required that the shareholders be able to vote on the referred candidates; (ii) the companies that accept digital proxies sent via world wide web must allow shareholders who hold 0.5% or more of the company’s corporate capital to make public solicitation of proxies through the company’s referred system; and (iii) the publicly held companies that do not accept digital proxies sent via world wide web must pay part of the costs of the public solicitation of proxies made by shareholders that own 0.5% or more of the company’s corporate capital.

     CVM Rule No. 481 also specifies the information and documents that shall be made available to shareholders which varies according to the meeting’s agenda (including net profits distribution and allocation, stock option plans, capital increases, issue of debentures or warrants/subscription bonus, capital reductions, acquisition of controlling stake in another company and withdrawal rights) since the date of the publication of the first call notice for the shareholders’ meeting. This information must be available at the CVM website before the meeting, shall be prepared in accordance with the requirements of Rule No. 481 and includes the disclosure of management discussion and analysis of the financial statements prior to the annual shareholders meeting, personal data and history of those who are up for election for an office with the company’s Board of Director and/or Fiscal Council and a proposal for the compensation of the company’s management.

D. Selling Shareholders

     Not applicable.

E. Dilution

     Not applicable.

F. Expenses of the Issue

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A. Share Capital

     Not applicable.

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B. Memorandum and Articles of Association

     The Registrant was formed on March 12, 2004 as a sociedade por ações, a stock corporation duly incorporated under the laws of Brazil with unlimited duration. The Registrant is registered with the São Paulo Commercial Registry (Junta Comercial do Estado de São Paulo) under number NIRE 35.300.314.441.

Description of Capital Stock

General

     The Registrant became the parent company of Gol on March 29, 2004, when all of the common shares, Class A preferred shares and Class B preferred shares of Gol (except for five common shares of Gol that are held by members of Gol’s board of directors for eligibility purposes) were contributed to the Registrant by the shareholders of Gol in exchange for the applicable number of either common shares or preferred shares of the Registrant. As a result of this reorganization, 41,499,995 common shares of Gol were exchanged for 109,448,497 common shares and 6,751,719 preferred shares of the Registrant, 10,375,000 Class A preferred shares of Gol were exchanged for 29,049,994 preferred shares and six common shares of the Registrant and 8,408,206 Class B preferred shares of Gol were exchanged for 23,542,977 preferred shares of the Registrant. The reorganization did not affect our operations in any respect. The aggregate number of our common and preferred shares outstanding was increased to 168,793,243 as the result of a 2.80 -for-one stock split on May 25, 2004 (which includes 224 common shares and 56 preferred shares of the Registrant that were issued in connection with its formation on March 12, 2004). On June 24, 2004, the Registrant completed its initial public offering through the issuance of 18,750,000 preferred shares in the form of ADSs in the United States and other countries outside Brazil and in the form of preferred shares in Brazil. On April 28, 2005, the Registrant completed a primary and secondary offering of 16,905,000 preferred shares in the form of ADSs in the United States and other countries outside Brazil and in the form of preferred shares in Brazil. In addition, during 2005, our executive officers exercised stock options for an aggregate of 703,579 preferred shares. During 2006, our executive officers exercised stock options for an aggregate of 233,833 preferred shares. In 2007, we increased our capital and, as a result of 6.1 million shares issued for the VRG acquisition and 11,569 shares issued related to our stock option program. On March 20, 2009, our board of directors approved a capital stock increase issuing 6,606,366 voting and 19,487,356 preferred shares. On October 19, 2009, we concluded a global share offering of 19,002,500 common shares and 43,187,500 preferred shares. As of December 31, 2009 our capital structure consisted of 133,199,658 common shares and 133,199,658 preferred shares, each with no par value. We are a stock corporation (sociedade anônima) incorporated under the laws of Brazil.

Issued Share Capital

     Under our by-laws, our authorized capital as of December 31, 2009 was R$4 billion, and can be increased by the issuance of preferred or common shares, after approval by our board of directors. Our shareholders must approve any capital increase that exceeds our authorized capital. Under our bylaws and the Brazilian corporation law, if we issue additional shares in a private transaction, the existing shareholders have preemptive rights to subscribe for shares on a pro rata basis according to their holdings. See “—Preemptive Rights.”

Regulation of Foreign Investment

     There are no general restrictions on ownership of our preferred shares or common shares by individuals or legal entities domiciled outside Brazil, except for those regarding airline companies (see “—Regulation of the Brazilian Civil Aviation Market”). However, the right to convert dividend payments and proceeds from the sale of preferred shares or common shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, the registration of the relevant investment with the Central Bank.

     Foreign investors may register their investment under Law No. 4,131 of September 3, 1962, or Law No. 4,131, or Resolution No. 2,689 of January 26, 2000 of the CMN, or Resolution No. 2,689. Registration under Law No. 4,131 or under Resolution No. 2,689 generally enables foreign investors to convert into foreign currency dividends, other distributions and sales proceeds received in connection with registered investments and to remit such amounts abroad. Resolution No. 2,689 affords favorable tax treatment to foreign investors who are not resident in a tax haven jurisdiction, which is defined under Brazilian tax laws as a country that does not impose taxes or where the maximum income tax rate is lower than 20% or that restricts the disclosure of shareholder composition or ownership of investments.

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     Under Resolution No. 2,689, foreign investors may invest in almost all financial assets and engage in almost all transactions available in the Brazilian financial and capital markets, provided that certain requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities that are domiciled or headquartered abroad. Resolution No. 2,690 investors may not transfer the ownership of investments made under Resolution No. 2,689 to other non-Brazilian holders through private transactions.

Pursuant to Resolution No. 2,689, foreign investors must:

     Amounts invested in our preferred shares by a non-Brazilian holder who qualifies under Resolution 2,689 and obtains registration with the CVM, or by the depositary representing an ADS holder, are eligible for registration with the Central Bank. This registration (the amount so registered is referred to as registered capital) allows the remittance outside Brazil of foreign currency, converted at the commercial market rate, acquired with the proceeds of distributions on, and amounts realized through, dispositions of our preferred shares. The registered capital per preferred share purchased in the form of an ADS, or purchased in Brazil and deposited with the depositary in exchange for an ADS, will be equal to its purchase price (stated in U.S. dollars). The registered capital per preferred share withdrawn upon cancellation of an ADS will be the U.S. dollar equivalent of (i) the average price of a preferred share on the Brazilian stock exchange on which the most preferred shares were traded on the day of withdrawal or (ii) if no preferred shares were traded on that day, the average price on the Brazilian stock exchange on which the most preferred shares were traded in the fifteen trading sessions immediately preceding such withdrawal. The U.S. dollar equivalent will be determined on the basis of the average commercial market rates quoted by the Central Bank on these dates.

     A non-Brazilian holder of preferred shares may experience delays in effecting Central Bank registration, which may delay remittances abroad. This delay may adversely affect the amount in U.S. dollars, received by the non-Brazilian holder.

     A certificate of registration has been issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary. Pursuant to the certificate of registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the preferred shares represented by our ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for preferred shares, such holder will be entitled to continue to rely on the depositary’s certificate of registration for five business days after such exchange, following which such holder must seek to obtain its own certificate of registration with the Central Bank.

     Thereafter, any holder of preferred shares may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, such preferred shares, unless the holder is a duly qualified investor under Resolution 2,689 or obtains its own certificate of registration.

     If the shareholder does not qualify under Resolution 2,689 by registering with the CVM and the Central Bank and appointing a representative in Brazil, the holder will be subject to less favorable Brazilian tax treatment than a holder of ADSs. Regardless of qualification under Resolution 2,689, residents in tax haven jurisdiction are subject to less favorable tax treatment than other foreign investors. See “—Taxation—Brazilian Tax Considerations.”

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     Under current Brazilian legislation, the federal government may impose temporary restrictions on remittances of foreign capital abroad in the event of a serious imbalance or an anticipated serious imbalance of Brazil’s balance of payments. For approximately six months in 1989 and early 1990, the Brazilian government froze all dividend and capital repatriations held by the Central Bank that were owed to foreign equity investors, in order to conserve Brazil’s foreign currency reserves. These amounts were subsequently released in accordance with federal government directives. There can be no assurance that the Brazilian government will not impose similar restrictions on foreign repatriations in the future. See “Item 3. Risk Factors—Risks Relating to Brazil.”

Description of Preferred Shares

     According to our by-laws, our preferred shares are non-voting. However, under certain limited circumstances provided for in the Brazilian corporation law and as described in this section, holders of our preferred shares may be entitled to vote. Upon liquidation, holders of preferred shares are entitled to receive distributions prior to the holders of our common shares.

     According to our by-laws, holders of our preferred shares are entitled to be included in a public tender offer in case our controlling shareholder sells its controlling stake in us, and the minimum price to be offered for each preferred share is 100% of the price paid per share of the controlling stake.

     Under Brazilian law, the protections afforded to minority shareholders are different from those in the United States. In particular, judicial guidance with respect to shareholder disputes is less established under Brazilian law than U.S. law and there are different procedural requirements for bringing shareholder lawsuits, such as shareholder derivative suits. As a result, in practice it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company.

Redemption and Rights of Withdrawal

     Under the Brazilian corporation law, a dissenting or non-voting shareholder has the right to withdraw from a company and be reimbursed for the value of the preferred or common shares held whenever a decision is taken at a general shareholders’ meeting by a vote of shareholders representing at least 50% of the total outstanding voting capital to:

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     In the event that the entity resulting from a merger, consolidation, or incorporação de ações, or spin-off of a listed company fails to become a listed company within 120 days of the shareholders meeting at which such decision was taken, the dissenting or non-voting shareholders may also exercise their withdrawal right.

     If there is a resolution to (a) merge or consolidate us with another company; (b) conduct a incorporação de ações; (c) participate in a group of companies, as defined under the Brazilian corporation law or (d) acquire control of another company, the withdrawal rights are exercisable only if our shares do not satisfy certain tests of liquidity and dispersal of the type or class of shares in the market at the time of the general meeting.

     Only holders of shares adversely affected by the changes mentioned in the first and second items above may withdraw their shares.

     The right of withdrawal lapses 30 days after publication of the minutes of the relevant general shareholders’ meeting that approved the corporate actions described above. In the case of the changes mentioned in items (a) and (b) above, the resolution is subject to confirmation by the preferred shareholders, which must be obtained at a special meeting held within one year. In those cases, the 30-day term is counted from the date of publication of the minutes of the special meeting. We would be entitled to reconsider any action triggering appraisal rights within 10 days following the expiration of such rights if the redemption of shares of dissenting or non-voting shareholders would jeopardize our financial stability. Shares to be purchased by us from the dissenting or non-voting shareholders exercising appraisal rights will be valued at an amount equal to the lesser of the ratable portion attributable to such shares of our shareholders’ equity as shown on the last balance sheet approved at a general shareholders’ meeting (book value) and the ratable portion attributable to such shares of the economic value of the company, pursuant to an appraisal report produced in accordance with the provisions of the Brazilian corporation law. If more than 60 days have elapsed since the date of such balance sheet, dissenting shareholders may require that the book value of their shares be calculated on the basis of a new balance sheet. As a general rule, shareholders who acquire their shares after the first notice convening the general shareholders’ meeting or after the relevant press release concerning the meeting is published will not be entitled to appraisal rights.

     For purposes of the right of withdrawal, the concept of “dissenting shareholder,” under the Brazilian corporation law, includes not only those shareholders who vote against a specific resolution, but also those who abstain from voting, who fail to attend the shareholders meeting or who do not have voting rights.

Preemptive Rights

     Each of our shareholders generally has a preemptive right to subscribe for shares or convertible securities in any capital increases, in proportion to its shareholdings. A minimum period of 30 days, unless a shorter period is established by our board of directors, following the publication of notice of the capital increase is allowed for the exercise of the right and the right is negotiable. In the event of a capital increase which would maintain or increase the proportion of capital represented by preferred shares, holders of ADSs or preferred shares would have preemptive rights to subscribe only to newly issued preferred shares.

     In the event of a capital increase which would reduce the proportion of capital represented by preferred shares, holders of ADSs or preferred shares would have preemptive rights to subscribe for preferred shares, in proportion to their shareholdings, and for common shares, only to the extent necessary to prevent dilution of their equity participation. (See “Risks Relating to the ADSs and Our Preferred Shares—Holders of ADSs may be unable to exercise preemptive rights with respect to our preferred shares”). Our by-laws provide that our board of directors may, within the limit of its authorized capital, withdraw preemptive rights to existing shareholders in connection with an increase in share capital through sale in stock exchanges, public offerings or public exchange offers. In addition, Brazilian corporation law provides that the granting or exercise of stock options pursuant to certain stock option plans is not subject to preemptive rights.

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Voting Rights

     Each common share entitles its holder to one vote at our shareholders’ meetings. Preferred shares have no voting rights, except that each preferred share entitles its holder to one vote at our shareholders’ meeting to decide on certain specific matters, such as:

     Holders of preferred shares are entitled to attend shareholders’ meetings and to participate in the discussions. The Brazilian corporation law provides that non-voting shares, such as preferred shares, may acquire voting rights if the company fails to distribute fixed or minimum dividends in connection with such shares for three consecutive fiscal years and will retain such voting rights until the distribution of such fixed or minimum dividends. (See “Risks Relating to the ADSs and Our Preferred Shares—Holders of the preferred shares may not receive any dividends”).

     According to the Brazilian corporation law, any change in the preferences or rights of our preferred shares, or the creation of a class of shares having priority over our preferred shares, unless such change is authorized by our by-laws, would require the approval of our preferred shareholders in a special shareholders’ meeting in addition to approval by a majority of the holders of our outstanding voting shares. The holders of preferred shares would vote as a class at the special meeting.

     The Brazilian corporation law grants (i) holders of preferred shares without voting rights (or with restricted voting rights) representing 10% of the total issued capital stock and (ii) holders of our common shares that are not part of the controlling group, and represent at least 15% of the voting capital stock, the right to appoint a member to the board of directors, by voting during the annual shareholders’ meeting. If none of our non-controlling holders of common or preferred shares meets the respective thresholds described above, holders of preferred or common shares representing at least 10% of the share capital would be able to combine their holdings to appoint one member and an alternate to our board of directors. Such rights may only be exercised by those shareholders who prove that they have held the required stake with no interruption during at least the three months directly preceding our annual shareholders meeting.

     Holders of common shares are entitled to certain rights that cannot be amended by changes in the by-laws or at a general shareholders’ meeting, which include (i) the right to vote at general shareholders’ meetings; (ii) the right to participate in distributions of dividends and interest on capital and to share in the remaining assets of the company in the event of liquidation; (iii) preemptive rights in certain circumstances and (iv) the right to withdraw from the company in certain cases. In addition to those rights, the by-laws or a majority of the voting shareholders may establish additional rights and, likewise, remove them. Currently, our by-laws do not establish any rights in addition to those already set forth by the Brazilian corporation law. The Level 2 of Differentiated Corporate Governance Practices, which we comply with, provides for the granting of voting rights to holders of preferred shares in connection with certain matters, including corporate restructurings, mergers and related party transactions.

     Controlling shareholders may nominate and elect a majority of the members of the board of directors of Brazilian companies. In a Brazilian company, management is not entitled to nominate directors for election by the shareholders. Non-controlling shareholders and holders of non-voting shares are entitled to elect representatives to the board, as described above. Holders of a threshold percentage of the voting shares may also request, up to 48 hours prior to any general shareholders’ meeting, that the election of directors be subject to cumulative voting. The threshold percentage required for cumulative voting for a corporation such as ours is currently 5% of the outstanding shares. Shareholders who vote to elect a representative of the non-controlling shareholders may not cast cumulative votes to elect other members of the board.

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Conversion Right

     Our shareholders may, at any time, convert common shares into preferred shares, at the rate of one common share to one preferred share, to the extent such shares are duly paid and provided that the amount of preferred shares does not exceed 50% of the total amount of shares outstanding. Any request for conversion must be delivered to our board of executive officers and, once accepted by the board of executive officers, must be confirmed by our board of directors at the first meeting after the date of the request for conversion.

Special and General Meetings

     Unlike the laws governing corporations incorporated under the laws of the State of Delaware, the Brazilian corporation law does not allow shareholders to approve matters by written consent obtained as a response to a consent solicitation procedure. All matters subject to approval by the shareholders must be approved in a general meeting, duly convened pursuant to the provisions of Brazilian corporation law. Shareholders may be represented at a shareholders’ meeting by attorneys-in-fact who are (i) shareholders of the corporation, (ii) a Brazilian attorney, (iii) a member of management or (iv) a financial institution.

     General and special shareholders’ meetings may be called by publication of a notice in the Diário Oficial do Estado de São Paulo and in a newspaper of general circulation in our principal place of business at least 15 days prior to the meeting. Special meetings are convened in the same manner as general shareholders’ meetings and may occur immediately before or after a general meeting.

     At duly called and convened meetings, our shareholders are empowered to take any action regarding our business. Shareholders have the exclusive right, during our annual shareholders’ meetings required to be hold within 120 days of the end of our fiscal year, to approve our financial statements and to determine the allocation of our net income and the distribution of dividends related to the fiscal year immediately preceding the meeting. The members of our board of directors are generally elected at annual shareholders’ meetings. However, according to Brazilian corporation law, they can also be elected at extraordinary shareholders’ meetings. At the request of shareholders holding a sufficient number of shares, a fiscal council can be established and its members elected at any shareholders’ meeting.

     An extraordinary shareholders’ meeting may be held concurrently with the annual shareholders’ meeting and at other times during the year. Our shareholders may take the following actions, among others, exclusively at shareholders’ meetings:

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     Anti-Takeover Provisions

     Our by-laws require any party that acquires our control to extend a tender offer for common and preferred shares held by non-controlling shareholders at the same purchase price paid to the controlling shareholder.

     Arbitration

     In connection with our listing with Level 2 of Differentiated Corporate Governance Practices, we and our controlling shareholders, directors, officers and members of our fiscal committee have undertaken to refer to arbitration any and all disputes arising out of the Level 2 rules or any other corporate matters. See “Market Information.” Under our by-laws, any disputes among us, our shareholders and our management with respect to the application of Level 2 rules, the Brazilian Corporate Law or the application of the rules and regulations regarding Brazilian capital markets, will be resolved by arbitration conducted pursuant to the BM&FBOVESPA Arbitration Chamber and rules. Any disputes among shareholders, including holders of ADSs, and disputes between us and shareholders, including holders of ADSs, will be submitted to arbitration in accordance with the BM&FBOVESPA Arbitration Chamber and rules.

     Going Private Process

     Pursuant to our bylaws, we may become a privately-held company only if we, our controlling shareholders or our group of controlling shareholders make a public tender offer for all outstanding shares.

     According to the Level 2 regulations and our bylaws, the minimum price of the shares in the public tender offer required to be made in case we go private shall be equivalent to the economic value determined in the appraisal report prepared by a specialized and independent company, with renowned expertise, to be selected at the annual shareholders’ meeting from among the three companies suggested by the board of directors.

     In addition to the requirements set out in the Level 2 regulations and our bylaws, according to the Brazilian corporation law, our registration as a publicly held company with shares traded on stock exchanges will be canceled only if we or our direct or indirect controlling shareholders make a public tender offer for the total outstanding shares in the market (which may be the same tender offer required by Level 2 regulations and our bylaws), at a fair value, for a price at least equal to our evaluation, determined based on the following criteria, separately or jointly adopted: stockholders’ equity book value, stockholders’ equity at market price, discounted cash flow, multiple comparisons, market price of our shares or any other criteria accepted by the CVM. Shareholders holding at least 10% of our outstanding shares may require our management to review the price offered for the shares, and in this event our management shall call a special shareholders` meeting to determine whether to perform another valuation using the same or a different valuation method. Such request must be made within 15 days following the disclosure of the price to be paid for the shares in the public tender offer, and shall be duly justified. The shareholders who make such request, as well as those who vote in its favor, shall reimburse us for any costs involved in preparing the new valuation if the valuation price is lower than or equal to the original valuation price. If the new valuation price is higher than the original valuation price, the public tender offer must be made at the new valuation price.

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     Delisting from Differentiated Corporate Governance Practices Level 2

     We may, at any time, delist our shares from the Level 2 segment, provided that this is approved by shareholders representing the majority of our voting share capital at an annual shareholders’ meeting and that we provide written notice to the BM&FBOVESPA at least 30 days in advance. If we decide to delist from the Level 2 segment, in order to make our shares available to be traded outside the Level 2 segment, our controlling shareholders must conduct a public tender offer for the acquisition of our shares within the legal timeframe, based on the economic value calculated in the appraisal report prepared by a specialized and independent company, to be selected at an annual shareholders’ meeting from among three companies suggested by the board of directors. The public tender offer notice must be communicated to the BM&FBOVESPA and immediately disclosed to the market after the shareholder’s meeting during which the delisting was approved. If the delisting from the Level 2 segment is a result of the cancellation of our registration as a publicly held company, our controlling shareholders must follow the other requirements applicable to going private.

     The delisting from the Level 2 segment does not imply the cancellation of the trading of our shares on the BM&FBOVESPA.

     If our share control is transferred within the 12 months subsequent to the delisting from the Level 2, the selling controlling shareholder and the buyer shall offer to our other shareholders the acquisition of their shares at the price and conditions provided to the controlling shareholder selling the shares, adjusted for inflation.

     After delisting from the Level 2 segment, we may not request the listing of our shares in the Level 2 segment for two years subsequent to the cancellation, except if there is a change of our share control after delisting from the Level 2 segment.

     Form and Transfer

     Because our preferred shares are in registered book-entry form, Banco Itaú S.A., as registrar, must effect any transfer of shares by an entry made in its books, in which it debits the share account of the transferor and credits the share account of the transferee. When our shares are acquired or sold on a Brazilian stock exchange, the transfer is effected on the records of our registrar by a representative of a brokerage firm or the stock exchange’s clearing system. Transfers of shares by a foreign investor are executed in the same way by that investor’s local agent on the investor’s behalf except that, if the original investment were registered with the Central Bank pursuant to Resolution No. 2,689, the foreign investor should also seek amendment through its local agent, if necessary, of the electronic registration to reflect the new ownership. The BM&FBOVESPA operates a clearinghouse through CBLC. The fact that such shares are subject to custody with the relevant stock exchange will be reflected in our registry of shareholders. Each participating shareholder will, in turn, be registered in the register of our beneficial shareholders that is maintained by CBLC and will be treated in the same way as registered shareholders.

     American Depositary Receipts

     The Bank of New York, as depositary, has executed and delivered the ADRs representing our preferred shares. Each ADR is a certificate evidencing a specific number of American Depositary Shares, also referred to as ADSs. After our 2:1 ADS ratio change in December 2005, each ADS represents one preferred share (or a right to receive one preferred share) deposited with the principal São Paulo office of Banco Itaú S.A., as custodian for the depositary in Brazil. Each ADS also represents any other securities, cash or other property which may be held by the depositary. The depositary’s office at which the ADRs are administered is located at 101 Barclay Street, New York, New York 10286.

     You may hold ADSs either directly (by having an ADR registered in your name) or indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADR holder. We do not treat ADR holders as our shareholders and ADR holders have no shareholder rights. Brazilian law governs shareholder rights. The depositary is the holder of the preferred shares underlying the ADSs. Holders of ADRs have ADR holder rights. A deposit agreement among us, the depositary and you, as an ADR holder, and the beneficial owners of ADRs sets out ADR holder rights as well as the rights and obligations of the depositary. New York law governs the deposit agreement and the ADRs.

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C. Material Contracts

     Our material contracts are directly related to our operating activities, such as contracts relating to aircraft leasing and fuel supply as well as contracts relating to our concession to operate as a commercial airline. We do not have material contracts that are not related to our operating activities.

Aircraft General Terms Agreement between The Boeing Company and VRG Linhas Aéreas S.A.

In 2004, we entered into an agreement, as amended, with The Boeing Company for the purchase of aircraft, installation of buyer furnished equipment provided by us, customer support services and product assurance. In addition to the aircraft supplied, The Boeing Company will provide maintenance training and flight training programs, as well as operations engineering support.

Commercial Sale Promise Agreement between Petrobrás Distribuidora S.A. and VRG Linhas Aéreas S.A.

     In 2001, we entered into a commercial sale promise agreement for the purchase of fuel from Petrobrás, which was renewed July 7, 2006. We agreed to purchase fuel exclusively from Petrobrás in all of the airports where Petrobrás maintains aircraft fueling facilities. Petrobrás, in turn, agreed to provide us with all of our fuel needs in the supplying airports.

Reservation Services and Software License Use Agreement between Navitaire Inc. and VRG Linhas Aéreas S.A.

     On May 1, 2004, we entered into an agreement, as amended and updated, with Navitaire Inc. for host reservation services and obtained a license to use the Navitaire software to provide reservation services to Gol customers. Navitaire provides a number of ancillary services in addition to the host reservation services, including data center implementation services, network configuration and design services, system integration services, customer site installation services and initial training services.

D. Exchange Controls

     The right to convert dividend or interest payments and proceeds from the sale of shares into foreign currency and to remit such amounts outside Brazil is subject to restrictions under foreign investment legislation which generally requires, among other things, that the relevant investments have been registered with the Central Bank and the CVM. Such restrictions on the remittance of foreign capital abroad may hinder or prevent the custodian for our preferred shares represented by our ADSs or the holders of our preferred shares from converting dividends, distributions or the proceeds from any sale of these preferred shares into U.S. dollars and remitting the U.S. dollars abroad. Holders of our ADSs could be adversely affected by delays in, or refusal to grant any, required government approval to convert Brazilian currency payments on the preferred shares underlying our ADS and to remit the proceeds abroad.

     Resolution No. 1,927 of the National Monetary Council provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers. The ADS program was approved under the Annex V Regulations by the Central Bank and the CVM prior to the issuance of the ADSs. Accordingly, the proceeds from the sale of ADSs by ADR holders outside Brazil are not subject to Brazilian foreign investment controls, and holders of the ADSs are entitled to favorable tax treatment under certain circumstances. See “Taxation—Material Brazilian Tax Considerations.”

E. Taxation

     The following discussion addresses the material Brazilian and United States federal income tax consequences of acquiring, holding and disposing of our preferred shares or ADSs.

     This discussion is not a comprehensive discussion of all the tax considerations that may be relevant to a decision to purchase our preferred shares or ADSs and is not applicable to all categories of investors, some of which may be subject to special rules, and does not specifically address all of the Brazilian and United States federal income tax considerations applicable to any particular holder. It is based upon the tax laws of Brazil and the United States as in effect on the date of this annual report, which are subject to change, possibly with retroactive effect, and to differing interpretations. Each prospective purchaser is urged to consult its own tax advisor about the particular Brazilian and United States federal income tax consequences to it of an investment in our preferred shares or ADSs. This discussion is also based upon the representations of the depositary and on the assumption that each obligation in the deposit agreement among us, The Bank of New York, as depositary, and the registered holders and beneficial owners of our ADSs, and any related documents, will be performed in accordance with its terms.

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     Although there presently is no income tax treaty between Brazil and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. We cannot assure you, however, as to whether or when a treaty will enter into force or how it will affect holders of our preferred shares or ADSs.

Material Brazilian Tax Considerations

     The following discussion, in the opinion of Mattos Filho, Veiga Filho, Marrey Jr. e Quiroga Advogados addresses the material Brazilian tax consequences of the acquisition, ownership and disposition of our preferred shares or ADSs by a non-Brazilian holder.

     This discussion is based on Brazilian law as currently in effect, which are subject to change, possibly with retroactive effect, and to differing interpretations. Any change in such law may change the consequences described below. Each non-Brazilian holder should consult his or her own tax adviser concerning the Brazilian tax consequences of an investment in the preferred shares or ADSs.

     Taxation of Dividends. Dividends, including dividends in kind, paid by us to the depository in respect of the preferred shares underlying the ADSs or to a non-Brazilian holder of preferred shares will not be subject to Brazilian withholding income tax, provided that such amounts are related to profits earned after January 1, 1996.

     Taxation of Gains. According to Law No. 10,833, enacted on December 29, 2003, capital gains realized on the disposition of assets located in Brazil by a non-Brazilian holder are subject to taxation in Brazil, regardless of whether the sale or the disposition is made by a non-Brazilian holder to another non-Brazilian resident or to a Brazilian resident.

     With respect to the disposition of preferred shares, as they are assets located in Brazil, the non-Brazilian holder will be subject to income tax on the gains assessed, following the rules described below, regardless of whether the disposition is conducted in Brazil or with a Brazilian resident.

     With respect to the ADSs, arguably the gains realized by a non-Brazilian holder on the disposition of ADSs to another non-Brazilian resident are not taxed in Brazil, based on the argument that ADSs would not constitute assets located in Brazil for purposes of Law No. 10,833/03. However, we cannot assure you how Brazilian courts would interpret the definition of assets located in Brazil in connection with the taxation of gains realized by a Non- Brazilian Holder on the disposition of ADSs to another non-Brazilian resident. As a result, gains on a disposition of ADSs by a non-Brazilian holder to Brazilian resident, or even to non-Brazilian holder in the event that courts determine that ADSs would constitute assets located in Brazil, may be subject to income tax in Brazil according to the rules described ahead. It is important to clarify that, for purposes of Brazilian taxation, the income tax rules on gains related to disposition of preferred shares or ADSs vary depending on the domicile of the non-Brazilian holder, the form by which such non-Brazilian holder has registered its investment with the Central Bank and/or how the disposition is carried out, as described below.

