20-F

As filed with the Securities and Exchange Commission on April 23, 2007

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(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, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

OR

o SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report [      ]

For the transition period from [      ] to [      ]

Commission file number 333-132289

EMBRAER-EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

(Exact name of Registrant as specified in its charter)

EMBRAER - Brazilian Aviation Company Inc.

(Translation of Registrant’s name into English)

Federative Republic of Brazil

(Jurisdiction of Incorporation)

Avenida Brigadeiro Faria Lima, 2170

12227-901 São José dos Campos, São Paulo, Brazil

(Address of principal executive offices)

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

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

* Not for trading purposes, but only in connection with the registration of American Depositary Shares pursuant to the requirements of the Securities and Exchange Commission.

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.

None.

Number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2006:

739,903,914 common shares, without par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YesxNo o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

YesoNo 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.

YesxNo o

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

Large Accelerated Filer xAccelerated Filer oNon-accelerated filer o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17oItem 18 x

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).

YesoNo x

TABLE OF CONTENTS

			Page
	PART I
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		1
ITEM 3.	KEY INFORMATION		1
	3A.	Selected Financial Data	1
	3B.	Capitalization and Indebtedness	4
	3C.	Reasons for the Offer and Use of Proceeds	4
	3D.	Risk Factors	5
ITEM 4.	INFORMATION ON THE COMPANY		15
	4A.	History and Development of the Company	15
	4B.	Business Overview	19
	4C.	Organizational Structure	35
	4D.	Property, Plants and Equipment	35
ITEM 4A.	UNRESOLVED STAFF COMMENTS		38
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		38
	5A.	Operating Results	39
	5B.	Liquidity and Capital Resources	51
	5C.	Research and Development	55
	5D.	Trend Information	56
	5E.	Off-Balance Sheet Arrangements	59
	5F.	Tabular Disclosure of Contractual Obligations	61
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		62
	6A.	Directors and Senior Management	62
	6B.	Compensation	66
	6C.	Board Practices	67
	6D.	Employees	70
	6E.	Share Ownership	70
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		71
	7A.	Major Shareholders	71
	7B.	Related Party Transactions	71
	7C.	Interests of Experts and Counsel	72
ITEM 8.	FINANCIAL INFORMATION		72
	8A.	Consolidated Statements and Other Financial Information	72
	8B.	Significant Changes	77
ITEM 9.	THE OFFER AND LISTING		77
	9A.	Offer and Listing Details	77
	9B.	Plan of Distribution	79
	9C.	Markets	79
	9D.	Selling Shareholders	82
	9E.	Dilution	82
	9F.	Expenses of the Issue	82
ITEM 10.	ADDITIONAL INFORMATION		82
	10A.	Share Capital	82
	10B.	Memorandum and Articles of Association	82
	10C.	Material Contracts	98
	10D.	Exchange Controls	98
	10E.	Taxation	99
	10F.	Dividends and Paying Agents	105
	10G.	Statements by Experts	106
	10H.	Documents on Display	106
	10I.	Subsidiary Information	106
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		107
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		110
PART II
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		110
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		110
ITEM 15.	CONTROLS AND PROCEDURES		113
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT		114
ITEM 16B.	CODE OF ETHICS		114
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		114
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		115
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		116
PART III
ITEM 17.	FINANCIAL STATEMENTS		117
ITEM 18.	FINANCIAL STATEMENTS		117
ITEM 19.	EXHIBITS		117

i

INTRODUCTION

In this annual report, “Embraer,” “we,” “us” or “our” refer to Embraer-Empresa Brasileira de Aeronáutica S.A., formerly known as Rio Han Empreendimentos e Participações S.A. (as successor in interest to Embraer-Empresa Brasileira de Aeronáutica S.A., or former Embraer, as a result of the merger of former Embraer with and into Embraer), and its consolidated subsidiaries (unless the context otherwise requires). All references herein to the “real,” “reais” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “US$,” “dollars” or “U.S. dollars” are to United States dollars.

Corporate Reorganization

On March 31, 2006, our shareholders approved a reorganization of our corporate structure. The purpose of the reorganization was to, among other things, create a basis for the sustainability, growth and continuity of our businesses and activities by simplifying our capital structure and thereby improving our access to capital markets and increasing financing resources for the development of new products and expansion programs. As a result of the reorganization and merger, former Embraer, ceased to exist and:

·   Embraer (formerly known as Rio Han Empreendimentos e Participações S.A. and renamed Embraer-Empresa Brasileira de Aeronáutica S.A.) succeeded to all rights and obligations of former Embraer,

·   each common share of former Embraer was exchanged for one common share of Embraer,

·   each preferred share of former Embraer was exchanged for one common share of Embraer,

·   each American Depositary Share, or ADS, of former Embraer, each of which represented four preferred shares of former Embraer, was exchanged for one ADS of Embraer, each of which represents four common shares of Embraer, and

·   the golden share, a special class of common shares of former Embraer held by the Federative Republic of Brazil, was exchanged for a special class of common shares of Embraer.

For further information on our corporate reorganization, see “Item 4A. History and Development of the Company—Corporate Reorganization.”

Former Embraer was incorporated as a publicly held company with private participation by the Brazilian government in 1969 and was privatized in 1994. We have grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a public company that produces aircraft for commercial aviation, executive jet and defense and government purposes. Throughout our evolution, we have obtained, developed and enhanced our engineering and technological capabilities through our own development of products for the Brazilian Air Force and through joint product development with foreign companies on specific projects. We have applied these capabilities that we gained from our defense and government business to develop our commercial aviation business.

Presentation of Financial and Other Data

Financial Data

Our audited financial statements at December 31, 2005 and 2006 and for each of the years ended December 31, 2004, 2005 and 2006 are included in this annual report and have been audited by Deloitte Touche Tohmatsu.

Our consolidated financial statements as of and for the years ended December 31, 2002 and 2003 have not been included in this annual report.

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. Because we export more than 90% of our production and operate in an industry that uses the U.S. dollar as its currency of reference, our management believes that the U.S. dollar is our functional currency and the most appropriate currency in which to present our financial statements. As a result, amounts for all periods presented have been remeasured into U.S. dollars in accordance with the methodology set forth in Statement of Financial Accounting Standards No. 52, or SFAS 52. Our financial statements and financial data presented herein and prepared in accordance with U.S. GAAP do not reflect the effects of inflation.

ii

Pursuant to SFAS 52 as it applies to us, non-monetary assets and liabilities, including inventories, property, plant and equipment, accumulated depreciation and shareholders’ equity, are remeasured at historical rates of exchange, while monetary assets and liabilities denominated in currencies other than U.S. dollars are remeasured at period-end rates. Export sales invoiced in currencies other than the U.S. dollar are remeasured at the respective exchange rate on the date of sale. Cost of sales and services, depreciation and other expenses relating to assets remeasured at historical exchange rates are calculated based on the U.S. dollar values of such assets and other non-U.S. dollar statement of income accounts are remeasured at the rate prevailing on the date of the charge or credit to income.

In our 2004, 2005 and 2006 financial statements, gains or losses resulting from the remeasurement of the financial statements and from foreign currency transactions have been reported in the consolidated statement of income as single line items.

For certain purposes, such as providing reports to our Brazilian shareholders, filing financial statements with the Comissão de Valores Mobiliários, or CVM, the Brazilian securities commission, and determining dividend payments and other distributions and tax liabilities in Brazil, we have prepared, and will continue to be required to prepare, financial statements in accordance with Law No. 6,404 of December 15, 1976, as amended, or the Brazilian Corporate Law. Our financial statements prepared in accordance with the Brazilian Corporate Law are not adjusted to account for the effects of inflation.

As a result of the reconciliation of amounts to the functional currency and other adjustments related to the differences in accounting principles between U.S. GAAP and accounting principles generally accepted in Brazil, or Brazilian GAAP, the amounts of net income and shareholders’ equity as reported in our consolidated financial statements presented herein differ from those included in our statutory accounting records.

As a result of the listing of our common shares on the Novo Mercado segment of the São Paulo Stock Exchange (Bolsa de Valores de São Paulo), beginning in June 2008 we will be required to either translate into English our quarterly financial statements, including cash flow statements, prepared in accordance with the Brazilian Corporate Law, or prepare such quarterly financial statements in accordance with, or reconciled to, U.S. GAAP or International Financial Reporting Standards, or IFRS.

Other Data and Backlog

In this annual report:

·   some of the financial data reflects the effect of rounding;

·   aircraft ranges are indicated in nautical miles;

·   one nautical mile is equal to approximately 1.15 ordinary or “statute” miles, or approximately 1.85 kilometers;

·   aircraft speeds are indicated in nautical miles per hour, or knots, or in Mach, which is a measure of the speed of sound;

·   the term “regional jets” refers to narrow body jet aircraft with 30-60 passenger seats;

·   the term “mid-capacity jets” refers to jet aircraft with 70-120 passenger seats. All of our regional and mid-capacity jet aircraft are sold in the commercial aviation segment;

·   the term “commercial aircraft,” as it applies to Embraer, refers to our regional jets and mid-capacity jets;

iii

·   the terms “very light jet” and “light jet” refer to executive jets that carry from six to eight passengers and up to nine passengers, respectively, that are designed for short take-off distances;

·   the term “ultra-large” refers to executive jets that have longer range and over-sized cabin space and carry, on average, 19 passengers; and

·   the term “executive jets,” as it applies to Embraer, refers to our aircraft sold to companies, including fractional ownership companies, charter companies and air-taxi companies and high net-worth individuals.

We calculate the value of our backlog by considering all firm orders that have not yet been delivered. A firm order is a firm commitment from a customer, represented by a signed contract and customarily accompanied by a down payment, for which we have reserved a place on one of our production lines. Every time we refer to our backlog in this annual report, we only make reference to firm orders and not to options. When we refer in this annual report to the number or value of commercial aircraft, we exclude one EMB 145 delivered to the Belgian government in 2002 and two EMB 145s delivered to Satena Airline, a state-owned Colombian airline, in 2003 and 2004. These aircraft have been included in our defense and government data. In July 2005, we started to include the number of aircraft sold by the defense and government segment to state-owned airlines, such as TAME and Satena, in our commercial aircraft backlog.

Special Note Regarding Forward-Looking Statements

This annual report includes forward-looking statements, within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, principally in Items 3 through 5 and Item 11 of this annual report. We have based these forward-looking statements largely on our current expectations and projections about future events, industry and financial trends affecting our business. These forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things:

·   general economic, political and business conditions, both in Brazil and in our markets;

·   changes in competitive conditions and in the general level of demand for our products;

·   management’s expectations and estimates concerning our future financial performance, financing plans and programs, and the effects of competition;

·   continued successful development and marketing of the EMBRAER 170/190 jet family, our line of executive jets (including our new executive jets, the Phenom 100, Phenom 300 and Lineage 1000), and our defense aircraft;

·   our level of debt;

·   anticipated trends in our industry and of our short- and long-term outlook for the 30-120 seat commercial airline market;

·   our expenditure plans;

·   inflation and fluctuations in exchange rates;

·   our ability to develop and deliver our products on a timely basis;

·   availability of sales financing for our existing and potential customers;

·   existing and future governmental regulation; and

·   other risk factors as set forth under “Item 3D. Risk Factors.”

The words “believe,” “may,” “will,” “forecast,” “estimate,” “plan,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements because of new information, future events or other factors. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in this annual report might not occur. Our actual results and performance could differ substantially from those anticipated in our forward-looking statements. As a result of various factors such as those risks described in “Item 3D. Risk Factors,” undue reliance should not be placed on these forward-looking statements.

iv

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

3A. Selected Financial Data

The following table presents our selected financial and other data at and for each of the periods indicated. The selected financial data at December 31, 2005 and 2006 and for the three years ended December 31, 2006, 2005 and 2004 are derived from our consolidated U.S. GAAP financial statements audited by Deloitte Touche Tohmatsu Auditores Independentes, an independent registered public accounting firm, included elsewhere in this annual report. The selected financial data presented for all other periods have been derived from our U.S. GAAP financial statements audited by Deloitte Touche Tohmatsu. See “Introduction—Presentation of Financial and Other Data—Financial Data.”

	At and for the year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except per share/ADS data)
Income Statement Data
Net sales		US$2,525,800			US$2,143,460			US$3,440,533			US$3,829,907			US$3,807,403
Cost of sales and services		(1,531,720	)		(1,335,032	)		(2,267,330	)		(2,671,816	)		(2,736,234	)
Gross profit		994,080			808,428			1,173,203			1,158,091			1,071,169
Operating expenses
Selling expenses		US$(211,015	)		US$(206,246	)		US$(342,883	)		US$(269,747	)		US$(374,140	)
Research and development		(158,499	)		(173,216	)		(44,506	)		(93,166	)		(112,743	)
General and administrative expenses		(109,673	)		(114,743	)		(139,357	)		(205,202	)		(235,505	)
Employee profit sharing		(25,222	)		(20,399	)		(61,199	)		(56,051	)		(42,719	)
Other operating expense, net		(20,498	)		(29,060	)		(41,272	)		(26,079	)		1,677
Total operating expenses		US$(524,907	)		US$(543,664	)		US$(629,217	)		US$(650,245	)		US$(763,430	)
Income from operations		US$469,173			US$264,764			US$543,986			US$507,846			US$307,739
Non-operating income (expense)
Interest income (expenses), net		US$80,456			US$(140,755	)		US$(38,000	)		US$(1,672	)		US$140,525
Exchange loss, net		(135,647	)		(16,500	)		(12,218	)		(15,218	)		(4,098	)
Other non-operating income (expenses), net		(1,394	)		711			(117	)		9,050			–
Total non-operating income (expense)		US$(56,585	)		US$(156,544	)		US$(50,335	)		US$(7,840	)		US$136,427
Income before income taxes		US$412,588			US$108,220			US$493,651			US$500,006			US$444,166
Income tax benefit (expenses)		US$(188,502	)		US$27,990			US$(112,139	)		US$(41,569	)		US$(44,412	)
Income before minority interest and equity in income (loss) from affiliates		US$224,086			US$136,210			US$381,512			US$458,437			US$399,754
Minority interest		(1,883	)		(217	)		(1,306	)		(9,622	)		(9,580	)
Equity in income (loss) from affiliates		389			51			—			(3,096	)		(34	)
Net income		US$222,592			US$136,044			US$380,206			US$445,719			US$390,140
Earnings per share
Common share - basic (1) (3) (6)		US$0.30			US$0.18			US$0.50			US$0.58			US$0.53
Preferred share - basic (1) (3) (6)		0.33			0.20			0.55			0.64			–
ADS - basic (1) (3) (6)		1.32			0.79			2.18			2.55			2.11
Common share - diluted (2) (3) (6)		0.30			0.18			0.49			0.58			0.53
Preferred share - diluted (2) (3) (6)		0.33			0.20			0.54			0.63			–
ADS - diluted (2) (3) (6)		1.31			0.78			2.17			2.54			2.10
Dividends per share
Common share (3) (4) (5) (6)		US$0.173256			US$0.088174			US$0.239678			US$0.260803			US$0.212420
Preferred share (3) (4) (5) (6)		0.190578			0.096991			0.263645			0.286880			–
ADS (3) (4) (5) (6)		0.762312			0.387964			1.054580			1.147520			0.849680
Weighted averaged number of shares outstanding
Common share - basic (3) (6)		242,544			242,544			242,544			242,544			739,904
Preferred share - basic (3) (6)		454,414			471,228			474,994			479,288			–
Common share - diluted (3) (6)		242,544			242,544			242,544			242,544			742,903
Preferred share - diluted (3) (6)		459,415			474,840			479,217			482,739			–
Balance Sheet Data
Cash and cash equivalents		US$656,822			US$1,265,820			US$963,818			US$1,339,159			US$1,209,396
Temporary cash investments		—			4,320			396,958			574,395			555,795
Other current assets		1,856,301			2,076,726			2,514,733			2,701,968			2,994,530
Property, plant and equipment, net		436,715			402,663			381,265			388,362			412,244
Other long-term assets		1,335,626			2,331,006			1,825,625			1,928,561			2,143,736
Total assets		US$4,285,464			US$6,080,535			US$6,082,399			US$6,932,445			US$7,315,701
Short-term loans and financing		244,526			517,014			513,281			475,305			503,047
Other current liabilities		1,397,407			1,929,181			1,802,820			2,179,131			2,515,751
Long-term loans and financing		308,110			526,728			825,448			1,078,117			846,104
Other long-term liabilities		1,237,015			1,925,776			1,565,539			1,532,863			1,512,604
Minority interest		8,226			12,611			21,443			46,775			63,914
Shareholders’ equity		1,090,180			1,169,225			1,353,868			1,620,254			1,874,281
Total liabilities and shareholders’ equity		US$4,285,464			US$6,080,535			US$6,082,399			US$6,932,445			US$7,315,701

1

	At and for the year ended December 31,
	2002			2003			2004			2005			2006
	(in thousands, except per share /ADS data)
Other Financial Data
Net cash provided by (used in) operating activities		US$575,653			US$239,634			US$(398,846	)		US$346,909			US$386,933
Net cash used in investing activities		(104,216	)		(72,667	)		(59,104	)		(50,496	)		(179,518	)
Net cash provided by (used in) financing activities		(352,435	)		403,791			105,220			24,916			(395,103	)
Depreciation and amortization		55,602			58,877			59,685			61,491			63,859

(1) Based on weighted average number of shares outstanding. See Note 25 to our consolidated financial statements.

(2) Based on weighted average number of shares outstanding and the effects of potentially dilutive securities. See Note 25 to our consolidated financial statements.

(3) Restated to give effect to the issuance on March 1, 2002, in the form of a share dividend, of 0.142106 new shares for each existing share.

(4) Includes interest on shareholders’ equity.

(5) Translated from nominal reais into U.S. dollars at the commercial selling rates in effect on the last date of the month in which distributions were approved during the period. The dividends to the ADSs were adjusted from the total amount paid to the shares multiplied by four.

(6) As a result of the merger of former Embraer with and into Embraer approved on March 31, 2006, each common share and preferred share of former Embraer was exchanged for one common share of Embraer and each ADS of former Embraer was exchanged for one ADS of Embraer.

	2002		2003			2004			2005			2006
Other Data:
Aircraft delivered during period (1):
To the Commercial Aviation Market
EMB 120 Brasília		—		—			—			—			—
ERJ 145		82		57			87 (5	)		46			12
ERJ 135		3		14			1 (1	)		2			—
ERJ 140		36		16			—			—			—
EMBRAER 170		—		—			46			46(1	)		32(2	)
EMBRAER 175		—		—			—			14			11(1	)
EMBRAER 190		—		—			—			12			40
EMBRAER 195		—		—			—			—			3
To the Defense and Government Market
EMB 120 Brasília		—		—			—			—			—
Legacy		1		—			—			6			—
EMB 135		—		—			—			—			—
EMB 145		1		1			1			1			—
EMBRAER 170		—		—			—			—			4(1	)
EMBRAER 190		—		—			—			—			1
EMB 145 AEW&C/RS/MP		5		3			6			1			—
EMB 312 Tucano / AL-X/ Super Tucano		—		—			7			24			14
AM-X		—		—			—			—			—
To the Executive Aviation Market
Legacy 600		8		11 (2	)		13			14			27
EMB 135		—		2			—			—			—
To the General Aviation Market
Light Propeller Aircraft		25		46			70			31			10
Total delivered		161		150			231			197			154
Aircraft in backlog at the end of period:
In the Commercial Aviation Market (2)
EMB 120 Brasília		—		—			—			—			1
ERJ 145		109		144			66			10			53
ERJ 135		31		17			17			15			1
ERJ 140		116		20			20			20			-
EMBRAER 170		88		120			112			104			29
EMBRAER 175		—		—			15			8			74
EMBRAER 190		—		110			155			178			264
EMBRAER 195		30		15			15			29			43
In the Defense and Government Market
EMB 145 AEW&C/RS/MP		10		7			1			—			—
EMB 312 Tucano/EMB 314/EP Super Tucano		86		76			69			93			80
EMB 145		—		1			—			—			—
EMB 135.		—		—			—			—			—
Legacy 600.		—		5			5			—			1
EMBRAER 170/ EMBRAER 190.		—		—			—			3			—
In the Executive Aviation Market
Legacy 600/Phenom/Lineage		58		27			4			15			384
In the General Aviation Market
Light Propeller Aircraft		—		11			25			6			0
Total backlog (in aircraft)		528		553			504			481			930
Total backlog (in millions)		US$9,034		US$10,591			US$10,097			US$10,383			US$14,806

(1) Deliveries identified by parentheses were aircraft delivered under operating leases.

(2) Since December 31, 2006, we have received five additional firm orders for our EMBRAER 170/190 jet family and six options for the EMBRAER 190 aircraft were converted into firm orders for that aircraft.

2

Exchange Rates

Prior to March 4, 2005, there were two principal legal foreign exchange markets in Brazil:

·   the commercial rate exchange market, and

·   the floating rate exchange market.

Most trade and financial foreign exchange transactions were carried out on the commercial rate exchange market. These included the purchase or sale of shares or payment of dividends or interest with respect to shares. Foreign currencies could only be purchased in the commercial exchange market through a Brazilian bank authorized to buy and sell currency in these markets. In both markets, rates were freely negotiated.

Resolution No. 3,265 by the National Monetary Council, dated March 4, 2005, consolidated the foreign exchange markets into one single foreign exchange market, effective as of March 14, 2005. All foreign exchange transactions are now carried out through institutions authorized to operate in the consolidated market and are subject to registration with the electronic registration system of the Central Bank of Brazil, or Central Bank. Foreign exchange rates continue to be freely negotiated, but may be influenced by Central Bank intervention.

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Since 1999, the Central Bank has allowed the real/U.S. dollar exchange rate to float freely, and during that period, the real/U.S. dollar exchange rate has fluctuated considerably. At April 18, 2007, the commercial selling rate for U.S. dollars was R$2.0365 per US$1.00. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to let the real float freely or will intervene in the exchange rate market through a currency band system or otherwise. The real may depreciate or appreciate against the U.S. dollar substantially in the future. See “Item 3D. Risk Factors—Risks Relating to Brazil.”

The following table sets forth the commercial selling rate, expressed in reais per U.S. dollar, for the periods indicated.

	Exchange Rate of Reais to US$1.00
	Low		High		Average (1)		Period-end
Year ended December 31,
2002		2.2709		3.9552		2.9982		3.5333
2003		2.8219		3.6623		3.0600		2.8892
2004		2.6544		3.2051		2.9171		2.6544
2005		2.1633		2.7621		2.4125		2.3407
2006		2.0586		2.3711		2.1771		2.1380
2007 (through April 18)		2.0231		2.1556		2.0886		2.0365

	Exchange Rate of Reais to US$1.00
	Low		High		Average(1)		Period-end
Month ended
October 31, 2006		2.1331		2.1676		2.1504		2.1430
November 30, 2006		2.1353		2.1870		2.1612		2.1668
December 31, 2006		2.1380		2.1693		2.1537		2.1380
January 31, 2007		2.1247		2.1556		2.1402		2.1247
February 28, 2007		2.0766		2.1182		2.0974		2.1182
March 31, 2007		2.0504		2.1388		2.0813		2.0504
April 30, 2007 (through April 18)		2.0231		2.0478		2.0355		2.0365

Source: Central Bank.

(1)   Represents the average of the exchange rates on the last day of each month during the relevant periods.

We will pay any cash dividends and make any other cash distributions with respect to the common shares in Brazilian currency. Accordingly, exchange rate fluctuations may affect the U.S. dollar amounts received by the holders of ADSs on conversion by the depositary of such distributions into U.S. dollars for payment to holders of ADSs. Fluctuations in the exchange rate between the real and the U.S. dollar may also affect the U.S. dollar equivalent of the real price of the common shares on the São Paulo Stock Exchange.

3B.  Capitalization and Indebtedness

Not applicable.

3C.  Reasons for the Offer and Use of Proceeds

Not applicable.

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3D.  Risk Factors

Risks Relating to Embraer

A downturn in commercial aviation may reduce our sales and revenue, and consequently our profitability, in any given year.

We expect that a substantial portion of our sales in the near future will be derived from sales of commercial aircraft, particularly the ERJ 145 regional jet family and the EMBRAER 170/190 jet family. Historically, the market for commercial aircraft has been cyclical due to a variety of factors that are both external and internal to the air travel industry, including general economic conditions.

The commercial airline industry has been negatively impacted by a number of factors since 2001. First, the U.S. and world economies experienced an economic downturn that began in 2001 and was characterized by rapid declines in securities markets, a decline in productivity and an increase in unemployment. Second, the terrorist attacks of September 11, 2001 caused an immediate decline in airline travel and a high level of financial uncertainty among the worldwide commercial airline industry.

In addition, airline travel decreased significantly in 2003 as a result of both the commencement of military action by the United States and other countries in Iraq and the concerns over outbreaks of severe acute respiratory syndrome (SARS) in Asia and Canada. In response to these events, beginning in the fourth quarter of 2001, many airlines, including our largest customers, reduced their flight schedules for the long-term and announced significant lay-offs, and a number of airlines filed for bankruptcy protection. As a result, we agreed to modify, between 2001 and 2004, certain delivery schedules to adjust to the changes in our customers’ businesses and reduced scheduled commercial aircraft, executive jet and government transportation aircraft deliveries. In 2004, we reduced scheduled deliveries from 160 to 145 aircraft following US Airways’ second Chapter 11 filing in September 2004. See also Note 8 to our consolidated financial statements for additional information on the bankruptcy of US Airways and its effect on us. In 2003 and 2004, we also re-evaluated our risk exposure related to aircraft valuations and customer credit risk, which resulted in charges to income of US$40.6 million and US$16.0 million, respectively.

Although the U.S. and world economies have shown some signs of recovery starting in 2004, many airlines continue to face increased competition, escalating insurance costs, increased security costs, credit downgrades, liquidity concerns and bankruptcy, and sharply higher fuel costs. A further downturn in general economic conditions could result in further reduction in commercial aviation and decreased orders for our commercial aircraft.

We cannot, at this time, predict the magnitude or duration of the impact that the above events will have on the commercial airline industry as a whole and on our business in particular. If one of our customers experiences a business downturn, cannot obtain financing or otherwise seeks to limit its capital expenditures, that customer could defer or cancel its purchase of our commercial aircraft or change its operating requirements. Because our commercial aircraft represent the majority of our net sales, sales of our other products would not be able to offset a reduction in sales of our commercial aircraft. Future delays or decreases in the number of commercial aircraft delivered in any year would likely reduce our sales and revenue, and, consequently, our profitability, for that year.

We depend on a small number of key customers and key suppliers, the loss of any of which could harm our business.

Commercial aircraft. As of March 31, 2007, 100% of our firm orders in backlog for the ERJ 145 regional jet family were attributable to Chinese costumers including the HNA Group. The aircraft will be assembled by our joint venture Harbin Embraer Aircraft Industry Company Ltd., formed with Harbin Aircraft Industry (Group) Co., Ltd. and Hafei Aviation Industry Co., Ltd., subsidiaries of China Aviation Industry Corp. II, or AVIC II.

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In addition, at the same date, 53.9% of our firm orders in backlog for the EMBRAER 170/190 jet family were attributable to JetBlue Airways, US Airways, and Northwest Airlines, in North America, as well as the HNA Group, in China. We believe that we will continue to depend on a limited number of large customers, the loss of any one of which could reduce our sales and reduce our market share. Fewer sales could reduce our profitability.

Increasingly, the commercial airline industry is experiencing consolidation and alliances through mergers and acquisitions and code-sharing arrangements. Although it is expected that such consolidations and alliances may result in the creation of more stable and competitive airlines, they may also have the effect of reducing the number of our customers and, possibly, the number of purchases of our aircraft through cost reduction programs or otherwise.

Defense aircraft. The Brazilian Air Force is our largest customer of defense aircraft products. Sales to the Brazilian government accounted for 31.4% of our defense and government sales for the year ended December 31, 2006. A decrease in defense spending by the Brazilian government due to defense spending cuts, general budgetary constraints or other factors that are out of our control could decrease our defense and government sales and defense research and development funding. We cannot assure you that the Brazilian government will continue to purchase aircraft or services from us in the future at the same rate or at all.

Key suppliers. Our risk-sharing partners develop and manufacture significant portions of our aircraft, including the engines, hydraulic components, avionics, wings, interior and parts of the fuselage and tail. Once risk-sharing partners have been selected and program development and aircraft production have begun, it is difficult to substitute these partners. In some cases, the aircraft are designed specifically to accommodate a particular component, such as the engines, which cannot be substituted by another manufacturer without significant delays and expenses. This dependence makes us susceptible to the risks of performance, product quality and financial condition of these risk-sharing partners.

We cannot assure you that we will not experience significant delays in obtaining key equipment in our manufacturing process in the future. A large number of the equipment employed by the aircraft industry is subject to export control regulations and, as such, deliveries are dependent on suppliers having secured the applicable export licenses. We recently learned that one of our suppliers could face delays in the delivery of equipment for one of our defense products due to export control requirements. We are closely monitoring this situation. Although we work closely with and monitor the production process of our risk-sharing partners and suppliers, the failure of our risk-sharing partners and other major suppliers to meet our performance specifications, quality standards or delivery schedules could affect our ability to deliver new aircraft to customers in a timely manner.

Our aircraft sales are subject to cancellation provisions that may reduce our cash flows.

A portion of our aircraft firm orders is subject to significant contingencies, both before and after delivery. Prior to delivery, some of our purchase contracts may be terminated, or all or a portion of a particular firm order may be canceled, for different reasons, including:

·   extended delays in delivering aircraft or failure to obtain certification of the aircraft or otherwise meet performance milestones and other requirements;

·   failure of a customer to receive financing, when required, with respect to any aircraft at the scheduled delivery date, in which case the customer can cancel the order for the particular aircraft to be delivered or terminate the contract with respect to all undelivered aircraft; or

·   production rate shortfalls.

Our customers may also reschedule deliveries, particularly during an economic downturn. A substantial number of cancellations or extensions of delivery schedules could reduce our sales and revenue for a given year, which in turn would reduce our cash flow.

6

Our aircraft sales are subject to trade-in options and financial and residual value guarantees that may require us to make significant cash disbursements in the future.

In connection with the signing of a purchase agreement for new aircraft, we may provide trade-in options to our customers. These options provide a customer with the right to trade-in existing aircraft upon the purchase of a new aircraft. In 2006, we were required to accept two aircraft for trade-in and at December 31, 2006, thirteen additional commercial aircraft were subject to trade-in options. Other aircraft may become subject to trade-in due to new sales agreements. The trade-in price is determined in the manner discussed under “Item 5A. Operating Results—Critical Accounting Estimates—Guarantees and Trade-In Rights” for commercial aircraft. We may be required to accept trade-ins at prices that are above the market price of the aircraft, which would result in financial loss for us when we remarket the aircraft.

We have in the past guaranteed, and may in the future guarantee, the financial performance of a portion of the financing for, and the residual value of, some of our aircraft that have already been delivered. Financial guarantees are provided to financing parties to support a portion of the payment obligations of purchasers of our aircraft under their financing arrangements to mitigate default-related losses. These guarantees are collateralized by the financed aircraft.

Residual value guarantees typically ensure that, in the 15th year after delivery, the relevant aircraft will have a residual market value of the original sale price. Most of our residual value guarantees are subject to a limitation (a “cap”) and, therefore, on average, our residual value guarantee exposure is limited to 21%of the original sale price. In the event of an exercise by a purchaser of its residual value guarantee, we will bear the difference between the guaranteed residual value and the market value of the aircraft at the time of exercise.

Assuming all customers that are supported by off-balance sheet financial guarantees defaulted on their aircraft financing arrangements, and also assuming we were required to pay the full aggregate amount of outstanding financial and residual value guarantees and we were not able to remarket any of the aircraft to offset our obligations, our maximum exposure under these guarantees (less provisions and liabilities) would have been US$2,122.0 million as of December 31, 2006. For further discussion of these off-balance sheet arrangements, see Note 34 to our consolidated financial statements. We have deposited US$272.7 million in escrow accounts to secure a portion of our financial guarantees. Based on current estimates, we believe that the proceeds from the sale or lease of the covered aircraft (based on resale value as of December 31, 2006) and from other offsetting collections, such as cash deposits, would be US$2,177.4 million as of December 31, 2006. As a result, we would be obligated to make substantial payments that are not recoverable through proceeds from aircraft sales or leases, particularly if the future value of the relevant aircraft is significantly lower than the guaranteed amount or financing defaults occur with respect to a significant portion of our aircraft. The value of the underlying aircraft is more likely to decrease and third parties are more likely to default during economic downturns.

We continually re-evaluate our risk for the financial guarantees and trade-in obligations based on a number of factors, including the estimated future market value of our aircraft based on third party appraisals, including information developed from similar aircraft remarketing in the secondary market, and the credit rating for the customers. For example, in 2004, we recorded a charge against income in an amount of US$16.0 million, based on our risk assessment, on an individual aircraft basis, for the issued guarantees. Any future decrease in the market value of the aircraft covered by trade-in rights or financial guarantees would decrease our ability to recoup the amounts payable to satisfy our obligations and cause us to incur additional charges to income. If we are required to pay amounts related to such guarantees, we may not have sufficient cash or other financial resources available to do so and may need to seek financing to fund these payments. We cannot assure you that then-prevailing market conditions would allow us to resell or lease the underlying aircraft at its anticipated fair value or in a timely manner. Consequently, honoring our trade-in or financial guarantee obligations could require us to make significant cash disbursements in a given year, which, in turn, would reduce our cash flow that year.

7

Any decrease in Brazilian government-sponsored customer financing, or increase in government-sponsored financing that benefits our competitors, may decrease the cost-competitiveness of our aircraft.

Historically, when purchasing our aircraft, our customers have benefited from export financing incentives provided by Brazilian government-sponsored export programs. The most important of these government programs is a system of interest rate adjustments called the Programa de Financiamento às Exportações, or Export Financing Program, known as the ProEx program.

As a result of past disputes between the Canadian and Brazilian governments at the World Trade Organization, or WTO, regarding the granting of export subsidies relating to sales of aircraft, the Brazilian government ultimately amended the ProEx program so that any ProEx payments would not decrease the effective interest rate below the interest rate permitted by the WTO and the Canadian government has also made changes to their financing arrangements for sales of aircraft by Bombardier, a Canadian aircraft manufacturer.

Although the ProEx program is currently in compliance with WTO rules, other export financing programs available to our customers may be subject to challenge in the future. If the ProEx program or another similar program is not available in the future, or if its terms are substantially reduced, our customers’ financing costs could be higher and our cost-competitiveness in the regional jet market could decrease.

The Brazilian government was invited to participate, as a full negotiating party, in the Aircraft Sector Understanding of the OECD Arrangement on Guidelines for Officially Supported Export Credits. In case an agreement is reached, these guidelines will define the terms and conditions for official support in the area of export credits, including sales financing and loan guarantees, with the objective to establish a “level playing field” among all commercial aircraft manufacturers. As this is an on-going negotiating process among all OECD countries and Brazil, we cannot assure you, at this time that any agreement will be reached.

Any future government subsidies supporting Bombardier or any of our other major competitors may cause the cost-competitiveness of our aircraft to suffer and our sales to decline.

Brazilian government budgetary constraints could reduce amounts available to our customers under government-sponsored financing programs.

In addition to the ProEx program, we rely on the BNDES-exim program, also a government-sponsored financing program, to assist customers with financing. This program provides our customers with direct financing for Brazilian exports of goods and services. From 1996 through 2006, approximately 32% of the total value of our export sales was subject to financing by the BNDES-exim program. As government-sponsored programs, the ProEx program and the BNDES-exim program rely on funds allocated from the Brazilian national budget. Therefore, the funds available to our customers under these programs will be affected by currency fluctuations and other political and economic developments in Brazil and the international capital markets. See “—Risks Relating to Brazil.” For example, the decrease in the amounts available under the ProEx program in 2001 caused us to make other financing arrangements for affected customers. In addition, from time to time, government-sponsored financing programs such as BNDES-exim can be subject to challenges. We cannot assure you that the Brazilian government will continue to sponsor and/or fund these programs or that funds under these or other similar programs will be available to our customers. The loss or significant reduction of funds available under one or either of these programs, without an adequate substitute, could lead to fewer sales and has caused and may continue to cause us to compensate our customers for their additional financing costs, resulting in lower profitability for us.

We may face a number of challenges resulting from the development of new products and the possible pursuit of strategic growth opportunities.

As we continue to develop new products, we may need to reallocate existing resources and coordinate with new suppliers and risk-sharing partners. From time to time, there is significant competition within the aviation industry for skilled personnel in general and engineers in particular. To the extent such competition reoccurs, we may be unable to recruit the necessary number of highly skilled engineers and other personnel we require. Failure to coordinate our resources in a timely manner or to attract and retain skilled personnel could impede our development efforts and cause delays in production and deliveries of our aircraft, which would delay recognition of revenue.

8

We may pursue strategic growth opportunities, including joint ventures, acquisitions or other transactions, to expand our business or enhance our products and technology. We may face a number of challenges, including difficulties in identifying appropriate candidates, assimilating their operations and personnel and maintaining internal standards and controls, as well as the diversion of our management’s focus from our ongoing business. We cannot assure you that we will be able to meet these challenges or that our business will not face disruptions.

We may have to refund cash contributions after the development of the EMBRAER 170/190 jet family, of the Phenom 100, and of the Phenom 300, if certification for each of these aircraft is not obtained.

We have arrangements with our risk-sharing partners pursuant to which they have contributed in cash to us a total of US$298.8 million as of December 31, 2006 and we expect to receive an additional US$74.9 million in future years for the development of the EMBRAER 170/190 jet family and of the Phenom 100 and Phenom 300. Cash contributions become non-refundable upon the achievement of certain developmental milestones. As of December 31, 2006, US$209.6 million of these cash contributions had become non-refundable. If we cancel the development and production of any of the remaining aircraft in the EMBRAER 170/190 jet family or the development of the Phenom 100 and Phenom 300 because we are unable to obtain certification or for other non-market related reasons, we may be obligated to refund US$89.3 million of the total cash contributions already received. We expect the EMBRAER 195 to receive certification from the FAA by mid-2007, and the certification of the Phenom 100 and Phenom 300 to be granted in 2008 and 2009, respectively.

If we require additional financing and we are unable to obtain it, we will not be able to continue to develop and market the remaining aircraft in our EMBRAER 170/190 jet family or our Phenom 100 and Phenom 300 aircraft.

We face significant international competition, which may adversely affect our market share.

The worldwide commercial aircraft manufacturing industry is highly competitive. We are one of the leading manufacturers of commercial aircraft in the world, along with The Boeing Company, Airbus S.A.S. and Bombardier Inc., all of which are large international companies. Certain of these competitors have greater financial, marketing and other resources than we do. Although we have achieved a significant share of the market for our commercial aircraft products, we cannot assure you that we will be able to maintain this market share. Our ability to maintain market share and remain competitive in the commercial aircraft manufacturing market over the long term requires continued technological and performance enhancement to our products. Our primary competitor in the regional and mid-capacity jet markets is Bombardier Inc., a Canadian company, which has significant technological capabilities and financial and marketing resources and benefits from government-sponsored export subsidies. In addition, other international aircraft manufacturers, including The Boeing Company and Airbus S.A.S., produce or are developing aircraft at the high end of the 70-120 seat segment, in which our EMBRAER 170/190 jet family competes, thereby increasing the competitive pressures in that segment. These companies also have significant technological capabilities and greater financial and marketing resources.

Some of our competitors may also reach the market before we do, allowing them to establish a customer base and making our efforts to gain greater market share more difficult. For example, in 2001, Bombardier began delivery of its 70-seat regional jet prior to the initial deliveries of the EMBRAER 170. As a relatively new entrant to the business jet market, we also face significant competition from companies with longer operating histories and established reputations in this industry. We cannot assure you that we will be able to compete successfully in our markets in the future.

9

We may have to make significant payments as a result of unfavorable outcomes of pending challenges to various taxes and payroll charges.

We have challenged the constitutionality of the nature of and modifications in rates and the increase in the calculation base of certain Brazilian taxes and payroll charges. Interest on the total amount of these unpaid taxes and payroll charges accrues monthly based on the Selic rate, the principal lending rate of the Central Bank, and we make an accrual as part of the interest income (expenses), net item of our statements of income. As of December 31, 2006, we had obtained preliminary injunctions permitting us not to pay certain taxes, in the total amount, including interest, of US$523.6 million, which is included as a liability (taxes and payroll charges) on our balance sheet. We are awaiting a final decision in these proceedings. We cannot assure you that we will prevail in these proceedings or that we will not have to pay significant amounts, including interest,to the Brazilian government in the future as payment for these liabilities. For an additional discussion of these liabilities, see Note 17 to our consolidated financial statements.

Risks Relating to the Commercial Airline Industry

Scope clause restrictions in airline pilot contracts may limit demand for regional and mid-capacity jets in the U.S. market.

A key limiting factor in demand for regional and mid-capacity jets is the existence of scope clauses contained in airline pilot contracts. These scope clauses are union-negotiated restrictions on the number and/or size of regional and mid-capacity jets that a particular carrier may operate. Current scope clause restrictions, which are more prevalent in the United States, include restrictions on the number of seats, weight of aircraft and number of 50-70 seat commercial aircraft in an airline’s fleet. As a result, our opportunities for near-term growth in the U.S. regional jet market in the 40-59 and 60-80 seat segments may be limited. The continuation or further tightening of scope clauses could also lead some of our customers who have purchased options to acquire our regional and mid-capacity jets not to exercise those options. We cannot assure you that current restrictions will be lessened, or will not be expanded, including by amending these scope clauses to cover larger-sized commercial aircraft. Furthermore, although scope clauses are less prevalent outside the United States, we cannot assure you that scope clauses will not become more prevalent or restrictive, or that some other form of restriction will not take effect, in Europe or in other markets.

We are subject to stringent certification requirements and regulation, which may prevent or delay our obtaining certification in a timely manner.

Our products are subject to regulation in Brazil and in each jurisdiction where our customers are located. The aviation authorities in Brazil and in other countries, in which our customers are located, including the Brazilian aviation authority, the U.S. Federal Aviation Authority, or FAA, the Joint Aviation Authority of Europe, or JAA, and the European Aviation Safety Agency, or EASA, must certify our aircraft before we can deliver them. We cannot assure you that we will be able to obtain certification of our aircraft on a timely basis or at all. If we fail to obtain a required certification from an aviation authority for any of our aircraft, that aviation authority would prohibit the use of that aircraft within its jurisdiction until certification has been obtained. In addition, complying with the requirements of the certification authorities can be both expensive and time-consuming.

Changes in government regulations and certification procedures could also delay our start of production as well as entry into the market with a new product. We cannot predict how future laws or changes in the interpretation, administration or enforcement of laws will affect us. We may be required to spend significantly more money to comply with these laws or to respond to these changes.

Any catastrophic events involving our aircraft could adversely affect our reputation and future sales of our aircraft, as well as the market price of the common shares and the ADSs.

We believe that our reputation and the safety record of our aircraft are important selling points for our products. We design our aircraft with backup systems for major functions and appropriate safety margins for structural components. However, the safe operation of our aircraft depends to a significant degree on a number of factors largely outside our control, including our customers’ proper maintenance and repair of our aircraft and pilot skill. The occurrence of one or more catastrophic events involving one of our aircraft could adversely affect our reputation and future sales, as well as the market price of our common shares and the ADSs.

10

Risks Relating to Brazil

Brazilian political and economic conditions have a direct impact on our business and the trading price of our common shares and ADSs.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes drastic changes in policy and regulations. The Brazilian government’s actions to control inflation and affect 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, results of operations and the trading price of the common shares and the ADSs may be adversely affected by changes in policy or regulations at the federal, state or municipal level involving or affecting factors such as:

·   interest rates;

·   exchange controls and restrictions on remittances abroad (such as those that were imposed in 1989 and early 1990);

·   currency fluctuations;

·   inflation;

·   liquidity of domestic capital and lending markets;

·   tax policies; and

·   other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian government will implement changes in policy or regulation affecting these or other factors in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and securities issued abroad by Brazilian companies.

In addition, in October 2006, elections were held in all states of Brazil and at the federal level, to elect state governors and the president. It is impossible to foresee how new policies that may be adopted by the re-elected president or by the state governors would affect the Brazilian economy or our business.

Historically, the political scenario in Brazil has influenced the performance of the Brazilian economy in the past; in particular, political crises have affected the confidence of investors and the public in general, which adversely affected the economic development in Brazil.

These and other future developments in the Brazilian economy and governmental policies may adversely affect us and our business and results of operations and may adversely affect the trading price of our common shares and ADSs.

Inflation and government efforts to combat inflation may contribute significantly to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets and, consequently, may adversely affect the market value of the common shares and ADSs.

Brazil has experienced extremely high rates of inflation in the past. More recently, Brazil’s annual rate of inflation was 8.7% in 2003, 12.4% in 2004, 1.2% in 2005, and 3.8% in 2006 (as measured by Índice Geral de Preços - Mercado, or the IGP-M). Inflation, and certain government actions taken to combat inflation, have in the past had significant negative effects on the Brazilian economy. Actions taken to combat inflation, coupled with public speculation about possible future governmental actions, have contributed to economic uncertainty in Brazil and heightened volatility in the Brazilian securities markets.

11

Future Brazilian government actions, including interest rate decreases, intervention in the foreign exchange market and actions to adjust or fix the value of the real may trigger increases in inflation. If Brazil experiences high inflation again in the future, our operating expenses and borrowing costs may increase, our operating and net margins may decrease and, if investor confidence decreases, the price of our common shares and ADSs may fall.

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

Although most of our net sales and debt are U.S. dollar-denominated, the relationship of the real to the value of the U.S. dollar, and the rate of depreciation of the real relative to the prevailing rate of inflation, may adversely affect us.

As a result of inflationary pressures, among other factors, the Brazilian currency has devalued periodically during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Although over long periods depreciation of the Brazilian currency generally has correlated with the rate of inflation in Brazil, devaluation over shorter periods has resulted in significant fluctuations in the exchange rate between the Brazilian currency and the U.S. dollar and other currencies.

The real depreciated against the U.S. dollar by 9.3% in 2000 and 18.7% in 2001. In 2002, the real depreciated 52.3% against the U.S. dollar, due in part to political uncertainty surrounding the Brazilian political elections and the global economic slowdown. Although the real appreciated 8.1%, 11.8%, 8.7% and 4.1% against the U.S. dollar in 2004, 2005, 2006 and the first three months of 2007, respectively, no assurance can be given that the real will not depreciate or be devalued against the U.S. dollar again.

Historically, depreciations in the real relative to the U.S. dollar have also created additional inflationary pressures in Brazil by generally increasing the price of imported products and requiring recessionary government policies to curb aggregate demand. On the other hand, appreciation of the real against the U.S. dollar may lead to a deterioration of the current account and the balance of payments, as well as dampen export-driven growth. Depreciations generally curtail access to foreign financial markets and may prompt government intervention, including recessionary governmental policies. Depreciations of the real relative to the U.S. dollar would also reduce the U.S. dollar value of distributions and dividends on our ADSs and may also reduce the market value of our common shares and ADSs.

Developments and perceptions of risk in other countries, especially emerging market countries, may adversely affect the trading price of Brazilian securities, including our common shares and ADSs.

The market value of securities of Brazilian issuers is affected to varying degrees by economic and market conditions in other countries, including other Latin American and emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Brazil, the reaction of investors to developments in these other countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries may diminish investor interest in securities of Brazilian issuers, including ours. This could adversely affect the trading price of our common shares and ADSs, 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.

12

Risks Relating to our Common Shares and ADSs

If holders of ADSs exchange the ADSs for common shares, they risk losing the ability to remit foreign currency abroad and Brazilian tax advantages.

The Brazilian custodian for the common shares has obtained an electronic certificate of registration from the Central Bank permitting it to remit foreign currency abroad for payments of dividends and other distributions relating to the common shares or upon the disposition of the common shares. If holders of ADSs decide to exchange their ADSs for the underlying common shares, they will be entitled to continue to rely on the custodian’s electronic certificate of registration for five business days from the date of exchange. Thereafter, such holders of ADSs may not be able to obtain and remit foreign currency abroad upon the disposition of, or distributions relating to, the common shares unless they obtain their own electronic certificate of registration or register their investment in the common shares pursuant to Resolution No. 2,689, which entitles certain foreign investors to buy and sell securities on the São Paulo Stock Exchange. Holders who do not qualify under Resolution No. 2,689 will generally be subject to less favorable tax treatment on gains with respect to the common shares. If holders of ADSs attempt to obtain their own electronic certificate of registration, they may incur expenses or suffer delays in the application process, which could delay their ability to receive dividends or distributions relating to the common shares or delay the return of their capital in a timely manner. In addition, we cannot assure you that the custodian’s electronic certificate of registration or any certificate of foreign capital registration obtained by a holder of ADSs will not be affected by future legislative or other regulatory changes, or that additional restrictions applicable to such holder, to the disposition of the underlying common shares or to the repatriation of the proceeds from such disposition will not be imposed in the future.

The Brazilian government has veto power over, among other things, change of control, change of corporate purpose and creation and alteration of defense programs, and its interests could conflict with the interests of the holders of our common shares or ADSs.

The Brazilian government holds one special class of our common stock called a “golden share,” which carries veto power over, among other things, change of control, change of corporate purpose and creation and alteration of defense programs (whether or not the Brazilian government participates in such programs). The Brazilian government may have an interest in vetoing transactions that may be in the interests of the holders of our common shares or ADSs.

Our bylaws contain provisions that could discourage our acquisition or prevent or delay transactions that you may favor.

Our bylaws contain provisions that have the effect of avoiding the concentration of our common shares in the hands of a small group of investors so as to promote the dispersed ownership of such shares. These provisions require any shareholder or group of shareholders that acquires or becomes the holder of (i) 35% or more of the total shares issued by us or (ii) other rights over shares issued by us that represent more than 35% of our capital, to make a public tender offer to purchase all of our shares on the terms specified in our bylaws, or to sell all of such shareholders’ shares that exceed the 35% limit, in either case, as required by the Brazilian government. If the request is approved, such shareholder or group of shareholders must commence the public tender offer within 60 days of the date of approval. If the request is refused, such shareholder or group of shareholders must sell such number of common shares within 30 days so that the holding of such shareholder or group of shareholders is less than 35% of our capital stock. These provisions may have anti-takeover effects and may discourage, delay or prevent a merger or acquisition, including transactions in which our shareholders might otherwise receive a premium for their common sharesand ADSs. These provisions can only be altered or overridden with the approval of our board of directors and our shareholders in a shareholders’ meeting convened for this purpose, and with the consent of the Brazilian government, as holder of the golden share.

The absence of a single, controlling shareholder or group of controlling shareholders may render us susceptible to shareholder disputes or other unanticipated developments.

The absence of a single, controlling shareholder or group of controlling shareholders may create difficulties for our shareholders to approve certain transactions, because the minimum quorum required by law for the approval of certain matters may not be reached. We and our shareholders may not be afforded the same protections provided by the Brazilian Corporate Law against abusive measures taken by other shareholders and, as a result, may not be compensated for any losses incurred. Any sudden and unexpected changes in our management team, changes in our corporate policies or strategic direction, takeover attempts or any disputes among shareholders regarding their respective rights may adversely affect our business and results of operations.

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Our bylaws contain provisions that limit the voting rights of certain shareholders including non-Brazilian shareholders.

Our bylaws contain provisions that limit the right of a shareholder or group of shareholders, including brokers acting on behalf of one or more holders of ADSs, to exercise voting rights in respect of more than 5% of the outstanding shares of our capital stock at any general meeting of shareholders. See “Item 10B. Memorandum and Articles of Association¾Description of Capital Stock¾Voting Right of Shares— Common Shares—Limitation on the Voting Rights of Certain Holders of Common Shares.”

Our bylaws also contain provisions that limit the right of non-Brazilian shareholders to exercise voting rights in respect of more than two-thirds of the voting rights that may be exercised by Brazilian shareholders present at any general meeting of shareholders. This limitation will effectively prevent our takeover by non-Brazilian shareholders and limit the ability of non-Brazilian shareholders to effect control over us. See “Item 10B. Memorandum and Articles of Association¾Description of Capital Stock—Voting Rights of Shares— Common Shares —Limitation on the Voting Rights of Non-Brazilian Shareholders.”

Holders of ADSs may not be able to exercise their voting rights.

Holder of ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, ADS holders must vote by giving voting instructions to the depositary. Upon receipt of the voting instructions of the ADS holder, the depositary will vote the underlying common shares in accordance with these instructions. Otherwise, ADS holders will not be able to exercise their right to vote unless they surrender the ADS for cancellation in exchange for the common shares. Pursuant to our bylaws, the first call for a shareholders’ meeting must be published at least 30 days in advance of the meeting, the second call must be published at least 15 days in advance of the meeting, and the third call, if necessary, must be published at least eight days in advance of the meeting. When a shareholders’ meeting is convened, holders of ADSs may not receive sufficient advance notice to surrender the ADS in exchange for the underlying common shares to allow them to vote with respect to any specific matter. If we ask for voting instructions, the depositary will notify ADS holders of the upcoming vote and will arrange to deliver the proxy card. We cannot assure that ADS holders will receive the proxy card in time to ensure that they can instruct the depositary to vote the shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. As a result, holders of ADSs may not be able to exercise their voting rights.

The relative volatility and illiquidity of the Brazilian securities markets may substantially limit the ability of holders of our common shares or ADSs to sell the common shares underlying the ADSs at the price and time they desire.

Investing in securities, such as the common shares or the ADSs, of issuers from emerging market countries, including Brazil, involves a higher degree of risk than investing in securities of issuers from more developed countries.

The Brazilian securities markets are substantially smaller, less liquid, more concentrated and more volatile than major securities markets in the United States and other jurisdictions, and are not as highly regulated or supervised as some of these other markets. The relatively small market capitalization and illiquidity of the Brazilian equity markets may substantially limit the ability of holders of our common shares or ADSs to sell the common shares or the ADSs at the price and time desired.

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There is also significantly greater concentration in the Brazilian securities markets than in major securities markets in the United States. See “Item 9C. Markets—Trading on the São Paulo Stock Exchange.”

The sale of a substantial number of common shares, or the belief that this may occur, could decrease the trading price of the common shares and the ADSs; holders of our common shares and/or ADSs may not be able to sell their securities at or above the price they paid for them.

Sales of a substantial number of common shares, or the belief that this may occur, could decrease the trading price of our common shares and ADSs. In connection with the secondary offering of our shares by certain of our shareholders in February 2007, Caixa de Previdência dos Funcionários do Banco do Brasil, or PREVI, Fundação Sistel de Seguridade Social, or SISTEL and BNDES Participações S.A.¾BNDESPAR, have agreed, subject to certain exceptions, not to, for 90 days as of February 6, 2007, without the prior consent of J.P. Morgan Securities Inc. and Merrill Lynch, Pierce Fenner & Smith Incorporated on behalf of the international underwriters (1) offer, pledge, sell, or otherwise transfer or dispose of, directly or indirectly, any shares of our capital stock, including in the form of ADSs or any securities convertible into, exercisable or exchangeable for such shares or (2) enter into any swap or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of any share of our capital stock. Our directors and officers have agreed to substantially similar lock-up provisions, subject to certain exceptions. After the expiration of the lock-up period, common shares owned by these shareholders become, subject to applicable law, eligible for sale. As a consequence of sales by existing shareholders, the market price of the common shares and, by extension, the ADSs may decrease significantly. As a result, the holders of the ADSs and/or common shares may not be able to sell their securities at or above the price they paid for them.

Holders of our ADSs might be unable to exercise preemptive rights with respect to the common shares.

Holders of our ADSs may not be able to exercise the preemptive rights relating to the common shares underlying their ADSs unless a registration statement under the Securities Act is effective with respect to those rights or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to the shares or other securities relating to these preemptive rights and we cannot assure holders of our ADSs that we will file any such registration statement. Unless we file a registration statement or an exemption from registration applies, holders of our ADSs may receive only the net proceeds from the sale of their preemptive rights by the depositary or, if the preemptive rights cannot be sold, the rights will be allowed to lapse.

Judgments of Brazilian courts with respect to our common shares will be payable only in reais.

If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of the common shares, we will not be required to discharge our obligations in a currency other than reais. Under Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares or the ADSs.

