##### 



As filed with the Securities and Exchange Commission on June 30, 2003

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549 FORM 20-F


---

[ ]   
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, 2002


OR

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

|For the transition period from [ ] to [ ]
|-----------------------------------------

Commission file number 1-15102

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:
|Preferred shares, without par value                             |  | New York Stock Exchange*                  
|American Depositary Shares (as evidenced by American Depositary |  | New York Stock Exchange                   
|Receipts), each representing four preferred shares              |  |                                           



---

| | * | 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.



---



Indicate the number of outstanding shares of each of the issuers classes
of capital or common stock as of the close of the period covered by the annual
report:

242,544,448 common shares, without par value
470,429,907 preferred shares, without par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes þ   
No [  ]

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

Item 17 [  ]
       Item 18
þ





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##### 



TABLE OF CONTENTS

|         |  |                                                                              |  |     
|-------- |  | ---------------------------------------------------------------------------- |  | ----
|         |  |                                                                              |  | Page
|         |  |                                                                              |  |     
|         |  | PART I                                                                       |  |     
|ITEM 1.  |  | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS                        |  | 1   
|ITEM 2.  |  | OFFER STATISTICS AND EXPECTED TIMETABLE                                      |  | 1   
|ITEM 3.  |  | KEY INFORMATION                                                              |  | 1   
|ITEM 4.  |  | INFORMATION ON THE COMPANY                                                   |  | 16  
|ITEM 5.  |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS                                 |  | 34  
|ITEM 6.  |  | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                   |  | 50  
|ITEM 7.  |  | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                            |  | 57  
|ITEM 8.  |  | FINANCIAL INFORMATION                                                        |  | 62  
|ITEM 9.  |  | THE OFFER AND LISTING                                                        |  | 66  
|ITEM 10. |  | ADDITIONAL INFORMATION                                                       |  | 69  
|ITEM 11. |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                   |  | 81  
|ITEM 12. |  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                       |  | 84  
|         |  | PART II                                                                      |  |     
|ITEM 13. |  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                              |  | 85  
|ITEM 14. |  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS |  | 85  
|ITEM 15. |  | CONTROLS AND PROCEDURES                                                      |  | 85  
|ITEM 16. |  | [Reserved]                                                                   |  | 85  
|         |  | PART III                                                                     |  |     
|ITEM 17. |  | FINANCIAL STATEMENTS                                                         |  | 86  
|ITEM 18. |  | FINANCIAL STATEMENTS                                                         |  | 86  
|ITEM 19. |  | EXHIBITS                                                                     |  | 86  

(i)



---



##### 



INTRODUCTION

In this annual report, Embraer, we, us or our refer to
Embraer-Empresa Brasileira de Aeronáutica S.A. 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.

Presentation of Financial and Other Data

Financial Data

Our audited financial statements at and for the years ended December 31,
2000, 2001 and 2002 are included in this annual report and have been audited by
Deloitte Touche Tohmatsu.

Our consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States, or U.S.
GAAP. Because we export approximately 97.7% of our production and operate in
an industry that uses the U.S. dollar as its currency of reference, management
believes that the U.S. dollar is our functional currency and the most
appropriate currency in which to present our financial statements.
Accordingly, we decided to present our primary U.S. GAAP financial statements
in U.S. dollars. As a result, amounts for all periods presented have been
remeasured or translated into U.S. dollars in accordance with the methodology
set forth in Statement of Financial Accounting Standards No. 52 (SFAS 52).

Prior to 2001, we presented our financial statements in accordance with
accounting principles generally accepted in Brazil, or Brazilian GAAP, stated
in Brazilian reaisand adjusted for the effects of inflation. Previously,
amounts of net income and shareholders equity under Brazilian GAAP were
reconciled to those that would have been reported under U.S. GAAP. Our
financial statements and financial data presented herein and prepared in
accordance with U.S. GAAP do not reflect the effects of inflation.

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 2000, 2001 and 2002 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. See Note 2.a to our consolidated financial statements.

Effective January 1, 2002, we decided to reclassify certain costs related
to information technology, support, training and education as general and
administrative expenses, instead of as cost of sales and services. All amounts
for prior periods presented in this annual report have been restated to give
effect to this reclassification. These reclassified costs equaled US$9.8
million in 1998, US$11.4 million in 1999, US$21.3 million in 2000, US$30.5
million in 2001 and US$32.2 million in 2002. Effective January 1, 2002, we
also began netting research and development related contributions that we
receive from certain of our suppliers against our research and development
expense, instead of recording these contributions as other operating income.
All amounts for prior periods presented in this annual report have been
restated to give effect to this reclassification. These reclassified amounts
equaled US$14.1 million in 2001 and US$1.0 million in 2002.

For certain purposes, such as providing reports to our Brazilian
shareholders, filing financial statements with the Comissão de Valores
Mobilários, 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

(ii)



---



##### 



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 remeasurement of amounts to the functional currency and
other adjustments related to the differences in accounting principles between
U.S. GAAP and 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.

Other Data

Some of the financial data contained in this annual report 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 20-110 passenger
seats. The term mid-capacity jets refers to the 70-110 seat segment of
regional jets.

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, customarily accompanied by a down
payment, where 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 regional aircraft, we exclude one EMB 145 and two EMB 135s
that were delivered to the Belgian government in 2001, one EMB 145 delivered to
the Belgian government in 2002, and one EMB 135 aircraft that we delivered to
the Greek government. These aircraft have been included in our defense data.

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 of this annual
report. We have based these forward-looking statements largely on our current
expectations and projections about future events 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;                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | managements expectations and estimates concerning our future
financial performance, financing plans and programs, and the effects of
competition;
|
| |  |  | successful development and marketing of the EMBRAER 170/190 jet
family, our line of corporate jets and our defense aircraft;                      
|
| |  |  | our level of debt;                                                                                                                                
|
| |  |  | anticipated trends in our industry;                                                                                                               
|
| |  |  | our expenditure plans;                                                                                                                            
|
| |  |  | inflation and devaluation;                                                                                                                        
|
| |  |  | our ability to develop and deliver our products on a timely basis;                                                                                
|
| |  |  | availability of sales financing for our existing and potential customers;                                                                         

(iii)



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##### 





| |  |  | existing and future governmental regulation; and              
| | - |  | --------------------------------------------------------------
|
| |  |  | other risk factors as set forth under Item 3D. Risk Factors.

The words believes, may, will, estimates, continues,
anticipates, intends, expects 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 could differ substantially from those
anticipated in our forward-looking statements.

(iv)



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##### 



PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

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 and for the
three years ended December 31, 2000, 2001 and 2002 are derived from our
consolidated U.S. GAAP financial statements audited by Deloitte Touche
Tohmatsu, independent public accountants, included elsewhere in this annual
report. The selected financial data at and for the year ended December 31,
1999 has been derived from our U.S. GAAP financial statements audited by
Deloitte Touche Tohmatsu, independent accountants. The selected financial data
at and for the year ended December 31, 1998 has been derived from financial
statements originally prepared in accordance with Brazilian GAAP and audited by
Arthur Andersen S/C, independent public accountants. This 1998 financial
statement data has been restated in accordance with U.S. GAAP and is unaudited.