     The deposit of preferred shares in exchange for ADSs may be subject to Brazilian tax on capital gains at the rate of 15%, or 25% in the case of investors domiciled in a Low or Nil Tax Jurisdiction, if the acquisition cost of the preferred shares is lower than (a) the average price per preferred share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit or (b) if no preferred shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of preferred shares were sold in the 15 trading sessions immediately preceding such deposit. In such case, the difference between the acquisition cost and the average price of the preferred shares calculated as described above, will be considered to be a capital gain subject to taxation. In some circumstances, there may be arguments to sustain that such taxation is not applicable in the case of a non-Brazilian holder that is a 2,689 Holder (as defined below) and is not resident in a Low or Nil Tax Jurisdiction.

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     The withdrawal of ADSs in exchange for preferred shares is not subject to Brazilian tax as long as the regulatory rules are duly observed in respect to the registration of the investment before the Central Bank.

     Gains assessed on the disposition of the preferred shares carried out on the Brazilian stock exchange (which includes the transactions carried out on the organized over-the-counter market) are:

     Any other gains assessed on the disposition of the preferred shares that are not carried out on the Brazilian stock exchange are subject to income tax at a rate of 15%, except for a resident of a Low or Nil Tax Jurisdiction, or yet where local regulations impose restrictions on disclosure of share ownership and identity of beneficiary holders which, in this case, is subject to income tax at a rate of 25%. If these gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% shall also be applicable and can be offset against the eventual income tax due on the capital gain.

     In the case of a redemption of preferred shares or ADSs or a capital reduction by a Brazilian corporation, the positive difference between the amount received by the non-Brazilian holder and the acquisition cost of the preferred shares or ADSs redeemed is treated as capital gain derived from the sale or exchange of shares not carried out on a Brazilian stock exchange market and is therefore subject to income tax at the rate of 15%, or 25%, as the case may be.

     As a general rule, the gains realized as a result of a disposition transaction of preferred shares or ADSs is the difference between the amount realized on the sale or exchange of the shares and their acquisition cost.

     There can be no assurance that the current preferential treatment for non-Brazilian holder of ADSs and 2,689 Holder of preferred shares will continue or will not be changed in the future.

     Any exercise of preemptive rights relating to the preferred shares or ADSs will not be subject to Brazilian income tax. Any gain on the sale or assignment of preemptive rights relating to preferred shares or the ADSs by a non-Brazilian holder will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of preferred shares.

     Distributions of Interest on Shareholders’ Equity. In accordance with Law No. 9,249, dated December 26, 1995, as amended, Brazilian corporations may make payments to shareholders characterized as distributions of interest on the company’s shareholders’ equity as an alternative to making individual distributions. Such interest is calculated by reference to the TJLP as determined by the Central Bank from time to time and cannot exceed the greater of:

     Distributions of interest on shareholders’ equity in respect of the preferred shares paid to shareholders who are either Brazilian residents or non-Brazilian holders, including non-Brazilian holders of ADSs, are subject to Brazilian income withholding tax at the rate of 15%, or 25% in case of a resident of a Low or Nil Tax Jurisdiction. The distribution of interest on shareholders’ equity may be determined by our board of directors. We cannot assure you that our board of directors will not determine that future distributions of profits may be made by means of interest on shareholders’ equity instead of by means of dividends.

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     The amounts paid as distribution of interest on shareholders’ equity are deductible for corporation income tax and social contribution on profit, both of which are taxes levied on our profits, as far as the limits and rules described above are observed by us.

     Low or Nil Taxation Jurisdictions.

     On June 24, 2008, Law No. 11,727 introduced the concept of “privileged tax regime”, considered as such the tax regime that (i) does not tax income or taxes it at a maximum rate lower than 20%; (ii) grants tax benefits to non-resident entities or individuals (a) without the requirement to carry out a substantial economic activity in the country or dependency or (b) contingent to the non-exercise of a substantial economic activity in the country or dependency; or (iii) does not tax or that taxes the income generated abroad at a maximum rate lower than 20%; or (iv) does not provide access to information related to shareholding composition, ownership of assets and rights or economic transactions carried out. We have been advised that the best interpretation of Law No. 11,727/08 should lead us to conclude that the new concept of “privileged tax regime” would be applicable solely for purposes of transfer pricing rules in export and import transactions. However, due to the recent enactment of this Law, we are unable to ascertain whether or not the privileged tax regime concept will be extended to the concept of Low or Nil Taxation Jurisdiction. The provisions of Law No. 11,727/08 that refer to the “privileged tax regime” came into effect on January 1, 2009.

     Other Relevant Brazilian Taxes

     There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of preferred shares or ADSs by a non-Brazilian holder except for gift and inheritance taxes which are levied by some states of Brazil on gifts made or inheritances bestowed by the non-Brazilian holder to individuals or entities resident or domiciled within such states in Brazil. There are non-Brazilian stamp, issue, registration or similar taxes or duties payable by a non-Brazilian holder of preferred shares or ADSs.

     Tax on foreign exchange transactions

     Pursuant to Decree No. 6,306/07, the conversion into foreign currency or the conversion into Brazilian currency of the proceeds received or remitted by a Brazilian entity from a foreign investment in the Brazilian securities market, including those in connection with the investment by a non-Brazilian holder in the preferred shares and ADSs may be subject to the Tax on Foreign Exchange Transactions, or IOF/Exchange. Although the current applicable rate for almost all foreign currency exchange transactions is 0.38%, the exchange transactions for the inflow and the outflow of funds by non–Brazilian holders for investment in the Brazilian financial and capital markets are subject to the IOF/Exchange Tax at the respective rates of 2% and 0%. In any case, the Brazilian Government is permitted to increase at any time the rate to a maximum of 25%, but only in relation to future transactions.

     Tax on Bonds and Securities Transactions

     Pursuant to Decree 6,306/07, the Tax on Bonds and Securities Transactions (“IOF/Bonds”) may be imposed on any transactions involving bonds and securities even if the transactions are performed on a Brazilian stock exchange. As a general rule, the rate of this tax is currently 0% but the Brazilian government may increase such rate up to 1.5% per day, but only with respect to future transactions.

     Registered Capital

     The amount of an investment in preferred shares held by a non-Brazilian holder who qualifies under Resolution No. 2,689 and obtains registration with the CVM, or by the depositary, as the depositary representing such holder, is eligible for registration with the Central Bank. Such registration allows the remittance outside of Brazil of any proceeds of distributions on the shares, and amounts realized with respect to disposition of such shares. The amounts received in Brazilian currency are converted into foreign currency through the use of the commercial market rate. The registered capital for preferred shares purchased in the form of ADSs or purchased in Brazil, and deposited with the depositary in exchange for ADSs will be equal to their purchase price (in U.S. dollars) to the purchaser. The registered capital for preferred shares that are withdrawn upon surrender of ADSs, as applicable, will be the U.S. dollar equivalent of the average price of preferred shares, as applicable, on a Brazilian stock exchange on which the greatest number of such preferred shares, as applicable, was sold on the day of withdrawal. If no preferred shares, as applicable, were sold on such day, the registered capital will refer to the average price on the Brazilian stock exchange on which the greatest number of preferred shares, as applicable, were sold in the 15 trading sessions immediately preceding such withdrawal. The U.S. dollar value of the preferred shares, as applicable, is determined on the basis of the average commercial market rate quoted by the Central Bank on such date or, if the average price of preferred shares is determined under the last preceding sentence, the average of such average quoted rates on the same 15 dates used to determine the average price of the preferred shares.

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     A non-Brazilian holder of preferred shares may experience delays in effecting such action, which may delay remittances abroad. Such a delay may adversely affect the amount, in U.S. dollars, received by the non-Brazilian holder.

     Material United States Federal Income Tax Consequences

     The following discussion describes the material United States federal income tax consequences of purchasing, holding and disposing of our preferred shares or ADSs. This discussion applies only to beneficial owners of ADSs or preferred shares that are “U.S. Holders,” as defined below. This discussion is based on the United States Internal Revenue Code of 1986, as amended, or the Code, its legislative history, existing final, temporary and proposed Treasury Regulations, administrative pronouncements by the United States Internal Revenue Service, or IRS, and judicial decisions, all as currently in effect and all of which are subject to change (possibly on a retroactive basis) and to different interpretations.

     This discussion does not purport to address all United States federal income tax consequences that may be relevant to a particular U.S. Holder and you are urged to consult your own tax advisor regarding your specific tax situation. The discussion applies only to U.S. Holders who hold preferred shares or ADSs as “capital assets” (generally, property held for investment) under the Code and does not address the tax consequences that may be relevant to U.S. Holders in special tax situations including, for example:

     Except where specifically described below, this discussion assumes that we are not a passive foreign investment company, or PFIC, for United States federal income tax purposes. Please see the discussion under —Passive foreign investment company rules” below. Further, this discussion does not address the alternative minimum tax consequences of holding preferred shares or ADSs or the indirect consequences to holders of equity interests in partnerships or other entities that own our preferred shares or ADSs. In addition, this discussion does not address the state, local and foreign tax consequences of holding our preferred shares or ADSs.

     You should consult your own tax advisor regarding the United States federal, state, local and foreign income and other tax consequences of purchasing, owning and disposing of our preferred shares or ADSs in your particular circumstances.

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     You are a “U.S. Holder” if you are a beneficial owner of preferred shares or ADSs and you are for United States federal income tax purposes:

     If a partnership (or any other entity taxable as a partnership for United States federal income tax purposes) holds preferred shares or ADSs, the United States federal income tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership. A partnership that holds our preferred shares or ADSs and partners in such partnerships should consult their own tax advisors regarding the United States federal income tax consequences of the purchase, ownership and disposition of our preferred shares or ADSs.

     For United States federal income tax purposes, a U.S. Holder of an ADS will generally be treated as the beneficial owner of the preferred shares represented by the ADS. However, see the discussion below under –”Distribution on preferred shares or ADSs” regarding certain statements made by the United States Treasury concerning depository arrangements.

     Distributions on preferred shares or ADSs

     Cash distributions (including amounts withheld to pay Brazilian withholding taxes and distributions of notional interest payments on shareholders’ equity, but excluding distributions in redemption of the preferred shares treated as exchanges or sales under the Code) made by us to or for the account of a U.S. Holder with respect to preferred shares or ADSs generally will be taxable to such U.S. Holder as ordinary dividend income when such distribution is paid, actually or constructively, out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of our current or accumulated earnings and profits will be treated first as a non-taxable return of capital reducing such U.S. Holder’s adjusted tax basis in the preferred shares or ADSs. Any distribution in excess of such U.S. Holder’s adjusted tax basis will be treated as capital gain and will be long-term capital gain if the U.S. Holder held the preferred shares or ADSs for more than one year. As used below, the term “dividend” means a distribution that constitutes a dividend for United States federal income tax purposes.

     A U.S. Holder will be entitled, subject to a number of complex limitations and conditions (including a minimum holding period requirement), to claim a United States foreign tax credit in respect of any Brazilian withholding taxes imposed on dividends received on preferred shares or ADSs. U.S. Holders who do not elect to claim a foreign tax credit with regard to any foreign income taxes paid or accrued during the taxable year may instead claim a deduction in respect of such withholding taxes. Dividends received with respect to the preferred shares or ADSs will be treated as foreign source income, which may be relevant in calculating such U.S. Holder’s United States foreign tax credit limitation. For purposes of the United States foreign tax credit limitation, foreign source income is separated into different “baskets,” and the credit for foreign taxes on income in any basket is limited to the United States federal income tax allocable to such income. Dividends paid with respect to our preferred shares or ADSs should generally constitute “passive category income” for most U.S. Holders. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit in their particular circumstances. The United States Treasury has expressed concern that intermediaries in connection with depository arrangements may be taking actions that are inconsistent with the claiming of foreign tax credits by United States persons who are holding depositary shares. Accordingly, investors should be aware that the discussion above regarding the ability to credit Brazilian withholding tax on dividends and the availability of the reduced tax rate for dividends received by certain non-corporate holders described below could be affected by actions taken by parties to whom the ADSs are released and the IRS.

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     Dividends paid by us generally will not be eligible for the dividends received deduction available under the Code to certain United States corporate shareholders. Subject to the above-mentioned concerns by the United States Treasury and certain exceptions for short-term and hedged positions, the United States dollar amount of dividends received by certain U.S. Holders (including individuals) prior to January 1, 2011 with respect to the ADSs will be subject to taxation at a maximum rate of 15% if the dividends represent “qualified dividend income.” Dividends paid on the ADSs will be treated as qualified dividend income if (i) the ADSs are readily tradable on an established securities market in the United States and (ii) we were not in the year prior to the year in which the dividend was paid, and are not in the year in which the dividend is paid, a PFIC. Our ADSs are listed on the New York Stock Exchange, and therefore the ADSs will qualify as readily tradable on an established securities market in the United States so long as they are so listed. However, no assurances can be given that the ADSs will be or will remain readily tradable. Subject to the discussion of passive foreign investment company rules below, based upon the nature of our current and projected income, assets and activities, we do not believe the preferred shares or the ADSs have been, nor do we expect them to be, shares of a PFIC for United States federal income tax purposes.

     Based on existing guidance, it is not entirely clear whether dividends received with respect to the preferred shares will be treated as qualified dividends, because the preferred shares are not themselves listed on a United States exchange. In addition, the United States Treasury Department has announced its intention to promulgate rules pursuant to which holders of ADSs or preferred stock and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, we are not certain that we will be able to comply with them. U.S. Holders of ADSs and preferred shares should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

     The amount of any cash distribution paid in Brazilian currency will equal the United States dollar value of the distribution, calculated by reference to the exchange rate in effect at the time the distribution is received by the depositary (in the case of ADSs) or by the U.S. Holder (in the case of preferred shares held directly by such U.S. Holder), regardless of whether the payment is in fact converted to U.S. dollars at that time. A U.S. Holder should not recognize any foreign currency gain or loss in respect of such distribution if such Brazilian currency is converted into U.S. dollars on the date received. If the Brazilian currency is not converted into United States dollars on the date of receipt, however, gain or loss may be recognized upon a subsequent sale or other disposition of the Brazilian currency. Such foreign currency gain or loss, if any, will be United States source ordinary income or loss.

     Because our preferred shares will not be treated as “preferred stock” for purposes of Section 305 of the Code, distributions to U.S. Holders of additional shares of our “non-preferred stock” or preemptive rights relating to such “non-preferred stock” with respect to their preferred shares or ADSs that are made as part of a pro rata distribution to all shareholders in most instances will not be subject to United States federal income tax. However, if the holders of ADSs are restricted in their ability to participate in the exercise of preemptive rights, the preemptive rights may give rise to a deemed distribution to holders of the preferred shares under Section 305 of the Code. Any deemed distribution will be taxable as a dividend to the extent of our earnings and profits as discussed above.

     Sale or exchange or other taxable disposition of preferred shares or ADSs

     Deposits and withdrawals of preferred shares by U.S. Holders in exchange for ADSs will not result in the realization of gain or loss for United States federal income tax purposes.

     A U.S. Holder generally will recognize capital gain or loss upon the sale, exchange or other taxable disposition of preferred shares or ADSs measured by the difference between the amount realized and the U.S. Holder’s adjusted tax basis in the preferred shares or ADSs. Any gain or loss will be long-term capital gain or loss if the preferred shares or ADSs have been held for more than one year. Long-term capital gains of certain U.S. Holders (including individuals) are eligible for reduced rates of United States federal income taxation. The deductibility of capital losses is subject to certain limitations under the Code.

     If a Brazilian tax is withheld on the sale, exchange or other taxable disposition of a preferred share or ADS, the amount realized by a U.S. Holder will include the gross amount of the proceeds of that sale, exchange or other taxable disposition before deduction of the Brazilian tax. Capital gain or loss, if any, realized by a U.S. Holder on the sale, exchange or other taxable disposition of a preferred share or ADS generally will be treated as United States source income or loss for United States foreign tax credit purposes. Consequently, in the case of a sale, exchange or other taxable disposition of a preferred share or ADS that is subject to Brazilian tax imposed on the gain (or, in the case of a deposit, in exchange for an ADS or preferred share, as the case may be, that is not registered pursuant to Resolution No. 2,689, on which a Brazilian capital gains tax is imposed (see above under “— Material Brazilian Tax Considerations — Taxation of Gains”), the U.S. Holder may not be able to benefit from the foreign tax credit for that Brazilian tax unless the U.S. Holder can apply the credit against United States federal income tax payable on other income from foreign sources in the appropriate income category. Alternatively, the U.S. Holder may take a deduction for the Brazilian tax if it does not elect to claim a foreign tax credit for any foreign income taxes paid or accrued during the taxable year.

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     Passive foreign investment company rules

     In general, a foreign corporation is a PFIC with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder holds stock in the foreign corporation, at least 75% of its gross income is passive income or at least 50% of the value of its assets (determined on the basis of a quarterly average) produce passive income or are held for the production of passive income. In determining whether a foreign corporation is a PFIC, a pro rata portion of the income and assets of each corporation in which it owns, directly or indirectly, at least 25% interest (by value) is taken into account. For this purpose, passive income generally includes, among other things, dividends, interest, rents, royalties and gains from the disposition of investment assets (subject to various exceptions). Based upon the nature of our current and projected income, assets and activities, we do not believe the preferred shares or ADSs are, nor do we expect them to be, shares of a PFIC for United States federal income tax purposes. However, the determination of whether the preferred shares or ADSs constitute shares of a PFIC is a factual determination made annually and thus may be subject to change. Because these determinations are based on the nature of our income and assets from time to time, and involve the application of complex tax rules, no assurances can be provided that we will not be considered a PFIC for the current or any past or future tax year.

     If, contrary to the discussion above, we are treated as a PFIC, a U.S. Holder would be subject to special rules (and may be subject to increased United States federal income tax liability and form filing requirements) with respect to (a) any gain realized on the sale, exchange or other disposition of preferred shares or ADSs and (b) any “excess distribution” made by us to the U.S. Holder (generally, any distribution during a taxable year in which distributions to the U.S. Holder on the preferred shares or ADSs exceed 125% of the average annual distributions the U.S. Holder received on the preferred shares or ADSs during the preceding three taxable years or, if shorter, the U.S. Holder’s holding period for the preferred shares or ADSs). Under those rules, (a) the gain or excess distribution would be allocated ratably over the U.S. Holder’s holding period for the preferred shares or ADSs, (b) the amount allocated to the taxable year in which the gain or excess distribution is realized and to taxable years before the first day on which we became a PFIC would be taxable as ordinary income, (c) the amount allocated to each prior year in which we were a PFIC would be subject to United States federal income tax at the highest tax rate in effect for that year and (d) the interest charge generally applicable to underpayments of United States federal income tax would be imposed in respect of the tax attributable to each prior year in which we were a PFIC. A U.S. Holder who owns preferred shares or ADSs during any taxable year that we are a PFIC generally must file IRS Form 8621. U.S. Holders should also be aware that recently enacted legislation may broaden the current IRS Form 8621 filing requirements or impose an additional annual filing requirement for United States persons owning shares of a PFIC. The legislation does not describe what information would be required to be included in either situation, but grants the Secretary of the United States Treasury power to make this determination. U.S. Holders should consult their own tax advisors regarding the application of the PFIC rules to our preferred shares or ADSs and the application of the recently enacted legislation to their particular situation. U.S. Holders should also consult their own tax advisors regarding the application of the PFIC rules to our preferred shares and ADSs and the application of the recently enacted legislation to their particular situation.

      In general, if we are treated as a PFIC, the rules described above can be avoided by a U.S. Holder that elects to be subject to a mark-to-market regime for stock in a PFIC. A U.S. Holder may elect mark-to-market treatment for its preferred shares or ADSs, provided the preferred shares or ADSs, for purposes of the PFIC rules, constitute “marketable stock” as defined in United States Treasury regulations. The ADSs will be “marketable stock” for this purpose if they are regularly traded on the New York Stock Exchange, other than in de minimis quantities on at least 15 days during each calendar quarter. A U.S. Holder electing the mark-to-market regime generally would compute gain or loss at the end of each taxable year as if the preferred shares or ADSs had been sold at fair market value. Any gain recognized by the U.S. Holder under mark-to-market treatment, or on an actual sale, would be treated as ordinary income, and the U.S. Holder would be allowed an ordinary deduction for any decrease in the value of preferred shares or ADSs as of the end of any taxable year, and for any loss recognized on an actual sale, but only to the extent, in each case, of previously included mark-to-market income not offset by previously deducted decreases in value. Any loss on an actual sale of preferred shares or ADSs would be a capital loss to the extent in excess of previously included mark-to-market income not offset by previously deducted decreases in value. A U.S. Holder’s adjusted tax basis in preferred shares or ADSs would increase or decrease by gain or loss taken into account under the mark-to-market regime. A mark-to-market election is generally irrevocable. If we are determined to be a PFIC, a U.S. Holder may be treated as indirectly holding any subsidiary of ours that is itself a PFIC(a lower-tier PFIC) and may be subject to the PFIC rules on indirect distributions or sales of the lower-tier PFIC, even if the U.S. Holder does not receive of the proceeds of such distribution or sales. In addition, a mark-to-market election with respect to preferred shares or ADSs would not apply to any lower-tier PFIC, and a U.S. Holder would not be able to make such a mark-to-market election in respect of its indirect ownership interest in that lower-tier PFIC. Consequently, the PFIC rules could apply with respect to income of a lower-tier PFIC, the value of which would already have been taken into account indirectly via mark-to-market adjustments in respect of preferred shares or ADSs.

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     If we are deemed to be a PFIC for a taxable year, dividends on our ADSs would not be “qualified dividend income” subject to preferential rates of Unites States federal income tax, as described above. See “— Distributions on preferred shares or ADSs.”

     Backup withholding and information reporting

     In general, dividends on preferred shares or ADSs, and payments of the proceeds of a sale, exchange or other disposition of preferred shares or ADSs, paid within the United States or through certain United States-related financial intermediaries to a U.S. Holder are subject to information reporting and may be subject to backup withholding of United States federal income tax at a current maximum rate of 28% unless the U.S. Holder (i) is a corporation or other exempt recipient or (ii) provides an accurate taxpayer identification number and certifies that it is a U.S. person and that no loss of exemption from backup withholding has occurred.

     The amount of any backup withholding tax from a payment to a U.S. Holder will be allowed as a credit against the U.S. Holder’s United States federal income tax liability, provided that the required information is timely furnished to the IRS. You generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your United States federal income tax liability by timely filing a refund claim with the IRS.

     In addition, U.S. Holders should be aware that recently enacted legislation imposes new reporting requirements with respect to the holding of foreign financial assets, including stock of foreign issuers, if the aggregate value of all of such assets exceeds $50,000. U.S. Holders should consult their own tax advisors regarding the application of the information reporting rules to our common shares and the application of the recently enacted legislation to their particular situation.

     Other Brazilian taxes

     You should note that any Brazilian IOF/Exchange Tax or IOF/Bonds tax may not be treated as a creditable foreign tax for United States federal income tax purposes, although you may be entitled to deduct such taxes, subject to applicable limitations under the Code. You should consult your tax advisors regarding the United States federal income tax consequences of these taxes.

F. Dividends and Paying Agents

     Not applicable.

G. Statement by Experts

     Not applicable.

H. Documents on Display

     We are subject to the informational requirements of the U.S. Securities Exchange Act of 1934, which is also known as the Exchange Act. Accordingly, we are required to file reports and other information with the Commission, including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information to be filed with the Commission at the public reference facilities maintained by the Commission at 100 F Street, N.W., Washington D.C. 20549 and at the Commission’s regional offices at 500 West Madison Street, Suite 1400, Chicago Illinois 60661, and 233 Broadway, New York, New York 10279. Copies of the materials may be obtained from the Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330. In addition, the Commission maintains an Internet website at http://www.sec.gov, from which you can electronically access the registration statement and its materials.

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     As a foreign private issuer, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act. For example, we are not required to prepare and issue quarterly reports. However, we furnish our shareholders with annual reports containing financial statements audited by our independent auditors and make available to our shareholders quarterly reports containing unaudited financial data for the first three quarters of each fiscal year. We file quarterly financial statements with the Commission within two months of the end of the first three quarters of our fiscal year, and we file annual reports on Form 20-F within the time period required by the Commission, which is currently six months from December 31, the end of our fiscal year.

     We will send the depositary a copy of all notices that we give relating to meetings of our shareholders or to distributions to shareholders or the offering of rights and a copy of any other report or communication that we make generally available to our shareholders. The depositary will make all these notices, reports and communications that it receives from us available for inspection by registered holders of ADSs at its office. The depositary will mail copies of those notices, reports and communications to you if we ask the depositary to do so and furnish sufficient copies of materials for that purpose.

     We also file financial statements and other periodic reports with the CVM located at Rua Sete de Setembro, 111, Rio de Janeiro, Rio de Janeiro 20159-900, Brazil.

I. Subsidiary Information

     Not applicable.

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The risk inherent in our market risk sensitive instruments and positions is the potential loss arising from adverse changes to the price of fuel, the real/U.S. dollar exchange rate and interest rates. The Company purchases jet fuel at prevailing market prices, but seeks to manage market risk through execution of a documented hedging program. The Company incurs a portion of its costs and operating expenses in U.S. dollars. The Company has interest rate risk in its floating rate leases and debt obligations. The company operates 127 aircraft, 94 of which were under operating leases and 33 were under finance leases. However, fixed rate leases are not considered market sensitive financial instruments and, therefore, are not included in the interest rate sensitivity analysis below.

Aircraft Fuel

     Our results of operations are affected by changes in the price of aircraft fuel required to operate our aircraft fleet. To manage the price risk, we utilize crude oil and heating oil derivative contracts. All of our derivative instruments must be liquid so as to allow us to make position adjustments and have prices that are widely disclosed. We avoid concentration of credit risk. All existing contracts settle on a monthly basis. We do not purchase or hold any derivative instruments for trading purposes. At December 31, 2009, we had crude oil derivative contracts outstanding for up to 2,183 barrels of oil. The fair value of such contracts was R$18.6 million. If the price of fuel increased by 10% in relation to the average 2009 price, based on expected fuel consumption in 2009, such an increase would result in an increase to aircraft fuel expense of approximately R$193.5 million in 2010, not considering our derivative contracts. We acquire substantially all of our fuel and oil from one supplier.

Foreign Currencies

     A significant part of our costs and operating expenses, such as aircraft and engine maintenance services, aircraft lease payments and aircraft insurance, are denominated in U.S. dollars. To manage exchange rate risk, we enter into derivative contracts with various counterparties to protect ourselves against a possible depreciation or devaluation of the real in relation to the U.S. dollar. At December 31, 2009, we had outstanding currency futures contracts. The fair value of such contracts was R$1.0 million. As a measure of our market risk with respect to our foreign currency exposure, an increase in aircraft and engine maintenance expense, aircraft operating lease payments and aircraft insurance from a hypothetical 10% depreciation of the real against the U.S. dollar would be approximately R$296.1 million, not considering our derivative contracts.

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Interest Rates

     Our earnings are affected by changes in interest rates due to the impact those changes have on interest expense from variable-rate debt instruments, variable-rate leasing contracts and on interest income generated from our cash and short-term investment balances. At December 31, 2009, 14% of our aircraft rental expenses had floating interest rates. A hypothetical 10% increase in market interest rates as of December 31, 2009 would increase our aircraft rental and interest expense by approximately R$0.3 million. A hypothetical 10% decrease in market interest rates as of December 31, 2009 would decrease our interest income by approximately R$0.3 million. These amounts are determined by considering the impact of the hypothetical interest rates on our variable-rate debt, variable-rate leasing contracts and cash equivalent and short-term investment balances at December 31, 2009.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

D. American Depositary Shares

     In the United States, our preferred shares trade in the form of ADS. Since December 2005 each ADS represents one preferred share, issued by The Bank of New York, as Depositary pursuant to a Deposit Agreement. On December 13, 2005, we executed a 2:1 ADS split, changing to ratio of one ADS representing two preferred shares to one ADS representing one preferred share, as approved by a meeting of the Board of Directors of the Company on November 8, 2005. The ADSs commenced trading on the NYSE on June 24, 2004.

     We do not treat ADR holders as our shareholders and ADR holders have no shareholder rights. Brazilian law governs shareholder rights. The depositary is the holder of the preferred shares underlying the ADSs. Holders of ADRs have ADR holder rights.

Fees and Expenses

     The following table summarizes the fees and expenses payable by holders of ADRs:

     Persons depositing preferred shares or ADR holders must pay:         For: 
 
     US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)        Issuance of ADSs, including issuances resulting from a distribution of preferred shares or rights or other property 

     Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates 
 
     US$0.02 (or less) per ADS (to the extent not prohibited by the rules of any stock exchange on which the ADSs are listed for trading)        Any cash distribution to you 
 
     A fee equivalent to the fee that would be payable if securities distributed to you had been preferred shares and the shares had been deposited for issuance of ADSs         Distribution of securities distributed to holders of deposited securities which are distributed by the depositary to ADR holders 
 
     US$0.02 (or less) per ADS per calendar year (to the extent the depositary has not collected a cash distribution fee of $.02 per ADS during the year)        Depositary services 

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     Registration or transfer fees         Transfer and registration of preferred shares on our preferred share register to or from the name of the depositary or its agent when you deposit or withdraw preferred shares. 
 