ITEM 4.  INFORMATION ON THE COMPANY

4A.  History and Development of the Company

General

Embraer-Empresa Brasileira de Aeronáutica S.A. is a joint stock company duly incorporated under the laws of Brazil with an indefinite term of duration. Originally formed in 1969 by the Brazilian government, we were privatized in 1994. In connection with our privatization, we were transformed into a publicly held corporation and we operate under the Brazilian Corporate Law. As a result of the merger of former Embraer with and into Embraer approved on March 31, 2006, we succeeded to all rights and obligations of former Embraer. See “—Corporate Reorganization” for more information on the merger. Our principal executive offices are located at Avenida Brigadeiro Faria Lima, 2170, 12227-901 São José dos Campos, São Paulo, Brazil. Our telephone number is 55-12-3927-1216. Our agent for service of process in the United States is National Registered Agents, Inc., with offices at 875 Avenue of the Americas, Suite 501, New York, New York, 10001.

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We have grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a public company that produces aircraft for commercial aviation, executive jet and defense and government purposes. Through our evolution, we have obtained, developed and enhanced our engineering and technological capabilities through our own development of products for the Brazilian Air Force and through joint product development with foreign companies on specific projects. We have applied these capabilities that we gained from our defense and government business to develop our commercial aviation business.

Our first regional aircraft was the Bandeirante, a 19-passenger twin-engine non-pressurized turboprop aircraft initially designed to service the transport needs of the Brazilian Air Force. This aircraft was certified in 1973. The Bandeirante was followed by the development of the EMB 120 Brasília, which was certified in 1985 and is a high performance, pressurized turboprop commercial aircraft seating up to 30 passengers that was designed to serve the longer routes and higher passenger traffic of the growing regional aircraft market. Drawing upon the design of the EMB 120 Brasília and the jet technology acquired in our development of the AM-X, a jet strike bomber for the Brazilian Air Force, we developed the ERJ 145 regional jet family, our first jet product for commercial use. This family is comprised of three aircraft, which seat up to 37, 44 and 50 passengers. The first member of the ERJ 145 family, the ERJ 145, was certified in 1996. We have expanded our jet product line with the development of the EMBRAER 170/190 jet family, which has the capacity to seat between 70 and 118 passengers and was designed to serve the aircraft market’s trend towards larger, higher volume and longer range jets. The first member of this family, the EMBRAER 170, was certified in February 2004 and its derivatives, the EMBRAER 175, and the EMBRAER 190 were certified in December 2004 and August 2005, respectively. The certification of the EMBRAER 195 was granted in June 2006. We are also marketing and selling the Legacy 600, a line of executive jets in the super-midsize category based on our ERJ 135 platform, and the Phenom 100, Phenom 300 and Lineage 1000 which are products in the very light jet, light jet, and utra-large jet categories, respectively. For the defense market, we also offer a line of intelligence, surveillance and reconnaissance aircraft based on the ERJ 145 regional jet platform.

Corporate Reorganization

On March 31, 2006, our shareholders approved a reorganization of our corporate structure. The purpose of the reorganization was to, among other things, create a basis for the sustainability, growth and continuity of our businesses and activities by simplifying our capital structure and thereby improving our access to capital markets and increasing financing resources for the development of new products and expansion programs. As a result of the reorganization and merger, former Embraer, ceased to exist and:

·   Embraer (formerly known as Rio Han Empreendimentos e Participações S.A. and renamed Embraer-Empresa Brasileira de Aeronáutica S.A.) succeeded to all rights and obligations of former Embraer,

·   each common share of former Embraer was exchanged for one common share of Embraer,

·   each preferred share of former Embraer was exchanged for one common share of Embraer,

·   each American Depositary Share, or ADS, of former Embraer, each of which represented four preferred shares of former Embraer, was exchanged for one ADS of Embraer, each of which represents four common shares of Embraer, and

·   the golden share, a special class of common shares of former Embraer held by the Federative Republic of Brazil, was exchanged for a special class of common shares of Embraer.

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Former Embraer was incorporated as a publicly held company with private participation by the Brazilian government in 1969 and was privatized in 1994. We have grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a public company that produces aircraft for commercial aviation, executive jet and defense and government purposes. Throughout our evolution, we have obtained, developed and enhanced our engineering and technological capabilities through our own development of products for the Brazilian Air Force and through joint product development with foreign companies on specific projects. We have applied these capabilities that we gained from our defense and government business to develop our commercial aviation business.

Strategic Alliance and Growth Opportunities

Strategic Alliance with European Aerospace and Defense Group

On November 5, 1999, a group consisting of Aerospatiale Matra, currently known as European Aeronautic, Defense and Space Company N.V., or EADS, Dassault Aviation, Thomson-CSF, currently referred to by its trade name Thales^TM, and Société Nationale d’Étude et de Construction de Moteurs d’Aviation, or Safran, which we refer to collectively as the European Aerospace and Defense Group, purchased 20% of the outstanding common stock of Embraer from our existing common shareholders at that time. Most of the common stock purchased was owned by our former controlling shareholders.

Because the members of the European Aerospace and Defense Group were, at the time, considered by our former controlling shareholders to be strategic partners of Embraer, they were granted the right, as a group, to appoint two members to our board of directors. However, as a result of the termination of the shareholders’ agreement among our former controlling shareholders in connection with our corporate reorganization, the European Aerospace and Defense Group no longer has the right to appoint members to our board of directors, other than pursuant to the general right provided for in the Brazilian Corporate Law. In addition, under Brazilian law the European Aerospace and Defense Group is no longer recognized as a group for voting purposes nor considered to be strategic shareholders of Embraer. As of March 31, 2007, each of Dassault and Safran individually held shares representing 0.9% and 1.1% of our total capital stock, respectively. Thales sold all of its shares in October 2006 and EADS sold all of its shares at a secondary offering in February 2007.

The relationship that developed as a result of the alliance between the European Aerospace and Defense Group and us, allowed us to develop several business opportunities. For example, our alliance with the European Aerospace and Defense Group led us with EADS to acquire a 65% interest in OGMA- Indústria Aeronáutica de Portugal S.A., or OGMA, and also resulted in the integration by us of Thales^TM mission systems and electronic equipment in some of our EMB 145 AEW&C aircraft, as well as in commercial transactions for the purchase by us of certain equipment and services from the members of the European Aerospace and Defense Group in the ordinary course of our business. See also Note 12 to our consolidated financial statements for additional information on our acquisition of OGMA.

We intend to review strategic growth opportunities, which may include joint ventures and acquisitions, and other strategic transactions and enhance our existing relationship with significant world players in the aerospace industry, including any of the members of the European Aerospace and Defense Group.

Joint Ventures and Acquisitions

In December 2002, we formed a joint venture company with Harbin Aircraft Industry (Group) Co., Ltd. and Hafei Aviation Industry Co., Ltd., subsidiaries of China Aviation Industry Corp. II, or AVIC II, to provide for the assembly, sale and after-sale support of the ERJ 145 regional jet family in China. We own 51% of the equity of the joint venture company, Harbin Embraer Aircraft Industry Company Ltd.

In March 2005, a consortium formed by Embraer and EADS acquired 65% of OGMA’s shares through a newly created holding company, AIRHOLDING, SGPS, S.A. At that time Embraer held 99% of the equity in the holding company and EADS held the remaining 1%. Further, in March 2006, EADS exercised its option to increase its interest and currently holds 30% of the equity in the holding company. OGMA is a major representative of the aviation industry in Europe, offering services that include the maintenance repair and overhaul of civil and military aircraft, engines and parts, assembly of structural components and engineering support. See also Note 12 to our consolidated financial statements for additional information on our acquisition of OGMA.

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In October 2006, we entered into an agreement with the Canadian company CAE Inc., or CAE to form a global training joint venture, which will provide comprehensive pilot and ground crew training to customers of the Phenom 100 very light jet and Phenom 300 light jet aircraft. The initial training program will be offered at CAE SimuFlite, Dallas, Texas, beginning when the Phenom 100 enters into service, which is expected to occur in 2008. The joint venture is expected to provide entitlement training and post-entitlement training for pilots, maintenance technicians and dispatch personnel.

Research and Development Costs and Capital Expenditures

Research and development costs, including the development of the EMBRAER 170/190 jet family, were US$44.5 million in 2004, US$93.2 million in 2005 and US$112.7 million in 2006 - net of cash contributions provided by risk-sharing partners. Research and development costs as a percentage of net sales were 1.3% in 2004, 2.4% in 2005 and 2.9% in 2006. Research and development costs increased as a percentage of our net sales in 2005 mainly because we only recognized US$55.1 million in contributions from our risk-sharing partners and also because of the 16.8% appreciation of the real against the U.S. dollar during the period, as approximately 87% of our research and development costs are real-denominated The increase in our research and development costs in 2006 was mainly due to the development of our new executive jets and the 8.7% appreciation of the real against the U.S. dollar during the period and was partially offset by revenues of US$57.0 million, received under an agreement with Kawasaki Heavy Industries Ltd., or KHI, and Kawasaki Aeronáutica do Brasil Ltda., or KAB, in 2006 (pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft) as well as by cash contributions from our risk-sharing partners in the amount of US$36 million as a result of the fulfillment of certain contractual milestones. See “¾Products¾EMBRAER 170/190 Jet Family.” Most of our research and development expenses are associated with a particular program, whether commercial or executive aviation. We do not record an expense for research and development of defense programs as these expenses are funded by the Brazilian government and other government customers.

In May 2005, we announced our plans to expand our executive jet product portfolio with jets for the very light and light categories, the Phenom 100 and Phenom 300, respectively. Total research and development and capital expenditures relating to the new jets are expected to be approximately US$235.0 million. This program has been funded by risk-sharing partners, financial institutions and our own cash generation. The Phenom 100 is expected to enter service in mid-2008 and the Phenom 300 is expected to enter service in mid-2009.

In May 2006, we launched another executive jet, the Lineage 1000, in the ultra-large category. The Lineage 1000 will be based on the platform of the EMBRAER 190 aircraft and is expected to enter service in mid-2008. Total research and development and capital expenditures relating to the Lineage 1000 are expected to be approximately US$60.0 million.

In 2007, we expect research and development costs to total approximately US$237.0 million, excluding contributions from risk-sharing partners, but including US$127 million in costs related to the development of our new executive jets, US$51 million in costs related to our commercial aviation programs and US$59 million in costs related to the development of technology. The increase in research and development costs in 2007 is mainly related to the development of our new executive jets.

Our investments in property, plant and equipment totaled US$50.1 million in 2004, US$51.8 million in 2005 and U$$90.8 million in 2006. These investments are related mainly to construction of facilities, improvements to our plant and production facilities and modifications for the production of new aircraft models. In 2007 and 2008, we expect investments in property, plant and equipment to total approximately US$194.0 million and US$117.0 million, respectively, which will primarily be related to construction of facilities, improvements to our plant and production facilities for the production of the EMBRAER 170/190 jet family, our defense aircraft, our executive jets and expansion of our customer services operations.

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4B.  Business Overview

We are one of the leading manufacturers of commercial aircraft in the world, based on 2006 net sales of commercial aircraft, with a global customer base. Our focus is achieving customer satisfaction with a range of products addressing the commercial airline, defense and executive jet markets. Our commercial aviation business accounted for 64.4% of our net sales in 2006. We are the leading supplier of defense aircraft for the Brazilian Air Force based on number of aircraft sold, and we have also sold aircraft to military forces in Europe, Asia and Latin America. Our defense and government business accounted for 6.0% of our net sales in 2006. We have developed a line of executive jets based on one of our regional jet platforms and recently launched new executive jets in the very light, light, and ultra-large categories, the Phenom 100, Phenom 300 and Lineage 1000, respectively. Our executive jet business accounted for 15.3% of our net sales in 2006. Providing high quality customer support is a key element of our customer focus and is critical to our ability to maintain long-term relationships with our customers. Other related businesses, which include customer services, accounted for 14.3% of our net sales in 2006. For the year ended December 31, 2006, we generated net sales of US$3,807.4 million, of which more than 90% was U.S. dollar-denominated. On March 31, 2007, we had a total firm backlog in orders of US$15.0 billion, including 454 aircraft sold by the commercial aviation segment.

Our Strengths

We believe that our primary strengths are:

Leading Commercial Aircraft Manufacturer with a Global Customer Base. We are a leading manufacturer of 30-120 seat jets with a strong global customer base. We have sold our regional and mid-capacity jets to 57 customers in the five continents of the world. Our customers include some of the largest and most significant regional, low-cost airlines and commercial carriers in the world.

Aircraft Design; Cost and Operating Efficiency. We conceive, develop and manufacture aircraft to provide our customers with reduced operating, maintenance and training costs due to the similarity and efficiency in design and the commonality of parts among jets within a family. These similarities enable us to significantly reduce our design, development and production costs and pass these savings along to our customers in our sales price. These similarities also reduce the development time of our aircraft.

Strategic Risk-Sharing Partners. With respect to our commercial and executive aircraft, we developed strategic relationships with key risk-sharing partners. These risk-sharing partners develop and manufacture significant portions of the systems and components of our aircraft and contribute their own funds to research and develop these systems and components, thereby reducing our development costs. These risk-sharing partners also fund a portion of our development costs through direct contributions of cash or materials. We believe that these strategic relationships enable us to lower our development costs and risks, improve our operating efficiency, enhance the quality of our products and reduce the number of our suppliers, thereby providing us with flexibility of our production process.

Benefits of Funded Development of Defense Products. Historically, research and development costs related to defense aircraft have been funded in large part by Brazilian government contracts and have had an important role in our engineering and industrial development. For instance, the AM-X program developed for the Brazilian Air Force in the 1980’s established the basic knowledge for the ERJ 145 jet family developed a decade later. In addition, we use well-proven platforms developed for the commercial aviation segment as a solution for certain defense products. We also sell proven defense products developed for the Brazilian Air Force to other military forces.

Flexibility of Production to Meet Market Demands. We believe the flexibility of our production processes and our operating structure, including our risk-sharing partnerships that are designed to minimize costs, allow us to increase or decrease our production in response to market demand without significantly impacting our margins.

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Experienced and Highly Skilled Workforce. Our employees are experienced and highly skilled. 20.5% of our workforce is comprised of engineers. Due to the high level of knowledge and skill of our employees, and our continuous training programs, we are able to efficiently pursue new programs and provide our customers with differentiated technical expertise and guidance.

Business Strategies

Looking to continue to grow our business and to increase our profitability, we intend to continue to offer our customers cost-effective, high quality, and reliable aircraft and services. The key elements of our strategy are the following:

Continuing to Market our Commercial Aircraft. We are fully committed to continuing to market our ERJ 145 regional jet family and to aggressively market our mid-capacity aircraft, the EMBRAER 170/190 jet family. As of March 31, 2007, we had almost 1,000 units of the ERJ 145 jet family in operation. We are currently evidencing increased demand for the ERJ 145 jet family in the secondary market due to its reliability and strong operating benefits. We believe that airlines can continue to benefit from this regional jet family, which we believe has helped our customers over the last ten years to pursue their goal of achieving profitable operations. We believe a significant market opportunity exists for the EMBRAER 170/190 jet family with regional airlines that are expanding their fleet, increasing their penetration into higher density markets and adding longer routes, as well as with major and low-cost airlines that are right-sizing their fleet in order to adjust capacity to meet demand in less dense routes. As of March 31, 2007, we were leaders in the 70-120 seat segment. Additionally, we believe that our commercial aircraft will provide us with significant opportunities to increase our competitiveness by offering our customers a full range of jets in the 30-120 seat category.

Strengthening our Position in the Executive Jet Market. We believe that the executive jet market provides us with significant growth opportunities. We expect to offer products in all categories of the executive jet market, from the “very light” to the “ultra large” categories. We have developed the Legacy 600, a “super mid-size” jet and are developing executive jets in the “very light,” “light” and “ultra large” segments, respectively, the Phenom 100, Phenom 300 and Lineage 1000. We have endeavored to understand and respond to market and customer needs, continually improving the product and customer support for our executive jets. In this sense, we plan to further expand our customer support worldwide, through the expansion of our own operations and also through agreements with authorized service centers.

Continue to Pursue Market Niche Opportunities in the Defense and Government Market. We currently offer products for transportation, training, light-attack, intelligence, surveillance and reconnaissance. Since our products offer multi-mission capabilities at a competitive price and are designed to be operated in any environment at low operating costs, we believe our products meet the needs of governments in countering present threats which are a global concern, such as terrorism, drug dealing and weapon smuggling.

Continuing Focus on Customer Satisfaction and Support. We believe that our focus on customer satisfaction is fundamental to our entrepreneurial success and our business strategy. Providing high quality customer support is a key element of our customer focus and is critical to our ability to maintain long-term relationships with our customers. As the number of our aircraft in operation continues to grow, and our executive aviation business expands, we have further increased our commitment to providing our customers with an appropriate level of after-sale support, including technical assistance, pilot and maintenance training and spare parts, as demonstrated by the expansion of our Nashville, Tennessee, maintenance, repair and overhaul, or MRO, facility, and the acquisition of OGMA, an MRO facility in Portugal, which we began operating in March 2005. We intend to continue to focus on providing our customers with high quality customer support by expanding our presence worldwide, both through our own operations and agreements with authorized service centers.

Pursuing Strategic Growth Opportunities and Enhancing Relationships with Significant World Players in the Aerospace Industry. We intend to review strategic growth opportunities, which may include joint ventures and acquisitions, and other strategic transactions and enhance our existing relationship with significant world players in the aerospace industry. For example, we recently increased our customer service capabilities with the acquisition of OGMA through a consortium led by us with EADS’ participation.

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Commercial Aviation Business

We design, develop and manufacture a variety of commercial aircraft. Our commercial aviation business is our primary business, accounting for 64.4% of our net sales for the year ended December 31, 2006.

Products

We developed the ERJ 145, a 50-passenger twin jet-powered regional aircraft, introduced in 1996, to address the growing demand among regional airlines for medium-range jet-powered aircraft. After less than two years of development, the ERJ 135, a 37-seat regional jet based on the ERJ 145, was introduced in July 1999. In addition, we developed the 44-seat ERJ 140 as part of the ERJ 145 regional jet family, which we began delivering in the second half of 2001. We believe that the ERJ 145 regional jet family provides the comfort, range and speed of a jet at costs comparable to turboprop aircraft. We are continuing to develop our 70-122 seat platform, the EMBRAER 170/190 jet family, to serve the trend in the commercial airline market toward larger, faster and longer range jets and to further diversify our strength in the jet market. We continue to analyze new aircraft demand in the jet market to determine potentially successful modifications to aircraft we already produce.

ERJ 145 Regional Jet Family

The ERJ 145 is a twin jet-powered regional aircraft accommodating up to 50 passengers. This jet was developed in response to the increasing demand from the regional airline industry for an aircraft that offered more speed, comfort and capacity than a turboprop. The ERJ 145 was certified by the Brazilian aviation authority in November 1996, the FAA in December 1996, the European aviation authority in May 1997, the Australian aviation authority in June 1998 and the Chinese aviation authority in December 2000. We began delivering the ERJ 145 in December 1996.

The development of the ERJ 145 aircraft was partially based on the EMB 120 Brasília and has approximately 30% commonality in terms of parts and components with that aircraft, including the nose section and cabin. The ERJ 145 has a maximum cruising speed of Mach .78, or 450 knots, and a maximum fully loaded range of 1,060 nautical miles in its standard version. The ERJ 145 is equipped with engines built by Rolls-Royce Allison. These engines are designed to operate 10,000 flight hours between major overhauls and operate at a low fuel cost. In addition, the ERJ 145 is equipped with sophisticated flight instruments, such as engine-indication instruments, crew-alert systems and digital flight control systems, produced by Honeywell.

The ERJ 145 is also available in a long-range, or LR, version, and, in response to customer requests, we have developed an extra-long-range, or XR, version of the aircraft. The ERJ 145 LR features a larger fuel tank, more powerful engines and greater range than the standard version. The ERJ 145 LR, which was certified by the Brazilian aviation authority, the FAA and the European aviation authority in 1998, and by the Chinese aviation authority in November 2000, uses engines that deliver 15% more thrust, allowing the fully loaded aircraft to operate on routes of up to 1,550 nautical miles. The ERJ 145 XR features a new and updated turbofan engine, increased capacity fuel tanks and winglets. The ERJ 145 XR, which was certified by the Brazilian aviation authority in August 2002 and by the FAA in October 2002, offers reduced fuel consumption, a maximum, fully loaded range of 2,000 nautical miles and enhanced operational capabilities for hot weather and high altitudes. Deliveries of the ERJ 145 LR began in February 1998, and deliveries of the ERJ 145 XR began in October 2002.

The ERJ 135 is a 37-seat regional jet based on the same design as the ERJ 145 and is manufactured on the same production line. The ERJ 135 has approximately 96% commonality in terms of parts and components with the ERJ 145, resulting in reduced spare parts requirements and permitting the utilization of the same ground support equipment for customers that use both aircraft. The ERJ 135 was certified by the Brazilian aviation authority in June 1999, by the FAA in July 1999 and by the European aviation authority in October 1999. Deliveries of the ERJ 135 began in July 1999.

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The ERJ 135 has a maximum operating speed of Mach .78, or 450 knots, and a maximum fully loaded range of 1,330 nautical miles in its standard version. The ERJ 135 uses the same engines, sophisticated flight instruments, digital flight control systems and body design as the ERJ 145. The ERJ 135’s fuselage is 11.6 feet shorter than the ERJ 145’s. The ERJ 135 is also available in a LR version, with maximum fully loaded range of l,700 nautical miles. The LR version received certification simultaneously with the standard version and began deliveries in August 1999.

We developed the ERJ 140 in response to customer requests. The ERJ 140 is a 44-seat regional jet based on the same design as the ERJ 135 and is manufactured on the same production line as the ERJ 145 and ERJ 135. The ERJ 140 has approximately 96% commonality with the ERJ 145 and ERJ 135, providing our customers with significant maintenance and operational benefits. The ERJ 140 was certified by the Brazilian aviation authority in June 2001 and by the FAA in July 2001. The ERJ 140 has a maximum fully loaded range of 1,230 nautical miles in its standard version. The ERJ 140 is available in a LR version, with maximum fully loaded range of 1,630 nautical miles. We began delivering the ERJ 140 in July 2001.

The ERJ 145 regional jet family allows for standardized pilot certification and maintenance procedures.

EMBRAER 170/190 Jet Family

The EMBRAER 170/190 jet family provides our customers with a choice of four aircraft in the mid-capacity passenger range. The EMBRAER 170 is a 70-80 seat jet and the EMBRAER 175 is a 78-88 seat jet, while the EMBRAER 190 is a 98-114 seat jet and the EMBRAER 195 is a 108-122 seat jet.

The EMBRAER 170 was certified by the Brazilian aviation authority, the FAA, the JAA, EASA and the authority of Poland in February 2004, and deliveries of the EMBRAER 170 began in March 2004. The EMBRAER 175 was certified by the Brazilian aviation authority in December 2004, by EASA in January 2005, by TCCA, the Canadian certification authority, in July 2005 and by the FAA in August 2006. The EMBRAER 190 was certified by the Brazilian aviation authority in August 2005, by the FAA in September 2005 and by EASA in June 2006. The EMBRAER 195 was certified by the Brazilian aviation authority in June 2006 and by EASA in July 2006. We expect this aircraft to receive certification from the FAA by mid-2007.

We designed the EMBRAER 170/190 jet family to maximize the benefits of commonality. Aircraft in the family share approximately 89% of the same components. The high level of commonality in this new jet family lowered our development costs and shortened our development period. We anticipate that this commonality will lead to significant savings to our customers in the form of easier training, less expensive parts and maintenance and lower operational costs. Due to differences in size and weight, the EMBRAER 170/190 jet family will not share the same wing design. This new mid-capacity jet family has engines fixed under its main wings—a design intended to enhance power, improve fuel economy and minimize turnaround times. All of the aircraft models of this family are powered by engines manufactured by General Electric and contain state-of-the-art avionics manufactured by Honeywell.

The EMBRAER 170/190 jet family’s principal features are:

·   Performance. All four jets in the EMBRAER 170/190 jet family have a maximum cruising speed of Mach .82. The EMBRAER 170 and the EMBRAER 175 have maximum fully loaded ranges of 1,700 and 1,600 nautical miles, respectively, and each is available in LR versions, with maximum fully loaded ranges of 2,000 and 1,800 nautical miles, respectively. The EMBRAER 190 and EMBRAER 195 have maximum fully loaded ranges of 1,700 and 1,500 nautical miles, respectively, and will be available in LR versions with maximum fully loaded ranges of 2,300 and 2,100 nautical miles, respectively.

·   Ground servicing. The under-wing engine design and the existence of four doors, two in the front and two in the back, provide for enhanced accessibility and efficiency of ground services.

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·   Cabin and cargo space. We have enhanced passenger safety and comfort in the EMBRAER 170/190 jet family. The aircraft’s “double-bubble” design enables a four-abreast cabin, a wide aisle, greater interior space and headroom and a larger baggage compartment than the existing mid-capacity jets of our competitors, including those mid-capacity jets that are in the development stage.

EMB 120 Brasília

The EMB 120 Brasília is a pressurized twin wing-mounted turboprop aircraft that accommodates up to 30 passengers. The EMB 120 Brasília was developed in response to the commercial airline industry’s demand for a high-speed and fuel-efficient 30-seat regional aircraft. The EMB 120 Brasília was certified by the FAA in May 1985 and by the Brazilian aviation authority in July 1985. Since its introduction in 1985 and through December 31, 2006, we have delivered 352 EMB 120 Brasília for the regional market and five EMB 120 Brasília for the defense market. We currently manufacture the EMB 120 Brasília only upon customer request.

Customers

While we have focused our efforts on the U.S. and European markets to date, we also have customers in the Middle East and Asia, including China. We have achieved a diverse, global customer base for our aircraft, principally in the commercial airline market. Our major customers for commercial aircraft include some of the largest regional and low-cost airlines in the world. As of March 31, 2007, our largest customers were JetBlue Airways, US Airways, the HNA Group and Northwest Airlines. For a discussion of these significant customer relationships, see “Item 3D. Risk Factors—Risks Relating to Embraer—We depend on a small number of key customers and key suppliers, the loss of any of which could harm our business.” See also Note 7 to our consolidated financial statements for additional information on our largest customers.

We generally sell our commercial aircraft pursuant to contracts with our customers on a fixed-price basis, adjusted by an escalation formula that reflects, in part, inflation in the United States. These contracts generally include an option for our customers to purchase additional aircraft for a fixed option price, subject to adjustment based on the same escalation formula. In addition, our contracts provide for after-sales spare parts and services, as well as warranties of our aircraft and spare parts. Other provisions for specific aircraft performance and design requirements are negotiated with our customers. Finally, some of our contracts contain cancellation provisions and trade-in options and financial and residual value guarantees. See “Item 3D. Risk Factors—Risks Relating to Embraer—Our aircraft sales are subject to trade-in options and financial and residual value guarantees that may require us to make significant cash disbursements in the future” for a more detailed discussion of these provisions.

Sales and Marketing

Our current marketing strategy is based upon our assessment of the worldwide commercial airline market and our assessment of the current and future needs of our customers. We actively market our aircraft to airlines and regional affiliates of major airlines through our regional offices in the United States, Europe and Asia. Our success depends, to a significant extent, on our ability to discern our customers’ needs, including needs for customer service and product support, and to fill those needs in a timely and efficient manner while maintaining the high quality of our products. Our market and airline analysts focus on the long-term trends of the market, competitive analysis, product enhancement planning and airline analysis. In terms of direct marketing to our customers, we rely heavily on the media, as well as participating in air shows and other cost-effective events that enhance customer awareness and brand recognition. We have regional sales offices in Le Bourget, France, Ft. Lauderdale, Florida, Beijing, China and Singapore. We sell our ERJ 145 regional jet family in the Chinese market exclusively through our joint venture in China, which has secured 66 firm orders for aircraft of this family from Chinese airlines since the beginning of 2004, 13 of which were delivered as of March 31, 2007.

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Production, New Orders and Options

Prior to starting production or development of a new project, we secure letters of intent representing future orders for a significant number of aircraft. We typically begin taking orders and building backlog two years before we begin producing a new aircraft model, aiming to receive a significant number of orders before we deliver the initial aircraft. Once an order is taken, we reserve a place for that order on the production line, ensuring that we will maintain production sufficient to meet demand. Once a place is reserved on the production line, we are able to give customers delivery dates for their orders.

We include an order in backlog once we have received a firm commitment, represented by a signed contract. Our backlog excludes options and letters of intent for which definitive contracts have not been executed. For the sales of our commercial aircraft, we customarily receive a deposit upon signing of the purchase agreement and progress payments in the amount of 5% of the sales price of the aircraft 18 months before scheduled delivery, another 5% twelve months before scheduled delivery and another 5% six months before scheduled delivery. For the EMBRAER 170/190 jet family, we receive an additional 5% progress payment 24 months before scheduled delivery. We typically receive the remaining amount of the sales price upon delivery of the aircraft. The deposits and the progress payments are generally non-refundable if orders are cancelled.

Our options generally provide our customers the right to purchase an aircraft in the future at a fixed price and on a specified delivery date, subject to escalation provisions, under a purchase agreement. Once a customer decides to exercise an option, we account for it as a firm order. On occasion, we have extended the exercise date for our options and renegotiated the delivery schedule of firm orders. On occasion, we have also allowed customers to convert their firm orders or options for one aircraft into firm orders or options for another aircraft within the same commercial aircraft family.

Competition

We generally face competition from major manufacturers in the international aircraft market. Each category of our products faces competition of a different nature and generally from different companies. Some of our competitors have greater financial, marketing and other resources than we do.

30-60-seat category

The main competitors of the ERJ 145 regional jet family are:

· the ATR-42, manufactured by ATR G.I.E., a joint project of Italy’s Alenia Aerospaziale and EADS; and

· the DHC-8-200 and the DHC-8-300, manufactured by De Havilland, Bombardier.

In October 2005, Bombardier announced its plans to stop manufacturing the CRJ-100/200/440 aircraft. In addition, in 2005, Avcraft Aviation LLC, that was manufacturing the 328 Jet after Fairchild Dornier filed for bankruptcy protection, announced its plans to stop manufacturing the 328 Jet.

Given the success of our regional jet family and the significant barriers to entry into the market, due mainly to the high development costs of a new model and the extensive and time-consuming development cycle of a new jet, we believe that we are well-positioned to maintain our market share for the ERJ 145 regional jet family.

61-90-seat and 91-120-seat categories

We currently face our strongest competition in the 61-90- and 91-120-seat categories.

We currently compete with the following aircraft in these categories:

· De Havilland’s DHC-8-400, a 72-seat turboprop, produced by Bombardier;

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· ATR’s ATR72, a 72-seat turboprop;

· Bombardier’s CRJ-700, a 70-seat regional jet, which was first delivered in January 2001, and its CRJ-900 aircraft, which seats 85 passengers and began deliveries in January 2003;

· Bombardier’s CR-1000, an 100-seat regional jet launched in February 2007, with first deliveries scheduled to take place in the second half of 2009;

· Airbus’ A318, a 100-plus-seat jet, which was certified by the EASA in December 2005; and

· Boeing’s 737-600, a 100-plus-seat jet.

We expect to compete with the following aircraft in these categories:

· Sukhoi’s RRJ, a 65-, 75- and 95-seat regional jet, which is scheduled to enter into service at the end of 2008; and

· AVIC I’s ARJ21, a 90- to 110-seat regional jet, which is scheduled to enter into service in 2009.

The key competitive factors in the markets in which we participate include design and technological strength, aircraft operational costs, price of aircraft, including financing costs, customer service and manufacturing efficiency. We believe that we will be able to compete favorably on the basis of our aircraft performance, low operating costs, product development experience, global customer base, market acceptance, cabin design and aircraft price.

Defense and Government Business

We design, develop, integrate and manufacture a wide range of defense and government products, principally transport, training, light attack and surveillance aircraft. We are the leading supplier of defense aircraft to the Brazilian Air Force based on the total number of aircraft in its current fleet. We also have sold defense aircraft to military forces of 16 other countries in Europe and Latin America, including the United Kingdom, France, Greece and Mexico. At December 31, 2006, we had sold 538 defense aircraft to the Brazilian government and 566 defense aircraft to other military forces. Our defense and government business accounted for 6.0% of our net sales for the year ended December 31, 2006.

Products

Tucano Family; AL-X

The Tucano is a single engine turboprop aircraft used for pilot training and armed reconnaissance missions. Although no longer manufactured, over 650 EMB 312 Tucanos are in operation in 15 air forces worldwide, including those of Brazil, the United Kingdom, France, Argentina, Egypt, Colombia, Paraguay, Peru and Venezuela.

We have also developed the Super Tucano, which has a light attack version, known as the AL-X (Aeronave Leve de Ataque, or Light Attack Aircraft). The Super Tucano and the AL-X offer an engine with twice the power of the Tucano’s standard engine, fighter standard avionics, ejection seats, an on-board oxygen-generating system and enhanced range and external loads capability. The AL-X was developed under an agreement with the Brazilian Air Force, with FINEP (Financiadora de Estudos e Projetos), which provides US$21.7 million in research and development debt financing that was fully repaid in 2005. The AL-X has sophisticated navigation and attack systems, night operations capability and the ability to operate under severe weather conditions. We have received firm orders for 99 AL-X aircraft from the Brazilian Air Force. The first delivery of the AL-X was made to the Brazilian Air Force in December 2003, an additional seven aircraft were delivered in 2004, 24 were delivered in 2005 and four were delivered in 2006. These aircraft are expected to be used for advanced pilot training and for defense operations in the Amazon region of Brazil in connection with the Brazilian government’s SIVAM (Sistema de Vigilância da Amazônia, or System for the Surveillance of the Amazon) program. In December 2005, we received firm orders for 25 Super Tucano aircraft from the Colombian government and in 2006 five aircraft were delivered to that customer.

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EMB 145 AEW&C; EMB 145 RS; EMB 145 MP

We have configured a special version of the ERJ 145 with an advanced early warning and control system - the EMB 145 AEW&C, with ground remote sensing capability - the EMB 145 RS, and with marine remote sensing capability - the EMB 145 MP. The EMB 145 AEW&C’s advanced phased-array radar and mission system, developed by Ericsson, is capable of conducting surveillance and providing air traffic control in support of aviation authorities. The EMB 145 RS is designed to carry out ground surveillance and environmental protection activities using advanced synthetic aperture radar, capable of providing day/night and all weather images of the ground over large areas, with multi-spectral sensors developed by subcontractors in the United States. The EMB 145 MP is designed to carry out maritime patrol and anti-submarine warfare missions, using maritime and ground surveillance radar, electro-optical sensors, and communications and other surveillance equipment developed by Ericsson and Thales^TM. We, Ericsson and Thales^TM are jointly marketing these aircraft worldwide. In February 2001, the Mexican government ordered one EMB 145 AEW&C aircraft and two EMB 145 MP aircraft, which were delivered in 2004. At December 31, 2003, the Brazilian government had ordered a total of eight EMB 145 AEW&C/RS aircraft to conduct surveillance and monitor ground activities in the Amazon region, all of which were delivered as of such date. The Greek government, through the Hellenic Air Force, ordered four EMB 145 AEW&C aircraft in October 1999 for use in the Greek government’s aerospace early warning and control system, two of which were delivered in 2004 and two of which were delivered in 2005.

AM-X; AMX-T

The AM-X is a subsonic ground attack and close air support aircraft developed under an international cooperation agreement with Alenia Un Azienda Finmecanica S.p.A. and Aermacchi Aeronautica Macchi S.p.A. and sponsored by the Brazilian and Italian governments. Under the agreement, each of the parties is responsible for key systems of the aircraft. The AM-X is assembled in both Brazil and Italy. Embraer and the Italian partners supply each other with different key components and systems of the aircraft. In addition, Embraer and the Italian partners are each free to market the aircraft independently, and each receives 100% of the proceeds of its sales. Approximately 170 AM-X aircraft are currently in operation in the air forces of Brazil and Italy, 55 of which were sold by us.

We have also developed, with the participation of Alenia and Aermacchi, the AMX-T, an enhanced version of the AM-X, currently being offered internationally. The AMX-T program operates under the same principles as the AM-X program, with the exception that Alenia’s role is greater than Aermacchi’s, which participates only as a subcontractor.

Government Transport Aircraft

We are marketing our executive jets, modified to meet added security needs, to the Brazilian and other governments. We entered into an agreement with the Belgian Air Force for two EMB 135 aircraft and two EMB 145 aircraft modified to transport government officials. Two EMB 135 aircraft and one EMB 145 were delivered in 2001 and one EMB 145 was delivered in 2002. In 1999, we entered into an agreement with the Greek government through the Hellenic Air Force for one EMB 135 aircraft for special transportation and support needs, which was delivered in 2000, and one Legacy 600, which was delivered in 2002. In addition, in 2003, Satena Airline, the state-owned Colombian airline, ordered two EMB 145 aircraft, which were delivered in December 2003 and January 2004. In June 2005, Satena exercised an option and took delivery of an additional EMB 145. We also signed an agreement with authorities from Nigeria for one Legacy 600, which was delivered in the first half of 2005 and with the Indian government for the sale of five Legacy 600 aircraft in a special configuration that were delivered in the second half of 2005.

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Other Projects and Activities

In December 2000, we were selected by the Brazilian government to perform a structural and electronics upgrade of the Brazilian Air Force’s F-5 fighter jets. As the prime contractor, we are integrating multi-mode radar, advanced navigation and attack systems and enhanced self-protection systems into the existing aircraft under a program known as “F-5BR.” The first upgraded aircraft was presented to the Brazilian Air Force in 2003.

Competition

Our defense aircraft face competition from various manufacturers, many of which have greater financial, marketing and other resources than we do. The Super Tucano and the AL-X compete with the Pilatus PC-9M and PC-21 and the Raytheon T-6A and T-6B. The EMB 145 AEW&C competes against the Northrop-Grumman E-2C II Hawkeye 2000. In addition, Boeing is developing the B737 AEW&C aircraft, with advanced warning and remote sensor capabilities, for the Australian and Turkish Air Forces. The AM-X/AMX-T competes with the British Aerospace Hawk-100, the Aermacchi MB-339FD and the Aero Vodochody L-159.

Executive Aviation Business

We have developed a line of executive jets, the Legacy 600, and are developing additional executive jets in the very light, light and ultra-large segments, the Phenom 100, Phenom 300 and Lineage 1000, respectively. We are marketing our executive jets to companies, including fractional ownership companies, charter companies and air-taxi companies, and high net-worth individuals. Our executive aviation segment accounted for 15.3% of our net sales for the year ended December 31, 2006, resulting from the delivery of 27 Legacy 600 jets. On March 31, 2007, we announced that our firm orders in backlog for our executive jets totaled US$2.1 billion from more than 210 customers.

The Legacy 600 was designed to provide customers with a cost-effective alternative to airline travel. We offer the Legacy 600 in two versions: executive and corporate shuttle. The executive version features a highly customized interior based on the customer’s specific requirements. The corporate shuttle version is partially customized and is generally intended to have business class-type seating and in-flight office design features. Both versions have a maximum cruising speed of Mach .8, or 470 knots.

We developed the Legacy 600 by building upon our regional jet design and manufacturing experience. For example, with the exception of the interior of the aircraft, the fuel tank, controller and indication system and the winglets, the Legacy 600 has the same components as the ERJ 135 and is capable of being manufactured on the same production line. Furthermore, the corporate shuttle version of the Legacy 600 does not require separate FAA, European aviation authority or Brazilian aviation authority approval. The executive version of the Legacy 600 was certified by the Brazilian aviation authority in December 2001, by the JAA in July 2002 and by the FAA in August 2002.

In May 2005, we launched the Phenom 100 and Phenom 300, which are executive jets in the very light and light jet categories, respectively. Total research and development and capital expenditures relating to the new jets is expected to be approximately US$235.0 million. We expect this program will be funded by risk-sharing partners, financial institutions and our own cash generation. Embraer’s Phenom 100 jet will carry from six to eight people and be powered by Pratt & Whitney Canada’s PW617F engine and is expected to enter into service in mid-2008. The Phenom 300 will carry up to nine people and have a larger fuselage and wingspan and longer range than the Phenom 100. It will be powered by Pratt & Whitney Canada’s PW535E engine and is expected to enter into service in mid-2009. Pratt & Whitney Canada, Garmin, and Eaton are our risk-sharing partners for this program.

In May 2006, we launched the Lineage 1000, an ultra-large executive jet based on the EMBRAER 190 commercial jet platform. The Lineage 1000 will be configured to accommodate up to 19 people in a total cabin volume of 4,085 cubic feet (115.7 cubic meters), and will be powered by GE CF34-10E7 engines. The Lineage 1000 is expected to enter service in mid-2008. Total research and development and capital expenditures relating to the Lineage 1000 is expected to be approximately US$60.0 million.

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We face significant competition from companies with longer operating histories and established reputations in the mature executive jet industry. Many of these manufacturers have greater financial, marketing and other resources than we do. Legacy 600 competitors include aircraft produced by Dassault Aviation, Bombardier Inc., General Dynamics and Raytheon. Phenom 100 and Phenom 300 competitors in the very light and light jet categories include Cessna Aircraft Co., Raytheon and Eclipse. Boeing and Airbus are the main competitors of the Lineage 1000 ultra-large jet.

We include an executive jet order in backlog once we have received a firm commitment, represented by a signed contract. We customarily receive a deposit at the time of order, progress payments totaling 15% to 30% of the aircraft price, and the full payment of the balance due upon delivery. We generally receive between US$10,000 and US$200,000 for each option to purchase an executive jet.

Other Related Businesses

We also provide after-sales customer support services and manufacture and market spare parts for the aircraft we produce. Activities in this segment include the sale of spare parts, maintenance and repair, training and other product support services, as well as revenues related to aircraft leased to customers primarily through our leasing subsidiary. In addition, we provide structural parts and mechanical and hydraulic systems to Sikorsky Corporation for its production of helicopters. We also manufacture, on a limited basis and upon customer request, general aviation propeller aircraft, such as executive jets and crop dusters, also known as light aircraft. Our other related businesses accounted for 14.3% of our net sales for the year ended December 31, 2006.

After-Sales Customer Support; Spare Parts Business

We also provide after-sales customer support services and manufacture and market spare parts for the fleets of our commercial, executive and defense and government customers. Our after-sales customer support and spare parts business falls into several categories:

· field support;

· material support, which includes spare parts sales and distribution;

· product warranty and repair administration;

· technical support, which includes engineering support, maintenance engineering and technical publications; and

· training.

This business is expected to continue to grow as the number of our aircraft in service increases. Our customers require aircraft manufacturers and their suppliers to maintain adequate spare parts and ground support equipment inventories for a period of 10 years after the production of the last aircraft of the same type, or until fewer than five aircraft are operated in scheduled commercial air transport service. We recently established a pooling program that allows customers to exchange used parts for new or refurbished parts.

We expect to enhance customer support and services offered to the executive aviation segment. We intend to add four wholly-owned service centers in the next three years, and are revamping the authorized service center network for executive jets. By 2008, we project that 45 service centers will support our executive jet fleet. In October 2006, we entered into an agreement with CAE to form a global training joint venture, which will provide comprehensive pilot and ground crew training to customers of the Phenom 100 very light jet and Phenom 300 light jet aircraft. The initial training program will be offered at CAE SimuFlite, Dallas, Texas, beginning with the Phenom 100 entry into service in 2008. Plans for the joint venture will provide entitlement training and post-entitlement training for pilots, maintenance technicians and dispatch personnel. We entered into an agreement with CAE to form a global training joint venture, that will provide comprehensive training to customers of the Phenom jets. We also plan to invest in parts inventory and logistics, as well as in the improvement of our special maintenance programs.

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Subcontracting

We provide subcontracting services to Sikorsky Corporation in connection with the development and manufacture of the landing gear, fuel system and fuel tanks for the S-92 Helibus helicopter. We also act as a risk-sharing partner to Sikorsky. The contracts expire in 2015.

General Aviation Aircraft

We build general aviation propeller aircraft. These aircraft include a six-passenger aircraft that is produced only on demand for use by corporations and by air-taxi companies. At December 31, 2006, we had delivered a total of 2,326 of these aircraft. The last delivery of this type of aircraft was in 2000. We also developed a crop duster aircraft pursuant to specifications of the Brazilian Ministry of Agriculture. These aircraft are produced only on demand. Through December 31, 2006, we had delivered a total of 1,019 of these aircraft, including 10 in 2006. We had no crop duster aircraft in backlog at December 31, 2006.

Aircraft Operating Lease Activities

In order to offer better financial support in the sales process, as well as reduce financial risks related to the re-marketing of aircraft, Embraer created, in 2002, two subsidiary companies, ECC Leasing Co. Ltd. and ECC-Insurance & Financial Co. Ltd.

The mission of ECC Leasing Co. Ltd is to manage and remarket the aircraft portfolio that, as a result of contractual obligations, may be acquired by Embraer as trade-in and/or re-purchase transactions. The company also provides remarketing services to third parties involved in sales campaigns.

The consolidated pre-owned aircraft business, since 2002, through ECC Leasing in Ireland, has contributed positively to the results of the company, reaching accumulated profits of US$8.5 million since its inception. Since then, sales campaigns for new aircraft, where the acceptance of trade-in aircraft as part of payment were conceded, have been successfully completed. Additional revenues have also been generated through the sale and lease of aircraft received as trade-in. Furthermore, leasing operations, involving Embraer170 and Embraer175 pre-series aircraft, all contributed to the current results. As of December 31, 2006, ECC Leasing and two other Embraer subsidiaries had a total portfolio of 38 aircraft, of which 30 were under operating lease.

All sale and leasing transactions were executed practicing market rates, helping to preserve the value of Embraer’s products.

The continued improvement in financial performance is directly related to ECC Leasing’s ability to renew lease agreements with similar conditions as those currently in place, as well as sell aircraft to operators, leasing companies and/or financial institutions, practicing values close to market rates without providing any type of Embraer guarantee.

Furthermore, the upcoming results will be largely dependent on market conditions, aircraft availability levels, and the demand for regional jets in the 37-50 seat category. In this regard, new markets such as Russia and Latin America are important, however, risks related to operator credit and asset repossession must be adequately evaluated.

Markets

The following table sets forth our net sales by line of business and geographic region of the end users of our aircraft for the periods indicated.  

	Year ended December 31,
	2004		2005		2006
	(in millions of dollars)
Commercial Aviation
Americas (excluding Brazil)		US$2,189.4		US$2,250.2		US$1,506.9
Europe		296.9		247.9		430.1
Brazil		—		—		—
Other		93.2		207.7		516.1
Total		US$2,579.5		US$2,705.8		US$2,453.1
Executive Aviation
Americas (excluding Brazil)		204.9		155.8		304.8
Europe		—		100.3		161.3
Other		40.8		22.0		116.0
Total		US$245.7		US$278.1		US$582.1
Defense and Government
Americas (excluding Brazil)		92.1		33.9		142.1
Europe		20.9		8.3		13.4
Brazil		2 46.1		230.3		71.2
Other		6.6		151.2		—
Total		US$365.7		US$423.7		US$226.7
Other Related Businesses
Americas (excluding Brazil)		130.1		145.9		220.9
Europe		54.4		202.9		237.0
Brazil		51.3		72.8		75.2
Other		13.8		0.7		12.4
Total		US$249.6		US$422.3		US$545.5

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Joint Ventures

We formed a joint venture company in December 2002 with Harbin Aircraft Industry (Group) Co., Ltd. and Hafei Aviation Industry Co., Ltd., subsidiaries of China Aviation Industry Corp. II, or AVIC II, to provide for the manufacture, sale and after-sale support of the ERJ 145 regional jet family. We own 51% of the equity of the joint venture company, Harbin Embraer Aircraft Industry Company Ltd. We have licensed to the joint venture the exclusive rights to produce, sell and provide support for the ERJ 145 regional jet family in the Chinese markets, and we contributed US$12.4 million in cash, tooling and inventory to the joint venture. Our joint venture partners have contributed the land use rights in Harbin, China and contributed US$10.8 million in cash and facilities to the joint venture. The roll-out for the first ERJ 145 manufactured by the joint venture occurred in December 2003, and the joint venture entered into its first sales contract for six aircraft to China Southern Airlines in February 2004. As of March 31, 2007, Harbin Embraer Aircraft Industry Company Ltd. had secured contracts with four Chinese airlines for a total of 66 ERJ 145 aircraft, 13 of which were delivered as of March 31, 2007.

In October 2006, we entered into an agreement with CAE to form a global training joint venture, which will provide comprehensive pilot and ground crew training to customers of the Phenom 100 very light jet and Phenom 300 light jet aircraft. The initial training program will be offered at CAE SimuFlite, Dallas, Texas, beginning when the Phenom 100 enters into service, which is expected to occur in 2008. The joint venture is expected to provide entitlement training and post-entitlement training for pilots, maintenance technicians and dispatch personnel.

Suppliers and Components; Risk-Sharing Arrangements

We do not manufacture all of the parts and components used in the production of our aircraft. More than 80% of the production costs of our ERJ 145 regional jet family, EMBRAER 170/190 family and Legacy 600 executive jet, depending on aircraft model, consist of materials and equipment purchased from our risk-sharing partners and other major suppliers. Risk-sharing arrangements with suppliers of key components enable us to focus on our core business: design and production of commercial aircraft. Risk-sharing arrangements are those in which suppliers are responsible for the design, development and manufacture of major components or systems of our aircraft, such as wings, tail or fuselage. Our risk-sharing partners, therefore, must invest their own money in research and development and share the risk and success of our products with us.

In our commercial and executive aviation businesses, we rely on risk-sharing partners to supply vital components of our aircraft, such as the engines, hydraulic components, avionics, wings, sections of the fuselage and portions of the tail. Once we select our risk-sharing partners and program development and aircraft production begins, it is difficult to substitute these partners. In some cases, our aircraft are designed specifically to accommodate a particular component, such as the engines, which cannot be substituted by another manufacturer without significant delay and expense. This dependence makes us susceptible to the performance, quality and financial condition of these risk-sharing partners. See “Item 3D. Risk Factors—Risks Relating to Embraer—We depend on a small number of key customers and key suppliers, the loss of any of which could harm our business.”

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ERJ 145 Regional Jet Family

Risk-sharing partners. We entered into risk-sharing arrangements with the following four suppliers in connection with the development and production of the ERJ 145 regional jet family:

· Grupo Auxiliar Metalúrgico S.A., or Gamesa, a Spanish company owned by Iberdrola S.A., a European power utility, and Banco Bilbao Vizcaya, a large Spanish financial institution, supplies the wings, engine nacelles and main landing-gear doors;

· Sonaca S.A.—Société Nationale de Constructions Aerospatiales, a Belgian company, supplies portions of the central and rear fuselages, the service, main and baggage doors and engine pylons;

· ENAER—Empresa Nacional de Aeronáutica, a Chilean company, supplies the vertical fin, horizontal stabilizers and elevators; and

· C&D Aerospace, Inc., a U.S. company, supplies the cabin and cargo compartment interiors.

Our risk-sharing partners generally receive payment for supplied components within three to five months after delivery of the components to us. The partnering relationship with these suppliers results in lower production costs and higher product quality for the ERJ 145 regional jet family. In addition, our line of executive jets benefits from the risk-sharing arrangements with Gamesa, Sonaca and ENAER. The interior of the Legacy 600 executive jet is provided by The Nordam Group, Inc., Duncan Aviation, Inc and us.

Other major suppliers. We have also entered into other agreements with numerous European, American, Canadian and Brazilian suppliers to provide key components for a number of our products, including the ERJ 145 regional jet family. These supply arrangements cover systems and components such as engines, avionics, landing gear and flight control systems. Our major suppliers include, among other companies, Rolls-Royce Allison, Parker Hannifin Corp., BF Goodrich Co., United Technologies Corp. - Hamilton Sundstrand Division, Honeywell, Rosemount Aerospace and Alcoa Inc.

We select suppliers on the basis of, among other factors, technical performance and quality of their products, production capacity, prior relationship and financial condition. We have had continuing relationships with most of our major suppliers since production of the Bandeirante aircraft began in 1975. We have entered into purchase agreements with our major suppliers, which cover our requirements for five to ten years of production. We are not obligated to purchase a minimum amount of materials annually under any of these supply contracts. Our ongoing supplier relationships depend on cooperation, performance and the maintenance of competitive pricing.

EMBRAER 170/190 Jet Family

We are continuing to develop the EMBRAER 170/190 jet family together with risk-sharing partners that supply key systems for the aircraft. Our supplier arrangements for the EMBRAER 170/190 jet family differ from the ERJ 145 regional jet family in that we use fewer suppliers. In the EMBRAER 170/190 jet family, each risk-sharing partner is responsible for the development and production of aircraft systems, such as the landing gear, the hydraulic system and the flight control system, rather than individual components, and fewer components are supplied by companies that are not risk-sharing partners. The assumption of responsibility for systems by our risk-sharing partners lowers our capital expenditures, which thereby decreases our development risks and increases our operating efficiency by reducing the number of suppliers per product and cutting production costs. It also shortens development and production time. The primary risk-sharing partners for the EMBRAER 170/190 jet family are the following:

· General Electric, which supplies CF34-8E/l0E turbofan engines and designs, develops and manufactures the engine nacelles;

· Honeywell, which supplies the avionics systems;

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· Liebherr, which is responsible for designing, developing and manufacturing the landing gear assemblies;

· Kawasaki, a Japanese company, which develops and manufactures the aircraft wing stub, engine pylon, fixed landing and trailing edge assemblies, flaps, spoilers and the wing’s flight control surfaces;

· Hamilton Sundstrand, a U.S. company and a wholly owned subsidiary of United Technologies Corp., which develops and produces the aircraft’s tail core, auxiliary power unit, electrical systems and the air management system;

· Sonaca, which is responsible for the aircraft’s wing slats;

· Gamesa, which is responsible for the rear fuselage and the vertical and horizontal tail surfaces;

· Latecoere, a French company, which manufactures two of the three fuselage sections;

· C&D Aerospace, which designs, develops and manufactures the aircraft interior; and

· Grimes Aerospace Company, a U.S. company and a wholly owned subsidiary of AlliedSignal Inc., which develops and manufactures the exterior and cockpit lighting.

In addition, some of the risk-sharing partners for the EMBRAER 170/190 jet family have assumed a broader role in other aspects of the program by providing sales financing and residual guarantees, rather than simply supplying us with aircraft components.

To prepare for the expected production increase for the EMBRAER 190 and EMBRAER 195 aircraft, on June 1, 2006 we entered into an agreement with KHI and KAB, under which they transferred to us assets required for the production of metallic parts for the wings of the EMBRAER 190 and EMBRAER 195 aircraft. As a result, we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft. KHI will continue producing the wing control surfaces and the main landing gear doors for these aircraft. The production of parts for the EMBRAER 170 and EMBRAER 175 aircraft will not be affected by this agreement.

Executive Jets

The risk-sharing partners for our Legacy 600 and the Lineage 1000 are the same as those for our ERJ 145 jet family and EMBRAER 170/190 jet family, respectively. The risk-sharing partners for the Phenom 100 and Phenom 300 jets are Pratt & Whitney Canada, the supplier of the engines, Garmin, the supplier of the avionic systems, and Eaton, the supplier of hydraulic systems.

Cash Contributions for the development of the EMBRAER 170/190 jet family and our Phenom 100 and Phenom 300 aircraft

We have arrangements with our risk-sharing partners pursuant to which they have contributed in cash to us a total of US$298.8 million as of December 31, 2006 and we expect to receive an additional US$74.9 million in future years for the development of the EMBRAER 170/190 jet family and of the Phenom 100 and Phenom 300. Cash contributions become non-refundable upon the achievement of certain developmental milestones. As of December 31, 2006, US$209.6 million of these cash contributions had become non-refundable. If we cancel the development and production of any of the remaining aircraft in the EMBRAER 170/190 jet family or the development of the Phenom 100 and Phenom 300 because we are unable to obtain certification or for other non-market related reasons, we may be obligated to refund US$89.3 million of the total cash contributions already received. We expect the EMBRAER 195 to receive certification from the FAA by mid-2007 and the certification of the Phenom 100 and Phenom 300 to be granted in 2008 and 2009, respectively. We generally do not need to refund these contributions as a result of insufficient market demand. We believe that these financial commitments are a strong endorsement of our aircraft design and our ability to execute our business plan.