1



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##### 



|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |            |           |  
|---------------------------------------------------- | -------------------------------------------------- | ------------------------------------------ | ------- | -------------------------------------- | --------- | ---- | ------- | ------------------------------------------ | --------- | ---- | ------- | ---------- | --------- | --- | ------- | ---------- | --------- | --- | ------- | ---------- | --------- | -
|                                                     |                                                    |                                            |         | At and for the year ended December 31,
|                                                     |                                                    |                                            |         |                                       
|                                                     |                                                    |                                            |         | 1998                                   |           | 1999 |         | 2000                                       |           | 2001 |         | 2002      
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |           
|                                                     |                                                    |                                            |         |                                        |           |      |         | (in thousands, except per share /ADS data) |           |      |         |           
|Income Statement Data                                |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Net sales                                          |                                            | US$     | 1,353,541                              |           |      | US$     | 1,837,277                                  |           |      | US$     | 2,762,162  |           |     | US$     | 2,926,995  |           |     | US$     | 2,525,800  |          
|                                                     | Cost of sales and services                         |                                            |         | (970,224                               | )         |      |         | (1,248,675                                 | )         |      |         | (1,879,318 | )         |     |         | (1,769,234 | )         |     |         | (1,531,720 | )        
|                                                     | Gross profit                                       |                                            |         | 383,317                                |           |      |         | 588,602                                    |           |      |         | 882,844    |           |     |         | 1,157,761  |           |     |         | 994,080    |          
|Operating expenses                                   |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Selling expenses                                   |                                            | US$     | (99,256                                | )         |      | US$     | (119,234                                   | )         |      | US$     | (193,420   | )         |     | US$     | (212,057   | )         |     | US$     | (211,015   | )        
|                                                     | Research and development                           |                                            |         | (39,749                                | )         |      |         | (18,808                                    | )         |      |         | (69,593    | )         |     |         | (99,566    | )         |     |         | (158,499   | )        
|                                                     | General and administrative                         |                                            |         | (50,166                                | )         |      |         | (55,948                                    | )         |      |         | (96,645    | )         |     |         | (120,787   | )         |     |         | (109,673   | )        
|                                                     | Employee profit sharing                            |                                            |         | (14,703                                | )         |      |         | (20,437                                    | )         |      |         | (41,770    | )         |     |         | (43,746    | )         |     |         | (25,222    | )        
|                                                     | Stock compensation                                 |                                            |         | (4,334                                 | )         |      |         | (2,436                                     | )         |      |         | (510       | )         |     |         | (1,074     | )         |     |         |           |          
|                                                     | Other operating expense, net                       |                                            |         | (3,431                                 | )         |      |         | (3,629                                     | )         |      |         | (19,518    | )         |     |         | (29,463    | )         |     |         | (20,498    | )        
|                                                     | Equity on income (loss) from affiliates            |                                            |         |                                       |           |      |         | (142                                       | )         |      |         | 753        |           |     |         | 310        |           |     |         | 389        |          
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     |                                                    | Total operating expenses                   |         | US$                                    | (211,639  | )    |         | US$                                        | (220,634  | )    |         | US$        | (420,703  | )   |         | US$        | (506,383  | )   |         | US$        | (524,518  | )
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|Income from operations                               |                                                    | US$                                        | 171,678 |                                        |           | US$  | 367,968 |                                            |           | US$  | 462,141 |            |           | US$ | 651,378 |            |           | US$ | 469,562 |           
|Non-operating income (expense)                       |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Interest income (expense)                          |                                            | US$     | (17,859                                | )         |      | US$     | 14,779                                     |           |      | US$     | (6,874     | )         |     | US$     | 47,502     |           |     | US$     | 80,456     |          
|                                                     | Financial transaction loss, net                    |                                            |         | (3,536                                 | )         |      |         | (65,226                                    | )         |      |         | (24,637    | )         |     |         | (148,637   | )         |     |         | (135,647   | )        
|                                                     | Other non-operating income (expense), net          |                                            |         | 3,591                                  |           |      |         | (13,361                                    | )         |      |         | 5,955      |           |     |         | (8,426     | )         |     |         | (1,394     | )        
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     |                                                    | Total non-operating income (expense)       |         | US$                                    | (17,804   | )    |         | US$                                        | (63,808   | )    |         | US$        | (25,556   | )   |         | US$        | (109,561  | )   |         | US$        | (56,585   | )
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|Income before income taxes                           |                                                    | US$                                        | 153,874 |                                        |           | US$  | 304,160 |                                            |           | US$  | 436,585 |            |           | US$ | 541,817 |            |           | US$ | 412,977 |           
|                                                     | Provision for income taxes                         |                                            | US$     | (8,587                                 | )         |      | US$     | (69,620                                    | )         |      | US$     | (117,379   | )         |     | US$     | (218,394   | )         |     | US$     | (188,502   | )        
|Income before minority interest                      |                                                    | US$                                        | 145,287 |                                        |           | US$  | 234,540 |                                            |           | US$  | 319,206 |            |           | US$ | 323,423 |            |           | US$ | 224,475 |           
|                                                     | Minority interest                                  |                                            |         |                                       |           |      |         |                                           |           |      |         | 1,522      |           |     |         | (423       | )         |     |         | (1,883     | )        
|Income before cumulative effect of
accounting change |                                                    | US$                                        | 145,287 |                                        |           | US$  | 234,540 |                                            |           | US$  | 320,728 |            |           | US$ | 323,000 |            |           | US$ | 222,592 |           
|                                                     | Cumulative effect of accounting change,
net of tax |                                            |         |                                       |           |      |         |                                           |           |      |         |           |           |     |         | 5,440      |           |     |         |           |          
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|Net income                                           |                                                    | US$                                        | 145,287 |                                        |           | US$  | 234,540 |                                            |           | US$  | 320,728 |            |           | US$ | 328,440 |            |           | US$ | 222,592 |           
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|Earnings per share                                   |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Common share  basic (1) (3) (6)                   |                                            | US$     | 0.27                                   |           |      | US$     | 0.43                                       |           |      | US$     | 0.55       |           |     | US$     | 0.48       |           |     | US$     | 0.30       |          
|                                                     | Preferred share  basic (1) (3) (6)                |                                            |         | 0.29                                   |           |      |         | 0.48                                       |           |      |         | 0.61       |           |     |         | 0.53       |           |     |         | 0.33       |          
|                                                     | ADS  basic (1) (3) (6)                            |                                            |         | 1.18                                   |           |      |         | 1.90                                       |           |      |         | 2.43       |           |     |         | 2.11       |           |     |         | 1.32       |          
|                                                     | Common share  diluted (2) (3) (6)                 |                                            |         | 0.27                                   |           |      |         | 0.38                                       |           |      |         | 0.48       |           |     |         | 0.46       |           |     |         | 0.30       |          
|                                                     | Preferred share  diluted (2) (3) (6)              |                                            |         | 0.29                                   |           |      |         | 0.42                                       |           |      |         | 0.53       |           |     |         | 0.50       |           |     |         | 0.33       |          
|                                                     | ADS  diluted (2) (3) (6)                          |                                            |         | 1.17                                   |           |      |         | 1.66                                       |           |      |         | 2.10       |           |     |         | 2.01       |           |     |         | 1.31       |          
|Dividends per share                                  |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Common share (3) (4) (5)                           |                                            | US$     | 0.031635                               |           |      | US$     | 0.085199                                   |           |      | US$     | 0.249700   |           |     | US$     | 0.254140   |           |     | US$     | 0.193490   |          
|                                                     | Preferred share (3) (4) (5)                        |                                            |         | 0.034799                               |           |      |         | 0.093719                                   |           |      |         | 0.274670   |           |     |         | 0.279560   |           |     |         | 0.212830   |          
|                                                     | ADS (3) (4) (5)                                    |                                            |         | 0.139196                               |           |      |         | 0.374876                                   |           |      |         | 1.098680   |           |     |         | 1.118240   |           |     |         | 0.851320   |          
|Weighted averaged number of shares outstanding       |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Common share  basic (3)                           |                                            |         | 242,544                                |           |      |         | 242,544                                    |           |      |         | 242,544    |           |     |         | 242,544    |           |     |         | 242,544    |          
|                                                     | Preferred share  basic (3)                        |                                            |         | 272,590                                |           |      |         | 272,590                                    |           |      |         | 308,401    |           |     |         | 402,035    |           |     |         | 454,414    |          
|                                                     | Common share  diluted (3)                         |                                            |         | 242,544                                |           |      |         | 242,544                                    |           |      |         | 242,544    |           |     |         | 242,544    |           |     |         | 242,544    |          
|                                                     | Preferred share  diluted (3)                      |                                            |         | 274,441                                |           |      |         | 347,064                                    |           |      |         | 392,954    |           |     |         | 433,386    |           |     |         | 459,415    |          
|Balance Sheet Data                                   |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Cash and cash equivalents                          |                                            | US$     | 259,690                                |           |      | US$     | 304,085                                    |           |      | US$     | 1,189,231  |           |     | US$     | 749,302    |           |     | US$     | 656,822    |          
|                                                     | Other current assets                               |                                            |         | 820,828                                |           |      |         | 986,961                                    |           |      |         | 920,278    |           |     |         | 1,816,046  |           |     |         | 1,856,301  |          
|                                                     | Property, plant and equipment, net                 |                                            |         | 138,613                                |           |      |         | 162,429                                    |           |      |         | 254,965    |           |     |         | 366,481    |           |     |         | 436,715    |          
|                                                     | Other long-term assets                             |                                            |         | 622,017                                |           |      |         | 757,463                                    |           |      |         | 528,942    |           |     |         | 628,958    |           |     |         | 1,335,626  |          
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     |                                                    | Total assets                               |         | US$                                    | 1,841,148 |      |         | US$                                        | 2,210,938 |      |         | US$        | 2,893,416 |     |         | US$        | 3,560,787 |     |         | US$        | 4,285,464 |  
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     | Short-term loans                                   |                                            |         | 550,730                                |           |      |         | 556,272                                    |           |      |         | 365,043    |           |     |         | 526,550    |           |     |         | 244,526    |          
|                                                     | Other current liabilities                          |                                            |         | 483,471                                |           |      |         | 561,897                                    |           |      |         | 967,283    |           |     |         | 1,161,313  |           |     |         | 1,397,407  |          
|                                                     | Long-term loans                                    |                                            |         | 124,038                                |           |      |         | 80,597                                     |           |      |         | 90,969     |           |     |         | 245,186    |           |     |         | 308,110    |          
|                                                     | Other long-term liabilities                        |                                            |         | 513,232                                |           |      |         | 647,271                                    |           |      |         | 677,013    |           |     |         | 599,212    |           |     |         | 1,237,015  |          
|                                                     | Minority interest                                  |                                            |         |                                       |           |      |         |                                           |           |      |         | 7,748      |           |     |         | 8,170      |           |     |         | 8,226      |          
|                                                     | Shareholders equity                               |                                            |         | 169,677                                |           |      |         | 364,901                                    |           |      |         | 785,360    |           |     |         | 1,020,356  |           |     |         | 1,090,180  |          
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           
|                                                     |                                                    | Total liabilities and shareholders equity |         | US$                                    | 1,841,148 |      |         | US$                                        | 2,210,938 |      |         | US$        | 2,893,416 |     |         | US$        | 3,560,787 |     |         | US$        | 4,285,464 |  
|                                                     |                                                    |                                            |         |                                        |           |      |         |                                            |           |      |         |            |           |     |         |            |           |     |         |           