     Expenses of the depositary in converting foreign currency to U.S. dollars     
 
     Expenses of the depositary         Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement)
 
     Taxes and other governmental charges the depositary or the custodian have to pay on any ADR or preferred share underlying an ADR, for example, stock transfer taxes, stamp duty or withholding taxes         As necessary 
 
     Any charges incurred by the depositary or its agents for servicing the deposited securities             No charges of this type are currently made in the Brazilian market 

Payment of Taxes

     The depositary may deduct the amount of any taxes owed from any payments to you. It may also sell deposited securities, by public or private sale, to pay any taxes owed. You will remain liable if the proceeds of the sale are not sufficient to pay the taxes. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any proceeds, or send to you any property, remaining after it has paid the taxes.

Reimbursement of Fees

     The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses we incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for our continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of United States federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to us based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.

     The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

Reimbursement of Fees Incurred in 2009

     From January 1, 2009 until the date of this annual report, the Company received from the depositary US$100,000 for standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

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PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None.

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

     None.

ITEM 15. CONTROLS AND PROCEDURES

     Disclosure Controls and Procedures. The Registrant maintains controls and procedures designed to ensure that it is able to collect the information it is required to disclose in the reports it files with the SEC, and to process, summarize and disclose this information within the time periods specified in the rules of the SEC. Based on an evaluation of the Registrant’s disclosure controls and procedures as of the end of the period covered by this report conducted by the Registrant’s management, with the participation of the chief executive and chief financial officers, the chief executive officer and chief financial officer, after evaluating together with other members of management the effectiveness of our disclosure controls and procedures (as defined in the U.S. Securities Exchange Act of 1934 under Rule 13a-15(e)) have concluded that our disclosure controls and procedures are effective to ensure that the Registrant is able to collect, process and disclose the information it is required to disclose in the reports it files with the SEC within the required time periods.

     Management’s Report on Internal Control over Financial Reporting. Management of the Registrant is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934. The Registrant’s internal control over financial reporting is designed to provide reasonable assurance to the Registrant’s management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

     Management assessed the effectiveness of the Registrant’s internal control over financial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on this assessment, management believes that, as of December 31, 2009, the Company’s internal control over financial reporting is effective based on those criteria.

     Attestation Report of the Independent Registered Public Accounting Firm. The effectiveness of internal controls over financial reporting as of December 31, 2009 has been audited by Deloitte Touche Tohmatsu Auditores Independentes, or Deloitte, the independent registered public accounting firm who also audited the Company’s consolidated financial statements. Deloitte’s report on the Company’s internal controls over financial reporting is included herein.

     Changes in internal controls. For the year ended December 31, 2008 our management found that a material weakness in our internal controls over financial reporting resulted in the need for adjustments to our financial statements. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

     After the publication of our financial statements in IFRS as of and for the year ended December 31, 2008, we identified in the process of preparing our annual report, adjustments related to the accounting for the acquisition of VRG and the recognition of certain deferred tax assets related to temporary differences in our accounting for aircraft leases. Our internal controls over financial reporting did not detect these deficiencies, which led to the need to restate the aforementioned IFRS financial statements. The material weakness identified was as follows:

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     • We performed the consolidation of our financial statements using spreadsheets for complex manual accounting processes. As a result, certain controls in the consolidation process were manual and we had not taken advantage of the inherent controls in an automated consolidation package.

     • The regulatory complexity in the integration of VRG and our parallel transition to IFRS led to more time and effort being spent on the preparation of our financial statements, at the expense of the time we allocated to the financial statement close process and the internal controls related thereto.

     • This shift in focus could not be mitigated due to turnover of personnel, which resulted in insufficient communication and teamwork among those involved in the audit and the preparation of our financial statements, leading to less efficient and thorough review and closing processes.

     In light of this material weakness, in preparing the restated financial statements as of and for the year ended December 31, 2008, we performed a full revision of the financial statements and post-closing procedures to provide assurance regarding the accuracy of the restated financial statements.

     To address the material weakness described above we undertook remediation measures to ensure the accuracy and effectiveness of our internal controls over financial reporting, including:

     • Automating certain portions of the financial statement close process to take advantage of the built-in controls of the automated system and increasing the amount of time allocated to the internal controls over the process.

     • Ensuring that the supervisory function and experience levels of the personnel in the accounting area are adequate and allow sufficient time to review and address critical accounting issues in order to further strengthen the financial statement close process.

     • Providing ongoing training in IFRS and internal controls to our staff.

     • Strengthening management’s proactive oversight function through our accounting, tax and financial statement policy subcommittee by increased focus on income taxes and related deferrals, and all future material non-common and non-recurring transactions.

     These measures were successful in remediating the material weakness identified as of December 31, 2008.

     No other significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses, were made as a result of the evaluation.

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     Our board of directors has determined that Luiz Kaufmann, a member of our audit committee, is an “audit committee financial expert” as defined by current SEC rules and meets the independence requirements of the SEC and the NYSE listing standards. For a discussion of the role of our audit committee, see “Item 6C. Board Practices—Audit Committee.”

ITEM 16B. CODE OF ETHICS

     Our board of directors has adopted a Code of Ethics applicable to our directors, officers and employees, including our principal executive officer and principal financial officer. The Code of Ethics can be found at www.voegol.com.br under the heading “Investor Relations.” Information found at this website is not incorporated by reference into this document.

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ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     The following table sets forth by category of service the total fees for services performed by our principal accountants during the fiscal years ended December 31, 2009 and 2008. Ernst & Young Auditores Independentes S.S., or E&Y, was our principal accountant during the fiscal year ended December 31, 2008, and until March 31, 2009, and Deloitte was our principal accountant during the fiscal year ended December 31, 2009.

        2008    2009 
     
        (in reais)
Audit Fees    5,616,361    1,695,392(1)
Audit-Related Fees    —    605,089(2)
Tax Fees    335,618    — 
All Other Fees    351,818    — 
   
Total        6,303,797    2,300,481 
     
 
       
(1)  
Does not include fess of R$537,462 paid to E&Y for its review of our interim financial statements as of March 31, 2009. 
(2)  
Does not include R$165,067 paid to E&Y for services in connection with securities offerings. 

Audit Fees

     Audit fees include the audit of our consolidated annual financial statements and internal controls, the audit of our Brazilian GAAP financial statements, review of our quarterly reports and required statutory audits.

Audit-Related Fees

     Audit-related fees include fees for the preparation and issuance of comfort letters in connection with our offering and registering securities with the SEC. No audit-related fees were incurred in 2008.

     In 2009, audit-related fees for services performed by E&Y amounted to R$165,067 and for services performed by Deloitte amounted to R$605,089.

Tax Fees

     Tax advisory services provided by E&Y in 2008 amounted to R$335,618. In 2009 E&Y did not provide us any tax advisory services.

     There were no tax advisory services provided by Deloitte in 2008 and 2009.

All Other Fees

     Other fees for services performed by E&Y during the fiscal year 2008 were related to the adoption of IFRS and amounted to R$351,818. There were no other fees for services performed by E&Y during 2009.

     There were no other fees for services performed by Deloitte during the fiscal years ended December 31, 2008 and 2009.

Pre-Approval Policies and Procedures

     Our audit committee approves all audit, audit-related services, tax services and other services provided by Deloitte or E&Y. Any services provided by Deloitte or E&Y that are not specifically included within the scope of the audit must be pre-approved by the audit committee in advance of any engagement. Pursuant to Rule 2-01 of Regulation S-X, audit committees are permitted to approve certain fees for audit-related services, tax services and other services pursuant to a de minimis exception prior to the completion of an audit engagement. In 2009 and 2008, none of the fees paid to E&Y and Deloitte were approved pursuant to the de minimis exception.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     None.

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

     In January 2008, our board of directors authorized a share buy-back program on the BM&FBOVESPA of up to 5,000,000 of our preferred shares, at market prices, representing 8.8% of the total number of preferred shares outstanding in the market. The purpose of the buyback is the purchase of preferred shares to be held in treasury and subsequently resold or cancelled, without reducing our capital. The period for these authorized transactions was 365 days from January 28, 2008. The program expired in January 2009, and a total of 1,574,200 preferred shares were bought back under the program.

     On December 9, 2009, our board of directors approved the cancellation of 1,119,775 preferred shares held in treasury and the amount of R$29.3 million was recorded against the capital reserves account. At December 31, 2009, we had 454,425 shares held in treasury, amounting to R$11.9 million.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

     As previously disclosed in our current report on Form 6-K filed on June 17, 2009, our board of directors, based on the recommendation from our audit committee, approved the dismissal of E&Y as independent registered public accounting firm and the engagement of Deloitte to serve as our new independent registered public accounting firm for fiscal year 2009 as of April 1, 2009.

     E&Y’s audit report dated March 19, 2009, except for Notes 2.a. and 24, which date is May 4, 2009, on our consolidated financial statements for the fiscal year ended December 31, 2008 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles. E&Y’s audit report dated February 11, 2008 on our consolidated financial statements for the fiscal year ended December 31, 2007 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

     E&Y’s audit report dated March 19, 2009, except for the effects of the material weakness described in the fifth paragraph therein, as to which the date is May 4, 2009, on the effectiveness of internal control over financial reporting as of December 31, 2008 contained an adverse opinion. E&Y’s report disclosed that management had identified and included in their assessment a material weakness in the financial statement closing process in connection with the implementation of IFRS related to the acquisition of VRG and the recognition of certain deferred tax assets related to temporary differences in the accounting for aircraft leases and, as a result, concluded that previously reported profit (loss) had been overstated. The insufficient controls related to the foregoing resulted in a restatement of our consolidated financial statements as of December 31, 2008 and 2007 and for the years then ended. E&Y’s audit report dated February 12, 2008 on the effectiveness of internal control over financial reporting as of December 31, 2007 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

     During the two fiscal years preceding the dismissal of E&Y and the subsequent interim period from January 1, 2009 through March 31, 2009, there were no disagreements between us and E&Y on any matters of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of E&Y, would have caused E&Y to make reference to the subject matter of the disagreement in its report on our consolidated financial statements. During the two fiscal years preceding the dismissal of E&Y and the subsequent interim period from January 1, 2009 through March 31, 2009, there were no “reportable events” as that term is defined in Item 304(a)(1)(v) of Regulation S-K, except for the material weakness identified on the effectiveness of internal control over financial reporting as of December 31, 2008.

     We have provided E&Y with a copy of the foregoing statements and have requested and received from E&Y a letter addressed to the Securities and Exchange Commission stating whether or not E&Y agrees with the above statements. A copy of the letter from E&Y is attached as Exhibit 16.1 to this annual report.

     During the two fiscal years preceding the dismissal of E&Y and the subsequent interim period from January 1, 2009 through March 31, 2009, neither us nor anyone acting on our behalf, consulted Deloitte regarding any of the matters or events set forth in Item 3.04(a)(2) of Regulation S-K.

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ITEM 16G. CORPORATE GOVERNANCE

Significant Differences between our Corporate Governance Practices and NYSE Corporate Governance Standards

     We are subject to the NYSE corporate governance listing standards. As a foreign private issuer, the standards applicable to us are considerably different than the standards applied to U.S. listed companies. Under the NYSE rules, we are required only to: (a) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (b) provide prompt certification by our chief executive officer of any material non-compliance with any corporate governance rules, and (c) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance practice required to be followed by U.S. listed companies. The discussion of the significant differences between our corporate governance practices and those required of U.S. listed companies follows below.

     Majority of Independent Directors

     The NYSE rules require that a majority of the board must consist of independent directors. Independence is defined by various criteria, including the absence of a material relationship between the director and the listed company. Brazilian law does not have a similar requirement. Under Brazilian law, neither our board of directors nor our management is required to test the independence of directors before their election to the board. However, both the Brazilian Corporate Law and the CVM have established rules that require directors to meet certain qualification requirements and that address the compensation and duties and responsibilities of, as well as the restrictions applicable to, a company’s executive officers and directors. While our directors meet the qualification requirements of the Brazilian Corporate Law and the CVM, we do not believe that a majority of our directors would be considered independent under the NYSE test for director independence. The Brazilian Corporate Law requires that our directors be elected by our shareholders at a general shareholders’ meeting. All of our directors are elected by our controlling shareholder and five of our directors represent our controlling shareholder.

     Executive Sessions

     NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management present. The Brazilian Corporate Law does not have a similar provision. According to the Brazilian Corporate Law, up to one-third of the members of the board of directors can be elected from management. Constantino de Oliveira Jr., our president and chief executive officer, is a member of our board of directors. There is no requirement that non-management directors meet regularly without management. As a result, the non-management directors on our board do not typically meet in executive session.

     Fiscal Committee

     Under the Brazilian corporation law, the Conselho Fiscal, or fiscal committee, is a corporate body independent of management and a company’s external auditors. The fiscal committee may be either permanent or non-permanent, in which case it is appointed by the shareholders to act during a specific fiscal year. A fiscal committee is not equivalent to, or comparable with, a U.S. audit committee. The primary responsibility of the fiscal committee is to review management’s activities and a company’s financial statements, and to report its findings to a company’s shareholders. The Brazilian corporation law requires fiscal committee members to receive as remuneration at least 10% of the average annual amount paid to a company’s executive officers. The Brazilian corporation law requires a fiscal committee to be composed of a minimum of three and a maximum of five members and their respective alternates.

     Under the Brazilian corporation law, the fiscal committee may not contain members that (i) are on our board of directors, (ii) are on the board of executive officers, (iii) are employed by us or a controlled company, or (iv) are spouses or relatives of any member of our management, up to the third degree. Our by-laws provide for a non-permanent fiscal committee to be elected only by our shareholders’ request at a general shareholders’ meeting. The fiscal committee, when elected, will be comprised of a minimum of three and a maximum of five members and an equal number of alternate members. In 2009, our shareholders did not request the election of a fiscal committee.

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     Audit Committee

     NYSE rules require that listed companies have an audit committee that (i) is composed of a minimum of three independent directors who are all financially literate, (ii) meets the SEC rules regarding audit committees for listed companies, (iii) has at least one member who has accounting or financial management expertise and (iv) is governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. However, as a foreign private issuer, we need only to comply with the requirement that the audit committee meet the SEC rules regarding audit committees for listed companies to the extent compatible with Brazilian corporate law. Our audit committee, which is not equivalent to, or comparable with, a U.S. audit committee, provides assistance to our board of directors on matters involving accounting, internal controls, financial reporting and compliance. The audit committee recommends the appointment of our independent auditors to our board of directors and reviews the compensation of our independent auditors and helps coordinate their activities. It also evaluates the effectiveness of our internal financial and legal compliance controls. The audit committee comprises three members elected by the board of directors for a one-year term with the right to re-election, all three of which are independent. The current members of our audit committee are Álvaro de Souza, Antônio Kandir and Luiz Kaufmann. All members meet the independent membership requirements of the SEC and NYSE as well as other NYSE requirements. Luiz Kaufmann is the committee’s “financial expert” within the scope of the SEC rules covering the disclosure of financial experts on audit committees in periodic filings pursuant to the U.S. Securities Exchange Act of 1934.

     Nomination/Corporate Governance and Compensation Committees

     NYSE rules require that listed companies have a nominating/corporate governance committee and a compensation committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities. Required responsibilities for the nominating/corporate governance committee include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. Required responsibilities for the compensation committee include, among other things, reviewing corporate goals relevant to the chief executive officer’s compensation, evaluating the chief executive officer’s performance, approving the chief executive officer’s compensation levels and recommending to the board non-chief executive officer compensation, incentive-compensation and equity-based plans.

     We are not required under applicable Brazilian law to have a nomination/corporate governance committee or compensation committee. Under the Brazilian Corporate Law, the total amount available for compensation of our directors and executive officers and for profit-sharing payments to our executive officers is established by our shareholders at the annual general meeting. The board of directors is then responsible for determining the individual compensation and profit-sharing of each executive officer, as well as the compensation of our board and committee members. In making such determinations, the board reviews the performance of the executive officers, including the performance of our chief executive officer, who typically excuses himself from discussions regarding his performance and compensation.

     Our personnel and corporate governance committee is responsible for the coordination, implementation and periodic review of best corporate governance practices and for monitoring and keeping our board of directors informed of legislation and market recommendations addressing corporate governance. It also reviews and recommends to our board of directors human resources policies, forms of compensation, including salary, bonus and stock options, to be paid to our employees, as well as analyzing management’s career and succession plans. The committee consists of up to five members elected by our board of directors for a one-year term, with the right to re-election, comprising the chairman of the board of directors, one member of the board of directors, two outside specialists and the management and personnel officer. The personnel and corporate governance committee currently consists of Henrique Constantino, a member of our board of directors, Betânia Tanure de Barros, Álvaro de Souza, Paulo César Aragão and Ricardo Khauaja.

     Shareholder Approval of Equity Compensation Plans

     NYSE rules require that shareholders be given the opportunity to vote on all equity compensation plans and material revisions thereto, with limited exceptions. Under the Brazilian Corporate Law, shareholders must approve all stock option plans. In addition, any issuance of new shares that exceeds our authorized share capital is subject to shareholder approval.

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     Corporate Governance Guidelines

     NYSE rules require that listed companies adopt and disclose corporate governance guidelines. We have not adopted any formal corporate governance guidelines beyond those required by applicable Brazilian law. We have adopted and observe a disclosure policy, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, which, among other things, establishes black-out periods and requires insiders to inform management of all transactions involving our securities.

     Code of Business Conduct and Ethics

     NYSE rules require that listed companies adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. Applicable Brazilian law does not have a similar requirement. We have adopted a Code of Ethics and Conduct applicable to our officers, directors and employees worldwide, including at the subsidiary level. We believe this code addresses the matters required to be addressed pursuant to the NYSE rules. For a further discussion of our Code of Ethics and Conduct, see “Item 16B. Code of Ethics.”

     Internal Audit Function

NYSE rules require that listed companies maintain an internal audit function to provide management and the audit committee with ongoing assessments of the company’s risk management processes and system of internal control. Our internal audit and compliance department was created in 2004 under the supervision of our chief financial officer and our audit committee and is responsible for our compliance with the requirements of Section 404 of the U.S. Sarbanes Oxley Act of 2002 regarding internal control over financial reporting. The internal audit and compliance department reports to our chief executive officer and the audit committee.

PART III

ITEM 17. FINANCIAL STATEMENTS

     See “Item 18. Financial Statements.”

ITEM 18. FINANCIAL STATEMENTS

     See our consolidated financial statements beginning on Page F-1.

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ITEM 19. EXHIBITS

1.1    *   
 
2.1       
Form of Deposit Agreement among the Registrant, The Bank of New York, as depositary, and the Holders from time to time of American Depositary Shares issued thereunder, including the form of American Depositary Receipts, incorporated herein by reference from our Registration Statement on Form F-1, filed June 1, 2004, as amended on June 17, 2004 and June 23, 2004, File No. 333-116054. 
 
8.1    *   
 
10.1       
Agreement, dated as of January 1, 2002, between the Registrant and Petrobrás Distribuidora S.A., including Amendment No. 1, dated as of May 1, 2002, incorporated herein by reference from our Registration Statement on Form F-1, filed June 1, 2004, as amended on June 17, 2004 and June 23, 2004, File No. 333-116054. 
 
10.3       
Navitaire Hosted Services Agreement, dated May 1, 2004, between Navitaire Inc. and Gol Transportes Aéreos S.A., including amendments 1 through 7 thereto, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2006, as filed on February 28, 2007. 
 
10.4       
Amendment No. 8 to Navitaire Hosted Services Agreement dated as of June 11, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008. 
 
10.5       
Amendment No. 9 to Navitaire Hosted Services Agreement dated as of August 20, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008. 
 
10.6       
Amendment No. 10 to Navitaire Hosted Services Agreement dated as of August 27, 2007, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008. 
 
10.7       
Amendment No. 11 to Navitaire Hosted Services Agreement dated as of April 24, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.8       
Amendment No. 12 to Navitaire Hosted Services Agreement dated as of April 24, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.9       
Amendment No. 13 to Navitaire Hosted Services Agreement dated as of May 5, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.10       
Amendment No. 14 to Navitaire Hosted Services Agreement dated as of October 1, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.11       
Amendment No. 15 to Navitaire Hosted Services Agreement dated as of October 1, 2008, between Navitaire Inc. and Gol Transportes Aéreos S.A., incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.12    *   

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10.13   *   
 
10.14       
Aircraft Purchase Agreement, dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed June 1, 2004, as amended on June 17, 2004 and June 23, 2004, File No. 333-116054. 
 
10.15       
Supplemental Aircraft Purchase Agreement No. 1 dated as of July 16, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625. 
 
10.16       
Supplemental Aircraft Purchase Agreement No 2 dated as of January 20, 2005 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625. 
 
10.17       
Supplemental Aircraft Purchase Agreement No. 3 dated as of January 7, 2005 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625. 
 
       
 
10.18       
Supplemental Aircraft Purchase Agreement No. 4 dated as of March 24, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Registration Statement on Form F-1, filed March 28, 2004, as amended on April 11, 2005 and April 26, 2005, File No. 333-123625. 
 
10.19       
Supplemental Agreement No. 5 dated July 25, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006. 
 
10.20       
Supplemental Agreement No. 6 dated August 26, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006. 
 
10.21       
Supplemental Agreement No. 7 dated October 18, 2005 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006. 
 
10.22       
Supplemental Agreement No. 8 dated February 19, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006. 
 
10.23       
Supplemental Agreement No. 9 dated March 6, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2005, as filed on March 20, 2006 and as amended on May 2, 2006. 
 
10.24       
Supplemental Agreement No. 10 dated October 19, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company. Certain portions of this exhibit have been omitted from the public filing and were separately filed with the Commission with a request for confidential treatment. 

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10.25       
Supplemental Agreement No. 11 dated October 24, 2006 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2006, as filed on February 28, 2007. 
 
10.26       
Supplemental Agreement No. 12 dated February 8, 2007 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008. 
 
10.27       
Supplemental Agreement No. 13 dated December 17, 2007 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2007, as filed on April 22, 2008. 
 
10.28       
Supplemental Agreement No. 14 dated September 20, 2008 to Purchase Agreement dated as of May 17, 2004 between Gol Transportes Aéreos S.A. and The Boeing Company, incorporated herein by reference from our Annual Report on Form 20-F for the year ended December 31, 2008, as filed on May 8, 2009. 
 
10.29    *   
 
10.30    *   
 
10.31    *   
 
12.1    *   
 
12.2    *   
 
13.1    *   
 
13.2    *   
 
16.1    *   
 
*       
Filed herewith. 

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SIGNATURE

The Company hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on Form 20-F on its behalf.

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
By:    /s/ CONSTANTINO DE OLIVEIRA JUNIOR 
Name:    Constantino de Oliveira Junior 
Title:    President and Chief Executive Officer 
 
 
GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
By:    /s/ LEONARDO PORCIÚNCULA GOMES PEREIRA 
Name:    Leonardo Porciúncula Gomes Pereira 
Title:    Executive Vice President, Chief Financial and Investor Relations Officer 
 
 
Dated: March 31, 2010 

112

GOL Linhas Aéreas Inteligentes S.A.

Consolidated Financial Statements for the years ended December 31, 2009, 2008 and 2007 and Independent Accountants’ Report

Deloitte Touche Tohmatsu Auditores Independentes

GOL LINHAS AÉREAS INTELIGENTES S.A.

Consolidated Financial Statements

December 31, 2009 and 2008
(In thousands of Brazilian Reais)

Contents     
 
Independent Accountants’ Report of Deloitte Touche Tohmatsu Auditores Independentes   F-3 
 

Independent Accountants’ Report of Ernst & Young Auditores Independentes

 F-5 
 
Consolidated financial statements for the years ended December 31, 2009 and 2008     
 
Consolidated statements of operations  F-6 
Consolidated statement of comprehensive income (loss)   F-7 
Consolidated statement of financial position   F-8 
Consolidated statements of shareholders’ equity    F-10 
Consolidated statements of cash flows    F-11 
Notes to the consolidated financial statements    F-12 

F-2

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  Deloitte Touche Tohmatsu 
  Rua José Guerra, 127 
  04719-030 - São Paulo - SP 
  Brasil 
   
  Tel.: +55 (11) 5186-1000 
  Fax: +55 (11) 5181-2911 
  www.deloitte.com.br 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Gol Linhas Aéreas Inteligentes S.A.

We have audited the accompanying consolidated statement of financial position of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries (the “Company”) as of December 31, 2009, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries as of December 31, 2009, and the consolidated results of their operations and their consolidated cash flows for the year then ended, in conformity with International Financial Reporting Standards - IFRS as issued by the International Accounting Standards Board - IASB.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB, the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO, and our report, dated March 23, 2010, expressed an unqualified opinion on the Company’s internal control over financial reporting.

DELOITTE TOUCHE TOHMATSU
Auditores Independentes
São Paulo, Brazil
March 23, 2010

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. 
   Member of 
Deloitte Touche Tohmatsu 

F-3

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  Deloitte Touche Tohmatsu 
  Rua José Guerra, 127 
  04719-030 - São Paulo - SP 
  Brasil 
   
  Tel.: +55 (11) 5186-1000 
  Fax: +55 (11) 5181-2911 
  www.deloitte.com.br 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Gol Linhas Aéreas Inteligentes S.A.

We have audited the internal control over financial reporting of Gol Linhas Aéreas Inteligentes S.A. and subsidiaries (the “Company”) as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO. The Company’s Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Controls over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included: obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards - IFRS. A company’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with International Financial Reporting Standards - IFRS, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Deloitte Touche Tohmatsu

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission - COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) - PCAOB, the consolidated statement of financial position of the Company as of December 31, 2009, and related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the year then ended. Our report, dated March 23, 2010, expressed an unqualified opinion on those consolidated financial statements.

DELOITTE TOUCHE TOHMATSU
Auditores Independentes
São Paulo, Brazil
March 23, 2010

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. 
   Member of 
Deloitte Touche Tohmatsu 

F- 4

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Independent Accountants’ Report of Ernst & Young Auditores Independentes

The Board of Directors and Shareholders Gol Linhas Aéreas Inteligentes S.A.

We have audited the accompanying consolidated balance sheets of Gol Linhas Aéreas Inteligentes S.A. as of December 31, 2008 and 2007 and the related consolidated statements of income, changes in equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gol Linhas Aéreas Inteligentes S.A. at December 31, 2008 and 2007, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with International Financial Reporting Standards, issued by the International Accounting Standards Board.

As discussed in Note 2 a), the consolidated financial statements have been restated to correct the accounting for the acquisition of VRG and the recognition of certain deferred tax assets related to temporary differences in the accounting for aircraft leases

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Gol Linhas Aéreas Inteligentes S.A.’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 19, 2009, except for the effects of the material weakness described in the fifth paragraph of that report, as to which the date is May 4, 2009, expressed an adverse opinion thereon.