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Customer Service and Product Support

Customer satisfaction and service is critical to our success. Through our customer focus, we aim to enhance customer loyalty and, ultimately, increase sales. We will continue to focus on the development of closer, long-term relationships with our customers by meeting their aircraft requirements, providing after-sale support and spare parts and meeting maintenance requirements. We identify at the time of purchase the appropriate level of after-sale regional or on-site customer support and coordinate regional inventory levels to address expected spare parts and maintenance requirements. To maintain and increase our responsiveness, we have established five support centers worldwide. We provide technical assistance, support and distribution to our Brazilian and other Latin American customers through our facility in São José dos Campos. In March 2002, we established a distribution center in Beijing, China, together with China Aviation Supplies Import and Export Corporation, or CASC. We also intend to provide support services through our joint venture in China for aircraft sold by the joint venture. In addition, we operate an MRO facility in Nashville, Tennessee, and an MRO facility in Alverca, Portugal. We provide full service maintenance and repair services for our commercial and executive aircraft at these service centers, enhancing our level of service to our customers in the United States and Europe.

We have dedicated teams in the United States, Europe and Brazil to focus exclusively on enhancing customer support. In addition, for each of our key customers, we have assigned senior relationship managers that are responsible for enhancing our relationships with these customers. We also provide direct field support with on-site technical representatives at several of our major customers’ facilities. These on-site representatives are assigned to major customers prior to the first delivery of their aircraft and provide advice on maintenance and operation. They also monitor our customers’ spare part needs and maintain customers’ inventories.

We operate support centers that are available 24 hours a day, seven days per week, in our São José dos Campos facility, as well as in Ft. Lauderdale, Florida, and Le Bourget, France. We train pilots, co-pilots, flight attendants and mechanics at these locations. We operate advanced flight simulators for our ERJ 145 regional jet family and for the Legacy 600 at our Florida facility under an agreement with FlightSafety International, Inc., a business specializing in flight simulation. We have entered into an agreement with GE Capital Aviation Training Limited, or GECAT, a joint venture between General Electric Company and Thales™, whereby GECAT provides training for the EMBRAER 170/190 jet family on a non-exclusive basis. We also provide field service and on-the-job training for airline personnel. For example, we routinely dispatch one of our pilots to fly with an operator’s crew during the introduction of an aircraft into a customer’s regular routes. We also provide technical publications with up-to-date technical information on our aircraft.

Aircraft Financing Arrangements

We generally do not provide long-term financing directly to our customers. We assist our customers in obtaining financing arrangements from different sources, including capital providers such as leasing companies, commercial banks, capital markets and the BNDES.

Airlines sometimes require short-term bridge financing prior to arranging long-term debt financing because at the delivery of the aircraft to the airlines, timing may not be the best to access the market or funding may not be available. On a case-by-case basis, we have provided interim financing, at market rates, to customers who have completed or are negotiating other financing arrangements and have not received funding by the time of the aircraft delivery. See Notes 8, 9 and 34 to our consolidated financial statements.

The BNDES-exim sponsored program, a Brazilian government program, provides our customers with direct financing for Brazilian exports of goods and services. From 1995 through 2006, approximately 32% of the total value of our export sales was financed by the BNDES-exim program.

Leasing arrangements generally involve the purchase of our aircraft by a leasing company under a customer’s purchase contract and the lease of that aircraft to that customer. In leveraged leasing transactions, an investor will borrow a portion of the aircraft purchase price from a third party lender, purchase our aircraft and lease it to our customer. In some jurisdictions, the investor may obtain tax benefits and may pass on a share of them onto an airline lessee. These lease arrangements accounted for approximately 51% of the total aircraft we delivered from 1995 trough 2006.

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Another very important financing arrangement is the straight financing. Between 1995 and 2006, Embraer has financed 37% of the total aircraft delivered through this arrangement, with funds provided by commercial banks, capital markets and BNDES.

Intellectual Property

Our intellectual property, which includes designs, trade secrets, know-how and trademarks, is important to our business. We hold trademarks over our name and symbol, and the names of our aircraft, some of which are registered and some of which are in the process of registration in a number of countries, including Brazil, the United States, Canada, Singapore, Hong Kong, China, European Union and Japan. At December 31, 2006, we had 60 trademarks. Our registered trademarks are generally renewed at the end of their validity period, which usually runs from 10 years from the date of application for registration. We do not believe that the loss of any of our trademarks would have a material impact on our business or results of operations.

We develop our intellectual property in our research, development and production process. We also have access to the intellectual property necessary for our business from our suppliers and risk-sharing partners, in accordance with agreements.

We aim to protect our intellectual property rights resulting from investments in technical research and development and in the form of invention, industrial design, brands or computer programs.

Recently, we have applied for the registration of certain patents relating to our production processes. Currently, we do not hold any registered patents, but have requested patents for products that are under development in the appropriate registry in Brazil, the United States and the European Union. We require that our suppliers and risk-sharing partners respect the intellectual property rights of third parties. We believe that we have the intellectual property rights necessary for our business and operations.

Government Regulation and Aircraft Certification

We are subject to regulation by regulatory aviation agencies, both in Brazil and abroad. These agencies principally regulate the certification of aircraft and aircraft manufacturers. Besides certification in Brazil, we must obtain certification in each jurisdiction in which our aircraft operate commercially. The competent authority for the certification of our aircraft in Brazil is the Departamento de Aviação Civil, or DAC (Civil Aviation Department), through the Centro Técnico Aeroespacial, or CTA (Aerospace Technical Center) under the Ministry of Defense. In 2005, a new regulatory agency was created, the Agência Nacional de Aviação Civil, or ANAC (National Civil Aviation Agency), becoming the main Brazilian authority for the regulation, supervision and certification of aircraft, aircraft parts, manufacturers and operations. The aviation authorities in other countries include the FAA in the United States, the recently created EASA for European Union, or EU, countries and the JAA for the other European countries. Some countries simply validate and complement the Brazilian aviation authority’s original certification, in accordance with their own rules. The Brazilian aviation authority has a bilateral certification agreement with the FAA under which the FAA certification requirements are covered by the Brazilian certification process. This cooperation among regulatory authorities leads to faster certification.

The ERJ 145 was certified to operate in the United States and Brazil in the last quarter of 1996, in Europe in the second quarter of 1997, in Australia in June 1998 and, for the LR version, in China in November 2000. The ERJ 145 XR version was certified by the Brazilian aviation authority in August 2002 and by the FAA in October 2002. The ERJ 135 was certified by the Brazilian aviation authority in June 1999, by the FAA in July 1999 and by the European aviation authority in October 1999. The ERJ 140 was certified by the Brazilian aviation authority in June 2001 and by the FAA in July 2001. The Legacy 600 executive jet was certified by the Brazilian aviation authority in December 2001, by the JAA in July 2002 and by the FAA in August 2002. The EMBRAER 170 was certified by the Brazilian aviation authority, the FAA, the JAA, EASA and the authority of Poland in February 2004, and deliveries of the EMBRAER 170 began in March 2004. The EMBRAER 175 was certified by the Brazilian aviation authority in December 2004, by EASA in January 2005, by TCCA, the Canadian certification authority, in July 2005 and by the FAA in August 2006. The EMBRAER 190 was certified by the Brazilian aviation authority in August 2005, by the FAA in September 2005 and by EASA in June 2006. The EMBRAER 195 was certified by the Brazilian aviation authority in June 2006 and by EASA in July 2006. We expect this aircraft to receive certification from the FAA by mid-2007.

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Once an aircraft is certified by the CTA and FAA, some authorities, such as those in Australia and Mexico, ratify the certification. Other countries, such as Canada, require compliance with their own specific national requirements before certification. In Europe, since September 2003, EASA has become the regulatory authority for EU countries, including Germany, Italy, France, the United Kingdom, Spain and The Netherlands. Most of the remaining non-EU countries, such as Switzerland, still operate under the rules of the JAA. The JAA is not a certification authority, but rather is an advisory organization that makes recommendations to the non-EU national authorities. A recommendation by the JAA is a requirement for certification of an aircraft by most of these authorities. Before the creation of EASA, 27 national authorities were JAA members. As EASA is a new organization, it is currently using the JAA technical structure and following the JAA’s recommendations for issuance of EASA certificates for aircraft.

Aircraft certification is an ongoing process. Any change in the design of any of our aircraft must be approved by the DAC. Significant changes may require a separate certification by other authorities. Changes in the aircraft certification requirements do not require recertification of an aircraft already certified, but significant safety improvements may be imposed by the authorities through operational rules or airworthiness directives.

4C. Organizational Structure

Our operations are conducted by Embraer-Empresa Brasileira de Aeronáutica S.A. as the controlling and principal operating company. We have a number of direct and indirect subsidiaries, none of which are considered significant. A complete list of our subsidiaries has been filed as Exhibit 8.1 to this annual report.

4D. Property, Plants and Equipment

We own our headquarters and plant, located in São José dos Campos. Significant portions of our facilities in São José dos Campos are subject to mortgages held by the IFC - International Finance Corporation. We lease, own or have the right to use the following properties:

Location	Purpose		Approximate square footage		Owned/ Leased			Lease Expiration
São José dos Campos, SP, Brazil		Headquarters, principal manufacturing facility and support center		5,902,102		Owned			—
São José dos Campos, SP, Brazil (Eugênio de Mello)		Manufacturing facility		3,658,884		Owned			—
Botucatu, SP, Brazil		Manufacturing facility		222,000		Owned			—
Harbin, China		Manufacturing facility		258,067		Owned	1		—
Gavião Peixoto, SP, Brazil		Testing and manufacturing facilities		191,648,512		2			—
São Paulo, SP, Brazil		Administrative offices		5,245		Leased			2007
Ft. Lauderdale, Florida, U.S.A.		Support center		91,500		Leased			2020
Nashville, Tennessee, U.S.A.		Aircraft maintenance and support center		316,128		Leased			2018 2028
Alverca, Portugal3		Aircraft maintenance and support center		417,000		Leased			2035
Le Bourget, France		Support center		33,500		Leased			2008
Villepinte, France		Representative offices		70,202		Leased			2014
Beijing, China		Representative offices		3,444		Leased			2007
Singapore		Representative offices		2,303		Leased			2009

1 The land is owned pursuant to a land use rights certificate.

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2 We currently have a temporary authorization from the State of São Paulo to use the land and expect to receive a concession for the land as soon as legal formalities are satisfied. The facilities are owned by Embraer.

3 We acquired this facility in March 2005.

See also Note 13 to our consolidated financial statements for additional information on our property, plants and equipment.

Production

The actual manufacture of an aircraft consists of three principal stages: fabrication of primary parts, assembly of major components and final assembly. Primary parts include metal sheets and plates (produced from die-cast molds, stretch forming or various chemical treatments), parts produced using computerized and non-computerized machines, and pre-fabricated parts. The primary parts are then joined, or mated, with one another to produce the aircraft’s major components, which are in turn joined to create the aircraft’s basic structure. In the final assembly stage, the aircraft’s various operating systems (such as wiring and electronics) are installed into the structure and tested.

Production facilities for our commercial, executive and defense aircraft are located in São José dos Campos in the State of São Paulo, Brazil. We reduced the aircraft production time of aircraft in the ERJ 145 family from eight months in 1996 to 3.1 months in 2004. From December 31, 1999 to December 31, 2000, we increased our production from 12 to 16 ERJ 145 family aircraft per month. At March 31, 2001, our production rate was 16 aircraft per month. In response to decreased market demand after the September 11, 2001 terrorist attacks and the related global economic slowdown, we decreased our production to 11 aircraft per month and, in 2005, decreased it further to nine aircraft per month.

Production time for our EMBRAER 170 aircraft has been reduced from approximately seven months at the beginning of its production in March 2004 to approximately 4.1 months at the end of 2005. We have the flexibility to increase production in the future in response to increased demand. We expect to increase our EMBRAER 170/190 jet family production to 11 aircraft per month in 2007 and 14 aircraft per month in 2008. In addition, on June 1, 2006, we entered into an agreement with KHI and KAB, pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft in order to meet demand for these types of aircraft. See “¾Products¾EMBRAER 170/190 Jet Family.”

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To accommodate our production of the ERJ 145 regional jet family and our EMBRAER 170/190 jet family, as well as any production of our executive jets, we have expanded our production facilities and acquired new facilities and will continue to coordinate with our risk-sharing partners to accommodate any future production needs. We built a new facility in Gavião Peixoto, in the State of São Paulo, Brazil, to enhance our flight testing capabilities and provide a final assembly line for our defense aircraft and of our executive jets. This facility has been operational since November 2002 and consists of a runway and other features to handle our development of supersonic aircraft technology. We are also conducting our flight tests for the EMBRAER 170/190 jet family and have a fully operational executive jet interior factory at Gavião Peixoto. In September 2000, we purchased a new facility in São José dos Campos in the State of São Paulo, Brazil, where we currently manufacture small parts and components for our aircraft. Our China joint venture has constructed a production facility for the ERJ 145 jet family in Harbin, China.

Environmental Matters

Most environmental regulation in Brazil is established at the state rather than at the federal or municipal level, with environmental authorities in most states granting operating permits to individual facilities rather than through general regulations. We have all material permits required to operate our business. The terms of these operating permits are reviewed every year and we are in compliance with our permits. In addition, we adhere internally to international ISO 14000 environmental standards. In 2004, 2005 and 2006, we invested US$2.6 million, US$3.8 million, and US$4.6 million respectively, in environmental matters and we expect to spend approximately US$6.1 million on environmental matters in 2007 with expenditures relating to the portion of construction of new facilities and modification of existing facilities relating to environmental compliance and improvements.

OGMA

During the process of due diligence prior to the acquisition of OGMA, we identified some industrial processes that did not meet environmental and occupational safety standards. As part of the negotiations, it was agreed with EMPORDEF, the seller, that (i) Embraer would spend €1.9 million - the amount estimated by the parties to be the amount necessary to bring the industrial processes into environmental and occupational safety compliance over a three-year period, (ii) the seller would indemnify OGMA for any losses due to environmental claims over the same three-year period, (iii) Embraer’s liability for pre-acquisition environmental claims would be limited to €4.1 million, and (iv) any liability for other pre-acquisition environmental and occupational safety claims in excess of €4.1 million would be paid by the seller. See also Note 12 to our consolidated financial statements for additional information on our acquisition of OGMA.

Insurance

We insure all of our plants and equipment for loss and replacement. We also carry insurance to cover all potential damages to our own fleet of aircraft, including those occurring during commercial and demonstration flights. In addition, we maintain a comprehensive aviation products liability policy, which covers damages arising out of the manufacture, distribution, sale and servicing of our aircraft and parts. We also carry natural disaster and business interruption insurance covering property damage and the related loss of gross income, as defined in the policy, and additional expenses, such as those incurred by us to offset the loss of production and delivery of aircraft due to partial or total interruption of our business because of material losses caused by an accident. We consider the amounts of our insurance coverage to be typical for a company of our size and adequate to meet all foreseeable risks associated with our operations.

We also maintain officers’ and directors’ liability insurance in the total amount of US$50 million. This insurance covers our officers and directors for liabilities resulting from wrongful acts, including any act or omission committed or attempted by any officer or director acting in his or her capacity as officer or director or any matter claimed against an officer or director solely by reason of his or her serving in such capacity.

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ITEM 4A. UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

This discussion should be read in conjunction with our consolidated financial statements and notes thereto and other financial information included elsewhere in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Item 3D. Risk Factors” and the matters set forth in this annual report generally.

Except as otherwise indicated, all financial information in this annual report has been prepared in accordance with U.S. GAAP and presented in U.S. dollars. For certain purposes, such as providing reports to our shareholders located in Brazil, filing financial statements with the CVM, the Brazilian securities commission, and determining dividend payments and other distributions and tax liabilities in Brazil, we have prepared and will continue to be required to prepare financial statements in accordance with the Brazilian Corporate Law. See “Introduction—Presentation of Financial and Other Data.”

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5A. Operating Results

Current Conditions and Future Trends in the Commercial Airline Industry and Executive Jet Market

The following discussion is based largely upon our current expectations about future events and trends affecting our business, actual results for our industry and performance could differ substantially. See “Introduction¾Special Note Regarding Forward-Looking Statements.”

Commercial Aircraft

The world’s air transportation market is still recovering from the 2001 crisis and is currently reaching break-even point, after five consecutive years of losses. This recovery is characterized by a growth in passenger demand in all regions, stimulated by reduced air fares, by a positive economic scenario due to the expansion of international trade and by greater flexibility of air transportation. Airlines are improving their efficiency and reducing operating costs, in order to survive in a more competitive environment with rising fuel prices. The increase in passenger demand and the right-sizing of airlines fleets have resulted in record load factors in 2006.

In the North American market, network airlines are facing increased competition from low-cost carriers, forcing them to reduce costs and to increase operating efficiency. The scope clauses relaxation from 50 to 75 seats has allowed network airlines to implement, through their regional partners, adjustments in the routes operated by narrow-body aircraft with excess capacity and to explore new medium-density markets. According to the International Air Transport Association, or IATA, this market should be profitable, once again, in 2007, after the negative results shown since 2001.

As per main European network airlines financial reports, they have recorded positive results, showing better adjustments to the growing competition from low cost airlines. We believe that regional airlines are developing secondary markets with a focus on business travelers and helped network airlines to improve their system efficiency. We also believe environmental regulations regarding noise and emissions should influence the development of new technologies and equipment for air travel. We also believe the inclusion of the aviation industry in the Emission Trading Scheme, or ETS, by 2011, will generate additional costs for European airlines and will result in a demand for more efficient aircraft with less environmental impact.

The Commonwealth of Independent States, or CIS has a diversified environment where the industry consolidation is progressing with airlines aiming to improve competitiveness to benefit from the strong economic growth and increased demand for air transportation in the region.

In the Middle East, we believe there is an increased demand for air transportation, mainly in the Gulf region, because of the expansion of long-distance international flights and the development of intra-regional aviation to explore lower-density markets and feed international routes.

The air transportation system in Africa is still tightly regulated and needs investments in infrastructure and fleet renovation. Air transport liberalization is being implemented in some countries with opportunities for regional aviation development.

Some Asia-Pacific regions are going through the process of liberalizing air transportation, which are stimulating passenger demand through the creation of new airlines with more competitive prices. We believe that more deregulation, with greater regional integration, will stimulate the air services between secondary cities, creating opportunities for regional aviation.

The continuous economic growth and recent government policies for regional aviation development in China are stimulating the evolution of the air transportation industry in that country. We believe the growth rates of 7% per year, with high investment levels in new airports and infrastructure will benefit cities in the western and northeastern regions of China. We also believe the Chinese fleet is highly concentrated on large capacity jets for domestic and international flights and regional aviation is being developed to provide adequate levels of services to medium-sized cities.

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In Latin America, the air transportation industry has shown significant growth, with the rise of low cost carriers, especially in Brazil and Mexico. Intra-regional aviation is growing considerably from some countries, like Mexico and Panama. We believe greater regional integration and more liberalization of air transport tend to increase the demand for regional airplanes to operate into secondary and medium-density markets.

We project that world air traffic demand will increase by 4.9% per year over the next 20 years, with China generating the highest growth rate in the world. The Asia Pacific and the Middle East regions will grow above world rates and mature markets, such as the USA and Europe, will grow around 4%, which corresponds to a decrease in their share of world traffic from 61% in 2006 to 53% by 2026.

We forecast a global demand for 7,500 jets in the 30-120 seat segment over the next 20 years and our estimates show that nearly 3,000 aircraft will be delivered between 2007 and 2016, with the remaining units to be delivered between 2017 and 2026 resulting in a total market value estimated at US$220 billion we expect that:

· the 30-60 seat segment has reached maturity, but will continue to play an important role in the North American and European air transportation systems and will develop in markets such as China, Mexico and Russia that have strong needs for regional aviation;

· the 61-90 seat segment will continue to explore the natural growth opportunities of regional airlines on high demand 50-seat regional jet routes, in order to sustain revenue growth and market share. In addition, it will help airlines to replace aging aircraft and will right-size aircraft capacity to market demand with improved service levels; and

· the 91-120 seat segment will expand with more airlines matching aircraft capacity to market demand, through the replacement of aging aircraft, right-sizing of narrow body routes with excess capacity and low-cost carrier expansion into mid-size markets.

We expect that more than 5,000 jets will be delivered to airlines in North America (the majority of which will be in the USA) and Europe, representing nearly 70% of total deliveries. We estimate that the 30-120 seat commercial jet fleet will double over the next 20 years, reaching more than 9,000 in 2026. We forecast that only 35% of the current fleet in service will be in operation by 2026 and over the next 20 years, nearly 3,000 units will be delivered to replace old and inefficient aircraft and the remaining 4,500 aircraft will be required to sustain air transport industry growth.

We believe the future world fleet profile indicates a clear trend towards higher-capacity aircraft. According to our estimates, the 61-120 seat jet fleet will increase from 2,500 to around 7,300, reaching 80% of the worldwide 30-120-seat commercial jet fleet by 2026, and the 30-60 seat jet fleet will decrease from 2,000 units in 2006 to 1,750 aircraft by 2026.

Executive Jets

Expected Market Trends

We believe the executive aviation market reached its all time record in terms of volume of deliveries in 2006. During last year, industry deliveries were 35 units higher than our prediction, totaling 885 jets. As a result, the market growth rate for 2006 increased to 18% in 2006.

We believe this strong momentum will continue in the short- to medium-term, despite the imminent risks of a deceleration in North American economic growth and the resulting slowdown in new aircraft demand over the next couple of years.

Some of the factors which we expect will sustain delivery rates in the following years are the expansion of industry’s backlogs, the healthy used-aircraft market, the increasing demand for very light jets and new air taxi per-seat operators. We believe the increasing deterioration of premium commercial air services due to the terrorist concerns and the restrictive security procedures in the main airports worldwide also support a “soft landing” of executive aviation demand and supports the trend of sustainable future growth.

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Since the beginning of 2005, the executive aviation market has registered an increase in sales outside the U.S.A., mainly in the Middle East, Russia and Asia. We believe the demand in these non-traditional markets has been leveraged mainly by the economic growth and the U.S. dollar depreciation in those regions. Some product lines are experiencing 35% to 55% in deliveries to non-U.S. markets.

We expect the air taxi per-seat business model to be tested in 2007. The strategy for this market segment is to create an affordable alternative to those customers who desire point-to-point travel in the 500 nautical mile range by using technology-driven very light jets. We believe that the majority of the expected customers for air taxi per-seat models are likely to be those travelers that are not satisfied with the current conditions of commercial air travel. The lower number of destinations, the delays of commercial flights, the restrictive security procedures and the reduction of premium services are the main fundamentals that we expect will support these trends. If successful, we believe the air taxi model may generate a demand for hundreds of very light jets and may modify the competitive dynamics of the executive aviation and even the commercial aviation offerings.

The industry investments are expected to focus on the introduction of new products and current product enhancements. As a result, manufacturers are also enhancing their sales and customer-support structures in fast growing regions such as Asia, the Middle East and Eastern Europe.

We believe the growth rate of executive aviation market revenues is expected to increase 2.2% per year over the next ten years, for a total of US$169 billion. Deliveries are expected to reach 3.7% of approximately 11,100 aircraft in the same period. We believe the new air taxi market may add another 2.500 to 3.000 aircraft to the very light jet segment.

Our Executive Jets

We entered the very light and light jet segments in May 2005, with the launch of the Phenom jets, and introduced the Lineage 1000, an ultra-large jet based on the EMBRAER 190 commercial jet platform, in May 2006.

We expect to enhance our executive jets customer support and services offering. We intend to add four wholly-owned service centers in the next three years, and are revamping the authorized service center network for executive jets. By 2008, we project that 45 service centers will support our executive jets fleet. For instance, in October 2006, we entered into an agreement with CAE to form a global training joint venture, which will provide comprehensive pilot and ground crew training to customers of the Phenom 100 very light jet and Phenom 300 light jet aircraft. We also plan to invest in parts’ inventory and logistics, as well as in the enhancement of our special maintenance programs.

We believe our commitment to executive aviation has produced significant results in 2006. As of December 31, 2006, the executive jets division added approximately US$2.1 billion of new contracts to our firm backlog. Firm orders for the recently launched Phenom 100 and Phenom 300 very light and light jets stood at over 350 aircraft, as of December 31, 2006.

As of December 2006, there were 94 Legacy 600 executive jets operating in 19 countries. We expect to deliver 25 to 30 per year in 2007 and 2008, up from 20 units delivered in 2005 and 13 in 2004. In 2006, 27 Legacy 600 aircraft were delivered.

We expect deliveries of the Phenom 100 to commence in mid-2008, totaling 15-20 units in the second half of that year. With deliveries of the Phenom 300, expected to begin in the second half of 2009, the production rate of the Phenom 100 and Phenom 300 is projected to reach 120-150 units combined during 2009.

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Delivery of up to two Lineage 1000 aircraft is expected for the second semester of 2008, in its first production year. We also plan to deliver three to four Lineage 1000 aircraft in 2009.

Brazilian Economic Environment

Events negatively affecting the commercial airline industry and the ensuing negative effects on the U.S. economy have adversely affected the global and Brazilian economies and securities markets, and have resulted in:

·      increased volatility in the market price of securities;

·      significant decline in corporate earnings estimates;

·      substantial losses in important industries, including the air transport and insurance industries; and

·      significant erosion of consumer confidence.

As discussed below, the uncertainty surrounding the U.S., Brazilian and global economies could result in the Brazilian government changing existing laws or regulations or imposing new ones, and/or the Central Bank changing base interest rates, which could adversely affect our operations.

The Brazilian government frequently intervenes in the Brazilian economy and occasionally makes drastic changes in policy and regulations. The Brazilian government’s actions to control inflation and affect 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. For example, the Brazilian government has the authority, when a serious imbalance in Brazil’s balance of payments occurs, to impose restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and on the conversion of Brazilian currency into foreign currencies. Changes in Brazil’s monetary, credit, tariff and other policies could adversely affect our business, as could inflation, currency and interest rate fluctuations, social instability and other political, economic or diplomatic developments in Brazil, as well as the Brazilian government’s response to such developments.

Rapid changes in Brazilian political and economic conditions that have occurred and may occur in the future will require a continued assessment of the risks associated with our activities and the adjustment of our business and operating strategy accordingly. Future developments in Brazilian government policies, including changes in the current policy and incentives adopted for financing the export of Brazilian goods, or in the Brazilian economy, over which we have no control, may materially adversely affect our business.

Brazilian economic conditions may also be negatively affected by economic and political conditions elsewhere, particularly in other Latin American and emerging market countries. Although economic conditions in such countries may differ significantly from economic conditions in Brazil, the reaction of investors to developments in such countries may have an adverse effect on the market value of securities of Brazilian issuers. Crises in other emerging market countries have at times significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil.

Presidential elections were held in Brazil in 2002. The country experienced a period of market turmoil in the second half of 2002 as investors feared that the victorious Labor Party would change the economic policies of the previous administration. The real fluctuated significantly as a result, depreciating by 52.3% during the year and closing at R$3.533 to US$1.00 on December 31, 2002. Inflation for the year 2002, as measured by the IGP-M, a measure of Brazilian inflation, was 25.3% andrealGDP grew by 1.9%.

The government elected in 2002 has largely continued the macroeconomic policies of the previous administration, focusing on fiscal responsibility and the Brazilian economy has witnessed increased stability. In 2003, investor confidence rebounded as a result and the real appreciated by 18.2% against the U.S. dollar to R$2.889 per US$1.00 at December 31, 2003. Inflation in 2003, as measured by the IGP-M, decreased to 8.7%. Brazil’s real GDP increased 0.5% in 2003, despite the constraints on economic growth caused by high interest rates that prevailed at the beginning of 2003 as the Central Bank sought to combat inflationary pressures. President Luiz Inácio Lula da Silva was reelected in October 2006. See “Item 3D. Risk Factors¾Risks Relating to Brazil¾Brazilian political and economic conditions have a direct impact on our business and the trading price of our common shares and ADSs.”

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In 2004, Brazil’s GDP increased 5.2% to US$559.6 billion and the country achieved a trade surplus of US$33.7 billion. Inflation in 2004, as measured by the IGP-M, was 12.4%. Interest rates continued to be maintained at high levels, with the rates for interbank certificates of deposit (Certificados de Depósito Interbancário), or CDI, averaging 17.8% in 2004.

Given the positive 2004 results, investor confidence continued to be strong in 2005. The real appreciated by 8.1% and 11.8% against the U.S. dollar in 2004 and 2005, respectively, to R$2.3407 per US$1.00 at December 31, 2005.

In 2005, Brazil’s GDP increased 3.1% to US$734.4 billion and the country achieved a record trade surplus of US$44.8 billion. Inflation in 2005, as measured by the IGP-M, was 1.2%. Interest rates continued to be maintained at high levels, with the CDI averaging 19.0% in 2005.

According to the Central Bank, in 2006 the GDP grew only 2.7% primarily as a result of high interest rates. Also in 2006, the real appreciated 8.7% against the U.S. dollar, reaching 2.138 per US$1.00 at December 31, 2006.

Effects of Inflation and Currency Exchange Fluctuations

Until the adoption of the Real Plan in 1994, Brazil had for many years experienced very high, and generally unpredictable, rates of inflation and steady devaluation of its currency relative to the U.S. dollar. The following table sets forth, for the periods shown, more recent rates of inflation in Brazil, as measured by the General Market Price Index and published annually by Fundação Getulio Vargas, and the devaluation of the real against the U.S. dollar as measured by comparing the daily exchange rates published by the Central Bank on the last day of each period:

	2002			2003			2004			2005			2006
Inflation (General Market Price Index)		25.3	%		8.7	%		12.4	%		1.2	%		3.8
Devaluation (appreciation) (R$ vs. US$)		52.3	%		(18.2	)%		(8.1	)%		(11.8	)%		(8.7	)%

Inflation and exchange rate variations have had, and may continue to have, substantial effects on our financial condition and results of operations. Inflation and exchange rate variations affect our monetary assets and liabilities denominated in reais. The value of such assets and liabilities as expressed in U.S. dollars declines when the real devalues against the U.S. dollar and increases when the real appreciates. In periods of devaluation of the real, we report (a) a remeasurement loss on real-denominated monetary assets and (b) a remeasurement gain on real-denominated monetary liabilities.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to use estimates and adopt assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and accounting disclosures. Therefore, in connection with the preparation of the financial statements included in this annual report, we have relied on variables and assumptions derived from historical experience and various other factors that we deemed reasonable and relevant. Although we review these estimates and assumptions in the ordinary course of business, the presentation of our financial condition and results of operation often requires us to make judgments regarding the effects of matters that are inherently uncertain. Actual results may differ from those estimated under different variables, assumptions or conditions. Note 3 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of these financial statements. In order to provide an understanding about how management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included below a brief discussion of our more significant accounting policies.

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Sales and Other Operating Revenues

We recognize sales of our commercial and executive aircraft when title and risk of loss is transferred to customers, which is generally when deliveries are made. In our defense and government segment, we perform work under long-term development contracts for the Brazilian government and other governments, and we recognize revenue in accordance with the percentage of completion method, which assumptions we frequently evaluate. From time to time, they may result in recognition of additional costs not previously recorded. These contracts contain provisions for price escalation based on various indices related to the cost of raw material and labor. Certain contracts contain provisions for the redetermination of price based upon future economic conditions.

Revenue under exchange pool programs are recognized monthly over the contract term and consist in part of a fixed fee and in part of a variable fee, directly related to actual flight hours of the covered aircraft. During 2004, 2005 and 2006, we recognized revenues of US$13.6 million, US$26.0 million and US$39.3 million, respectively, from those exchange pool arrangements, which are reported as net sales in the accompanying consolidated financial statements. Revenue is recognized net of indirect sales taxes.

Product Warranties

Generally, aircraft sales are accompanied by a standard warranty for systems, accessories, equipment, parts and software manufactured by us and/or by our risk-sharing partners. We recognize warranty expense, as a component of selling expenses, at the time of sale based on the estimated amounts of warranty costs expected to be incurred. These estimates are based on a number of factors, including our historical warranty claim and cost experience, the type and duration of the warranty coverage, volume and mix of aircraft sold and in service and warranty coverage available from the related suppliers. Actual product warranty costs may have different patterns from our past experience, mainly when a new family of aircraft begins its revenue services, which could require us to increase the product warranty reserve. The warranty period ranges from two years for spare parts to five years for components that are a part of the aircraft when sold.

Guarantees and Trade-In Rights

We have provided financial and residual value guarantees and trade-in rights related to our aircraft. We review the value of these commitments relative to the aircraft’s anticipated future fair value and, in the case of financial guarantees, the creditworthiness of the obligor. Provisions and losses are recorded when and if payments become probable and are reasonably estimable. We estimate future fair value using third party appraisals of aircraft valuations, including information developed from the sale or lease of similar aircraft in the secondary market. We evaluate the creditworthiness of obligors for which we have provided credit guarantees by analyzing a number of factors, including third party credit ratings and estimated obligors’ borrowing costs.

In accordance with FASB Interpretation No. 45, or FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others,” we record third-party guarantees on our balance sheet at their fair value. FIN 45 has the general effect of delaying the recognition of the portion of our revenue sales that are accompanied by certain third-party guarantees. These estimates of fair value are based on certain assumptions, including the probability of default by the ultimate obligor and the market value of the mortgaged assets. As a result, actual losses derived from financial guarantees may differ from the amounts recognized on our balance sheet, and, consequently, could negatively affect future operating results. During 2005 and 2006, the fair impact of guarantees recorded was an expense of US$4.5 million and an income of US$1.6 million, respectively.

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See also Note 4 to our consolidated financial statements for a summary of certain recently issued accounting pronouncements, which, as of December 31, 2006, had not yet been adopted.

Overview

Basis of Presentation

The consolidated financial statements have been prepared in accordance with U.S. GAAP. See “Introduction—Presentation of Financial and Other Data—Financial Data” for a discussion of factors affecting our financial data.

Operating Data

The following chart sets forth statistical data concerning our deliveries and backlog for our aircraft at the end of the respective periods. Deliveries consist of aircraft that have been delivered to customers and for which the corresponding revenue has been recognized. Our backlog consists of all firm orders that have not yet been delivered. A firm order is a contractual commitment from a customer, customarily accompanied by a down payment, for which we have reserved a place on one of our production lines. See “Item 5D. Trend Information” for certain information on our firm orders and options.

	2004	2005	2006
Commercial Aviation
Deliveries (1)
ERJ 145	87 (5)	46	12
ERJ 135	1 (1)	2	—
ERJ 140	—	—	—
EMBRAER 170	46	46 (1)	32 (2)
EMBRAER 175	—	14	11 (1)
EMBRAER 190	—	12	40
EMBRAER 195	—	—	3
Defense and Government (2)
Deliveries	1	7	5(1)
Executive Aviation
Deliveries (1)	13	14	27
Other Operating Information
Total backlog (in millions)(3)	US$10,097	US$10,383	US$14,806

(1) Deliveries identified by parentheses are aircraft delivered under operating leases.

(2) Includes only aircraft delivered to state-owned airlines and for government transportation.

(3) Since December 31, 2006, we have received five additional firm orders for our EMBRAER 170/190 jet family and six options for the EMBRAER 190 aircraft were converted into firm orders.

Net Sales

We generate revenue primarily from sales of commercial aircraft. We also generate revenue from the sale of defense aircraft, and from the sale of our Legacy 600 executive jets. Net sales of commercial and executive aircraft are denominated in U.S. dollars. Of defense and government net sales, approximately 79% are denominated in U.S. dollars and 21% are denominated in Brazilian reais, but indexed to the U.S. dollar through price adjustment indexes. Finally, we generate revenue from our other related businesses, which include after-sales support (including the sale of spare parts, maintenance and repair, training and other product support services), operating leases and single-source supply of structural parts and mechanical and hydraulic systems to other aircraft manufacturers.

We generally recognize revenue for the sale of our commercial and executive aircraft when the aircraft is delivered to the customer. We customarily receive a deposit upon signing of the purchase agreement for the sale of our commercial and executive aircraft and progress payments in the amount of 5% of the sales price of the aircraft 18 months, 12 months and six months before scheduled delivery. For the EMBRAER 170/190 jet family, we receive an additional 5% progress payment 24 months before scheduled delivery. We typically receive the remaining amount of the sales price upon delivery. Payments in advance of delivery are recorded under advances from customers as a liability on our balance sheet and, when we deliver the aircraft, these payments are recorded against trade account receivables of such aircraft.

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Our sales contracts with our customers typically include adjustments to the purchase price of the aircraft based on an escalation formula which is based on a mix of indexes related to raw material and labor costs. The deposits, progress payments and option payments are generally non-refundable. Once a customer decides to exercise an option, we account for it as a firm order and we begin to receive progress payments and recognize revenue upon delivery as discussed above.

We recognize revenue from the sale of our defense aircraft, including the funding of the research and development for specific programs, in accordance with the percentage of completion method. Certain contracts contain provisions for the redetermination of price based upon future economic conditions. Our defense and government customers continue to provide customer advances, which are converted into revenue as we achieve pre-determined stages of completion of the project, such as conception, development and design, and engineering, systems integration and customization. These installments are generally non-refundable.

Cost of Sales and Services

Our cost of sales and services consists primarily of:

· Material—These costs are primarily U.S. dollar-denominated. Substantially all of our materials costs are covered by contracts with our suppliers. Prices under these contracts are generally adjusted based on an escalation formula which reflects, in part, inflation in the United States.

· Labor—These costs are primarily real-denominated.

· Depreciation—We depreciate our property, plant and equipment over their useful lives, ranging from five to 48 years, on a straight-line basis. On average, our property, plant and equipment is depreciated over 16 years.

Recent Developments

On April 16, 2007 we announced that our firm order backlog increased from US$14.8 billion at December 31, 2006 to US$15.0 billion at March 31, 2007. During the first three months of 2007 we delivered a total of 25 aircraft. The delivery forecast for 2007 is expected to be at 165-170 aircraft, of which 40% is expected to be delivered in the first half of the year.

On April 17, 2007, we announced that we reached a preliminary agreement with Deutsche Lufthansa AG for the purchase of 30 EMBRAER 190 aircraft, with deliveries scheduled to begin in 2009. The execution of a final agreement is expected within the next few weeks. When executed, this agreement will supersede the existing agreement between Swiss International Air Lines and us for 15 EMBRAER 170 aircraft and 15 EMBRAER 195 aircraft. As a result, it will not substantially alter our existing firm backlog.

On April 19, 2007, we announced, during a press conference at the Latin America Aero & Defense air show, in Rio de Janeiro, that we have been studying the possible development of a military transport aircraft. If it is actually launched, the EMBRAER C-390, as it is called, will be the heaviest airplane ever produced by us and will be able to transport up to 19 tons (41,888 pounds) of cargo. The new project will incorporate a number of technological solutions developed for the EMBRAER 190 commercial aircraft.

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Results of Operations

The following table presents income statement data by business segment for the periods indicated.

Summary Financial Data by Business

	Operating Income
	Year ended December 31,
	2004			2005			2006
	(in millions of dollars)
Net sales:
Commercial Aviation		US$2,579.4			US$2,705.8			US$2,453.0
Defense and Government		365.8			423.8			226.7
Executive Aviation		245.7			278.0			582.1
Other related businesses		249.6			422.3			545.6
		3,440.5			3,829.9			3,807.4
Cost of sales and services:
Commercial Aviation		(1,613.0	)		(1,867.4	)		(1,765.5	)
Defense and Government		(291.4	)		(319.4	)		(174.1	)
Executive Aviation		(181.5	)		(188.4	)		(396.2	)
Other related businesses		(181.4	)		(296.6	)		(400.4	)
		(2,267.3	)		(2,671.8	)		(2,736.2	)
Gross profit:
Commercial Aviation		966.4			838.4			687.6
Defense and Government		74.4			104.4			52.6
Executive Aviation		64.2			89.6			185.9
Other related businesses		68.2			125.7			145.1
		1,173.2			1,158.1			1,071.2
Operating expenses:
Commercial Aviation		(348.1	)		(425.6	)		(456.9	)
Defense and Government		(59.8	)		(50.3	)		(37.9	)
Executive Aviation		(28.6	)		(44.5	)		(130.4	)
Other related businesses		(36.4	)		(32.3	)		(25.6	)
Unallocated corporate expenses		(156.3	)		(97.5	)		(112.5	)
		(629.2	)		(650.2	)		(763.4	)
Income from operations		US$544.0			US$507.9			US$307.7

The following table sets forth income statement information, and such information as a percentage of our net sales, for the periods indicated.

	Year ended December 31,
	2004					2005					2006
	(in millions of dollars, except percentages)
Net sales		US$3,440.5		100.0	%		US$3,829.9		100.0	%		US$3,807.4		100.0	%
Cost of sales and services		(2,267.3	)	65.9			(2,671.8	)	69.8			(2,736.2	)	71.9
Gross profit		1,173.2		34.1			1,158.1		30.2			1,071.2		28.1
Operating expense
Selling expenses		(342.9	)	10.0			(269.7	)	7.0			(374.1	)	9.8
Research and development		(44.5	)	1.3			(93.2	)	2.4			(112.7	)	2.9
General and administrative expenses		(139.4	)	4.1			(205.2	)	5.4			(235.5	)	6.2
Employee profit sharing		(61.2	)	1.8			(56.1	)	1.5			(42.7	)	1.1
Other operating expenses, net		(41.3	)	1.2			(26.1	)	0.7			1.7		¾
Income from operations		544.0		15.8			507.8		13.3			307.7		8.1
Non-operating income (expense)
Interest income (expenses), net		(38.0	)	1.1			(1.7	)	¾			140.5		3.7
Exchange loss, net		(12.2	)	0.4			(15.2	)	0.4			(4.1	)	0.1
Other non-operating income (expenses), net		(0.1	)	¾			9.1		0.2			¾		¾
Income before income taxes		493.7		14.3			500.0		13.1			444.2		11.7
Income tax benefit (expenses)		(112.1	)	3.3			(41.6	)	1.1			(44.4	)	1.2
Income before minority interest and equity in income (loss) from affiliates		381.5		11.1			458.4		12.0			399.8		10.5
Minority interest		(1.3	)	¾			(9.6	)	0.3			(9.6	)	0.3
Equity in income (loss) from affiliates		—		¾			(3.1	)	0.1			¾		¾
Net income		US$380.2		11.1	%		US$445.7		11.6	%		US$390.1		10.2

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2006 Compared with 2005

Net sales. Net sales decreased 0.6% from US$3,829.9 million in 2005 to US$3.807.4 million in 2006. Net sales in the commercial aviation segment decreased 9.3% from US$2,705.8 million in 2005 to US$2,453.0 million in 2006. Net sales in the executive aviation segment increased 109.4% from US$278.0 million in 2005 to US$582.1 million in 2006. Defense and government net sales decreased 46.5% from US$423.8 million in 2005 to US$226.7 million in 2006. Net sales from customer services and other related businesses increased 29.2% from US$422.3 million in 2005 to US$545.6 million in 2006.

The decrease in commercial aviation net sales is primarily due to a lower number of deliveries during the period. We delivered 98 aircraft in 2006, compared to 120 aircraft in 2005 for that segment, partially offset by a more diverse product mix. This decrease in the number of deliveries is due to delays in the supply chain and difficulties related to the wing assembly of the EMBRAER 190 and the EMBRAER 195 jets. The increase in executive aviation net sales resulted from the delivery of 27 Legacy 600 executive jets in 2006 compared to 14 aircraft of the same model delivered in 2005. The decrease in defense and government net sales is due to lower revenue during 2006 compared to 2005 as recognized from programs subject to the percentage of completion method of revenue recognition, principally the ALX program. The decrease is also due to a lower number of aircraft delivered for the transportation government officials and state-owned airlines. In 2006 we delivered five aircraft for that segment compared to seven deliveries in 2005. The increase in net sales from customer services and other related businesses is mostly due to an increase in revenues from spare parts salesand services rendered, and to the remarketing of used ERJ 145 aircraft.

Cost of sales and services. Cost of sales and services increased 2.4% from US$2,671.8 million in 2005 to US$2,736.2 million in 2006, primarily due to the 8.7% appreciation of the real against the U.S. dollar during the period, and the difficulties with the production ramp-up of the EMBRAER 190 and EMBRAER 195 jets, especially those related to the wing assembly. Approximately 13% of our cost of sales and services is denominated in reais. Cost of sales and services as a percentage of net sales increased to 71.9% in 2006, compared to 69.8% in 2005.

Gross profit. Our gross profit decreased 7.5% from US$1,158.1 million in 2005 to US$1,071.2 million in 2006, primarily due to the appreciation of the real against the U.S. dollar during the period and costs associated with the production learning curve associated with deliveries of the EMBRAER 170/190 family. As a result, our gross margin decreased from 30.2% in 2005 to 28.1% in 2006

Operating expenses. Operating expenses increased 17.4% from US$650.2 million in 2005 to US$763.4 million in 2006.

Research and development expenses in 2006 were US$112.7 million, compared to US$93.2 million in 2005. This increase is mainly attributed to the development of new products for the executive aviation segment and the research for improvements to all our products. During 2006, we also recognized revenues of approximately US$57.0 million as a reduction of research and development expenses due to an agreement between KHI and us, pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft in order to meet demand for these types of aircraft. The amounts received from our risk-sharing partners related to the fulfillment of certain contractual milestones, which offset our research and development expenses, totaled US$36.0 million in 2006 compared to US$55.1 million in 2005.

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Selling expenses showed an increase of 38.7% in 2006 compared to 2005 due to expenses associated with the implementation of a dedicated sales force and a marketing strategy to promote the new Phenom 100 and Phenom 300 executive jets, and efforts to support the commencement of the EMBRAER 190 model operations.

General and administrative expenses increased 14.8% from US$205.2 million in 2005 to US$235.5 million in 2006, mainly due to the effects on real-denominated administrative expenses resulting from the 8.7% appreciation of the real during the period (approximately 80% of our administrative expenses are denominated in reais) and to increases in employee salaries from a new collective bargaining agreement of approximately 6.0% in 2006.

Other operating expenses, net represented an expense of US$26.1 million in 2005 and an income of US$1.7 million in 2006, primarily due to the reversal of accrued tax penalties resulting from the favorable settlement of certain tax disputes in 2006.

As a result of the foregoing factors, operating expenses as a percentage of net sales increased from 17.0% in 2005 to 20.0% in 2006.

Financial income (expense), net. Financial income (expense), net, represented an expense of US$1.7 million in 2005 and an income of US$140.5 million in 2006, primarily as a result of an increase in net interest income derived from higher net cash availability in 2006 and the reversal of accrued interest charges resulting from a new legislation passed by the Brazilian government which allowed companies to pay taxes on the dispute of a reduction in interest and penalties accrued from certain tax disputes in 2006.

Foreign exchange income (loss), net. Foreign exchange income (loss), net, decreased from a loss of US$15.2 million in 2005 to a loss of US$4.1 million in 2006, reflecting the exchange variations on monetary assets and liabilities denominated in other currencies which are translated to U.S. dollars.

Income tax benefit (expense). The effective tax rate in 2006 was 10.0%, compared with 8.3% in 2005. Income tax expenses presented a 6.8% increase from US$41.6 million in 2005 to US$44.4 million in 2006, mainly due to earnings provided by currency variations reported in our financial statements prepared in accordance with Brazilian GAAP.

Net income. As a result of the foregoing factors, our net income decreased 12.5% from US$445.7 million in 2005 to US$390.1 million in 2006. In 2005, net income was 11.6% of net sales compared to 10.2% in 2006.

2005 Compared with 2004

Net sales. Net sales increased 11.3% from US$3,440.5 million in 2004 to US$3,829.9 million in 2005. Net sales in the commercial aviation segment increased 4.9% from US$2,579.4 million in 2004 to US$2,705.8 million in 2005. Net sales in the executive aviation segment increased 13.1% from US$245.7 million in 2004 to US$278.0 million in 2005. Defense and government net sales increased 15.8% from US$365.8 million in 2004 to US$423.8 million in 2005. Net sales from other related businesses increased 69.1% from US$249.6 million in 2004 to US$422.3 million in 2005.

The increase in commercial aviation net sales is primarily due to a product mix with a higher aggregated value due to the commencement of deliveries of the EMBRAER 175 and EMBRAER 190 aircraft. The increase in executive aviation net sales resulted from a product mix with a higher aggregate value due to the larger volume of deliveries of the Legacy 600 executive jet in 2005. The increase in defense and government net sales is primarily due to the commencement of the serial production of the ALX and the advancements made in the F-5 program for the Brazilian Air Force in 2005. The increase in net sales from other related businesses is mainly due to the US$125.2 million in net sales recorded by OGMA, a maintenance, repair and overhaul facility acquired in March 2005, and to the sale of two used ERJ 145 aircraft.

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Cost of sales and services. Cost of sales and services increased 17.8% from US$2,267.3 million in 2004 to US$2,671.8 million in 2005, primarily due to the appreciation of the real against the U.S. dollar during the period and the production learning curve associated with the initial deliveries of the EMBRAER 175 and EMBRAER 190, which are also aircraft of higher aggregate value. For the same reasons, cost of sales and services as a percentage of net sales increased to 69.7% in 2005, compared to 65.9% in 2004.

Gross profit. Our gross profit decreased 1.3% from US$1,173.2 million in 2004 to US$1,158.1 million in 2005, primarily due to the appreciation of the real against the U.S. dollar during the period and the production learning curve associated with the initial deliveries of the EMBRAER 175 and EMBRAER 190 and to benefits provided to the launch customers of those aircraft. As a result, our gross margin decreased from 34.1% in 2004 to 30.2% in 2005.

Operating expenses. Operating expenses increased 3.3% from US$629.3 million in 2004 to US$650.2 million in 2005, as compared to an increase in net sales of 11.3% in the same period.

Research and development expenses in 2005 were US$93.1 million, compared to US$44.5 million in 2004. This increase is due to the lower amounts received from our risk-sharing partners related to certification of the EMBRAER 190 and the fulfillment of certain contractual milestones, which offset our research and development costs and totaled US$55.1 million in 2005 compared to US$108.6 million in 2004.

Selling expenses decreased 21.3% from US$342.9 million in 2004 to US$269.7 million in 2005. The decrease in selling expenses resulted partially from the recovery of amounts related to guarantees on certain aircraft delivered upon the implementation of the financing structures for those aircraft.

General and administrative expenses increased 47.2% from US$139.4 million in 2004 to US$205.2 million in 2005, due to the effects on the real-denominated administrative expenses resulting from the appreciation of the real during 2005 (approximately 80% of our administrative expenses are denominated in reais), due to employee salary adjustments of approximately 8% in 2005 and also because of expenses related to the implementation of the SAP 4.7 Aerospace & Defense version.

Other operating expenses, net decreased 36.8% from US$41.3 million in 2004 to US$26.1 million in 2005, of which US$21.6 million was related to a tax fine provision related to taxes and payroll charges under legal dispute.

As a result of the foregoing factors, operating expenses as a percentage of net sales decreased from 18.3% in 2004 to 17.0% in 2005.

Interest income (expenses), net. Interest income (expenses), net, decreased from an expense of US$38.0 million in 2004 to an expense of US$1.7 million in 2005, primarily related to the gains on prepayment of loans in the total amount of US$36.4 million (2004¾US$8.2 million). See Note 21 to our consolidated financial statements.

Exchange loss, net. Exchange loss, net, increased from US$12.2 million in 2004 to US$15.2 million in 2005, mainly due to the remeasurement of non-U.S. dollar-denominated assets and liabilities into U.S. dollars.

Income tax benefit (expenses). Income tax expenses decreased from US$112.1 million in 2004 to US$41.6 million in 2005, as a result of the recognition of interest on shareholders’ equity of US$186.5 million distributed in 2005 compared to US$204.0 million distributed in 2004, which distributions are deductible for tax purposes.

Net income. As a result of the foregoing factors, our net income increased 17.2% from US$380.2 million in 2004 to US$445.7 million in 2005. In 2004, net income was 11.1% of net sales as compared to 11.6% in 2005.

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5B. Liquidity and Capital Resources

Our liquidity needs arise principally from research and development, capital expenditures, principal and interest payments on our debt, working capital requirements and distributions to shareholders. We generally rely on funds provided by operations, borrowings under our credit arrangements, cash contributions from risk-sharing partners, advance payments from customers and, to a lesser extent, capital increases to meet these needs. For further information, see “Item 4B. Business Overview¾Suppliers and Components; Risk-Sharing Arrangements” and “Item 4B. Business Overview¾Production Aviation Business¾Production, New Orders and Options.” We believe that these sources of funds will be sufficient to fund our future liquidity needs, continue to develop and finalize the certification process of the EMBRAER 170/190 jet family, develop our new Phenom 100, Phenom 300 and Lineage 1000 executive jets, and make other planned capital expenditures and pay dividends. However, our customers may reschedule deliveries, fail to exercise options or cancel firm orders as a result of the economic downturn and the financial volatility in the commercial airline industry. In addition, our risk-sharing partners’ cash contributions are refundable under certain limited circumstances and we may need to find replacement sources of capital.

Working Capital and Net Cash Provided by Operating Activities

We had a working capital surplus of US$1,961.1 million at December 31, 2005 and of US$1,740.9 million at December 31, 2006. Working capital decreased mainly, due to a decrease in trade accounts receivable related to aircraft delivered for which sales financing arrangements are under a structuring process, increased trade accounts payable and advances from customers, partially offset by an increase in inventory levels as a result of the ramp-up in the production of aircraft in the EMBRAER 170/190 family.

We generated net cash provided by operating activities of US$386.9 million in 2006, compared to net cash provided by operating activities of US$346.9 million in 2005, and a net cash used in operating activities of US$398.8 million in 2004. Net cash provided by operating activities increased in 2006 primarily as a result of a decrease in our accounts receivable and customer and commercial financing.

Net Cash Used in Investing Activities

In 2006, our net cash used in investing activities was US$179.5 million compared to US$50.5 million in 2005 and US$59.1 million in 2004. The increase in 2006 was mainly due to additions to property, plant and equipment related to the production ramp-up of aircraft in the EMBRAER 170/190 family, as well as investments related to the production of the Phenom 100 and Phenom 300 aircraft. In addition, in 2006 we made escrow deposits to allow us to continue discussing labor and tax disputes in court.

Capital Expenditures

We recorded additions to property, plant and equipment of US$90.8 million in 2006, US$51.8 million in 2005, and US$50.1 million in 2004. These expenditures related to construction of facilities, improvements to our plant and production facilities and modifications for the production of new aircraft models.

We currently expect investments in property, plant and equipment to total approximately US$194.0 million in 2007 and an additional US$117.0 million in 2008, primarily related to the production of the EMBRAER 170/190 jet family, as well as our executive jets and defense aircraft.

Cash Provided by (Used in) Financing Activities and Total Debt

Net cash provided by financing activities was US$105.2 million in 2004 compared to net cash provided by financing activities of US$24.9 million in 2005 and a net cash used in financing activities of US$395.1 million in 2006. In addition, during 2006 we contracted new borrowings in the total amount of US$1,258.2 million, compared to new borrowings in the total amount of US$1,523.3 million and US$1,587.5 million during 2005 and 2004, respectively. Furthermore, we also repaid a total amount of US$1,497.8 million of our indebtedness in 2006, compared to repayment in the aggregate amount of US$1,308.8 million and US$1,295.3 million in 2005 and 2004, respectively. In 2006, we distributed US$157.7 million as interest on shareholders’ equity compared to US$198.9 million and US$185.5 million distributed in 2005 and 2004, respectively.

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At December 31, 2006, we had total debt of US$1,349.2 million under our financing arrangements described below, 62.7% of which consisted of long-term debt and 37.3% of which consisted of short-term debt. In comparison, we had total debt of US$1,553.4 million at December 31, 2005 and US$1,338.7 million at December 31, 2004, consisting of 69.4% and 61.7% of long-term debt, respectively. Our total debt decreased from 2005 to 2006 largely due to repayments of loans.

Total debt consists of amounts recorded as loans and financing on our balance sheet and excludes non-recourse and recourse debt associated with customer financing arrangements transacted through special purposes entities, or SPEs. In structured financings, an SPE purchases an aircraft from us, pays us the full purchase price on delivery or at the conclusion of the sales financing structure, and leases the related aircraft to the ultimate customer. A third-party financial institution facilitates the financing of an aircraft purchased through an SPE, and a portion of the credit risk remains with that third party. We may provide financial guarantees and/or residual value guarantees in favor of the financial institution, as well as act as the equity participant in such financial structuring process. According to FIN 46-R (“Consolidation of Variable Interest Entities an interpretation of ARB 51”), an enterprise shall consolidate a variable interest entity if that enterprise has a variable interest that will absorb a majority of the entity’s expected losses if they occur, receive a majority of the entity’s expected residual returns if they occur, or both. Therefore, we have been consolidating certain SPEs owned by third parties where we are the primary beneficiary. See Note 9 to our consolidated financial statements.