2



---



##### 



|                     |                                                     |  |                                        |         |      |             |                                            |         |              |  |      |             |   |  |            |          |   |  |  |          |  
|-------------------- | --------------------------------------------------- |  | -------------------------------------- | ------- | ---- | ----------- | ------------------------------------------ | ------- | ------------ |  | ---- | ----------- | - |  | ---------- | -------- | - |  |  | -------- | -
|                     |                                                     |  | At and for the year ended December 31,
|                     |                                                     |  |                                       
|                     |                                                     |  | 1998                                   |         | 1999 |             | 2000                                       |         | 2001         |  | 2002
|                     |                                                     |  |                                        |         |      |             |                                            |         |              |  |     
|                     |                                                     |  |                                        |         |      |             | (in thousands, except per share /ADS data) |         |              |  |     
|Other Financial Data |                                                     |  |                                        |         |      |             |                                            |         |              |  |      |             |   |  |            |          |   |  |  |         
|                     | Net cash provided by (used in)
operating activities |  | US$(28,442                             | )       |      | US$(125,826 | )                                          |         | US$1,119,974 |  |      | US$(263,160 | ) |  | US$507,863 |         
|                     | Net cash provided by (used in)
financing activities |  |                                        | 236,606 |      |             |                                            | (5,632  | )            |  |      | (130,398    | ) |  |            | 98,403   |   |  |  | (200,790 | )
|                     | Net cash used in investing activities               |  |                                        | (38,727 | )    |             |                                            | (75,799 | )            |  |      | (104,430    | ) |  |            | (275,172 | ) |  |  | (208,421 | )
|                     | Depreciation and amortization                       |  |                                        | 21,046  |      |             |                                            | 25,076  |              |  |      | 30,596      |   |  |            | 46,417   |   |  |  | 55,602   |  



---

|(1) |  | Based on weighted average number of shares outstanding. See Note 27 to
our consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Based on weighted average number of shares outstanding and the
effects of potentially dilutive securities. See Note 27 to our
consolidated financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(3) |  | Restated to give effect to the reverse stock split, on April 30,
1999, of one newly issued common or preferred share for 100 outstanding
preferred shares or 100 outstanding common shares, respectively. Also
restated to give effect to the issuance on March 1, 2002, in the form
of a preferred share dividend, of 0.142106 new preferred share for each
existing preferred or common share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   
|(4) |  | Includes interest on shareholders equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(5) |  | Translated from nominal reaisinto U.S. dollars at the commercial
selling rates in effect on the dates that distributions were declared
during the period. The dividends to the ADSs were adjusted from the
total amount paid to the preferred shares multiplied by four.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|(6) |  | During 1999 and 2000, our results of operations benefited from
changes we made to our valuation allowance related to deferred tax
assets. Based on our assessment of future taxable income, we concluded
that it was more likely than not that we would realize certain of these
benefits given our improved profitability and increases in expected
sales and backlog. The adjustments to the valuation allowances
resulted in a decrease to income tax expense of US$168.5 million in
1999 and US$27.5 million in 2000. In addition, in 2001, we adopted
SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended. As a result, we recognized a gain of US$5.4
million, net of related taxes, as a cumulative effect of a change in
accounting. The following summarizes the earnings per share impact
related to the above adjustments.

|                                                    |       |            |      |         |           |  |      |        |   |  |       |       | 
|--------------------------------------------------- | ----- | ---------- | ---- | ------- | --------- |  | ---- | ------ | - |  | ----- | ----- | 
|                                                    |       |            | 1999 |         | 2000      |  | 2001
|                                                    |       |            |      |         |           |  |     
|Effect of tax adjustments                           |       | US$168,533 |      |         | US$27,539 |  |      |        |  | 
|Effect of cumulative effect of change
in accounting |       |            |     |         |           |  |     |        |   |  | 5,440 |      
|                                                    |       |            |      |         |           |  |      |        |   |  |       |      
|                                                    | Total |            |      | 168,533 |           |  |      | 27,539 |   |  |       | 5,440 | 
|                                                    |       |            |      |         |           |  |      |        |   |  |       |      
|Basic earnings per common share                     |       |            | 0.31 |         |           |  | 0.05 |        |   |  | 0.01  |      
|Basic earnings per preferred share                  |       |            | 0.34 |         |           |  | 0.05 |        |   |  | 0.01  |      
|Basic earnings per ADS                              |       |            | 1.37 |         |           |  | 0.21 |        |   |  | 0.04  |      
|Diluted earnings per common share                   |       |            | 0.27 |         |           |  | 0.04 |        |   |  | 0.01  |      
|Diluted earnings per preferred share                |       |            | 0.30 |         |           |  | 0.05 |        |   |  | 0.01  |      
|Diluted earnings per ADS                            |       |            | 1.20 |         |           |  | 0.19 |        |   |  | 0.04  |      

