LAN AIRLINES S.A. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2010 CONTENTS Report of the Independent Auditors Consolidated Statement of Financial Position Consolidated Statement of Income by Function Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows - Direct Method Notes to the Consolidated Financial Statements CLP - CHILEAN PESO ARS - ARGENTINE PESO US$ - UNITED STATES DOLLAR THUS$ - THOUSANDS OF UNITED STATES DOLLARS Management’s Report on Internal Control over Financial Reporting The management of the Company, including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as amended. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, and that the degree of compliance with the policies or procedures may deteriorate. Lan Airlines’ management, including the Chief Executive Officer and the Chief Financial Officer, has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2010 based on the criteria established in Internal Control - “Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and, based on such criteria, Lan Airlines’ management has concluded that, as of December 31, 2010, the Company’s internal control over financial reporting is effective. The company’s internal control over financial reporting effectiveness as of December 31, 2010 has been audited by PricewaterhouseCoopers Consultores, Auditores y Companía Limitada, an independent registered public accounting firm, as stated in their report included herein. _________________________ _______________________ Enrique Cueto Plaza Alejandro de la Fuente Goic Chief Executive Officer Chief Financial Officer March 1, 2011 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Lan Airlines S.A. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Lan Airlines S.A. and its subsidiaries at December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Santiago - Chile March 1, 2011 Contents of the notes to the consolidated financial statements of Lan Airlines S.A. and Subsidiaries. Notes Page 1 General information ............................................................................................................... 1 2 Summary of significant accounting policies.......................................................................... 4 2.1. Preparation ........................................................................................................................ 4 2.2. Consolidation .................................................................................................................... 6 2.3. Foreign currency transactions ........................................................................................... 7 2.4. Property, plant and equipment .......................................................................................... 8 2.5. Intangible assets ................................................................................................................ 8 2.6. Goodwill ............................................................................................................................ 9 2.7. Borrowing costs ................................................................................................................ 9 2.8. Losses for impairment of non-financial assets .................................................................. 9 2.9. Financial assets ................................................................................................................. 9 2.10. Derivative financial instruments and hedging activities ................................................. 10 2.11. Inventories ....................................................................................................................... 11 2.12. Trade and other accounts receivable ............................................................................... 11 2.13. Cash and cash equivalents ............................................................................................... 12 2.14. Capital ............................................................................................................................. 12 2.15. Trade and other accounts payable ................................................................................... 12 2.16. Interest-bearing loans ...................................................................................................... 12 2.17. Deferred taxes ................................................................................................................. 12 2.18. Employee benefits ........................................................................................................... 13 2.19. Provisions ........................................................................................................................ 13 2.20. Revenue recognition........................................................................................................ 14 2.21. Leases .............................................................................................................................. 14 2.22. Non-current assets (or disposal groups) classified as held for sale ................................. 15 2.23. Maintenance.................................................................................................................... 15 2.24. Environment costs ........................................................................................................... 15 3 Financial risk management .................................................................................................. 16 3.1. Financial risk factors ....................................................................................................... 16 3.2. Capital risk management ................................................................................................. 24 3.3. Estimates of fair value ..................................................................................................... 25 4 Accounting estimates and judgments .................................................................................. 27 5 Segmental Information ........................................................................................................ 28 6 Cash and cash equivalents ................................................................................................... 30 7 Financial instruments .......................................................................................................... 31 7.1. Financial instruments by category .................................................................................. 31 7.2. Financial instruments by currency .................................................................................. 33 8 Trade, other accounts receivable and non-currents rights receivable ................................ 34 9 Accounts receivable from/payable to related parties .......................................................... 37 10 Inventories ........................................................................................................................... 39 11 Other financial assets .......................................................................................................... 40 12 Other non financial assets ................................................................................................... 42 13 Non-current assets (or disposal groups) classified as held for sale ..................................... 44 14 Investments in subsidiaries ................................................................................................. 45 15 Equity accounted investments ............................................................................................. 48 Notes Page 16 Intangible assets other than goodwill .................................................................................. 50 17 Goodwill ............................................................................................................................. 