ERNST & YOUNG
Auditores Independentes S.S.
CRC-2SP015199/O-1

Maria Helena Pettersson
Partner

São Paulo, Brazil
March 19, 2009, except for Notes 2 a) and 24,
as to which the date is May 4, 2009

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 
(In thousands of Brazilian Reais, except amounts per share)
 

    Notes    2009    2008    2007 
         
 
Operating revenues                 
   Passenger        5,306,530    5,890,104    4,566,691 
   Cargo and other        718,852    516,089    374,293 
         
Total operating revenues        6,025,382    6,406,193    4,940,984 
 
Operating expenses                 
   Salaries    3    (1,100,953)   (983,783)   (799,344)
   Aircraft fuel        (1,813,104)   (2,630,834)   (1,898,840)
   Aircraft rent        (650,683)   (645,089)   (525,785)
   Aircraft insurance        (56,324)   (42,813)   (44,646)
   Sales and marketing        (364,551)   (588,735)   (367,866)
   Landing fees        (312,637)   (338,370)   (273,655)
   Aircraft and traffic servicing        (381,721)   (422,177)   (348,732)
   Maintenance materials and repairs        (417,212)   (388,030)   (339,281)
   Depreciation and amortization        (142,853)   (125,127)   (62,548)
   Other operating expenses        (372,052)   (329,883)   (270,422)
         
Total operating expenses        (5,612,090)   (6,494,841)   (4,931,119)
 
Income (loss) before finance income and expenses        413,292    (88,648)   9,865 
 
Finance income and expenses                 
     Finance expenses    4    (1,076,058)   (1,858,738)   (448,562)
     Finance income    4    1,418,902    752,344    639,580 
         
Total finance income and expenses, net        342,844    (1,106,394)   191,018 
 
Income (loss) before income taxes        756,136    (1,195,042)   200,883 
 
   Income taxes    5             
     Current        (609)   (57,338)   (105,291)
     Deferred        135,305    13,033    71,696 
         
        134,696    (44,305)   (33,595)
                 
         
Net income (loss) for the year        890,832    (1,239,347)   167,288 
         
 
 
Basic earnings (losses) per share    15    3.92    (6.16)   0.84 
Diluted earnings (losses) per share    15    3.91    (6.16)   0.84 

 

The accompanying notes are an integral part of these consolidated financial statements

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 
(In thousands of Brazilian Reais)
 

    Notes    2009    2008    2007 
         
 
Net income (loss) for the year        890,832    (1,239,347)   167,288 
         
 
Other comprehensive income (loss)                
Available for sale financial assets    22    (1,866)   10,727    (6,726)
Cash flow hedges    22    28,874    (30,523)   (3,628)
Income tax    5    (9,817)   10,378    1,233 
         
        17,191    (9,418)   (9,121)
 
         
Total comprehensive income (loss) for                 
 the year        908,023    (1,248,765)   156,012 
         

The movements in comprehensive income (loss) for the years ended on December 31, 2009, 2008 and 2007 are presented below:

    Available for            Total
    sale financial    Cash flow    Income   comprehensive
    assets    hedges    tax    income (loss)
         
Balance at December 31, 2006    -    3,282    (1,116)   2,166 
         
   Realized losses on financial instruments transferred to profit or loss    -    (11,362)   -    (11,362)
   Increase (decrease) in fair value    (6,726)   7,734    1,233    2,241 
         
Balance at December 31, 2007    (6,726)   (346)   117    (6,955)
         
   Realized losses on financial instruments transferred to profit or loss    -    2,575    -    2,575 
   Decrease in fair value    10,727    (33,098)   10,378    (11,993)
         
Balance at December 31, 2008    4,001    (30,869)   10,495    (16,373)
         
   Realized losses on financial instruments transferred to profit or loss   7    98,576    -    98,583 
   Decrease in fair value    (1,873)   (69,702)   (9,817)   (81,392)
         
Balance at December 31, 2009    2,135    (1,995)   678    818 
         

The accompanying notes are an integral part of these consolidated financial statements.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2009 AND 2008 
(In thousands of Brazilian Reais)
 

    Notes    2009    2008 
       
 
Assets             
Non-current assets             
     Property, plant and equipment, net    8    3,325,713    3,011,105 
     Intangible assets    9    1,231,785    1,210,320 
     Other non-current assets             
           Prepaid expenses    7    63,574    58,793 
           Deposits    6    805,140    493,460 
           Deferred income tax    5    866,136    603,071 
           Restricted cash    13    7,264    6,589 
           Other non-current assets        17,304    98,956 
       
     Total other non-current assets        1,759,418    1,260,869 
       
Total non-current assets        6,316,916    5,482,294 
 
 
Current assets             
     Other current assets        42,983    52,386 
     Prepaid expenses    7    124,728    123,801 
     Deposits    6    50,429    237,914 
     Recoverable taxes, net    5    86,125    110,767 
     Inventories, net    10    137,959    188,164 
     Trade and other receivables    11    519,308    344,927 
     Restricted cash    13    18,820    176,697 
     Short-term investments    23a    40,444    245,585 
     Cash and cash equivalents    12    1,382,408    169,330 
       
Total current assets        2,403,204    1,649,571 
 
       
Total assets        8,720,120    7,131,865 
       

The accompanying notes are an integral part of these consolidated financial statements.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2009 AND 2008 
(In thousands of Brazilian Reais)
 

    Notes    2009    2008 
       
 
Shareholders' equity and liabilities             
Shareholders' equity    14         
     Issued capital        2,062,272    1,250,618 
     Capital reserves        60,263    89,556 
     Treasury shares        (11,887)   (41,180)
     Other reserves        818    (16,373)
     Retained earnings (accumulated losses)       498,520    (211,013)
       
Total shareholders' equity        2,609,986    1,071,608 
 
Non-current liabilities             
     Other non-current liabilities        115,429    142,283 
     Tax obligations    17    88,642    41,055 
     Provisions    18    76,834    157,310 
     Deferred taxes    5    562,303    421,967 
     Advances from customers    19    64,087    - 
     Smiles deferred revenue    20    221,414    262,626 
     Long-term debt    23b    2,542,167    2,452,437 
       
Total non-current liabilities        3,670,876    3,477,678 
 
Current liabilities             
     Other current liabilities        85,789    219,308 
     Dividends payable    14    186,416    577 
     Advances from customers    19    126,059    - 
     Smiles deferred revenue    20    92,541    90,043 
     Provisions    18    66,259    165,287 
     Advance ticket sales    25    561,347    572,573 
     Sales taxes and landing fees        76,331    97,210 
     Tax obligations    17    57,277    39,605 
     Salaries, wages and benefits        233,162    146,805 
     Accounts payable        362,382    283,719 
     Short-term debt    23b    591,695    967,452 
       
Total current liabilities        2,439,258    2,582,579 
 
       
Total shareholders' equity and liabilities        8,720,120    7,131,865 
       

The accompanying notes are an integral part of these consolidated financial statements.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 
FOR THE YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 
(In thousands of Brazilian Reais)
 

        Issued capital   Treasury Shares        Other reserves         
               
    Notes    Shares   Amount   Shares   Amount   Capital reserves   Investments
revaluation
reserve		   Cash flow hedging reserve   Retained earnings (accumulated losses)    Total 
                     
Balance at December 31, 2006        196,206,466    887,625    -    -    89,556    -    2,166    1,189,811    2,169,158 
                     
   Net income for the year        -    -    -    -    -    -    -    167,288    167,288 
   Other comprehensive income for the year        -    -    -    -    -    (6,726)   (2,395)       (9,121)
                     
   Total comprehensive income        -    -    -    -    -    (6,726)   (2,395)   167,288    (158,167)
   Common shares issued        11,569    432    -    -    -    -    -    -    432 
   Shares issued        6,082,220    362,561    -    -    -    -    -    -    362,561 
   Share-based payment        -    -    -    -    -    -    -    4,905    4,905 
   Dividends payable and interest on shareholders’ equity        -    -    -    -    -    -    -    (302,775)   (302,775)
                     
Balance at December 31, 2007        202,300,255    1,250,618    -    -    89,556    (6,726)   (229)   1,059,229    2,392,448 
                     
   Net loss for the year        -    -    -    -    -    -    -    (1,239,347)   (1,239,347)
   Other comprehensive income for the year        -    -    -    -    -    10,727    (20,145)   -    (9,418)
                     
   Total comprehensive income        -    -    -    -    -    10,727    (20,145)   (1,239,347)   (1,248,765)
   Common shares issued        336    -    -    -    -    -    -    -    - 
   Share-based payment        -    -    -    -    -    -    -    5,362    5,362 
   Treasury shares        -    -    (1,574,200)   (41,180)   -    -    -    -    (41,180)
   Dividends payable        -    -    -    -    -    -    -    (36,257)   (36,257)
                     
Balance at December 31, 2008        202,300,591    1,250,618    (1,574,200)   (41,180)   89,556    4,001    (20,374)   (211,013)   1,071,608 
                     
   Net income for the year        -    -    -    -    -    -    -    890,832    890,832 
   Other comprehensive income for the year        -    -    -    -    -    (1,866)   19,057    -    17,191 
                     
   Total comprehensive income        -    -    -    -    -    (1,866)   19,057    890,832    908,023 
   Share-based payment        -    -    -    -    -    -    -    4,540    4,540 
   Capital increase on March 20, 2009    14    26,093,722    203,531    -    -    -    -    -    -    203,531 
   Capital increase on October 8, 2009, net of issuance costs of R$19,194    14    38,005,000    607,889    -    -    -    -    -    -    607,889 
   Common shares issued    15    -    234    -    -    -    -    -    -    234 
   Cancellation of treasury shares    14    (1,119,775)   -    1,119,775    29,293    (29,293)   -    -    -    - 
   Dividends payable (R$0.70 per share)   14    -    -    -    -    -    -    -    (185,839)   (185,839)
                     
Balance at December 31, 2009        265,279,538    2,062,272    (454,425)   (11,887)   60,263    2,135    (1,317)   498,520    2,609,986 

The accompanying notes are an integral part of these consolidated financial statements.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 
2009, 2008 AND 2007 
(In thousands of Brazilian Reais)
 

    2009    2008    2007 
       
Cash flows from operating activities             
Net income (loss) for the year    890,832    (1,239,347)   167,288 
Adjustments to reconcile net income (loss) to net cash             
 provided by operating activities:             
   Depreciation and amortization    142,853    125,127    62,548 
   Allowance for doubtful accounts    7,701    8,329    - 
   Litigation    (1,983)   (43,354)   - 
   Onerous contracts    2,080    8,250    - 
   Provision of obsolescence    4,327    (7,739)   - 
   Deferred income taxes    (135,305)   (13,033)   (198,707)
   Share-based payments    4,540    5,362    4,905 
   Net foreign exchange fluctuations and interests    (417,536)   742,636    (165,230)
   Loss in fair value of derivative financial instruments    98,583    (9,417)   (9,121)
   Return of aircraft    (82,823)   (29,211)   - 
   Smiles deferred revenues    (38,714)   (28,297)   5,469 
   Other non-monetary items    (8,832)   -    - 
Changes in operating assets and liabilities:             
   Insurance provision    (16,272)   10,272    184,811 
   Trade and other receivables    (182,082)   549,805    (219,602)
   Changes in inventories    45,878    17,151    (129,319)
   Deposits    (124,196)   (104,178)   (163,836)
   Prepaid expenses    (5,712)   (1,829)   (45,683)
   Other assets    47,771    (7,412)   1,389 
   Accounts payable    78,663    (42,645)   (22,055)
   Advance ticket sales    (11,226)   99,713    98,800 
   Advances from customers    190,146    -    - 
   Salaries, wages and benefits    86,357    (16,632)   - 
   Sales tax and landing fees    (20,879)   12,891    - 
   Tax obligations    65,868    28,930    - 
   Other liabilities    (46,749)   143,666    286,855 
       
Cash provided by operating activities    573,290    209,038    (141,488)
     Interest paid    (115,422)   -    - 
     Income tax paid    (609)   (57,338)   - 
       
Net cash provided by (used in) operating activities    457,259    151,700    (141,488)
 
Cash flows from investing activities             
     Acquisition of VRG, net of cash acquired    -    -    (201,509)
   Short term investments    205,140    574,758    566,931 
   Investments in restricted cash, net    (37,812)   (177,245)   6,041 
   Payment for property, plant and equipment    (130,475)   (346,035)   (539,407)
   Payment for intangible assets    (31,431)   (10,828)   (22,395)
       
Net cash provided by (used in) investing activities    5,422    40,650    (190,339)
 
Cash flows from financing activities             
   Net proceeds from / repayment of debt    (42,416)   (328,366)   919,827 
     Interest paid    -    (205,497)   - 
   Acquisition of treasury shares    -    (41,180)   - 
   Dividends paid    -    (36,258)   (302,775)
   Paid subscribed capital            432 
   Capital increase    811,654    -    - 
       
Net cash provided by (used in) financing activities    769,238    (611,301)   617,484 
 
Effects of exchange rate changes on the balance of cash held in foreign currencies    (18,841)   14,890    - 
 
Net increase (decrease) in cash and cash equivalents    1,213,078    (403,791)   285,657 
 
Cash and cash equivalents at the beginning of the year    169,330    573,121    287,464 
       
Cash and cash equivalents at the end of the year    1,382,408    169,330    573,121 
       

The accompanying notes are an integral part of these consolidated financial statements.

F-11

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

1. Corporate information

Gol Linhas Aéreas Inteligentes S.A. (“Company” or “GLAI”) is a publicly-listed company incorporated in accordance with Brazilian Corporate laws, organized on March, 12, 2004. The objective of the Company is through its operating wholly-owned subsidiary VRG Linhas Aéreas S.A. (“VRG”), to exploit (i) regular and non-regular air transportation services of passengers, cargo and mail bags, domestically or internationally, according to the concessions granted by the competent authorities; (ii) complementary activities of chartering air transportation of passengers.

GLAI is direct parent company of foreign wholly-owned subsidiaries GAC Inc. ("GAC"), Gol Finance ("Finance") and indirect of SKY Finance ("SKY") and SKY Finance II ("SKY II").

GAC was constituted on March 23, 2006 according to the bylaws of the Cayman Islands and its activity is related to the aircraft acquisition from its only shareholder GLAI, which provides a finance support for its operational activities. GAC is the parent company of SKY and SKY II, constituted on August 28, 2007 and November 30, 2009, respectively, both located in the Cayman Islands which activities are related to funds raising to finance aircraft acquisition.

Finance was constituted on March 16, 2006, according to the bylaws of the Cayman Islands and its activities are related to funds raising to finance aircraft acquisition and financing.

On April 9, 2007, the Company acquired VRG, a low-cost and low-fare airline company which operates domestic and international flights with GOL and VARIG brands offering regular and non-regular air transportation services to the main destinations in Brazil, South America and the Caribbean.

The Company’s shares are traded on the New York Stock Exchange (NYSE) and on the São Paulo Stock Exchange (BM&FBOVESPA). The Company has entered into an Agreement for Adoption of Level 2 Differentiated Corporate Governance Practices with the BM&F BOVESPA, integrating indices of Shares with Differentiated Corporate Governance – IGC and Shares with Differentiated Tag Along – ITAG, created to identify companies committed to adopting differentiated corporate governance practices.

F-12

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies

The Company’s consolidated financial statements for the year ended December 31, 2009 were authorized for issue by the Board of Directors on March 11, 2010. The registered office is located at Rua Tamoios, 246, Jd. Aeroporto, São Paulo, Brazil.

The consolidated financial statements were prepared on a historical cost basis except for certain assets and liabilities, which are measured at fair value, as set out below in each specific accounting policy for such assets and liabilities. The carrying value of recognized assets and liabilities that are accounted for as cash flow hedges are adjusted to record changes in the fair values attributable to the risks that are being hedged.

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board, using Brazilian Reais as the functional and reporting currency. The accounting principles adopted under IFRS differ in certain aspects from accounting principles generally accepted in Brazil (“BR GAAP”), which the Company uses to prepare its statutory financial statements.

a) Basis of consolidation

The consolidated financial statements comprise the accounts of GLAI and its direct and indirect subsidiaries presented below:

        Type of    % of capital stock 
       
    Location    control    2009    2008 
         
VRG    Brasil    Direct    100%    100% 
GAC    Ilhas Cayman    Direct    100%    100% 
Finance    Ilhas Cayman    Direct    100%    100% 
SKY    Ilhas Cayman    Indirect    100%    100% 
SKY II    Ilhas Cayman    Indirect    100%    - 

The accounting policies were applied consistently in all consolidated and are consistent entities with those used in previous years.

For off-shore subsidiaries that do not have administrative autonomy, the Company and its subsidiary VRG includes in its financial statements the assets, liabilities, revenues and expenses, eliminating the shares in the capital, reserves and retained earnings of the subsidiaries and the balances of revenues and expenses resulting from intercompany transactions between the Company, VRG and its subsidiaries. See Note 2.o for further information.

F-13

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

b) Cash and cash equivalents

Consists primarily of cash balances, bank deposits certificates, cash in transit and investments. The investments are stated at cost plus interest earned until the year-end, has original maturities of three months or less (or with no fixed time for redemption) with immediate liquidity, and are subject to an insignificant risk of changes in value. The cash and cash equivalents are classified as financial assets measured at fair value and the earnings are recorded in the profit or loss.

c) Restricted cash

Restricted cash represents pledge deposits with the purpose to guarantee some of Company’s hedge operations and long-term financings with the Brazilian Development Bank (“BNDES”) and the Development Bank of Minas Gerais (“BDMG”).

d) Financial assets and liabilities

The financial assets and liabilities include investments in marketable securities, debt instruments and equities, accounts receivable and other receivables, loans and financings, other accounts payable and other debts. The financial assets and liabilities are initially recognized at their fair value plus the costs directly attributable to their purchase or issue, except those classified under the category of instruments appraised at their fair market value based on results, for which the costs are booked at the statements of operations. Subsequent to initial recognition, the financial assets and liabilities are measured as of each balance sheet date according to their classification, which is defined upon initial recognition based on the purposes for which they were acquired or issued, as described below:

i. Financial assets measured at fair value: these include financial assets acquired for sale and repurchase on a short-term basis, designated upon initial recognition at fair value by means of results, measured at fair value, with the interest, monetary restatement, exchange variation and variations resulting from appraisal of fair value being recognized in profit or loss as financial revenues or expenses, when incurred. The Company has cash and cash equivalents in this category.

ii. Financial assets or liabilities held to maturity: these include financial instruments with fixed or determinable payments with defined maturities, for which the Company has the intention and capacity to hold to maturity. After the initial recognition they are measured at the amortized cost based on the effective interest rate method using a discount rate that, when applied to the estimated future yields over the expected time the financial instrument will remain effective. The interest, monetary and exchange variation, less losses in recoverable value, when applicable, are recognized in profit or loss as financial revenues or expenses, when incurred. The Company has no financial assets in this category.

F-14

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

d) Financial assets and liabilities (Continued)

iii. Loans granted and receivable: these include financial assets and liabilities with fixed or determinable payments that are not quoted on an active market which, after initial recognition are measured based on the amortized cost under the effective interest rate method. The interest, monetary and exchange variation, less losses in recoverable value, when applicable, are recognized in profit or loss as financial revenues or expenses, when incurred. The Company has no financial liabilities in this category.

iv. Available for sale: these include financial assets that do not match the above categories, measured at their fair value. After initial recognition, available for sale financial assets are measured at fair value, with gains or losses recognized as equity until the investment is derecognized or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is included in profit or loss The Company has short-term investments in this category.

The principal financial assets recognized by the Company are cash and cash equivalents, short-term investments and trade accounts receivable.

Short-term investments in fixed income securities, equities, public government bonds, committed securities and FIDC redeemable in a period of more than 90 days from the purchase date, are purchased in order to match due dates with the cash flow needs. The Company’s cash policy determines that securities are to be purchased that feature the characteristics of being rapidly convertible into cash, involve low transaction costs, are of a highly liquid nature and are contracted with leading financial institutions. The Company does not engage in investments involving securities for speculative purposes or to make deals. As defined by IAS 39, “Financial Instruments: Recognition and Measurement”, the Company’s investments are classified as available-for-sale financial assets. Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale and not classified as trading, held-to-maturity or loans and receivables.

F-15

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

d) Financial assets and liabilities (Continued)

Financial liabilities are classified according to the following categories based on the nature of the financial instruments contracted or issued:

i. Financial liabilities measured at fair value based on results: these include financial liabilities normally traded prior to maturity, liabilities designated upon initial recognition at fair value based on results and derivatives, except those designated as hedge instruments. They are remarked to fair value at each balance sheet date. The interest, monetary and exchange variations and variations resulting from the fair value, when applicable, are recognized in profit or loss, when incurred. The Company has no financial liabilities in this category.

ii. Financial liabilities not marked at fair value: non-derivative financial liabilities that are not normally traded prior to maturity. After initial recognition they are measured on the amortized cost based on the effective interest rate method. The interest, monetary updating and exchange variation, when applicable, are recognized in profit or loss when incurred. The Company has short and long-term debt and accounts payable in this category.

e) Trade and other receivables

Trade and other receivables are stated at cost less allowances made for doubtful receivables, which approximates fair value given their short term nature. An allowance for doubtful receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable through risk analysis and taking into account the historical analysis of the recovery of arrears. The allowance for doubtful receivables is the difference between the book value and recoverable amount. The provision is made for all accounts overdue for more than 90 days for installment sales and 30 days in respect of travel and cargo agencies and others.

f) Inventories

Inventories, including aircraft expendables, are valued at the lower of cost, determined by the weighted average cost method, includes importation of assets in progress and is reduced by a provision for obsolescence, when applicable. The cost of inventory is charged to expense when consumed.

F-16

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

g) Lease accounting

In accordance with IAS 17 "Leases", leases are classified as finance leases when the lease arrangement transfers substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Operating lease payments are recognized as an expense in the income statement on a straight line basis over the lease term. Differences between aircraft rentals paid and rentals recognized as expense in the income statement are recorded as prepaid assets or accrued rent in the balance sheet.

The assets held under a finance lease are valued at the lower of the following two amounts: the present value of the minimum lease payments under the lease arrangement or the leased asset’s fair value determined at inception of the lease. Lease payments are allocated between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized in the income statement. The corresponding obligation to the lessor is accounted for as short and long-term debt. The aircraft held under finance leases, which have a purchase option at the end of the contract, are depreciated on a straight-line basis over the useful life at rates calculated to write down the cost to the estimated residual value of 20% based on the Company experience and market price valuations. All other aircraft recorded on property, plant and equipment, when there is no reasonable certainty that the Company will obtain ownership of the property at the end of the contractual term, are depreciated over the shorter of the useful life of the assets and the lease term.

Profit or loss related to sale-leaseback transactions followed by an operating lease, is accounted for as follows:

• They are recognized immediately when it is clear that the transaction is established at fair value;

• If the sale price is below fair value, any profit or loss is recognized immediately. However, if the loss is compensated for by future lease payments at below market price, it is deferred and amortized in proportion to the lease payments over the contractual lease term;

• If the sale price is above fair value, the excess is deferred and amortized over the asset’s expected useful life, with the amortization recorded as a reduction of rent expense.

h) Prepaid expenses

Prepaid expenses and other assets primarily consist of prepayments for aircraft and engine rentals under operating lease agreements, sales commissions, deferred losses arising on sale-leaseback transactions and prepayments for insurance.

F-17

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

i) Revenue recognition

Passenger revenue is recognized either when transportation is provided or when the unused ticket expires. Tickets sold but not yet used are recorded as advance ticket sales that represents primarily deferred revenue for tickets sold for future travel dates and also estimated refunds and exchanges of tickets sold for past travel dates. Estimated refunds and exchanges included in the advance ticket sales account are compared with actual refund and exchange activities every month to monitor their reasonableness. These estimates are based on historical data and experience.

Revenue from cargo shipments is recognized when transportation is provided. Other revenue includes charter services, ticket change fees and other incidental services, and is recognized when the service is performed. The Company’s revenues are net of certain taxes, including state value-added and other state and federal taxes that are collected from customers and transferred to the appropriate government entities. Such taxes in the year ended December 31, 2009, 2008 were R$272,547, R$262,388 and R$191,164, respectively.

j) Mileage program

Since the acquisition of VRG, the Company operates a frequent flyer program, (“Smiles Program”) that provides travel and other awards to members based on accumulated mileage credits. The obligations assumed under the Smiles Program were valued at the acquisition date at estimated fair value that represents the estimated price the Company would pay to a third party to assume the obligation for miles expected to be redeemed under the Smiles Program.

The sale of passenger tickets by the Company includes air transportation and mileage credits. The Company sales of miles to business partners include marketing and mileage credits. The fair value of the mileage credit, net of breakage is determined based (i) on weighted-average price of passenger tickets sold by VRG considering the mileage amount necessary to issue a ticket when VRG offers mileage for flying and, (ii) on weighted-average price at which the Company sells mileage credits to business partners. The fair value of the mileage credits sold and the mileage component of passenger ticket sales is deferred and recognized as revenue when miles are redeemed and services are provided based on the weighted-average price of all miles that have been deferred. The portion of the revenue received in excess of the fair value of mileage credits sold (the “marketing premium) is recognized in income when the related marketing services are provided and classified as cargo and other revenue.

F-18

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

j) Mileage program (Continued)

For accounts that are inactive for a period of 36 consecutive months, the Company’s policy is to cancel all miles contained in those accounts at the end of the 36 month period of inactivity. The associated value for mileage credits which the Company estimates are not likely to be redeemed (“breakage”) is recognized as revenue. The Company calculates its breakage estimate based on historical redemption patterns. Future program redemption opportunities can significantly alter customer behavior from historical patterns with respect to inactive accounts. Such changes may result in material changes to the deferred revenue balance, as well as recognized revenues from that program.

k) Property, plant and equipment

Property, plant and equipment, including rotable parts, are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using the straight-line method. Each component of property, plant and equipment that has a cost that is significant in relation to the overall cost of the item is depreciated separately. Aircraft and engine spares acquired on the introduction or expansion of a fleet, as well as rotable spares purchased separately, are carried as fixed assets and generally depreciated in line with the fleet to which they relate. Pre-delivery deposits refer to prepayments made based on the agreements entered into with Boeing Company for the purchase of Boeing 737-800 Next Generation aircraft and includes interest and finance charges incurred during the manufacture of aircraft and the leasehold improvements.

The estimated useful lives for property and equipment are as follows:

    Estimated Useful Life 
   
Leasehold improvements to flight equipment    Lower of lease term or useful life 
Aircraft flight equipment    25 years 
Rotables    25 years 
Maintenance and engineering equipment.    10 years 
Major overhaul expenditures    5 years 
Communication and meteorological equipment    10 years 
Computer hardware and software    5 years 

F-19

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

k) Property, plant and equipment (Continued)

Under IAS 16 “Property, Plant and Equipment”, major engine overhauls including replacement spares and labor costs, are treated as a separate asset component with the cost capitalized and depreciated over the period to the next major overhaul. All other replacement spares and costs relating to maintenance of fleet assets are charged to the income statement on consumption or as incurred. Interest costs incurred and exchange differences on borrowings that fund progress payments on assets under construction, including pre-delivery deposits to acquire new aircraft, are capitalized and included as part of the cost of the assets through the earlier of the date of completion or aircraft delivery. Exchange variations are capitalized to the extent that they are regarded as an adjustment to interest costs.

The carrying value of property, plant and equipment is reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable and the cumulative impairment losses are shown as a reduction in the carrying value of property, plant and equipment.

l) Intangible assets

i) Goodwill

Goodwill is tested for impairment annually by comparing the carrying amount to the recoverable amount at the cash-generating unit level which is considered the operating wholly-owned subsidiary VRG. Considerable judgment is necessary to evaluate the impact of operating and macroeconomic changes to estimate future cash flows and to measure the recoverable amount. Assumptions in the Company’s impairment evaluations are consistent with internal projections and operating plans.

ii) Airport operating rights

Airport operating rights were acquired as part of the acquisition of VRG and were capitalized at fair value at that date and are not amortized. Those rights are considered to to have an indefinite useful life due to several factors and considerations, including requirements for necessary permits to operate within Brazil and limited slot availability in the most important airports in terms of traffic volume. The carrying value of those rights is tested for impairment annually or on a more frequent basis when events or changes in circumstances indicate that carrying values may not be recoverable. No impairment has been recorded to date.

F-20

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

l) Intangible assets (Continued)

iii) Tradenames

VRG tradenames were acquired as part of the VRG acquisition and were capitalized at fair value at that date. The tradenames are considered to have an indefinite useful life (and are not amortized) due to several factors and considerations, including the brand awareness and market position, customer recognition and loyalty and the continued use of the VRG tradenames. The carrying value of the tradenames is tested for impairment annually or on a more frequent basis when events or changes in circumstances indicate that carrying values may not be recoverable. No impairment has been recorded to date.

iv) Software

Costs related to the purchase or development of computer software that is separable from an item of related hardware is capitalized separately and amortized over a period not exceeding five years on a straight-line basis.

The carrying value of these intangibles is reviewed for impairment if events or changes in circumstances indicate the carrying value may not be recoverable.

m) Impairment of financial assets

The Company assesses at each balance sheet date whether a financial asset is impaired using discounted cash flow analysis, which considers the creditworthiness of the issuer of the security, as further described in Note 23.

n) Deposits

Are represented by maintenance deposits for aircraft and engines, deposits in guarantee and collaterals of lease agreements and judicial deposits of contingent liabilities relating to labor, civil and tax claims.

Maintenance deposits refer to payments made by the Company to commercial lease companies to be used in future aircraft and engine maintenance work. The deposits that will be returned in cash to the Company are denominated in U.S. Dollars and are adjusted according to exchange rate variation and the prepaid amounts of maintenance deposits are recorded at historical value of the original payment, recognized as maintenance costs when actually incurred, in accordance with the accounting policy spending on maintenance. Management performs regular reviews of the recovery of maintenance deposits and believes that the values reflected in the consolidated balance sheet are recoverable.

F-21

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

n) Deposits (Continued)

The deposits in guarantee and collaterals are represented by amounts deposited to lessors of lease monthly payments, as required at the inception of the lease agreements. The deposits in guarantee and collaterals are denominated in U.S. Dollars, do not bear interest and are reimbursable to the Company upon termination of the agreements.

o) Foreign currency transactions

The functional currency used for preparation and presentation of the financial statements of the Company and its subsidiaries is the Brazilian Real. Transactions in foreign currencies are translated into the Company’s functional currency at the exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are subsequently translated at the exchange rate at the balance sheet date. Any differences resulting from the currency translation are recognized in the statements of operations. These transactions include the off-shore foreign subsidiaries as described in Note 2.a).

p) Derivative financial instruments and hedge accounting

The Company accounts for derivative financial instruments in accordance with IAS 39. In executing the risk management program, management uses a variety of financial instruments, including petroleum call options, interest fixed-price swap agreements, and foreign currency forward contracts to protect against sharp changes in market prices and to mitigate the volatility of its expenditures related to these prices. The Company does not hold or issue derivative financial instruments for speculative purposes.

Derivative financial instruments are initially recognized at fair value and subsequently the change in fair value is recorded in profit or loss, unless the derivative meet the strict criteria for hedge accounting which are accounted for as cash flow hedges.

Cash flow hedges

For hedge accounting purposes according to IAS 39, the hedge instrument is classified as a cash flow hedge when it protects against the exposure to fluctuations in cash flow that are attributable to a particular risk associated with an asset or liability recognized regarding an operation that is highly likely to occur or to an exchange rate risk for an unrecognized firm commitment.