3



---



##### 



|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  |  |     |  | 
|----------------------------------------- | ------------------------------ | -------- | ----------------------------------- |  | -------- | -------------------------------------- | --- | --------- |  | ---- | --------- | ---- |  | -------- | --- |  |  | --- | --- |  |  | --- |  | 
|                                          |                                |          |                                     |  |          | At and for the year ended December 31,
|                                          |                                |          |                                     |  |          |                                       
|                                          |                                |          |                                     |  |          | 1998                                   |     | 1999      |  | 2000 |           | 2001 |  | 2002    
|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |         
|Other Data:                               |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|Aircraft delivered during period:         |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|                                          | To the Regional Market         |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | EMB 120 Brasília                    |  |          | 13                                     |     |           |  | 7    |           |      |  |         |     |  |  | 2   |     |  |  |    | 
|                                          |                                |          | ERJ 145                             |  |          | 60                                     |     |           |  | 80   |           |      |  | 112      |     |  |  | 104 |     |  |  | 80  | 
|                                          |                                |          | ERJ 135                             |  |          |                                       |     |           |  | 16   |           |      |  | 45       |     |  |  | 27  |     |  |  | 3   | 
|                                          |                                |          | ERJ 140                             |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  | 22  |     |  |  | 36  | 
|                                          | To the Defense Market          |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | EMB 120 Brasília                    |  |          | 1                                      |     |           |  |     |           |      |  |         |     |  |  |    |     |  |  |    | 
|                                          |                                |          | Legacy                              |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  |    |     |  |  | 1   | 
|                                          |                                |          | EMB 135                             |  |          |                                       |     |           |  |     |           |      |  | 1        |     |  |  | 2   |     |  |  |    | 
|                                          |                                |          | EMB 145                             |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  | 1   |     |  |  | 1   | 
|                                          |                                |          | EMB 145 AEW&C/RS/MP                 |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  |    |     |  |  | 5   | 
|                                          |                                |          | EMB 312 Tucano                      |  |          | 6                                      |     |           |  |     |           |      |  |         |     |  |  |    |     |  |  |    | 
|                                          |                                |          | AM-X                                |  |          | 10                                     |     |           |  | 3    |           |      |  | 1        |     |  |  |    |     |  |  |    | 
|                                          | To the Corporate Market        |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | Legacy                              |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  |    |     |  |  | 8   | 
|                                          |                                |          | EMB 135                             |  |          |                                       |     |           |  |     |           |      |  | 2        |     |  |  | 5   |     |  |  |    | 
|                                          | To the General Aviation Market |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | Light Aircraft                      |  |          | 26                                     |     |           |  | 17   |           |      |  | 17       |     |  |  | 11  |     |  |  | 25  | 
|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|Total delivered                           |                                |          | 116                                 |  |          |                                        | 123 |           |  |      | 178       |      |  |          | 174 |  |  |     | 161 | 
|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|Aircraft in backlog at the end of period: |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|                                          | In the Regional Market(1)      |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | EMB 120 Brasília                    |  |          | 7                                      |     |           |  |     |           |      |  | 2        |     |  |  |    |     |  |  |    | 
|                                          |                                |          | ERJ 145                             |  |          | 131                                    |     |           |  | 176  |           |      |  | 261      |     |  |  | 159 |     |  |  | 109 | 
|                                          |                                |          | ERJ 135                             |  |          | 134                                    |     |           |  | 124  |           |      |  | 85       |     |  |  | 53  |     |  |  | 31  | 
|                                          |                                |          | ERJ 140                             |  |          |                                       |     |           |  |     |           |      |  | 133      |     |  |  | 152 |     |  |  | 116 | 
|                                          |                                |          | EMBRAER 170                         |  |          |                                       |     |           |  | 40   |           |      |  | 90       |     |  |  | 82  |     |  |  | 88  | 
|                                          |                                |          | EMBRAER 195                         |  |          |                                       |     |           |  | 30   |           |      |  | 30       |     |  |  | 30  |     |  |  | 30  | 
|                                          | In the Defense Market          |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | EMB 145 AEW&C/RS/MP                 |  |          | 8                                      |     |           |  | 12   |           |      |  | 12       |     |  |  | 15  |     |  |  | 10  | 
|                                          |                                |          | EMB 312 Tucano/EMB 314
Super Tucano |  |          |                                       |     |           |  |     |           |      |  |         |     |  |  | 86  |     |  |  | 86  | 
|                                          |                                |          | AM-X                                |  |          | 4                                      |     |           |  | 1    |           |      |  |         |     |  |  |    |     |  |  |    | 
|                                          |                                |          | EMB 145                             |  |          |                                       |     |           |  |     |           |      |  | 2        |     |  |  | 1   |     |  |  |    | 
|                                          |                                |          | EMB 135                             |  |          |                                       |     |           |  | 1    |           |      |  | 2        |     |  |  | 1   |     |  |  |    | 
|                                          | In the Corporate Market        |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | Legacy/EMB 135                      |  |          |                                       |     |           |  |     |           |      |  | 29       |     |  |  | 66  |     |  |  | 58  | 
|                                          | In the General Aviation Market |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     |  | 
|                                          |                                |          | Light aircraft                      |  |          |                                       |     |           |  | 2    |           |      |  |         |     |  |  |    |     |  |  |    | 
|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|Total backlog (in aircraft)               |                                |          | 284                                 |  |          |                                        | 386 |           |  |      | 646       |      |  |          | 645 |  |  |     | 528 | 
|                                          |                                |          |                                     |  |          |                                        |     |           |  |      |           |      |  |          |     |  |  |     |     | 
|Total backlog (in millions)               |                                | US$4,112 |                                     |  | US$6,365 |                                        |     | US$11,421 |  |      | US$10,693 |      |  | US$9,034 |    



---

|(1) |  | Subsequent to December 31, 2002, we received 126 net additional firm
orders for our EMBRAER 170/190 jet family.
|--- |  | ---------------------------------------------------------------------------------------------------------------

4



---



##### 



Exchange Rates

There are two foreign exchange markets in Brazil that are subject to
regulation by the Brazilian Central Bank, or the Central Bank, both of which
operate at free-floating rates:



| |  |  | the free rate foreign exchange market, also known as the commercial market, and
| | - |  | -------------------------------------------------------------------------------
|
| |  |  | the floating rate foreign exchange market.                                     

In 1999, the Central Bank unified the operational limits applicable to
both markets. However, each market continues to have a specific regulation.
Most trade and financial foreign exchange transactions, including transactions
relating to the purchase or sale of preferred shares or the payment of
dividends with respect to preferred shares or ADSs, are carried out on the
commercial market at the applicable commercial market rate. Purchase of
foreign currencies in the commercial market may be carried out only through a
Brazilian bank authorized to buy and sell currency in that market. In both
markets, rates are freely negotiated but may be strongly influenced by Central
Bank intervention.

Between March 1995 and January 1999, the Central Bank permitted the
gradual devaluation of the realagainst the U.S. dollar pursuant to an exchange
rate policy that established a band within which the real/U.S. dollar exchange
rate could fluctuate.

Responding to pressure on the real, on January 13, 1999, the Central Bank
widened the foreign exchange band. Because the pressure did not ease, on
January 15, 1999, the Central Bank allowed the realto float freely. The real
reached a low of R$1.4659 per US$1.00 on January 15, 1999 and a high of
R$3.9552 per US$1.00 on October 22, 2002. At June 16, 2003, the commercial
market rate for purchasing U.S. dollars was R$2.8508 to US$1.00. We cannot
assure you that the realwill not appreciate or devalue substantially in the
near future.