The effect of consolidating these SPEs resulted in non-recourse and recourse debt at December 31, 2006, on our balance sheet as a short- and long-term liability, of US$829.8 million, and collateralized accounts receivable of US$819.7 million. US$511.2 million of this debt is non-recourse and we have no actual obligation for such debt as debtor or guarantor, other than potentially under existing financial guarantees for the financed aircraft. The remaining US$318.6 million of debt is recourse to us as a result of pending equity contributions and is secured by a pledge of a deposit with a financial institution. The non-recourse and recourse debt is collateralized by the collateralized accounts receivable and by the financed aircraft and, as a result, we do not anticipate a net cash outflow related to our non-recourse debt in the future. These financing transactions do not materially affect our income statement and cash flow data since the terms of the leases and the loans are substantially the same. See Notes 9 and 30 to our consolidated financial statements.

Credit Facilities and Lines of Credit

Our debt profile changed significantly during 2006. We prepaid US$529.8 million of outstanding credit facilities, and we renegotiatiated the spreads on US$234.0 million in credit lines. We entered into two separate syndicated standby facilities with Banco BNP Paribas Brasil S.A. in the total amount of US$500 million, as of December 31, 2006 no disbursements had been made under this facility. In addition, we issued US$400 million of 6.375% guaranteed notes due 2017 through our subsidiary, Embraer Overseas Limited.

Long-term facilities

In December 2002, we entered into a US$100.0 million credit facility with Santander Central Hispano Benelux S.A., fully disbursed, to fund our purchases of wings and other equipment from Gamesa. As of December 31, 2006, US$35.6 million was outstanding under this facility (US$21.6 million is currently short-term), which bears interest at a fixed rate of 4.79% per annum with final maturity in February 2009.

In April 2004, we entered into a credit agreement with Banco do Brasil S.A. for an import financing facility for US$50.0 million, at a fixed rate of 4.60% per annum with final maturity in April 2007. We have borrowed the full amount of the facility, of which US$56.3 million remained outstanding as of December 31, 2006 including principal and accrued interest, fully classified as short-term.

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In May 2004, we entered into a credit agreement with ABN Amro Bank for working capital in the amount of US$50.0 million, at a fixed rate of 7.11% per annum with final maturity in April 2009. We have borrowed the full amount of the facility and US$52.4 million remained outstanding as of December 31, 2006 (US$22.4 million in the short-term, including principal and accrued interest).

In March 2005, we entered into a credit agreement with Bladex - Banco Latino Americano de Exportaciones S.A., for an import financing facility of US$51.0 million, at a cost of LIBOR plus 1.88% per annum with final maturity in September 2010, of which US$52.0 million remained outstanding as of December 31, 2006 (US$4.8 million in the short-term including principal and accrued interest). The spread over LIBOR was renegotiated and, beginning March 2007, the spread will be 1.10% per annum.

In April 2005, we entered into an Export Credit Note with Banco Votorantim S.A. of US$50.0 million, at a fixed rate of 7.81% per annum with final maturity in April 2010, of which US$50.8 million remained outstanding as of December 31, 2006 (US$0.8 million is currently short-term) including principal and accrued interest.

In June 2005, we entered into an IFC - International Finance Corporation A/B Loan Secured Facility for a total amount of US$180.0 million, which includes the A loan for up to US$35.0 million, the B1 loan for up to US$60.0 million and the B2 loan for up to US$85.0 million. The terms of the loans are 12, 10 and eight years, respectively, and the loans bear interest at an average rate of six-month LIBOR plus 2.9% per annum. The facility is secured by a combination of mortgages on our main industrial facility in Brazil, three EMBRAER 170/190 pre-series aircraft and a bank account pledge agreement in an amount equivalent to 12 months interest coverage. In addition to the customary covenants and restrictions, including but not limited to those that require us to maintain defined debt liquidity and interest expense coverage ratios, the facility has covenants related to compliance with IFC general environmental, health and safety guidelines. We also agreed to a mandatory pre-payment provision, which limits our net revenues generated by selling and supporting offensive attack aircraft to 12.5% of our total net revenues. As of December 31, 2006, US$181.9 million remained outstanding under this facility (US$23.6 million in the short-term) including principal and accrued interest. In September 2006, we obtained from the IFC - International Finance Corporation, a consent to maintain a debt liquidity ratio above the contracted limit for the periods ending September 30, and December 31, 2006. We also renegotiated the spread over LIBOR and, beginning May, 2007 the spread will be 1.21% per annum.

In August 2006, we entered into two separate syndicated credit agreements with Banco BNP Paribas Brasil S.A., in each case as administrative agent for the lenders under each facility in the total amount of US$500.0 million. The trade finance credit facility provides for US$250.0 million in loans to be made to finance certain of our exports and imports, to be allocated at our discretion, provided that the aggregate amount does not exceed the US$250.0 million, and is available for multiple drawdowns on a non-revolving basis until August 25, 2009, unless fully disbursed prior thereto. Each drawdown is repayable in full in two years from the borrowing date. The trade financing facility is subject to a commitment fee of 25 basis points over the unused portion and, if disbursed, will bear interest at six-month LIBOR plus 40 and 45 basis points, respectively, for export or import finance disbursements thereof. The other agreement is a US$250.0 million syndicated revolving credit facility, with a five-year availability period. Disbursements under the revolving credit facility will be repayable on August 25, 2011. This revolving credit facility is subject to a commitment fee of 30 basis points per annum and, if disbursed, will bear interest at one-, two-, three- or six-month LIBOR plus 60 basis points per annum, as specified by us on each drawdown notice. Both facilities contain customary covenants and restrictions, including but not limited to, those that require us to maintain defined debt liquidity and interest expense coverage ratios. In addition, in the event the Brazilian government imposes restrictions on foreign exchange transactions, only disbursements under the trade finance facility will be available to us. If we make any disbursements under the trade finance facility, we will be required to grant a first priority pledge on certain of our export receivables, as determined by us at the disbursement date. As of December 31, 2006, no disbursement had been made under these facilities.

In October 2006, through our subsidiary Embraer Overseas Limited, we issued US$400 million 6.375% guaranteed notes due 2017 and, as of December 31, 2006, US$404.7 million was outstanding (US$4.7 million is currently short-term), including principal and accrued interest. Interest will be paid semiannually. The notes are unconditionally guaranteed by us. On April 5, 2007, we and Embraer Overseas commenced an exchange offer to exchange the notes for new notes registered with the U.S. Securities and Exchange Commission, or SEC. The exchange offer will expire on May 18, 2007. If the exchange offer is not completed on or before the date that is 270 days after the closing date, the annual interest rate will be increased by 0.25% per annum (which rate will be increased by an additional 0.25% per annum for each subsequent 90-day period that such additional interest continues to accrue, with a maximum limit of 0.5% per annum increase, until the exchange offer is completed). The indenture under which the notes were issued contains customary covenants and restrictions such as limitation on liens, consolidation, merger or transfer of assets.

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In November 2006, we entered into a credit facility in the amount of US$37.0 million with FINEP - Financiadora de Estudos e Projetos to support the development costs of Phenom 100 and Phenom 300 aircraft, of which US$19.8 million were disbursed in 2006. The facility bears interest at TJLP plus 5.0% per annum and is fully secured by a first priority mortgage of our Eugênio de Melo facility and a chattel mortgage of certain machines and equipment. The credit facility is repayable from December 2008 to December 2013. We expect the remaining amount to be disbursed during 2007, in accordance with the achievement of project milestones.

In addition, some of our subsidiaries maintain credit facilities with BNDES in the total amount of US$3.6 million outstanding at December 31, 2006, of which US$2.2 million is currently in short-term. Some of our subsidiaries also maintain a credit facility with FINEP in a total amount of US$8.1 million outstanding at December 31, 2006. The total amounts borrowed under the BNDES and FINEP credit facilities are due November and December 2011, respectively. The interest rates on these facilities range from TJLP plus 3.0% to TJLP plus 5.0% per annum. For BNDES borrowings, our subsidiary ELEB also pays fees at the rate of 0.40% of the sales price of the landing gear of 450 EMBRAER 170 and EMBRAER 175 aircraft.

We have various other loans and credit agreements with aggregate outstanding borrowings of US$122.0 million at December 31, 2006, of which US$44.5 million was allocated to our subsidiaries.

Some of our long-term financing arrangements include customary covenants and restrictions, including those that require us to maintain defined debt liquidity and interest expense coverage ratios, with which we were in compliance at December 31, 2006 and none of which are expected to have a material effect on our business. See “Item5F. Tabular Disclosure of Contractual Obligations” and Note 19 to our consolidated financial statements for further information on these financing arrangements.

Short-term facilities

In 2006, we entered into various credit agreements with BNDES for short-term pre-export credit financing. At December 31, 2006, we had US$257.4 million outstanding under these arrangements, at a cost of TJLP plus 2.16% per annum, with maturities from February 2007 to March 2008.

We have various other short-term loans and credit agreements with aggregate outstanding borrowings of US$104.4 million at December 31, 2006, of which US$83.8 million was allocated to our subsidiaries to finance working capital requirements. See Note 19 to our consolidated financial statements for further information on our short-term financing arrangements.

Capital Contributions and Issuances of Capital Stock

During 2006, we received capital contributions in the aggregate amount of US$5.1 million, representing the issuance of common shares upon the exercise of options. During 2006, we issued 1,292,094 common shares at a weighted average exercise price of R$8.61 per share. In addition, through April 18, 2007, 194,157 common shares were issued upon the exercise of options at an average exercise price of R$9.25 per share.

Recently Issued Accounting Pronouncements

In July 2006, the FASB issued FASB Interpretation No. 48, or FIN 48, “Accounting for Uncertainty in Income Taxes¾an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return that is reflected in measuring current and deferred tax assets. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this interpretation is adopted. We are currently evaluating the potential impact of this interpretation on our financial statements.

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In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement shall be effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application is encouraged, provided that the reporting entity has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. We do not expect that this will have any significant impact on the accounting we currently follow for measuring fair value and are currently evaluating the expanded disclosure requirements about fair value measurements.

In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. The adoption of SAB 108 did not have a material impact on the Company's consolidated financial position, annual results of operations or cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115” (“SFAS No. 159”). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The effect, if any, of adopting SFAS No. 159 on the Company's consolidated financial position, annual results of operations or cash flows has not been finalized.

5C. Research and Development

We incur research and development costs related to our aircraft and aircraft components. We also incur research and development costs that are not associated with the development of any particular aircraft. Such costs include the implementation of quality assurance initiatives, production line productivity improvements and studies to determine the latest developments in technology and quality standards. The research and development costs incurred by us are divided into two categories, research and development expense and additions to fixed assets. Research and development expense is the cost actually associated with the design and development of the aircraft less amounts earned from cash contribution from risk-sharing partners based on meeting performance milestones. Under U.S. GAAP, these costs are expensed in the year in which they are incurred. Additions to fixed assets relate solely to specialized equipment built by us and required for the project. These costs are treated as additions to property, plant and equipment.

We invest significantly in the development of new projects. Total research and development expenses for 2004, 2005 and 2006, including expenses related to the development of the EMBRAER 170/190 jet family and to the development of our new Phenom 100, Phenom 300 and Lineage 1000 executive jets, were US$44.5 million, US$93.2 million and US$112.7 million, respectively, net of cash contributions provided by risk-sharing partners. Research and development costs as a percentage of net sales were 1.3% in 2004, 2.4% in 2005 and 2.9% in 2006. Research and development costs increased as a percentage of our net sales in 2005 mainly because we only recognized US$55.1 million in contributions from our risk-sharing partners and also due to the 16.8% appreciation of the real against the U.S. dollar during the period, as approximately 85% of our research and development costs are real dominated. The increase in our research and development costs in 2006 was mainly due to the development of our new executive jets and the 8.7% appreciation of the real against the U.S. dollar during the period, partially offset revenues of US$57.0 million, related to an agreement we reached with KHI and KAB in 2006, pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft in order to meet demand for those aircraft as well as cash contributions from our risk-sharing partners in the amount of US$36.0 million as a result of the fulfillment of certain contractual milestones.

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We do not incur research and development expenses for defense programs as those are funded by the Brazilian government and other government customers. Most of our research and development expenses are associated with particular programs, whether commercial or executive aviation.

In 2007, we expect our research and development costs to total approximately US$237.0 million, excluding contributions from risk-sharing partners, but including estimated costs of US$127.0 million related to development of our new executive jets, US$51.0 million related to improvements in our commercial aviation segment products, and US$59.0 million related to development of technology.

We receive additional funds from risk-sharing partners to fund our cash costs for our commercial and executive aircraft research and development. In addition, the Brazilian and other governments fund substantially all of our defense and government research and development costs under long-term development contracts.

5D. Trend Information

The following table summarizes our order book for the commercial aviation segment at March 31, 2007 (also includes orders for the defense and government segment placed by state-owned airlines such as Satena and Tame). Our total firm order backlog at that date, including executive jets and defense aircraft, was US$15.0 billion (US$14.8 billion at December 31, 2006).

Commercial Aviation	Firm Orders		Options		Deliveries		Firm Order Backlog
EMB 120 Brasília		352		—		352		—
ERJ 135		108		—		108		—
ERJ 140		74		—		74		—
ERJ 145		732		132		679		53
EMBRAER 170		160		130		130		30
EMBRAER 175		99		136		29		70
EMBRAER 190		327		241		65		262
EMBRAER 195		44		51		5		39

The following tables set forth our commercial aviation order book at March 31, 2007 by aircraft type, customer and country.

ERJ 135:

Customer	Firm Orders		Delivered		Firm Order Backlog
American Eagle (USA)		40		40		—
British Midland (UK)		3		3		—
City Airline AB (Sweden)		2		2		—
ExpressJet (USA)		30		30		—
Flandair (France)		3		3		—
Jet Magic (Ireland)		1		1		—
Luxair (Luxembourg)		2		2		—
Pan Européenne (France)		1		1		—
Proteus (France)		3		3		—
Regional Airlines (France)		3		3		—
Republic Airways (USA)		15		15		—
South Africa Airlink (South Africa)		5		5		—
TOTAL		108		108		—

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ERJ 140:

Customer	Firm Orders		Delivered		Firm Order Backlog
American Eagle (USA)		59		59		—
Republic Airways (USA)		15		15		—
TOTAL		74		74		—

ERJ 145:

Customer	Firm Orders		Delivered		Firm Order Backlog
Aerolitoral (Mexico)		5		5		—
Air Caraibes (Guadalupe)		2		2		—
Alitalia (Italy)		14		14		—
American Eagle (USA)		118		118		—
Axon (Greece)		3		3		—
British Midland (UK)		9		9		—
British Regional Airlines (UK)		23		23		—
Brymon (UK)		7		7		—
China Southern (China)		6		6		—
China Eastern Jiangsu (China)		5		5		—
China Eastern Wuhan (China)		5		2		3
Cirrus (Germany)		1		1		—
ExpressJet (USA)		245		245		—
ERA (Spain)		2		2		—
Flandre Air (France)		5		5		—
GECAS (PB Air - Thailand)		2		2		—
NHA Group (China)		50		¾		50
KLM EXEL (Holand)		2		2		—
Lot Polish (Poland)		14		14		—
Luxair (Luxembourg)		9		9		—
Mesa (USA)		36		36		—
Portugalia (Portugal)		8		8		—
Proteus (France)		8		8		—
Regional (France)		15		15		—
Republic Airways (USA)		60		60		—
Rheintalflug (Austria)		3		3		—
Rio Sul (Brazil)		16		16		—
Satena (Colombia)		3		3		—
Sichuan (China)		5		5		—
Skyways (Sweden)		4		4		—
Swiss (Switzerland)		25		25		—
Transtates (USA)		22		22		—
TOTAL		732		679		53

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EMBRAER 170:

Customer	Firm Orders	Delivered	Firm Order Backlog
Alitalia (Italy)	6	6	—
Cirrus (Germany)	2	2	—
Egypt Air	6	—	6
Finnair (Finland)	10	10	—
Gecas (USA)	9	8	1
Lot Polish (Poland)	6	6	—
Paramount (India)	2	2	—
Republic Airline (USA)	48	48	—
Satena (Colombia)	2	2	—
Saudi Arabian Airlines (Saudi Arabia)	15	15	—
Sirte Oil (Libya)	1	1	—
South Africa Airlink (South Africa)	2	—	2
Swiss (Switzerland)	15	—	15
TAME (Ecuador)	2	2	—
US Airways (USA)	28	28	—
Virgin Blue (Australia)	6	—	6
TOTAL	160	130	30

EMBRAER 175:

Customer	Firm Orders	Delivered	Firm Order Backlog
Air Canada (Canada)	15	15	—
Air Caraibes (Guadeloupe)	1	1	—
Gecas (USA)	5	5	—
Lot Polish (Poland)	4	4	—
Northwest Airlines (USA)	36	—	36
Republic Airlines (USA)	30	4	26
Undisclosed	8	—	8
TOTAL	99	29	70

EMBRAER 190:

Customer	Firm Orders	Delivered	Firm Order Backlog
Air Canada (Canada)	45	22	23
Air Caraibes (Guadeloupe)	1	—	1
AeroRepublica (Colombia)	5	4	1
Copa (Panama)	15	6	9
Finnair (Finland)	10	2	8
Gecas (USA)	17	—	17
Hainan (China)	50	—	50
JetBlue (USA)	101	25	76
M1 Travel (Switzerland)	5	—	5
Regional (France)	6	2	4
TAME (Ecuador)	1	1	—
US Airways (USA)	57	3	54
Virgin Blue (Australia)	14	—	14
TOTAL	327	65	262

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EMBRAER 195:

Customer	Firm Orders	Delivered	Firm Order Backlog
Alpi Eagles (Italy)	5	—	5
Gecas (USA)	6	2	4
Flybe (UK)	14	3	11
Royal Jordanian (Jordan)	4	—	4
Swiss (Switzerland)	15	—	15
TOTAL	44	5	39

For additional information regarding trends in our business, see “Item 4B. Business Overview—Business Strategies” and “Item 5A. Operating Results—Current Conditions and Future Trends in the Commercial Airline Industry and Executive Jet Market.” For risks affecting our business, see “Item 3D. Risk Factors.”

5E. Off-Balance Sheet Arrangements

In the normal course of business, we participate in certain off-balance sheet arrangements, including guarantees, trade-in obligations, financial and residual value guarantees and product warranty commitments that are discussed below. We also have a number of swap transactions that are described in “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

See also Note 34 to our consolidated financial statements for additional information on our off-balance sheet arrangements.

Guarantees

Financial guarantees are triggered if customers do not perform their obligation to service the debt during the term of the financing under the relevant financing arrangements. Financial guarantees provide credit support to the guaranteed party to mitigate default-related losses. The underlying assets collateralize these guarantees. The value of the underlying assets may be adversely affected by an economic or industry downturn. Upon an event of default, we are usually the agent for the guaranteed party for the refurbishment and remarketing of the underlying asset. We may be entitled to a fee for such remarketing services. Typically a claim under the guarantee shall be made only upon surrender of the underlying asset for remarketing.

Residual value guarantees provide a third party with a specific guaranteed asset value at the end of the financing agreement. In the event of a decrease in market value of the underlying asset, we shall bear the difference between the specific guaranteed amount and the actual fair market value. Our exposure is mitigated by the fact that, in order to benefit from the guarantee, the guaranteed party has to make the underlying assets meet tight specific return conditions.

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The following table provides quantitative data regarding guarantees we render to third parties. The maximum potential payments represent the worst-case scenario and do not necessarily reflect the results expected by us. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets we could liquidate or receive from other parties to offset our payments under guarantees.

Description	At December 31, 2005			At December 31, 2006
	(in thousands of US$)
Maximum financial guarantees		1,768,030			1,741,559
Maximum residual value guarantees		878,249			930,002
Mutually exclusive exposure (1)		(415,460	)		(433,112	)
Provisions and liabilities recorded		(54,011	)		(116,402	)
Off-balance sheet exposure		2,176,808			2,122,047
Estimated proceeds from performance guarantees and underlying assets		2,127,208			2,177,379

(1) In the event both guarantees were issued for the same underlying asset, the residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered and, therefore, their distinct effects have not been combined to calculate the maximum exposure.

As discussed in Note 34 of our consolidated financial statements included, as of December, 2005 and December 2006, we maintained escrow deposits in the total amount of US$249.7 million and US$272.7 million, respectively, in favor of third parties for whom we have provided financial and residual value guarantees in connection with certain aircraft sales financing structures.

Trade-in Obligations

In connection with the signing of a purchase contract for new aircraft, we may provide trade-in options to our customers. These options provide a customer with the right to trade in existing aircraft upon the purchase of a new aircraft. At December 31, 2006, thirteen commercial aircraft were subject to trade-in options, and additional aircraft may become subject to trade-in options due to new sales contracts. The trade-in price is determined in the manner discussed under “Item 5A. Operating Results—Critical Accounting Estimates—Guarantees and Trade-In Rights” for commercial aircraft. We may be required to accept trade-ins at prices that are above the then-market price of the aircraft, which would result in financial loss for us when we resell the aircraft. Based on our current estimates and third party appraisals, we believe that any aircraft accepted for trade-in could be sold without any material gain or loss. In 2006, we were required to accept two aircraft for trade-in.

Financial and Residual Value Guarantees

We have guaranteed the financial performance of a portion of the financing for, and the residual value of, some of our aircraft that have already been delivered. Financial guarantees are provided to financing parties to support a portion of the payment obligations of purchasers of our aircraft under their financing arrangements to mitigate default-related losses. These guarantees are collateralized by the financed aircraft.

Assuming all customers supported by financial guarantees defaulted on their aircraft financing arrangements, and also assuming we were required to pay the full aggregate amount of outstanding financial and residual value guarantees and we were not able to remarket any of the aircraft to offset our obligations, our maximum exposure under these guarantees (less provisions and liabilities) would have been US$2,122.0 million as of December 31, 2006. For further discussion of these off-balance sheet arrangements, see Note 34 of our consolidated financial statements.

At December 31, 2006, we had US$272.7 million deposited in escrow accounts as collateral for financing and residual value guarantees of certain aircraft sold. If the guarantor of the debt (an unrelated third party) is required to pay the creditors of such financing arrangement or the residual value guarantee, the guarantor has the right to withdraw from the escrow account. Based on current estimates, we believe that the proceeds from the sale or lease of the covered aircraft (based on resale value as of December 31, 2006) and from other offsetting collections, such as cash deposits, would be US$2,177.4 million. The deposited amounts will be released when the financing contracts mature (from 2013 to 2021) if no default by the buyers of the aircraft occurs or the aircraft market price is above the residual value guarantee.

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The interest earned on the escrow funds is added to the balance in escrow and is recorded as interest income by us. In order to earn a better interest rate on such guarantee deposits, at December 31, 2006, we had invested part of the US$272.7 million deposited in escrow accounts in fourteen-year structured notes in a total amount of US$123.4 million with the depositary bank, which generated interest in the amount of US$7.6 million in 2005 that was added to the principal amount and recognized in our consolidated statements of income and comprehensive income. At December 31, 2004 the amount invested in these structured notes was US$42.2 million. This yield enhancement was obtained through a credit default swap (CDS) transaction which provides to the note holder the right of early redemption of the note in case of a credit event by us. Upon such a credit event, the note may be redeemed by the holder at the greater of the note’s market value or its original face amount, which would result in a loss of all interest accrued on such note to date. Credit events include obligation and payment defaults under the terms of the guarantees above specified thresholds, events related to the restructuring of the obligations above a specified threshold, bankruptcy and a repudiation of and/or moratorium on the obligations above a specified threshold. See Note 11 to our consolidated financial statements.

Residual value guarantees typically ensure that, in the 15th year after delivery, the relevant aircraft will have a residual market value of a percentage of the original sale price. Most of our residual value guarantees are subject to a limitation (a “cap”) and, therefore, in average our guaranteed residual value is 21%of the original sale price. In the event of a decrease in the market value of the underlying aircraft and an exercise by the purchaser of the residual value guarantee, we will bear the difference between the guaranteed residual value and the market value of the aircraft at the time of exercise. Our exposure is mitigated by the fact that the guaranteed party, in order to benefit from the guarantee, must make the aircraft meet specific return conditions.

For a discussion of the risks related to our trade-in obligations and our financial and residual value guarantee obligations, see “Item 3D. Risk Factors—Risk Relating to Embraer—Our aircraft sales are subject to trade-in options and financial and residual value guarantees that may require us to make significant cash disbursements in the future.”

We continually re-evaluate our risk under our guarantees and trade-in obligations based on a number of factors, including the estimated future market value of our aircraft based on third party appraisals, including information developed from the sale or lease of similar aircraft in the secondary market, and the credit rating of customers. See Note 34 to our consolidated financial statements for a further discussion of these off-balance sheet arrangements.

5F. Tabular Disclosure of Contractual Obligations

The following table and discussion provide additional disclosure regarding our material contractual obligations and commercial commitments as of December 31, 2006.

Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Loans and Interest		US$1,759.3		US$448.6		US$439.6		US$206.4		US$664.7
Pension Fund		107.6		15.3		20.5		20.5		51.3
Capital lease obligations		7.1		2.8		2.5		1.0		0.8
Operating leases		18.1		3.2		3.6		1.6		9.6
Purchase obligations		917.6		917.6		-		-		-
Other long-term liabilities		1,696.0		348.9		706.2		246.6		389.4
Total		US$4,505.7		US$1,741.4		US$1,172.5		US$476.1		US$1,115.8

The above table shows the sum of the loan’s principal and forecast interests until its maturity date. For the fixed rate loans, the interest expenses were calculated based on the rate established in each debt contract. For the floating rate loans, the interest expenses were calculated based on a market forecast for each period (LIBOR 6m - 12m), dated on December 30, 2006. This floating rate exposure is managed through derivatives operations mentioned in Item11.

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The above table does not reflect contractual commitments related to trade-in options and financial and residual value guarantees discussed in “Item 5E. Off-Balance Sheet Arrangements” above. See “Item 3D. Risk Factors¾Risks Relating to Embraer¾Our aircraft sales are subject to trade-in options and financial and residual value guarantees that may require us to make significant cash disbursements in the future.”

Purchase obligations consist of trade accounts payable and insurance payables.

Other long-term liabilities include recourse and non-recourse debt in the total amount of US$441.4 million that relates to obligations of our consolidated SPEs at December 31, 2006. The above table does not reflect any information about our derivative instruments, which are discussed more fully in “Item 11. Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

6A. Directors and Senior Management

We are managed by our Conselho de Administração, or Board of Directors, composed of 11 members, and our Diretoria, or committee of officers, composed of at least four and at the most 11 members (each an executive officer). We have a permanent Conselho Fiscal, or audit board, which is composed of five members and an equal number of alternates.

There are no family relationships among the members of our Board of Directors and/or our executive officers.

Board of Directors

Our Board of Directors ordinarily meets four times a year and extraordinarily when called by the chairman or by the majority of members of the board. It has responsibility, among other things, for establishing our general business policies and for electing our executive officers and supervising their management.

Our bylaws contain a temporary provision, specifying that our Board of Directors appointed at the general meeting of our shareholders held on March 31, 2006 will hold office for three years, expiring at the annual general meeting of our shareholders in 2009 to approve our financial statements for the fiscal year ended December 31, 2008. We refer to this Board as the transition Board of Directors.

The transition Board of Directors is composed of 11 members, including (i) Mr. Maurício Novis Botelho, our current president and Chief Executive Officer, or CEO, who is Chairman; (ii) one member appointed by the Brazilian Government; (iii) two members appointed by our employees; and (iv) one member appointed by each of Cia. Bozano, PREVI and SISTEL, our former controlling shareholders.

Beginning after the annual general shareholders’ meeting in 2009 to approve our financial statements for the fiscal year ended December 31, 2008, our Board of Directors will be appointed for two-year terms by our shareholders and there will be only three permanent members on our Board of Directors: (i) one to be appointed by the Brazilian Government, as holder of the “golden share,” and (ii) two to be appointed by the company’s employees. The remaining eight directors will be elected in accordance with the slate voting or cumulative voting rules contained in our bylaws. See “Item 10B. Memorandum and Articles of Association—Election of Board of Directors” for a detailed description of the rules and procedures regarding the nomination and election of our board members. The Brazilian Corporate Law requires each director to hold at least one of our shares. There is no mandatory retirement age for our directors.

Under the rules of the Novo Mercado, the members of our Board of Directors have agreed to comply with the Novo Mercado Regulations and to the rules of the São Paulo Stock Exchange Arbitration Chamber before taking office and for such purpose have executed a Term of Agreement of Management (Termo de Anuência dos Administradores).

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Set forth below are the names, ages, positions and brief biographical descriptions of the members of the transition Board of Directors at April 18 , 2007.

Name	Age	Position	Year First Elected
Maurício Novis Botelho	64	President and Chief Executive Officer and  Chairman of the Board of Directors	2000
Vitor Sarquis Hallack	54	Member of the Board of Directors	1995
José Reinaldo Magalhães	51	Member of the Board of Directors	2006
Wilson Carlos Duarte Delfino	60	Member of the Board of Directors	2004
Neimar Dieguez Barreiro	62	Member of the Board of Directors	2004
Boris Tabacof	78	Member of the Board of Directors	2006
Eduardo Salomão Neto	43	Member of the Board of Directors	2006
Hermann Wever	70	Member of the Board of Directors	2006
Samir Zraick	66	Member of the Board of Directors	2006
Paulo Cesar de Souza Lucas	47	Member of the Board of Directors	1999
Claudemir Marques de Almeida	54	Member of the Board of Directors	2004

Maurício Novis Botelho. Mr. Botelho has been our President and Chief Executive Officer since September 1995, and since March 2006 has also been chairman of the board of directors. Mr. Botelho served as CEO of OTL - Odebrecht Automação & Telecomunicações Ltda., also known as OTL and later named Stelar Telecom, a telecommunications company, from 1988 to 1995. He also served as CEO of CMW Equipamentos S.A., or CMW, an industrial automation company, from 1985 to 1995. He was also the CEO of STL - Engenharia de Sistemas Ltda., also known as STL, a project engineering company, from 1985 to 1995, a partner in Soluções Integradas PROLAN Ltda., also known as PROLAN, a corporate network company, from 1994 to 1995, and executive vice-president of TENENGE - Técnica Nacional de Engenharia Ltda., or TENENGE, a construction company, during 1992. During 1995, Mr. Botelho was an executive officer of Cia. Bozano. His business address is the address of our principal executive offices.

Vitor Sarquis Hallack. Mr. Hallack is our Vice-Chairman. He is the Chairman of the board of directors of Camargo Corrêa S.A. (“CCSA”), and board member of several other companies of CCSA, since September 2006. Previously he worked for the Bozano Group, an investment holding Company based in Rio de Janeiro, Brazil, from 1993 to 2006, as an Executive Director, with responsibility for overseeing the portfolio companies. Mr. Hallack also worked for CVRD, a mining and natural resources company for 17 years where he served as chief financial officer and executive director of Business Development from 1990 to 1993. During his time at CVRD, he sat on the board of several affiliated companies. Mr. Hallack has a law degree from the UFJF- Federal University of Juiz de Fora, Brazil and an MBA from Pace University, USA.

José Reinaldo Magalhães. Mr. Magalhães has been the Investments officer of PREVI, since January 2006. He was the deputy general manager of the New York branch of Banco do Brasil between July 2004 and December 2005 and representative at the Chicago Office between December 2002 and June 2004. From 1995 to 1998 he was a manager of the international division of Banco do Brasil. He was a member and vice chairman of the board of directors of Companhia Energética do Rio Grande do Norte from 1998 to 2002 and chairman of the board of directors of Companhia Energética de Pernambuco from 2000 to 2002. Mr. Magalhães’ business address is Praia de Botafogo, 501, 4th floor, 22250-040 Rio de Janeiro, RJ, Brazil.

Wilson Carlos Duarte Delfino. Mr. Delfino has been the acting President and CEO of SISTEL since January 2004, and has served as Executive Officer of Planning, Controlling, and Administrative Offices of SISTEL since March 2000. Previously, Mr. Delfino served as Assistant to the Executive Officer responsible for the Coordination of the Committee of Investments of SISTEL from September 1993 to September 1994 and as Manager of the Investment Analysis Department of SISTEL from October 1994 to March 2000. He was also a member of the board of directors of Paranapanema, a mining company, from April 1998 to April 2006, and a member of the board of directors of Perdigão, a company in the food sector, from April 2004 to April 2006. Mr. Delfino’s business address is SEP Sul, Quadra 702/902 - Conj. B, Bloco A, Ed. Gal. Alencastro, 2nd floor, 70390-025 Brasília, DF, Brazil

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Neimar Dieguez Barreiro. Mr. Barreiro has been a Brigadier Major in the Brazilian Air Force since July 2001 and the Secretary of Economy and Financing of the Brazilian Air Force since August 2001. He is also the representative of the Air Force in the Interministerial Follow-up Group of the Strengthening Program of Control of the Brazilian Air Space. He has served in the Brazilian Air Force since 1963. He is the representative of the Brazilian government, through the government’s ownership of the “golden share,” and his business address is Esplanada dos Ministérios, Bloco M, 3rd floor, room 05, 70045-900 Brasília, DF, Brazil.

Boris Tabacof. Mr. Tabacof has been Vice Chairman of the Board of Directors of Suzano Holding since 2004. From 2001 to 2004 he was president of Suzano and its subsidiaries. From 1993 to 2001, Mr. Tabacof was a member of the Board of Directors of Holding Nemofeffer, of Companhia Suzano and of Bahia Sul. Prior to that he occupied the position of director of Bahia Sul Papel e Celulose and director of the Safra Finance Group. He was also the finance secretary of the state of Bahia, responsible for the implementation of a tax reform in the state. He was the president of the economic board of the Federação das Indústrias do Estado de São Paulo, or Fiesp and is currently director of the economics department of the Centro das Indústrias do Estado de São Paulo, or CIESP. Mr. Tabacof’s business address is Rua Angelina Maffei Vita, 344, 9^th floor, 01455-070 São Paulo, SP, Brazil.

Eduardo Salomão Neto. Mr. Salomão is a partner of the law firm Levy & Salomão- Advogados. He has also been the general counsel of the Museum of Modern Art of São Paulo since 1992 and a member of the board of directors of the institution. Mr. Salomão holds an LLM from the University of London and Ph.D. and post doctorate degrees in Business Law from the University of São Paulo. Mr. Salomão’s business address is Av. Brigadeiro Faria Lima, 2601, 12th floor, 01452-924, São Paulo, SP, Brazil.

Hermann Wever. Mr. Wever has been the president of the Consulting Board of Siemens Ltda. since 2001. From 1987 to 2001 he was president of Siemens Brasil. He was also Officer of Energy and Installations at Siemens do Brasil from 1980 to 1987. Prior to that, Mr. Wever held several positions at General Electric, including Industrial Officer of the department of lamps and illumination from 1968 to 1974, and Vice President of Domestic Appliances from 1974 to 1978. Mr. Wever’s business address is Rua Desembargador Sylos Cintra, 90, 04646-150 São Paulo, SP, Brazil.

Samir Zraick. Mr. Zraick was chief financial officer of Cia. Vale do Rio Doce-CVRD and Head of its US Affiliate from 1971 to 1986. He was also a Board Member of CVRD in 2000 and served as a Special Advisor and member of CVRD’s Strategic Committee from 2001 to 2004. He was CFO and VP Business Development of Caemi Mineração e Metalurgia S. A. from 1986 to 1998. He was a member of the Board of Directors and Chairman of the Marketing Committee of Quebec Cartier Mining, in Montreal, Quebec, from 1990 to 1999. He served as a Board Member of Canico Resources in Vancouver, British Columbia from July 2004 to March 2006, Mr. Zraick’s business address is 3 Lincoln Center, apt. 38H, New York, NY 10023, U.S.A.

Paulo Cesar de Souza Lucas. Mr. Lucas has participated in our strategic planning division since 1998 and was the coordinator of Embraer’s implementation of the modernization and cost-reduction strategy from 1990 to 1996. Mr. Lucas has been working at Embraer for more than 16 years and is a representative of our shareholder employees. Mr. Lucas’ business address is the address of our principal executive offices.

Claudemir Marques de Almeida. Mr. Almeida has been an employee of Embraer since 1987, and currently holds the position of Aeronautic Supervisor I. He previously served as a member the Board of Directors from January 1995 to April 2001. Mr. Almeida is the representative of our non-shareholder employees, and his business address is the address of our principal executive offices.

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Executive Officers

Our executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities established by our bylaws and by the Board of Directors. The business address of each of our executive officers is the address of our principal executive offices.

Our current executive officers were elected by the Board of Directors on March 31, 2006 with a term of office until the meeting of our Board of Directors to be held following the annual general meeting of our shareholders in 2009 to approve our financial statements for the fiscal year ended December 31, 2008. After the 2009 annual general meeting of our shareholders, the terms of office for members of our Board of Directors and for our executive officers will be two years, with each director or executive officer eligible for reelection.

Until the annual general meeting of our shareholders to be held in 2009, a majority vote of the members of our Board of Directors will be necessary to remove an officer. After the annual general meeting of our shareholders, a vote of at least seven members of our Board of Directors will be necessary to remove an officer.

As a transition measure, our current President and CEO concurrently holds the office of Chairman of our Board of Directors until April 23, 2007, when he will resign from his position as CEO. On such date, Frederico Fleury Curado is expected to be elected by our Board of Directors as our new CEO. Our bylaws expressly forbid any executive officer from also serving at the same time as our director. Our bylaws contain a provision that our CEO will participate in meetings of the Board of Directors, but shall not vote on resolutions of the Board of Directors.

Under the rules of the Novo Mercado, our executive officers have agreed to comply with the Novo Mercado Regulations and to the rules of the São Paulo Stock Exchange Arbitration Chamber before taking office and for such purpose have executed a Term of Agreement of Management (Termo de Anuência dos Administradores).

Set forth below are the names, ages, positions and brief biographical descriptions of our executive officers at April 18, 2007:

Name	Age	Position	Year First Elected
Maurício Novis Botelho	64	President and Chief Executive Officer	1995
Antonio Luiz Pizarro Manso	62	Executive Vice-President Corporate and Chief Financial Officer	1995
Satoshi Yokota	66	Executive Vice-President—Technology Development and Advanced Design	1997
Luis Carlos Affonso	46	Executive Vice-President—Executive Aviation	2006
Frederico Pinheiro Fleury Curado	45	Executive Vice-President—Airline Market	1995
Luiz Carlos Siqueira Aguiar	44	Executive Vice-President—Defense Market and Governments	2005
Horácio Aragonés Forjaz	55	Executive Vice-President—Corporate Communications	1998
Artur Aparecido V. Coutinho	58	Executive Vice-President—Procurement and Industrial Operations	2005

Mauricio Novis Botelho. For a biographical description of Mr. Botelho, please see “—Board of Directors.”

Antonio Luiz Pizarro Manso. Mr. Manso has been Executive Vice-President Corporate since 2001, and Chief Financial Officer of Embraer since 1995. Mr. Manso is also a director and/or president of several of Embraer’s subsidiaries. Mr. Manso was the administrative and financial officer of STL from 1986 to 1995 and of CMW from 1986 to 1995 and served as a member of the board of directors of CMW during 1995. He was also the chief financial officer of OTL from 1989 to 1995, the financial officer of TENENGE during 1992 and the chief financial officer of PROLAN from 1994 to 1995.

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Satoshi Yokota. Prior to becoming Executive Vice-President—Technology Development and Advanced Design of Embraer in 1997, Mr. Yokota held several other positions at Embraer, including Programs and Commercial Contracts Officer during 1995 and 1996 and Programs Officer from 1992 to 1995. Mr. Yokota is also the chairman of the board of directors of ELEB, one of Embraer’s subsidiaries.

Luis Carlos Affonso. Mr. Affonso became Embraer’s Executive Vice-President - Executive Aviation in June 2006. In 2005 he was our Vice-President - Executive Aviation. Prior to that he held several positions at Embraer, including Vice-President of Engineering and Development from 2004 to 2005 and Director of the EMBRAER 170/190 Program from 1999 to 2004.

Frederico Pinheiro Fleury Curado. Prior to becoming Executive Vice-President—Airline Market of Embraer in 1998, Mr. Curado was our Executive Vice-President—Planning and Organizational Development from 1997 to August 1998. Prior to that, he held several different positions at Embraer in the areas of manufacturing, procurement, information technology, contracts and sales. Mr. Curado is also a director and/or secretary of several of Embraer’s subsidiaries.

Luiz Carlos Siqueira Aguiar. Mr. Aguiar has been our Executive Vice President for Defense Market and Governments since December 2005. He was elected as a board member and chairman of the board in April 2004, as a representative of PREVI, and was an executive officer of PREVI since February 2003. From August 2000 to February 2003, he was an officer of Banco do Brasil. He also served as Deputy Manager of Banco do Brasil in New York from February 1997 to August 2000. He was previously a member of the board of directors of Seguradora Brasileira de Crédito a Exportação, a Brazilian trade finance insurance company, from May 2001 to February 2003. Since April 2003 and July 2003, respectively, he has served as Deputy Chairman of the board of directors of Companhia Paulista de Força e Luz - CPFL, a utility company, and as member of the Financing Committee of Companhia Vale do Rio Doce - CVRD, a mining company.

Horácio Aragonés Forjaz. Prior to becoming Executive Vice-President—Corporate Communications of Embraer in 2001, Mr. Forjaz was Executive Vice-President—Planning and Organizational Development of Embraer from 1998 to 2001, and prior to 1998, he was our engineering officer. From 1995 to 1997, Mr. Forjaz was the operational director of Compsis—Computadores e Sistemas Ltda., a systems engineering and software company, and from 1975 to 1995, he held several different positions at Embraer in the areas of engineering and systems design.

Artur Aparecido V. Coutinho. Prior to becoming Executive Vice-President—Procurement and Industrial Operations in 2005, Mr. Coutinho was Embraer’s Vice-President responsible for marketing, sales and customer support activities in North America from January 2003 to March 2005. From February 2000 to December 2002, he was Vice-President—Customer Service. Prior to that, Mr. Coutinho held several different positions at Embraer in the areas of marketing, training and quality control.

6B. Compensation

For the fiscal year ended December 31, 2006, the aggregate compensation (including benefits in kind granted) that we paid to members of the Board of Directors, the Conselho Fiscal and the executive officers for services in all capacities was approximately US$9.1 million. In addition, in 2006, we set aside approximately US$0.1 million for the payment of pension benefits to our executive officers. The members of our Board of Directors and Conselho Fiscal do not receive any such benefits. The board members, Conselho Fiscal members and executive officers did not receive any compensation (including benefits in kind) from any of our subsidiaries. At December 31, 2006, none of the board members, Conselho Fiscal members or executive officers had any financial or other interests in any transaction involving Embraer which was not in the ordinary course of our business.

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In addition, at April 18, 2007, the board members and executive officers owned an aggregate of 3,043,916 common shares.

Stock Option Plan

At a special shareholders’ meeting held on April 17, 1998, we approved a stock option plan for management and employees, including those of our subsidiaries, subject to restrictions based on continuous employment with us for at least two years. The five-year term for the granting of options under the plan expired on May 31, 2003.

Under the terms of the plan, we were authorized to grant options to purchase up to 25,000,000 common shares over the five-year period from the date of the first grant. As of the end of this five-year period, we had granted options for an aggregate of 20,237,894 common shares, including 662,894 options granted in connection with our share dividend in 2002, at a weighted average exercise price of R$6.17 per share. The options granted to each employee vest as follows: 30% after three years from the date granted, an additional 30% after four years and the remaining 40% after five years. Employees may exercise their options for up to seven years from the date they are granted. At December 31, 2006, 17,331,109 of the total options granted had been exercised, and an additional 194,157 options had been exercised as of April 13, 2007. Of the total number of options granted, options to purchase an aggregate of 7,799,470 common shares have been granted to our executive officers at a weighted average exercise price of R$4.57 per share, of which 6,940,000 were exercised during the period from June 1, 2001 through April 18 , 2007.

Profit Sharing Plan

We implemented a profit sharing plan in 1998 that ties employee profit sharing to dividend payments. Every time we pay dividends to our shareholders, we also pay a profit sharing participation of 25% of the amount of the dividend payment to employees who have achieved goals established at the beginning of the year.

Under the plan, we may pay additional amounts of up to an additional 5% of such dividend payment to employees who have performed exceptionally, on a discretionary basis. We believe that this policy encourages individual employees to meet our production goals. In April 2005, our Board of Directors approved certain changes to our profit sharing plan related to the additional 5% distribution to exceptionally performing employees. These changes were based on recommendations made by an Advisory Committee of the Board of Directors, which was formed in April 2004 for the purpose of reviewing the company’s policies with regard to compensation and profit sharing.

The new policy provides that the additional distribution of up 5% to exceptionally performing employees will be limited to an amount equal to 50% of our net income for the fiscal year, adjusted for certain cash flow events, to be distributed in cash after our annual general shareholders’ meeting at which our annual financial statements are approved. For certain high level employees, two-thirds of the distribution will be distributed in cash on the same date and the remaining one-third will be allocated as “virtual common shares” and payments related thereto will be made over a three-year period, using a weighted average price formula. As a result, the value of these payments will be tied to the future market performance of our common shares.

For the 2004, 2005 and 2006 fiscal years, we distributed to employees, US$61.2 million, US$56.1 million and US$42.7 million, respectively.

6C. Board Practices

All members of our transition Board of Directors serve three-year terms and the terms of all current members expire at the annual general meeting of our shareholders in 2009 to approve our financial statements for the fiscal year ended December 31, 2008. Beginning after the annual general meeting of our shareholders in 2009, our Board of Directors will be appointed for two-year terms. See “Item 6A. Directors and Senior Management—Board of Directors” for the year each of the members of our Board of Directors was first elected.

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The executive officers are elected by the Board of Directors. Our current executive officers were elected on March 31, 2006, with a term of office until the meeting of our Board of Directors to be held following the annual general meeting of our shareholders in 2009 to approve our financial statements for the fiscal year ended December 31, 2008. After the 2009 annual general meeting of our shareholders, the terms of office for members of our Board of Directors and for our executive officers will be made a unified two years, reelection being allowed.

Until the annual general meeting of our shareholders to be held in 2009, a majority vote of the members of our Board of Directors will be necessary to remove an officer. After the annual general meeting of our shareholders, a vote of at least seven members of our Board of Directors will be necessary to remove an officer. See “Item 6.A. Directors and Senior Management—Executive Officers” for the year each of our executive officers was first elected.

None of our directors is party to an employment contract providing for benefits upon termination of employment. All our executive officers are party to an employment agreement setting forth the rights and obligations of the executive officers. If we terminate an employment agreement with any of our executive officers, we will be required to pay a termination benefit to such executive officer equivalent to 50% of his/her remaining annual compensation, provided that a minimum of six monthly wages of the annual compensation is paid. Maurício Botelho has agreed to a three-year non-compete agreement, effective after he steps down as chief executive officer.

Conselho Fiscal

Under the Brazilian Corporate Law, the Conselho Fiscal is a corporate body independent of management and a company’s external auditors. A Conselho Fiscal has not typically been equivalent to or comparable with a U.S. audit committee; its primary responsibility has been to monitor management’s activities, review the financial statements, and report its findings to the shareholders. However, pursuant to an exemption under the new rules of the SEC, regarding the audit committees of listed companies, a foreign private issuer is not required to have a separate audit committee composed of independent directors if it has a board of auditors established and selected pursuant to home country legal or listing provisions expressly requiring or permitting such a board and such board meets certain requirements. Pursuant to this exemption, our Conselho Fiscal can exercise the required duties and responsibilities of a U.S. audit committee to the extent permissible under Brazilian Corporate Law. To comply with the new SEC rules, the board of auditors must meet the following standards: it must be separate from the full board, its members must not be elected by management, no executive officer may be a member, and Brazilian law must set forth standards for the independence of the members. In addition, in order to qualify for the exemption, the board of auditors must, to the extent permitted by Brazilian law:

· be responsible for the appointment, retention, compensation and oversight of the external auditors (including the resolution of disagreements between management and the external auditors regarding financial reporting);

· be responsible for establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters, and procedures for the confidential, anonymous submission by employees of concerns regarding questionable accounting or auditing matters;

· have the authority to engage independent counsel and other advisors as it determines necessary to carry out its duties; and

· receive appropriate funding from the company for payment of compensation to the external auditors, for any advisors and ordinary administrative expenses.

As a foreign private issuer, we decided to modify our Conselho Fiscal to comply with the exemption requirements. Our Board of Directors has delegated to the Conselho Fiscal certain additional responsibilities and the Conselho Fiscal and the Board of Directors adopted an additional charter delegating to the Conselho Fiscal the duties and responsibilities of a U.S audit committee to the extent permitted under Brazilian Corporate Law. Because Brazilian Corporate Law does not permit the Board of Directors to delegate responsibility for the appointment, retention and compensation of the external auditors and does not provide the board or the Conselho Fiscal with the authority to resolve disagreements between management and the external auditors regarding financial reporting, the Conselho Fiscal cannot fulfill these functions. Therefore, in addition to its oversight responsibilities, the Conselho Fiscal may only make recommendations to the Board of Directors with respect to the appointment, retention and compensation of the external auditors, and with regard to resolution of disagreements between management and the external auditors, the Conselho Fiscal may only make recommendations to management and the board.

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Under the Brazilian Corporate Law, the Conselho Fiscal may not contain members who are members of the Board of Directors or the executive committee, or who are employees of Embraer or employees of a controlled company or of a company of this group, or a spouse or relative of any member of our management. In addition, the Brazilian Corporate Law requires that Conselho Fiscal members receive a remuneration at least 10% of the average amount paid to each executive officer. The Brazilian Corporate Law requires a Conselho Fiscal to be composed of a minimum of three and a maximum of five members and their respective alternates. Under the rules of the Novo Mercado, the members of the Conselho Fiscal have agreed to comply with the Novo Mercado Regulations and to the rules of the São Paulo Stock Exchange Arbitration Chamber before taking office and for such purpose have executed a Term of Agreement of the Conselho Fiscal (Termo de Anuência do Conselho Fiscal).

Our Conselho Fiscal is composed of five members who are elected at the annual shareholders’ meeting, with terms lasting until the next annual shareholders’ meeting after their election. Under the Brazilian Corporate Law, in the event a company acquires control of another company, minority shareholders that in the aggregate hold at least 10% of the voting shares also have the right to elect separately one member of the Conselho Fiscal. Such provision will not be applicable to us as long as we are subject to widespread control. Set forth below are the names, ages and positions of the members of our Conselho Fiscal and their respective alternates, as of April 28, 2006, the date of the last annual shareholders’ meeting.

Name	Age	Position	Year First Elected
Jorge Khalil Miski	47	Effective member	2004
Maria da Salete Medeiros	56	Alternate	2005
Geraldo Humberto de Araujo (1)	55	Effective member	2004
Tarcísio Luiz Silva Fontenele(1)	44	Alternate	2001
José Mauro Laxe Vilela(2)	59	Effective member	2003
Alberto Carlos Monteiro dos Anjos(2)	44	Alternate	2003
Taiki Hirashima	66	Effective member	2004
Guillermo Oscar Braunbeck	34	Alternate	2005
Rolf Von Paraski (3)	55	Effective member	2006
José Roberto Gerbasi de Andrade	57	Alternate	2006

(1)Employed by SISTEL.

(2)Employed by Cia. Bozano.

(3)Employed by Banco do Brasil.

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Advisory and Executive Committee

In April 2004, our Board of Directors established an Advisory Committee with a term of 18 months with the task of reviewing the company’s policies regarding the compensation and profit sharing for our executive officers and making recommendations for the revision of such policies. The three-member Committee was composed of two members of our Board of Directors and one alternate member of our Board of Directors. The members of the Advisory Committee and their alternates were as follows: Vitor Sarquis Hallack (alternate: Carlyle Wilson), Wilson Carlos Duarte Delfino (alternate: Carlos Alberto Cardoso Moreira) and Maysa Oliveira da Volta (alternate: Luiz Carlos Siqueira Aguiar). The term of the Committee was shortened to twelve months and terminated by the Board of Directors on April 20, 2005, as the Committee accomplished the purpose for which it had been created.

On the same date, the Board of Directors established a Special Committee, composed of the same members as the Advisory Committee, with the purpose of assisting in the performance of the functions of our Board of Directors, specifically with respect to our executive compensation policy. As a result of the merger of former Embraer with and into Embraer approved on March 31, 2006 and the change to Embraer’s bylaws, the Special Committee was terminated on such date.

Pursuant to our bylaws, our Board of Directors must appoint an Executive Committee that may be composed of up to four members. The members of the Executive Committee appointed on March 31, 2006 are Herman Wever, Vitor Sarquis Hallack, Boris Tabacov and Maysa Oliveira da Volta.

6D. Employees

The table below sets forth the number of our employees by category as of the dates indicated.

	At December 31,
	2004		2005		2006
Production Process		7,857		8,058		9,157
Research and Development		3,179		3,279		3,627
Customer Support		1,074		2,697		2,808
Administrative - Production Support		879		1,045		1,472
Administrative - Corporate		1,669		1,874		2,201
Total		14,658		16,953		19,265

Approximately 87% of our workforce is employed in Brazil. Most of our technical staff is trained at leading Brazilian engineering schools, including the Instituto Tecnológico Aeronáutico, known as the ITA, located in São José dos Campos. A small percentage of our employees belong to one of two different labor unions, the Sindicato dos Metalúrgicos (Union of Metallurgical Workers) or the Sindicato dos Engenheiros do Estado de São Paulo (Union of Engineers of the State of São Paulo). Overall, union membership as a percentage of total workforce has declined significantly in past years. At December 31, 2000, approximately 74.1% of our employees were non-union, compared to 87.8% at December 31, 2006. We believe that relations with our employees are good.

We actively support the training and professional development of our employees. We have established a program at our facility in São José dos Campos to provide newly graduated engineers with specialized training in aerospace engineering.

6E. Share Ownership

At April 18, 2007, the board members and executive officers owned an aggregate of 3,043,916 common shares. None of the officers or directors individually own more than 1% of the outstanding common shares. As of April 18 2007, our executive officers also owned options to purchase an aggregate of 859,470common shares at per-share purchase prices ranging from R$8.11 to R$23.00. As of the same date, none of our directors owned any options to purchase shares of common stock.

See “Item 6B. Compensation—Stock Option Plan” for a description of our stock option plan applicable to our management and employees, including those of our subsidiaries.

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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7A. Major Shareholders

We have total authorized capital of 1,000,000,000 shares, with a total aggregate of 740,098,071 common shares including one special “golden share” held by the Brazilian government issued and outstanding as of April 18, 2007. In February 2007, PREVI, SISTEL, BNDESPAR, EADS and Dassault Aviation sold a portion of the shares held by them at a secondary offering. The following table sets forth share ownership information for each of our significant shareholders that beneficially own our equity securities and for our executive officers and board members at April 18, 2007, including 2,030,889 common shares underlying the options exercisable until May 2008.

	Common Shares
	Shares		(%)
PREVI(1)		103,082,901		13.9
SISTEL(2)		22,612,297		3.0
Bozano Group (3)		71,565,809		9.7
BNDESPAR(4)		37,412,579		5.0
Dassault Aviation (5)		6,671,360		0.9
Safran (5)		8,310,342		1.1
União Federal/Brazilian Government(6)		2,349,911		0.3
Officers and directors as a group (7)		3,903,386		0.5
Others (São Paulo Stock Exchange) (8)		85,318,375		11.5
Others (NYSE)		400,902,000		54.1
Total		742,128,960		100.0

(1) Banco do Brasil Employee Pension Fund, also known as PREVI, was founded in 1904 as a pension fund for the employees of Banco do Brasil S.A, which is controlled by the Brazilian government.

(2) SISTEL Social Security Foundation, also known as SISTEL, was founded in 1977 as part of the Telebrás system, which, prior to its recent privatization, consisted of the Brazilian government-owned telecommunications companies.

(3) Shares belongiong to the Bozano Group belong to both Cia. Bozano and Bozano Holdings Ltd., which are owned and controlled by Julio Bozano. 18,786,088 of the shares owned by Cia. Bozano have been pledged in favor of Banco Santander Central Hispano, S.A. in connection with its acquisition from Cia. Bozano of substantially all of the capital stock of Banco Meridional S.A.

(4) BNDESPAR is a wholly owned subsidiary of Banco Nacional de Desenvolvimento Econômico e Social—BNDES, the government-owned national development bank of Brazil.

(5) The Brazilian government also holds the “golden share.”

(6) Includes 859,470 shares underlying options which are exercisable until May 2008.

(7) Includes 1,171,419 shares underlying options which are exercisable until May 2008.