52 18 Property, plant and equipment ............................................................................................ 53 19 Income taxes ....................................................................................................................... 61 20 Other financial liabilities ..................................................................................................... 66 21 Trade and other current accounts payable ........................................................................... 71 22 Other provisions ................................................................................................................. 73 23 Other current non-financial liabilities ................................................................................. 75 24 Employee benefits ............................................................................................................... 75 25 Other non-current accounts payable ................................................................................... 77 26 Equity .................................................................................................................................. 78 27 Revenues ............................................................................................................................. 82 28 Costs and expenses by nature .............................................................................................. 83 29 Gains (losses) on the sale of non-current assets not classified as held for sale ................... 84 30 Other income, by function .................................................................................................. 85 31 Foreign currency and exhange rate differences .................................................................. 86 32 Earnings per share ............................................................................................................... 92 33 Contingencies ...................................................................................................................... 93 34 Commitments ...................................................................................................................... 97 35 Transactions with related parties ....................................................................................... 101 36 Share-based payments ....................................................................................................... 104 37 The environment ............................................................................................................... 105 38 Subsequent events ............................................................................................................. 106 39 Business combinations ...................................................................................................... 107 LAN AIRLINES S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION ASSETS Note 2010 2009 ThUS$ ThUS$ Current Assets Cash and cash equivalents 6 - 7 631,052 731,497 Other financial assets 7 - 11 245,451 110,667 Other non-financial assets 12 18,820 17,128 Trade and other accounts receivable 7 - 8 481,350 423,739 Accounts receivable from related entities 7 - 9 50 38 Inventories 10 53,193 46,563 Tax assets 97,656 68,420 Total current assets other than non-current assets (or disposal groups) classified as held for sale 1,527,572 1,398,052 Non-current assets (or disposal groups) classified as held for sale 13 5,497 10,919 Total current assets 1,533,069 1,408,971 Non-current Assets Other financial assets 7 - 11 21,587 20,024 Other non-financial assets 12 32,508 28,736 Rights receivable 7 - 8 7,883 7,190 Equity accounted investments 15 593 1,236 Intangible assets other than goodwill 16 45,749 34,814 Goodwill 17 157,994 63,793 Property, plant and equipment 18 4,948,430 4,196,556 Deferred tax assets 19 38,084 10,652 Total non-current assets 5,252,828 4,363,001 Total assets 6,785,897 5,771,972 The accompanying Notes 1 to 39 form an integral part of these consolidated financial statements. LAN AIRLINES S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF FINANCIAL POSITION LIABILITIES AND NET EQUITY For the year ended December 31, Note 2010 2009 LIABILITIES ThUS$ ThUS$ Current liabilities Other financial liabilities 7 - 20 542,624 417,932 Trade and other accounts payable 7 - 21 645,571 476,597 Accounts payable to related entities 7 - 9 184 297 Other provisions 22 753 970 Tax liabilities 15,736 11,287 Other non-financial liabilities 23 939,151 616,256 Total current liabilities 2,144,019 1,523,339 Non-current liabilities Other financial liabilities 7 - 20 2,562,348 2,443,178 Other accounts payable 7 - 25 425,681 426,521 Other provisions 22 32,120 26,834 Deferred tax liabilities 19 312,012 240,619 Employee benefits 24 9,657 5,555 Total non-current liabilities 3,341,818 3,142,707 Total liabilities 5,485,837 4,666,046 EQUITY Share capital 26 453,444 453,444 Retained earnings 26 949,214 740,047 Other equity interests 26 5,463 2,490 Other reserves 26 (111,307) (97,154) Equity attributable to owners of parent 1,296,814 1,098,827 Non-controlling interest 3,246 7,099 Total equity 1,300,060 1,105,926 Total liabilities and equity 6,785,897 5,771,972 The accompanying Notes 1 to 39 form an integral part of these consolidated financial statements. LAN AIRLINES S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME BY FUNCTION For the year ended December 31, Note 2010 2009 2008 ThUS$ ThUS$ ThUS$ Revenue 27 4,390,502 3,519,162 4,140,245 Cost of sales (3,012,698) (2,522,778) (2,893,944) Gross margin 1,377,804 996,384 1,246,301 Other income 30 132,826 136,351 142,942 Distribution costs (383,517) (326,964) (366,652) Administrative expenses (331,831) (269,588) (274,950) Other expenses (172,428) (100,483) (127,864) Other gains/(losses) 5,438 (11,728) (134,731) Financial income 14,946 18,183 18,480 Financial costs 28 (155,279) (153,109) (125,488) Equity accounted earnings 15 132 315 696 Foreign exchange gains/(losses) 31 13,792 (11,237) 23,443 Result of indexation units 149 (605) 1,229 Income before taxes 502,032 277,519 403,406 Income tax expense 19 (81,107) (44,487) (65,094) NET INCOME FOR THE PERIOD 420,925 233,032 338,312 Income attributable to owners of the parent 419,702 231,126 336,480 Income attributable to non-controlling interests 1,223 1,906 1,832 Net income for the period 420,925 233,032 338,312 EARNINGS PER SHARE Basic earnings per share (US$) 1.23882 0 .68221 0.99318 Diluted earnings per share (US$) 1.23534 0 .68221 0.99318 The accompanying Notes 1 to 39 form an integral part of these consolidated financial statements. LAN AIRLINES S.A. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended December 31, Note 2010 2009 2008 ThUS$ ThUS$ ThUS$ NET INCOME 420,925 233,032 338,312 Currency translation differences Gains (losses) on currency translation, before tax 31 708 1,442 (7,371) Other comprehensive income, before taxes, currency translation differences 708 1,442 (7,371) Cash flow hedges Gains (losses) on cash flow hedges before tax 20 (17,855) 252,508 (308,901) Other comprehensive income, before taxes, cash flow hedges (17,855) 252,508 (308,901) Other components of other comprehensive income, before taxes (17,147) 253,950 (316,272) Income tax relating to components of other comprehensive income Income tax related to currency translation differences in other comprehensive income 19 (120) 1,008 - Income tax related to cash flow hedges in other comprehensive income 19 3,035 (42,925) 52,513 Amount of income taxes related to components of other comprehensive income 2,915 (41,917) 52,513 Other comprehensive income (14,232) 212,033 (263,759) Total comprehensive income 406,693 445,065 74,553 Comprehensive income attributable to the owners of the parent 405,549 441,977 73,900 Comprehensive income attributable to non-controlling interest 1,144 3,088 653 TOTAL COMPREHENSIVE INCOME 406,693 445,065 74,553 The accompanying Notes 1 to 39 form an integral part of these consolidated financial statements.