F-22

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

p) Derivative financial instruments and hedge accounting (Continued)

Cash flow hedges (Continued)

At the beginning of a hedge transaction, the Company designates and formally documents the item covered by the hedge, as well as the objective of the hedge and the risk policy strategy. Documentation includes identification of the hedge instrument, the item or transaction to be protected, the nature of the risk to be hedged and how the entity will determine the effectiveness of the hedge instrument in offsetting exposure to variations in the fair value of the item covered or the cash flows attributable to the risk covered. The purpose is that such hedge instruments will be effective in offsetting the changes in fair value or cash flows and they are constantly appraised to determine if they really have been effective throughout the entire period for which they have been designated.

According to the provisions of IAS 39, the effective portion of the gain or loss on change in the fair value of the hedging instrument is recognized directly in equity, while any ineffective portion is recognized immediately in profit or loss.

Amounts classified in equity are transferred to profit or loss each period which the hedged transaction affects profit or loss. If the hedged item is the cost of a non-financial asset, the amounts classified in equity are transferred to the initial carrying amount of the non-financial asset.

If the forecast transaction or the firm commitment is no longer expected to occur, amounts previously recognized in equity are transferred to profit or loss. If the hedging instrument expires, is terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognized in equity is recognized in the profit or loss.

The Company measures quarterly the effectiveness of the hedge instruments in offsetting changes in prices. Derivative financial instruments are effective if they offset between 80% and 125% of the changes in price of the item for which the hedge has been contracted. Any gain or loss resulting from changes in the fair value of the derivative financial instruments during the quarter in which they are not qualified for hedge accounting, as well as the ineffective portion of the instruments designated for hedge accounting are recognized in profit or loss.

The Company had the following derivative financial instruments classified as cash flow hedges: petroleum call options, foreign currency call options denominated in U.S. Dollars, forward contracts for U.S. Dollars and interest fixed-price swap agreements for Libor.

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Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

q) Share-based payments

The Company measures the fair value of equity-settled transactions with employees at the grant date using an appropriate valuation model. The resulting amount, as adjusted for forfeitures is charged to income over the period in which the options vest. At each balance sheet date before vesting, the cumulative expense is calculated; representing the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. The change in cumulative expense since the previous balance sheet date is recognized in the income statement with a corresponding entry in equity.

r) Provisions

For certain operating leases, the Company is contractually obligated to return aircraft in a defined condition. The Company accrues for restitution costs related to aircraft held under operating leases at the time the asset does not meet the return condition criteria throughout the duration of the lease.

Other provisions are recorded for probable losses and are reviewed based on the development of lawsuits and the background of losses on labor and civil claims, based on the best current estimate.

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Company expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognized as a separate asset when the reimbursement is virtually certain. The expense relating to any provision is presented in profit or loss net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost.

s) Cost for lease return conditions under operating leases

The Company is contractually required to return aircraft leased on the basis of operating lease agreements at defined activity levels. The Company recognizes the obligations related to the costs of return of the aircraft on the contractually required terms when the conditions of the aircraft are not in conformity with the contractual conditions for return, using estimates based on Company’s experience and industry data available.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

t) Segment information

The Company has adopted IFRS 8 – Operating Segments on January 1, 2009. This new accounting standard requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the management decision maker in order to allocate resources to the segments and to assess their performance.

The Company’s operations are derived from its wholly-owned subsidiary VRG and consist in to provide air transportation services within South America and Caribbean, where it operates domestic and international flights. The Company’s Management decision maker makes resource allocation decisions to maximize the Company’s consolidated financial results. The major revenue earning assets of the Company are its aircraft, which are registered in Brazil and therefore all profits accrue principally in the same country. Other revenues primarily arises from cargo, Smiles mileage program, installment sales, excess baggage charges and cancellation fares, all directly attributable to air transportation services.

Based on the way the Company treats the network and the manner in which resource allocation decisions are made, the Company has only one operating segment for financial reporting purposes. The Company’s primary reporting segments comprise of net revenue geographic segments which is presented in Note 26.

u) Income taxes

a) Current income tax

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the balance sheet date.

Current income tax relating to items recognized directly in equity is recognized in equity and not in profit or loss.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 


2. Basis of preparation and summary of significant accounting policies (Continued)

u) Income taxes (continued)

b) Deferred income tax

Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax assets are recognized for all deductible temporary differences, carryforward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and
the carry forward of unused tax credits and unused tax losses can be utilized except:

The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilized. Unrecognized deferred income tax assets are reassessed at each balance sheet date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.

Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax assets and deferred income tax liabilities are offset, if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation
authority.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

v) Key accounting estimates and judgments

The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the application of policies and the reported amounts of assets and liabilities, income and expenses. These estimates and associated assumptions are based on historical experience and various other factors believed to be reasonable under the circumstances. Actual results could differ from these estimates. These underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

i) Impairment of non-financial assets

The Company assesses whether there are any indicators of impairment for all non-financial assets at each reporting date. Goodwill and indefinite-lived intangible assets are tested for impairment annually and at other times when such indicators exist. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. The value in use is determined using discounted cash flow assumptions established by management. These calculations require the use of estimates (Note 9).

Other non-financial assets are tested for impairment when there are indicators that the carrying amounts may not be recoverable.

ii) Impairment of available-for-sale financial assets

The Company classifies certain financial assets as available-for-sale and recognizes changes in their fair value in shareholders’ equity. When the fair value declines, Management evaluates the decline in value to determine whether it is an impairment that should be recognized in the statements of operations. See Note 23.

iii) Passenger revenue recognition from unused tickets

Passenger revenue is recognized either when the transportation is provided or when the unused ticket expires. Unused tickets are recognized as revenue using estimates regarding the timing of recognition based on the terms and conditions of the ticket and historical trends, including breakage.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

v) Key accounting estimates and judgments (Continued)

iv) Income taxes

The Company believes that the tax positions taken are reasonable. However, various taxing authorities may challenge the positions taken resulting in additional liabilities for taxes and interest that may become payable in future years as a result of audits by tax authorities. The tax positions involve considerable judgment on the part of management and tax positions are reviewed and adjusted to account for changes in circumstances, such as lapsing of applicable statutes of limitations, conclusions of tax audits, additional exposures based on identification of new issues or court decisions affecting a particular tax issue. Actual results could differ from estimates.

v) Property, plant and equipment

During 2009, the Company revised the depreciation rates used for aircraft under financial leases, aircraft reconfiguration and spare parts, from 5% to 4%, for better compatibility with the useful life of these assets and is supported by technical studies approved by the Company's Management. This change in economic useful life was applied prospectively in the financial statements since April 1st, 2009. The related reduction of depreciation arising from the change in economic useful life in the year ended December 31, 2009 amounted approximately to R$12,000.

w) New and revised standards and interpretations effective in 2009 adopted

The following new and revised standards and interpretations were adopted and had impact on the Company’s consolidated financial statements:

F-28

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

w) New and revised standards and interpretations effective in 2009 adopted (Continued)

The following new and revised standards and interpretations have had no impact on the consolidated financial statements of the Company:

F-29

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

w) New and revised standards and interpretations effective in 2009 adopted (Continued)

F-30

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies (Continued)

w) New and revised standards and interpretations effective in 2009 adopted (Continued)

x) New and revised standards and interpretations not yet adopted

As of the date of these financial statements the following new and revised standards and interpretations were issued but not yet adopted by the Company since its adoption was not yet mandatory:

F-31

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

x) New and revised standards and interpretations not yet adopted (Continued)

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

z) Reconciliation with BR GAAP

As permitted by the SEC and in order to meet the information needs of the market in which it operates, the Company is presenting its financial statements under the International Financial Reporting Standards (IFRS), as well as those pursuant to Brazilian Corporation Law, on a simultaneous basis.

Considering the current stage of the convergence of accounting principles generally accepted in Brazil (BR GAAP) with IFRS, there are still differences between the Company’s financial statements under Brazilian law and those prepared according to IFRS. The reconciliations of net income for the years ended December 31, 2009, 2008 and 2007 and shareholders’ equity as of December 31, 2009 and 2008 are as follows:

             Shareholders’ equity 
     
        2009    2008 
       
Under IFRS        2,609,986    1,071,608 
   Smiles deferred revenue (i)       (3,034)   29,663 
   Effects of acquisition of companies (ii)       346,306    346,306 
   Deferred income taxes (ix)       (112,853)   (113,184)
       
Under BR GAAP        2,840,405    1,334,393 
       
 
        Net income (loss)
     
    2009    2008    2007* 
       
Under IFRS    890,832    (1,239,347)   167,288 
   Smiles deferred revenue (i)   (43,483)   3,385    26,278 
   Effects of acquisition of companies (ii)   -    -    229,533 
   Property, plant and equipment and leases (iii)   -    -    (170,600)
   Maintenance deposits (iv)   -    -    (58,704)
   Deferred charges (vi)   -    -    7,888 
   Derivative financial instruments (vii)   -    -    (4,408)
   Stock options (viii)   -    -    4,905 
   Deferred income taxes (ix)   11,117    (1,152)   66,347 
       
Under BR GAAP    858,466    (1,237,114)   268,527 
       

F-33

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

z) Reconciliation with BR GAAP (Continued)

i) Smiles deferred revenue

The wholly-owned subsidiary VRG sponsors a mileage program denominated Smiles that provides travel and other awards to members based on accumulated mileage credits.

The portion of revenue related to miles is deferred, and is recognized in the profit or loss when the miles are redeemed and services are provided. For IFRS purposes, the deferred revenue is recorded at fair value based on the weighted-average price of all miles that have been deferred. Under BR GAAP obligations are recognized based on the incremental cost that is the additional cost of providing services.

Due to the process of revamping the Mileage Program, the Company has been stimulating the usage of accrued miles through promotions and after the corporate structuring the benefit of Mileage Program was extended to all the passengers with accumulated miles. Consequently, the deferred revenue recognized on December 31, 2009 increased of R$43,483 in IFRS compared to BRGAAP (decrease of R$3,385 in 2008 and R$26,278 in 2007).

ii) Business combination

For IFRS purposes, the purchase method of accounting was used based on the fair value of the assets acquired and liabilities assumed, including contingent liabilities, being the excess of the consideration transferred over the net of the identifiable assets acquired and liabilities assumed registered as goodwill of the business. Under BR GAAP, the goodwill calculated on the acquisition of the company has been determined based on book shareholders’ equity.

iii) Property, plant and equipment and leases

These adjustments are to record finance leases, capitalized major overhaul costs, aircraft maintenance reserve deposit assets and borrowing costs. Under BR GAAP, all leased aircraft were recorded as operating leases. Also, the costs of major overhauls, payments to aircraft lessors for maintenance reserves were expensed as incurred. Finally, borrowing costs under BR GAAP were capitalized at different amounts.

Adjustments to recognize the aircraft assets and the obligations under finance leases include the recognition of related depreciation and interest costs. Additionally, under IFRS, the Company recorded liabilities related to the aircraft restoration obligations for aircraft under operating leases, which were expensed when paid under BR GAAP.

F-34

Table of Contents

GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

2. Basis of preparation and summary of significant accounting policies
(Continued)

z) Reconciliation with BR GAAP (Continued)

iv) Maintenance deposits

Under BR GAAP, all aircraft and engine maintenance deposits were expensed when paid to the lessor and recognized as supplementary rent in the income statement.

IFRS requires aircraft and engine maintenance deposits to be recorded as a deposit on the balance sheet and maintenance cost is recognized when the underlying maintenance is performed. The amount of aircraft and engine maintenance deposits expected to be utilized in the next twelve months is classified in current assets.

v) Deferred charges

Under BR GAAP, pre-operating costs were capitalized and amortized. Under IFRS, pre-operating costs that do not meet the definition of an intangible asset are recorded as expenses. Additionally, amounts capitalized related to the cost of software developed for internal use have been reclassified from property, plant and equipment to other non-current assets for IFRS.

vi) Derivative financial instruments

These adjustments were made to record derivatives and available-for-sale financial assets at fair value, as required by IFRS. Under BR GAAP, financial instruments, including securities, were recorded at cost plus income earned through the date of the financial statements according to the rates agreed with the financial institutions, not in excess of market value. Financial instruments include the Company’s investments in highly liquid investment grade commercial paper issued by financial institutions which are classified differently under IFRS and BR GAAP. Restricted cash has been disclosed separately under IFRS.

vii) Share-based payments

The Company recorded adjustments to recognize the expense for equity instruments granted based on their fair value at the date of grant, as required by IFRS. As permitted under BR GAAP, the Company did not record any compensation expense.

viii) Deferred income taxes

Changes in the Company’s deferred tax assets and liabilities are the result of the tax effects created by adjustments made to amounts recognized under IFRS which differ from amounts recognized for BR GAAP.

2. Basis of preparation and summary of significant accounting policies
(Continued)

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

Reclassifications

Certain balances previously reported in 2008 were reclassified with the purpose of better presentation and comparability in the financial statements. The statement of cash flow for the year ended December 31, 2008 has been corrected to present the effects of exchange rate changes on the balance of cash held in foreign currencies.

The main groups from the balance sheet for which balances were reclassified are demonstrated below:

    Previously reported    Reclassifications    Reclassified balances 
       
Assets             
Non-current assets             
   Property, plant and equipment    2,998,756    12,349    3,011,105 
   Intangible assets    1,197,861    12,459    1,210,320 
   Other non-current assets             
       Deposits    507,428    (13,968)   493,460 
       Deferred income tax    729,784    (126,713)   603,071 
       Other non-current assets    97,446    1,510    98,956 
       
   Total other non-current assets    1,400,040    (139,171)   1,260,869 
       
Total non-current assets    5,596,657    (114,363)   5,482,294 
 
Current assets             
   Inventories    200,514    (12,350)   188,164 
       
Total current assets    1,661,921    (12,350)   1,649,571 
 
       
Total assets    7,258,578    (126,713)   7,131,865 
       
 
Liabilities             
Non-current liabilities             
   Other non-current liabilities    196,894    (54,611)   142,283 
   Tax obligations    -    41,055    41,055 
   Deferred taxes    548,680    (126,713)   421,967 
   Long-term debt    2,438,881    13,556    2,452,437 
       
Total non-current liabilities    3,604,391    (126,713)   3,477,678 
 
Current liabilities             
   Other current liabilities    219,885    (577)   219,308 
   Dividends payable    -    577    577 
       
Total current liabilities    2,582,579    -    2,582,579 
 
       
Total liabilities and shareholders' equity    7,258,578    (126,713)   7,131,865 
       

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

3. Employee costs and headcount

a) Staff costs

The average headcount of employees at December 31, of each year was as follows:

    (Unaudited)
   
    2009    2008 
     
Brazil    17,500    15,421 
Rest of the world    463    490 
     
    17,963    15,911 
     

The employee costs were as follows:

    2009    2008    2007 
       
Salaries, wages and benefits    1,059,206    945,702    784,450 
Other employee costs    41,747    38,081    14,894 
       
Total employee costs    1,100,953    983,783    799,344 
       

b) Key management personnel

    2009    2008    2007 
       
Social charges    4,111    3,622    2,383 
Salary and benefits    13,228    6,928    7,588 
Share-based payments    3,430    3,599    3,448 
       
Total    20,769    14,149    13,419 
       

The Company maintains a profit sharing plan and stock option plans for its employees. The employee profit sharing plan is linked to the economic and financial results measured based on the Company’s performance indicators that measure the achievements by the Company, its business units and individual performance goals. At December 31, 2009, the Company recorded an estimated provision of the profit sharing plan in the amount of R$70,810, based on Management’s expectations.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

4. Finance income and expenses

    2009    2008    2007 
       
Finance expenses:             
   Interest on loans    (275,466)   (269,278)   (182,618)
   Liability exchange variations    (519,111)   (1,366,459)   (92,876)
   Losses on investment funds    (1,299)   (15,939)   (7,348)
   Losses on financial instruments    (199,387)   (159,335)   (52,367)
   Liability monetary variations    -    (6,016)   (5,035)
   Tax on financial operations    (30,615)   (9,108)   (15,045)
   Other financial expenses    (50,180)   (32,603)   (93,273)
       
Total finance expenses    (1,076,058)   (1,858,738)   (448,562)
 
Finance income:             
   Interest and gains on marketable securities    40,940    65,605    94,667 
   Asset exchange variations    1,227,351    599,592    256,842 
   Gains on financial instruments    119,055    12,744    198,666 
   Asset monetary variations    3,603    15,357    - 
   Other financial income    27,953    59,046    89,405 
       
Total finance income    1,418,902    752,344    639,580 
       
 
Net finance income (expenses)   342,844    (1,106,394)   191,018 
       

5. Deferred and recoverable taxes

    2009    2008 
     
Recoverable taxes         
  PIS and COFINS (1)   -    782 
  ICMS (2)   4,711    4,184 
  Prepaid IRPJ and CSSL (3)   37,644    45,106 
  Withholding tax (IRRF) on cash equivalents (4)   2,044    25,837 
  Withholding tax (IRRF) of public institutions    18,047    17,193 
  Value-added taxes recoverable (IVA) (5)   5,071    15,968 
  Import tax    18,119    - 
  Other recoverable taxes    489    1,697 
      
  Total recoverable taxes - current    86,125    110,767 
     
 
(1)    PIS and COFINS: federal taxes charged on revenues; 
(2)    ICMS: Value Added Tax on sales and services; 
(3)    IRPJ: Brazilian income tax, which is a federal tax charged on the net taxable income; 
 CSLL: Federal tax levied on the net taxable income and was introduced to fund social and welfare programs; 
(4)    IRRF: Withholding income tax applied on certain domestic transactions, such as payment of fees to some service providers, payment of salary and interest income resulting from short term investments; 
(5)    IVA: foreign indirect Value Added Tax on sales and services. 

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

5. Deferred and recoverable taxes (Continued)

    2009    2008 
     
Deferred non-current tax assets:         
 Credits on accumulated IRPJ tax losses carryforward    346,725    272,027 
 Negative base of CSLL    124,821    37,365 
 Temporary differences:         
       VRG acquisition effects    99,215    99,215 
       Smiles deferred revenue    10,085    10,085 
       Provision for contingencies    60,419    - 
       Allowance for doubtful accounts    187,558    29,054 
       Return of aircraft    6,729    34,889 
       Aircraft leasing operations    -    86,404 
       Others    30,584    34,032 
     
 Total of deferred non-current tax assets    866,136    603,071 
     
 
Deferred non-current tax liabilities:         
 VRG acquisition effects    210,154    210,154 
 Smiles deferred revenue    11,117    - 
 Maintenance deposits    151,820    133,276 
 Engine and rotable depreciation    83,427    64,564 
 Reversal of goodwill amortization    25,532    - 
 Aircraft leasing operations    69,893    - 
 Other deferred taxes    10,360    13,973 
     
Total of deferred non-current tax liabilities    562,303    421,967 
     

The Company and its subsidiary have IRPJ tax losses and negative basis of CSLL carryforwards in calculating taxable income that are offsettable against up to 30% of the taxable income accrued each year, with no expiration date, in the following amounts:

    Company       Subsidiary (VRG)
     
    2009    2008    2009     2008 
         
 
Accumulated IRPJ tax losses    266,520    144,786    1,360,390    1,183,236 
Negative base of CSLL    266,520    144,786    1,360,390    1,183,236 

On December 31, 2009, the tax credits resulting from accumulated IRPJ tax losses, negative basis of CSLL and temporary differences were recorded based on expectations for future taxable income of the Company and its subsidiaries, within the legal limits.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

5. Deferred and recoverable taxes (Continued)

The reconciliation of the IRPJ and CSLL, calculated according to the combined statutory rate, and the amounts recorded in the statement of operations, is shown as follows:

    IRPJ and CSLL 
   
    2009    2008    2007 
       
Income (Loss) before Income Tax (IRPJ) and Social Contribution on Net Income (CSLL)   756,136    (1,195,042)   200,383 
Combined tax rate    34%    34%    34% 
   IRPJ and CSLL at combined tax rate    (257,086)   406,314    (68,130)
   Adjustments to calculate the effective tax rate:             
   Exchange variation on overseas investments    104,934    (98,921)   - 
   Benefit from calculation of deferred IRPJ and CSLL at subsidiaries    -    (3,876)   25,185 
   Recognized (unrecognized) benefit on tax loss    273,954    (330,654)   - 
   Non-deductible expenses (non-taxable revenue) of subsidiaries    22,970    (30,281)   - 
   Income tax on permanent differences    (10,074)   11,865    (39,811)
   Deductible interest on shareholders’ equity            49,161 
   Tax benefit of offsetting of tax losses    -    1,248    - 
       
Income (expense) related to income tax and social contribution    134,696    (44,305)   (33,595)
       
 
Effective rate    17.8%    3.7%    16.8% 
 
   Current IRPJ and CSLL    (609)   (57,338)   (105,291)
   Deferred IRPJ and CSLL    135,305    13,033    71,696 
       
    134,696    (44,305)   (33,595)
       

Income tax recognized in other comprehensive income (loss)

During the year ended December 31, 2009, the income tax recognized in other comprehensive income (loss) relating to cash flow hedges is R$(9,817) (R$10,378 in 2008 and R$1,233 in 2007). There is no income tax recognized in other comprehensive income relating to available for sale financial assets.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

6. Deposits

Maintenance deposits

Under certain existing lease agreements, maintenance deposits are paid to aircraft and engine lessors that are to be applied to future maintenances deposits. The maintenance deposits paid under lease agreement transfer neither the obligation to maintain the aircraft nor the cost risk associated with the maintenance activities to the aircraft lessor. The Company maintains the right to select any third-party maintenance provider or to perform such services in-house.

These deposits are calculated based on a performance measure, such as flight hours or cycles, and are available for reimbursement to the Company upon the completion of the maintenance of the lease aircraft. Therefore, these amounts are recorded as a deposit on the balance sheet and maintenance cost is recognized when the underlying maintenance is performed, in accordance with the Company’s maintenance policy. Certain lease agreements provide that the excess deposits are not refundable to the Company. Such excess could occur if the amounts ultimately expended for the maintenance events were less than the amounts deposited. Any excess amounts held by lessor or retained by the lessor upon the expiration of the lease, which are not expected to be significant, would be recognized as additional aircraft rental expense.

Based on the foregoing analysis, management believes that the amounts reflected on the consolidated balance sheet are probable of recovery. There has been no impairment of Company’s maintenance deposits, which presented on December 31, 2009 the amount of R$50,429 and R$472,244, in current and non-current assets, respectively (R$237,914 and R$283,823 at December 31, 2008).

Additionally, the Company has reached agreements with certain lessors to replace the deposits with letters of credit and amend the lease terms to enable the Company to utilize the deposited funds to settle other amounts owed under the lease. Many of the new aircraft leases do not require maintenance deposits.

Deposits in guarantee for leasing contracts

As required by the lease agreements, the Company made deposits in guarantee for aircraft leasing companies, which are fully redeemable at the maturity dates of the lease contracts. On December 31, 2009, the balance of these deposits classified in non-current asset is R$251,716 (R$147,927 on December 31, 2008).

Judicial deposits

The judicial deposits represent, primarily, guarantees for contingent liabilities relating to labor, civil and tax claims until the resolution of the related litigations. The balance of judicial deposits on December 31, 2009, is R$81,180 (R$61,710 on December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

7. Prepaid Expenses

    2009    2008 
     
Deferred losses on sale-leaseback transactions (a)   72,947    66,603 
Prepayments for insurance    60,398    52,971 
Prepayments for lease agreements    35,453    45,596 
Prepaid comission expenses    14,705    11,738 
Others    4,799    5,682 
     
    188,302    182,590 
     
 
Current    124,728    123,797 
     
Non-current    63,574    58,793 
     

(a) During 2007, 2008 and 2009, the Company had losses on the sale-leaseback transactions for 9 Boeing 737-800 Next Generation aircraft. The net deferred losses on the sale-leaseback transactions in the amount of R$89,337 is being deferred in proportion to the monthly payments of their respective operating leases over the contractual term of 120 months. On December 31, 2009, the balances classified as current and non-current prepaid expenses are R$9,373 e R$63,574, respectively (R$7,810 e R$58,793 at December 31, 2008). See further information about sale-leaseback transactions in Note 24.

8. Property, plant and equipment

    Consolidated 
   
    2009     2008 
     
    Annual                 
    depreciation        Accumulated    Net    Net 
    rate    Cost    depreciation    amount    amount 
           
Flight equipment                     
 Property, plant and equipment under financial leases    4 - 10%    1,873,911    (150,984)   1,722,927    1,308,562 
 Sets of replacement parts and spare engines    4%    651,695    (71,442)   580,253    552,738 
 Reconfigurations of aircraft    4%    87,015    (78,930)   8,085    34,054 
 Aircraft and safety equipment    20%    1,259    (577)   682    789 
 Tools    10%    15,805    (3,661)   12,144    7,684 
           
        2,629,685    (305,594)   2,324,091    1,903,827 
Property and equipment in use                     
 Vehicles    20%    6,816    (4,344)   2,472    2,997 
 Machinery and equipment    10%    19,883    (5,652)   14,231    14,684 
 Furniture and fixtures    10%    15,671    (5,488)   10,183    10,647 
 Computers and peripherals    20%    31,309    (17,623)   13,686    15,811 
 Communications equipment    10%    2,262    (897)   1,365    1,350 
 Installations    10%    4,407    (1,755)   2,652    3,071 
 Confins maintenance center    7%    95,231    (8,567)   86,664    55,889 
 Leasehold improvements    20%    30,786    (7,521)   23,265    2,687 
 Construction in progress    -    10,050    -    10,050    30,588 
           
        216,415    (51,847)   164,568    137,724 
           
        2,846,100    (357,441)   2,488,659    2,041,551 
           
 
 Advances for acquisition of property, plant and equipment    -    837,054    -    837,054    969,554 
           
        3,683,154    (357,441)   3,325,713    3,011,105 
           

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

8. Property, plant and equipment (Continued)

The advances for acquisition of property, plant and equipment, net of returns, primarily refer to the pre-payments made based on contracts with the Boeing Company for acquisition of 90 next generation 737-800 aircraft (94 aircraft in December 31, 2008), in the amount of R$804,631 (R$957,204 in December 31, 2008), and include the interest and charges capitalized in the amount of R$19,971 (R$33,955 in December 31, 2008). The Company has a schedule for these aircraft delivery until February, 2016, as described in Note nº 24.

As described in Note 23, as of December 31, 2009, the advances for acquisition of aircraft, in the amount of R$245,776 (R$697,719 in December 31, 2008), are related to loan contract guarantees.

Changes in the property, plant and equipment balances are as follows:

    Flight equipment   Advances for acquisition of property, plant and equipment (b)        
       
    Property, plant and equipment under finance lease (a)   Rotable parts and spares     Other    Total 
           
At December 31, 2006    211,615    366,666    440,165    104,148    1,122,594 
           
   Additions    663,973    242,624    622,359    63,613    1,592,569 
   Disposals    (1,147)   (269)   (366,986)   (35,534)   (403,936)
   Depreciation and amortization    (29,654)   (67,653)   -    (22,892)   (120,199)
           
At December 31, 2007    844,787    541,368    695,538    109,335    2,191,028 
           
   Additions    523,001    178,433    511,308    54,934    1,267,676 
   Disposals    (6,815)   (84,669)   (237,292)   (13,921)   (342,697)
   Depreciation and amortization    (52,411)   (39,867)   -    (12,624)   (104,902)
           
At December 31, 2008    1,308,562    595,265    969,554    137,724    3,011,105 
           
   Additions    525,787    53,090    420,894    44,832    1,044,603 
   Disposals    (43,299)   (75)   (553,394)   (340)   (597,108)
   Depreciation and amortization    (68,123)   (47,116)   -    (17,648)   (132,887)
           
At December 31, 2009    1,722,927    601,164    837,054    164,568    3,325,713 
           

During the year, the Company carried out a review of the recoverable amount of its property, plant and equipment. The recoverable amount of the relevant assets has been determined on the basis of their value in use. The discount rate used in measuring value in use was 23.1% per year. No impairment was recognized for the years ended on December 31, 2009 and 2008.

(a) Refers to aircraft held under finance leases agreements in the total of R$1,720,010, net of depreciations and other assets in the amount of R$2,917, net as of December 31, 2009 (R$1,301,146 and R$7,416 as of December 31, 2008, respectively).

(b) The disposals of pre-delivery deposits correspond to the amounts returned by the Boeing Co. at the time the aircraft is delivered to the Company. These resources are used for the payment of the financing of respective aircraft as described in Note nº 23, under the captions PDP I and II.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

9. Intangible assets

            Airport         
            operating         
    Goodwill    Tradenames    rights    Software    Total 
           
At December 31, 2006    -    -    -    15,114    15,114 
           
   Additions    542,302    63,109    560,842    22,395    1,188,648 
   Disposals    -    -    -    -    - 
   Amortization    -    -    -    (6,321)   (6,321)
           
At December 31, 2007    542,302    63,109    560,842    31,188    1,197,441 
           
   Additions    -    -    -    38,290    38,290 
   Disposals    -    -    -    (15,003)   (15,003)
   Amortization    -    -    -    (10,408)   (10,408)
           
At December 31, 2008    542,302    63,109    560,842    44,067    1,210,320 
           
   Additions    -    -    -    31,431    31,431 
   Amortization    -    -    -    (9,966)   (9,966)
           
At December 31, 2009    542,302    63,109    560,842    65,532    1,231,785 
           

The Company has allocated goodwill and intangible assets with indefinite lives acquired through business combinations for the purposes of impairment testing to a single cash-generating unit which is the operating subsidiary VRG.