Other than as discussed in “Item 4A. History and Development of the Company,” there have been no significant changes in percentage ownership by any major shareholder in the past three years.

On March 31, 2007, we had 23,633 holders, either directly or through ADSs, of common shares. On March 31, 2007, an aggregate of 400,902,000 common shares were held, either directly or through ADSs, by 166 record holders, including DTC, in the United States.

7B. Related Party Transactions

We have engaged in a number of transactions with our subsidiaries and the Brazilian government, as described below:

Brazilian Government

The Brazilian government, principally through the Brazilian Air Force, has participated in the development of Embraer since its inception. For the years ended December 31, 2004 and 2005, 2006, the Brazilian government accounted for approximately 7.1%, 6.2% and 1.9% of our net sales, respectively. We expect to continue to be the primary source of new aircraft and spare parts and services for the Brazilian government. For a description of our transactions with the Brazilian government, see “Item 4B. Business Overview¾Defense and Government Business.”

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The Brazilian government plays a key role as:

· a source for research and development debt financing through technology development institutions such FINEP and BNDES; and

· an export support agency through BNDES.

See “Item 4B. Business Overview¾Aircraft Financing Arrangements.” “Item 3D. Risk Factors¾Risks Relating to Embraer¾Any decrease in Brazilian government sponsored customer financing, or increase in government sponsored financing that benefits our competitor, may decrease the cost competitiveness of our aircraft.” and “Item 3D. Risk Factor¾Risks Relating to Embraer¾Brazilian government budgetary constraints could reduce amounts available to our customers under government sponsored financing programs.” We maintain credit facilities with BNDES and FINEP (total outstanding of US$23.2 million at December 31, 2006), primarily to fund development costs of the Phenom 100 and 300 aircraft. Our subsidiaries maintain credit facilities with BNDES and FINEP in the total amount of US$11.7 million outstanding at December 31, 2006, of which US$3.8 million is currently in short-term. The total amounts borrowed under the BNDES and FINEP credit facilities are due August 2008 and December 2013, respectively. In addition to the long-term facilities we maintain with BNDES, in 2006 we negotiated with BNDES various short-term pre-export credit financings, of which US$257.4 million was outstanding as of December 31, 2006, including principal and interest accrued.

The Brazilian government has been an important source of export financing for our customers through the BNDES-exim program, administered by BNDES.

Banco do Brasil S.A., which is owned by the Brazilian government, administers the ProEx program, which enables some of our customers to receive the benefit of interest equalization. We have also entered into numerous financing transactions with Banco do Brasil S.A. and its affiliates. At December 31, 2004, 2005 and 2006, we maintained cash investments of , US$688.0 million, US$203.6 million and US$78.7 million, respectively, with Banco do Brasil S.A. and several of its affiliates. We also had outstanding borrowings from Banco do Brasil S.A. and several of its affiliates, which at December 31, 2004, 2005 and 2006 equaled US$382.1 million, US$380.6 million and US$385.3 million, respectively.

See Note 30 to our consolidated financial statements for more information regarding related party transactions.

7C. Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

8A. Consolidated Statements and Other Financial Information

See “Item 3A. Selected Financial Data” and “Item 18. Financial Statements.”

Legal Proceedings

We have some individual labor lawsuits, several of which have already been settled, but we are awaiting the decision of the Brazilian labor courts on others. We do not believe that any liabilities related to these individual lawsuits would have a material adverse effect on our financial condition or results of operations.

We have challenged the constitutionality of the nature of and modifications in rates and the increase in the calculation base of certain Brazilian taxes and payroll charges in order to obtain writs of mandamus or injunctions to avoid payments or recover past payments. Interest on the total amount of unpaid taxes and payroll charges accrues monthly based on the Selic rate, the key lending rate of the Central Bank, and we make an accrual as part of the interest income (expenses), net item of our statements of income. As of December 31, 2006, we had obtained preliminary injunctions permitting us not to pay certain taxes, in the total amount, including interest, of US$523.6 million, which is included as a liability (taxes and payroll charges) on our balance sheet. See “Item 3D. Risk Factors—Risks Relating to Embraer—We may have to make significant payments as a result of unfavorable outcomes of pending challenges to various taxes and payroll charges” and Note 18 to our consolidated financial statements for a further discussion of these challenges.

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In addition, we are involved in other legal proceedings, including tax disputes, all of which are in the ordinary course of business. Our management does not believe that any of these other proceedings, if adversely determined, would materially or adversely affect our business, financial condition or results of operations. See Note 18 to our consolidated financial statements for a further discussion of our legal proceedings.

Dividends and Dividend Policy

Amounts Available for Distribution

At each annual shareholders’ meeting, the Board of Directors is required to recommend how net profits for the preceding fiscal year are to be allocated. For purposes of the Brazilian Corporate Law, net profits are defined as net income after income taxes and social contribution taxes for such fiscal year, net of any accumulated losses from prior fiscal years and any amounts allocated to employees’ and management’s participation in our profits. In accordance with the Brazilian Corporate Law and our bylaws, the amounts available for dividend distribution are the amounts equal to our net profits less any amounts allocated from such net profits to:

· the legal reserve;

· a contingency reserve for anticipated losses; and

· an unrealized revenue reserve.

We are required to maintain a legal reserve, to which we must allocate 5% of net profits for each fiscal year until the amount for such reserve equals 20% of our paid-in capital. However, we are not required to make any allocations to our legal reserve in respect of any fiscal year in which it, when added to our other established capital reserves, exceeds 30% of our capital. Net losses, if any, may be charged against the legal reserve. At December 31, 2006, the balance of our legal reserve was US$13.8 million, which was equal to 0.7% of our paid-in capital at December 31, 2006.

The Brazilian Corporate Law also provides for two additional, discretionary allocations of net profits that are subject to approval by the shareholders at the annual meeting. First, a percentage of net profits may be allocated to a contingency reserve for anticipated losses that are deemed probable in future years. Any amount so allocated in a prior year must be either reversed in the fiscal year in which the loss was anticipated if such loss does not in fact occur, or written off in the event that the anticipated loss occurs. Second, if the amount of unrealized revenue exceeds the sum of:

· the legal reserve;

· the investment and working capital reserve;

· retained earnings; and

· the contingency reserve for anticipated losses,

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such excess may be allocated to an unrealized revenue reserve. Under the Brazilian Corporate Law, unrealized revenue is defined as the sum of:

· price-level restatement of balance sheet accounts;

· the share of equity earnings of affiliated companies; and

· profits from installment sales to be received after the end of the next succeeding fiscal year.

According to our bylaws and subject to shareholder approval, our Board of Directors may allocate up to 75% of our adjusted net income to an investment and working capital reserve. The reserve may not exceed 80% of our capital. The purpose of the investment and working capital reserve is to make investments in fixed assets or increase our working capital. This reserve may also be used to amortize our debts. We may also grant a participation in our net income to our management and employees. However, the allocation to the investment and working capital reserve or the participation of our management and employees cannot reduce the mandatory distributable amount (discussed below). Otherwise, the amount in excess of our capital must be used to increase our capital or be distributed as a cash dividend. The balance of the investment and working capital reserve may be used:

· in the deduction of accumulated losses, whenever necessary;

· in the distribution of dividends, at any time;

· in the redemption, withdrawal, purchase or open market repurchase of shares, as authorized by law; and

· to increase our capital, including by means of an issuance of new shares.

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, or further increased or reduced as a result of the allocations of revenues to or from the unrealized revenue reserve. The amounts available for distribution are determined on the basis of financial statements prepared in accordance with the Brazilian Corporate Law method.

Mandatory Distribution

The Brazilian Corporate Law generally requires that the bylaws 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 distributable amount. Under our bylaws, the mandatory distribution is based on a percentage of adjusted net income, not lower than 25%, rather than a fixed monetary amount per share. The Brazilian Corporate Law, however, permits a publicly held company, such as Embraer, to suspend the mandatory distribution of dividends if the Board of Directors and the audit committee report to the shareholders’ meeting that the distribution would be inadvisable in view of the company’s financial condition. This suspension is subject to approval of holders of common shares. In this case, the Board of Directors shall file a justification for such suspension with the CVM. Profits not distributed by virtue of the suspension mentioned above shall be attributed to a special reserve and, if not absorbed by subsequent losses, shall be paid as dividends as soon as the financial condition of such company permits such payments.

Payment of Dividends

We are required by the Brazilian Corporate Law and by our bylaws to hold an annual shareholders’ meeting by the end of the fourth month after the end of each fiscal year at which, among other things, the shareholders have to decide on the payment of an annual dividend. The payment of annual dividends is based on the financial statements prepared for the relevant fiscal year. Under the Brazilian Corporate Law, dividends generally are required to be paid 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 the dividend was declared. A shareholder has a three-year period from the dividend payment date to claim dividends (or interest payments) in respect of its shares, after which the amount of the unclaimed dividends reverts to us.

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The Brazilian Corporate Law permits a company to pay interim dividends out of preexisting and accumulated profits for the preceding fiscal year or semester, based on financial statements approved by its shareholders. According to our bylaws, the shareholders may declare, at any time, interim dividends based on the preexisting and accumulated profits, provided the mandatory dividend has already been distributed to the shareholders. Our bylaws also permit us to prepare financial statements semiannually and for shorter periods. Our Board of Directors may approve the distribution of dividends calculated with reference to those financial statements, even before they have been approved by the shareholders. However, such dividends cannot exceed the amount of capital reserves.

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

Payments of cash dividends and distributions, if any, will be made in Brazilian currency to the custodian on behalf of the depositary, which will then convert such proceeds into U.S. dollars and will cause such U.S. dollars to be delivered to the depositary for distribution to holders of ADSs. Under current Brazilian law, dividends paid to shareholders who are not Brazilian residents, including holders of ADSs, will not be subject to Brazilian withholding income tax, except for dividends declared based on profits generated prior to December 31, 1995. See “Item 10E. Taxation—Material Brazilian Tax Consequences.”

History of Dividend Payments and Dividend Policy and Additional Payments on Shareholders’ Equity

We did not pay dividends from 1988 through 1997 because we did not have net profits for any year during that period. On January 16, 1998, we reduced our capital in order to offset our accumulated deficit. As a result, we were then able to distribute profits achieved in 1998.

Law No. 9,249, dated December 26, 1995, as amended, provides for distribution of interest on net worth to shareholders as an alternative form of payment to shareholders. Such interest is limited to the daily pro rata variation of the TJLP and cannot exceed the greater of:

· 50% of net income (after taking into account the provisions for the Contribuição Social Sobre o Lucro Líquido, or Social Contribution on Net Profits, or CSLL, but before taking into account such distribution and any deductions for income taxes) for the period in respect of which the payment is made; or

· 50% of the sum of retained earnings and profit reserves as of the beginning of the year in respect of which the payment is made.

Distribution of interest on net worth may also be accounted for as a tax-deductible expense. Any payment of interest on shareholders’ equity to holders of ADSs or common shares, whether or not they are Brazilian residents, is subject to Brazilian withholding income tax at the rate of 15% or 25% if the beneficiary is resident in a tax haven. See “Item 10E. Taxation—Material Brazilian Tax Consequences.” The amount paid to shareholders as interest on net worth, net of any withholding tax, may be included as part of any mandatory distributable amount. Under Brazilian law, we are obligated to distribute to shareholders an amount sufficient to ensure that the net amount received by them, after payment by us of applicable Brazilian withholding taxes in respect of the distribution of interest on net worth, is at least equal to the mandatory distributable amount. When we distribute interest on net worth, and that distribution is not accounted for as part of the mandatory distribution, Brazilian withholding tax will apply. All payments to date were accounted for as part of the mandatory distribution.

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The following table sets forth the historical payments of dividends and historical payments of interest on shareholders’ equity we have made to our shareholders.

Date of approval	Period in which profits were generated	Total amount of Distribution
		(R$ in millions)	(US$ in millions) (3)
September 18, 1998(1)	First two quarters of 1998	21.3	17.9
March 30, 1999(1)	Remaining two quarters of 1998	33.9	19.7
September 28, 1999(1)	First two quarters of 1999	36.8	19.1
January 31, 2000(1)	Remaining two quarters of 1999	86.7	48.1
March 24, 2000(2)	First quarter of 2000	19.6	11.2
June 16, 2000(2)	Second quarter of 2000	19.9	11.0
July 6, 2000(1)	First two quarters of 2000	79.6	44.8
September 22, 2000(2)	Third quarter of 2000	27.7	15.0
December 15, 2000(2)	Fourth quarter of 2000	33.5	17.1
March 16, 2001(1)	Remaining two quarters of 2000	107.5	49.7
March 16, 2001(2)	First quarter of 2001	33.8	15.7
June 13, 2001(2)	Second quarter of 2001	41.4	18.0
September 14, 2001(1)	First two quarters of 2001	123.1	46.1
September 14, 2001(2)	Third quarter of 2001	48.4	18.1
December 15, 2001(2)	Fourth quarter of 2001	57.1	24.6
March 19, 2002(1)	Remaining two quarters of 2001	100.0	43.0
March 19, 2002(2)	First quarter of 2002	58.9	25.4
June 14, 2002(2)	Second quarter of 2002	59.5	20.9
September 13, 2002(2)	Third quarter of 2002	66.3	17.0
December 13, 2002(2)	Fourth quarter of 2002	70.0	19.8
December 13, 2002(2)	1998 and 1999	72.5	20.5
June 16, 2003(2)	First two quarters of 2003	76.7	26.7
December 12, 2003(2)	Remaining two quarters of 2003	118.5	41.0
March 12, 2004(2)	First quarter of 2004	101.0	34.7
June 25, 2004(2)	Second quarter of 2004	160.0	51.5
September 20, 2004(2)	Third quarter of 2004	160.0	55.9
December 17, 2004(2)	Fourth quarter of 2004	164.1	61.8
March 11, 200 (2)	First quarter of 2005	106.5	39.9
June 3, 2005(2)	Second quarter of 2005	110.8	47.1
September 16, 2005(2)	Third quarter of 2005	113.5	51.0
December 19, 2005(2)	Fourth quarter of 2005	112.9	48.2
June 12, 2006(2)	First two quarters of 2006	114.4	52.9
June 12, 2006(1)	First two quarters of 2006	35.6	16.4
September 15, 2006(2)	Third quarter of 2006	92.3	42.5
December 8,2006(2)	Fourth quarter of 2006	85.0	39.8
March 9, 2007(2)	First quarter of 2007	43.4	21.2

(1) Represents dividend payments.

(2)Represents interest on shareholders’ equity.

(3)Translated from nominal reais into U.S. dollars at the commercial selling rates in effect on the last date of the month in which the dividends were approved.

Further, on March 9, 2007, our Board of Directors approved the payment of interest on shareholders’ equity for the first quarter of 2007, in the total amount of R$43.4 million, which translated using the exchange rate on June 12, 2006, is equivalent to US$21.2 million.

We intend to declare and pay dividends and/or interest on shareholders’ equity, as required by the Brazilian Corporate Law and our bylaws. Our Board of Directors may approve the distribution of dividends and/or interest on shareholders’ equity, calculated based on our semiannual or quarterly financial statements. 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 stock. 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 to determine that it is to our benefit to distribute interest on shareholders’ equity.

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8B. Significant Changes

No significant changes or events have occurred after the close of the balance sheet date at December 31, 2006, other than the events already described in this annual report.

ITEM 9. THE OFFER AND LISTING

9A. Offer and Listing Details

 

Our ADSs are listed on the New York Stock Exchange, or NYSE, under the symbol “ERJ.” In addition, our common shares are traded on the São Paulo Stock Exchange under the symbol “EMBR3.” Each ADS represents four common shares.

The reported high and low closing prices in U.S. dollars for the ADSs on the NYSE for the periods indicated are set forth in the following table. Trading prices for the ADSs until June 2, 2006 are for the former Embraer ADSs, each of which represented four preferred shares of former Embraer. Our ADSs began trading on the NYSE on June 5, 2006, with each ADS representing four common shares issued by us.

	Price in U.S. dollars per ADS
	High		Low
2002:
Year end		25.01		12.85
2003:
Year end		35.45		9.15
2004:
Year end		36.81		23.28
2005:
First quarter		35.00		29.70
Second quarter		33.95		28.71
Third quarter		39.00		30.37
Fourth quarter		41.78		36.20
Year end		41.78		28.71
2006:
First quarter		41.63		37.00
Second quarter		39.04		31.99
Third quarter		41.78		33.53
Fourth quarter		43.50		39.59
Year end		43.50		31.99
2007
First quarter		46.23		39.01
Second quarter (through April 18)		47.83		45.85
Month ended:
October 31, 2006		43.50		39.59
November 30, 2006		42.87		40.49
December 31, 2006		43.46		40.27
January 31, 2007		41.36		39.01
February 28, 2007		46.23		41.04
March 31, 2007		45.86		44.10
April 30, 2007 (through April 18)		47.83		45.85

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The table below sets forth, for the periods indicated, the reported high and low closing sale prices in nominal reais for the former Embraer preferred shares on the São Paulo Stock Exchange. The former Embraer preferred shares were cancelled on June 5, 2006, date on which the Embraer common shares began trading on the São Paulo Stock Exchange.

	Nominal reais per preferred share
	High		Low
2001:
Year end		25.45		7.65
2002:
Year end		15.30		11.20
2003:
Year end		25.70		8.10
2004:
First quarter		26.43		20.30
Second quarter		23.50		18.30
Third quarter		22.20		18.20
Fourth quarter		22.50		17.10
Year end		26.43		17.10
2005:
First quarter		23.30		19.80
Second quarter		20.75		17.90
Third quarter		22.19		18.50
Fourth quarter		23.73		20.12
Year end		23.73		17.90
2006:
First quarter		23.68		19.86
Second quarter (through June 2)		20.50		18.55
Month ended:
January 31, 2006		23.68		21.55
February 28, 2006		22.51		19.90
March 31, 2006		21.86		19.86
April 30, 2006		20.50		19.20
May 31, 2006		20.17		18.55
June 30, 2006 (through June 2)		19.70		19.55

The table below set forth, for the periods indicated, the reported high and low closing prices in nominal reais for the common shares on the São Paulo Stock Exchange. Trading prices for the common shares until June 2, 2006 are for the former Embraer common shares. Our common shares began trading on the Novo Mercado segment of the São Paulo Stock Exchange on June 5, 2006.

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	Nominal reais per common share
	High		Low
2002:
Year end		14.00		9.82
2003:
Year end		19.30		7.00
2004:
Year end		20.30		12.31
2005:
First quarter		17.90		14.40
Second quarter		16.00		13.50
Third quarter		16.50		14.18
Fourth quarter		18.50		14.90
Year end		18.50		13.50
2006:
First quarter		22.90		17.41
Second quarter		20.54		18.38
Third quarter		22.51		18.08
Fourth quarter		23.50		21.31
Year end		23.50		17.41
2007:
First quarter		24.00		20.86
Second quarter (through April 18)		24.10		23.40
Month ended:
October 31, 2006		23.12		21.31
November 30, 2006		23.08		21.72
December 31, 2006		23.50		21.55
January 31, 2007		22.08		20.86
February 28, 2007		24.00		21.42
March 31, 2007		23.99		22.65
April 30, 2007 (through April 18)		24.10		23.40

On April 18, 2007, we had 23,633 holders, either directly or through ADSs, of common shares. On April 18, 2007, an aggregate of 400,902,000 common shares were held, either directly or through ADSs, by 166 record holders, including DTC, in the United States.

On April 18, 2007, the closing sale price for our common shares on the São Paulo Stock Exchange was R$24.10 which is equivalent to US$46.71 per ADS. On the same date, the closing sale price for our ADSs on the NYSE was US$47.80. The ADSs are issued under a deposit agreement and JPMorgan Chase Bank serves as depositary under that agreement.

9B. Plan of Distribution

Not applicable.

9C. Markets

Trading on the São Paulo Stock Exchange

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.

The common shares are listed and traded on the Novo Mercado segment of the São Paulo Stock Exchange. Trades in our common shares on the São Paulo Stock Exchange settle in three business days after the trade date. Delivery of and payment for shares is made through the facilities of the CBLC—Companhia Brasileira de Liquidação e Custódia, the clearinghouse for the São Paulo Stock Exchange, which maintains accounts for member brokerage firms.

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In order to better control volatility, the São Paulo Stock Exchange 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 this stock exchange fall below the limit of 10% and 15%, respectively, in relation to the index registered in the previous trading session.

The São Paulo Stock Exchange is less liquid than the NYSE and other major exchanges in the world. The São Paulo Stock Exchange had an aggregate market capitalization of approximately R$1.5 trillion, equivalent to US$722.6 billion at December 31, 2006. In comparison, the NYSE had a market capitalization of approximately US$25 trillion at the same date. Although any of the outstanding shares of a listed company may trade on the São Paulo Stock Exchange, in most cases less than one-half of the listed shares are actually available for trading by the public, the remainder being held by small groups of controlling persons, by governmental entities or by one principal shareholder. At April 18, 2007, we accounted for approximately 1% of the market capitalization of all listed companies on the São Paulo Stock Exchange.

There is also significantly greater concentration in the Brazilian securities markets than in the NYSE or other major exchanges. During the one-year period ended December 31, 2006, the ten largest companies listed on the São Paulo Stock Exchange represented approximately 54% of the total market capitalization of all listed companies and the 10 largest companies listed on the NYSE represented approximately 8% of the total market capitalization of all listed companies.

Trading on the São Paulo Stock Exchange by non-residents of Brazil is subject to limitations under Brazilian foreign investment legislation.

Novo Mercado Corporate Governance Practices

In 2000, the São Paulo Stock Exchange introduced three special listing segments, known as Levels 1 and 2 of Differentiated Corporate Governance Practices and the New Market (Novo Mercado), aiming at fostering a secondary market for securities issued by Brazilian companies with securities listed on the São Paulo Stock Exchange, 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, (d) follow stricter disclosure policies, including regarding contracts with related parties, material contracts and transactions made by controlling shareholders, directors and officers involving securities issued by the issuer, (e) submit any existing shareholders’ agreements and stock option plans to the São Paulo Stock Exchange, and (f) make a schedule of corporate events available to shareholders.

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 of 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 expert firm to ascertain the fair 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 20% must be independent directors, with a term limited to two years, (e) prepare annual financial statements in English, including cash flow statements, in accordance with international accounting standards, such as U.S. GAAP or International Financial Reporting Standards, (f) 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 determined by an appraisal process), and (g) adhere exclusively to the rules of the São Paulo Stock Exchange Arbitration Chamber for resolution of disputes between the company and its investors.

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To be listed on the Novo Mercado, an issuer must meet all of the requirements described above, in addition to (a) issuing only voting shares and (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. Our shares are listed on the Novo Mercado segment.

Regulation of Brazilian Securities Markets

The Brazilian securities markets are regulated by the CVM, which has regulatory authority over stock exchanges and the securities markets generally, and by the Central Bank, which has, among other powers, licensing authority over brokerage firms and regulates foreign investment and foreign exchange transactions.

Under the Brazilian Corporate Law, a corporation is either public (companhia aberta), like us, or closely held (companhia fechada). All public companies, including us, are registered with the CVM and are subject to reporting requirements. Our shares are listed and traded on the Novo Mercado segment of the São Paulo Stock Exchange and may be traded privately subject to limitations.

We have the option to ask that trading in our securities on the São Paulo Stock Exchange be suspended in anticipation of a material announcement. Trading may also be suspended on the initiative of the São Paulo Stock Exchange or the CVM, among other reasons, based on or due to a belief that a company has provided inadequate information regarding a material event or has provided inadequate responses to the inquiries by the CVM or the São Paulo Stock Exchange.

Trading on the São Paulo Stock Exchange by non-residents of Brazil is subject to limitations under Brazilian foreign investment and tax legislation. The Brazilian custodian for our common shares and the depositary for our ADSs have obtained an electronic certificate of 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 thereto. In the event that a holder of ADSs exchanges ADSs for common shares, the holder will be entitled to continue to rely on the depositary’s electronic certificate of registration for five business days after the exchange. Thereafter, the holder may not be able to obtain and remit U.S. dollars abroad upon the disposition of the common shares, or distributions relating to the common shares, unless the holder obtains a new electronic certificate of registration or registers its investment in the common shares under Resolution No. 2,689.

Disclosure Requirements

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 on the trading and acquisition of securities issued by publicly held companies.

These requirements include provisions that:

· establish the concept of a material fact that gives rise to reporting requirements. Material facts include decisions made by the controlling shareholders, resolutions of the general meeting of shareholders and of management of the company, or any other facts related to the company’s business (whether occurring within the company or otherwise somehow related thereto) that may influence the price of its publicly traded securities, or the decision of investors to trade such securities or to exercise any of such securities’ underlying rights;

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· specify examples of facts that are considered to be material, which include, among others, the execution of shareholders’ agreements providing for the transfer of control, the entry or withdrawal of shareholders that maintain any managing, financial, technological or administrative function with or contribution to the company, and any corporate restructuring undertaken among related companies;

· oblige the investor relations officer, controlling shareholders, other officers, directors, members of the audit committee and other advisory boards to disclose material facts;

· require simultaneous disclosure of material facts to all markets in which the corporation’s securities are admitted for trading;

· require the acquirer of a controlling stake in a corporation to publish material facts, including its intentions as to whether or not to de-list the corporation’s shares, within one year;

· establish rules regarding disclosure requirements in the acquisition and disposal of a material stockholding stake; and

· restrict the use of insider information.

9D. Selling Shareholders

Not applicable.

9E. Dilution

Not applicable.

9F. Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

10A. Share Capital

Not applicable.

10B. Memorandum and Articles of Association

Set forth below is certain information concerning our capital stock, and a brief summary of certain significant provisions of our bylaws, the Brazilian Corporate Law, the relevant rules and regulations of the CVM, and the relevant rules of the Novo Mercado applicable to our capital stock. This description does not purport to be complete and is qualified by reference to our bylaws and to Brazilian law.

Corporate Purposes

We are a joint stock company with a principal place of business and jurisdiction in the city of São José dos Campos, São Paulo, Brazil, governed mainly by our bylaws and the Brazilian Corporate Law. Our corporate purpose, as stated in our bylaws, is to (1) design, manufacture and market aircraft and aerospace materials and their respective accessories, components and equipment in accordance with the highest technology and quality standards, (2) promote and carry out technical activities related to the production and maintenance of aerospace materials, (3) contribute towards the education of technical personnel required for the aerospace industry and (4) conduct technological, industrial and commercial activities and services related to the aerospace industry.

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Description of Capital Stock

General

At December 31, 2006, our capital stock consisted of a total of 739,903,914 outstanding common shares, including one special class of common share known as the “golden share,” held by the Brazilian government.

As a result of the merger of former Embraer with and into Embraer approved on March 31, 2006 and the consequent share exchange and after considering the subsequent issuance of common shares upon the exercise of stock options granted, as of April 18, 2007, our capital stock consisted of a total of 742,128,960 outstanding common shares, without par value, including one special class of common share known as the “golden share,” held by the Brazilian government. Our bylaws authorize the Board of Directors to increase the capital stock up to 1,000,000,000 common shares without seeking specific shareholder approval. All our outstanding shares are fully paid. Our shareholders must approve at a shareholders’ meeting any capital increase that exceeds the above-referenced authorized amounts.

Common Shares

Each common share entitles the holder thereof to one vote at our annual and special shareholders’ meetings. Pursuant to our bylaws and the São Paulo Stock Exchange listing agreement in connection with the listing of our shares on the Novo Mercado, we cannot issue shares without voting rights or with restricted voting rights.

The Brazilian Corporate Law and our bylaws require that all our shareholders’ meetings be called by publication of a notice in the Diário Oficial do Estado de São Paulo, the official government publication of the State of São Paulo, and in a newspaper of general circulation in the city in which our principal place of business is located, currently the ValeParaibano in São José dos Campos, at least 30 days prior to the meeting , and in another newspaper of general circulation in São Paulo, where the São Paulo Stock Exchange is located, currently the Gazeta Mercantil. The quorum to hold general meetings of our shareholders at first call is the presence of shareholders representing 35% of the common shares; at second call the meetings can be held with the presence of shareholders representing 25% of the common shares; and at third call the meeting can be held with the presence of any number of shareholders.

According to the Brazilian Corporate Law, the common shares are entitled to dividends in proportion to their share of the amount available for distribution. See “Item 8A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy” for a more complete description of payment of dividends on our shares. In addition, upon any liquidation of the company, the common shares are entitled to return of capital in proportion to their share of our net worth.

According to the Brazilian Corporate Law, neither our bylaws nor actions taken at a shareholders’ meeting may deprive a shareholder of the following rights:

· the right to participate in the distribution of profits;

· the right to participate equally and proportionally in any remaining residual assets in the event of liquidation of the company;

· preemptive rights in the event of issuance of shares, convertible debentures or warrants, except in some specific circumstances under Brazilian law described in “Item 10D. Exchange Controls—Preemptive Rights”;

· the right to supervise our management in accordance with Article 109 of the Brazilian Corporate Law; and

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· the right to appraisal rights in the cases specified in the Brazilian Corporate Law, which are described in “Item 10D. Exchange Controls—Redemption and Right of Withdrawal.”

Golden Share

The golden share is held by the Federative Republic of Brazil. For a discussion of the rights to which the golden share is entitled, see “—Voting Rights of Shares —Golden Share.”

Voting Rights of Shares

Common Shares

Each share of common stock is generally empowered with one vote at general meetings of our shareholders. Pursuant to our bylaws and the São Paulo Stock Exchange listing agreement in connection with the listing of our shares on the Novo Mercado, we cannot issue shares without voting rights or with restricted voting rights.

Limitations on the Voting Rights of Certain Holders of Common Shares

Our bylaws provide that, at any general meeting of our shareholders, no shareholder or group of shareholders, including brokers acting on behalf of one or more holders of ADSs, may exercise votes representing more than 5% of the quantity of shares into which our capital stock is divided. Votes that exceed this 5% threshold will not be counted.

For purposes of our bylaws, two or more of our shareholders are considered to be a “group of shareholders” if:

· they are parties in a voting agreement;

· one of them is, directly or indirectly, a controlling shareholder or controlling parent company of the other, or the others;

· they are companies directly or indirectly controlled by the same person/entity, or group of persons/entities, which may or may not be shareholders; or

· they are companies, associations, foundations, cooperatives and trusts, investment funds or portfolios, universalities of rights or any other forms of organization or undertaking (a) with the same administrators or managers, or further (b) whose administrators or managers are companies that are directly or indirectly controlled by the same person/entity, or group of persons/entities, which may or may not be shareholders.

In the case of investment funds having a common administrator, only funds with policies of investment and of exercise of voting rights at shareholders’ meetings that fall under the responsibility of the administrator on a discretionary basis will be considered to be a group of shareholders.

In addition, shareholders represented by the same proxy, administrator or representative on any account at any general meeting of our shareholders will be considered to be a group of shareholders, except for holders of our ADSs when represented by the relevant depositary. All signatories to a shareholders’ agreement that addresses the exercise of voting rights will also be considered to be a group of shareholders for purposes of the foregoing limitation.

This limitation on the voting rights of certain holders of common shares is illustrated in the following table:

Equity Interest of Shareholder or Group of Shareholders	Voting Rights as a Percentage of our Capital Stock
1%	1%
2%	2%
3%	3%
4%	4%
5%	5%
> 5%	5%

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Limitation on the Voting Rights of Non-Brazilian Shareholders

In accordance with the edital (invitation to bid) issued by the Brazilian government in connection with the privatization of Embraer in 1994, voting participation of non-Brazilian holders of Embraer common shares was limited to 40% of Embraer common shares.

Our bylaws provide that, at any general meeting of our shareholders, non-Brazilian shareholders and groups of non-Brazilian shareholders may not exercise voting rights representing more than two-thirds of the total votes of all of the Brazilian shareholders present at such meeting. The total number of votes that may be exercised by Brazilian shareholders and by non-Brazilian shareholders will be assessed after giving effect to the 5% voting limitation described in “—Limitation on the Rights of Certain Holders of Common Shares” above. Votes of non-Brazilian shareholders that exceed this two-thirds threshold will not be counted. If the total vote of non-Brazilian shareholders at any general meeting of our shareholders exceeds two-thirds of the votes that may be exercised by the Brazilian shareholders present at such meeting, the number of votes of each non-Brazilian shareholder will be proportionately reduced so that the total vote of non-Brazilian shareholders does not exceed two-thirds of the total votes that can be exercised by Brazilian shareholders present at such shareholders’ meeting.

The fraction of two-thirds effectively limits the voting rights of non-Brazilian shareholders and groups of non-Brazilian shareholders to 40% of our total share capital. The objective of this limitation is to ensure that Brazilian shareholders constitute a majority of the total votes cast at any general meeting of our shareholders. This limitation will effectively prevent our takeover by non-Brazilian shareholders and limit the ability of non-Brazilian shareholders to effect control over us.

For purposes of our bylaws, the following are considered to be “Brazilian shareholders”:

· Brazilian individuals, whether native or naturalized, resident in Brazil or abroad;

· legal private entities organized under the laws of Brazil that have their administrative head offices in Brazil and (a) do not have a foreign controlling parent company, unless the parent company meets the requirements of clause (b) of this item, and (b) are controlled, directly or indirectly, by one or more Brazilian individuals, whether native or naturalized, resident in Brazil or abroad; and

· investment funds or clubs organized under the laws of Brazil that have their administrative head office in Brazil and whose managers and/or quotaholders holding the majority of their quotas are persons/entities referred to above.

A Brazilian shareholder will be required to provide evidence to us and the depositary for the book-entry registry that such shareholder satisfies the foregoing requirements and only after such evidence is given will such shareholder be included in the records of Brazilian shareholders.

For purposes of our bylaws, “non-Brazilian shareholders” are considered to be persons or legal entities, investment funds or clubs and any other entities not comprised of Brazilian shareholders and that cannot evidence that they satisfy the requirements to be considered Brazilian shareholders.

A “group of shareholders” as defined above will be considered to be non-Brazilian whenever one or more of its members is a non-Brazilian shareholder.

The effect of this limitation on the voting rights of non-Brazilian shareholders (i.e., their participation) is illustrated in the following table, where the column “Non-Brazilian Shareholder Participation” indicates the maximum percentage of votes a non-Brazilian shareholder may cast:

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Brazilian Shareholder Participation (% of capital stock)	Non-Brazilian Shareholder Participation (% of capital stock)	Non-Brazilian Shareholder Participation(1)
90%	10%	10%
80%	20%	20%
70%	30%	30%
60%	40%	40%
59%	41%	39.33%
50%	50%	33.33%
40%	60%	26.67%
30%	70%	20%
20%	80%	13.33%
10%	90%	6.67%

(1) Number of votes calculated based on two-thirds of the Brazilian shareholders’ votes.

The tables below illustrate, in different situations, the voting system that will apply at our shareholders’ meetings.

Example 1

All Brazilian shareholders hold less than 5% and non-Brazilian shareholders hold a total of 40%, but without any individual holdings higher than 5%. This example shows a situation where the general restriction for non-Brazilian shareholders does not affect the voting ratio.

Shareholder	% Shares Attending		Effective Votes After 5% Vote Restriction		Effective Votes After Non-Brazilian Restriction			% of Valid Votes			Vote Ratio (Votes/Share)
Brazilian A		5		5		5			5	%		1.00
Brazilian B		5		5		5			5	%		1.00
Brazilian C		5		5		5			5	%		1.00
Brazilian D		5		5		5			5	%		1.00
Brazilian E		5		5		5			5	%		1.00
Brazilian F		5		5		5			5	%		1.00
Brazilian G		5		5		5			5	%		1.00
Brazilian H		5		5		5			5	%		1.00
Brazilian I		5		5		5			5	%		1.00
Brazilian J		5		5		5			5	%		1.00
Brazilian K		5		5		5			5	%		1.00
Brazilian L		5		5		5			5	%		1.00
Total Brazilians		60		60		60			60	%		1.00
Non-Brazilians1		40		40		40	2		40	%		1.00
Total		100		100		100			100	%		1.00

(1) Assumes that no individual non-Brazilian shareholder holds more than 5% of our capital. If a non-Brazilian shareholder holds more than 5% of our capital, such shareholder will also be subject to the 5% voting restriction on such holding.

(2)Two-thirds of 60 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 40 votes.

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Example 2

One Brazilian shareholder holds more than 5% of our capital, the other Brazilian shareholders hold 5% and non-Brazilian shareholders hold a total of 50%, but without any individual holdings higher than 5%.

Shareholder	% Shares Attending		Effective Votes After 5% Vote Restriction		Effective Votes After Non-Brazilian Restriction			% of Valid Votes			Vote Ratio (Votes/Share)
Brazilian A		20		5		5			8.57	%		0.25
Brazilian B		5		5		5			8.57	%		1.00
Brazilian C		5		5		5			8.57	%		1.00
Brazilian D		5		5		5			8.57	%		1.00
Brazilian E		5		5		5			8.57	%		1.00
Brazilian F		5		5		5			8.57	%		1.00
Brazilian G		5		5		5			8.57	%		1.00
Total Brazilians		50		35		35			60	%		1.00
Non-Brazilians1		50		50		23.3	2		40	%		0.47
Total		100		85		58.3			100	%		0.58

(1) Assumes that no individual non-Brazilian shareholder holds more than 5% of our capital. If a non-Brazilian shareholder holds more than 5% of our capital, such shareholder will also be subject to the 5% voting restriction on such holding.

(2)Two-thirds of 35 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 23 votes.

Example 3

No Brazilian shareholders hold more than 5% of our capital, a non-Brazilian shareholder holds 30% and other non-Brazilian shareholders hold a total of 40%, but without any individual holdings higher than 5%.

Shareholder	% Shares Attending		Effective Votes After 5% Vote Restriction		Effective Votes After Non-Brazilian Restriction			% of Valid Votes			Vote Ratio (Votes/Share)
Brazilian A		5		5		5			10	%		1.00
Brazilian B		5		5		5			10	%		1.00
Brazilian C		5		5		5			10	%		1.00
Brazilian D		5		5		5			10	%		1.00
Brazilian E		5		5		5			10	%		1.00
Brazilian F		5		5		5			10	%		1.00
Total Brazilians		30		30		30			60	%		1.00
Non-Brazilian A		30		5		2.2	2		4.4	%		0.07
Non-Brazilians1		40		40		17.8	2		35.6	%		0.44
Total		100		75		50			100	%		0.50

(1)Assumes that no individual non-Brazilian shareholder (except Non-Brazilian A) holds more than 5% of our capital. If a non-Brazilian shareholder holds more than 5% of our capital, such shareholder will also be subject to the 5% voting restriction on such holding.

(2) Two-thirds of 30 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 20 votes, proportionally divided between Non-Brazilian A and the other non-Brazilians.

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Example 4

Two Brazilian shareholders holding more than 5% of our capital, three Brazilian shareholders holding 5% and non-Brazilian shareholders holding a total of 30%, but without individual holdings higher than 5%.

Shareholder	% Shares Attending		Effective Votes After 5% Vote Restriction		Effective Votes After Non-Brazilian Restriction			% of Valid Votes			Vote Ratio (Votes/Share)
Brazilian A		30		5		5			12	%		0.17
Brazilian B		25		5		5			12	%		0.20
Brazilian C		5		5		5			12	%		1.00
Brazilian D		5		5		5			12	%		1.00
Brazilian E		5		5		5			12	%		1.00
Total Brazilians		70		25		25			60	%		1.00
Non-Brazilians1		30		30		16.7	2		40	%		0.56
Total		100		55		41.7			100	%		0.42

(1) Assumes that no individual non-Brazilian shareholder (except Non-Brazilian A) holds more than 5% of our capital. If a non-Brazilian shareholder holds more than 5% of our capital, such shareholder will also be subject to the 5% voting restriction on such holding.

(2) Two-thirds of 25 (total votes of the Brazilian shareholders after application of the 5% voting restriction) equals 16.7 votes.

Shareholders’ Agreement

In connection with the merger of former Embraer with and into Embraer approved on March 31, 2006, Cia. Bozano, PREVI and SISTEL, the former controlling shareholders of former Embraer, terminated the shareholders’ agreement governing matters relating to their equity ownership of former Embraer, and relinquished voting control over former Embraer in favor of all Embraer shareholders. As of the implementation of the merger, Cia. Bozano, PREVI and SISTEL no longer have the ability to control the outcome of matters submitted to a vote of Embraer shareholders. Our bylaws prohibit any shareholder or group of shareholders from exercising voting control over us.

Golden Share

The golden share is held by the Federative Republic of Brazil. The golden share is entitled to the same voting rights as the holders of common shares. In addition, the golden share entitles the holder thereof to veto rights over the following corporate actions:

· change of our name and corporate purpose;

· amendment and/or application of our logo;

· creation and/or alteration of military programs (whether or not involving Brazil);

· development of third party skills’ in technology for military programs;

· discontinuance of the supply of spare parts and replacement parts for military aircraft;

· transfer of our control;

· any amendments to the list of corporate actions over which the Golden Share carries veto rights, including the right of the Brazilian Government to appoint one member and alternate to our Board of Directors and the right of our employees to appoint two members and their respective alternates to our Board of Directors, and to the rights conferred to the Golden Share; and

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· changes to certain provisions of our bylaws pertaining to voting restrictions, rights of the Golden Share and the mandatory tender offer requirements applicable to holders of 35% or more of our outstanding shares.

The matters listed above are subject to prior approval by our Board of Directors and the approval within 30 days of the Brazilian Government, as holder of the Golden Share. Such matters are also subject to prior notice to the Brazilian Ministry of Finance. In the absence of the approval of the Brazilian Government within the 30-day period, the matter will be deemed to have been approved by our Board of Directors.

Disclosure of Significant Interest

Brazilian Requirements

Brazilian law and our bylaws provide that all shareholders or groups of shareholders will be required to disclose, through notice to us and to the stock exchanges on which our securities are traded, the acquisition of shares that, together with those already held by them, exceed 5% of our capital stock. A violation of this disclosure obligation could result in the suspension of rights, including voting rights, by a resolution of shareholders at a shareholders’ meeting.

Certain U.S. Legal Requirements

In addition, the U.S. Exchange Act imposes reporting requirements on shareholders or groups of shareholders who acquire beneficial ownership (as such term is defined under Rule 13d-3 of the U.S. Exchange Act) of more than 5% of our common shares. In general, such shareholders must file, within 10 days after such acquisition, a report of beneficial ownership with the SEC containing the information prescribed by the regulations under the U.S. Exchange Act. This information is also required to be sent to us and to each U.S. securities exchange on which our common shares are traded. Shareholders should consult with their own legal advisor regarding their reporting obligations under the U. S. Exchange Act.

Form and Transfer

As our shares are in registered book-entry form, the transfer of shares is governed by the rules of Article 35 of the Brazilian Corporate Law. This Article provides that a transfer of shares is effected by an entry made by Banco Itaú S.A., also known as the registrar, in its books, by debiting the share account of the transferor and crediting the share account of the transferee. Banco Itaú also performs all the services of safe-keeping and transfer of shares and related services for us.

Transfers of shares by a non-Brazilian shareholder are made in the same way and executed by that shareholder’s local agent on the shareholder’s behalf except that if the original investment was registered with the Central Bank pursuant to Resolution No. 2,689, the foreign investor must also seek amendment, if necessary, through its local agent, of the electronic registration to reflect the new ownership.

The São Paulo Stock Exchange operates as a central clearing system. A holder of our shares may choose, in its discretion, to participate in this system and all shares elected to be put into this system will be deposited in the custody of the São Paulo Stock Exchange (through a Brazilian institution duly authorized to operate by the Central Bank and having a clearing account with the São Paulo Stock Exchange). The fact that those shares are held in the custody of the São Paulo Stock Exchange will be reflected in our register of shareholders. Each participating shareholder will, in turn, be registered in our register of beneficial shareholders maintained by the São Paulo Stock Exchange and will be treated in the same way as registered shareholders.

Board of Directors

Under the Brazilian Corporate Law, the members of a company’s board of directors must be shareholders of the company. There is no requirement as to the number of shares an individual must own in order to act as a member of the Board of Directors.

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According to the Brazilian Corporate Law, our officers and directors are prohibited from voting on, or acting in, matters in which their interests conflict with ours.

Our bylaws provide that the shareholders are responsible for determining the global remuneration of the members of our management bodies. Our Board of Directors is responsible for dividing such remuneration among the members of management. There are no specific provisions regarding the directors’ power to vote on their compensation in the absence of an independent quorum.

With respect to the borrowing powers of the Board of Directors, the Board of Directors has the power to authorize the borrowing of funds, either in the form of bonds, notes, commercial papers or other instruments of regular use in the market. Other financing arrangements, including bank loans, may be entered into by us upon the joint signatures of (i) two executive officers, (ii) one officer and one attorney-in-fact, or (iii) two attorneys-in-fact.

There is no requirement under the Brazilian Corporate Law or our bylaws that directors retire upon reaching a certain age. In addition, our bylaws do not provide for the re-election of directors at staggered intervals.

For a discussion of our Board of Directors, see “Item 6A. Directors and Senior Management—Board of Directors” and “Item 6C. Board Practices.”

Election of Board of Directors

The election of members of our Board of Directors, absent a request to adopt a cumulative voting system, will be conducted under a system of slate voting whereby voting will be based on a slate of directors and no voting will be allowed on individual candidates. According to our bylaws, the current members of the board at the time of the election will always be candidates as a slate for a new term of office. A person may participate in two or more different slates. Each shareholder may only vote on one slate and the slate that receives the highest number of votes shall be declared elected.

Any shareholder has a right to propose and submit other slates of members for election to the Board of Directors, other than the slate of members provided according to our bylaws. Our bylaws also contain a provision whereby a shareholder that intends to appoint one or more members of the Board of Directors, other than the current members of the Board of Directors, must notify the company in writing at least ten days prior to the general meeting at which the members of the Board of Directors will be elected, providing us with the name and resume of the candidate. In case we receive such a notification, we must disclose receipt and the contents of such notification (i) immediately, electronically, to the CVM and the São Paulo Stock Exchange and (ii) through a press release to our shareholders that must also be available on our website, within at least eight days before the date of the general meeting.

Alternatively, the election of members of the Board of Directors may be conducted under a system of cumulative voting. According to the regulations of the CVM and to our bylaws, adoption of a resolution for cumulative voting depends on a written request by shareholders representing at least 5% of our capital stock, submitted at least 48 hours in advance of the time for which the general shareholders’ meeting has been called. Under the cumulative voting system, each share is entitled to the same number of votes as the number of board members to be elected (subject to the restriction on shareholders holding greater than 5% of the common shares and restrictions on non-Brazilian shareholders), and each shareholder is entitled to concentrate votes in just one member or to distribute the votes among more than one or all of the members. Any vacant offices not filled due to a tie in the voting will be subject to a new vote, under the same process.

Preemptive Rights

Each of our shareholders has a general preemptive right to subscribe for shares in the event of any capital increase, or securities convertible into shares, in proportion to its shareholding, except in the event of the grant and exercise of any option to acquire shares of our capital stock. A period of at least 30 days following the publication of notice of the issuance of shares or securities convertible into shares is allowed for exercise of the right, and the right is negotiable. According to the Brazilian Corporate Law and our bylaws, the Board of Directors may, in its discretion, eliminate the preemptive rights of the shareholders in the event that we issue shares, debentures convertible into shares, or subscription warrants that will be offered either through a stock exchange or in a public offering, or through an exchange of shares in a public offering, the purpose of which is to acquire control of another company, as established by law.

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In the event of a capital increase by means of the issuance of new shares, holders of ADSs, or of common shares, would, except under the circumstances described above, have preemptive rights to subscribe to any class of our newly issued shares. However, a holder may not be able to exercise the preemptive rights relating to the common shares underlying the ADSs unless a registration statement under the Securities Act is effective with respect to those shares to which the rights relate or an exemption from the registration requirements of the Securities Act is available. See “Item 3D. Risk Factors—Risks Relating to the Common Shares and the ADSs—Holders of our ADSs might be unable to exercise preemptive rights with respect to the common shares.” We are not obligated to file such registration statement.

Redemption and Right of Withdrawal

According to our bylaws, our common shares will not be redeemable.

The Brazilian Corporate Law provides that, under limited circumstances, a shareholder has the right to withdraw his equity interest from the company and to receive payment for the portion of shareholder’s equity attributable to his equity interest. This right of withdrawal may be exercised by our dissenting shareholders in the event that at least half of all voting shares outstanding authorize us to:

· reduce the mandatory distribution of dividends;

· change our corporate purpose;

· merge into or consolidate with another company, subject to the conditions set forth in the Brazilian Corporate Law;

· transfer all of our shares to another company or receive shares of another company in order to make the company whose shares were transferred a wholly owned subsidiary of such other company, known as incorporação de ações;

· acquire control of another company at a price which exceeds the limits set forth in the Brazilian Corporate Law;

· participate in a centralized group of companies as defined under the Brazilian Corporate Law and subject to the conditions set forth therein; or

· conduct a spin-off that results in (a) a change of our corporate purposes, except if the assets and liabilities of the spun-off company are contributed to a company that is engaged in substantially the same activities, (b) a reduction in the mandatory dividend or (c) any participation in a centralized group of companies, as defined under the Brazilian Corporate Law.

In addition, in the event that the entity resulting from a merger, incorporação de ações, as described above, or a consolidation or a 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 shareholders may also exercise their right of withdrawal.

The Brazilian Corporate Law contains provisions that restrict withdrawal rights and allow companies to redeem their shares at their economic value, subject to certain requirements. As our bylaws currently do not provide that our shares would be redeemable at their economic value, our shares would be redeemable at their book value, determined on the basis of the last balance sheet approved by the shareholders. If the shareholders’ meeting giving rise to withdrawal rights occurs more than 60 days after the date of the last approved balance sheet, a shareholder may demand that its shares be valued on the basis of a new balance sheet that is as of a date within 60 days of such shareholders’ meeting.

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According to the Brazilian Corporate Law, in events of consolidation, merger, incorporação de ações,participation in a group of companies, and acquisition of control of another company, the right to withdraw does not apply if the shares in question meet certain tests relating to market liquidity and float. Shareholders would not be entitled to withdraw their shares if the shares are a component of a general stock index in Brazil or abroad and shares held by persons unaffiliated with the controlling shareholder represent more than half of the outstanding shares of the relevant type or class.

Mechanism to Promote Dispersed Ownership of Our Shares

Our bylaws contain provisions that have the effect of avoiding concentration of our shares in the hands of an investor or a small group of investors, in order to promote more dispersed ownership of our shares. To this end, these provisions place certain obligations on a shareholder or group of shareholders that becomes a holder of 35% or more of our total capital stock, or an Acquiring Shareholder. Not later than 15 days after a shareholder becomes an Acquiring Shareholder, such Shareholder must submit a request to the Brazilian Government, through the Ministry of Finance, to make a public tender offer to acquire all of our capital stock. The Brazilian Government will have full discretion to accept or deny this request. The Acquiring Shareholder may not purchase any additional shares until the Brazilian Government provides its opinion on the public offer. If the request is accepted by the Brazilian Government, the Acquiring Shareholder must make a public offer for all shares within 60 days of acceptance. The offer must be made in accordance with the CVM and the São Paulo Stock Exchange regulations and the provisions of our bylaws. If the request is denied by the Brazilian Government the Acquiring Shareholder must sell all shares such Acquiring Shareholder owns in excess of 35% of our total capital stock within 30 days. Failure to comply with these provisions will subject the Acquiring Shareholder to the potential suspension of all voting rights inherent to the shares held by it, if a resolution to such effect is approved at a general meeting of our shareholders called by our management. These provisions are not applicable to shareholders who become holders of 35% or more of our total capital stock in certain transactions specified in our bylaws as, for example, cancellation of our common shares held in treasury.

The public tender offer must be (i) directed to all of our shareholders, (ii) made through an auction to take place on the São Paulo Stock Exchange, (iii) launched at a set price calculated in accordance with the procedure set forth below, (iv) paid upfront, in Brazilian currency, (v) made so as to assure equal treatment to all shareholders, (vi) irrevocable and not subject to any changes after publication of the bidding offer, and (vii) based on a valuation report to be prepared in accordance with the rules set forth in our bylaws and in applicable CVM rules and regulations.

The price to be offered for the shares in such public tender offer shall be calculated as follows:

· Tender Offer Price = Value of the Share + Premium,

where:

· “Tender Offer Price” corresponds to the acquisition price for each share issued by us in the public offering of shares provided hereunder.

· “Value of the Share” corresponds to the greater of:

(i) the highest unit quotation obtained for the shares issued by us during the 12-month period prior to the tender offer among values recorded on any stock exchange on which the shares were traded;

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(ii) the highest price paid by the Acquiring Shareholder, during the 36-month period prior to the tender offer, for a share or tranche of shares issued by us;

(iii) the amount equivalent to 14.5 times our Consolidated Average EBITDA, as defined below, reduced by our net consolidated indebtedness, divided by the total number of shares issued by us; or

(iv) the amount equivalent to 0.6 times the amount of our firm backlog orders, according to the last information disclosed by the latter, reduced by our net consolidated indebtedness, divided by the total number of shares issued by us.

· “Premium” corresponds to 50% of the Value of the Share.

· “Consolidated EBITDA” is our consolidated operating profit before net financial expenses, income tax and social contribution, depreciation, depletion and amortization, as assessed based on the audited restated statements for our most recent complete fiscal year.

· “Average Consolidated EBITDA” is the arithmetic average of our consolidated EBITDA for the two most recent complete fiscal years.

The launch of a public tender offer does not preclude us or any of our shareholders from launching a competing public tender offer, in accordance with applicable regulations.

Arbitration

Any disputes or controversies relating to the listing rules of the Novo Mercado, our bylaws, the Brazilian Corporate Law, the rules published by the CMN, the Central Bank, the CVM, any shareholders’ agreement filed at our headquarters, and other rules applicable to the Brazilian capital markets in general, must be submitted to arbitration conducted in accordance with the Rules of the Market Arbitration Chamber established by the São Paulo Stock Exchange. According to Chapter 12 of such Rules, the parties may consensually agree to use another arbitration chamber or center to resolve their disputes. Any shareholder that becomes a holder of shares representing our control must agree to comply with the rules of the São Paulo Stock Exchange Arbitration Chamber within 30 days of the acquisition of the shares. These provisions will not apply however, in the event of a dispute or controversy related to the member of the Board of Directors elected by the Brazilian Government or to a dispute or controversy deriving from the Golden Share.

Going Private Process

We may become a private company only if we or our controlling shareholders conduct a public tender offer to acquire all of our outstanding shares subject to prior approval of the public offer by the Brazilian Government, as holder of the Golden Share, and in accordance with the rules and regulations of the Brazilian Corporate Law and the CVM regulations and rules of the Novo Mercado, if applicable. The minimum price offered for the shares in the public tender offer will correspond to the economic value of such shares, as determined by a valuation report issued by a specialized firm.

The valuation report must be prepared by a specialized and independent firm of recognized experience chosen by the shareholders representing the majority of the outstanding shares (excluding, for such purposes, the shares held by the controlling shareholder, its partner and any dependents included in the income tax statement, should the controlling shareholders be an individual, treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes) from a list of three institutions presented by our Board of Directors. All the expenses and costs incurred in connection with the preparation of the valuation report must be paid for by the controlling shareholder.

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Shareholders holding at least 10% of our outstanding shares may require our management to call a special meeting of our shareholders to determine whether to perform another valuation using the same or a different valuation method. This request must be made within 15 days following the disclosure of the price to be paid for the shares in the public offering. The shareholders who make such request, as well as those who vote in its favor, must reimburse us for any costs involved in preparing the new valuation, if the new valuation price is not higher than the original valuation price. If the new valuation price is higher than the original valuation price, the public offering must be made at the higher price. If our shareholders determine to take us private and at that time we are controlled by a shareholder holding less than 50% of our total capital stock or by a shareholder that is not a member of a group of shareholders (as defined in its bylaws), we must conduct the public tender offer, within the limits imposed by law. In this case, we may only purchase shares from shareholders that have voted in favor of us becoming a private company after purchasing all shares from the other shareholders that did not vote in favor of such deliberation and that have accepted the public tender offer.

Delisting from the Novo Mercado

At any time, we may delist our shares from the Novo Mercado, provided that shareholders representing the majority of our shares approve the action and that at least 30 days’ written notice is given to the São Paulo Stock Exchange. The decision of the shareholders must specify if the delisting will occur because the securities will no longer be traded on the Novo Mercado, or because we are going private. Our delisting from the Novo Mercado will not result in the loss of our registration as a public company on the São Paulo Stock Exchange.