The following table shows the commercial selling rate for U.S. dollars for
the periods and dates indicated.

|                        |      |  |                                   |        |      |  |             |        |            |  |  |        |  |  |  |        | 
|----------------------- | ---- |  | --------------------------------- | ------ | ---- |  | ----------- | ------ | ---------- |  |  | ------ |  |  |  | ------ | 
|                        |      |  | Exchange Rate of Reais to US$1.00
|                        |      |  |                                  
|                        |      |  | Low                               |        | High |  | Average (1) |        | Period-end
|                        |      |  |                                   |        |      |  |             |        |           
|Year ended December 31, |      |  |                                   |        |      |  |             |        |            |  |  |        |  |  |  |       
|                        | 1998 |  |                                   | 1.1165 |      |  |             | 1.2087 |            |  |  | 1.1611 |  |  |  | 1.2087 | 
|                        | 1999 |  |                                   | 1.2078 |      |  |             | 2.1647 |            |  |  | 1.8158 |  |  |  | 1.7890 | 
|                        | 2000 |  |                                   | 1.7234 |      |  |             | 1.9847 |            |  |  | 1.8295 |  |  |  | 1.9554 | 
|                        | 2001 |  |                                   | 1.9357 |      |  |             | 2.8500 |            |  |  | 2.3532 |  |  |  | 2.3204 | 
|                        | 2002 |  |                                   | 2.2709 |      |  |             | 3.9552 |            |  |  | 2.9309 |  |  |  | 3.5333 | 

|            |                                 |  |                                   |  |  |  |     |        |      |  |  |        |  |  |  |  | 
|----------- | ------------------------------- |  | --------------------------------- |  |  |  | --- | ------ | ---- |  |  | ------ |  |  |  |  | 
|            |                                 |  | Exchange Rate of Reais to US$1.00
|            |                                 |  |                                  
|            |                                 |  |                                   |  |  |  | Low |        | High |  |  |        | 
|            |                                 |  |                                   |  |  |  |     |        |      |  |  |        | 
|Month ended |                                 |  |                                   |  |  |  |     |        |      |  |  |       
|            | December 31, 2002               |  |                                   |  |  |  |     | 3.4278 |      |  |  | 3.7980 | 
|            | January 31, 2003                |  |                                   |  |  |  |     | 3.2758 |      |  |  | 3.6623 | 
|            | February 28, 2003               |  |                                   |  |  |  |     | 3.4832 |      |  |  | 3.6580 | 
|            | March 31, 2003                  |  |                                   |  |  |  |     | 3.3531 |      |  |  | 3.5637 | 
|            | April 30, 2003                  |  |                                   |  |  |  |     | 2.8898 |      |  |  | 3.3359 | 
|            | May 31, 2003                    |  |                                   |  |  |  |     | 2.8653 |      |  |  | 3.0277 | 
|            | June 30, 2003 (through June 16) |  |                                   |  |  |  |     | 2.8504 |      |  |  | 2.9776 | 



---

| | Source: Central Bank.
| | ---------------------
|

|(1) |  | Represents the daily average exchange rate during each of the
relevant periods.
|--- |  | -------------------------------------------------------------------------------

We will pay any cash dividends and make any other cash distributions with
respect to the preferred shares in Brazilian currency. Accordingly, exchange
rate fluctuations may affect the U.S. dollar amounts received by the

5



---



##### 



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 realand the U.S. dollar may also affect the U.S. dollar equivalent
of the realprice of the preferred shares on the São Paulo Stock Exchange.

3B. Capitalization and Indebtedness

Not applicable.

3C. Reasons for the Offer and Use of Proceeds

Not applicable.

3D. Risk Factors

Risks Relating to Embraer

A downturn in the regional aircraft market 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 regional aircraft, particularly the ERJ 145 regional
jet family and the EMBRAER 170/190 jet family. Historically, the market for
regional 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 aviation industry has been negatively impacted by a number
of factors beginning in 2001. First, the U.S. and world economies have been
experiencing an economic downturn that began in 2001 and is characterized by
rapid declines in securities markets, a decline in productivity and an increase
in unemployment. Second, the terrorist attacks of September 11th caused an
immediate decline in airline travel and a high level of financial uncertainty
among the worldwide airline industry. Many airlines faced, and continue to
face, a reduction in demand, escalating insurance costs, increased security
costs, increasing fuel costs and, in some cases, credit downgrades, liquidity
concerns and bankruptcy. Finally, 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. As a result, we have agreed to modify certain
delivery schedules to adjust to the changes in our customers businesses and
have reduced scheduled regional, corporate jet and government transportation
aircraft deliveries in 2002 to 131 aircraft as compared to planned 2002
deliveries of 205 at August 31, 2001 and reduced 2003 scheduled deliveries to
110 aircraft from planned 2003 deliveries of 148 as of December 31, 2002. We
have also re-evaluated our risk exposure related to aircraft valuations and
customer credit risk, which resulted in charges to income. A further downturn
in general economic conditions could result in further reduction in the
passenger aircraft market and decreased orders for our regional aircraft.

We cannot, at this time, predict the magnitude or duration of the impact
that the above events will have on the 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 regional
aircraft or change its operating requirements. Because our regional 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 regional aircraft. Future delays
or decreases in the number of regional aircraft delivered in any year would
likely reduce our sales and revenue, and consequently our profitability, for
that year.

6



---



##### 



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

Civil aircraft. We rely on a limited number of customers for a
substantial portion of our total net sales. As of June 30, 2003, our largest
customers were ExpressJet, American Eagle, JetBlue Airways, US Airways, Wexford
and Swiss International Airlines, Ltd., or SWISS. At the same date, 78.5% of
our firm orders in backlog for the ERJ 145 were attributable to ExpressJet,
55.3% of our options for the ERJ 145 were attributable to ExpressJet and US
Airways, and 81.1% of our firm orders and 55.6% of our options for the ERJ 140
were from American Eagle. In addition, at June 30, 2003, JetBlue Airways, US
Airways and GE Capital Aviation Services together represented 77.9% of firm
orders in backlog and 80.9% of options for the EMBRAER 170/190 jet family, and
65.5% of our firm orders in backlog and 61.0% of our options for the Legacy,
our new line of corporate jets, were from Swift Aviation Services. We believe
that we will continue to depend on a limited number of large customers, the
loss of any of which could reduce our sales and reduce our market share. Fewer
sales could reduce our profitability.

Defense aircraft. The Brazilian Air Force is our largest customer of
defense aircraft products. Sales to the Brazilian government accounted for
31.8% of our defense sales for the year ended December 31, 2002. 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 sales and defense research and development funding.
Given past statements by the Brazilian government of its intent to reduce its
overall level of spending, 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 expense. 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. 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.

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.

In July 1998, the Canadian government initiated a proceeding at the World
Trade Organization, or WTO, accusing the Brazilian government of granting
prohibited export subsidies relating to sales of aircraft to foreign purchasers
under the ProEx program. The Brazilian government countered, accusing the
Canadian government of granting prohibited export subsidies to the Canadian
aircraft industry. On April 14, 1999, the WTO declared the portions of the
ProEx program relating to Brazilian aircraft financing, and some aspects of the
Canadian aircraft financing programs, to be prohibited export subsidies.
Following appeals, the WTO formally decided on August 20, 1999 to give Brazil
until November 18, 1999 to withdraw the prohibited export subsidies or make any
necessary adjustments to bring the program into compliance with WTO rules. On
April 28, 2000, the WTO concluded that Brazil had failed to comply with the
earlier ruling to remove prohibited subsidies by November 18, 1999. In
particular, the WTO concluded that the issuance of ProEx benefits after
November 18, 1999 pursuant to letters of commitment issued by the Brazilian
government to our customers prior to November 18, 1999 were prohibited export
subsidies. The WTO also concluded that the amended version of the ProEx
program, adopted in response to

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the WTOs August 1999 ruling, still decreased effective interest rates for
regional aircraft to below commercial market levels and thus continued to
provide a prohibited export subsidy. In July 2000, the WTO confirmed this
decision after an appeal by the Brazilian government. The Brazilian government
publicly announced that it would honor its contractual commitments to our
customers. As a result of Brazils continuing to provide ProEx benefits under
its contractual commitments, the WTO dispute settlement body granted Canada the
authority to impose up to US$1.4 billion in trade sanctions over five to six
years against Brazil. Canada has not yet imposed sanctions. We cannot predict
what form, if any, these sanctions will take and whether such sanctions will
adversely affect our business. The Brazilian government subsequently amended
the ProEx program so that any ProEx payments would not decrease the effective
interest rate below the interest rate permitted by the WTO. On August 23,
2001, the dispute settlement body of the WTO determined the revised ProEx
program was in full compliance with WTO rules.