The recoverable amount of the cash generating unit has been measured on the basis of its value-in-use, by applying cash flow projections in the functional currency based on the Company’s approved business plan covering a five-year period followed by the long-term growth rate of 3%. The pre-tax discount rate applied to the cash flow projections is 23.1% .

The calculation of value-in-use for the cash generating unit is most sensitive to the following assumptions:

• Discounted free cash flow approach, based on current acquisition valuation model;

• Discount rates derived from the Company’s weighted average cost of capital, adjusted for the market specific risks;

• Long-term growth rate which reflects the market consensus on the business;

• Royalty stream that could be obtained from licensing the intangible asset to a third party in an arm’s length transaction.

As of December 31, 2009 and 2008, no impairment of goodwill and other intangible assets was recognized.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

10. Inventories

    2009    2008 
     
Consumable material    11,040    9,318 
Parts and maintenance material    98,744    108,408 
Advances to suppliers    25,086    65,230 
Importation of assets in progress    5,749    5,378 
Other    5,942    4,105 
Provision for obsolescence    (8,602)   (4,275)
     
    137,959    188,164 
     

Changes in the provision for obsolescence are as follows:

   
Balances at December 31, 2006    - 
   
Additions    (12,013 
Disposals    - 
   
Balances at December 31, 2007    (12,013)
   
Additions    (8,473)
Disposals    16,211 
   
Balances at December 31, 2008    (4,275)
   
Additions    (4,327)
Disposals    - 
   
Balances at December 31, 2009    (8,602)
   

11. Trade and other receivables

    2009    2008 
     
Local currency:         
   Credit card administrators    341,784    95,097 
   Travel agencies    123,884    116,270 
   Installment sales    57,491    92,913 
   Cargo agencies    14,220    15,505 
   Other    23,161    48,723 
     
    560,540    368,508 
 
Foreign currency         
   Credit card administrators    4,273    5,749 
   Travel agencies    6,349    13,940 
   Cargo agencies    545    1,428 
     
    11,167    21,117 
     
    571,707    389,625 
 
Allowance for doubtful accounts    (52,399)   (44,698)
     
    519,308    344,927 
     

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

11. Trade and other receivables (Continued)

Changes in the allowance for doubtful accounts are as follows:

   
Balances at December 31, 2006    (10,366)
   
   Additions    (32,937)
   Irrecoverable amounts    - 
   Recoveries    6,934 
   
Balances at December 31, 2007    (36,369)
   
   Additions    (15,864)
   Irrecoverable amounts    - 
   Recoveries    7,535 
   
Balances at December 31, 2008    (44,698)
   
   Additions    (41,366)
   Irrecoverable amounts    17,672 
   Recoveries    15,993 
   
Balances at December 31, 2009    (52,399)
   

The aging analysis of accounts receivable is as follows:

    2009    2008 
     
 
Falling due    498,684    327,722 
Overdue 30 days    10,172    13,103 
Overdue 31-60 days    4,870    3,555 
Overdue 61-90 days    2,350    4,455 
Overdue 91-180 days    14,592    13,011 
Overdue 181-360 days    9,492    8,194 
Overdue more than 360 days    31,547    19,585 
     
    571,707    389,625 
     

At December 31, 2009, the accounts receivables from travel agencies in the amount of R$67,691 (R$18,070 at December 31, 2008), are related to loan agreements guarantees.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

12. Cash and cash equivalents

Cash and cash equivalents are composed as follows:

    2009    2008 
     
Cash and bank deposits    84,262    148,716 
Cash equivalents    1,298,146    20,614 
     
    1,382,408    169,330 
     

On December 31, 2009, cash equivalents primarily refer to CDB (bank deposits certificates), Brazilian treasury bills (government securities) and fixed income funds, bearing interest at rates ranging between 95.0% and 107.3% of the CDI (Interbank Deposit Certificate). The composition of the cash equivalents is as follows:

    2009    2008 
     
 
Bank deposits certificates    619,587    1,895 
Government securities    582,710    2,749 
Committed - Overnight    95,849    - 
Other    -    15,970 
     
    1,298,146    20,614 
     

These investments have high liquidity, are readily convertible to a known amount of cash and are subject to an insignificant risk of change in value.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

13. Restricted cash

The restricted cash represents guarantee margin deposits related to hedge operations and BNDES and BDMG loans.

The guarantee margin deposits related to hedge exchange rate corresponds to R$18,820 (R$174,460 on December 31, 2008), recorded in current assets, and are deposited with the BM&FBOVESPA for future U.S. Dollars operations and, in the case of derivative operations with oil and interest, deposited with banks with which the contracts were made. These deposits are primarily invested in government securities bearing interest based on SELIC or other prime rate.

The restricted cash linked to BNDES and BDMG loans are invested in DI securities, bearing interest rate of 98.2% of CDI, and correspond to the requirement of margin deposits from counterparties. On December 31, 2009, the balance recorded in non-current assets, corresponds to R$7,264 (R$6,589 on 31 December 2008).

14. Shareholders’ equity

The following table sets forth the ownership and the percentage of the Company’s voting (common) and non-voting (preferred) shares as of December 31, 2009 and 2008:

     2009     2008 
     
    Common    Preferred    Total    Common    Preferred     Total 
             
Fundo de Investimento em                        
Participações ASAS    100.00%    26.96%    63.64%    100.00%    42.60%    73.13% 
Others    -    1.57%    0.78%    -    3.84%    1.80% 
Treasury shares    -    0.34%    0.17%    -    1.66%    0.78% 
Public Market (Free Float)   -    71.13%    35.41%    -    51.90%    24.29% 
             
    100.00%    100.00%    100.00%    100.00%    100.00%    100.00% 
             

As of December 31, 2009, the capital of the Company is comprised of 265,279,538 fully paid-up shares being 133,199,658 common shares and 132,079,880 preferred shares, each with no par value, authorized, issued and outstanding. According to the Company’s bylaws, the capital can be increased up to R$4 billion through the issuance of common or preferred shares. Fundo de Investimento em Participações Asas is the Company’s controlling fund which is equaly controlled by Constantino de Oliveira Júnior, Henrique Constantino, Joaquim Constantino Neto and Ricardo Constantino.

Each common share entitles its holder to one vote at the Company’s shareholder meetings. The outstanding preferred shares have no class designation, are not convertible into any other security and are non-voting, except under the limited circumstances provided under Brazilian law. Upon liquidation, holders of preferred shares are entitled to receive distributions prior to the holders of common shares. In addition, the São Paulo Stock Exchange – Bovespa Level 2 of Differentiated Corporate Governance Practices provides for the granting of voting rights to holders of preferred shares in connection with certain matters, including corporate restructurings, mergers and related party transactions.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

14. Shareholders’ equity (Continued)

On March 20, 2009 the Board of Directors approved the capital increase of the Company in the amount of R$203,531 and the issuance of 26,093,722 shares, comprising 6,606,366 common shares and 19,487,356 preferred shares. The issuance price for the common and preferred shares was fixed at R$7.80 per share, according to the quotation of the shares on the São Paulo Stock Exchange on March 20, 2009, verified after the closing of the trading session, in accordance with Article 170, Paragraph 1, Item III of the Law No. 6,404/76.

As of June 2, 2009, the Board of Directors authorized the subscription of all shares and approved the capital increase in the amount of R$203,531. The shares issued herein are identical to the shares already existing and shall be entitled to the same rights conferred to the other shares of the same kind, including receipt of dividends and interest on shareholders’ equity.

On October 8, 2009, the Board of Directors approved the capital increase of R$627,083 as a result of primary public offering by issuing a total of 38,005,000 shares, comprising 19,002,500 common shares and 19,002,500 preferred shares all nominative, registered with no par value, free and clear of any liens or encumbrances, issued by the Company, being the preferred shares with limited voting rights for certain matters. The issue price of the common and preferred shares was set at R$16.50 per share, defined by the completion of the book building procedure. The issuance costs amounted R$19,194, net of taxes, and were recorded in the shareholders’ equity offsetting the capital amount.

Retained earnings

Under Brazilian corporation law and according to the Company’s bylaws, the Company is required to maintain a “legal reserve” to which it must allocate 5% of its net income after the realization of accumulated losses, limited to 20% of capital. The legal reserve can only be used to offset losses and increase the capital of the Company and is subject to approval by the shareholders voting at the annual shareholders meeting and may be transferred to capital but is not available for the payment of dividends in subsequent years. On December 31, 2009, a total of R$39,123 was constituted based on the net income of the year under BR GAAP. On December 31, 2008, there was no legal reserve constituted.

Dividends

The Company’s bylaws provide for a mandatory minimum dividend to common and preferred shareholders, in the aggregate of at least 25% of annual net distributable income determined in accordance with Brazilian corporation law. Brazilian law permits the payment of cash dividends only from current net income and certain reserves registered in the Company’s statutory accounting records.

For the year ended December 31, 2009, the Company’s statutory consolidated financial statements prepared under BR GAAP presented net income of R$858,466 (loss of R$1,237,114 in 2008 and net income of R$268,527 in 2007).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

14. Shareholders’ equity (Continued)

Dividends (Continued)

The Board of Directors approved a Dividend Policy for 2009 whereby, without prejudice to the Company’s Bylaws, approve a distribution of dividends in the amount of R$185,839, or R$0.70 per common and preferred share of the Company, according to Law No. 9,249 of December 26, 1995. The basis for the dividend calculation is described in article 26 of the Company’s Bylaws which determines that the net income for the year has to first compensate any accumulated losses.

The dividend per share and proposed dividends were calculated as follows:

    2009 
   
Accumulated losses from previous years    (994,565)
     (+) Reinvestment reserve realization    837,700 
     (+) Legal reserve realization    80,865 
   
Accumulated losses after reserves compensation    (76,000)
Net income for the year under BR GAAP    858,466 
   
Net income for the year under BR GAAP after accumulated losses compensation    782,466 
     (-) Legal reserve constitution (5%)   (39,123)
   
Profit basis for the determination of the minimum mandatory dividends    743,343 
 
Proposed dividends (25%)   185,839 
   
 
Dividend per share    0.70 
   

The proposed dividends related to the year ended December 31, 2009 is in accordance with statutorily guaranteed rights, and will be submitted by the Company’s Management for approval at the Extraordinary General Meeting to be held within the term established by the prevailing Corporation Law.

Treasury shares

The Board of Directors at the meeting held on January 28, 2008, approved a preferred shares repurchase program aiming to enable the Company to achieve important opportunities of value enhancement for holding in treasury and subsequent disposal or cancellation, without capital reduction. The Company has acquired 1,574,200 of its own issued shares in prior years using retained earnings, at an average price of R$26.16 per share, recorded as Treasury shares. In accordance with the provisions of Brazilian Securities and Exchange Commission (CVM) Instructions No. 10/80 the maximum term for the performance of the transaction was 365 days counted as from January 28, 2008. The minimum cost was R$19.98 per share and the maximum cost was R$30.28 per share, amounting a total of R$41,180.

The Board of Directors at the meeting held on December 9, 2009, approved the cancellation of 1,119,775 preferred shares in Treasury shares, at the amount of R$ 29,293 recorded against the capital reserves account. As of 31 December 2009, the Company has 454,425 held as Treasury shares, amounting R$11,887, with a market value of R$11,851 (R$41,180 with a market value of R$15,600 as of December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

14. Shareholders’ equity (Continued)

Other comprehensive income (loss)

The market-to-market fair value of short-term investments classified as available for sale financial assets and derivative financial instruments designated as cash flow hedges are recognized in the Shareholders’ equity as other comprehensive income (loss), net of tax effects, until the end of the contracts. The balance at December 31, 2009 corresponds to a net gain of R$ 818 (net loss of R$16,373 at December 31, 2008).

15. Share-based payments

The Company’s Board of Directors within the scope of its functions and in conformity with the Company’s Stock Option Plan, approved a stock option plan for key senior executive officers and employees. Under this plan the stock options granted to employees cannot exceed 5% of total outstanding preferred shares. The options vest at a rate of 1/5 per year, and can be exercised up to 10 years after the grant date. The Board of Directors meetings date and the assumptions utilized to estimate the fair value of the stock purchase options using the Black-Scholes option pricing model are demonstrated below:

    Stock option purchase plans 
   
    2005    2006    2007    2008    2009 
           
    December    January 2,    December    December    February 4, 
Board of Directors meeting    9, 2004    2006    31, 2006    20, 2007    2009 
Total options granted    87,418    99,816    113,379    190,296    925,800 
Option exercise price    33.06    47.30    65.85    45.46    10.52 
Fair value of option on grant date    29.22    51.68    46.61    29.27    8.53 
Estimated volatility of share price    32.5%    39.9%    46.5%    41.0%    76.91% 
Expected dividend yield    0.8%    0.9%    1.0%    0.9%    - 
Risk-free return rate    17.2%    18.0%    13.2%    11.2%    12.7% 
Duration of the option (in years)   10.00    10.00    10.00    10.00    10.00 

During the year ended December 31, 2009, the Company recorded a share-based payments expense of R$4,540 (R$5,362 in 2008 and R$4,905 in 2007), in the income statement as employee costs.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

15. Share-based payments (Continued)

Changes in the stock options as of December 31, 2009 are shown as follows:

        Average weighted 
    Stock options    purchase price 
     
Options outstanding as of December 31, 2007   241,857    50.67 
 Granted    190,296     45.46 
 Exercised    (336)    36.35 
 Forfeited    (64,830)    50.27 
     
Options outstanding as of December 31, 2008   366,987     48.05 
 Granted    925,800    10.52 
 Exercised    (22,650)   10.37 
 Forfeited    (420,783)   10.80 
     
Options outstanding as of December 31, 2009  849,354    26.59 
 
Number of exercisable options as of December 31, 2008  151,436    46.23 
Number of exercisable options as of December 31, 2009  303,774    37.31 

As of February 2, 2010, the Board of Directors authorized the homologation of the exercise of 22,650 stock options occurred during 2009, that resulted in a capital increase of R$234.

The interval of the exercise prices and the average maturity of the outstanding options, as well as the interval of the exercise prices for the exercisable options as of December 31, 2009, are summarized below:

Outstanding options    Exercisable options 
     
    Options in    Remaining    Weighted    Exercisable    Weighted 
Exercise price    circulation as of    average maturity    average    options as of    average 
     interval    12/2009    in years    exercise price    12/2009    exercise price 
     
33.06    60,810    5.00    33.06    60,810    33.06 
47.30    69,194    6.00    47.30    55,123    47.30 
65.85    76,253    7.00    65.85    45,752    65.85 
45.46    157,947    8.00    45.46    63,179    45.46 
10.52    485,150    9.00    10.52    78,910    10.52 
     
10.52-65.85    849,354    9.10    26.59    303,774    37.31 
     

16. Earnings per share

Although, there are differences in voting rights and liquidation preferences, the Company’s preferred shares are not entitled to receive any fixed dividends. Rather, the preferred shareholders have identical rights to earnings and are entitled to receive dividends per share in the same amount of the dividends per share paid to holders of the common shares. Therefore, the Company understands that, substantially, there is no difference between preferred shares and common shares and the basic earnings (loss) per share calculation should be the same way for both shares.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

16. Earnings per share (Continued)

Consequently, basic earnings per share are computed by dividing income by the weighted average number of all classes of shares outstanding during the period. The diluted earnings per share are computed including dilutive potential shares from the executive employee stock options using the treasury-stock method when the effect is dilutive. The effect anti-dilutive potential shares are ignored in calculating dilutive earnings per share.

    2009    2008    2007 
       
Numerator             
Net income (loss) for the year    890,832    (1,239,347)   167,288 
Denominator             
Weighted-average shares outstanding for basic             
 earnings per share (in thousands)   227,472    202,301    198,609 
Treasury shares    -    (1,108)   - 
       
 
Adjusted weighted-average shares outstanding for             
 basic earnings per share (in thousands)   227,472    201,193    198,609 
Effect of dilutive securities:             
Executive stock options (in thousands)   111    -    48 
       
Adjusted weighted-average shares outstanding and             
 assumed conversions for diluted earnings per             
  shares (in thousands)   227,583    201,193    198,657 
       
 
Basic earnings (loss) per share    3.92    (6.16)   0.84 
Diluted earnings (loss) per share    3.91    (6.16)   0.84 

At December 31, 2009, diluted earnings per share, takes into account potential future dilutive instruments related to the 2009 year stock option plan which had an exercise price below the average market price during the period (“in-the-money”). Due to this there is dilution related to the stock options amounting R$946.

As of December 31, 2009, the total of 364,204 stock options described in Note 15 are non-dilutive (361,901 stock options as of December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

17. Tax obligations

    2009    2008 
     
   PIS and COFINS (1)   63,971    50,756 
   REFIS (2)   38,166    - 
   IOF (3)   13,415    - 
   IRRF on wages and benefits (4)   8,855    4,166 
   CIDE (5)   4,593    - 
   ICMS (6)   2,121    8,421 
   Import tax    2,455    2,383 
   Others    12,343    14,934 
     
    145,919    80,660 
     
 
   Current    57,277    39,605 
     
   Non-current    88,642    41,055 
     
 
(1) PIS and COFINS: federal taxes charged on revenues; 
(2) REFIS: Federal Taxes Refinancing Program; 
(3) IOF: Tax on financial operations 
(4) IRRF: Withholding income tax applies on certain domestic transactions, such as payment of fees to some service providers,  payment of salary and interest income resulting from short term investments; 
(5) CIDE: Contribution for Intervention in the Economic Domain 
(6) ICMS: Value Added Tax on sale and services; 

PIS e COFINS

As the calculation system of such contributions started to use the non-cumulative tax principle in the calculation of PIS (Law 10,637/02) and COFINS (Law 10,833/03), the subsidiary VRG started to apply the said rules, as well as, to question the Judiciary Branch, about the application of the tax rate to calculate such contributions. The provision recorded in the balance sheet at December 31, 2009 in the amount of R$63,971 (R$50,796 on December 31, 2008) includes the unpaid installment, monetarily adjusted by SELIC interest rate. There are judicial deposits for these matters in order to ensure the suspension of liabilities, amounting to R$49,518 (R$38,358 on December 31, 2008).

Adhesion to the Federal Taxes Refinancing Program (REFIS)

On November 30, 2009, the Company and its subsidiary VRG filed their inclusion in the Federal Taxes Refinancing Program (REFIS) according to Law No. 11.941/09 and included all the federal debts due to the Federal Reserve Service of Brazil and the General Attorney’s Office of the National Treasury and maturing until November 30, 2008.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

17. Tax obligations (Continued)

Adhesion to the Federal Taxes Refinancing Program (REFIS) (Continued)

The Management has opted for payment in 180 installments of the tax debts totaling R$11,610 for GLAI and R$35,012 for VRG. The mode of payment chosen by the Company provides matching reductions of 60% (sixty percent) related to the ex-officio fine, 25% (twenty five percent) of late payment fine and 20% (twenty percent) of isolated fines reducing the value of debt to R$10,257 and R$27,909 to GLAI and VRG, respectively. The effect in the profit or loss of the year arising from the exercise of these discounts amounted to R$1,353 for GLAI and R$7,103 for VRG recorded as “Other operating expenses” in the statements of operations.

The debts homologation is scheduled for March, 2010, and when such approval occurs, the Company and its subsidiary VRG will use part of the accumulated income tax losses and negative basis of social contribution to compensate the fines and interest settlement in the amount of R$1,645 and R$9,032 for GLAI and VRG, respectively.

18. Provisions

    Insurance    Return    Onerous         
    provision    of aircraft    contracts    Litigation    Total 
           
At December 31, 2006    44,897    111,462    -    5,715    162,074 
           
   Recognized    84,240    86,945    -    109,962    281,147 
   Utilized    -    (66,581)   -    -    (66,581)
           
At December 31, 2007    129,137    131,826    -    115,677    376,640 
           
   Recognized    10,272    102,615    8,250    -    121,137 
   Utilized    -    (131,826)   -    (43,354)   (175,180)
           
At December 31, 2008    139,409    102,615    8,250    72,323    322,597 
           
     Recognized    -    13,113    2,080    13,000    28,193 
     Utilized    (96,777)   (95,936)   -    (13,469)   (206,182)
     Unused    -    -    -    (1,515)   (1,515)
           
At December 31, 2009    42,632    19,792    10,330    70,339    143,093 
           
 
Current    42,632    19,792    3,835    -    66,259 
Non-current    -    -    6,495    70,339    76,834 

Insurance provision

Includes provisions related to the accident of an aircraft during Gol Airlines Flight 1907 on September 29, 2006 and amounts payable for aircraft insurance. Management takes out insurance coverage in amounts it considers necessary to cover any claims, in view of the nature the Company’s assets and the risks inherent in its operating activities, with due heed being paid to the limits set in the lease agreements, in compliance with provisions of the Law nº. 11,744/03.

The Company maintains insurance for the coverage of these liabilities resulting from the claim. The payments for the hull to the lessor were made by the insurance company. Management does not expect any liabilities arising from the accident involving Flight 1907 to have a material adverse effect on the financial position or results of its operations.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

18. Provisions (Continued)

Return of aircraft

Includes provisions for the maintenance costs to meet the contractual return conditions on engines held under operating leases.

Onerous contract

As of December 31, 2009, the Company recorded a provision of R$10,330 being a total of R$3,835 classified in current liability and R$6,495 classified in non-current liability (R$8,250 as of December 31, 2008 classified in current liability) for onerous operating lease contracts related to two non-operating Boeing 767-300 aircrafts. The provision represents the present value of the future lease payments that the Company is presently obligated to make under non-cancellable onerous operating lease contracts, less revenue expected to be earned on the lease, including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilization of the leased premises and sub-lease arrangements where applicable. The term of the leases range from 2 to 4 years.

Litigation

At December 31, 2009, the Company and its subsidiaries are parties in judicial lawsuits and administrative proceedings, totaling 17,446 according to the following distribution: (i) 12,425 civil claims, being 1,257 administrative proceedings and (ii) 5,021 labor claims, being 97 administrative proceedings. As a result of the Company’s normal course of operations, there are respectively, 11,590 civil claims and 1,089 labor claims. The remainder is related to requests for recognition of succession related by obligations from the former Varig S.A.

Provisions are recognized for probable losses and are reviewed based on the development of suits and the historical record of loss of civil and labor suits, based on the best current estimate. The estimated obligations resulting from the civil and labor suits are shown as follows:

    2009    2008 
     
Civil    34,815    20,898 
Labor    35,524    51,425 
     
    70,339    72,323 
     

The Company and its subsidiary VRG discuss various civil lawsuits involving petitions, actions for damages in general related to: flight delays, flight cancellations, baggage loss and damage to baggage. On December 31, 2009, the judicial deposits relating to civil contingencies correspond to R$ 1,640 (R$1,605 on December 31, 2008).

The Company is also party in various labor claims which consist mainly of discussions involving: overtime, hazardous work premium, health exposure allowance and differences in salary. On December 31, 2009, the judicial deposits relating to labor contingencies correspond to R$25,145 (R$18,189 on December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

18. Provisions (Continued)

Litigation (Continued)

As of December 31, 2209, there are other judicial lawsuits evaluated by Management and its legal advisers as a possible losses, at the estimated amount of R$54,823 for civil claims and R$1,731 for labor claims for which no provision was recorded (R$47,425 and R$1,731 as of December 31, 2008, respectively).

The Company is part of 4 labor claims in France arising from Varig S.A. debts. As of December 31, 2009, there is no indication of chances of success of said lawsuits, since the respective judicial proceedings have not initiated yet. There were no new developments with respect to the first hearing held in December 2009 and was appointed the new date for April 2010..The total amount involved was not accrued and is approximately R$5,332 (corresponding to € 2.1 million).

The Company is challenging in court the VAT (ICMS) levies on aircraft and engines imported under aircraft leases without purchase options in transactions carried out with lessors headquartered in foreign countries. The Company’s management understands that these transactions represent simple leases in view of the contractual obligation to return the assets that are the subject of the contract. Given that there is no circulation of goods, a relevant tax triggering event is not characterized.

The estimated aggregate value of lawsuits filed is R$210,164 at December 31, 2009 (R$201,760 at December 31, 2008), monetarily adjusted and not including charges in arrears. Management, based on the assessment of the cases by its legal advisors and supported by case laws favorable to taxpayers from the High Court (STJ) and the Supreme Federal Court (STF) handed down in the second quarter of 2007, understands that it is unlikely for the Company to have losses on these lawsuits.

Although the results of these proceedings cannot be anticipated, the final judgment of these actions will not have a material effect on the Company’s financial position, operating income and cash flow, according to management’s opinion supported by its outside legal advisors.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

19. Advances from customers

On June 30, 2009, the Company, through its subsidiary VRG concluded a partnership with Brazilian financial instutitions: Banco Bradesco S.A. and Banco do Brasil S.A. through an Operating Agreement for the issuance and management of credit cards in a co-branded format. Under the agreement, the Company initially received an amount of R$252,686 related to the purchase of miles from SMILES frequent flyer program, for access and use of the customer database of the program. Until December 31, 2009 the Company received as an advance of purchase of miles from the SMILES program, the amount of R$170,116 from the two financial institutions described above. The Company's expects to receive the full amount within 5 years from the date of the agreement, and also the remuneration conditioned by the right to access and use the registration database, share of the revenue from the credit cards issued by the financial institutions and participation in revenues. As of December 31, 2009, the balance recorded as advances from customers in current assets, relating to this agreement corresponds to R$72,010 and R$64,087 in non-current assets.

On November 13, 2009, the Company through its wholly-owned subsidiary VRG signed a commercial agreement with Banco Santander (Brasil) S/A with a term of 13 months in the amount of R$34,500 for the purchase of mileage credit, not exclusive, to use in their rewards programs. As of December 31, 2009, the balance recorded as advances from customers in current assets related to this agreement is R$32,823.

On July 27, 2009, the Company through its wholly-owned subsidiary VRG signed a commercial agreement with Operadora e Agência de Viagens CVC Tur Ltda. (“CVC”) with a term of 6 months in the amount of R$50,000 allowing the sale of tickets to their customers of flights operated by VRG. As of December 31, 2009, the balance recorded as advances from customers in current assets related to this agreement is R$21,226.

20. Smiles deferred revenue

The obligations assumed under the frequent flyer program, (“Smiles Program”) were valued at the VRG’s acquisition date at estimated fair value. The sale of passenger tickets by the Company includes air transportation and mileage credits. The Company’s sales of miles to business partners include marketing and mileage credits. The fair value of the mileage credit component is determined based (i) on weighted-average price of passenger tickets sold by VRG parted for mileage amount necessary to issue a ticket when VRG offers mileage for flying and, (ii) on weighted-average price at which the Company sells mileage credits to business partners.

The Company uses the residual method for revenue recognition of mileage credits. Under the residual method, the portion of revenue from the sale mileage credits and the mileage component of passenger ticket sales that approximates fair value is deferred and recognized as revenue when miles are redeemed and services are provided based on the weighted-average price of all miles that have been deferred. The portion of the revenue received in excess of the fair value of mileage credits sold (the “marketing premium) is recognized in income when the related marketing services are provided and classified as cargo and other revenue.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

20. Smiles deferred revenue (Continued)

The associated value for mileage credits which the Company estimates are not likely to be redeemed (“breakage”) is recognized as revenue. The Company calculates its breakage estimate based on historical redemption patterns.

At December 31, 2009, the Smiles deferred revenue balances are R$92,541 and R$221,414 classified in current and non-current liabilities, respectively (R$90,043 and R$262,626 at December 31, 2008, respectively).

21. Transactions with related parties

Graphic, consultancy and transportation services

VRG maintains an operating agreement with related party Breda Transportes e Serviços S.A., for passengers, baggage and employees transportation between airports, with a contractual term expiring on June 02, 2010, with a possibility to be renewed every 12 months for the same period by signing an additive instrument firmed by the parties with annual price restatement based on the General Market Price Index (IGP-M) variation.

VRG also maintains operating agreements with related parties Expresso União Ltda., Serviços Gráficos Ltda. and HK Consultoria e Participações, for passengers, baggage and employees transportation between airports, graphic services and consultancy, respectively, with a contractual maturity of 12 months without incidence of financial charges.

During the year ended December 31, 2009, VRG recognized a total expense relating to such services amounting R$10,075 (R$8,287 in 2008 and R$19,157 in 2007). The entities mentioned above belong to the same economic group and all controlled by Comporte Participações S.A.

Operating lease

VRG is the tenant of the property located at Rua Tamoios, 246, in São Paulo – SP, owned by a related company Patrimony Administradora de Bens controlled by Comporte Participações S.A. whose lease agreement expires on April 05, 2010 and has an annual price restatement clause based on the General Market Price Index (IGP-M) variation. During the year ended December 31, 2009, VRG recognized a total expense relating to such rental amounting R$428 (R$302 in 2008 and R$369 in 2007).

Unidas Rent a Car

In May, 2009, VRG entered into a commercial agreement with Unidas Rent a Car, a Brazilian car rental company, which gives Unidas' customers a 50% discount on the daily car rental charges when these customers purchase their tickets through the Company’s website. The Company’s chairman, Álvaro de Souza, is also the chairman of Unidas Rent a Car.