If we delist from the Novo Mercado, by decision taken at a shareholders’ meeting, any controlling shareholder or group of controlling shareholders at the time, if any, must conduct a public offering for the acquisition of our outstanding shares, within a period of 90 days if we delist in order for its shares to be tradable outside the Novo Mercado, or within a period of 120 days if we delist as a result of a corporate reorganization in which the surviving company is not listed on the Novo Mercado. The price per share shall be equivalent to the economic value of those shares as determined in a valuation report prepared by a specialized and independent company of recognized experience, which will be chosen at a shareholders’ meeting from a list of three institutions presented by our Board of Directors, by an absolute majority of the votes of the shareholders of our outstanding shares present at the meeting (excluding, for such purposes, the shares held by any controlling shareholder or group of shareholders at the time, if any, its partners and dependents included in our income tax statement, should the controlling shareholder be an individual, treasury shares, shares held by our affiliates and by other companies that are a part of our economic group, as well as blank votes). All the expenses and costs incurred in connection with the preparation of the valuation report must be paid by the controlling shareholder.

If we are subject to widespread control at the time of our delisting from the Novo Mercado, either for our shares to be traded outside the Novo Mercado or as a result of a corporate reorganization, the shareholders that voted in favor of such deliberation must conduct a public tender offer for the acquisition of our shares.

Pursuant to our bylaws, we may also be delisted if the São Paulo Stock Exchange decides to suspend trading of our shares on the Novo Mercado due to our non-compliance with the Novo Mercado Regulations. In this case, the Chairman of the Board of Directors must call a shareholders’ meeting, within two days of the determination by the São Paulo Stock Exchange, in order to replace all members of our Board of Directors. If the Chairman of the Board of Directors does not call the shareholders’ meeting, any shareholder may do so. The new Board of Directors will be responsible for the compliance with the requirements that resulted in the delisting.

Additionally, if we are delisted from the Novo Mercado (i) because a decision taken at a general meeting of our shareholders resulted in non-compliance with the Novo Mercado Regulations, the public tender offer must be conducted by the shareholders that voted in favor of the deliberation, or (ii) as a result of our non-compliance with the Novo Mercado Regulations resulting from acts of our management, we must conduct the public tender offer in order to become a private company, within the limits imposed by law.

According to the Novo Mercado Regulations, in the event of a transfer of our shareholding control within 12 months following our delisting from the Novo Mercado, the selling controlling shareholders and the acquirer must offer to acquire the remaining shares for the same price and terms offered to the selling controlling shareholders, adjusted for inflation.

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If our shares are delisted from the Novo Mercado, we will not be permitted to have shares listed on the Novo Mercado for a period of two years after the delisting date, unless there is a change in our control after our delisting from the Novo Mercado.

According to the Novo Mercado Regulations, the São Paulo Stock Exchange may issue complementary rules to regulate the public offering in the event of delisting in case a company has dispersed ownership.

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: (i) have an audit committee or audit board, pursuant to an applicable exemption available to foreign private issuers, that meets certain requirements, as discussed below, (ii) provide prompt certification by our CEO of any material non-compliance with any corporate governance rules, and (iii) provide a brief description of the significant differences between our corporate governance practices and the NYSE corporate governance 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, which independence must be affirmatively determined by the board of directors. Likewise, the Novo Mercado Regulations requires that at least 20% of the members of the board of directors of a company listed on the Novo Mercado segment of the São Paulo Stock Exchange be independent. Independence of board members in accordance with the Novo Mercado Regulations is defined by criteria similar to those set forth in the NYSE rules. However, under the Novo Mercado Regulations and Brazilian law, neither our Board of Directors nor our management is required to test the independence of directors before their election to the board.

With the exception of Mr. Mauricio Novis Botelho (our CEO), Mr. Neimar Dieguez Barreiro (the representative of the Brazilian government, through the government’s ownership of the “golden share”) and Messrs. Paulo Cesar de Souza Lucas and Claudemir Marques de Almeida (both representatives of our employees), all the current members of our Board of Directors elected at the shareholders’ meeting held on March 31, 2006 have declared that they are independent for purposes of the Novo Mercado Regulations. While our directors meet the qualification requirements of the Brazilian Corporate Law, the CVM requirements and the Novo Mercado Regulations, our Board of Directors has not determined whether our directors are considered independent under the NYSE test for director independence.

The Brazilian Corporate Law and our bylaws require that our directors be elected by our shareholders at a general shareholders’ meeting. Our transition Board of Directors is composed of 11 members, including (i) one member appointed by each of our former controlling shareholders, (ii) one member appointed by the Brazilian government, as holder of the “golden share,” (iii) our CEO, and (iv) two members appointed by our employees.

Beginning after the annual general meeting of our shareholder in 2009 to approve our financial statements for the fiscal year ended December 31, 2008, our Board of Directors will be appointed for two-year terms by our shareholders and there will only be three permanent members on the Board of Directors: (i) one to be appointed by the Brazilian government, as holder of the “golden share” and (ii) two to be appointed by our employees. The remaining eight directors will be elected in accordance with the slate voting and cumulative voting rules contained in our bylaws. See “Item 7A. Major Shareholders—Board of Directors” and “Item 10B. Memorandum and Articles of Association—Description of Capital Stock—Election of Board of Directors.”

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Executive Sessions

NYSE rules require that the non-management directors must meet at regularly scheduled executive sessions without management. 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. Maurício Novis Botelho, our president and CEO, is a member of our transition Board of Directors. The remaining non-management directors are not expressly empowered to serve as a check on management and there is no requirement that those directors meet regularly without management. As a result, the non-management directors on our board do not typically meet in executive session.

Nominating/Corporate Governance Committee

NYSE rules require that listed companies have a Nominating/Corporate Governance Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, identifying and selecting qualified board member nominees and developing a set of corporate governance principles applicable to the company. We are not required under applicable Brazilian law to have a Nominating Committee/Corporate Governance Committee, and accordingly, to date, have not established such a committee. Pursuant to our bylaws, the members of our transition Board of Directors were appointed by our former controlling shareholders, the Brazilian government and our employees, as described above in “—Majority of Independent Directors.” The directors are then elected by our shareholders at a general shareholders’ meeting. Our corporate governance practices are adopted by the entire board.

Compensation Committee

NYSE rules require that listed companies have a Compensation Committee composed entirely of independent directors and governed by a written charter addressing the committee’s required purpose and detailing its required responsibilities, which include, among other things, reviewing corporate goals relevant to CEO compensation, evaluating CEO performance and approving CEO compensation levels and recommending to the board non-CEO compensation, incentive-compensation and equity-based plans. We are not required under applicable Brazilian law to have a 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 CEO. Maurício Novis Botelho, our CEO and member of our transition Board of Directors, typically excuses himself from discussions regarding his performance and compensation.

In April 2004, our Board of Directors established an Advisory Committee with a term of 18 months with the task of reviewing the company’s policies regarding the compensation and profit sharing for our executive officers and making recommendations for the revision of such policies. The Committee completed its review by April 2005. As it was a temporary committee, it did not operate pursuant to a written charter. For a further discussion of our Advisory Committee, see “Item 6C. Board Practices—Advisory and Executive Committee.”

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, or audit board in our case, meet the SEC rules regarding audit committees for listed companies. The Brazilian Corporate Law requires companies to have a non-permanent Conselho Fiscal composed of three to five members who are elected at the general shareholders’ meeting. The Conselho Fiscal operates independently from management and from a company’s external auditors. Its main function is to monitor the activities of management, examine the financial statements of each fiscal year and provide a formal report to our shareholders.

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We have a permanent Conselho Fiscal that consists of five members and five alternates and which has ordinary meetings at least every two months. The members of our Conselho Fiscal are all financially literate and one member has accounting expertise that qualifies him as an audit committee financial expert. In order to comply with the exemption requirements that allow our Conselho Fiscal to act as an audit committee pursuant to SEC rules, our Board of Directors approved the delegation to the Conselho Fiscal of certain additional responsibilities and the Conselho Fiscal and the Board of Directors adopted an additional charter that delegates to the Conselho Fiscal the duties and responsibilities of a U.S audit committee to the extent permitted under Brazilian Corporate Law. For a further discussion of our Conselho Fiscal, see “Item 6C. Board Practices—Conselho Fiscal.”

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.

Corporate Governance Guidelines

NYSE rules require that listed companies adopt and disclose corporate governance guidelines. In addition to being subject to the Novo Mercado Regulations that include rules on corporate governance, we have not adopted any formal corporate governance guidelines. We have adopted and observe a disclosure policy, our Policy on Publicizing Acts or Relevant Facts, which requires the public disclosure of all relevant information pursuant to guidelines set forth by the CVM, as well as an insider trading policy, our Policy on Securities Transactions, 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. However, in April 2004, we adopted a Code of Ethics and Conduct applicable to our officers, directors and employees worldwide, including at the subsidiary level. We believe this code substantially addresses the matters required to be addressed pursuant to the NYSE rules. A copy of our Code of Ethics and Conduct has been filed as Exhibit 11.1 to this annual report. 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 function is the responsibility of our risk and internal controls office, under the supervision of the Chief Financial Officer, assuring the necessary independence and competence to assess the design of our internal control over financial reporting, as well as to test its effectiveness as required by Section 404 of the Sarbanes-Oxley Act of 2002.

Sarbanes Oxley Act of 2002

We maintain control and procedures designed to ensure that we are able to collect the information required to disclose in the report we file with the SEC, and to process, summarize and disclose the information within the periods specified in the rules of the SEC. We have filed the relevant officer certifications under Section 404 of the U.S. Sarbanes Oxley Act of 2002 regarding internal controls over financial reporting as Exhibits 12.1 and 12.2 to this annual report.

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10C. Material Contracts

Issuance of US$400 million 6.375% Guaranteed Notes due 2017

In October 2006, through our subsidiary Embraer Overseas Limited, we issued US$400 million 6.375% guaranteed notes due 2017 and, as of December 31, 2006, US$404.7 million was outstanding, US$4.7 million of which is currently short-term, including principal and accrued interest. Interest will be paid semiannually. The notes are unconditionally guaranteed by us on March 30, 2007, we and Embraer Overseas commenced an exchange offer to exchange the notes for now notes duly registered with the Commission. The exchange offer will expire on May 18, 2007. If the exchange offer is not completed on or before the date that is 270 days after the closing date, the annual interest rate will be increased by 0.25% per annum (which rate will be increased by an additional 0.25% per annum for each subsequent 90-day period that such additional interest continues to accrue, with a maximum limit of 0.5% per annum increase, until the exchange offer is completed). The indenture under which the notes were issued contains customary covenants and restrictions such as limitation on liens, consolidation, merger or transfer of assets.

Merger Agreement related to Merger of former Embraer with and into Embraer

On January 19, 2006, Embraer entered into a Protocol of Merger and Justification of Embraer-Empresa Brasileira de Aeronáutica S.A. with and into Rio Han Empreendimentos e Participações S.A., or Merger Agreement, with former Embraer in connection with the merger of former Embraer with and into Embraer. The Merger Agreement was approved by the shareholders of both Embraer and former Embraer at their respective shareholders’ meetings held on March 31, 2006 and the merger of former Embraer with and into Embraer was effective as of April 1, 2006. The Merger Agreement provided for, among other things, the conditions for the merger, the valuation and exchange ratio for the exchange of former Embraer shares and ADSs for Embraer shares and ADSs, the capital increase of Embraer as a result of the merger, the renaming of Embraer and the changes made to Embraer’s bylaws as a result of the merger.

For more information on additional financing agreements, see “Item 5B. Liquidity and Capital Resources — Credit Facilities and Lines of Credit — Long-term Facilities.”

10D. Exchange Controls

There are no restrictions on ownership of our common shares by individuals or legal entities domiciled outside Brazil. However, the right to convert dividend payments and proceeds from the sale of 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.

Pursuant to Brazilian law, investors may invest in the common shares under Resolution No. 2,689, of January 26, 2000, of the National Monetary Council. The rules of Resolution No. 2,689 allow foreign investors to invest in almost all financial assets and to engage in almost all transactions available in the Brazilian financial and capital markets, provided that some requirements are fulfilled. In accordance with Resolution No. 2,689, the definition of foreign investor includes individuals, legal entities, mutual funds and other collective investment entities domiciled or headquartered abroad.

Pursuant to the rules, foreign investors must: (1) appoint at least one representative in Brazil with powers to perform actions relating to the foreign investment; (2) complete the appropriate foreign investor registration form; (3) register as a foreign investor with the CVM; and (4) register the foreign investment with the Central Bank.

Securities and other financial assets held by foreign investors pursuant to Resolution No. 2,689 must be registered or maintained in deposit accounts or under the custody of an entity duly licensed by the Central Bank or the CVM. In addition, securities trading is restricted to transactions carried out in the stock exchanges or organized over-the-counter markets licensed by the CVM.

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Under Resolution No. 2,689, foreign investors registered with the CVM may buy and sell shares on the São Paulo Stock Exchange without obtaining a separate certificate of registration for each transaction. Investors under these regulations are also generally entitled to favorable tax treatment.

Annex V to Resolution No. 1,289, as amended, of the National Monetary Council, also known as the Annex V Regulations, provides for the issuance of depositary receipts in foreign markets in respect of shares of Brazilian issuers.

In connection with the equity offerings of our common shares, an electronic registration was issued in the name of the depositary with respect to the ADSs and is maintained by the custodian on behalf of the depositary. This electronic registration was carried out through the Central Bank Information System-SISBACEN. Pursuant to the registration, the custodian and the depositary are able to convert dividends and other distributions with respect to the common shares represented by ADSs into foreign currency and remit the proceeds outside Brazil. In the event that a holder of ADSs exchanges such ADSs for common shares, the holder will be entitled to continue to rely on the depositary’s registration for five business days after the exchange. Thereafter, a holder must seek to obtain its own electronic registration. Unless the common shares are held pursuant to Resolution No. 2,689 by a duly registered investor or a holder of common shares who applies for and obtains a new certificate of registration, that holder may not be able to convert into foreign currency and remit outside Brazil the proceeds from the disposition of, or distributions with respect to, the common shares. In addition, if the foreign investor resides in a “tax haven” jurisdiction or is not an investor registered under Resolution No. 2,689, the investor will be subject to less favorable Brazilian tax treatment than a holder of ADSs.

See “Item 3D. Risk Factors—Risks Relating to the Common Shares and the ADSs—If holders of ADSs exchange the ADSs for common shares, they risk losing the ability to remit foreign currency abroad and Brazilian tax advantages” and “Item 10E. Taxation—Material Brazilian Tax Consequences.”

10E. Taxation

The following discussion, subject to the limitations set forth below, describes material Brazilian and United States tax considerations relating to the ownership of our common shares or ADSs. This discussion does not purport to be a complete analysis of all tax considerations in those countries and does not address tax treatment of shareholders under the laws of other countries. Shareholders who are resident in countries other than Brazil and the United States, along with shareholders that are resident in those two countries, are urged to consult with their own tax advisors as to which countries’ tax laws could be relevant to them. This summary 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.

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. No assurance can be given, however, as to if or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.

Material Brazilian Tax Consequences

General. The following discussion summarizes the material Brazilian tax consequences of the acquisition, ownership and disposition of common shares or ADSs, as the case may be, by a holder that is not considered domiciled in Brazil, (“non-Brazilian holder”), for purposes of Brazilian taxation.

Taxation of Dividends. Dividends, including stock dividends and other dividends paid in property, paid by us to the depositary in respect of the ADSs, or to a non-Brazilian holder in respect of the common shares, are currently not subject to income withholding tax, provided that they are paid out of profits generated as of January 1, 1996 (or out of reserves derived therefrom). We do not have retained earnings generated prior to January 1, 1996 (or reserves out of such earnings).

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Taxation of Gains. According to Law No. 10,833, enacted on December 29, 2003, the disposition of assets located in Brazil, by a non-Brazilian holder, whether to another non-Brazilian holder or to a Brazilian holder, may be subject to taxation in Brazil. Accordingly, on the disposition of the common shares, which are considered assets located in Brazil, the non-Brazilian holder may be subject to income tax on the gains assessed, following the rules described below, regardless of whether the transactions are conducted in Brazil or abroad and with a Brazilian resident or not. Regarding ADSs, although we believe that the ADSs do not fall within the definition of assets located in Brazil for the purposes of Law No. 10,833/03, considering the general and unclear scope of this law and the lack of any judicial court rulings in respect thereto, we are unable to predict whether our belief will ultimately prevail in the courts of Brazil. Thus, the gain on disposition of ADSs by a non-Brazilian holder to a resident in Brazil (or even to non-Brazilian resident in case the argument above does not prevail) may be subject to income tax in Brazil according to the rules described below for ADSs or those applicable to the disposition of common shares, when applicable.

As a general rule, gains assessed are the positive difference between the amount in reais realized on the sale or exchange of a security and its acquisition cost measured in reais (without correction for inflation).

The deposit of common shares in exchange for ADSs may be subject to Brazilian income tax on capital gains at the rate of 15% or 25%, in case of a non-Brazilian holder located in a tax haven jurisdiction (as defined below), if the acquisition cost of the common shares is lower than (1) the average price per common share on a Brazilian stock exchange on which the greatest number of such shares were sold on the day of deposit or (2) if no common shares were sold on that day, the average price on the Brazilian stock exchange on which the greatest number of common shares were sold in the 15 trading sessions immediately preceding such deposit. In such case, the difference between the average price of the common shares, calculated as above and the corresponding acquisition cost, will be considered a capital gain. There are arguments to support that such taxation is not applicable in case of non-Brazilian holders registered under Resolution No. 2,689 (“2,689 holder”) that are not located in a tax haven country or jurisdiction, which is defined as the jurisdiction that does not impose any income tax or which imposes such tax at a maximum rate of less than 20%, or in which the domestic legislation imposes restrictions on the disclosure of the shareholders’ composition or the ownership of the investment (“tax haven holder”) . The withdrawal of ADSs in exchange for common shares is not subject to Brazilian tax as far as the regulatory rules in respect to the registration of the investment before the Brazilian Central Bank are duly observed.

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

·   are exempt from income tax when assessed by a non-Brazilian holder that is a 2,689 holder and is not a tax haven holder ; or

·   are subject to income tax at a rate of 15% in any other case, including the gains assessed by a non-Brazilian holder that (i) is not a 2,689 holder; or (ii) is a 2,689 holder but a tax haven holder. In these cases, a withholding income tax of 0.005% on the sale value shall be applicable and can be offset with the eventual income tax due on the capital gain.

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Any other gains assessed on the disposition of the common shares that are not carried out on Brazilian stock exchanges are subject to income tax at a rate of 15%, except for tax haven holders, which, in this case, are subject to income tax at a rate of 25%. In case the gains are related to transactions conducted on the Brazilian non-organized over-the-counter market with intermediation, the withholding income tax of 0.005% on the sale value shall also be applicable and can be offset with the eventual income tax due on the capital gain.

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

Any exercise of preemptive rights relating to the common shares will not be subject to Brazilian taxation. Any gain on the sale or assignment of preemptive rights relating to our common shares by the depositary on behalf of holders of our ADSs will be subject to Brazilian income taxation according to the same rules applicable to the sale or disposition of common shares.

Taxation on Interest on Shareholders’ Equity. Any payment of interest on shareholders’ equity (see “Item 8A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy—History of Dividend Payments and Dividend Policy and Additional Payments on Shareholders’ Equity”) to non-Brazilian holders of ADSs or common shares, is subject to Brazilian withholding tax at the rate of 15% at the time Embraer records such liability, whether or not the effective payment has been made at that time. In the case of non-Brazilian residents that are tax haven holders, the applicable rate for income tax is 25%. The Brazilian Corporation Law establishes that a notional interest charge attributed to shareholders’ equity can either be accounted for as part of the mandatory dividend or not. In the event that the payment of such interest is accounted for as part of the mandatory dividend, we would be required to pay an additional amount to ensure that the net amount received by the shareholders, after the income tax, is at least equal to the minimum mandatory dividend. The distribution of interest attributed to shareholders’ equity would be proposed by our Board of Directors and subject to subsequent declaration by the shareholders at a general meeting.

Taxation on Foreign Exchange Transactions (“IOF/Câmbio”). Pursuant to Decree No. 4,494 of December 3, 2002, the conversion into Brazilian currency of proceeds received by a Brazilian entity from a foreign investment in the Brazilian securities market (including those in connection with an investment in common shares or the ADSs and those under Resolution No. 2,689) and the conversion into foreign currency of proceeds received by a non-Brazilian holder is subject to IOF/Câmbio, the rate of which is currently 0% for most cases. However, the Minister of Finance has the power to increase the IOF/Câmbio rate at any time to a maximum of 25%, but only in relation to future exchange transactions.

Taxation on Bonds and Securities Transactions (“IOF/Títulos”). IOF/Títulos may be imposed on any transactions involving bonds and securities, even if these transactions are performed on the Brazilian stock, futures or commodities exchange. As a general rule, the rate of this tax is currently 0% for transactions involving common shares and ADSs, although the executive branch may increase such rate up to 1.5% per day, but only with respect to future transactions.

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Other Brazilian Taxes. There are no Brazilian inheritance, gift or succession taxes applicable to the ownership, transfer or disposition of common 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 non-Brazilian holder to individuals or entities resident or domiciled within such state in Brazil. There are no Brazilian stamp, issue, registration, or similar taxes or duties payable by holders of common shares or ADSs.

Transactions on Bank Accounts. As a general rule, the Contribuição Provisória sobre Movimentação Financeira, the tax on transactions on bank accounts, or CPMF, is imposed on any debit to bank accounts at a rate of 0.38%. Therefore, transactions by the depositary or by holders of common shares that involve the transfer of Brazilian currency through Brazilian financial institutions could be subject to the CPMF tax. Currently, the funds transferred to Brazil to acquire shares on Brazilian stock exchanges and the remittance abroad of the proceeds earned on the disposition of common shares in Brazil are exempted from the CPMF. In addition, the CPMF rate is reduced to zero on withdrawals from bank accounts used to buy common shares in a public offering, provided that (i) the public offering is registered with the CVM and (ii) the issuer is listed on a Brazilian stock exchange.

Material U.S. Federal Income Tax Consequences

The following discussion, subject to the limitations and conditions set forth herein, describes the material U.S. federal income tax considerations to U.S. Holders (as defined below) of owning and disposing of Embraer common shares and ADSs. The discussion is only applicable to U.S. Holders that hold common shares or ADSs of Embraer as capital assets (generally for investment purposes). This discussion does not address all aspects of U.S. federal income taxation that may be applicable to a U.S. Holder subject to special treatment under U.S. federal income tax law.

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In addition, except as otherwise specifically provided above, there is no discussion of state, local, or non-U.S. tax consequences of the ownership of Embraer common shares or ADSs. The discussion is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations, rulings and other pronouncements of the U.S. Internal Revenue Service (the “IRS”) and judicial decisions as of the date hereof. Such authorities may be repealed, revoked or modified (with possible retroactive effect) so as to result in U.S. federal income tax consequences different from those discussed below.

Shareholders are urged to consult their own independent tax advisors concerning the U.S. federal income tax consequences of the ownership of Embraer common shares and ADSs in light of their particular situations, as well as any consequences arising under the laws of any other taxing jurisdiction.

As used herein, the term “U.S. Holder” means a beneficial owner of Embraer common shares or ADSs representing Embraer common shares that is (i) an individual who is a citizen or resident of the United States, (ii) a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any State thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source or (iv) a trust (X) that is subject to the supervision of a court within the United States and the control of one or more United States persons as described in Section 7701(a)(30) of the Code or (Y) that has a valid election in effect under applicable U.S. Treasury regulations to be treated as a United States person.

If a partnership (or an entity treated as a partnership for U.S. Federal income tax purposes) holds Embraer common shares or ADSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A U.S. Holder that is a partner of a partnership holding such common shares or ADSs is urged to consult its tax advisors regarding the consequences of the ownership of Embraer common shares or ADSs.

In general, for U.S. federal income tax purposes, a U.S. Holder who is a beneficial owner of an ADS will be treated as the owner of the underlying Embraer common shares that are represented by such ADS. Deposits or withdrawals of underlying shares by U.S. Holders for ADSs will not be subject to U.S. federal income tax.

Distributions on Embraer Common Shares or ADSs

Subject to the discussion below under “—Passive Foreign Investment Company Rules,” the gross amount of any distributions (including distributions of notional interest charges attributed to shareholders’ equity) paid to U.S. Holders of Embraer common shares or ADSs (including Brazilian withholding taxes imposed on such distributions) will be treated as a dividend under Section 301 of the Code, to the extent paid out of current or accumulated earnings and profits of Embraer and its predecessor as determined under U.S. federal income tax principles. Such a dividend will be includable in the gross income of a U.S. Holder as ordinary income on the date received by the U.S. Holder. To the extent that the amount of any distribution exceeds Embraer’s current and accumulated earnings and profits for a taxable year (as determined under U.S. federal income tax principles), the distribution will first be treated as a tax-free return of capital to the extent of a U.S. Holder’s adjusted tax basis in the Embraer common shares or ADSs, and thereafter as capital gain.

As used below, the term “dividend” means a distribution that constitutes a dividend for U.S. federal income tax purposes under Section 316 of the Code.

Dividends paid by Embraer will not be eligible for the dividends received deduction allowed to corporations under the Code.

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The amount of any dividend paid in reais will equal the U.S. dollar value of the reais calculated by reference to the exchange rate in effect on the date the dividend is received by the U.S. Holder regardless of whether the reais are converted into U.S. dollars. If the reais received as a dividend are not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in the reais equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the reais will be treated as U.S. source ordinary income or loss for U.S. federal income tax purposes.

Pursuant to Section 901 of the Code, a U.S. Holder will be entitled, subject to a number of complex limitations and conditions (including those discussed in Section 904 of the Code), to claim a U.S. foreign tax credit in respect of any Brazilian withholding taxes imposed on dividends received on Embraer’s common shares or ADSs. U.S. Holders who do not elect to claim a credit for foreign taxes may instead claim a deduction in respect of such Brazilian withholding taxes (in accordance with Sections 164 and 275 of the Code). Dividends received with respect to the Embraer common shares or ADSs will be treated as foreign source income for U.S. federal income tax purposes, subject to various classifications and other limitations. The rules relating to computing foreign tax credits are complex, and U.S. Holders are urged to consult their own tax advisors regarding the availability of foreign tax credits with respect to any Brazilian withholding taxes in regards of dividends paid on Embraer’s common shares or ADSs.

Distributions of additional Embraer common shares to U.S. Holders with respect to their common shares or ADSs that are made as part of a pro rata distribution to all shareholders of Embraer generally will not be subject to U.S. federal income tax.

Subject to certain exceptions for short-term and hedged positions, the amount of dividends received by certain U.S. Holders (including individuals) prior to January 1, 2011 with respect to the Embraer common shares or ADSs will be subject to taxation at a maximum rate of 15% if the dividends represent “qualified dividend income.” Dividends paid on the Embraer common shares or ADSs will be treated as qualified dividend income if (i) the Embraer common shares or ADSs are readily tradable on an established securities market in the United States and (ii) neither Embraer nor its predecessor was in the year prior to the year in which the dividend was paid, and is not in the year in which the dividend is paid, a passive foreign investment company or “PFIC”. Under current guidance issued by the IRS, the ADSs of Embraer should qualify as readily tradable on an established securities market in the United States so long as they are listed on the NYSE, but no assurances can be given that the Embraer ADSs will be or remain readily tradable under future guidance. In the case of Embraer common shares held directly by U.S. Holders and not underlying an ADS, it is not clear whether dividends paid with respect to such shares will represent “qualified dividend income.” U.S. Holders holding Embraer common shares directly and not through an ADS are urged to consult their own tax advisors.

Based on its audited financial statements as well as relevant market and shareholder data, Embraer believes that neither it nor its predecessor was a PFIC for United States federal income tax purposes with respect to its 2006 taxable year. In addition, based on Embraer’s audited or projected financial statements and current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, Embraer does not anticipate becoming a PFIC for its 2007 taxable year. However, because this determination is based on the nature of Embraer’s income and assets from time to time, involves the application of complex tax rules, and since Embraer’s view is not binding on the courts or the IRS, no assurances can be provided that Embraer (or its predecessor) will not be considered a PFIC for the current, or any past or future tax year. The potential application of the PFIC rules is further discussed below.

The U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends. Because such procedures have not yet been issued, it is not clear whether Embraer will be able to comply with them. U.S. Holders of Embraer common shares and ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate in light of their own particular circumstances.

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Sale, Exchange or Other Taxable Disposition of Embraer Common Shares or ADSs

Subject to the discussion below under “—Passive Foreign Investment Company Rules” for U.S. federal income tax purposes, a U.S. Holder will recognize taxable gain or loss on any sale, exchange or other taxable disposition of Embraer common shares or ADSs in an amount equal to the difference between the amount realized on the sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax basis (determined in United States dollars) in the Embraer common shares or ADSs. Such gain or loss will generally be capital gain or loss and will be long-term capital gain or loss if the Embraer common shares or ADSs have a holding period of more than one year. Certain U.S. Holders (including individuals) may be eligible for preferential rates of U.S. federal income tax in respect of long-term capital gains. The deductibility of capital losses is subject to limitations under the Code.

Any gain or loss recognized by a U.S. Holder from the sale, exchange or taxable disposition of Embraer common shares or ADSs generally will be gain or loss from U.S. sources for U.S. foreign tax credit purposes. Consequently, if a Brazilian withholding tax or capital gains tax is imposed pursuant to a sale of Embraer common shares or ADSs, U.S. Holders who do not have significant foreign source income might not be able to derive effective U.S. foreign tax credit benefit in respect of such Brazilian withholding tax or capital gains tax. The rules relating to foreign tax credits, including the amount of foreign income taxes that may be claimed as a credit in any given year, are complex and subject to limitations. You are urged to consult your own tax advisor regarding the application of the foreign tax credit rules to your particular circumstances.

Passive Foreign Investment Company Rules

If, during any taxable year of a non-U.S. corporation, 75% or more of the corporation’s gross income consists of certain types of “passive” income, or the average value during a taxable year of the “passive assets” of the corporation (generally assets that generate passive income) is 50% or more of the average value of all the corporation’s assets, the corporation will be treated as a PFIC under U.S. federal income tax law. If a corporation is treated as a PFIC, a U.S. Holder may be subject to increased tax liability upon the sale of its stock, or upon the receipt of certain dividends, unless such U.S. Holder makes an election to be taxed currently on its pro rata portion of the corporation’s income, whether or not such income is distributed in the form of dividends, or otherwise makes a “mark-to-market” election with respect to the corporation’s stock as permitted by the Code. In addition, as discussed above, a U.S. Holder would not be entitled to (if otherwise eligible for) the preferential reduced rate of tax payable on certain dividend income. As stated above, although no assurances can be given, based on Embraer’s operations, projections and business plans and the other items discussed above, Embraer does not believe that it (or its predecessor) was or currently is a PFIC, and does not expect to become a PFIC for its 2007 taxable year.

Any U.S. Holder who owns Embraer common shares or ADSs during any taxable year that Embraer is a PFIC would be required to file IRS Form 8621. U.S. Holders are urged to consult their own tax advisors regarding the potential application of the PFIC rules to the common shares or ADSs and the availability and advisability of making an election to avoid the adverse tax consequences of the PFIC rules should Embraer be considered a PFIC for any taxable year.

Information Reporting and Backup Withholding

In general, payments of dividends on Embraer common shares or ADSs, and payments of the proceeds of sale, exchange or other disposition of Embraer common shares or ADSs, paid within the United States or through certain United States-related financial intermediaries to a U.S. Holder may be subject to information reporting and backup withholding at a current maximum rate of 28% unless the U.S. Holder (i) is a corporation or other exempt recipient or (ii) in the case of backup withholding, provides an accurate taxpayer identification number and certifies that no loss of exemption from backup withholding has occurred. Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a refund or a credit against the U.S. Holder’s U.S. federal income tax liability provided the required information is timely provided to the IRS.

10F. Dividends and Paying Agents

Not applicable.

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10G. Statements by Experts

Not applicable.

10H. Documents on Display

We are subject to the periodic reporting and other informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the U.S. Securities and Exchange Commission, or the SEC. You may inspect and obtain copies, at prescribed rates, of reports and other information filed by us with the SEC at its Public Reference Room maintained at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330. You may also inspect and copy this material at the offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005.

We file our annual report on Form 20-F, including our financial statements, and other reports, including our reports on Form 6-K, electronically with the SEC. These filings are available at www.sec.gov. We also file financial statements and other periodic reports electronically with the CVM at its website, www.cvm.gov.br. Copies of our annual reports on Form 20-F and documents referred to in this annual report and our bylaws will be available for inspection upon request at our headquarters at Av. Brigadeiro Faria Lima, 2170, 12227-901 São José dos Campos, São Paulo, Brazil.

10I. Subsidiary Information

Not required.

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to various market risks, primarily related to potential loss arising from adverse changes in interest rates and foreign currency exchange rates. We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate risk. These procedures include the monitoring of our levels of exposure to each market risk, including an analysis based on forecast of future cash flows, the funding of variable rate assets with variable rate liabilities, and limiting the amount of fixed rate assets which may be funded with floating rate liabilities. We may also use derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce our exposure to exchange rate risk. The following sections address the significant market risks associated with our financial activities.

Interest Rate Risk

Our exposure to market risk for interest rate fluctuations principally relates to changes in the market interest rates of our U.S. dollar-denominated and real-denominated monetary liabilities, principally our short- and long-term debt obligations. Increases and decreases in prevailing interest rates generally translate into increases and decreases in interest expense. Additionally, the fair values of interest rate-sensitive instruments are also affected by general market conditions.

Our short- and long-term debt obligations totaled US$1,349.2 million at December 31, 2006 and were denominated in U.S. dollars, Brazilian reais and Euro. Of the total amount of debt denominated in U.S. dollars, US$1,017.1 million, approximately US$762.0 million was fixed rate. The remaining floating rate U.S. dollar-denominated debt was indexed to six-month LIBOR. Of the US$298.2 of our Brazilian reais-denominated debt at December 31, 2006, US$291.9 million bears interest at a variable rate based on the TJLP, the long-term interest rate in Brazil. The TJLP was 6.85% per annum at December 31, 2006. We also maintain subsidiary lines of credit in an amount of US$6.3 million, which bear interest at a variable rate of 115% of the CDI, the interbank deposit rate in Brazil. Our Euro-denominated debt, totaling US$33.9 million, of which US$20.6 million was fixed rate and US$13.3 million was indexed to a variable rate based on the Euribor.

The table below provides information about our short- and long-term debt obligations as of December 31, 2006 that are sensitive to changes in interest rates and foreign currency exchange rates.

						Outstanding Amount By Year of Maturity
	Weighted Average Interest Rate 2006			Total Outstanding Amount		2007		2008		2009		20010		2011		2012		Thereafter		Total Fair Value
Short Term Debt						(in thousands, except percentages)
U.S. dollars (LIBOR indexed)		8.10	%		US$49,491		US$49,491		-		-		-		-		-		-		US$67,984
U.S. dollars (fixed rate)		6.25	%		164,396		164,396		-		-		-		-		-		-		185,113
Reais (TJLP indexed)		8.89	%		262,088		262,088		-		-		-		-		-		-		304,921
Reais (CDI indexed)		12.61	%		6,327		6,327		-		-		-		-		-		-		6,514
Euro (fixed rate)		3.97	%		20,593		20,593		-		-		-		-		-		-		20,511
Euro (EURIBOR indexed)		4.63	%		152		152		-		-		-		-		-		-		2,186
Total short-term debt					US$503,047		US$503,047		-		-		-		-		-		-		US$587,229
Long Term Debt
U.S. dollars (LIBOR indexed)		8.10	%		US$205,624		-		US$47,362		US$42,544		US$34,049		US$25,555		US$25,555		US$30,559		US$204,648
U.S. dollars (fixed rate)		6.25	%		597,512		-		97,041		20,352		50,000		119		-		430,000		584,944
Reais (TJLP indexed)		8.89	%		29,798		-		4,495		6,468		5,811		5,287		3,891		3,846		29,037
Reais (CDI indexed)		12.61	%		-		-		-		-		-		-		-		-		-
Euro (fixed rate)		3.97	%		-		-		-		-		-		-		-		-		-
Euro (EURIBOR indexed)		4.63	%		13,170		-		5,670		2,500		2,500		2,500		-		-		10,974
Total long-term debt					US$846,104		-		154,568		71,864		92,360		33,461		29,446		464,405		US$829,603
Total debt					US$1,349,151		US$503,047		US$154,568		US$71,864		US$92,360		US$33,461		US$29,446		US$464,405		US$1,416,832

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In order to manage our interest rate risk on our monetary liabilities, we have entered into a number of swaps, which effectively convert US$242.7 million of our floating interest rate U.S. dollar-denominated debt into U.S. dollar fixed interest rate denominated obligations. In addition, as of December 31, 2006, we had effectively converted US$19.6 million of our U.S. dollar fixed interest rate debt into CDI-based reais denominated obligations. These swaps did not affect the maturity or amortization schedule of our existing debt.

These swaps are not accounted for as hedging transactions under U.S. GAAP. Nevertheless, these swaps are recorded at fair value on our balance sheet, and we recognized an unrealized loss of US$11.3 million as of December 31, 2006 as part of interest income (expense), net. For further information about the terms of these swap transactions, including notional amount, maturity date and fair value gains and losses, see Note 31 to our consolidated financial statements.

We do not currently have any derivative instruments that limit our exposure to changes in the TJLP because we believe that our total exposure, combined with the relatively low volatility of the TJLP, is unlikely to have a material effect on our company.

The table below provides information about our short- and long-term debt obligations as of December 31, 2006, after considering the effects of the above mentioned derivative transactions. 

						Outstanding Amount By Year of Maturity
	Weighted Average Interest Rate 2006			Total Outstanding Amount		2007		2008		2009		2010		2011		2012		Thereafter		Total Fair Value
Short Term Debt						(in thousands, except percentages)
U.S. dollars (LIBOR indexed)		8.03	%		US$12,396		US$12,396		-		-		-		-		-		-		US$12,370
U.S. dollars (fixed rate)		6.53	%		186,537		186,537		-		-		-		-		-		-		226,915
Reais (TJLP indexed)		8.89	%		262,089		262,089		-		-		-		-		-		-		304,921
Reais (CDI indexed)		10.87	%		21,280		21,280		-		-		-		-		-		-		20,326
Euro (fixed rate)		3.97	%		20,593		20,593		-		-		-		-		-		-		20,511
Euro (EURIBOR indexed)		4.63	%		152		152		-		-		-		-		-		-		2,186
Total short-term debt					US$503,047		US$503,047		-		-		-		-		-		-		US$587,229
Long Term Debt
U.S. dollars (LIBOR indexed)		8.03	%		US$50		-		US$50		-		-		-		-		-		US$175
U.S. dollars (fixed rate)		6.53	%		798,486		-		139,753		62,895		84,049		25,674		25,555		460,560		783,835
Reais (TJLP indexed)		8.89	%		29,798		-		4,495		6,469		5,811		5,287		3,891		3,845		29,037
Reais (CDI indexed)		10.87	%		4,600		-		4,600		-		-		-		-		-		5,582
Euro (fixed rate)		3.97	%		-		-		-		-		-		-		-		-		-
Euro (EURIBOR indexed)		4.63	%		13,170		-		5,670		2,500		2,500		2,500		-		-		10,974
Total long-term debt					US$846,104		-		154,568		71,864		92,360		33,461		29,446		464,405		US$829,603
Total debt					US$1,349,151		US$503,047		US$154,568		US$71,864		US$92,360		US$33,461		US$29,446		US$464,405		US$1,416,832

Foreign Currency Risk

In managing our foreign currency risk, we focus on balancing our non-U.S. dollar-denominated assets against our non-U.S. dollar-denominated liabilities plus shareholders’ equity in relation to our forecasts of future cash flows. Beyond the foreign currency exposure related to our debt obligations as summarized above, we also have other assets and liabilities denominated in currencies other than the U.S. dollar. These monetary assets and liabilities are primarily cash and cash equivalents, accounts receivable and payable, deferred income taxes, dividends and certain other assets and liabilities and are primarily denominated in Brazilian reais. The effects on such assets and liabilities of the appreciation or devaluation of other foreign currencies against the U.S. dollar result in foreign exchange gains (losses) recognized on our income statement as interest income (expense), net.

108

The table below provides information about our assets and liabilities exposed to foreign currency risk as of December 31, 2006 as well as the derivative transactions outstanding at the same date:

	Total			Outstanding Amount by Year of Maturity
	Outstanding Amount			2007			2008			2009			2010			2011			Thereafter			Total Fair Value
ASSETS
Cash and cash equivalents
In reais		US$343,442			US$343,442			-			-			-			-			-			US$343,442
In Euro		19,136			19,136			-			-			-			-			-			19,136
In Chinese Yuan		33,590			33,590			-			-			-			-			-			33,590
Investments and temporary cash investments
In reais		555,795			555,795			-			-			-			-			-			555,795
Trade accounts receivable
In Rreais		33,267			33,267			-			-			-			-			-			33,267
In Euro		65,927			65,927			-			-			-			-			-			65,927
Deferred income tax assets
In reais		252,857			107,304			89,343			24,756			10,117			8,469			12,869			252,857
In Euro		11,932			11,932			-			-			-			-			-			11,932
Other assets
In reais		56,765			42,611			14,154			-			-			-			-			56,765
In Euro		23,596			8,430			15,166			-			-			-			-			23,596
In CNY		8,734			8,734			-			-			-			-			-			8,734
Total Assets in reais		US$1,242,126			US$1,082,419			US$103,496			US$24,756			US$10,117			US$8,469			US$12,869			US$1,242,126
Total Assets in Euro		US$120,590			US$105,424			15,166			-			-			-			-			US$120,590
Total Assets in Chinese Yuan		US$42,323			US$42,323			-			-			-			-			-			US$42,323
LIABILITIES
Loans
In reais		US$298,213			US$268,415			US$4,495			US$6,468			US$5,811			US$5,287			US$7,735			US$340,472
In Euro		33,915			20,745			5,670			2,500			2,500			2,500			-			33,671
In Japanese Yen		-			-			-			-			-			-			-			-
Accounts payable to suppliers																							-
In reais		57,637			57,637																		57,637
In Euro		37,812			37,812																		37,812
Customer advances																							-
In reais		22,171			22,171																		22,171
Other accounts payable & accrued liabilities																							-
In reais		129,965			129,077			888			-			-			-			-			129,965
In Euro		35,263			27,575			7,688			-			-			-			-			35,263
In CNY		5,789			5,789			-			-			-			-			-			5,789
Taxes and payroll charges payable																							-
In reais		575,975			244,424			203,511			56,392			23,045			19,290			29,313			575,975
In Euro		5,238			5,238			-			-			-			-			-			5,238
In Chinese Yuan		8,442			8,442			-			-			-			-			-			8,442
Accrued taxes on income																							-
In reais		192			192			-			-			-			-			-			192
In Euro		3,341			3,341			-			-			-			-			-			3,341
Deferred income tax liabilities
In reais		208,517			24,079			29,381			31,084			30,081			30,438			63,454			208,517
In Euro
Accrued dividends
In reais		35,555			35,555			-			-			-			-			-			35,555
Contingencies
In reais		48,955			20,775			17,297			4,793			1,959			1,640			2,491			48,955
In Euro		15,589			15,024			565			-			-			-			-			15,589
-
Total liabilities in reais		US$1,377,180			US$802,326			US$255,572			US$98,736			US$60,896			US$56,655			US$102,994			US$1,419,439
Total liabilities in Euro		US$131,158			US$109,735			US$13,923			US$2,500			US$2,500			US$2,500			-			US$130,914
Total liabilities in Japanese Yen		-			-			-			-			-			-			-			-
Total liabilities in Chinese Yuan		US$14,231			US$14,231			-			-			-			-			-			US$14,231
Total exposure in reais		US$(135,055	)		US$280,093			US$(152,075	)		US$(73,980	)		US$(50,779	)		US$(48,187	)		US$(90,125	)		US$(177,314	)
Total exposure in Euro		US$(10,568	)		US$(4,311	)		US$1,243			US$(2,500	)		US$(2,500	)		US$(2,500	)		-			US$(10,324	)
Total exposure in Japanese Yen		-			-			-			-			-			-			-			-
Total exposure in Chinese Yuan		US$28,092			US$28,092			-			-			-			-			-			US$28,092

109

	Total			Outstanding Amount by Year of Maturity
	Outstanding Amount			2007			2008			2009			2010			2011			Thereafter			Total Fair Value
DERIVATIVE INSTRUMENTS
Cross-currency interest rate swap contracts (US$Floating v. US$Fixed)
Notional amount		US$239,371			US$38,566			US$42,544			US$42,544			US$34,049			US$25,555			US$56,114			US$2,937
Average interest paid in US$		7.36	%		-			-			-			-			-			-			-
Average interest received in US$		Libor + 2.68	%		-			-			-			-			-			-			-
Cross-currency interest rate swap contracts (US$v. R$)
Notional amount		US$16,434			US$11,646			US$4,788			-			-			-			-			US$(15,236	)
Average interest paid in eais		58.61% of CDI			-			-			-			-			-			-			-
Average interest received in US$		5.14	%		-			-			-			-			-			-			-
Dual-currency interest rate swap contracts CDI v. the greater than exchange variation or CDI)
Notional amount		US$6,289			US$6,289			-			-			-			-			-			US$7
Average interest paid in US$		9.88	%		-			-			-			-			-			-			-
Average interest received in JPY		15.29	%		-			-			-			-			-			-			-
Net exposure of assets/liabilities
- In reais		US$(157,778	)		US$262,158			US$(156,863	)		US$(73,980	)		US$(50,779	)		US$(48,187	)		US$(90,125	)		-
- In Euro		US$(10,568	)		US$(4,311	)		US$1,243			US$(2,500	)		US$(2,500	)		US$(2,500	)		-			-
- In Japanese Yen		-			-			-			-			-			-			-			-
- In Chinese Yuan		US$28,092			US$28,092			-			-			-			-			-			-

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

No matters to report.

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

Material Modifications to the Rights of Security Holders

Set forth below is a summary of the modifications of the rights of the holders of former Embraer common and preferred shares as a result of the share exchange resulting from the merger of former Embraer with and into Embraer approved on March 31, 2006. As a result of the merger, former Embraer ceased to exist and (1) each common share of former Embraer was exchanged for one common share of Embraer, (2) each preferred share of former Embraer was exchanged for one common share of Embraer, (3) each ADS of former Embraer, each of which represented four preferred shares of former Embraer was exchanged for one ADS of Embraer, each of which represents four common shares of Embraer, and (4) the golden share, a special class of common share of former Embraer held by the Federative Republic of Brazil, was exchanged for a special class of common share of Embraer.

This summary lists certain of the material differences but is not meant to be relied upon as an exhaustive list of the differences between the former Embraer common and preferred shares, and our common shares or a detailed description of the provisions discussed, and is qualified in its entirety by reference to the former Embraer bylaws, our bylaws, the Brazilian Corporate Law, the rules and regulations of the CVM, and the Novo Mercado Regulations.

110

Comparison of Rights of Holders of Former Embraer Common Shares and Embraer Common Shares

	Rights of Holders of Former Embraer Common Shares	Rights of Holders of Embraer Common Shares
Voting	Each former Embraer common share entitled its holder to one vote in the resolutions of a general meeting. Certain resolutions and acts of the shareholders and management of former Embraer were subject to the veto of the Brazilian Government, as holder of the Golden Share.	Each of our common shares entitles its holder to one vote in the resolutions of a general meeting. In the resolutions of the general meeting: (1) no shareholder or group of shareholders, whether Brazilian or non-Brazilian, including brokers acting on behalf of one or more holders of ADSs, may exercise voting rights representing more than 5% of the number of shares into which the capital stock is divided; and (2) non-Brazilian shareholders and groups of non-Brazilian shareholders may not exercise voting rights representing more than ⅔ of the total of the votes conferred on the entirety of Brazilian shareholders present. Certain resolutions and acts of our shareholders and management will be subject to the veto of the Brazilian Government, as holder of the Golden Share.
Maximum Shareholder Votes	None.	No shareholder or group of shareholders, whether Brazilian or non-Brazilian, may exercise voting rights representing more than 5% of our total capital stock.
Non-Brazilian Shareholder Voting	Ownership of former Embraer common shares by non-Brazilians was limited to 40% of all former Embraer common shares. Non-Brazilian shareholders holding former Embraer common shares, within the 40% limitation, had full voting rights.	Non-Brazilian shareholders and groups of non-Brazilian shareholders may not exercise voting rights representing more than ⅔ of the total of the votes conferred on the entirety of Brazilian shareholders present at the general meeting of our shareholders.
Dividends	Shareholders were entitled to receive, in each fiscal year, a mandatory dividend corresponding to a percentage equivalent to 25% of the net income for the fiscal year, subject to certain adjustments.	Shareholders are entitled to receive, in each fiscal year, a mandatory dividend corresponding to a percentage equivalent to 25% of the net income for the fiscal year, subject to certain adjustments.
Number of Directors; Qualifications	The Board of Directors consisted of at least nine and no more than 18 directors and their respective alternates, all of whom had to be shareholders.	The Board of Directors consists of 11 members and their respective alternates, all of whom must be shareholders.
Term of Directors	The directors were elected at a general meeting for a term of three years, reelection being permitted.	The transition Board of Directors has a term of office of three years, until the annual general meeting in 2009 that approves the financial statements for the fiscal year ended December 31, 2008. After such meeting, the term of office of the Board of Directors will be for two years, reelection being allowed.
Removal of Directors and Filling of Vacancies	In the event of impairment or a vacancy in the office of a member of the Board of Directors, his alternate assumed office until such impairment ceased or, in the event of a vacancy, until the first general meeting subsequent thereto was held, which general meeting established a definitive alternate for the remaining term of office. In case of simultaneous or successive vacancies in the offices of an effective director and his respective alternate, the Board of Directors convened a general meeting to fill such offices.	As already provided by the Brazilian Corporate Law and, therefore, applicable to holders of our common shares, whenever the election is conducted under the cumulative voting process, the dismissal of any member of the Board of Directors at a general meeting will immediately result in the dismissal of all the other members, thus requiring a new election; in other cases of vacancy, if there is no alternate, the entire Board of Directors will stand for election at the next general meeting. Any vacant offices that have not been filled, due to a tie, will be subject to a new voting, under the same process, after adjustment is made to the number of votes entitled to each shareholder based on the number of seats to be filled.
Election of Directors	In the election of the directors, the general meeting first established, by a majority vote, the number of directors to be elected that were not otherwise allocated as representatives of a certain person or group. If the process of cumulative voting had not been requested, the general meeting voted by means of a candidates roll previously registered with the presiding board, which candidates roll assured the shareholders that held, whether individually or in block, 20% or more of the former Embraer common shares had the right to appoint two effective directors and their respective alternates.	Unless a 5% shareholder invokes the cumulative voting provision, the election of directors will be conducted under a system of slate voting, whereby voting on individual candidates will not be allowed; provided, however, that any shareholder who wishes to do so must appoint candidates at least ten days prior to the general meeting of shareholders at which the members of the Board of Directors will be elected. As already provided by the Brazilian Corporate Law and, therefore, applicable to holders of our common shares, shareholders representing at least 5% of the corporate capital may request the election of directors by cumulative voting if notice is given to the company no later than 48 hours prior to the date for which the general meeting has been called. Each shareholder will have the right to cumulate their votes for one candidate and the respective alternate, or to distribute them among several candidates. The candidate(s) and respective alternate(s) that receive the higher number of votes will be declared elected.

111

Rights of Holders of Former Embraer Common Shares Rights of Holders of Embraer Common Shares

Quorum of Shareholders for a General Meeting	The quorum for convening a general meeting on first call was the presence of shareholders representing at least 25% of the voting capital; on second call, it was convened with the presence of any number of shares.	The quorum for convening a general meeting on first call is the presence of shareholders representing at least 35% of the capital stock, except if the law requires a higher quorum; and on second call is the presence of shareholders representing at least 25% of the capital stock; and, on third call, the presence of any number of shareholders.
Notice of Shareholders’ Meetings	The first call of a general meeting was made 15 days in advance, and the second call was eight days in advance of the general meeting.	A general meeting is called by the Board of Directors or, as provided by law, by shareholders or by the Conselho Fiscal, the first call being published at least 30 days in advance of the general meeting counting from the date of the first publication of the notice; if the meeting is not held because of a lack of quorum, a notice of second call will be published at least 15 days in advance of the general meeting; and, if again the meeting is not held, the third call will be published at least eight days in advance of the general meeting.
Compulsory Acquisition of a Majority Shareholder	None.	Any shareholder or group of shareholders that acquires or becomes the holder, for any reason of: (i) 35% or more or the total shares issued by us; or (ii) of other rights, including beneficial ownership and trust, over shares issued by us that represent more than 35% of our capital, or an Acquiring Shareholder, will submit to the Brazilian Government, as holder of the Golden Share, through the Brazilian Ministry of Finance, a request to make a public tender offer for acquisition of all shares issued by us. If the request is denied, the Acquiring Shareholder, within a period of 30 days as of communication of the denial, must sell all of the shares that exceed the 35% limit. During the period between the request to make the public tender offer and the reply from the Brazilian Government, the Acquiring Shareholder may not acquire or sell any shares or convertible securities issued by us. The price to be paid for each of our common shares in the public tender offer must be equal to or greater than the amount obtained by the following formula: “Acquisition Price” = Value of the Share + 50% Premium “Value of the Share” = the greater value between: (i) the highest unit quotation of the shares issued by us during the 12-month period prior to conducting the public tender offer recorded on any stock exchange in which the shares were traded; (ii) the highest price paid by the Acquiring Shareholder during the 36-month period prior to the public tender offer for a share or tranche of shares issued by us; (iii) the amount equivalent to 14.5 times our consolidated average EBITDA (determined in accordance with the bylaws), reduced by our net consolidated indebtedness, divided by the total number of shares issued; and (iv) the amount equivalent to 0.6 times the amount of our firm backlog orders, according to the last information disclosed by us, reduced by our net consolidated indebtedness, divided by the total number of shares issued by us.

112

Comparison of Rights of Holders of Former Embraer Preferred Shares and Embraer Common Shares

Below is a summary comparison of the material changes in the rights that resulted from holders of former Embraer preferred shares becoming holders of Embraer common shares.

	Rights of Holders of Former Embraer Preferred Shares	Rights of Holders of Embraer Common Shares
Voting	Preferred shares were not entitled to vote at a general meeting. Preferred shareholders could attend a general meeting and take part in the discussion of matters presented at the meeting.	Each of our common shares entitles its holder to one vote in the resolutions of a general meeting. In the resolutions of the general meeting: (1) no shareholder or group of shareholders, whether Brazilian or non-Brazilian, including brokers acting on behalf of one or more holders of ADSs, may exercise voting rights representing more than 5% of the number of shares into which the capital stock is divided; and (2) the set of non-Brazilian shareholders and groups of shareholders may not exercise voting rights representing more than two-thirds of the total of the votes conferred on the entirety of Brazilian shareholders present. Certain resolutions and acts of our shareholders and management are subject to the veto of the Brazilian Government, as holder of the Golden Share.
Dividends	Preferred shares were entitled to the receipt of dividends per share at least 10% higher than those conferred to each common share. Shareholders were entitled to receive, in each fiscal year, a mandatory dividend corresponding to a percentage equivalent to 25% of the net income for the fiscal year, subject to certain adjustments.	There is no dividend preference among shareholders. The shareholders will be entitled to receive, in each fiscal year, a mandatory dividend corresponding to a percentage equivalent to 25% of the net income for the fiscal year, subject to certain adjustments.
Priority in Capital Stock Reimbursements	Preferred shares were entitled to at least a 10% premium over that received by common shares in the event of a reimbursement of capital.	There is no preference among shareholders in the event of a reimbursement of capital.

Use of Proceeds

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our president and CEO, Maurício Novis Botelho, and our executive vice-president corporate and chief financial officer, Antonio Luiz Pizarro Manso, after evaluating, together with management, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2006, the end of the period covered by this report, have concluded that, as of such date, our disclosure controls and procedures were adequate and effective to ensure information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that material information relating to us and our consolidated subsidiaries was be made known to them by others within our company and our consolidated subsidiaries during the period in which this annual period applies.

113

Management’s Report on Internal Control over Financial Reporting

Our management 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. Our internal control over financial reporting is designed to provide reasonable assurance to our 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. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2006. 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 has concluded that, as of December 31, 2006, our internal control over financial reporting is effective based on those criteria.