Although this ruling confirms ProExs compliance with WTO rules, the ProEx
program or 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.

In 2001, the Canadian government agreed to provide up to US$1.1 billion of
low-interest financing to Air Wisconsin, an affiliate of United Airlines, to
fund its purchase of Bombardier regional jets. The Brazilian government
challenged these subsidies and, in January 2002, a WTO panel declared that such
subsidies were illegal and required Canada to withdraw the funds. The panel
also found that, since 1996, two airlines in addition to Air Wisconsin had been
recipients of illegal subsidies. As a result, the dispute settlement body of
the WTO authorized Brazil to apply retaliatory measures against Canada in the
amount of US$248 million. Officials of the Canadian government have indicated
that they intend to continue providing support to Bombardier. Any future
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.

The Brazilian and Canadian governments have entered into negotiations
regarding government support for aircraft exports. We cannot assure you that
any agreement will be reached.

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-eximprogram, 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. At December 31, 2002, approximately 48.0% of our
backlog (in terms of value) was subject to financing by the BNDES-eximprogram.
As government-sponsored programs, the ProEx program and the BNDES-eximprogram
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, a decrease in the amounts available under the ProEx program caused
us to make other financing arrangements for affected customers. In addition,
from time to time, government-sponsored financing programs such as ProEx or
BNDES-eximcan be subject to challenge. 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
Embraer.

We face a number of challenges resulting from the development of new
products and our expansion into new markets.

As we continue to develop the EMBRAER 170/190 jet family, we will have to
continue reallocating existing resources and coordinating with new suppliers
and risk-sharing partners. We also need to recruit, retain and motivate
additional highly skilled engineers and other personnel to assist us in our
research and development activities, which are essential to the success of our
current and future programs. There is significant competition within the
aviation industry for skilled personnel in general and engineers in particular.
As a result, we may be unable to recruit the necessary number of highly
skilled engineers and other personnel we require. Failure to

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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.

Finally, 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 if certification for these aircraft is not obtained.

Our risk-sharing partners have contributed to us a total of US$250.6
million for the development of the EMBRAER 170/190 jet family as of December
31, 2002. If we cancel the development and production of the EMBRAER 170/190
jet family because we are unable to obtain certification or for other
non-market related reasons, we may be obligated to refund all or a part of
these cash contributions. If we require additional financing and we are unable
to obtain it, we will not be able to develop and market our EMBRAER 170/190 jet
family.

Our aircraft sales are subject to cancellation provisions, repurchase and
trade-in options and financial and residual value guarantees that may reduce
our cash flow or require us to make significant cash disbursements in the
future.

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 the customer to receive financing, when required,
with respect to any aircraft by the scheduled delivery date of such
aircraft, in which case the customer could cancel the order for the
particular aircraft to be financed or terminate the contract with
respect to all undelivered aircraft; or
|
| |  |  | exceeding production rate limits.                                                                                                                                                                                                                                                                             

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.

We may also have to repurchase a number of our aircraft. Under the
relevant purchase contracts, the price per aircraft of any required repurchase
is less than the original purchase price of the aircraft and less than our
estimate at that time of the market value of the relevant aircraft type in
future years (based on third party appraisals of aircraft valuations). If we
are required to repurchase all of the relevant aircraft under our repurchase
obligation, which covers the period from 2003 to 2007, we could be required to
pay up to approximately US$500 million for these aircraft.

At December 31, 2002, 34 of our regional jets were subject to trade-in
options and additional aircraft may become subject to trade-in options upon
delivery. These options provide that the trade-in price can be applied to the
price of an upgraded model or any of our other aircraft. The trade-in price is
determined in the manner discussed above for regional jets and as a percentage
of the original purchase price for our corporate jets. We may be required to
accept trade-ins at trade-in prices that are above the then-market price of the
aircraft, which would result in financial loss for us when we resell the
aircraft.

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We also 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 our customers under their
financing arrangements to mitigate default-related issues. These guarantees
are collateralized by the financed aircraft. Our residual value guarantees
typically ensure that in the 15th year after delivery, the relevant aircraft
will have a residual market value of 10% to 27% of the original sale price. In
the event of a decrease in the market value of the underlying aircraft, we will
bear the difference between the then market value of the aircraft and the
guaranteed residual value.

Assuming all customers supported by financial guarantees defaulted on
their aircraft financing arrangements, we were required to pay the full
aggregate amount of outstanding residual value guarantees and we were not able
to sell or lease any of the aircraft to offset our obligations, our maximum
exposure under these guarantees (less provisions and liabilities) would have
been US$1.4 billion as of December 31, 2002. See Note 37 to our consolidated
financial statements for a further discussion of these off-balance sheet
arrangements. We have deposited US$187.4 million in escrow accounts to secure
a portion of our financial guarantees. Although we believe that the estimated
value of the covered aircraft, on an aggregate basis, is currently sufficient
to cover our exposure, we may 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 such as we are currently experiencing.

We recorded a charge against income of US$14.5 million in 2002, based on
our risk assessment, on an individual aircraft basis, of our guarantees. We
continually re-evaluate our risk under guarantees and repurchase 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. Any future decrease in the market value of the aircraft covered by
repurchase obligations, trade-in rights or 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 or repurchase obligation, 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
repurchase, trade-in or guarantee obligations could require us to make
significant cash disbursements in a given year, which in turn would reduce our
cash flow in that year.

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

The worldwide regional jet 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 Industrie and Bombardier Inc.,
all of which are large international companies. These and other of our
competitors have greater financial, marketing and other resources than we do.
Although we have achieved a significant share of the market for our regional
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 regional jet aircraft market over the long term requires continued
technological and performance enhancements to our products. Our primary
competitor in the regional jet market is Bombardier Inc., a Canadian company,
which has significant technological capabilities, financial and marketing
resources and benefits from government-sponsored export subsidies. In
addition, other major international aircraft manufacturers, including The
Boeing Company and Airbus Industrie, produce or are developing aircraft at the
high end of the 81-110 seat segment, 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, Bombardier recently commenced delivery of
its 70-seat regional jet prior to the initial deliveries of the EMBRAER 170.
As a new entrant to the corporate 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.

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We may have to make significant payments as a result of unfavorable
outcomes of pending challenges to various taxes and social 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 social charges. Interest on the total amount of these
unpaid taxes and social 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 (expense) item of our statements of income. As of December 31,
2002, we had obtained preliminary injunctions for not paying or recovering past
payments in the total amount, including interest, of US$186.9 million, which is
included as a liability on our balance sheet. We cannot assure you that we
will prevail in these proceedings or that we will not have to pay significant
amounts, including penalties and interest, to the Brazilian government in the
future as payment for these liabilities.

Risks Relating to the Regional Aircraft Industry

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

A key limiting factor in demand for regional 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 aircraft
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 regional jets in an airlines
fleet. Most scope clauses are aimed at limiting 50-70 seat jets. 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 are limited. The continuation or further
tightening of scope clauses could also lead some of our customers who have
purchased options to acquire our regional 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
regional 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 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 FAA, the Joint Aviation Authority of Europe, the
European aviation authority, and the Chinese aviation authority, must certify
our aircraft before we can deliver them. A recommendation by the European
aviation authority is a requirement for certification of an aircraft by the
aviation authorities of most European countries. 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. 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
preferred shares and the ADSs.