21. Transactions with related parties (Continued)

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

Accounts payable – current liability

The accounts payable to related parties, in the amount of R$688 on December 31, 2009 (R$281 on December 31, 2008) are included in the suppliers’ balances and are mainly related to payment for services performed by Breda Transportes e Serviços S.A.

22. Financial instruments and concentration of risk

The Company and its subsidiaries are exposed to market risks as a result of its operations and consider as more relevant risks the effects of changes in the price of fuel, exchange rate, interest rate risks and credit risks.

The goal of the risk management program of the Company aims to protect against sudden increase of the costs linked to market prices that could affect the Company’s competitiveness in a given period. These risks are managed through use of financial instruments for protection available in the financial market such as swaps, future contracts, exchange options and fuel options. The operations that involve fuel and interest are contracted with international banks classified as low risk (average rating of A+ according to Moody’s and Fitch) and the operations that involve foreign currency are negotiated on BM&FBOVESPA. The use of these instruments is oriented by a formal policy of risk management which is under the guidance of its executive officers, Risk Policies Committee and Board of Directors

The majority of the financial instruments contracted for protection purposes of fuel price and foreign currency risks aim scenarios with low probability to occur and therefore, those derivatives have lower costs comparing to others with a higher probability to occur. As a result, despite the highly correlation between the protected object and the derivatives financial instruments contracted to protected them, when the transactions are settled, a substation part of them show ineffectiveness results, as presented in the following tables in this note.

The Company’s Risk Management Policy establishes controls and limits, as well as other tracking techniques, chiefly mathematical models adopted to constantly monitor exposures, in addition to expressly prohibiting the carrying out of speculative operations involving derivative instruments. The derivative financial instruments are only used for hedge purposes. Additionally, the Company does not conduct any type of operation involving leverage.

Historically, the Company does not contract protection for all of its exposure to fuel consumption, to foreign exchange and interest exposure and is, therefore, subject to the portion of the risks arising from market fluctuations. The portion of the exposure being protected is determined quarterly in line with the strategies determined in the Risk Policies Committee and are monitored periodically. As of December 31, 2009, the protection, which may reach 100% upon decision of the Risk Management Committe, is about 27% and 18% of the Company´s total exposure for the next 12 months of fuel consumption and foreign exchange, respectively.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

The Financial Risk Committee recommends for approval of the Board of Directors long term programs of contracting derivative financial instruments to protect the Company against possible changes in the market price relating to risk of fuel, exchange rates and interest rates during the period of 12 months on a rolling basis allowing, such to be extended if some predetermined prices are reached.

The Company adopts for a large portion of its derivatives financial instruments the hedge accounting method according to the parameters described in the IAS 39. All derivative financial instruments contracted with the purpose of protection are formally identified through documentation on the acquisition to allow it to fit with the requirements needed to use the hedge accounting method. The Company classified the derivative financial instruments used for protection as “cash-flow hedge” and recognizes, based on the criteria for hedge accounting described in IAS 39, the changes in fair value of effective derivatives financial instruments under shareholders’ equity until the object of the hedge achieves its maturity.

The IAS 39 also requires proof of the effectiveness, prospective and retrospective, of the derivative financial instruments to contain the changes of the expenses protected. The Company estimates the effectiveness based on statistical correlation methods or by the proportion of the variation of gains and losses in fair value of derivatives instruments used as hedge and the variation of the costs of the protected object. The results of effective hedges are booked as a reduction or increase in the operational cost (with exception of interest rate hedge results), and the results of hedges that are not effective are recognized as a financial income or expense of the period. Ineffective hedges occur when the variation in the value of the derivatives is not between 80% and 125% of the variation in the price of the object of hedge. When the protected object is consumed and the respective derivative financial instrument is settled, the unrealized gains or losses booked in shareholders’ equity are recognized in the income statement. In the case of the derivative financial instruments designated for hedging interest rates, the values of gains or losses with liquidation of these instruments are recorded in income or expense.

The Company also contracts derivative financial instruments which are not designated as hedge, in other words, such do not use the criteria for hedge accounting. These contracts are derivatives of interest swap-lock that are used to protect the exposure denominated in Libor rates on operation of aircraft leases. For these derivatives instruments, the change in fair value is recognized directly as financial income or expense of the period.

The market fair value of swaps is estimated based on the method of discounted cash-flow and the fair value of options is estimated using the Black & Scholes method (adapted to commodities options in the case of oil).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

Derivatives financial instruments are classified as current and non-current or are segregated between current and non-current according to the analysis of the facts and circumstances and if this segregation can be made in a reliable manner. The derivative financial instruments were recorded in the following accounts in the balance sheet:

Description    Accounts    Amounts on 
        December 31, 2009 
 
Amount receivable on settlement    Other assets    24,113 
Amount payable on settlement    Other liabilities    12,118 
Foreign currency cash flow hedge    Short-term investments    976 
Margin deposits related to hedge exchange rate    Restricted cash    18,820 
Changes in fair value of hedge accounting    Other comprehensive     
     income (loss)   (1,317)

The relevant information relating to the main risks that affect the Company operations are detailed as follows:

a) Fuel price risk

One of the main market risks that the airlines companies face is the price of aircraft fuel whose variations are tied to fluctuations in the price of oil and the fuel represent a significant portion of airlines companies’ costs. Because of this exposure, the Company manages this risk by using strategies of contracting derivative financial instruments that aims to provide protection against sudden and significant increases in the price of oil, thus ensuring the competitiveness of the Company.

Aircraft fuel consumed in the years ended December 31, 2009, 2008 and 2007 represented 32.2%, 40.5% and 38.4% of the Company’s operating costs of service, respectively.

Because of the jet fuel traded in commodity exchanges has lower liquidity, the Company acquires derivatives of crude oil to protect against oscillation of aircraft fuel price. Historically, oil prices have been highly correlated to aviation fuel prices, which make oil derivatives effective in offsetting the prices of aviation fuel, so as to provide immediate protection. The hedged item of fuel is the operational expenses with aircraft fuel. The contracts of derivative for fuel hedge are done in Over the Counter markets with the following financial institutions: British Petroleum, Citibank, Deutsche Bank, Goldman Sachs, MF Global and Morgan Stanley.

On December 31, 2009, there were no financial assets linked to margin deposits for contracting derivative instruments for fuel hedge.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

a) Fuel price risk (Continued)

The following is a summary of the Company’s oil derivative contracts designated for hedge of aircraft fuel (in thousands, except as otherwise indicated):

Year ended:    December 31,    December 31, 
    2009    2008 
     
Fair value of derivative instruments (R$)   18,588    (102,387)
Hedge effectiveness losses recognized in shareholders’ equity,         
 net of taxes (R$)   -    (90,580)

Year ended December 31:    2009    2008    2007 
       
Hedge effectiveness gains recognized in operating costs (R$)   8,045    49,572    33,167 
Hedge ineffectiveness gains (losses) recognized in             
 finance expenses during the year (R$)   (122,737)   (73,388)   17,233 
Hedge ineffectiveness losses recognized in finance expenses             
 for future period (R$)   (7,602)   (40,318)   (16,395)
       
Total hedge ineffectiveness gains (losses) recognized in finance             
 expenses (R$)   (130,339)   (113,706)   34,005 
       
Hedged volume (in thousands of barrels) during the year    2,183    4,141    4,936 
Percentage of exposure hedged during the year *    27%    56%    56% 

* The percentage is calculated through the value of contracted hedge (notional value) divided by fuel costs.

The following table demonstrates the notional value of the derivatives designated as hedge contracted by the Company to protect the future fuel costs, the average rate contracted for the derivatives and the percentage of the fuel exposure protected for each period of competence as of December 31, 2009:

Market risk factor: Fuel Price

Over the Counter    Maturities 
   
    1Q10    2Q10       3Q10    4Q10    Total 
           
Percentage of the fuel exposure hedged    31%    32%    18%    7%     
 
Notional volume in barrels (thousands)   1,076    1,068    626    235    3,005 
Notional volume in liters (thousands)   171,062    169,791    99,521    37,360    477,734 
 
Future agreed rate per barrel (USD)*    78.52    86.81    92.97    99.12    86.09 
 
           
Total in Reais **    147,110    161,432    101,336    40,558    450,449 
           

* Weighted average between the strikes of collars and callspreads.
** Exchange rate at 12.31.2009 was R$ 1.7412/ US$ 1.00

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

b) Foreign currency risk

Risk of exchange rate is the risk related to unexpected variation, in a favorable or unfavorable way, of the expenses and/or revenues whose values are tied to the fluctuations in foreign currencies. The Company’s exposure to foreign currencies is mainly related to operating activities and investments in foreign subsidiaries. The Company’s revenue is generated in Brazilian reais, except for a small portion in Argentine Pesos, Aruban Florin Bolivian Bolivianos, Chilean Pesos, Colombian Pesos, Paraguayan Guaranis, Uruguayan Pesos and Venezuelan Bolivares from flights between Brazil, Argentina, Aruba, Bolivia, Chile, Colombia, Paraguay, Uruguay and Venezuela. However, the Company has a significant portion of its liabilities exposed to changes in the exchange rate of U.S. dollars, particularly those related to aircraft leasing and instruments for raising funds for financing aircrafts acquisitions, requiring contracting derivative financial instruments to mitigate this risk. The main expenses accounts that are hedged due to exchange rate exposure are: jet fuel, leasing, maintenance, insurance and international IT services.

The contracts of derivative financial instruments for U.S. dollar hedge are performed with BM&FBOVESPA using exclusive investments funds which are used as vehicles for contracting risk coverage as described in the Company’s Risk Management Policy.

The value of financial assets linked to margin deposits on December 31, 2009 is R$18,820 represented by CDB’s (Bank Certificate Deposits) of first tier banks.

The Company’s current and future currency exchange exposure at December 31, 2009 and 2008 are as set forth below:

    2009    2008 
     
Assets         
   Cash, cash equivalents and short-term investments    139,287    281,286 
   Accounts receivable from leasing companies    64,046    104,465 
   Deposits in guarantee of lease agreements    247,562    111,326 
   Maintenance deposits    446,530    391,989 
   Prepayments of lease agreements    35,453    45,596 
   Other    66,823    53,533 
     
Total assets    999,701    988,195 
 
Liabilities         
   Foreign suppliers    30,077    37,336 
   Loans and borrowings    989,157    1,715,068 
   Finance leases    1,557,418    1,587,161 
   Other leases payable    38,708    15,863 
   Insurance premium payable    38,150    54,422 
     
Total liabilities    2,653,510    3,409,850 
     
Exchange exposure, net – R$    1,653,809    2,421,655 
     
Exchange exposure, net – US$    949,810    1,036,224 
     
 
Future obligations         
   Operating leases    2,498,571    3,285,186 
   Aircraft commitments    12,565,036    16,662,776 
     
Total future obligations – R$    15,063,607    19,947,962 
     
Total future obligations – US$    8,651,279    8,535,713 
     
 
Total exchange exposure (current and future) – R$    16,717,416    22,369,617 
     
Total exchange exposure (current and future) – US$    9,601,087    9,571,937 
     

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

b) Foreign currency risk (Continued)

The following is a summary of Company’s foreign currency derivative contracts designated for hedge of U.S. dollar (in thousands, except as otherwise indicated):

Year ended:    December 31,    December 31, 
    2009    2008 
     
Fair value of derivative instruments (R$)   982    9,416 
Hedge effectiveness gains (losses) recognized in shareholders’ equity,         
 net of taxes (R$)   (294)   50,387 

Year ended December 31:    2009    2008    2007 
       
Hedge effectiveness gains (losses) recognized in operating expenses (R$)   (11,833)   55,149    (14,935)
Hedge ineffectiveness gains (losses) recognized in finance income             
 during the year (R$)   39,207    2,255    (12,280)
Hedge ineffectiveness losses recognized in finance expenses for future             
period (R$)   (1,171)   -    643 
       
Total hedge ineffectiveness gains recognized in finance income (R$)   38,036    2,255    (11,637)
       
Hedged volume (USD) during the year    293,250    1,070,250    626,800 
Percentage of exposure hedged during the year    18%    52%    47% 

The following table demonstrates the notional value of the derivatives designated as hedge contracted by the Company to protect the future expenses denominated in U.S. dollar and the average rate contracted for each period, as of December 31, 2009:

Market risk factor: U.S. dollar exchange     
Exchange market     
    1Q10 
   
Notional value in U.S. dollar    95,000 
 
Futures contracted average rate    1.8653 
 
   
Total in Reais    177,204 
   

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

c) Credit risk

Credit risk is the risk that the counterparty will not meet its obligations under a financial instrument or a customer contract, leading to a financial loss.

The Company is exposed to credit risk from its operating activities primarily for trade receivables, cash and cash equivalents, including bank deposits, financial assets classified as available for sale assets, and derivative financial instruments. The credit risk of accounts receivable is minimized because it is substantially represented by accounts receivable of the largest credit card operators. The derivative financial instruments are made with counterparties that have high ratings according to the assessment by Moody’s and Fitch (an average rate of A+) or the instruments are contracted in the stock exchange of futures and commodities (BM&FBOVESPA). In addition, the Company assesses the risks of counterparties and diversifies its exposure. The Company's management believes that the risk of not receiving the amounts owed by their counterparts in derivative transactions is not significant.

d) Interest rate risk

The Company results are affected by fluctuations in international interest rates because of the impacts of such changes in expenses with leasing. On December 31, 2009, the Company has derivative financial instruments of interest swap-lock to protect against oscillation of interest rates on aircraft leasing.

The interest rate hedge operations are performed through contracts with first tier financial institutions. At December 31, 2009, the Company has open contracts with the following financial institutions: Calyon, Citibank and Merrill Lynch.

The Company had no financial assets linked to margin deposits as of December 31, 2009.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

d) Interest rate risk (Continued)

The following is a summary of Company’s interest rate derivative contracts designated as hedge interest rate Libor (in thousands, except as otherwise indicated):

Year ended:    December 31,    December 31, 
    2009    2008 
     
Fair value of derivative instruments (R$)   (2,182)   (3,878)
Hedge effectiveness losses recognized in shareholders’ equity, net of taxes (R$)   (1,023)   (3,873)

Year ended December 31:    2009    2008    2007 
       
Hedge effectiveness gains recognized in operating expenses (R$)   (2,482)   (211)   - 
Hedge ineffectiveness losses recognized in finance expenses for future period (R$)   (3)   -    - 
       
 
Total hedge ineffectiveness losses recognized in finance expenses (R$)   (3)   -    - 
       
Notional value at the end of the year (US$)   60,575    60,575    - 
Notional value at the end of the year (R$)   105,474    141,564    - 

The following is a summary of Company’s interest rate derivative contracts not designed as hedge (in thousands, except as otherwise indicated):

Year ended:    December    December 
    31, 2009    31, 2008 
     
Fair value of derivative instruments (R$)   (4,411)   (30,903)

Year ended December 31:    2009    2008    2007 
       
Hedge gains (losses) recognized in finance income (R$)      14,457    (32,369)   (2,630)
Notional value at the end of the year (US$)      29,500    87,200    - 
Notional value at the end of the year (R$)      51,365    203,786    - 

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

e) Sensitivity Analysis Demonstration of the Financial Instruments

The following table demonstrates the sensitivity of financial instruments to a reasonably possible change in fuel prices, with all other variables held constant, on income before tax and equity:

    2009    2008    2007 
       
    Effect on    Effect on    Effect on    Effect on    Effect on 
Increase / (decrease)   income    shareholders’    income    shareholders’    income 
in fuel price    before tax    equity    before tax    equity    before tax 
(percent)   (R$ million)   (R$ million)   (R$ million)   (R$ million)   (R$ million)
           
10    (193.5)   (117.0)   (292.9)   (173.1)   (204.8)
-10    193.5    127.7    285.6    163.9    192.2 
           

The following table demonstrates the sensitivity to a reasonably possible change in the U.S. dollar exchange rate, with all other variables held constant, on the Company’s profit before tax (due to changes in the fair value of monetary assets and liabilities) and the Company’s equity (due to changes in the fair value of forward exchange contracts).

    2009    2008    2007 
       
Strengthening    Effect on    Effect on    Effect on    Effect on    Effect on 
/weakening in U.S.    income    shareholders’    income    shareholders’    income 
dollar    before tax    equity    before tax    equity    before tax 
(percent)   (R$ million)   (R$ million)   (R$ million)   (R$ million)   (R$ million)
           
10    (296.1)   (190.5)   (500.8)   (313.6)   (358.0)
-10    296.1    191.7    493.5    315.9    345.4 
           

The following table illustrates the sensitivity of financial instruments on profit before tax for the year to a reasonably possible change in Libor interest rates, with effect from the beginning of the year. There was no impact on shareholders’ equity. These changes are considered to be reasonably possible based on observation of current market conditions. The calculations are based on financial instruments held at each balance sheet date. All other variables were held constant.

    2009    2008    2007 
       
Increasing (decreasing)   Effect on    Effect on    Effect on    Effect on    Effect on 
in Libor interest rates    income    shareholders’    income    shareholders’    income 
for all maturities,    before tax    equity    before tax    equity    before tax 
(percent)   (R$ million)   (R$ million)   (R$ million)   (R$ million)   (R$ million)
           
10    (0.3)   (0.2)   (1.4)   (0.6)   (2.0)
-10    0.3    0.2    1.4    0.6    2.0 
           

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

f) Liquidity risk

Liquidity risk represents the risk of shortage of funds to pay off debts. To avoid mismatch of accounts receivable and accounts payable, the Company’s cash management policy limits a maximum of 20% of its investments with maturities in the same month and the duration of the investments cannot exceed the duration of the Company’s payment obligations.

The Company’s off-balance sheet exposure represents the future obligations related to operating lease contracts and aircraft purchase contracts. The Company utilizes derivative financial instruments with first-tier banks for cash management purposes.

The table below presents the Company’s contractual payments required on its financial assets and liabilities:

Year ended December 31,    2010    2011    2012    2013    2014    Thereafter   
 2014 		   Total 
               
Non-derivative Financial                             
Assets                             
Cash and cash equivalents    1,382,408    -    -    -    -    -    1,382,408 
Short-term investments    40,444    -    -    -    -    -    40,444 
Restricted cash    18,820    -    6,133    -    1,131    -    26,084 
Trade and other receivables    571,707    -    -    -    -    -    571,707 
               
Total    2,013,379    -    6,133    -    1,131    -    2,020,643 
 
Non-derivative Financial                             
Liabilities                             
Interest-bearing borrowings:                             
   Finance leases    207,877    206,823    204,907    204,053    204,053    975,870    2,003,583 
   Floating rate loans    278,864    31,956    25,977    17,604    774    -    355,175 
   Fixed rate loans    13,998    93,492    93,492    93,492    93,569    671,072    1,059,115 
   Working capital    162,154    -    -    -    -    -    162,154 
               
Total    662,893    332,271    324,376    315,149    298,396    1,646,942    3,580,027 
 
Derivative Instruments -                             
net settlement                             
Fuel derivative    18,588    -    -    -    -    -    18,588 
Foreign exchange derivative    982    -    -    -    -    -    982 
Interest rate swaps    (6,593)   -    -    -    -    -    (6,593)
               
Total    12,977    -    -    -    -    -    12,977 
               
 
    2,689,249    332,271    330,509    315,149    299,527    1,646,942    5,613,647 
               

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

g) Capital management

The leverage ratios at December 31, 2009 and 2008 were as follows:

    December 31, 2009    December 31, 2008 
     
 
Total equity    2,609,986    1,071,608 
     
   Cash and cash equivalents    (1,382,408)   (169,330)
   Restricted cash    (18,820)   (183,286)
   Other current financial assets    (40,444)   (245,585)
   Loans and borrowings    1,576,444    1,832,728 
   Finance leases    1,557,418    1,587,161 
     
Net debt (a)   1,692,190    2,821,688 
     
Total capital (b)   4,302,176    3,893,296 
     
 
Leverage ratio (a) / (b)   39%    72% 
     

The decrease in the leverage ratio during the year ended on December 31, 2009 resulted primarily from the growth in retained earnings and reduction in net debt due to higher cash balances resulting from higher operating profits and financial operations.

In 2009, the Company’s Financial and Risk Policy Committee has suggested to the Board of Directors for approval the issue of new debts, equity offering and capital increase as part of the reconstruction of the Company’s cash position, aimed at achieving cash and cash equivalents of approximately 20% of last twelve months (“LTM”) net revenues.

From this date, the Company remains committed in having at least 20% of LTM net revenues.

h) Fair value measurement

Market values are estimated for most of the Company’s financial instruments using a variety of valuation methods, such as discounted future cash flows. However, the methods and assumptions used to provide the information set out below are theoretical in nature. They bear the following inherent limitations:

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

h) Fair value measurement (Continued)

As described in IAS 39, the Company must classify the type of input used in the method of valuation of financial instruments at fair value in accordance with the following categories:

a) Level 1 Prices negotiated (without adjustment) in identical active or passive market;

b) Level 2 Different Input price traded in active market included in Level 1 that are observable for asset or liability, directly (as prices) or indirectly (derived from the prices); and

c) Level 3 Inputs for asset or liability that are not based on observable market variables (unobservable inputs).

The following table states a summary of the Company’s financial instruments measured at fair value with their respective classifications of the valuation method:

Balance as of December 31, 2009                 
 
        Active Market Price    Other Significant    Valuation 
Financial Instrument    Book value    for Identical Assets    Observable Factors    Method 
        (Level 1)   (Level 2)   (Level)
         
Financial assets:                 
   Short-term investments    39.468    17.156    22.312    I e II 
 
Financial liabilities:                 
   Fixed rate debt (a)   671.072    592.238    -    I 
   Floating rate debt (b)   905.372    -    922.100    II 
         
    1.576.444    592.238    922.100     
Derivatives financial instruments:                 
   Petrolleum    18.588    -    18.588    II 
   U.S. Dollar    982    -    982    II 
   Libor interest    (2.182)   -    (2.182)   II 
         
    17.388    -    17.388     
 
 
Balance as of December 31, 2008                 
 
        Active Market Price    Other Significant    Valuation 
Financial Instrument    Book value    for Identical Assets    Observable Factors    Method 
        (Level 1)   (Level 2)   (Level)
         
Financial assets:                 
   Short-term investments    245.585    210.615    34.970    I e II 
 
Financial liabilities:                 
   Fixed rate debt (a)   896.098    403.372    -    I 
   Floating rate debt (b)   936.630    -    904.926    II 
         
    1.832.728    403.372    904.926     
Derivatives financial instruments:                 
   Petrolleum    (102.387)   -    (102.387)   II 
   U.S. Dollar    9.416    -    9.416    II 
   Libor interest    (34.781)   -    (34.781)   II 
         
    (127.752)   -    (127.752)    

(a) Fixed rate debt includes: Sênior and Perpetual notes.
(b) Floating rate debt includes: Working capital, IFC loan, BNDES loan, BDMG loan, Debentures and PDP Facilities I and II.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

22. Financial instruments and concentration of risk (Continued)

h) Fair value measurement (Continued)

The Company’s available-for-sale securities consist of government bonds, certificates of deposit (CDB), time-deposits and investment funds. The inputs utilized to determine the fair values of government bonds are obtained in quoted public markets. The inputs utilized to determine the fair value of certificates of deposit and time deposits are derived from information quoted in public markets.

The Company’s fuel and interest rate derivative contracts consist of Over-the-Counter (OTC) contracts, which are not traded on a public exchange. These contracts include both swaps as well as other types of option contracts. The fair values of swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. The Company determines the value of option contracts utilizing a standard option pricing model based on inputs that are either readily available in public markets, can be derived from information available in publicly quoted markets, or are quoted by counterparties to these contracts. In situations where the Company obtains inputs via quotes from its counterparties, it verifies the reasonableness of these quotes via similar quotes from another counterparty as of each date for which financial statements are prepared.

The Company’s foreign exchange derivatives consist of exchange-listed futures and options contracts. The inputs utilized to determine the fair value of these contracts are obtained from quoted public markets.

23. Financial assets and liabilities

a) Short-term investments

    December 31, 2009    December 31, 2008 
     
Bank deposits certificates    16,307    131,694 
Government securities    -    7,475 
Committed - Overnight    -    9,776 
Foreign bank deposits    22,312    31,086 
Other    849    65,554 
     
Total of available for sale assets    39,468    245,585 
 
Foreign currency cash flow hedge    976    - 
     
    40,444    245,585 
     

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial assets (Continued)

The financial assets classified as available for sale are primarily comprised of exclusive funds, debt securities (FIDC) and foreign bank deposits (time deposits). These financial assets have an average maturity of 572 days bearing interest at an average rate of 109.3% per year of CDI as of December 31, 2009.

The cash flow hedge consists of future derivative financial instruments and purchase options of U.S. Dollars recorded in equity or compensation accounts in operating income, aiming to manage the Company exposure to market and exchange rate risks, as detailed in Note 22.

b) Financial liabilities (Continued)

At December 31, 2009 and 2008, debt consisted of the following:

    Effective    Effective             
    interest rate    interest rate             
    as of    as of             
    December    December 31,             
    31, 2009    2008    Maturity    2009    2008 
           
Current                     
Local currency:                     
   Working capital    10.89%    15.00%    March, 2010    160,000    50,000 
   Secured floating rate BNDES loan    8.90%    8.90%    July, 2012    14,352    14,181 
   Secured floating rate BDMG loan    8.88%    12.79%    January, 2014    2,800    2,567 
   Interest    -    -        3,309    1,686 
           
                180,461    68,434 
Foreign currency in U.S. Dollars:                     
   Unsecured floating rate PDP loan facility    1.99%    3.51%    February, 2010    111,585    697,719 
   Unsecured floating rate PDP II loan facility    2.68%    -    December,2010    131,836    - 
   Secured floating rate IFC loan    4.72%    5.50%    July, 2013    14,510    19,475 
   Finance leases    -    -    -    136,679    157,948 
   Interest    -    -        16,624    23,876 
           
                411,234    899,018 
           
                591,695    967,452 
           
Non-current                     
Local currency:                     
   Secured floating rate BNDES loan    8.90%    8.90%    July, 2012    22,725    36,633 
   Secured floating rate BDMG loan    8.88%    12.79%    January, 2014    10,056    12,593 
   Debentures    11.03%    -    November,2014    374,045    - 
           
                406,826    49,226 
Foreign currency in U.S. Dollars:                     
   Secured floating rate IFC loan    4.72%    5.50%    July, 2013    43,530    77,900 
   Finance leases    -    -    -    1,420,739    1,429,213 
           
 Unsecured fixed rate Senior notes    7.50%    7.50%    April, 2017    360,993    481,630 
 Unsecured fixed rate Perpetual notes    8.75%    8.75%    -    310,079    414,468 
           
                2,135,341    2,403,211 
           
                2,542,167    2,452,437 
           
                3,133,862    3,419,889 
           

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial liabilities (Continued)

Working capital

On December 31, 2009, the Company had R$160,000 (R$50,000 at December 31, 2008) of working capital lines with three financial institutions. The weighted average annual interest rate for these loans in local currency at December 31, 2009 was 10.89% (15.00% at December 31, 2008). The loans are guaranteed by the Company and certain accounts receivable from travel agencies, as applicable.

On October 5, 2009, the Company obtained an extension of the line of working capital lines amounted R$50,000 for a period of three months.

BNDES loan

In May 2006, the Company through its wholly-owned subsidiary VRG, closed a secured floating rate loan in the amount of R$75,700 with the BNDES. The proceeds financed a major portion of the construction and expansion of the Company Aircraft Maintenance Center at the International Airport of Confins, in the state of Minas Gerais, Brazil. The borrowing has a term of six years, an interest rate of 2.65% over the long-term borrowing rate –TJLP and is collateralized by accounts receivable in the amount of R$16,000. The principal is amortized in monthly payments of R$1,196 with a grace period of 12 months.

BDMG loan

In July 2007, the Company through its wholly-owned subsidiary VRG, closed a secured floating rate loan in the amount of R$14,000 (US$7,613) with the BDMG. This credit line will be used to finance a portion of the investments and operating expenses of the Company Aircraft Maintenance Center at the International Airport of Confins, in the state of Minas Gerais. The loan has a term of five years with an annual interest rate of IPCA plus 6%. The principal is amortized in monthly payments of R$233 with a grace period of 18 months.

IFC loan

In June 2006, the Company through its wholly-owned subsidiary VRG, closed a secured floating rate borrowing agreement in the amount of R$108,000 (US$50,000) with the International Finance Corporation (IFC). This financing is being used to acquire spare parts inventories and fund working capital requirements. The loan has a term of six years with interest of LIBOR plus 1.875% p.a. and is guaranteed by spare parts and equipment at market value at a minimum amount equivalent to 1.3 times the outstanding amount. The principal is amortized in semi-annually payments of R$7,256 (US$4,167), with a grace period of 6 months. In July 2009, due to non compliance of financial performance required by IFC, the Company obtained a specific consent and established a new contract changing the interest rate of LIBOR plus 1.875% p.a. to LIBOR plus 3.75% a.a..