Management’s assessment of the effectiveness of internal controls over financial reporting as of December 31, 2006 has been audited by Deloitte Touche Tohmatsu Auditores Independentes, the independent registered public accounting firm who also audited our consolidated financial statements. Deloitte Touche Tohmatsu attestation report on management’s assessment of the our internal controls over financial reporting is included herein.

Changes in Internal Controls

There were no changes in our company’s internal control over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.

ITEM 16A.AUDIT COMMITTEE FINANCIAL EXPERT

Our Board of Directors has determined that Taiki Hirashima, a member of our Conselho Fiscal, is an “audit committee financial expert” as defined by current SEC rules. Furthermore, Mr. Hirashima is an independent member of our Conselho Fiscal as required by the NYSE rules and regulations. For a discussion of the role of our Conselho Fiscal, see “Item 6C. Board Practices—Conselho Fiscal.”

ITEM 16B.CODE OF ETHICS

Our Board of Directors has adopted a Code of Ethics and Conduct applicable to our directors, officers and employees worldwide, including our principal executive officer, principal financial officer and controller. A copy of our Code of Ethics and Conduct has been filed as Exhibit 11.1 to this annual report.

ITEM 16C.PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth by category of service the total fees for services performed by Deloitte Touche Tohmatsu during the fiscal years ended December 31, 2005 and December 31, 2006:

114

	2005		2006
	(in thousands)
Audit Fees		US$1,093		US$1,886
Audit-Related Fees		621		434
Tax Fees		508		807
All Other Fees		68		148
Total		US$2,290		US$3,275

Audit Fees

Audit fees in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche Tohmatsu in connection with the audit of our annual financial statements under Brazilian GAAP, which are published in Brazil, and our annual financial statements under U.S. GAAP and for the review of our financial information included in our annual report on Form 20-F, reviews of quarterly financial statements, which are submitted on Form 6-K, and statutory audits of our subsidiaries.

Audit-Related Fees

Audit-related fees in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche Tohmatsu in connection with the review of our internal control system and assistance in complying with the requirements of the Sarbanes-Oxley Act of 2002.

Tax Fees

Tax fees in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche Tohmatsu in connection with services for tax compliance and tax advice, mainly comprised of the review of income tax returns in the several jurisdictions in which we operate and assistance with other tax filings in foreign jurisdictions, as well as assistance to our tax committee to ensure compliance with Brazilian tax requirements.

All Other Fees

We did not pay any other fees to Deloitte Touche Tohmatsu in 2006 other than those described above.

Other fees paid to Deloitte Touche Tohmatsu in 2005 consisted of the aggregate fees billed primarily in connection with human resources related consulting services.

Pre-Approval Policies and Procedures

Our Board of Directors approves all audit, audit-related services, tax services and other services provided by Deloitte Touche Tohmatsu. Any services provided by Deloitte Touche Tohmatsu that are not specifically included within the scope of the audit must be pre-approved by our Board of Directors 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 2005 and 2006, none of the fees paid to Deloitte Touche Tohmatsu were approved pursuant to the de minimis exception.

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

We are in full compliance with the listing standards for audit committee pursuant to Exchange Act Rule 10A-3. For a further discussion of our Conselho Fiscal and the audit committee exemption, see “Item 6C. Board Practices—Conselho Fiscal.”

115

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

In 2006, neither we nor any affiliated purchaser purchased or repurchased any of our equity securities.

116

PART III

ITEM 17. FINANCIAL STATEMENTS

We have responded to Item 18 in lieu of responding to this item.

ITEM 18. FINANCIAL STATEMENTS

 

Our consolidated financial statements, together with the Independent Auditors’ Report thereon, are filed as part of this annual report and are located following the signature page hereof.

ITEM 19. EXHIBITS

Exhibit Number	Description
1.1	Bylaws of Embraer (English translation) incorporated herein by reference from Exhibit 3.2 to Embraer’s Registration Statement No. 333-132289.
2.1	Form of Amended and Restated Deposit Agreement among Embraer, Morgan Guaranty Trust Company 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 to Exhibit 99(a) to Embraer’s Registration Statement No. 333-133162.
2.2	Indenture, dated as of October 25, 2006, among Embraer Overseas Limited, Embraer-Empresa Brasileira de Aeronáutica S.A., The Bank of New York, as Trustee, Registrar, Transfer Agent, and Principal Paying Agent, and The Bank of New York (Luxembourg) S.A., as Luxembourg Paying Agent and Transfer Agent, incorporated herein by reference from Exhibit 4.1 to Embraer’s Registration Statement No. 333-141629.
2.3	The registrant hereby agrees to furnish to the SEC, upon request, copies of certain instruments defining the rights of holders of long-term debt of the kind described in Item 2(b)(i) of the Instructions as to Exhibits in Form 20-F.
4.1*	Shareholders’ Agreement executed by Embraer and Liebherr International AG on May 22, 2000, incorporated herein by reference from Exhibit 10.5 to Embraer’s Registration Statement No. 333-12220.
4.2	Protocol of Merger and Justification of Embraer-Empresa Brasileira de Aeronáutica S.A. with and into Rio Han Empreendimentos e Participações S.A., dated as of January 19, 2006, and exhibits thereto, or Merger Agreement (English translation), incorporated herein by reference from Exhibit 2.1 to Embraer’s Registration Statement No. 333-132289.
4.3	Lease Agreement, as amended, between Howard County and Embraer Aircraft Corporation, dated as of April 21, 1998, incorporated herein by reference from Exhibit 10.6 to Embraer’s Registration Statement No. 333-12220.
4.4	Lease Agreement, as amended, between the Paris Airport and Embraer, dated as of January 1, 1999, together with an English translation, incorporated herein by reference from Exhibit 10.6 to Embraer’s Registration Statement No. 333-12220.
8.1	List of Embraer’s subsidiaries.

117

11.1	Code of Ethics and Conduct, incorporated herein by reference from Exhibit 11.1 to Embraer’s Annual Report on Form 20-F for the fiscal year ended December 31, 2003.
12.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
12.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
13.1	Section 1350 Certification of Chief Executive Officer.
13.2	Section 1350 Certification of Chief Financial Officer.

*Embraer has been granted confidential treatment for portions of this Exhibit. Accordingly, portions thereof have been omitted and were filed separately with the SEC.

118

SIGNATURES

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

	EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
Date: April 23, 2007	By:	/s/ MAURICIO NOVIS BOTELHO
		Name:Maurício Novis Botelho
		Title:President and Chief Executive Officer

Date: April 23, 2007	By:	/s/ ANTONIO LUIZ PIZARRO MANSO
		Name:Antonio Luiz Pizarro Manso
		Title: Executive Vice-President Corporate and    ChiefFinancial Officer

INDEX TO FINANCIAL STATEMENTS

	Page
Index to Financial Statements		F-1
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets at December 31, 2005 and 2006		F-4
Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 2004, 2005 and 2006		F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2005 and 2006		F-7
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2004, 2005 and 2006		F-8
Notes to Consolidated Financial Statements for the Years Ended December 31, 2004, 2005 and 2006		F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Management of

EMBRAER - Empresa Brasileira de Aeronáutica S.A.

São Paulo - SP

1. We have audited the accompanying consolidated balance sheets of EMBRAER - Empresa Brasileira de Aeronáutica S.A. (a Brazilian Corporation) and subsidiaries as of December 31, 2006 and 2005, and the related consolidated statements of income, change in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2006.We also have audited management's assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006, based on Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  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.  Our responsibility is to express an opinion on these financial statements, an opinion on management's assessment, and an opinion on the effectiveness of the Company's internal control over financial reporting based on our audits.

2. 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 and whether effective internal control over financial reporting was maintained in all material respects.  Our audit of 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, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances.  We believe that our audits provide a reasonable basis for our opinions.

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

4. 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.

F-2

5. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of EMBRAER - Empresa Brasileira de Aeronáutica S.A. and subsidiaries as of December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006, in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, management's assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Deloitte Touche Tohmatsu Auditores Independentes

São Paulo, Brazil

April 18, 2007

F-3

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2006

(In thousands of U.S. dollars - US$)

ASSETS	Notes		2005		2006
CURRENT ASSETS
Cash and cash equivalents		5		1,339,159		1,209,396
Temporary cash investments		6		574,395		555,795
Trade accounts receivable, net		7		445,520		272,153
Customer and commercial financing		8		147,118		16,215
Collateralized accounts receivable		9		65,440		70,980
Inventories		10		1,477,559		2,047,244
Deferred income taxes		27		121,376		116,510
Guarantee deposits		11		247,613		301,670
Other assets		11		197,342		169,758
Total current assets				4,615,522		4,759,721
LONG TERM ASSETS
Trade accounts receivable		7		5,304		22,109
Customer and commercial financing		8		460,044		552,751
Collateralized accounts receivable		9		788,780		748,742
Property, plant and equipment, net		13		388,362		412,244
Investments		12		31,433		33,844
Deferred income taxes		27		302,304		340,659
Guarantee deposits		11		273,181		289,050
Other assets		11		67,515		156,581
Total long-term assets				2,316,923		2,555,980
TOTAL ASSETS				6,932,445		7,315,701

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

F-4

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2006

(In thousands of U.S. dollars - US$)

LIABILITIES AND SHAREHOLDERS’ EQUITY	Notes		2005			2006
CURRENT LIABILITIES
Loans and financing		19		475,305			503,047
Non-recourse and recourse debt		9		321,172			388,380
Capital lease obligations		20		2,753			2,388
Trade accounts payable				728,011			912,753
Advances from customers		16		485,958			544,802
Other payables and accrued liabilities		15		405,965			433,291
Taxes and payroll charges payable		17		113,360			136,950
Contingencies		18		19,826			31,175
Deferred income taxes		27		22,153			23,609
Accrued taxes on income				37,122			6,848
Dividends payable				42,811			35,555
Total current liabilities				2,654,436			3,018,798
LONG-TERM LIABILITIES
Loans and financing		19		1,078,117			846,104
Non-recourse and recourse debt		9		498,081			441,378
Capital lease obligations		20		2,216			3,453
Advances from customers		16		97,024			183,639
Contribution from suppliers		14		97,852			92,217
Taxes and payroll charges payable		17		513,743			455,048
Other payables and accrued liabilities		15		125,006			107,512
Deferred income taxes		27		165,250			195,988
Contingencies		18		33,691			33,369
Total long-term liabilities				2,610,980			2,358,708
MINORITY INTEREST				46,775			63,914
SHAREHOLDERS’ EQUITY
Statutory capital-
Preferred (without par value, 1,000,000,000 shares authorized; 479,287,609 shares issued and outstanding at December 31, 2005)				882,627			-
Common (at December 31, 2005, 500,000,000 shares authorized and 242,544,447 shares issued and outstanding; without par value, 1,000,000,000 shares authorized and 739,903,913 shares issued and outstanding as of December 31, 2006)				298,397			1,434,406
Special common share (R$ 1 par value, 1 share authorized, issued and outstanding at December 31, 2006 and 2005)				-			-
Additional paid-up capital				8,353			-
Legal reserve				126,711			13,797
Appropriate retained earnings				305,914			422,334
Accumulated other comprehensive income (loss)				(1,748	)		3,744
Total shareholders’ equity				1,620,254			1,874,281
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY				6,932,445			7,315,701

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

F-5

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars - US$, except earnings per share )

	Notes		2004			2005			2006
GROSS SALES
Foreign market				3,170,832			3,526,848			3,669,148
Domestic market				282,287			312,507			146,063
Sales deductions				(12,586	)		(9,448	)		(7,808	)
NET SALES				3,440,533			3,829,907			3,807,403
Cost of sales and services				(2,267,330	)		(2,671,816	)		(2,736,234	)
GROSS PROFIT				1,173,203			1,158,091			1,071,169
OPERATING INCOME (EXPENSES)
Selling expenses				(342,883	)		(269,747	)		(374,140	)
Research and development				(44,506	)		(93,166	)		(112,743	)
General and Administrative expenses				(139,357	)		(205,202	)		(235,505	)
Employee profit sharing				(61,199	)		(56,051	)		(42,719	)
Other operating income (expenses), net		28		(41,272	)		(26,079	)		1,677
INCOME FROM OPERATIONS				543,986			507,846			307,739
Interest income (expenses), net		21		(38,000	)		(1,672	)		140,525
Exchange loss, net		29		(12,218	)		(15,218	)		(4,098	)
Other non-operating income (expenses), net				(117	)		9,050			-
INCOME BEFORE INCOME TAXES				493,651			500,006			444,166
Income tax (expense)		27		(112,139	)		(41,569	)		(44,412	)
INCOME BEFORE MINORITY INTEREST AND EQUITY LOSS FROM AFFILIATES				381,512			458,437			399,754
Minority interest				(1,306	)		(9,622	)		(9,580	)
Equity in loss from affiliates				-			(3,096	)		(34	)
NET INCOME				380,206			445,719			390,140
OTHER COMPREHENSIVE INCOME				5,174			(4,632	)		9,287
COMPREHENSIVE INCOME				385,380			441,087			399,427
EARNINGS PER SHARE		25
Basic-
Common				0.4970			0.5790			0.5273
Preferred				0.5467			0.6369
Diluted-
Common				0.4940			0.5762			0.5252
Preferred				0.5434			0.6338
WEIGHTED AVERAGE SHARES (in thousands )
Basic-
Common				242,544			242,544			739,904
Preferred				474,994			479,288
Diluted-
Common				242,544			242,544			742,903
Preferred				479,217			482,739

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

F-6

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars - US$)

	2004			2005			2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		380,206			445,719			390,140
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation		59,685			61,491			63,859
Allowance for doubtful accounts		908			2,109			8,231
Write down for inventory obsolescence		28,827			21,851			16,569
Loss on property, plant and equipment disposals		178			750			885
Deferred income taxes		4,511			(42,270	)		(1,295	)
Accrued interest in excess of interest paid (paid in excess of accrued)		(30,276	)		5,123			551
Equity in loss from affiliates		-			3,096			34
Minority interest		1,306			9,622			9,580
Exchange loss, net		12,218			15,218			4,098
Other		(3,508	)		(154	)		(1,546	)
Changes in assets and liabilities:
Temporary cash investments		(402,147	)		(179,676	)		18,600
Trade accounts receivable and customer and commercial financing , net		(266,652	)		(241,606	)		186,612
Inventories		(340,608	)		(90,802	)		(583,269	)
Other assets		(21,259	)		(120,079	)		33,482
Trade accounts payable		136,554			172,591			181,639
Other payables and accrued liabilities		45,791			41,555			(24,663	)
Accrued taxes on income		10,497			24,305			(32,321	)
Contribution from suppliers		(94,921	)		(42,185	)		(5,635	)
Advances from customers		(80,024	)		103,819			145,460
Taxes and payroll charges payable		167,096			124,756			(35,105	)
Contingencies		(7,228	)		31,676			11,027
Net cash provided by (used in) operating activities		(398,846	)		346,909			386,933
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment		163			557			697
Escrow deposits		(15,417	)		(164	)		(88,554	)
Additions to property, plant and equipment		(50,075	)		(51,766	)		(90,761	)
Other		6,225			877			(900	)
Net cash used in investing activities		(59,104	)		(50,496	)		(179,518	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of loans		(1,295,315	)		(1,308,817	)		(1,497,751	)
Proceeds from borrowings		1,587,504			1,523,261			1,258,249
Dividends and/or interest on capital paid		(185,537	)		(198,945	)		(157,771	)
Proceeds from issuance of shares		3,250			12,104			5,116
Payments of capital lease obligations		(4,682	)		(2,687	)		(2,946	)
Net cash provided by financing activities		105,220			24,916			(395,103	)
Effect of exchange rate changes on cash and cash equivalents		50,728			54,012			57,924
Net increase (decrease) in cash and cash equivalents		(302,002	)		375,341			(129,763	)
Cash and cash equivalents, at beginning of year		1,265,820			963,818			1,339,159
Cash and cash equivalents, at end of year		963,818			1,339,159			1,209,396
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Please see note 36.

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

F-7

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars - US$)

											Additional									Accumulated
	Capital										paid-up						Appropriated			other
	Common				Preferred						capital			Legal			Retained			comprehensive
	Shares		Amount		Shares			Amount			earnings			reserve			Earnings			(loss) income			Total
BALANCE AT DECEMBER 31, 2003		242,544,448		207,014		473,501,135			688,039			8,353			87,368			180,741			(2,290	)		1,169,225
Capital increase		-		-		2,296,285			3,250			-			-			-			-			3,250
Capitalization of reserves		-		33,187		-			64,849			-			-			(98,036	)		-			-
Net income		-		-		-			-			-			-			380,206			-			380,206
Legal reserve		-		-		-			-			-			24,075			(24,075	)		-			-
Dividends / Interest on equity		-		-		-			-			-			-			(203,998	)		-			(203,998	)
Expired dividends		-		-		-			-			-			-			11			-			11
Currency translation adjustment		-		-		-			-			-			-			-			5,174			5,174
BALANCE AT DECEMBER 31, 2004		242,544,448		240,201		475,797,420			756,138			8,353			111,443			234,849			2,884			1,353,868
Capital increase		-		-		3,490,189			12,104			-			-			-			-			12,104
Capitalization of reserves		-		58,196		-			114,385			-			-			(172,581	)		-			-
Net income		-		-		-			-			-			-			445,719			-			445,719
Legal reserve		-		-		-			-			-			15,268			(15,268	)		-			-
Dividends / Interest on equity		-		-		-			-			-			-			(186,837	)		-			(186,837	)
Expired dividends		-		-		-			-			-			-			32			-			32
Currency translation adjustment		-		-		-			-			-			-			-			(4,632	)		(4,632	)
BALANCE AT DECEMBER 31, 2005		242,544,448		298,397		479,287,609			882,627			8,353			126,711			305,914			(1,748	)		1,620,254
Capital increase		1,292,094		5,116		-			-			-			-			-						5,116
Restructuring of the company		16,779,763		248,266		-			-			(8,353	)		(126,711	)		(109,407	)		(3,795	)		-
Conversion preferred shares into common shares		479,287,609		882,627		(479,287,609	)		(882,627	)		-			-			-			-			-
Net income		-		-		-			-			-			-			390,140			-			390,140
Legal Reserve		-		-		-			-			-			13,797			(13,797	)		-			-
Dividends / Interest on equity		-		-		-			-			-			-			(150,516	)		-			(150,516	)
Currency translation adjustment		-		-		-			-			-			-			-			8,533			8,533
Post-retirement benefits - Adoption SFAS 158 (net of tax of $476)		-		-		-			-			-			-			-			754			754
BALANCE AT DECEMBER 31, 2006		739,903,914		1,434,406		-			-			-			13,797			422,334			3,744			1,874,281

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

F-8

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

1. THE COMPANY AND ITS OPERATIONS

Embraer - Empresa Brasileira de Aeronáutica S.A. (the “Company”), previously Rio Han Empreendimentos e Participações S.A. (see below), is a publicly-held company incorporated under the laws of the Federative Republic of Brazil. Originally formed in 1969 by the Brazilian government, the Company was privatized in 1994. The corporate purpose of the Company is the development, production and sale of jet and turboprop aircraft for civil and defense aviation, aircraft for agricultural use, structural components, mechanical and hydraulic systems and technical activities related to the production and maintenance of aerospace material.

The Company has grown from a government-controlled company established to develop and produce aircraft for the Brazilian Air Force into a public company that produces aircraft for commercial, business jet and defense purposes. Through its evolution, the Company has obtained, developed and enhanced its engineering and technological capabilities through its own development of products for the Brazilian Air Force and through joint product development with foreign companies on specific projects. The Company has applied these capabilities that it gained from its defense business to develop its commercial and executive aviation aircraft businesses.

At the Extraordinary General Meeting of the shareholders held on March 31, 2006, shareholders approved the proposal for corporate restructuring of the Company presented by the Board of Directors on January 19, 2006, resulting in the merger of the former Embraer into its Parent Company, Rio Han Empreendimentos e Participações S.A. The Parent Company, which had no operations up to the date of the merger, adopted the corporate name of Embraer - Empresa Brasileira de Aeronáutica S.A.

As established in the merger protocol, the equity variations of the former Embraer from September 30, 2005 (base date for the merger) to December 31, 2005 were recorded by the Company directly in retained earnings. The Company recorded the equity variations from January 1 to March 31, 2006 in results of operations. The December 31, 2006 financial statements are being compared to those of former Embraer.

The objective of this restructuring was to provide improved access to the capital markets, to sustain the growth of Embraer’s businesses. This restructuring permitted the Company’s registration in a special listing segment of the São Paulo Stock Exchange (BOVESPA), called the New Market (“Novo Mercado”). Furthermore, the Company no longer has a defined controlling group, and the capital now comprises only common stock, assuring voting rights for all the shareholders. The notice of relevant fact providing details of this transaction was published on January 20, 2006.

The Company has wholly-owned consolidated subsidiaries and/or commercial representative offices located in Brazil, the United States, France, Spain, China and Singapore, mainly engaged in sales marketing and post sales/maintenance services.

F-9

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

In December 2004, a consortium formed by the Company and the European Aeronautic Defense and Space Company (“EADS”) was declared the winner in the privatization of OGMA - Indústria Aeronáutica de Portugal S.A. (“OGMA”). For this purpose, Embraer and EADS formed a holding company, AIRHOLDING, SGPS, S.A. (AIRHOLDING), controlled by Embraer, owning 99%, and EADS owning 1%. In March 2006 EADS exercised its option to increase its interest in AIRHOLDING to 30%. Conclusion of this acquisition was subject to final approval from the relevant European antitrust authorities, which occurred in March 9, 2005. Therefore, the entity was consolidated by the Company as of December 31, 2005. The stake acquired through AIRHOLDING SGPS, S.A., represents 65% of OGMA’s total capital and the total consideration paid amounted to €11.4 million, equivalent to $15,417. The acquisition was accounted for as a business combination according to SFAS 141 as of December 31, 2005 (Note 12).

2. PRESENTATION AND CONSOLIDATION OF FINANCIAL STATEMENTS

(i) The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), which differ in certain respects from accounting principles applied by the Company in its financial statements prepared in accordance with Brazilian accounting practices (“BR GAAP”).

(ii) The consolidated financial statements include the accounts of (i) the Company and all majority-owned subsidiaries in which the Company directly or indirectly has either a majority of the equity of the subsidiary or otherwise has management control and (ii) special purpose entities - SPEs for which the Company was considered to be the primary beneficiary according to FIN 46-R - “Consolidation of Variable Interest Entities”. All intercompany accounts and transactions arising from consolidated entities have been eliminated.

(iii) A substantial portion of the Company's sales is destined to export markets and a substantial level of financing, manufacturing and other costs is denominated in U.S. dollars (US$). The Company presents its financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52 - "Foreign Currency Translation". The Company's Board of Directors and management have historically considered that the U.S. dollar has been, and remains in their opinion, the currency in which the Company principally operates. Accordingly, the Company's management has concluded that its functional currency is currently the U.S. dollar.

(iv) For US GAAP purposes, the Company has elected the U.S. dollar as its reporting currency, as it believes such presentation is more meaningful to readers.

(v) For subsidiaries whose particular functional currency is other than the U.S. dollar, asset and liability accounts are translated into the Company’s reporting currency using exchange rates in effect at the date of the balance sheet, and income and expense items are translated using weighted average exchange rates. Resulting translation adjustments are reported in a separate component of shareholders’ equity, as a cumulative translation adjustment - CTA.

F-10

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a) Cash and cash equivalents

Cash and cash equivalents consist of cash on hand in banks and highly liquid investments, such as certificates of deposit, time deposits, treasury notes and other money market investments with original maturity of 90 days or less.

b) Temporary cash investments

Debt securities with original maturities greater than 90 days, which are held through exclusive investment funds required to be consolidated in accordance with FIN 46-R are classified as temporary cash investments.

c) Allowance for doubtful accounts

The allowance for doubtful accounts is recorded based on an analysis of accounts receivable in an amount considered sufficient to cover probable losses on uncollectible accounts receivable.

d) Inventories

Inventories are stated at the lower of average production or acquisition cost or market value. Inventories of work in process and finished goods are reduced, when applicable, to net realizable value after deduction for costs, taxes and selling expenses. The Company writes down inventory when items are determined to be obsolete or are held in quantities that are in excess of projected usage based on management’s estimate of net realizable values.

On January 1, 2006 the Company adopted Statement Financial Accounting Standards No. 151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. The adoption of SFAS 151 did not have a material impact on the company’s financial statements for 2006.

e) Spare part exchange pools

Based on formal contractual arrangements with customers, certain spare parts are segregated and placed in exchange pools for the exclusive use of customers participating in such programs, which may withdraw for use an equivalent functioning part, as defined, from an exchange pool in exchange for an unserviceable part, as needed. Parts placed in exchange pools are depreciated using the straight-line method over estimated useful lives of 7 to 10 years and considering estimated residual values of 20% to 50% of original cost, which management believes approximate the usage and change in value of the items. Costs to refurbish parts placed in exchange pools are expensed as incurred. Items in exchange pools are classified as other long-term assets on the consolidated balance.

F-11

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

f) Customer and commercial financing

Customer and commercial financing consists of notes receivable originated from financed aircraft sales, and used aircraft assets either under operating leases or available for lease and/or sale.

Notes receivable are stated at cost plus accrued interest and reduced by valuation allowances, when necessary, which are determined by the Company considering the customer credit rating and related collateral attached to the respective notes receivable, if any.

Aircraft under operating leases are recorded at cost, net of accumulated depreciation, which is calculated from the beginning of the lease term using the straight-line method over the estimated useful life and considering a residual value at the end of the lease term. Income from operating leases is recognized ratably over the lease term and recorded as net sales in the customer services and others segment.

The Company reviews aircraft under operating leases for impairment when events or circumstances indicate that the carrying amount of the assets may not be recoverable. An asset under an operating lease is considered to be impaired when the expected undiscounted cash flows over its remaining useful life is less than its carrying value. Various assumptions are used to determine the expected undiscounted cash flow. These assumptions include lease rates, lease terms, periods in which the asset may be held in preparation for a follow-on lease, maintenance costs, remarketing costs and the expected useful life of the asset. The determination of expected lease rates is generally based on independent reference values obtained from publications and similar aircraft sales in the secondary market. The Company uses historical information and current economic trends to develop the remaining assumptions. When there is an indication that an asset is impaired, the impairment loss recorded represents the excess of the carrying value over the estimated fair value.

Used aircraft available for lease are stated at their acquisition cost. The Company performs a comparison between the individual aircraft cost and its estimated market value, based on third party appraisal estimates for each aircraft. Any resulting deficiencies are recorded as a reduction of the carrying value of the aircraft and charged to other operating expenses.

g) Property, plant and equipment

Property, plant and equipment are stated at cost including applicable construction-period interest. Materials allocated to specific projects are added to construction in progress and, in accordance with the provisions of SFAS No. 34, “Capitalization of Interest Costs”, interest incurred on borrowings is capitalized to the extent that borrowings do not exceed construction in progress. The credit is recorded as a reduction of interest expense. Interest costs capitalized in 2004, 2005 and 2006 were $393, $733 and $871, respectively.

F-12

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Assets acquired through capital lease arrangements are capitalized and depreciated over the expected useful lives of the assets, in accordance with SFAS No. 13 - “Accounting for Leases”.

Costs incurred for the development of computer software for internal use are capitalized in accordance with Statement of Position (SOP) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use”.

Depreciation is calculated using the straight-line method over the estimated useful lives of the assets disclosed in Note 13. Improvements to existing property that significantly extend the useful life or the utility of the asset are capitalized, while maintenance and repair costs are charged to expense as incurred.

Long-lived assets held for sale are stated at the lower of cost or fair value. Long-lived assets held for use are subject to an impairment assessment if the carrying value is no longer recoverable based upon the undiscounted future cash flows of the asset. The amount of the impairment is the difference between the carrying amount and the estimated fair value of the asset. No impairment losses on fixed assets were recorded in 2004, 2005 or 2006.

h) Marketing and advertising expenses

The Company expenses the costs of marketing and advertising as incurred and such expenses amounted to $7,350, $7,074 and $13,309 for 2004, 2005 and 2006, respectively. These amounts are reported in the consolidated statements of income and comprehensive income as selling expenses.

In addition to the marketing and advertising expenses above, the Company has participated in some air show fairs to promote its products and improve its relationship with current and prospective customers. The amounts expensed in such fairs totaled $6,649, $9,437 and $13,812 for 2004, 2005 and 2006 respectively.

i) Investments

The Company uses the equity method of accounting for its long-term investments in which it owns more than 20% but less than 50% of the investee’s voting stock and has the ability to exercise significant influence over the operating and financial policies of the investee. Under the equity method, the Company records its proportionate share in the investee’s earnings, reduced by dividends received.

Marketable debt and equity securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Investments in marketable securities which the Company has the ability and intent to hold to maturity are classified as held-to-maturity and are reported at amortized cost, while securities that are purchased for trading purposes are classified as trading securities and marked to market with the effects of changes in fair value recorded on statement of income and comprehensive income. Declines in the fair value of held-to-maturity securities below their cost that are deemed to be other-than-temporary are recorded as permanent write-downs with a charge to interest income (expense), net the statement of income and comprehensive income.

F-13

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

j) Product warranties

Warranty costs related to sales of aircraft and parts are recognized as a selling expense at the time of sale based on estimated amounts of warranty costs anticipated to be incurred. These estimates are based on factors that consider, among other factors, historical warranty claims and cost experience, warranty coverage available from suppliers, type and duration of warranty coverage, and the volume and mix of aircraft sold and in service. The warranty period typically ranges from two years for spare parts up to five years for aircraft components.

Provisions for warranties are included in “other payable and accrued liabilities” (Note 15).

k) Contingencies and guarantees

Losses for contingencies related to labor, tax, civil and commercial litigation are recorded when they are determined to be probable and can be reasonably estimated. These estimates are based on the opinion of legal counsel and management’s estimate as to the likely outcome of the outstanding matters and the estimated amount of loss at the balance sheet dates.

In accordance with FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others”, certain guarantees that are issued or modified after December 31, 2002, including third-party guarantees, are initially recorded on the balance sheet at fair value. Liabilities for guarantees issued on or before December 31, 2002 are recorded when and if payments become probable and estimable. FIN 45 has the general effect of delaying recognition of a portion of the revenue for product sales that are accompanied by certain third-party guarantees. During 2004, 2005 and 2006, the fair value of guarantees recorded by the Company was expenses of $11,865, $4,469 and a income of $1,603, in 2006.

l) Post-retirement benefits

The Company participates in a defined contribution pension plan that provides pension benefits for its employees. Expense is recognized as the amount of the required contribution for the period and is recorded on the accrual basis.

F-14

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Certain wholly-owned subsidiaries in the United States of America sponsored a defined benefit pension plan, which was terminated and liquidated during 2006, and a post-retirement medical benefit plan. The Company accounted for such benefits in accordance with SFAS No. 87 - “Employers’ Accounting for Pensions” and SFAS No. 106 - “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, respectively.

The funded status of the defined benefit pension and post-retirement medical benefit plans is recorded by the Company based on the funded status of each plan as of the balance sheet dates. The net periodic cost of the Company’s post-retirement medical benefit plan and the terminated defined benefit pension is (was) determined using the projected unit credit method and several actuarial assumptions, the most significant of which are the discount rate, the long-term rate of return on plan assets and the medical cost trend rate (rate of growth of medical costs).

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158 requires an entity to recognize in its statement of financial position the overfunded or underfunded status of its defined benefit postretirement plans, measured as the difference between the fair value of the plan assets and the benefit obligation. SFAS 158 also requires an entity to recognize changes in the funded status of a defined benefit postretirement plan within accumulated other comprehensive income, net of tax, to the extent such changes are not recognized in earnings as components of periodic net benefit cost. The Company adopted the aforementioned provisions of SFAS 158 on December 31, 2006. The impact of adopting SFAS 158 on the Company's consolidated financial position is discussed further in Note 22. Additionally, SFAS 158 requires companies to measure plan assets and benefit obligations at their year-end balance sheet date. This requirement, which is effective for fiscal years ending after December 15, 2008, will have no effect on the Company since its post-retirement medical plan assets and liabilities are measured as of December 31. The Company adopted this standard at December 31, 2006, which resulted in a decrease in long-term liabilities of $754 and an adjustment to accumulated other comprehensive income of $754.

m) Employee profit sharing plan

The Company maintains a profit sharing plan linked to dividend payments to shareholders and to action plans and specific goals, established and agreed upon yearly, that provides employees of the Company and some subsidiaries the right to share in the Company’s profits. The amounts recorded for profit sharing expense are accrued in accordance with the variable compensation policy renewed by the Board of Directors in November 2005.

n) Revenue recognition

The Company recognizes revenues of the commercial aviation and executive aviation segments when title and risk of loss is transferred to customers, which is generally when the aircraft are delivered to customers.

F-15

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated.

In the defense and government segments, a significant portion of revenues is derived from long-term development contracts for the Brazilian and foreign governments, for which the Company recognizes revenues under the percentage of completion (“POC”) method. Such contracts contain provisions for price escalation based on a mix of indexes related of raw material and labor cost. From time to time, the Company reassesses the expected margins of certain long-term contracts, adjusting their revenue recognition based upon costs and project completion forecast.

Revenues under exchange pool programs are recognized monthly over the contract term and consist partly of a fixed fee and partly of a variable fee, directly related to actual flight hours of the covered aircraft. During 2004, 2005 and 2006, the Company recognized revenues of $13,626, $26,022 and $39,311, respectively, from exchange pool arrangements, which are reported as net sales in the accompanying consolidated statements of income and comprehensive income (customer services and other).

Revenue is recognized net of indirect sales taxes.

o) Research and development

Research and development costs are expensed when incurred and are recorded net of amounts contributed by risk-sharing suppliers. Amounts received from risk-sharing suppliers as contributions for research and development activities are classified as contributions from suppliers and recognized as revenue only when the Company has met its obligations under the provisions of the related supply agreements. Net research and development expense was $44,506, $93,166 and $112,743 for 2004, 2005 and 2006, respectively. In 2004, 2005 and 2006, Embraer recognized income of $108,640, $55,085 and $36,003, respectively, related to payments previously received from risk-sharing partners related to the certification of the EMBRAER 170, EMBRAER 175 and EMBRAER 190 and the fulfillment of other contractual milestones.

p) Stock compensation

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This statement revised SFAS No. 123, “Accounting for Stock-Based Compensation”, amended SFAS No. 95, “Statement of Cash Flows”, and superseded APB No. 25, “Accounting for Stock Issued to Employees”. SFAS 123(R) requires companies to apply a fair-value based measurement method in accounting for share-based payment transactions with employees and to record compensation expense for all share awards granted, and to awards modified, repurchased or cancelled after the required effective date. In addition, companies are required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123R is effective for annual periods beginning after June 15, 2005, which is the Company’s fiscal 2006. The Company has a share-based compensation plan as described in Note 26. On January 1, 2006, the Company adopted statement of Financial Accounting Standards No. 123R, "Shared-Based Payment," ("SFAS No. 123R”) using the modified prospective application transition method. Under the modified prospective method, compensation cost is recognized for all share-based payments granted after the adoption of SFAS No. 123R and for all awards granted to employees prior to the adoption of SFAS No. 123R that were unvested on the adoption date. The adoption of SFAS 123R did not have a material impact on the Company’s financial statements for 2006 because no new share-based payments have been granted by the Company after the adoption of SFAS No. 123R and the awards granted to employees prior to the adoption of SFAS No. 123R that were unvested were not significant. In accordance with the modified prospective application transition method, the Company's consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

F-16

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Prior to the adoption of SFAS 123R, the Company applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its employee stock compensation plan. Under such standard, the Company recorded an expense for stock-based compensation in an amount equal to the excess of the quoted market price over the option exercise price on the grant dates, if any.

Since there were no options granted in 2004 and 2005, there would be no impact if the Company had applied the provisions of SFAS 123 “Accounting for Stock based Compensations.”

q) Income taxes

Income taxes in Brazil are comprised of federal income tax and social contribution tax. There are no state or local income taxes in Brazil. The enacted income tax rates applicable for the years ended December 31, 2004, 2005 and 2006 are as follows:

Federal income tax rate	25	%
Social contribution tax rate	9	%
Combined tax rate	34	%

The Company records income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". The effects of adjustments made to reflect the US GAAP requirements, as well as the differences between the tax basis and the amounts included in the BR GAAP have been recognized as temporary differences for the purpose of recording deferred income taxes, except that, in accordance with paragraph 9(f) of SFAS No. 109, deferred taxes have not been recorded for differences relating to certain assets and liabilities that are remeasured from Brazilian reais to US$ at historical exchange rates and that result from changes in exchange rates or indexing to inflation in local currency for tax purposes.

r) Derivative financial instruments

The Company accounts for derivative financial instruments pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended. This standard requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. The Company’s derivative financial instruments have not qualified for hedge accounting designation for purposes of SFAS No. 133. Accordingly, changes in the fair value of these derivative financial instruments are recorded in income and classified as a component of interest income (expense), net in the consolidated statements of income and comprehensive income (Note 21).

F-17

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

s) Comprehensive income

SFAS No. 130, “Reporting Comprehensive Income”, establishes standards for reporting and display of comprehensive income and its components in financial statements. It requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income of the Company consists of net income, the effects of foreign currency translation adjustments and commenting in 2006, the effects of recording the funded status of post-employment benefit plans in accordance with SFAS No. 158.

t) Compensated absences

The liability for future compensation of employee vacations earned is fully accrued as benefits are earned.

u) Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and adopt assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the fair value of financial instruments on the balance sheet dates and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from such estimates.

v) Adoption of Securities and Exchange Commission Staff Accounting Bulletin No. 108. In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current year's financial statements are materially misstated. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not have a material impact on the Company's consolidated financial position, annual results of operations or cash flows.

F-18

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

4. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - NOT YET ADOPTED

In July 2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109" which clarifies the accounting for and disclosure of uncertain tax positions. This guidance seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to tax positions with uncertainty. FIN 48 requires that a tax position taken or expected to be taken in a tax return be recognized in the financial statements when it is more likely than not (i.e., a likelihood of more than fifty percent) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company will adopt the provisions of FIN 48 effective January 1, 2007. Management is evaluating the potential impact of this interpretation on the Company’s financial statements but does not anticipate any material impact on it.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"), which is effective for financial statements issued for fiscal years beginning after November 15, 2007. Therefore, the Company expects to adopt SFAS 157 at the beginning of fiscal 2008. This standard clarifies the definition of fair value, establishes a framework for using fair value to measure assets and liabilities, and expands the disclosures on fair value measurements. This standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances. The Company does not expect the adoption of SFAS 157 to have a material impact on the Company's consolidated financial position, annual results of operations or cash flows.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statements No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the "fair value option"). A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting period. This accounting standard is effective as of the beginning of an entity's first fiscal year that begins after November 15, 2007. The effect, if any, of adopting SFAS No. 159 on the Company's consolidated financial position, annual results of operations or cash flows has not been finalized.

F-19

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

5.CASH AND CASH EQUIVALENTS

	At December 31,
	2005		2006
Cash and bank balances
In Brazilian reais - R$		21,925		10,231
In U.S. dollar - US$		14,359		24,441
In other currencies		37,979		79,737
Cash equivalents
Denominated in US$ (i)		1,064,935		751,331
Denominated in R$ (ii)		188,814		333,211
Denominated in other currencies		11,147		10,445
		1,339,159		1,209,396

(i) Represents time deposits and overnight funds deposited overseas by consolidated subsidiaries; the average annualized interest rate for the year ended December 31, 2006 was 5.29% (2005 - 3.27%).

(ii) Mainly represented by money market funds at several financial institutions, primarily comprised of debt instruments classified as held for trading purposes under SFAS 115. These funds are exclusively for the benefit of the Company and managed by third parties who charge a monthly commission fee. The funds are comprised of investments that have daily liquidity and are marked-to-market on a daily basis with changes in fair value reflected in results of operations. The target returns are specified with each financial institution based on a percentage of the CDI (Brazilian Interbank Deposit Rate). In 2006, the weighted average annualized interest income rate was 15.38% (2005 - 19.15%) compared to 15.04% of the CDI in the same period (2005 - 18.99%).

6.TEMPORARY CASH INVESTMENTS

	At December 31,
	2005		2006
Temporary cash investments		574,395		555,795
		574,395		555,795

At December 31, 2006 and 2005, the Company held investments in private investment money market funds primarily comprised of debentures issued by private companies and notes issued by the Brazilian federal government. The securities included in the portfolio of the private investment funds have daily liquidity and are marked-to-market on a daily basis. The Company considers these investments as securities held for trading purposes, with changes in the fair value reflected in results of operations.

F-20

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

These private investment funds do not have significant financial obligations. Any financial obligations are limited to asset management and custodial fees, audit fees and similar expenses. There are no consolidated assets of the Company that are collateral for these obligations and the creditors of the funds do not have recourse against the general credit of the Company.

7.TRADE ACCOUNTS RECEIVABLE

	At December 31,
	2005			2006
Commercial Aviation		99,515			-
Defense and Government
- Brazilian Air Force		120,910			87,268
- Other		49,673			26,103
Customer Services and others		205,972			212,865
		476,070			326,236
Less allowance for doubtful accounts receivable		(25,246	)		(31,974	)
		450,824			294,262
Less - current portion		445,520			272,153
Long-term portion		5,304			22,109

Unbilled accounts receivable totaled $14,786 at December 31, 2006 (2005 - $76,759) referring to revenues from long-term defense contracts recognized under the percentage of completion method.

The allowance for doubtful accounts is summarized as follows:

	Year ended at December 31,
	2004			2005			2006
Beginning balance		24,259			23,497			25,246
Write-offs		(6,033	)		(360	)		(1,503	)
Additions		5,271			2,109			8,231
Ending balance		23,497			25,246			31,974

F-21

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Major customers

In 2004, 2005 and 2006, the Company had sales to customers that individually accounted for more than 10% of the Company’s sales for the respective year. Shown below is the percentage of total net sales and accounts receivable for each customer.

	Net Sales (%)
	2004		2005		2006
Commercial Aviation
Continental/ExpressJet		12.4		11.7		4.6
American Eagle		19.8		10.3		-
Republic/Chautauqua		14.3		17.5		6.7
US Airways		13.6		1.7		1.5
Air Canada		-		11.4		11.5
Jet Blue		-		-		11.1

8.CUSTOMER AND COMMERCIAL FINANCING

	At December 31,
	2005		2006
Notes receivable (i)		287,926		217,393
Operating lease equipment, at cost, less accumulated depreciation of $29,127 and $36,081 as of December 31, (ii)		319,236		351,573
		607,162		568,966
Current portion		147,118		16,215
Long-term portion		460,044		552,751

(i) Notes receivable represent sales financing, indexed at average interest rates of 5.9% per year with maturities through 2021. The maturity schedule is as follows at December 31, 2006:

Year	2006
2007		16,215
2008		14,883
2009		9,362
2010		9,887
2011		10,445
2012		11,038
Thereafter		145,563
Total		217,393

F-22

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

(ii) Operating lease equipment includes used turboprop and jet aircraft which are either under operating lease agreements or available for remarketing. In 2005, there were 9 available for remarketing in the amount of $72,969, which 2 were sold, 5 were leased and there are still 2 available for sale. Rental income for leased aircraft amounted to $16,006, $26,202 and $ 34,785 for 2004, 2005 and 2006, respectively.

Minimum future rentals on non-cancelable operating leases for each of the five succeeding years are as follows at December 31, 2006:

Year	2006
2007		42,660
2008		41,247
2009		31,424
2010		21,000
2011		9,347

9. COLLATERALIZED ACCOUNTS RECEIVABLE AND NON-RECOURSE AND RECOURSE DEBT

Some of the Company’s sales transactions are structured financing through which an SPE purchases the aircraft, pays the Company the purchase price on delivery or at the conclusion of the sales financing structure, and leases the related aircraft to the ultimate customer. A third-party financial institution facilitates the financing of the aircraft purchase through a SPE, and a portion of the credit risk remains with the third party. The Company may provide financial guarantees and/or residual value guarantees in favor of the financial institution, as well as act as the equity participant in such financial structuring process.

As from 2004, the Company adopted FIN 46-R, “Consolidation of Variable Interest Entities an interpretation of ARB 51”, and began to consolidate variable interest entities in which it has a variable interest that will absorb a majority of the entity's expected losses if they occur, receive a majority of the entity's expected residual returns if they occur, or both. Accordingly, SPEs owned by third parties where the Company is the primary beneficiary are consolidated on the Company´s financial statements.

Generally, the underlying lease transactions qualify as sales-type leases and, as a result, the consolidation of these SPEs results in an amount of investments in minimum lease payments receivable and residual value, gross of unearned income in the amount of $1,413,040 and $1,360,253, and a net amount of $854,220 and $819,722 as of December 31, 2005 and 2006, respectively, which are being presented as collateralized accounts receivable.

F-23

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Such consolidation has also resulted in an amount of non-recourse debt of $558,409 and $511,181, and an amount of recourse debt of $260,844 and $318,577, as of December 31, 2005 and 2006, respectively.

The components of investment in sales-type leases at December 31 were as follows:

	2005			2006
Minimum lease payments receivable		842,222			773,015
Estimated residual value of leased assets		570,818			587,238
Unearned income		(558,820	)		(540,531	)
Investments in sales-type lease		854,220			819,722
Less - current portion		65,440			70,980
Long-term portion		788,780			748,742

The Residual Value of the sales-type lease assets is estimated at the lease inception based on a number of factors, including the estimated future market value of our aircraft based on third party appraisals, including information developed from similar aircraft remarketing in the secondary market. The Company quarterly reassess the sales-type lease investment amount for impairment based on third party appraisals and credit rating for customers.

Maturities of minimum lease payments receivable are summarized as follows:

Year	At December 31, 2006
2007		70,980
2008		68,923
2009		57,977
2010		56,929
2011		54,020
2012		57,753
After 2012		406,433
		773,015

10. INVENTORIES

	At December 31,
	2005		2006
Finished goods		86,635		289,212
Work-in-process (i)		677,174		744,284
Raw materials		599,667		825,235
Inventory in transit		103,425		171,289
Advances to suppliers		10,658		17,224
		1,477,559		2,047,244

The amounts presented above are net of obsolescence provision.

F-24

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated) 

(i) Includes $141,743 related to 8 pre-series aircraft (2005 - $206,438 related to 12 aircraft) of the EMBRAER 170/190 family and one Legacy, which were in construction or in use under the certification campaign.

11. OTHER ASSETS

	At December 31,
	2005		2006
Guarantee deposits (i)		520,794		590,720
Restricted cash from consolidated sales type lease		10,851		9,717
Credits with suppliers (ii)		8,530		17,492
Prepaid expenses (iii)		14,664		21,120
Taxes recoverable (v)		45,981		54,283
Advances to employees		7,156		9,321
Compulsory loans and bank guarantee deposits		17,317		16,322
Commission advances		2,853		5,361
Escrow deposits		20,316		108,870
Prepaid insurance		16,544		14,479
Exchange pools		33,746		29,889
Unrealized gains on derivatives (Note 31)		330		4,122
Accounts Receivable-National Bank for Economic and Social Development - BNDES (iv)		63,725		1,809
Other		22,844		33,554
		785,651		917,059
Less- Current portion		444,955		471,428
Long-term portion		340,696		445,631

(i) Guarantee deposits are mainly represented by:

(a) $272,661 refers to amounts deposited in guaranteed deposits as collateral for financing and residual value guarantees of certain aircraft sold (see note 34) (2005 - $249,673). If the guarantor of the debt (an unrelated third party) is required to pay the creditors of such financing arrangement or the residual value guarantee, the guarantor has the right to withdraw from the escrow account. The deposited amounts will be released when the financing contracts mature (from 2013 to 2021) if no default by the buyers of the aircraft occurs or the aircraft market price is above the residual value guarantee. The interest earned on the escrow funds is added to the balance in escrow and is recorded as interest income by the Company. In order to earn a better interest rate on such guarantee deposits, in 2004, the Company structured notes in the face amount of $123,400 with the depositary bank which generated interest in the amount of $7,581 in 2006 (2005 - $6,940), which was added to the principal amount and recognized in the consolidated statements of income and comprehensive income. This yield enhancement was obtained through a credit default swap (CDS) transaction which provides to the note holder the right of early redemption of the note in case of a credit event by the Company. Upon such credit event, the note may be redeemed by the holder at the greater of the note’s market value or its original face amount, which would result in a loss of all interest accrued on such note to date.

F-25

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

(b) $318,059 (2005 -$260,764) relates to amounts deposited with a third party financial institution as a pledge under a specific sale financing structure.

(ii) Credits with suppliers represent price discounts, rebates and free aircraft parts to be received from suppliers in connection with purchases made.

(iii) Prepaid expenses represent credits for parts and the training of pilots, mechanics and flight attendants granted to customers in connection with the sale of aircraft. Such credits are stated in the sales contract in terms of number of aircraft sold and are included in the overall sales price of the aircraft. The actual delivery of such parts and services may be different from that of the aircraft. The amounts reflect the cost of such concessions provided in advance of the aircraft delivery. These amounts will be recognized as selling expense in the periods aircraft deliveries are made and the corresponding revenues are recognized.

(iv) Refers to credits derived from financing pending receipt from the BNDES.

(v) Refers mainly to PIS/COFINS and ICMS tax credits recoverable on purchases of production inputs.

12. INVESTMENTS

	At December 31,
	2005		2006
Held-to-maturity securities - NTNs (i)		31,269		32,840
Other		164		1,004
		31,433		33,844

(i) Refers to debt securities, represented by National Treasury Notes, acquired by the Company from customers, related to the equalization of interest rates to be paid by the Export Financing Program - PROEX between the 11^th and 15^th year after the sale of the related aircraft, recorded at its present value. The interest earned is added to the balance and recorded as interest income, as the Company has the intent to hold these securities until maturity.

On March 9, 2005, the Company acquired 65% of the voting capital of OGMA, a Portuguese aeronautical maintenance and production company (Note 1).  The acquisition has been accounted for as a business combination under SFAS 141, “Business Combinations” and OGMA’s financial statements included on the Company’s consolidated financial statements as from that date.  The pro forma effects of the OGMA acquisition on the Company’s historical consolidated financial statements are not material.

F-26

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The aggregate purchase price was $15,417 (or €11,388), which generated negative goodwill of $ 18,854. The following table summarizes the purchase price allocation made to determine the negative goodwill on this acquisition:

	As of March 9,
	2005
Net Assets		52,724
Percentage acquired		65	%
Historical net assets acquired		34,271
Purchase Price		15,417
Net Value to be allocated		18,854
Allocation
Fiscal and Legal Contingencies		(3,129	)
Warranties		(411	)
Dismissal		(6,960	)
Commitment Investments		(2,556	)
Accounts payable to seller		(2,405	)
Total Allocation		(15,461	)
Excess of fair value		(3,393	)

The excess of fair value of acquired net assets over cost generated based on the purchase price allocation above was recorded in other non-operating income (expenses), net for the year ended December 31, 2005.

13. PROPERTY, PLANT AND EQUIPMENT, NET

	Estimated		At December 31,
	useful		2005						2006
	life				Accumulated						Accumulated
	(years)		Cost		depreciation		Net		Cost		depreciation		Net
Land		-		2,512		-		2,512		2,483		-		2,483
Buildings and land improvements		10 to 48		222,925		68,938		153,987		234,407		71,312		163,095
Installations		10 to 31		84,963		59,545		25,418		84,552		62,552		22,000
Machinery and equipment		5 to 17		266,437		203,902		62,535		290,377		223,713		66,664
Tooling		10		124,229		52,912		71,317		148,781		66,699		82,083
Furniture and fixtures		5 to 10		25,574		18,072		7,502		28,233		19,435		8,798
Vehicles		5 to 14		9,613		7,471		2,142		10,556		8,234		2,322
Aircraft (i)		5 to 20		14,191		7,683		6,508		18,650		10,799		7,851
Computers and peripherals		5		102,776		83,721		19,055		94,978		83,728		11,250
Software		5		78,157		60,962		17,195		84,355		67,580		16,775
Other		5		21,813		14,988		6,825		16,703		7,911		8,791
Construction in progress		-		13,366		-		13,366		20,132		-		20,132
				966,556		578,194		388,362		1,034,207		621,963		412,244

(i) These aircraft are used for external demonstration and for internal use purposes.

F-27

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

14. CONTRIBUTION FROM SUPPLIERS

The Company has agreements with certain key suppliers for the participation in research and development activities. Certain supply agreements require that such suppliers provide cash contributions to the Company as compensation for their participation as suppliers in such programs. As part of the related supply agreements, these contributions are subject to the Company meeting certain performance milestones, including successful certification of the aircraft, first delivery and minimum number of aircraft deliveries. The Company records such contributions as a liability when received and as reduction to research and development when contractual milestones are achieved.

15. OTHER PAYABLES AND ACCRUED LIABILITIES

	At December 31,
	2005		2006
Accounts payable		41,666		68,663
Deferred income (i)		56,377		51,060
Product warranties (ii)		90,904		97,354
Product improvement liabilities (ii)		40,350		43,509
Commercial incentives (iii)		23,599		38,072
Technical assistance and training (iii)		37,641		48,254
Accrued payroll and related charges		79,701		90,335
Accrued employee profit sharing		33,662		29,097
Post-retirement benefits (Note 22)		3,637		4,963
Insurance		5,313		4,857
Provision related to financial guarantees (Note 34)		54,011		32,402
Unrealized losses on derivatives (Note 31)		18,450		15,236
Other		45,660		17,001
		530,971		540,803
Less-Current portion		405,965		433,291
Long-term portion		125,006		107,512

(i) Refers to certain aircraft sales that, due to contractual contingent obligations, are accounted for as operating leases.

F-28

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

(ii) Represent accruals for product liability programs including warranty and contractual obligations to implement improvements in aircraft sold to meet contractual performance indices.

(iii) Amounts represent accruals for customer sales concessions and allowances including spare parts, commercial rebates and services related to technical assistance and training of mechanics and crews.

16. ADVANCES FROM CUSTOMERS

	At December 31,
	2005		2006
Denominated in:
US$		566,422		706,270
Brazilian reais		16,560		22,171
		582,982		728,441
Less-Current portion		485,958		544,802
Long-term portion		97,024		183,639

The advances denominated in Brazilian reais are presented in US$ in the above table at the exchange rates prevailing at the respective balance sheet dates. The allocation between current and long-term portions is based on the contractual terms for delivery of the related aircraft.

17. TAXES AND PAYROLL CHARGES PAYABLE

	At December 31,
	2005		2006
Refinanced INSS / FUNRURAL (social security contribution on rural worker’s compensation)		56,415		16,014
Current taxes (other than taxes on income)		27,939		43,464
Disputed taxes and social charges (i)		542,749		532,520
		627,103		591,998
Less-current portion		113,360		136,950
Long-term portion		513,743		455,048

(i) The Company is challenging in Court the merit and constitutionality of several taxes and has obtained writs of mandamus or injunctions to avoid payment of such taxes. Pending a final decision on such cases, the Company is recognizing as expenses the total amount of the legal obligations and accruing interest calculated based on the SELIC (Central Bank overnight rate) on those liabilities, as it would be required to do if the Company is unsuccessful in these lawsuits. SELIC represented a nominal variation of 15.08 % for the year ended December 31, 2006 (2005 - 14.12%). The principal taxes being challenged in court are as follows:

· The Company is questioning in Court certain changes in rates and tax basis of PIS (Social Contribution on Gross Revenue) and COFINS (Social Contribution on Billing), determined by Law nº 9.718/98 from January 1, 1999 (PIS and COFINS) and Law 10.637/02 from December 30, 2002 (PIS). Total amount accrued amounts to $214,160 as of December 31, 2006 ($178,838 as of December 31, 2005).

F-29

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

· The Company is required to pay to the government a tax called SAT (Workers Compensation Insurance) at a rate of 3% of wages. In December 1998, the Company obtained a preliminary injunction to reduce the tax rate from 3% to 1%, and the difference has been accrued and amounts to $61,648 at December 31, 2006 ($45,280 as of December 31, 2005).

· In April 1999, the Company obtained a Writ of Mandamus that authorized the offset of tax payments (INSS - social security contribution), which were made in August, September and October 1989, against future payments, due to a rate increase from 10% to 20%, which the Company believes was unconstitutional. The amount of $25,587 was accrued as of December 31, 2006 ($21,585 as of December 31, 2005).

· IPI (Federal VAT) - The Company is claiming the right to offset IPI credits on the acquisition of non-taxable or zero-rate raw materials against income and social contribution taxes. The amount of taxes accrued but not paid related to this claim as of December 31, 2006 was $43,992 ($147,522 as of December 31, 2005). Such reduction was originated by the partial payment of the IPI tax under dispute, which was benefited with a reduction in the interest and fines amounts, based on Provisional Measure 303, of June 29, 2006, resulting in reversals of provisions shown in the consolidated statements of income and comprehensive income in the Financial Expense and Other Operating Income respectively.