We believe that our reputation and the safety record of our aircraft are
important selling points for our aircraft. 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. Due to our relative position in the aircraft market and because
we have focused on products in the regional aircraft segment, the occurrence of
one or more catastrophic events involving one of our aircraft could adversely
affect our entire regional jet family as well as our reputation and future
sales.

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Risks Relating to Brazil

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

The Brazilian economy has been characterized by frequent, and occasionally
drastic, intervention by the Brazilian government and by volatile economic
cycles. The Brazilian governments actions to control inflation and affect
other policies have involved wage and price controls, currency devaluations,
capital controls and limits on imports, among other things. Our business,
financial condition, results of operations and the market price of the
preferred shares and the ADSs may be adversely affected by changes in policy
involving tariffs, exchange controls and other matters, as well as other
factors outside of our control such as:



| |  |  | fluctuations in exchange rates;                                                      
| | - |  | -------------------------------------------------------------------------------------
|
| |  |  | base interest rate fluctuations;                                                     
|
| |  |  | inflation and price instability;                                                     
|
| |  |  | liquidity of domestic capital and lending markets;                                   
|
| |  |  | tax policy;                                                                          
|
| |  |  | structural and investment deficiencies in the energy sector; and                     
|
| |  |  | other political, diplomatic, social and economic developments in or affecting Brazil.

Rapid changes in Brazilian political and economic conditions that have
already occurred and that might continue will require continued emphasis on
assessing the risks associated with our activities and adjusting our business
and operating strategy. 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, financial condition
and results of operations.

Our business could be significantly affected by political instability in
Brazil. In the elections in October 2002, Brazilian voters elected a new
president from the Workers Party, Luís Inácio Lula da Silva, known as Lula. In
the period leading up to and following his election, there was substantial
uncertainty relating to the policies that the new government would pursue,
including the potential implementation of macroeconomic policies that differed
significantly from those of the prior administration. This uncertainty
resulted in a loss of confidence in the Brazilian capital markets and the
continued devaluation of the real. Although the new government has not yet
departed in any material way from previous policies, it is premature to
determine what policies might be implemented, whether these policies will be
effective and how investors and the capital markets will react to them. Any
substantial negative reaction to the policies of the Brazilian government could
adversely affect our business, operations and the market price of our preferred
shares and ADSs.

Inflation and certain governmental measures 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 preferred shares and the ADSs.

Brazil has historically experienced extremely high rates of inflation.
Inflation itself, certain governmental measures to combat inflation and public
speculation about possible future measures have in the past had significant
negative effects on the Brazilian economy, contributing to economic uncertainty
in Brazil and to heightened volatility in the Brazilian securities markets.

Since the reals introduction in July 1994 under the RealPlan, Brazils
inflation rate has been substantially lower than in previous periods. If
Brazil experiences substantial inflation again in the future, our operating
expenses

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and borrowing costs may increase, our operating and net margins may
decrease and, if investor confidence decreases, the price of the preferred
shares and ADSs may fall.

Exchange rate instability may result in uncertainty in the Brazilian
economy and the Brazilian securities market and could lower the market value of
the preferred shares and the ADSs.

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

As a result of inflationary pressures, the Brazilian currency has been
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. From time to time, there have been significant
fluctuations in the exchange rates between the Brazilian currency and the U.S.
dollar and other currencies. More recently, the realdevalued against the U.S.
dollar by 9.3% in 2000 and 18.7% in 2001. During 2002, the realcontinued to
undergo significant devaluation due in part to continued economic and political
uncertainties in emerging markets and the global economic slowdown. In 2002,
the depreciation of the realrelative to the U.S. dollar totaled 52.3%. In the
first five months of 2003, the realappreciated 16.1%.

Devaluations of the realrelative to the U.S. dollar would reduce the U.S.
dollar value of distributions and dividends on the ADSs and may also reduce the
market value of the preferred shares and the ADSs. Devaluations also create
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 realagainst 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. The potential impact of the
floating exchange rate and of measures of the Brazilian government aimed at
stabilizing the realis uncertain.

Developments in other countries, particularly other emerging market
countries, may adversely affect the Brazilian economy, may make it more
difficult or expensive for us to obtain additional debt financing and,
therefore, may affect the market price of the preferred shares and the ADSs.

Securities of Brazilian issuers have been, to varying degrees, influenced
by economic and market conditions in other countries, particularly emerging
market countries. Although economic conditions differ in each country,
investors reactions to developments in one country may affect the securities
of issuers in other countries, including Brazil. Since the fourth quarter of
1997, the international financial markets have experienced significant
volatility, and a large number of market indices, including those in Brazil,
have declined significantly. For example, the political crisis in Venezuela,
the recession in Argentina, the economic difficulties of Ecuador and Turkey,
the Asian economic crisis, and the 1998 Russian debt moratorium and devaluation
of the Russian currency triggered market volatility in Brazils and other
emerging market countries securities markets. See Item 5A. Operating ResultsBrazilian Economic Environment for a discussion of recent events. In the
third week of September 2001, upon the reopening of the New York Stock Exchange
after its closure for four business days following the September 11th terrorist
attacks in the United States, the Dow Jones Industrial Average experienced its
largest single-week decline since the 1930s. In the same period, the Ibovespa,
the index of the São Paulo Stock Exchange, experienced a decline of 18.1%.

These events discouraged investment worldwide, including international
investment in Brazil, and, more directly, has caused a decline in the market
for our preferred shares and ADSs. In addition, the continuation of the
Argentine recession and the recent devaluation of the peso could affect the
Brazilian economy, as Argentina is one of South Americas largest economies.
Further negative developments in the international financial markets,
especially in South America, may adversely affect our financial condition and
our ability to obtain debt financing on acceptable terms or at all. We cannot
assure you that the Brazilian securities markets will not continue to be
affected negatively by events elsewhere, especially in Argentina, Venezuela and
other emerging markets, or that these events will not adversely affect the
market price of our preferred shares and ADSs.

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Risks Relating to the Preferred Shares and the ADSs

Exchange controls and restrictions on remittances abroad may adversely
affect the holders of our ADSs.

The Brazilian government may impose temporary restrictions on the
conversion of Brazilian currency into foreign currencies and on the remittance
to foreign investors of proceeds from their investments in Brazil. The
Brazilian government imposed remittance restrictions for a number of months in
1989 and early 1990. These restrictions would hinder or prevent the conversion
of dividends, distributions or the proceeds from any sale of preferred shares,
as the case may be, from reaisinto U.S. dollars and the remittance of the U.S.
dollars abroad. We cannot assure you that the Brazilian government will not
take similar measures in the future. Holders of our ADSs could be adversely
affected by delays in, or refusals to grant, any required governmental approval
for conversion of realpayments and remittances abroad in respect of the
preferred shares underlying the ADSs. In such a case, the depositary for the
ADSs will hold the reaisit cannot convert for the account of the ADR holders
who have not been paid. The depositary will not invest the reaisand will not
be liable for interest on those amounts.

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

The Brazilian custodian for the preferred 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 preferred shares or upon the disposition of the preferred
shares. If holders of ADSs decide to exchange their ADSs for the underlying
preferred 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 preferred shares unless they obtain their own electronic certificate of
registration or register their investment in the preferred 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 preferred 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 preferred shares
or the return of their capital in a timely manner. 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, the disposition of the underlying
preferred shares or the repatriation of the proceeds from disposition will not
be imposed in the future.

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

Investing in securities, such as the preferred shares or the ADSs, of
issuers from emerging market countries, including Brazil, involves greater risk
than investing in securities of issuers from more developed countries, and such
investments are generally considered speculative in nature.