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial liabilities (Continued)

Debentures

As of May 13, 2009, the Company approved the third public issue of 400 simple debentures, not convertible into shares, in single series, of the kind with real guarantee, issued by VRG, in the unitary nominal value of R$1,000, totaling R$400,000, aiming to strengthen the working capital of the Company. The maturity of the debentures is 2 years from the date of the issuance and its amortization will be made in 18 consecutive monthly payments, with 6 months of grace, from the seventh month of the issuance date, with the last maturity on May 13, 2011. The debentures are paid based on 126.50% of CDI and have as guarantee certain accounts receivable from credit card operators in the amount up to R$250,000.

On December 30, 2009, General Meeting of Debenture Holders was held which deliberated the amendment to the third public issue of debentures changing the maturity to 5 years and 6 months from the date of issue. The amortization began to be performed in 9 payments starting on December 13, 2009, and the remaining repayments semiannually beginning in June 13, 2011. Exceptionally, the last payment will be made on November 13, 2014.

The Meeting also decided to reduce to zero the guarantee related to the receivables from credit card operators. The premium payment for redemption remains as 1% for the first year from the date of issue and 0.5% for the remaining years until the maturity.

As of December 31, 2009, the interest paid monthly and recorded in current liabilities is R$1,886.

The expenses with the issuance totalized R$6,616 and are being classified as reduction of the debentures, appropriated in the total period of the debt as determined by IAS 39. As of December 31, 2009, the outstanding amounts were R$4,687.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial liabilities (Continued)

PDP loan facility

On October 15, 2007 the Company’s subsidiary SKY contracted financing denominated in U.S. Dollars from 8 international banks led by Calyon and Citibank, in the amount of R$560,418 (US$310 million), which is being used for payment of the advances for acquisition of 21 next generation Boeing 737 aircraft, delivery of which is scheduled to occur until 2010. On October 15, 2007, a disbursement was made in the amount of US$151 million for payment of obligations to Boeing, with the remainder being available for use on the future scheduled disbursement dates. The maturity term of this financing is in February 2010, bears interest at LIBOR plus 1.0% p.a. and is guaranteed by the right to purchase the 21 aircraft.

On December 16, 2009, the Company’s subsidiary SKY II contracted financing with Natixis Transport Finance in the amount of R$185.691 (US$106 million) which is being used for payment of advances for acquisition of 7 Boeing 737-800 Next Generation aircraft, which delivery is scheduled to occur until 2010.

The financing denominated in U.S. Dollars and has a maturity term in December 2010 with LIBOR plus 2.45% p.a. The debt is guaranteed by the right to purchase the 7 aircraft.

As of December 31, 2009, the costs for capturing the resources totalized R$2,355 (US$1,353) and are recorded as a reduction of the debt and amortized according to maturity.

Perpetual and senior notes

In April 2006, the Company, through its subsidiary Finance, issued fixed rate perpetual notes guaranteed by the Company and VRG in the nominal amount of US$200 million, corresponding to R$426,880 as of the issued date. The notes are denominated in U.S. dollars, have no fixed final maturity date, are callable at par by the Company after five years from the issuance date, and bear interest at 8.75% . The Company is using the proceeds to finance the pre-delivery deposits made for the acquisition of aircraft, supplementing its own funds and bank financings guaranteed by assets obtained with the U.S. Exim Bank.

In March 2007, the Company, through its subsidiary Finance, issued fixed rate senior notes in the amount of R$463,545 (US$225,000) guaranteed by the Company and VRG. The notes are senior unsecured debt obligations, denominated in U.S. dollars, which mature in 2017, and bear interest at 7.50% p.a. The Company is using the proceeds to finance the pre-delivery deposits made for the acquisition of aircraft, supplementing its own funds and the bank financings guaranteed by assets obtained with the U.S. Exim Bank.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial liabilities (Continued)

Perpetual and senior notes (Continued)

The fair values of the senior notes and perpetual bonds as of December 31, 2009, reflecting the frequent readjustment of the market quotations for these instruments, based on the exchange rate in effect on the balance sheet closing date, are as follows:

    Consolidated 
     
    Book    Market 
     
Senior notes    360,993    339,142 
Perpetual bonds    310,079    253,096 

The following table provides a summary of Company’s principal payments of long-term debt obligations at December 31, excluding the finance leases:

                    Beyond     
     2011     2012    2013    2014     2014    Total 
             
Local currency:                         
BDMG loan    3,094    3,094    3,094    774    -    10,056 
BNDES loan    14,352    8,373    -    -    -    22,725 
Debentures    93,492    93,492    93,492    93,569    -    374,045 
             
    110,938    104,959    96,586    94,343    -    406,826 
Foreign currency                         
 in U.S. Dollars:                         
IFC loan    14,510    14,510    14,510    -    -    43,530 
Senior notes    -    -    -    -    360,993    360,993 
             
    14,510    14,510    14,510    -    360,993    404,523 
 
Perpetual notes    -    -    -    -    310,079    310,079 
             
Total    125,448    119,469    111,096    94,343    671,072    1,121,428 
             

Restrictive covenants

The Company holds agreements that require compliance with certain financial and performance indicators (covenants) based on Consolidated Financial Statements such as: (1) Net Debt/EBITDAR, (2) Current Assets/Current Liabilities, (3) EBITDA/Debt Service, (4) Short-term Debt/EBITDA, (5) Current Ratio and (6) Debt Coverage Index (DCI). The Company also had not reached the minimum parameters established with BNDES at December 31, 2009 and presented a letter of consent in compliance with the obligations established in the contract. In relation with IFC loan, at December 31, 2009, the Company reached all the minimum indicators required.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

23. Financial assets and liabilities (Continued)

b) Financial liabilities (Continued)

Restrictive covenants (Continued)

In relation to the debenture issue, the deed of issue requires the maintenance of the Debt Service Coverage Index which is defined as the ratio between the Company’s cash flow and debt service (total of the principal amortized plus interest paid) for the fiscal year in question. The VRG must obtain an index of at least 100% (one hundred percent) in 2009 and 130% (one hundred and thirty percent) in 2010, to be verified at the end of each period. Additionally, VRG should also maintain its Financial Leverage Ratio until 7 (seven) times parameter. As of December 31, 2009, the Company reached the minimum parameters required for the debentures.

24. Commitments

The following table provides a summary of the Company’s principal payments under aircraft purchase commitments and other obligations at December 31 of each year:

                        Beyond     
    2010     2011    2012    2013    2014    2014    Total 
               
Pre-delivery                             
deposits for flight                             
equipment    159,536    200,228    406,147    429,396    222,477    156,875    1,574,659 
Aircraft purchase                             
commitments    1,091,624    966,897    417,312    2,273,215    3,352,360    2,888,969    10,990,377 
               
 
Total    1,251,160    1,167,125    823,459    2,702,611    3,574,837    3,045,844    12,565,036 
               

The Company has a purchase contract with Boeing for acquisition of aircraft, and at December 31, 2009, the Company has 90 firm orders and 40 purchase options granted with non-onerous term. Up to one year, the Company made pre-delivery deposits for 14 aircraft, which have a schedule for delivery until February 2010 and the other with a term exceeding 18 months. These advances for aircraft acquisition were being financed by financings denominated Pre-delivery Facility I and II, with maturities in February 2010 and December 2010 respectively, as described in Note 23. The firm orders have an approximate value of R$10,990,377 (US$6.3 billion) based on the aircraft list price (which excludes contractual manufacturer discounts), including estimated amounts for contractual price escalations and pre-delivery deposits. Aircraft purchase commitments financed with long-term financing guaranteed by the U.S. Ex-Im Bank corresponds to approximately 85% of the total acquisition cost. Other agents finance the acquisition at or above this percentage reaching 100%.

The Company has been making payments for pre-delivery deposits of aircraft using combined resources of: Company’s own capital, borrowings, cash generated by operations, short and medium-term working capital and financings to the supplier.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

24. Commitments (Continued)

The Company leases its entire fleet under a combination of operating and finance leases. At December 31, 2009, the total fleet was 127 aircraft, of which 94 were operating leases and 33 were recorded as finance leases. The Company’s has 27 finance leases aircraft with bargain purchase options. During the year ended on December 31, 2009, 9 aircraft under finance leases were delivered and 6 737-300 aircraft were returned. At December 31, 2009, there were 7 737-300 aircraft which were in the process of being returned.

a) Finance leases

Future minimum lease payments non-cancelable under finance leases are denominated in US dollars with initial or remaining terms in excess of one year at December 31, 2009 and 2008 and were as follows:

    2009    2008 
     
2009    -    222,222 
2010    207,877    221,904 
2011    206,823    220,906 
2012    204,907    219,188 
2013    204,053    219,188 
2014    204,053    215,348 
Beyond 2014    975,870    770,526 
     
Total minimum lease payments    2,003,583    2,089,282 
Less: amount representing interest    (446,165)   (502,121)
     
Present value of net minimum lease payments    1,557,418    1,587,161 
Less current portion    (136,679)   (157,948)
     
Long-term portion    1,420,739    1,429,213 
     

The discount rate used to calculate the present value of the minimum rental payments is 6.64% on December 31, 2009 (7.92% on December 31, 2008). There is no significant difference between the present value of the minimum rental payments and the fair value of these financial liabilities.

The Company has extended the maturity of the financing for some of its leased aircraft to 15 years by using the SOAR structure, which is a mechanism for lengthening the period for amortizing and paying off the financing and permits calculated drawdowns to be made for settlement by payment in full at the end of the lease agreement. As of December 31, 2009 the value of the drawdowns made for payment in full upon termination of the lease agreement is R$24,617 (R$13,556 as of December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

24. Commitments (Continued)

b) Operating leases

The Company leases aircraft in operation, airport terminal space, other airport facilities, office space and other equipment with initial lease term expiration dates ranging from 2010 to 2021. Future minimum lease payments under non-cancelable operating leases are denominated in US dollars. Such leases with initial or remaining terms in excess of one year at December 31, 2009 and 2008 were as follows:

    2009    2008 
     
2009    -    673,520 
2010    515,936    592,014 
2011    489,655    574,701 
2012    466,315    532,256 
2013    402,497    449,289 
2014    245,792    247,954 
Beyond 2014    378,376    215,452 
     
Total minimum lease payments    2,498,571    3,285,186 
     

c) Sale-leaseback transactions

During 2006, the Company had gains on the sale-leaseback transactions for 8 Boeing 737-800 Next Generation aircraft. The net deferred gain on the sale-leaseback transactions in the amount of R$58,347 is being deferred in proportion to the monthly payments of their respective operating leases over the contractual term of 124 months. On December 31, 2009, the balances classified as other current and non-current liabilities are R$7,172 and R$29,653, respectively (R$7,172 and R$36,825 at December 31, 2008). For the year ended December 31, 2009, the total gains recognized in profit or loss were R$7,172 (R$7,172 in 2008 and R$7,178 in 2007).

During 2007, 2008 and 2009, the Company had losses on the sale-leaseback transactions for 9 Boeing 737-800 Next Generation aircraft. The net deferred losses on the sale-leaseback transactions in the amount of R$89,337 is being deferred in proportion to the monthly payments of their respective operating leases over the contractual term of 120 months. On December 31, 2009, the balances classified as current and non-current prepaid expenses are R$9,373 e R$63,574, respectively (R$7,810 e R$58,793 at December 31, 2008). For the year ended December 31, 2009, the total losses recognized in profit or loss was R$9,373 (R$6,371 in 2008 and R$733 in 2007).

Also in 2009, the Company recorded a gain of R$12,638 in the profit or loss, resulted from sale-leaseback transactions based on the fair value of 2 aircraft.

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

25. Advance Ticket Sales

At December 31, 2009, the balance of advance ticket sales of R$561,347 is represented by 2.228.703 tickets sold and not yet used (R$572,573, represented by 2,010,347 at December 31, 2008) with 96 days of average term of use.

26. Revenue by geographic segment

The Company operates domestic and international flights. Since the Company’s aircraft fleet is flexibly employed across its route network in South America and Caribbean, there is no suitable basis of allocating such assets and related liabilities to geographical segments. Geographic information for net operating revenues by market was compiled based on passenger and cargo transportation provided by origin to final destination for VRG flights and is presented below:

          2008      2007   
    2009  %    (Unaudited) %    (Unaudited) % 
             
Domestic    5,661,101  94.0%    5,938,118  92.7%    4,513,815  91.4% 
International    364,281  6.0%    468,075  7.3%    427,169  8.6% 
             
Total    6,025,382  100.0%    6,406,193  100.0%    4,940,984  100.0% 
             

27. Non-cash transactions

During the year ended December 31, 2009, the Company entered into the following non-cash investing and financing activities which are not reflected in the statement of cash flows:

• the Company acquired R$322,519 and disposed R$488,344 of pre-delivery deposits included in property, plant and equipment there was financed directly through PDP facility financing;

• the Company acquired R$526,559 of aircraft and other equipment under a finance lease (R$514,708 for the year ended on December 31, 2008).

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GOL LINHAS AÉREAS INTELIGENTES S.A. 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 
(In thousands of Brazilian Reais, except as indicated otherwise)
 

28. Subsequent Events

On February 2, 2009, the Board of Directors, with the powers vested in it and in conformity with Company’s Stock Purchase Option Plan, approved the granting of 2,672,746 options to purchase preferred Company stock at the price of R$20.65 per share for the year 2010. The vesting period of the stock options is 3 years, and can be exercised up to 10 years after the grant date.

On March 11, 2010, the Board of Directors meeting, authorized the dividends distribution for 2009 year, through a capital increase in the same amount of dividends declared of R$185,839 by means of private issuing of 7,622,584 shares, being 3,833,077 ordinary and 3,789,507 preferred shares. The issue price of the common and preferred shares was R$24.38 per share, determined in the date of the meeting, after the close of negotiations in BMF&BOVESPA.

29. Consolidating Condensed Financial Information of Guarantor Subsidiaries

The following condensed consolidating financial information, prepared in accordance with IFRS, is presented in lieu of providing separate audited financial statements for the guarantor subsidiary VRG in connection with its unconditional guarantee, on a joint and several basis, of the obligation to pay principal and interest under the 8.75% perpetual notes and 7.50% senior notes issued by Company’s wholly owned subsidiary Gol Finance.

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Financial Position as of December 31, 2009

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Assets                         
Non-current assets                         
   Property, plant and equipment, net    -    -    2,521,082    804,631    -    3,325,713 
   Intangible assets    266    -    1,231,519    -    -    1,231,785 
   Investments    2,641,685    -    -    -    (2,641,685)   - 
   Other non-current assets                         
       Credits with related parties    90,830    734,845    -    -    (825,675)   - 
       Other non-current assets    51,965    -    1,751,452    63,574    (107,573)   1,759,418 
             
   Total other non-current assets    142,795    734,845    1,751,452    63,574    (933,248)   1,759,418 
             
Total non-current assets    2,784,746    734,845    5,504,053    868,205    (3,574,933)   6,316,916 
 
Current assets                         
   Other current assets    62,962    -    228,983    9,373    2,947    304,265 
   Inventories of parts and supplies    -    -    137,959    -    -    137,959 
   Trade and other receivables    -    -    519,308    -    -    519,308 
   Restricted cash    3,180    -    15,640    -    -    18,820 
   Financial assets    165,088    -    16,441    22,312    (163,397)   40,444 
   Cash and cash equivalents    41,208    16    1,155,421    23,595    162,168    1,382,408 
             
Total current assets    272,438    16    2,073,752    55,280    1,718    2,403,204 
 
             
Total assets    3,057,184    734,861    7,577,805    923,485    (3,573,215)   8,720,120 
             

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Financial Position as of December 31, 2009

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Total shareholders' equity    2,840,405    (14,968)   2,414,180    (43,126)   (2,586,505)   2,609,986 
 
Non-current liabilities                         
 Other non-current liabilities    9,697    -    527,064    29,653    (8)   566,406 
 Debt with related parties    -    -    199,608    626,067    (825,675)   - 
 Deferred taxes    26    -    607,167    -    (44,890)   562,303 
 Long-term debt    -    733,755    1,871,091    -    (62,679)   2,542,167 
             
Total non-current liabilities    9,723    733,755    3,204,930    655,720    (933,252)   3,670,876 
 
Current liabilities                         
 Other current liabilities    19,368    1,779    640,206    62,033    (52,227)   671,159 
 Dividends payable    186,416    -    -    -    -    186,416 
 Provisions    -    -    66,259    -    -    66,259 
 Advance ticket sales    -    -    561,347    -    -    561,347 
 Accounts payable    1,272    -    357,948    3,162    -    362,382 
 Short-term debt    -    14,295    332,935    245,696    (1,231)   591,695 
             
Total current liabilities    207,056    16,074    1,958,695    310,891    (53,458)   2,439,258 
 
             
Total liabilities and shareholders' equity    3,057,184    734,861    7,577,805    923,485    (3,573,215)   8,720,120 
             

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Operations for the year ended December 31, 2009

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Total operating revenues    178    -    6,025,204    -    -    6,025,382 
 
Operating expenses                         
   Salaries    (7,746)   -    (1,093,207)   -    -    (1,100,953)
   Aircraft fuel    -    -    (1,813,104)   -    -    (1,813,104)
   Aircraft rent    -    -    (648,568)   (2,115)   -    (650,683)
   Aircraft insurance    -    -    (56,324)   -    -    (56,324)
   Sales and marketing    (200)   -    (364,351)   -    -    (364,551)
   Landing fees    -    -    (312,637)   -    -    (312,637)
   Aircraft and traffic servicing    (4,038)   -    (373,585)   (4,098)   -    (381,721)
   Maintenance materials and repairs    -    -    (417,212)   -    -    (417,212)
   Depreciation    (89)   -    (142,764)   -    -    (142,853)
   Other operating expenses    (3,716)   -    (380,974)   12,638    -    (372,052)
             
Total operating expenses    (15,789)   -    (5,602,726)   6,425    -    (5,612,090)
 
Income(loss) before finance income and expenses    (15,611)   -    422,478    6,425    -    413,292 
 
Total finance costs and other income (expense)   246,707    (3,280)   169,135    (69,718)   -    342,844 
 
   Equity in income (loss) of subsidiary    634,424    -    -    -    (634,424)   - 
             
 
Income (loss) before income taxes    865,520    (3,280)   591,613    (63,293)   (634,424)   756,136 
 
   Income taxes    3,732    -    123,278    7,686    -    134,696 
 
             
Net income (loss) for the year    869,252    (3,280)   714,891    (55,607)   (634,424)   890,832 
             

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Cash Flow Statement for the year ended December 31, 2009

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Cash flows from operating activities:                         
Net cash provided by (used in) operating activities    62,811    (3,280)   346,355    (7,522)   58,895    457,259 
 
Cash flows from investing activities:                         
   Acquisition of property, plant and equipment, net    (44,163)   -    (86,312)   -    -    (130,475)
   Net investments in restricted cash    (75,152)   -    37,340    -    -    (37,812)
   Net investments in financial assets    27,032    -    198,328    -    (20,220)   205,140 
   Other    (270,591)   -    (31,077)   -    270,237    (31,431)
             
Net cash provided by (used in) investing activities    (362,874)   -    118,279    -    250,017    5,422 
 
Cash flows from financing activities:                         
   Net proceeds from long-term debt    (308,635)   3,276    273,583    28,036    (38,676)   (42,416)
   Credit with related parties    811,654    -    1,216,852    -    (1,216,852)   811,654 
   Addition of treasury shares    -    -    (946,616)   -    946,616    - 
             
Net cash provided by (used in) financing activities    503,019    3,276    543,819    28,036    (308,912)   769,238 
 
Effects of exchange rate changes on the balance of cash                         
held in foreign currencies    -    -    (18,841)   -    -    (18,841)
 
Net increase (decrease) in cash and cash equivalents    202,956    (4)   989,612    20,514    -    1,213,078 
 
Cash and cash equivalents at beginning of the year    420    20    165,809    3,081    -    169,330 
             
Cash and cash equivalents at end of the year    203,376    16    1,155,421    23,595    -    1,382,408 
             


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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Financial Position as of December 31, 2008

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Assets                         
Non-current assets                         
   Property, plant and equipment, net    355    -    2,041,197    957,204    -    2,998,756 
   Intangible assets    -    -    1,197,861    -    -    1,197,861 
   Investments    310,781    -    -    -    (310,781)   - 
   Other non-current assets                         
       Credits with related parties    699,537    986,273    -    693,843    (2,379,653)   - 
       Other non-current assets    822    -    1,317,496    81,722    -    1,400,040 
             
   Total other non-current assets    700,359    986,273    1,317,496    775,565    (2,379,653)   1,400,040 
             
Total non-current assets    1,011,495    986,273    4,556,554    1,732,769    (2,690,434)   5,596,657 
 
Current assets                         
   Other current assets    133,044    2,332    728,961    261,877    (256,419)   869,795 
   Inventories of parts and supplies    -    -    200,514    -    -    200,514 
   Restricted cash    137,571    -    39,126    -    -    176,697 
   Financial assets    21,177    -    277,454    31,086    (84,132)   245,585 
   Cash and cash equivalents    420    20    165,809    3,081    -    169,330 
             
Total current assets    292,212    2,352    1,411,864    296,044    (340,551)   1,661,921 
 
             
Total assets    1,303,707    988,625    5,968,418    2,028,813    (3,030,985)   7,258,578 
             

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Financial Position as of December 31, 2008

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Total shareholders' equity    1,182,200    (11,688)   446,238    22,038    (567,180)   1,071,608 
 
Non-current liabilities                         
 Long-term debt    -    980,230    1,542,783    -    (84,132)   2,438,881 
 Debt with related parties    -    -    1,146,224    1,233,430    (2,379,654)   - 
 Other non-current liabilities    10,786    -    1,118,114    36,825    (215)   1,165,510 
             
Total non-current liabilities    10,786    980,230    3,807,121    1,270,255    (2,464,001)   3,604,391 
 
Current liabilities                         
 Short-term debt    -    20,083    248,332    699,036    1    967,452 
 Accounts payable    4,292    -    280,019    -    (592)   283,719 
 Advance ticket sales    -    -    572,573    -    -    572,573 
 Smiles deferred revenue    -    -    90,043    -    -    90,043 
 Other current liabilities    106,429    -    524,092    37,484    787    668,792 
             
Total current liabilities    110,721    20,083    1,715,059    736,520    196    2,582,579 
 
 
             
Total liabilities and shareholders' equity    1,303,707    988,625    5,968,418    2,028,813    (3,030,985)   7,258,578 
             

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Table of Contents

GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Operations for the year ended December 31, 2008

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Total operating revenues    -    -    6,406,193    -    -    6,406,193 
 
Operating expenses                         
   Salaries    (6,805)   -    (976,978)   -    -    (983,783)
   Aircraft fuel    -    -    (2,630,834)   2,901    (2,901)   (2,630,834)
   Aircraft rent    -    -    (647,990)   -    2,901    (645,089)
   Aircraft insurance    -    -    (42,813)   -    -    (42,813)
   Sales and marketing    (484)   -    (588,251)   -    -    (588,735)
   Landing fees    (5)   -    (338,365)   -    -    (338,370)
   Aircraft and traffic servicing    (10,044)   (66)   (407,344)   (4,723)   -    (422,177)
   Maintenance materials and repairs    -    -    (388,030)   -    -    (388,030)
   Depreciation    -    -    (125,127)   -    -    (125,127)
   Other operating expenses    (1,712)   -    (328,038)   (133)   -    (329,883)
             
Total operating expenses    (19,050)   (66)   (6,473,770)   (1,955)   -    (6,494,841)
 
Operating profit(loss)   (19,050)   (66)   (67,577)   (1,955)   -    (88,648)
 
Total finance costs and other income (expense)   (247,562)   (3,789)   (795,074)   (59,824)   (145)   (1,106,394)
 
   Equity in income (loss) of subsidiary    (778,419)   -    (719,960)   -    1,498,379    - 
             
Profit (loss) before income taxes    (1,045,031)   (3,855)   (1,582,611)   (61,779)   1,498,234    (1,195,042)
 
   Income taxes    (59,406)   -    8,827    -    6,274    (44,305)
             
 
Profit (loss) for the year from continuing                         
 operations attributable to equity                         
             
 holders of the parent    (1,104,437)   (3,855)   (1,573,784)   (61,779)   1,504,508    (1,239,347)
             

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GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Cash Flow Statement for the year ended December 31, 2008

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Cash flows from operating activities:                         
Net cash provided by (used in) operating activities    577,034    753,982    (426,146)   (317,097)   (420,913)   166,860 
 
Cash flows from investing activities:                         
   Acquisition of property, plant and equipment, net    (355)   -    (174,893)   (261,666)   -    (436,914)
   Net investments in restricted cash    (137,571)   -    (39,674)   -    -    (177,245)
   Net investments in financial assets    66,000    -    218,000    245,000    46,000    575,000 
   Other    -    -    79,809    -    -    79,809 
             
Net cash provided by (used in) investing activities    (71,926)   -    83,242    (16,666)   46,000    40,650 
 
Cash flows from financing activities:                         
   Net proceeds from long-term debt    -    232,288    (751,934)   (14,217)   -    (533,863)
   Credit with related parties    (608,605)   (986,273)   1,083,674    136,291    374,913    - 
   Dividends paid    (36,258)   -    -    -    -    (36,258)
   Addition of treasury shares    (41,180)   -    -    -    -    (41,180)
             
Net cash provided by (used in) financing activities    (686,043)   (753,985)   331,740    122,074    374,913    (611,301)
 
Net increase (decrease) in cash and cash equivalents    (180,935)   (3)   (11,164)   (211,689)   -    (403,791)
 
Cash and cash equivalents at beginning of the period    181,355    23    176,973    214,770    -    573,121 
             
Cash and cash equivalents at end of the period    420    20    165,809    3,081    -    169,330 
             

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Table of Contents

GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Statement of Operations for the year ended December 31, 2007

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Total operating revenues    -    -    4,386,273    554,711    -    4,940,984 
 
Operating expenses                         
   Salaries    (3,727)   -    (646,396)   (149,221)   -    (799,344)
   Aircraft fuel    -    -    (1,595,346)   (303,494)   -    (1,898,840)
   Aircraft rent    -    -    (406,078)   (119,707)   -    (525,785)
   Aircraft insurance    -    -    (43,019)   (1,627)   -    (44,646)
   Sales and marketing    -    -    (308,436)   (59,428)   (2)   (367,866)
   Landing fees    -    -    (215,977)   (57,678)   -    (273,655)
   Aircraft and traffic servicing    (6,897)   (305)   (237,813)   (103,361)   (356)   (348,732)
   Maintenance materials and repairs    -    -    (247,905)   (91,376)   -    (339,281)
   Depreciation    -    -    (109,111)   46,563    -    (62,548)
   Other operating expenses    (1,336)   -    (245,311)   (23,769)   (6)   (270,422)
             
Total operating expenses    (11,960)   (305)   (4,055,392)   (863,098)   (364)   (4,931,119)
 
Operating profit(loss)   (11,960)   (305)   330,881    (308,387)   (364)   9,865 
 
Total finance costs and other income (expense)   49,923    (4,702)   42,604    102,788    405    191,018 
 
   Equity in income (loss) of subsidiary    63,562    -    -    (63,562)   -    - 
   Non-operating results    -    -    -    (47,015)   47,015    - 
             
 
Profit (loss) before income taxes    101,525    (5,007)   373,485    (316,176)   47,056    200,883 
 
   Income taxes    46,401    -    (127,439)   47,443    -    (33,595)
             
 
Profit (loss) for the year from continuing                         
 operations attributable to equity                         
 holders of the parent    147,926    (5,007)   246,046    (268,733)   47,056    167,288 
             

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Table of Contents

GOL LINHAS AÉREAS INTELIGENTES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Expressed in thousands of Brazilian Reais)
Condensed Consolidating Cash Flow Statement for the year ended December 31, 2007

    Parent    Issuer    Subsidiary    Subsidiary    Consolidating     
    Company    Subsidiary    Guarantor    Non guarantor    Adjustments    Consolidated 
             
 
Cash flows from operating activities:                         
Net cash provided by (used in) operating activities    249,179    (4,205)   810,428    (690,916)   (505,974)   (141,488)
 
Cash flows from investing activities:                         
   Acquisition of VRG, net cash acquired    -    -    -    (201,509)   -    (201,509)
   Acquisition of property, plant and equipment, net    -    -    (367,874)   (187,887)   -    (555,761)
   Investments    (431,412)   -    -    -    431,412    - 
   Due from related parties    82,906    (327,177)   (140,227)   -    384,498    - 
   Net investments in financial assets    386,380    -    114,182    66,369    -    566,931 
             
Net cash provided by (used in) investing activities    37,874    (327,177)   (393,919)   (323,027)   815,910    (190,339)
 
Cash flows from financing activities:                        - 
   Net proceeds from long-term debt    -    331,123    234,732    353,972    -    919,827 
   Paid subscribed capital    60,745    -    (436,592)   257,448    118,831    432 
   Dividends paid    (302,775)   -    (173,717)   -    173,717    (302,775)
   Credit with related parties    -    -    -    602,484    (602,484)   - 
             
Net cash provided by (used in) financing activities    (242,030)   331,123    (375,577)   1,213,904    (309,936)   617,484 
                        - 
Net increase (decrease) in cash and cash equivalents    45,023    (259)   40,932    199,961    -    285,657 
                        - 
Cash and cash equivalents at beginning of the period    136,332    282    136,041    14,809    -    287,464 
             
Cash and cash equivalents at end of the period    181,355    23    176,973    214,770    -    573,121 
             

F-92