· The Company is challenging the payment of the social contribution incurred on export sales revenues. The amount of taxes accrued but not paid related to this claim was $178,179 as of December 31, 2006 ($140,977 as of December 31, 2005).

18. CONTINGENCIES

Based on an analysis of each claim and on consultation with its outside legal counsel, the Company has recognized provisions for probable losses arising from its legal proceedings involving tax, labor and civil matters, as shown below:

	At December 31,
	2005		2006
Labor contingencies (i)		24,561		32,244
Tax contingencies (ii)		26,682		21,667
Civil disputes		2,274		2,582
Other contingencies		-		8,051
		53,517		64,544
Less-current portion		19,826		31,175
Long-term portion		33,691		33,369

(i) The labor lawsuits relate to claims brought by unions on behalf of employees or by individuals, in which former employees are individually claiming overtime, productivity premiums, reinstatement, allowances and retroactive salary increases and adjustments.

F-30

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

A lawsuit claiming a retroactive salary increase was brought by the labor union in June 1991 in the name of all employees of the Company which worked at November 1990. The objective of the claim is to make the salary increase granted by the Company in January and February 1991 retroactive to November and December 1990, through an agreement with the employees’ union. As of December 31, 2006, approximately 97% of current and former employees have agreed to settlements. Another on going claim relates to monetary restatements associated with the “Plano Collor” and “Plano Verão” (Brazilian economic recovery plans) on the FGTS (employee severance pay fund) penalty paid by the Company for employees dismissed between December 1988 and April 1990. In the opinion of the legal advisors, the chances of success in this suit are remote.

(ii) This provision relates to income tax and social contributions contingencies resulted from notices of assessment received from Brazilian Federal Revenue Department. The company is challenging de applicability of these assessments and waits for a final decision.

19. LOANS AND FINANCING

Summary

	Final		At December 31,
Description	Maturity	Currency	Annual interest rate - %	2005	2006
Foreign Currency
Materials acquisition	2011	U.S. dollar	4.12 to 8.05;	526,224	229,049
			LIBOR plus 1.75 to 2.70(1)
	2006	Japanese yen	JIBOR plus 1.05(2)	31,443	-
Export financing	2010	U.S. dollar	7.81	50,846	50,824
Advances on foreign exchange contracts	2007	U.S. dollar	5.42 to 5.98	96,763	7,265
Project development	2016	U.S. dollar	LIBOR plus 2.50 to 3.50	182,360	182,353
Working capital	2011	Euro	Euribor plus 1.5(3)	25,324	33,915
			3.65% a 6.00%
	2017	U.S. dollar	LIBOR plus 2,70%	416,677	536,906
			3.65 to 7.7;
Property and Equipment Additions	2008	U.S. dollar	Libor plus 3.40	-	10,626
			2.39 to 3.27
Subtotal				1,329,637	1,050,938
Local Currency
Project development	2013		TJLP plus 1.00 to 6.00(4)	13,891	34,526
Export financing	2008		TJLP plus 2.20	201,277	257,360
Working capital	2007		115% of the CDI(5)	5,775	6,327
Property and equipment additions	2006		TJLP plus 3.00 to 4.35	2,842	-
Subtotal				223,785	298,213
Total debt				1,553,422	1,349,151
Less-Current portion				475,305	503,047
Long-term portion				1,078,117	846,104

(1)  LIBOR means London Interbank Offered Rate.

F-31

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

(2)  JIBOR means Japanese Interbank Offered Rate.

(3)  Euribor means Euro Interbank Offered Rate.

(4)  The annualized TJLP (Government nominal long-term interest rate), fixed quarterly, was 6.85 at December 31, 2006 (2005 - 9.75%).

(5)  CDI means Brazilian Interbank Offered Rate.

As of December 31, 2006 the Company maintains availability to disburse up to US$ 500 million under a Standby Facility. The cost to maintain the availability of the line was accounted as financial expense and no disbursement has been made under this facility in 2006.

In October 2006, Embraer’s subsidiary Embraer Overseas Limited issued Guaranteed Notes due 2017 with an aggregate principal amount of US$400 million, bearing a 6.375% coupon rate, in an offering that were registered at in the US Securities and Exchange Commission within 180 days from its issuance. The notes are unconditionally guaranteed by Embraer.

The foreign currency exchange rates (expressed in units per US$1.00) related to the Company’s main debt instruments were as follows:

	At December 31,
	2005		2006
Brazilian reais		2.3407		2.1380
Euro		1.1830		1.3191
Japanese yen		118.0205		119.110

F-32

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Maturities of long-term debt, including accrued interest, are as follows:

Year	2006
2008		154,568
2009		71,864
2010		92,360
2011		33,461
2012		29,446
2013 and thereafter		464,405
		846,104

The table below provides the weighted average interest rates on loans by currency as of December 31:

	2005			2006
U.S. dollars		6.53	%		6.63	%
Brazilian reais		12.28	%		9.12	%
Japanese yen		1.17	%		-
Euro		3.67	%		3.84	%

Of the total $1,349,151 indebtedness of the Company as of December 31, 2006, $214,728 is secured by a combination of mortgages on real estate, mortgages on pre-series aircraft , mortgages on machinery, equipment and inventories and by an escrow account.

Restrictive covenants

Loan agreements with certain financial institutions, representing $337,535 at December 31, 2006 (2005 - $891,025), $255,587 of which was classified as long-term (2005 - $799,457), contain certain restrictive covenants, as per usual market practices, which require that the Company maintain a maximum leverage ratio of 3.5 : 1 (debt to EBITDA - earnings before interest, taxes, depreciation and amortization);, minimum debt service coverage ratio of 3.0 : 1 (EBITDA to financial expenses) and Company’s shareholders’ equity must be higher than R$2.3 billion. In addition, there are other general restrictions related to new pledges of assets, significant changes in ownership control of the Company, disposition of assets, dividend payments during an event of default and transactions with affiliates.

As of September 30, 2006 , the Company has obtained from IFC - International Finance Corporation, the consent to maintain the total debt to EBITDA ratio above 3.5 : 1 for the periods ending September 30 and December, 31, 2006.

As a result, as of December 31, 2006, the Company was compliant with all restrictive covenants.

F-33

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

20. OPERATING AND CAPITAL LEASE OBLIGATIONS

The Company and its subsidiaries lease certain land, equipment, computers and peripherals under non-cancelable agreements classified as operating leases. Rental expense for leased properties under operating leases was $2,698, $2,183 and $5,367 for 2004, 2005 and 2006, respectively.

Future minimum operating lease payments under non-cancelable lease agreements are as follows:

Year	2006
2007		3,240
2008		2,420
2009		1,252
2010		862
2011		744
Thereafter		9,606
		18,124

Obligations under capital leases mainly relate to the lease of software and equipment with terms ranging from 2007 to 2013 and implicit interest rates which range from 5.7% to 10.3% per annum. The related software and equipment are being depreciated over 5 years. Future minimum lease payments under this lease agreement, including implicit interest, are as follows:

Year	2006
2007		2,765
2008		1,694
2009		805
2010		512
2011		473
Thereafter		829
Total		7,078
Less-Implicit interest		(1,237	)
Capital lease obligations		5,841
Less-Current portion		2,388
Long-term portion		3,453

F-34

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

21. INTEREST INCOME (EXPENSE), NET

Interest income (expense), net is comprised of:

	Year ended at December 31,
	2004			2005			2006
Interest expenses:
Interest and commissions on loans		(56,234	)		(73,145	)		(87,623	)
Interest on taxes and payroll charges under litigation (Notes 17 and 18) and Interest on refinanced taxes		(32,845	)		(63,174	)		(40,921	)
CPMF (tax on bank account transactions)		(13,919	)		(17,197	)		(23,625	)
Structured financing costs		(47,220	)		(12,481	)		(4,707	)
Other		(14,952	)		(6,933	)		(4,770	)
		(165,170	)		(172,930	)		(161,647	)
Interest income:
Temporary cash investments		104,002			109,659			161,956
Gain on early repayment of loans		8,128			36,417			46,970
Interest on NTN, trade accounts receivable, collateralized accounts receivable andguarantee deposits (Notes 9, 11 and 12)		44,333			38,422			93,431
Other		4,636			8,792			2,470
		161,099			193,290			304,827
Gain (loss) on derivatives		(10,083	)		(6,434	)		7,634
Monetary and exchange variations of long term debt		(23,846	)		(15,598	)		(10,289	)
Interest income (expenses), net		(38,000	)		(1,672	)		140,525

22. POST-RETIREMENT BENEFITS

Defined Contribution Pension Plan

The Company and certain subsidiaries sponsor a defined contribution pension plan for their employees, in which participation is optional. The plan is managed by a Brazilian pension fund controlled by Banco do Brasil, a related party. The contributions of the Company and its subsidiaries to the plan in 2004, 2005 and 2006 were $ 7,500, $ 9,986 and $12,904, respectively.

F-35

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Defined Benefit Plan

Embraer Aircraft Holding Inc. - EAH, and some of its subsidiaries, sponsor a defined benefit plan for their employees, which included a pension plan and a post-retirement medical care plan. The pension plan (“Pension Plan”) was amended and restated, effective January 1, 2002, for changes effected by the Economic Growth and Tax Relief Reconciliation Act of 2001 - (“EGTRRA”). The amended and restated plan provided that an employee is not eligible to participate in the Plan if the employee was not first employed by the Company prior to October 1, 2001.

In September 2005, the Company approved termination of the defined benefit pension plan. Regulatory approval for termination of the pension plan was obtained in March 2006, upon which the termination became effective. As a result, the Plan’s participants became fully vested in their accounts and the Plan’s net assets were distributed to the Plan participants during the second quarter of 2006.

Effective December 31, 2006, the Company adopted SFAS No. 158, which requires that the Consolidated Statements of Financial Position reflect the funded status of the pension and postretirement plans. The funded status of the plans is measured as the difference between the plan assets at fair value and the projected benefit obligation. We have recognized the underfunded status of the post-retirement medical care plan in Accrued post-retirement benefits liability included in long-term liabilities.

At December 31, 2006, previously unrecognized differences between actual amounts and estimates based on actuarial assumptions are included in accumulated other comprehensive income in our consolidated statements of financial position as required by SFAS No. 158. In future reporting periods, the difference between actual amounts and estimates based on actuarial assumptions will be recognized in other comprehensive income in the period in which they occur.

The adoption of SFAS No. 158 resulted in a net decrease in long-term liabilities of $754, consisting of an increase in deferred income tax liabilities of $476 and a decrease in accrued post-retirement benefits of $1,230. The offsetting amount of $754 was included as an adjustment to accumulated other comprehensive income as of December 31, 2006.

Expected costs of providing post-retirement medical benefits to employees and their beneficiaries and covered dependents are accrued during the years that employees render the necessary service. The change in the benefit obligations for the years ended December 31, 2005 and 2006 is summarized as follows:

	Pension benefits						Other post-retirementbenefits
	2005			2006			2005			2006
Benefit obligation - beginning of year		7,716			8,607			7,120			8,868
Amendments		-			-			-			(2,628	)
Service cost		-			-			836			801
Interest cost		435			103			436			420
Actuarial (gain) loss		749			835			577			(367	)
Participant contributions		-			-			14			18
Benefits paid to participants		(293	)		(5	)		(115	)		(155	)
Settlement		-			(9,540	)		-			-
Benefit obligations - end of year		8,607			-			8,868			6,957

F-36

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The change in plan assets for the years ended December 31, 2005 and 2006 is as follows:

	Pension benefits						Other post-retirement benefits
	2005			2006			2005			2006
Fair value of plan assets - beginning of year		9,217			8,775			1,968			1,965
Employer contributions		-			598			44			-
Actual return on plan assets		(149	)		173			54			166
Participant contributions		-			-			14			18
Benefits paid to participants		(293	)		(5	)		(115	)		(155	)
Settlements		-			(9,540	)		-			-
401(h) receivable		-			(1	)		-			-
Fair value of plan assets - end of year		8,775			-			1,965			1,994

The net prepaid (accrued) benefit cost as of December 31, 2005 and 2006 is included in the caption “other payables and accrued liabilities” in the accompanying balance sheets and its components are summarized as follows:

	Pension benefits				Other post-retirement benefits
	2005		2006		2005			2006
Funded status		167		-		(6,903	)		(4,963	)
Unamortized prior service cost		-		-		(577	)		-
Unrecognized net (gain) loss		1,377		-		2,299			-
Prepaid (accrued) benefit cost		1,544		-		(5,181	)		(4,963	)

The principal actuarial assumptions utilized at December 31, 2005 and 2006 are as follows:

	Pension benefits (%)				Other post-retirement benefits (%)
	2005		2006		2005		2006
Average discount rate		4.89		4.73		5.75		5.75
Expected return on plan assets		6.00		6.00		7.75		7.75

The Company does not expect any employer contribution to be made during 2007 to the post-retirement medical care plan. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid to participants under the post-retirement medical plan:

	Other post-
	retirement benefits
2007		224
2008		235
2009		238
2010		272
2011		306
2012 - 2015		2,209

F-37

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Regarding the cash flow of Pension Benefits, with the termination and liquidation of the Pension Plan in 2006, there will be no future contributions or benefit payments in 2007 or beyond.

The components of net periodic benefit cost as of December 31, 2004, 2005 and 2006 are as follows:

	Pension benefits									Other post-retirement benefits
	2004			2005			2006			2004			2005			2006
Service cost		-			-			-			691			836			801
Interest cost		479			435			103			362			436			420
Expected return on plan assets		(655	)		(541	)		(129	)		(144	)		(149	)		(144	)
Amortization of transition obligation		-			-			-			-			-			-
Amortization of prior service cost		-			-			-			(46	)		(45	)		(169	)
Amortization of loss		-			-			36			69			100			103
Effect of curtailment		-			-			-			-			-			-
Net periodic benefit cost (benefit)		(176	)		(106	)		10			932			1,178			1,011

The net benefit cost (benefit) is included in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income.

For measurement purposes, an annual rate of increase in the per capita cost of covered health and dental care benefits of 10%, 9% and 8%, was assumed for 2004, 2005 and 2006, respectively. The rate is expected to decrease gradually to 5% by 2009. Assumed health care cost trend rates have a significant effect on the amounts reported for the post-retirement health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects:

	One percentage point
	Increase		Decrease
Effect on total of service and interest cost components		250		(198	)
Effect on the post-retirement benefit obligation		1,195		(972	)

F-38

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

23. SHAREHOLDERS’ EQUITY

Each of our common shares is generally empowered with one vote at general and special meetings of our shareholders, subject to certain limitations, according to the bylaw of the Company. Pursuant to our bylaws and São Paulo Stock Exchange listing agreement in connection with the listing of the Company shares on the Novo Mercado, the Company cannot issue shares without voting rights or with other restrictions voting rights.

Special common share - golden share

The Brazilian Government holds one special common share, with the same voting rights as other holders of common shares; however, the Brazilian Government has certain special rights as established in article 9 of the Company´s bylaws.

The special class share grants the Brazilian Government the power of veto on the following matters:

i) Change of the Company’s name or its corporate objective.

ii) Alteration and/or application of the Company’s logo;

iii) Creation and/or alteration of military programs, whether or not the Federal Republic of Brazil is involved.

iv) Training third parties in technology for military programs.

v) Interruption of the supply of maintenance and spare parts for military aircraft;

vi) Transfer of the Company's stock control;

vii) Any changes in (1) the provisions of the above-mentioned article or of article 4, the main clause of art. 11, arts 12, 15 and 16, sub-item III of art. 19, paragraphs 1 and 2 of art. 28, sub-item X of art. 34, sub-item XII of art. 40 or Chapter VII; or (2) the rights attributed by the bylaws to the special class share.

Legal reserve

Brazilian corporations are required to allocate 5% of annual net income to a legal reserve until that reserve equals 20% of capital, or that reserve plus other capital reserve equals 30% of capital; thereafter, allocations to this reserve are not mandatory. This reserve can only be used to increase share capital or to offset accumulated losses.

Appropriated retained earnings

Retained earnings are statutorily restricted by a reserve for discretionary appropriations (“Reserve for Investments and Working Capital”), which was ratified by the Company’s shareholders for plant expansion and other capital projects. The amount restricted is based on an approved capital budget presented by management. After completion of such projects, the Company may elect to retain the amounts in this reserve until the shareholders vote to transfer all or a portion of the reserve to capital or to retained earnings, from which a cash dividend may then be paid.

F-39

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The Company’s Board of Directors decided to submit for approval at its Ordinary Shareholders’ Meeting the appropriation of 100% of net income for the year, after allocation to the legal reserve and for dividend distribution, as a reserve for investments and working capital, mainly designated for:

· Research and development - Development of the EMBRAER 170/190 family and a new family of executive jets.

· New technologies, processes and management models in order to improve the Company’s results, competencies and productivity, and investments in subsidiaries.

24.DIVIDENDS

Brazilian legislation permits the payment of cash dividends only from retained earnings and certain reserves determined as per the Company's statutory accounting records in BR GAAP. As of December 31, 2006, the earnings and reserves available for distribution as dividends, upon approval by the Company's shareholders, were $436,131 (2005 - $305,914). The dividends are calculated using the BR GAAP figures and are paid in Brazilian reais.

In conformity with the Company’s bylaws, shareholders are entitled to minimum dividends equivalent to 25% of annual net income computed in accordance with BR GAAP. The Company’s preferred shares did not have voting rights but had priority in capital redemption and, in accordance with prevailing corporate legislation, were entitled to dividends in an amount 10% greater than those payable to the common shares. As a result of the corporate restructuring completed in March 2006, the Company no longer has preferred shares in its capital structure.

The Company has elected to pay interest on shareholders’ equity, calculated on a quarterly basis in accordance with Article 9 of Law No. 9249/95 based on the TJLP (Brazilian long-term interest rate), for deductibility purposes in computing income and social contribution taxes, and charged directly to shareholders’ equity for reporting purposes, in compliance with CVM Instruction No. 207/96. The amount paid to shareholders as interest on shareholders’ equity, net of any withholding tax, may be included as part of any mandatory distributable dividend amount.

F-40

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Dividends paid are as follows:

					Dividends per share
	Amounts
Approval date	(in thousands)				Common				Preferred
	US$		R$		US$		R$		US$		R$
2004:
March 12, 2004 - interest on capital		34,723		100,998		0.0455		0.1322		0.0500		0.1454
June 25, 2004 - interest on capital		51,489		160,002		0.0673		0.2092		0.0741		0.2301
September 20, 2004 - interest on capital		55,959		160,058		0.0731		0.2091		0.0805		0.2300
December 17, 200 - interest on capital		61,827		164,115		0.0807		0.2143		0.0888		0.2357
Total dividends in 2004		203,998		585,173
2005:
March 11, 2005 - interest on capital		39,959		106,542		0.0521		0.1389		0.0573		0.1528
June 3, 2005 - interest on capital		47,156		110,836		0.0615		0.1445		0.0676		0.1590
September 16, 2005 - interest on capital		51,097		113,551		0.0665		0.1478		0.0731		0.1625
December 19, 2005 - interest on capital		48,247		112,932		0.0627		0.1469		0.0690		0.1616
Total dividends in 2005		186,459		443,861
2006:
June 12, 2006 - interest on capital		51,868		114,440		0.0702		0.1549		-		-
September 15, 2006 - interest on capital		42,370		92,337		0.0574		0.1250		-		-
September 15, 2006 - dividends		16,318		35,561		0.0221		0.0481		-		-
December 15, 2006 - interest on capital		39,960		84,993		0.0537		0.1149		-		-
Total dividends in 2006		150,516		327,331

25. EARNINGS PER SHARE

Up to 2005, the Company’s capital stock was comprised of preferred and common shares. Preferred shares were entitled to receive dividends 10% greater than dividends allocated to common shares. Accordingly, basic and diluted earnings per share presented below for the years ended December 31, 2005 and 2004 were computed based on the two class method, considering an allocation of undistributed earning to common an preferred shares on a 100 to 110 basis, respectively, based on the weighted average number of shares outstanding during the period to total shares (allocation percentage). Because the allocation percentage for each class differs for basic and diluted earnings per share, allocated undistributed earnings differ for each calculation.

Basic earnings per common share was computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Net income available to common shareholders was computed by deducting distributed and undistributed net income available to preferred shareholders from net income. Basic earnings per preferred share was computed by dividing net income available to preferred shareholders by the weighted average number of preferred shares outstanding. Net income available to preferred shareholders corresponds to the sum of preferred stock dividends and the preferred shareholders’ portion of undistributed net income. Undistributed net income is computed by deducting total dividends (the sum of preferred and common stock dividends) from net income.

F-41

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

In 2006, as a result of the Company’s restructuring in March 2006, the capital stock is composed of common shares only. Accordingly, all undistributed earnings are allocated to common shares.

Diluted earnings per share is computed similarly to basic earnings per share except that the outstanding shares are increased to include the number of additional shares that would have been outstanding if the potential dilutive shares attributable to stock options had been issued during the respective periods, utilizing the treasury stock method.

F-42

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The computation of basic and diluted earnings per share for the years ended December 31, 2004, 2005 and 2006 is as follows:

	Years Ended December 31 (in thousands, except per share data)
	2004						2005						2006
	Common		Preferred		Total		Common		Preferred		Total		Common
Basic numerator:
Actual dividends declared/paid		64,675		139,323		203,998		58,870		127,965		186,835		150,516
Basic allocated undistributed earnings		55,864		120,344		176,208		81,572		177,312		258,884		239,624
Allocated net income available for common and preferred shareholders		120,539		259,667		380,206		140,442		305,277		445,719		390,140
Basic denominator:
Weighted average shares		242,544		474,994				242,544		479,288				739,904
Basic earnings per share		0.4970		0.5467				0.5790		0.6369				0,5273
Diluted numerator:
Actual dividends declared/paid		64,284		139,714		203,998		58,581		128,254		186,835		150,516
Diluted allocated undistributed earnings		55,527		120,681		176,208		81,172		177,712		258,884		239,624
		119,811		260,395		380,206		139,753		305,966		445,719		390,140
Allocated net income available for common and preferred shareholders		119,811		260,395		380,206		139,753		305,966		445,719		390,140
Allocated diluted net income available for common and preferred shareholders		119,811		260,395		380,206		139,753		305,966		445,719		390,140
Diluted denominator:
Weighted average shares outstanding		242,544		474,994				242,544		479,288				739,904
Dilutive effects of stock options		-		4,223				-		3,451				2,999
Diluted weighted average shares		242,544		479,217				242,544		482,739				742,903
Diluted earnings per share		0.4940		0.5434				0.5762		0.6338				0,5250

F-43

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

26.STOCK COMPENSATION

On April 17, 1998, the Company’s shareholders approved a stock option plan for management and employees, including those of the Company’s subsidiaries, subject to restrictions based on continuous employment with the Company for at least two years. The Administration Committee, which was appointed by the Board of Directors on the same date, is responsible for managing the plan.

Under the terms of the plan, options for 25,000,000 preferred shares were authorized to be granted up to May 2003. Options were granted with an exercise price equal to the weighted average price of the Company’s preferred shares traded on the BOVESPA (São Paulo Stock Exchange) in the 60 trading days prior to the grant date, increased or decreased by 30%, as defined by the Administration Committee. Such percentage is deemed to offset unusual fluctuations in the market price during this 60-day-period. These options generally vest 30% after three years, 30% after four years, and 40% after five years, if the employee is still employed by the Company on each date. The options expire seven years from the date of grant. The right to grant options under the plan terminated five years after the date of the first grant.

As of December 31, 2006, the Administration Committee had made seven grants, equivalent to 400 lots of 50,000 shares each, totaling 18,941,578 preferred shares, net of 1,058,422 shares which were forfeited, as the grantees are no longer employees of the Company.

After the corporate restructuring, all the preferred shares were converted into common shares.

During 2004, 2005 and 2006, 2,296,285, 3,490,189 and 1,292,094 options were exercised, in the total amount of $3,250, $12,104 and $5,116 respectively.

In connection with the 14.2106% stock dividend approved at the Extraordinary Shareholders’ Meeting on March 1, 2002, the Administration Committee granted additional 25,576 options to purchase preferred shares to holders of vested options as of the record date. In addition, all non-vested option holders were offered an additional grant of 14.2106% of the options held. The total number of additional options granted was 637,318, with an exercise price of R$14.99 (which was higher than the market price of the preferred stock on the date of grant).

Information regarding options granted to management and employees is shown on the following table (options in thousands):

F-44

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

	2004					2005					2006
	Thousands of options			Weighted average exercise price R$)		Thousands of options			Weighted average exercise price (R$)		Thousands of options			Weighted average exercise price (R$)
Outstanding at beginning of year		9,985			10.55		7,639			12.37		3,761			15.14
Exercised		(2,296	)		4.15		(3,490	)		8.29		(1,292	)		8.61
Canceled or expired		(50	)		23.00		(388	)		22.00		(243	)		20.87
Outstanding at end of year		7,639			12.37		3,761			15.14		2,225			18.30
Exercisable at end of year		3,946			10.22		3,167			13.85		2,225			18.30

The weighted average grant date fair value of options granted in 2001, the last year in which options were granted, was $5.83. The estimated fair values of the options were computed using the Black-Scholes option pricing model based on the U.S. dollar to Brazilian real exchange rates in effect on the date of grant and using the following weighted average assumptions: 5 years of expected option life; 60% of expected volatility; 3% of dividend yield and 13.4% of risk-free interest rate.

The following table summarizes information about stock options outstanding at December 31, 2006 (options in thousands):

Exercise price (R$)	Number of outstanding stock options		Options exercisable		Weighted average remaining contractual life (years)
8.11		280		280		0.3
13.70		450		450		0.8
14.99		260		260		1.1
23.00		1.235		1.235		1.4

The following table summarizes information about outstanding stock options by anticipated vesting date and at December 31, 2006 (options in thousands):

Grant dates	Vesting date		Expiration date		Weighted average exercise price (R$)		Number of outstanding stock options (thousands)
May 2000		May 2003		May 2007		9.15		71
November 2000		November 2003		November 2007		13.86		120
May 2000 and 2001		May 2004		May 2007 and 2008		20.97		448
November 2000		November 2004		November 2007		13.85		142
May 2000 and 2001		May 2005		May 2007 and 2008		17.69		628
November 2000		November 2005		November 2007		13.86		251
May 2001		May 2006		May 2008		22.07		565
Total								2,225

Since there were no options granted or modifications of existing options in 2004, 2005 and 2006, no stock option compensation expense was recorded for such years. The effects of the adoption of SFAS No. 123R in 2006 were no material and no stock option compensation expense was recorded on outstanding stock options that were unvested as of January 1, 2006.

F-45

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

27.INCOME TAXES

Income tax expense is comprised of the following:

	For the year ended December 31,
	2004			2005			2006
Current		(107,628	)		(83,839	)		(45,707	)
Deferred-
Temporary differences-
Additions		1,505			40,844			189
Tax loss carryforwards
Additions (reversions)		(6,016	)		1,426			1,106
Total deferred		(4,511	)		42,270			1,295
Income tax expense		(112,139	)		(41,569	)		(44,412	)

The reconciliation of reported income tax expense to the amount calculated based on the combined statutory tax rate is summarized as follows:

	For the year ended December 31,
	2004			2005			2006
Income before taxes as reported in the accompanying consolidated financial statements		493,651			500,006			444,166
Combined statutory income tax rate		34	%		34	%		34	%
Tax expense at statutory income tax rate		167,841			170,002			151,016
Permanent differences:
Nondeductible expenses		1,548			1,882			6,397
Translation effects		10,238			(45,587	)		(48,077	)
Dividends paid as interest on capital		(69,359	)		(63,524	)		(45,627	)
Change in valuation allowance for deferred tax assets		366			(9,292	)		491
Reversal of tax incentives		(1,029	)		(1,221	)		-
Research and Development		-			-			(16,943	)
Equity in loss from affiliates		-			(1,053	)		(12	)
Other		2,534			(9,638	)		(2,833	)
Income tax expense as reported in the income statement		112,139			41,569			44,412

F-46

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The Company’s deferred tax assets and liabilities are comprised of tax loss carryforwards and effects resulted from temporary differences as follows:

	At December 31,
	2005			2006
Deferred tax assets on:
Tax loss carryforwards (i)		7,300			8,897
Temporary differences:
Accrual for product warranties and improvements		44,192			46,538
Accrued taxes other than taxes on income		86,596			95,450
Deferred charges, except research and development		144,591			162,587
Other accrued expenses not deductible for tax purposes		70,661			65,630
Differences in bases of property, plant and equipment		9,346			9,634
Differences in inventory basis		31,999			35,637
Post-retirement benefits accrual		1,255			1,943
Other		30,975			34,579
Valuation allowance (ii)		(3,235	)		(3,726	)
Total deferred tax assets		423,680			457,169
Deferred tax liabilities on:
Temporary differences:
Differences in bases of property, plant and equipment		(18,175	)		(14,390	)
Research and development		(157,392	)		(195,878	)
Other		(11,836	)		(9,329	)
Total deferred tax liabilities		(187,403	)		(219,597	)
Net deferred tax asset		236,276			237,572

(i)Tax loss carryforwards are derived from:

	At December 31,
	2005		2006
Brazilian entities		2,972		3,371
Foreign subsidiaries		4,328		5,526
Total		7,300		8,897

Tax losses originated from the Brazilian entities do not have expiration dates but utilization is limited to 30% of the taxable income for each period. Tax losses in foreign subsidiaries are also not subject to any statute of limitation.

(ii) The recorded valuation allowance relates to tax loss carryforwards of foreign subsidiaries, which cannot be offset against taxable income in Brazil. The recorded valuation allowance reduces deferred tax assets to the amount that is more likely than not to be realized.

F-47

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

28.OTHER OPERATING INCOME (EXPENSES), NET

Other operating expenses, net are composed of the following income (expense) items:

	For the year ended December 31,
	2004			2005			2006
Product modifications		(50	)		(253	)		(1,622	)
Employee education, training and professional development		(3,536	)		(4,064	)		(6,771	)
Provision for contingencies and disputed taxes		(22,342	)		(17,183	)		3,775
Contractual fines		3,680			7,340			12,709
Other operating expenses from consolidated sales-type leases, net (i)		(20,766	)		(9,938	)		(11,666	)
Net Gain (loss) on sale of investments in sale-type lease investments		3,645			(294	)		(924	)
Sale of pre-series aircraft		-			-			9,891
Other		(1,903	)		(1,686	)		(3,715	)
		(41,272	)		(26,078	)		1,677

(i)Represents a loss from recognized valuation allowance on sales-type lease investments.

29.EXCHANGE GAIN (LOSS), NET

Exchange gains and losses result from the remeasurement of the balance sheet accounts from the local currency to the functional currency as follows:

	For the year ended December 31,
	2004			2005			2006
Assets:
Cash and cash equivalents		50,728			54,715			23,812
Trade accounts receivable		136			(1,704	)		(700	)
Other assets		(354	)		7,237			11,078
Exchange gain on assets		50,510			60,248			34,190

F-48

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Liabilities:
Trade accounts payable	(51,304	)	(63,352	)	(8,086	)
Income taxes	(548	)	(58	)	(12,274	)
Provisions	(6,798	)	(11,018	)	(3,887	)
Other liabilities	(4,078	)	(1,038	)	(14,041	)
Exchange loss on liabilities	(62,728	)	(75,466	)	(38,288	)
Exchange loss, net	(12,218	)	(15,218	)	(4,098	)

30. RELATED-PARTY TRANSACTIONS

Brazilian Government

PREVI, one of the Company’s shareholders, is controlled by Banco do Brasil, which is controlled by the Brazilian government. As a result, the Company considers Banco do Brasil to be a related party, as well as the Brazilian Air Force and BNDES (National Bank for Economic and Social Development), which are also controlled by the Brazilian government.

The Brazilian government, principally through the Brazilian Air Force, has participated in the development of Embraer since its inception. For the years ended December 31, 2004, 2005 and 2006, the Brazilian Air Force accounted for approximately 7.1%, 6.2% and 1.9% of the Company’s net sales, respectively. The Company expects to continue to be the primary source of new aircraft and spare parts and services for the Brazilian Air Force.

BNDES and Banco do Brasil have several transactions with the Company, mainly represented by support in debt financing and other ordinary bank transactions, such as being the depositary for part of the Company’s cash equivalents and a provider of certain credit line facilities.

Transactions with such related parties are summarized as follows:

	December 31, 2006
	Brazilian		Banco do
	Air Force		Brasil S.A.		BNDES		Total
Assets
Cash and cash equivalents		-		78,747		-		78,747
Trade accounts receivable		87,268		-		-		87,268
Other assets		-		327,776		1,809		329,585
Liabilities
Loans and financing		-		66,745		292,318		359,063
Recourse and non-recourse debt		-		318,577		511,181		829,758
Advances from customers		17,450		-		-		17,450
Other payables and accrued liabilities		-		-		-		-
Results of operations (for the year ended December 31, 2006)
Net sales		70,806		-		-		70,806
Interest income		-
Interest expenses		-		19,954		18,075		38,029

F-49

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

	December 31, 2005
	Brazilian		Banco do
	Air Force		Brasil S.A.		BNDES		Total
Assets
Cash and cash equivalents		-		203,587		-		203,587
Trade accounts receivable		120,910		-		-		120,910
Other assets		-		260,764		63,725		324,489
Liabilities
Loans and financing				119,783		209,293		329,076
Recourse and non-recourse debt		-		260,844		558,409		819,253
Advances from customers		18,881		-		-		18,881
Other payables and accrued liabilities		524		-		-		524
Results of operations (for the year ended December 31, 2005)
Net sales		237,342		-		-		237,342
Interest income		-		27,364		-		27,364
Interest expenses		-		16,503		3,431		19,934

	December 31, 2004
	Brazilian		Banco do
	Air Force		Brasil S.A.		BNDES		Total
Results of operations (for the year ended December 31, 2004)
Net sales		246,104		-		-		246,104
Interest income		-		23,186		-		23,186
Interest expenses		-		10,264		6,213		16,477

F-50

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

European Aerospace and Defense Group

As a result of share capital organization of the Company, such group has no longer the right to appoint two members of the Board of Directors of the Company and is no longer recognized as a group for voting purposes.

Despite of this the Company entered into commercial transactions with such shareholders, Dassault Aviation, EADS and SAFRAN, which together form the European Aerospace and Defense Group (“EADG”). EADG holds approximately 5,36% of our outstanding voting shares. Such transactions represented the purchase of certain equipment and services in the ordinary course of its business and amounted to $3,672, $2,175 and $2,831 for 2004, 2005 and 2006, respectively.

31.    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Overview

The Company is primarily engaged in the assembly and sale of aircraft to various markets throughout the world. More than 90% of the Company’s sales are exported and are U.S. dollar-denominated, which is the Company’s functional currency. Nevertheless, a significant portion of the Company’s labor costs and other local overheads are Brazilian real-denominated. Therefore, the Company maintains certain monetary assets and liabilities, mainly represented by recoverable and payable taxes, cash equivalents and loans in Brazilian reais, targeting to balance its non-U.S. dollar-denominated assets against its non- U.S. dollar-denominated liabilities plus shareholders’ equity in relation to its forecasts of future cash flows.

The Company’s primary market risks include fluctuations in interest rates and foreign currency exchange rates. The Company has established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate risk. These procedures include monitoring the Company’s level of exposure to each market risk, including the analysis of the amounts based on a forecast of future cash flows, the matching of variable rate assets with variable rate liabilities, and limiting the amount of fixed rate assets which may be funded with floating rate liabilities. These procedures may also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the exposure to exchange rate risk. By using derivative instruments the Company exposes itself to credit risk, as further discussed in Note 32.

Interest rate risk management

Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. This interest rate exposure principally relates to changes in the market interest rates affecting the Company’s loans.

The Company’s U.S. dollar-denominated debt bears interest at fixed or variable interest rates based on 6-month or 12-month LIBOR. The Company’s foreign currency debt is primarily denominated in Brazilian reais and European Union euro. The Brazilian real-denominated debt bears interest at a variable rate based on TJLP, the long-term interest rate in Brazil, and the European Union euro-denominated debt bears interest at fixed rates.

F-51

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The Company’s interest rate risk management strategy may use derivative instruments to reduce fluctuations attributable to interest rate volatility.

Exchange rate risk management

Exchange rate risk is the risk that changes in foreign currency exchange rates may cause the Company to incur losses, leading to a reduction in assets or an increase in liabilities. The Company’s primary exposures to foreign currency exchange fluctuations are the Brazilian real/U.S. dollar and Euro/U.S. dollar exchange rates. As previously discussed in the overview section of this Note, the Company aims to hedge its exposure in foreign currencies through (i) balancing its non-U.S. dollar-denominated assets against its non-U.S. dollar-denominated liabilities and (ii) using derivative instruments. The Company typically uses derivatives such as foreign currency forward and swap contracts to implement this strategy.

Derivative financial instruments

Derivative instruments outstanding as of December 31 are as follows:

2006
							Agreed		Gain/ (loss)
			Notional		Maturity		average		Fair
Underline Transactions	Type		amount		date		rate		value
Import financing		Swap ( interest + US$ into R$ + CDI +Fixed interest rate)		16,434		2007 to 2008		58,61% of CDI		(15,236	)
Working capital / Import financing		Swap (variable interest into fixed interest - US$)		239,371		2007 to 2016		7,36%		2,937
Working capital		Swap (CDI into dual currency - the greater than exchange variation or CDI)		6,289		2007		100% exchange variation (US$-R$) or 75% CDI		7
Total										(12,292	)

2006
			Original		Negotiated		National		Gain / (loss)
Underline Transactions	Type		Currency		Currency		Amount		Fair value
Suppliers		NDF		GBP		BRL		7,402		409
Accounts Receivable		NDF		USD		BRL		100,000		769
TOTAL										1,178

F-52

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

2005
									Gain/
							Agreed		(loss)
			Notional		Maturity		average		Fair
Underline Transactions	Type		amount		date		rate		value
Import financing		Swap ( interest + US$ into R$ + CDI +Fixed interest rate)		37,904		2006 to 2008		59.82% of CDI		(19,629	)
Working capital / Import financing		Swap (variable interest into fixed interest - US$)		605,901		2007 to 2016		8.05%		3,050
Import financing		Swap (JIBOR + JPY into US$ + fixed interest rate)		33,541		2006		4.35%		(1,541	)
Total										(18,120	)

32.CONCENTRATION OF CREDIT RISK

Credit risk is the risk that the Company may incur losses if counterparties to the Company’s contracts do not pay amounts owed to the Company. The Company’s primary credit risk derives from the sales of aircraft, spare parts and related services to its customers, including the financial obligations related to these sales discussed in Notes 9 and 31.

Financial instruments which may potentially subject the Company to concentrations of credit risk include (i) cash and cash equivalents, (ii) trade and other accounts receivable, (iii) advances to suppliers and (iv) financial derivative contracts. The Company limits its credit risk associated with cash and cash equivalents by placing its investments with investment grade rated institutions in short-term securities and mutual funds. With respect to trade accounts receivable, the Company limits its credit risk by performing ongoing credit evaluations. All such customers are meeting current commitments, are operating within established credit limits and are considered by management to represent an acceptable credit risk level. The Company believes that no additional credit risk beyond amounts provided for collection losses is inherent in the Company’s trade accounts receivable. Advances to suppliers are made only to select long-standing suppliers. The financial condition of such suppliers is analyzed on an ongoing basis to limit credit risk. The Company addresses credit risk related to derivative instruments by restricting the counterparties of such derivative to major financial institutions.

F-53

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The Company may also have credit risk related to the sale of aircraft while its customers are finalizing the financing structures for their purchases from the Company. To minimize these risks, customer credit analyses are continuously monitored and the Company works closely with the financial institutions to help facilitate customer financing.

33. FAIR VALUE OF FINANCIAL INSTRUMENTS

The following estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret market data and to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair values.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Potential income tax ramifications related to the realization of unrealized gains and losses that would be incurred in an actual sale or settlement have not been taken into consideration.

The carrying amounts for cash and cash equivalents, trading debt securities, accounts and notes receivable and current liabilities approximates their fair values. The fair value of held-to-maturity securities is estimated using the discounted cash flows method. The fair value of long-term debt is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for debt with similar characteristics and remaining maturities.

F-54

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The estimated fair values of financial instruments are as follows:

	2005				2006
	Carrying		Fair		Carrying		Fair
	amounts		value		amounts		value
Financial assets:
Cash and cash equivalents		1,339,159		1,339,159		1,209,396		1,209,396
Temporary cash investments		574,395		574,395		555,795		555,795
Trade accounts receivable, net		450,824		450,824		294,262		294,262
Guarantee deposits (Note 11)		546,806		546,806		607,109		607,109
Held-to-maturity securities		31,269		30,311		32,932		31,785
Derivatives		330		330		4,122		4,122
Financial liabilities:
Loans and financing		1,553,422		1,554,905		1,349,151		1,416,832
Trade accounts payable		731,384		731,384		912,753		912,753
Derivatives		18,450		18,450		15,236		15,236

34.OFF-BALANCE SHEET ARRANGEMENTS

In the normal course of business, the Company participates in certain off-balance sheet arrangements, including guarantees, repurchase obligations, trade-in and product warranty commitments, as discussed below:

Guarantees

Financial guarantees are triggered if customers do not perform their obligation to serve the debt during the term of the financing under the relevant financing arrangements. Financial guarantees provide credit support to the guaranteed party to mitigate default-related losses. The underlying assets collateralize these guarantees. The value of the underlying assets may be adversely affected by an economic or industry downturn. Upon an event of default, the Company usually is the agent for the guaranteed party for the refurbishment and remarketing of the underlying asset. The Company may be entitled to a fee for such remarketing services. Typically a claim under the guarantee shall be made only upon surrender of the underlying asset for remarketing.

Residual value guarantees provide a third party with a specific guaranteed asset value at the end of the financing agreement. In the event of a decrease in market value of the underlying asset, the Company shall bear the difference between the specific guaranteed amount and the actual fair market value. The Company’s exposure is mitigated by the fact that, in order to benefit from the guarantee, the guaranteed party has to make the underlying assets meet tight specific return conditions.

F-55

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The following table provides quantitative data regarding the Company’s guarantees to third parties. The maximum potential payments represent the worst-case scenario, and do not necessarily reflect the results expected by the Company. Estimated proceeds from performance guarantees and underlying assets represent the anticipated values of assets the Company could liquidate or receive from other parties to offset its payments under guarantees.

Description	2005			2006
Maximum financial guarantees		1,768,030			1,741,559
Maximum residual value guarantees		878,249			930,002
Mutually exclusive exposure (*)		(415,460	)		(433,112	)
Provisions and liabilities recorded		(54,011	)		(116,402	)
Off-balance sheet exposure		2,176,807			2,122,047
Estimated proceeds from performance guarantees and underlying assets		2,127,208			2,177,379

(*)In the event both guarantees were issued for the same underlying asset, the residual value guarantees can only be exercised if the financial guarantees have expired without having been triggered and, therefore, their distinct effects have not been combined to calculate the maximum exposure.

As discussed in Note 11, as of December 31, 2005 and 2006, the Company maintained escrow deposits in the total amount of $249,673 and $272,661, respectively, in favor of third parties for whom it has provided financial and residual value guarantees in connection with certain aircraft sales financing structures.

Aircraft Trade-In Options

In connection with the signing of a purchase contract for new aircraft, the Company may provide trade-in options to its customers. These options provide a customer with the right to trade-in existing aircraft upon the purchase of a new aircraft. As of December 31, 2006, 13 commercial aircrafts were subject to trade-in options, and additional aircraft may become subject to trade-in options due to new trade-in contracts. The trade-in price is based on third-party appraisals related to the forecasted fair value of each specific aircraft. In 2006, we were required to accept 02 aircrafts for trade-in.

Product Warranties

The Company provides product warranties in conjunction with certain product sales.

Generally, aircraft sales are accompanied by a standard warranty for systems, accessories, equipment, parts and software manufactured by the Company. Warranty expense related to aircraft and parts is recognized at the time of sale based on estimated amounts of warranty costs anticipated to be incurred. These estimates are based on factors that include, among other things, warranty claim and cost experience, warranty coverage available from suppliers, type and duration of warranty coverage and the volume and mix of aircraft sold and in service. The warranty period typically ranges from two to five years.

F-56

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Product and performance provisions are included in other payables and accrued liabilities and had the following activity ended December 31, 2006:

(US$ million)	At December  31, 2005		Additions		Reductions for payments made/reversals			At December  31, 2006
Product warranties		90,904		34,431		(27,981	)		97,354
Product improvement liabilities		40,350		13,330		(10,172	)		43,509

35.SEGMENT INFORMATION

The Company is organized based on the products and services it offers. Under this organizational structure, the Company operates in the following segments: commercial aviation, defense and government, executive aviation and customer services and others.

Commercial aviation segment

The commercial aviation segment includes the development, production and marketing of commercial jets and provision of related support services, principally to the airline industry worldwide. The Company’s products in the commercial aviation segment are organized around product families, including the ERJ 145 family, the EMBRAER 170/190 family and the EMB 120 Brasília.

The ERJ 145 family is composed of the ERJ 135, ERJ 140 and ERJ 145 aircraft, certified to operate with 37, 44 and 50 seats, respectively. These aircraft share approximately 96% of common parts and components.

The EMBRAER 170 was certified by the Brazilian aviation authority, the FAA, the JAA, EASA and the authority of Poland in February 2004, and deliveries of the EMBRAER 170 began in March 2004. The EMBRAER 175 was certified by the Brazilian aviation authority in December 2004, by EASA in January 2005 and in July 2005 by TCCA, the Canadian certification authority. The EMBRAER 190 was certified by the Brazilian aviation authority in August 2005 and by the FAA in September 2005, and the EMBRAER 195 made its maiden flight in December 2004. We have concluded the flight tests for the EMBRAER 195 and expect to receive FAA certification during 2007.

The EMB 120 Brasília is a 30-seat turboprop aircraft that has been operating since 1985. Since its introduction in 1985 and through December 31, 2006, we have delivered 352 EMB 120 Brasília for the regional market and five EMB 120 Brasília for the defense market. We currently manufacture the EMB 120 Brasília only upon customer request.

F-57

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The commercial aviation segment is subject to both operational and external risks. Operational risks that can seriously disrupt the Company’s ability to make timely delivery of its commercial aviation aircraft and meet its contractual commitments include execution of internal performance plans, regulatory certifications of the Company's commercial aviation aircraft by the U.S. Government and foreign governments, collective bargaining labor disputes and performance issues with key suppliers and subcontractors.

The Company’s principal operations are in Brazil, with some key suppliers and subcontractors located in the United States, Europe and South America. External risks include adverse governmental export and import policies, factors that result in significant and prolonged disruption to air travel worldwide, and other factors that affect the economic viability of the airline industry. Examples of external risks include the volatility of aircraft fuel prices, global trade policies, worldwide political stability and economic growth, acts of aggression that impact the perceived safety of commercial flight and a competitive industry environment.

Defense and government segment

Operations in the defense and government segment involve research, development, production, modification and support of military aircraft, products and related systems. Although some military aircraft are contracted in the commercial environment, the Company’s primary customer is the Brazilian Air Force. In the defense and government segment, the Company has the following products:

· The Super Tucano - a light attack and training aircraft also know as AL-X,

· The AMX, an advanced ground attack jet, developed and manufactured through an industrial cooperation agreement between Brazil and Italy.

· Intelligence surveillance, and reconnaissance special mission aircraft based on the platform of the ERJ 145. These aircraft include the EMB 145 AEW&C - Airborne Early Warning and Control, the EMB 145 RS - Remote Sensing, and the EMB 145 MP - Marine Remote Sensing.

The Brazilian Air Force is the major customer of the Company’s defense products. A decrease in defense spending by the Brazilian government due to defense spending cuts and general budgetary constraints or other factors could adversely affect the Company’s defense sales and defense research and development.

Executive jet segment

We have developed a line of executive jets, the Legacy 600, and are developing additional executive jets in the very light, light and ultra-large segments - the Phenom 100, Phenom 300 and Lineage 1000, respectively. We are marketing our executive jets to companies, including fractional ownership companies, and high net-worth individuals.

F-58

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Customer services and others

The customer services and others segment relates mainly to (i) after-sales customer support services, including maintenance and training, (ii) aircraft operating leases and (iii) the manufacture and marketing of spare parts for the Company’s aircraft. In addition, the Company sells structural parts and mechanical and hydraulic systems to certain specified customers. The Company also manufactures, on a limited basis and upon customer request, general aviation propeller aircraft and crop dusters.

Other unallocated costs include corporate costs not allocated to the operating segments and include costs attributable to stock-based compensation. Unallocated capital expenditures and depreciation relate primarily to shared services assets.

The following table provides geographic information regarding net sales. The geographic allocation is based on the location of the operator of the aircraft.

Net sales by geographic area	2004		2005		2006
The Americas without Brazil-
Commercial Aviation		2,189,405		2,250,169		1,506,868
Defense and Government		92,135		33,927		142,099
Executive Aviation		204,914		155,764		304,756
Customer Services and Others		130,054		145,921		220,965
		2,616,508		2,585,781		2,174,688
Brazil-
Defense and Government		246,104		230,286		71,203
Customer Services and Others		51,332		72,773		75,191
		297,436		303,059		146,394
Europe-
Commercial Aviation		296,885		247,976		430,080
Defense and Government		20,906		8,347		13,405
Executive Aviation		-		100,253		161,314
Customer Services and Others		54,372		202,862		237,002
		372,163		559,438		841,801
Others-
Commercial Aviation		93,159		207,652		516,098
Defense and Government		6,622		151,237		-
Executive Aviation		40,800		22,036		116,010
Customer Services and Others		13,845		703		12,412
		154,427		381,628		644,520
Total		3,440,533		3,829,907		3,807,403

F-59

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

The following table presents income statement information by operating segment:

Operating income	2004			2005			2006
Net sales-
Commercial Aviation		2,579,449			2,705,797			2,453,046
Defense and Government		365,767			423,796			226,707
Executive Aviation		245,714			278,054			582,080
Customer Services and Others		249,603			422,260			545,570
		3,440,533			3,829,907			3,807,403
Cost of sales and services-
Commercial Aviation		(1,613,028	)		(1,867,357	)		(1,765,467	)
Defense and Government		(291,400	)		(319,428	)		(174,131	)
Executive Aviation		(181,457	)		(188,437	)		(396,199	)
Customer Services and Others		(181,445	)		(296,594	)		(400,437	)
		(2,267,330	)		(2,671,816	)		(2,736,234	)
Gross profit-
Commercial Aviation		966,421			838,440			687,579
Defense and Government		74,367			104,368			52,576
Executive Aviation		64,257			89,617			185,881
Customer Services and Others		68,158			125,666			145,133
		1,173,203			1,158,091			1,071,169
Operating expenses-
Commercial Aviation		(348,115	)		(425,659	)		(456,948	)
Defense and Government		(59,782	)		(50,267	)		(37,988	)
Executive Aviation		(28,556	)		(44,474	)		(130,390	)
Customer Services and Others		(36,455	)		(32,339	)		(25,602	)
Unallocated corporate expenses		(156,309	)		(97,505	)		(112,502	)
		(629,217	)		(650,244	)		(763,430	)
Income from operations		543,986			507,847			307,739

The following tables present other information about the Company’s operating segments:

Property, plant and equipment, net	2005		2006
Commercial Aviation		59,456		117,655
Defense and Government		51,326		50,791
Customer Services and Others		17,148		42,625
Unallocated		260,432		201,173
Total		388,362		412,244

F-60

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006

(In thousands of U.S. dollars, unless otherwise stated)

Trade accounts receivable, net	2005		2006
Commercial Aviation		99,515		-
Defense and Government		170,583		113,371
Customer Services and Others		180,726		180,891
Total		450,824		294,262

Advances from customers	2005		2006
Commercial Aviation		440,157		403,706
Defense and Government		85,562		92,548
Executive Aviation		29,540		195,746
Customer Services and Others		27,723		36,441
Total		582,982		728,441

36. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.

The following are the supplemental disclosure of cash flow information:

	2004		2005		2006
Cash paid during the year for:
Income taxes		11,032		21,698		89,899
Interest		53,488		65,964		99,611
Non-cash financing and investing transactions:
Assets acquired as capital lease		427		3,754		3,918
Dividends payable		54,959		42,811		35,555
Property, plant and equipment, net (OGMA acquisition)		-		10,286		-
Loans and financing (OGMA acquisition)		-		31,730		-

* * *

F-61

EX-8.1

EXHIBIT 8.1

List of Subsidiaries of Embraer - Empresa Brasileira de Aeronáutica S.A.

Name	Jurisdiction of Incorporation
Embraer Aircraft Holding, Inc - EAH	Delaware, U.S.A.
Embraer Aircraft Customer Services, Inc. - EACS	Florida, U.S.A.
Embraer Aircraft Maintenance Services, Inc. - EAMS	Delaware, U.S.A.
Embraer Services, Inc. - ESI	Delaware, U.S.A.
Indústria Aeronáutica Neiva Ltda. - Neiva	Brazil
ELEB-Embraer Liebherr Equipamentos do Brasil S.A.	Brazil
Embraer - Gavião Peixoto - GPX	Brazil
Embraer Aviation Europe - EAE	France
Embraer Aviation International - EAI	France
Embraer Europe SARL	France
Embraer Australia Pty Ltd. - EAL	Australia
Embraer Credit Ltd. - ECL	Delaware, U.S.A.
Embraer Representations, LLC - ERL	Delaware, U.S.A
Harbin Embraer Aircraft Industry Company, Ltd. - HEAI	China
Embraer Spain Holding Co., SL - ESH	Spain
ECC Investment Switzerland AG - SWIN	Switzerland
ECC Insurance & Financial Company Ltd.	Cayman Islands, BWI
Embraer Finance Ltd. - EFL	Cayman Islands, BWI
Embraer Merco S/A - EMS	Uruguay
Embraer Overseas Limited	Cayman Islands, BWI
Air Holding SGPS, S.A.	Portugal
OGMA - Ind. Aeronáutica de Portugal S.A.	Portugal
ECC Leasing Company Ltd.	Ireland
Canal Investments LLC	Delaware, U.S.A.
ECC do Brasil Cia de Seguros	Brazil
Embraer Asia Pacific Pte- Limited - EAL	Singapore

EX-12.1

EXHIBIT 12.1

CERTIFICATION

I, Maurício Novis Botelho, certify that:

1. I have reviewed this annual report on Form 20-F of Embraer - Empresa Brasileira de Aeronáutica S.A.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of and for the periods presented in this report;

4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: April 23, 2007
By:	/s/ MAURICIO NOVIS BOTELHO
	Mauricio Novis Botelho Chairman, President and Chief Executive Officer

EX-12.2

EXHIBIT 12.2

CERTIFICATION

I, Antonio Luiz Pizarro Manso, certify that:

1. I have reviewed this annual report on Form 20-F of Embraer - Empresa Brasileira de Aeronáutica S.A.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements and other financial information included in this report fairly present in all material respects the financial condition, results of operations and cash flows of the company as of and for the periods presented in this report;

4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and to the audit committee of the company’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: April 23, 2007
By:	/s/ ANTONIO LUIZ PIZARRO MANSO
	Antonio Luiz Pizarro Manso Executive Vice-President Corporate and Chief Financial Officer

EX-13.1

EXHIBIT 13.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Empresa Brasileira de Aeronáutica S.A. (the "Company") on Form 20-F for the fiscal year ended December 31, 2006, as filed with the U.S. Securities and Exchange Commission on the date hereof (the "Report"), I, Mauricio Novis Botelho, Chairman, President and Chief Executive Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:

(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: April 23, 2007

By:	/s/ MAURICIO NOVIS BOTELHO
	Mauricio Novis Botelho Chairman, President and Chief Executive Officer

EX-13.2

EXHIBIT 13.2

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Embraer - Empresa Brasileira de Aeronáutica S.A. (the "Company") on Form 20 F for the fiscal year ended December 31, 2006, as filed with the U.S. Securities and Exchange Commission on the date hereof (the "Report"), I, Antonio Luiz Pizarro Manso, Executive Vice President Corporate and Chief Financial Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the U.S. Sarbanes Oxley Act of 2002, that to the best of my knowledge:

(i) the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 23, 2007
By:	/s/ ANTONIO LUIZ PIZARRO MANSO
	Antonio Luiz Pizarro Manso Executive Vice-President Corporate and Chief Financial Officer