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 preferred shares or ADSs to sell the preferred shares
underlying the ADSs at the price and time desired. See Item 9C. MarketsTrading on the São Paulo Stock Exchange.

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Because we are subject to different corporate rules and regulations as a
Brazilian company, holders of our ADSs have fewer and less well-defined
shareholders rights.

Our corporate affairs are governed by our bylaws and the Brazilian
Corporate Law, which differ from the legal principles that would apply if we
were incorporated in a jurisdiction in the United States, such as Delaware or
New York, or in other jurisdictions outside Brazil. As a result, the holders
of the ADSs or the holders of our preferred shares may have fewer and less
well-defined rights under Brazilian Corporate Law with which to protect their
interests against actions by our board of directors and our principal
shareholders than under the laws of those jurisdictions outside Brazil.

Although the Brazilian Corporate Law imposes restrictions on insider
trading and price manipulation, the Brazilian securities markets are not as
highly regulated and supervised as the U.S. securities markets or markets in
other jurisdictions. In addition, rules and policies against self-dealing and
regarding the preservation of minority shareholder interests may be less
well-defined and enforced in Brazil than in the United States, putting holders
of the preferred shares and ADSs at a potential disadvantage. Corporate
disclosures may be less complete or informative than what may be expected of a
U.S. public company. Specifically, among other differences when compared to,
for example, Delaware general corporation law, Brazilian Corporate Law and
practice has less detailed and well-established rules and judicial precedents
relating to the review of management decisions against duty of care and duty of
loyalty standards in the context of corporate restructurings, transactions with
related parties and sale-of-business transactions. In addition, the Brazilian
Corporate Law provides that shareholders must hold 5% of the outstanding share
capital of a corporation to have standing to bring shareholders derivative
suits, and shareholders ordinarily do not have standing to bring a class
action.

Also, in accordance with Brazilian Corporate Law, holders of our preferred
shares, and therefore our ADSs, are not entitled to vote at meetings of our
shareholders except in limited circumstances. See Item 10B. Memorandum and
Articles of IncorporationDescription of Capital StockVoting Rights of
the Preferred Shares.

Changes to the Brazilian Corporate Law were approved by the Brazilian
Congress and became effective as of March 2002. Such changes may adversely
affect the rights of holders of our ADSs. See Item 10B. Memorandum and
Articles of AssociationChanges to the Brazilian Corporate Law.

The Brazilian government has veto power over major corporate actions; our
controlling shareholders act in concert to control Embraer.

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). In addition, under the terms of a shareholders agreement, our
controlling shareholdersCia. Bozano, Caixa de Previdência dos Funcionários
do Banco do BrasilPREVI, also known as PREVI, and Fundação SISTEL de
Seguridade Social, also known as SISTELact in concert to vote 60% of the
outstanding shares of our common stock, allowing them to elect a majority of
the members of our board of directors and to determine the outcome of any
actions requiring shareholder approval, including corporate reorganizations and
the timing and payment of future dividends.

The sale of a substantial number of preferred shares, or the belief that
this may occur, could decrease the trading price of the preferred shares and
the ADSs; holders of our preferred 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 preferred shares, or the belief that this
may occur, could decrease the trading price of our preferred shares and our
ADSs. As of December 31, 2002, we had 470,429,907 preferred shares
outstanding. Of this amount, holders of exchangeable notes that were issued in
June 2001 by Banco Nacional de Desenvolvimento Econômico e SocialBNDES, the
Brazilian National and Social Development Bank, also known as BNDES, have the
right to acquire, at any time prior to the maturity of the notes, an aggregate
of 7,279,200 ADSs, representing 29,116,800 preferred shares currently owned by
BNDES Participações S.A.BNDESPAR, also known as BNDESPAR, a wholly owned
subsidiary of BNDES, subject to adjustment. As a consequence of the issuance
of preferred shares or sales by existing shareholders, the market price of the
preferred shares and, by

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extension, the ADSs may decrease significantly. As a result, the holders
of our ADSs and/or preferred shares may not be able to sell their securities at
or above the price they paid for them.

Our share price may be affected by potential dilution of our preferred
shares and the ADSs.

The issuance of preferred shares pursuant to our stock option plan could
substantially dilute the preferred shares. Under the terms of our stock plan,
we were authorized to grant options to purchase up to 25,000,000 preferred
shares over the five-year period from the date of the first grant of options
pursuant to the plan. As of the end of this five-year period, we had granted
options for an aggregate of 19,665,000 preferred shares. The options granted
to each employee generally 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. As of December 31, 2002, options representing 7,196,313
preferred shares have already been exercised and options representing 4,757,218
preferred shares are exercisable in 2003.

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

Holders of our ADSs may not be able to exercise the preemptive rights
relating to the preferred 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.

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 by
the Brazilian government in 1994. In connection with our privatization, we
were transformed into a publicly held corporation and we operate under the
Brazilian Corporate Law. 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 our subsidiary, Embraer Aircraft Holding, Inc.,
with offices at 276 S.W. 34th Street, Ft. Lauderdale, Florida 33315.

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, corporate and defense 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 business to develop our regional aircraft business.

Our first major 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. The Bandeirante was followed by
the development of the EMB 120 Brasília, a high performance, pressurized
turboprop commercial aircraft seating up to 30 passengers and 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 defense aircraft for the Brazilian
Air Force, we developed the ERJ 145 regional jet family, our first jet product
for commercial use. We are expanding our jet product line with the development
of the EMBRAER 170/190 jet family, designed to serve the aircraft markets
trend towards larger, higher volume and longer range jets. We are also
marketing and selling the Legacy, a line of corporate jets based on our ERJ 135

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regional jet, with several improvements including longer range. For the
Defense market, we also offer a line of Intelligence, Surveillance and
Reconnaissance aircraft based on the ERJ 145 regional jet.

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, and
Société Nationale dÉtude et de Construction de Moteurs dAviation, or SNECMA,
which we refer to collectively as the European Aerospace and Defense Group,
purchased as a single investor 20% of the outstanding common stock of Embraer
from our existing common shareholders, a majority of which was from our
controlling shareholders. We believe that this alliance will continue to
assist us in the development of new defense products and enable us to expand
our defense markets. For example, we integrated Thales mission systems and
electronic equipment in some of our EMB 145 AEW&C/RS/MP aircraft.

Joint Ventures and Acquisitions

In 2000, we entered into a joint venture with Liebherr International AG to
develop and manufacture landing gear and high precision hydraulic equipment and
provide related services for Embraer and other clients around the world. In
connection with this joint venture, we formed a new subsidiary, ELEB - Embraer
Liebherr Equipamentos do Brasil S.A.

In March 2002, we acquired the operating assets of Celsius Aerotech Inc.
in Nashville, Tennessee from Reliance Aerotech Inc. in order to provide full
service maintenance and repair services for our regional and corporate aircraft
in the United States.

In December 2002, we entered into a joint venture with Harbin Aircraft
Industry (Group) Co., Ltd. and Hafai 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.

Research and Development Costs and Capital Expenditures

Research and development costs, including the development of the new
EMBRAER 170/190 jet family, were US$69.6 million in 2000, US$99.6 million in
2001 and US$158.5 million in 2002. Research and development costs as a
percentage of our net sales were 2.5% in 2000, 3.4% in 2001 and 6.3% in 2002.
The increases in research and development costs as a percentage of our net
sales in 2001 and 2002 reflect principally the costs related to the EMBRAER
170/190 jet family.

Our investments in property, plant and equipment totaled US$114.2 million
in 2000, US$143.8 million in 2001 and US$127.7 million in 2002. The
investments in 2001 and 2002 related to construction of facilities,
improvements to our plant and production facilities and modifications for the
production of new aircraft models.

We expect our future research and development costs to increase as a
result of the continued development of the EMBRAER 170/190 jet family. In
2003, we expect research and development costs to total approximately US$167.0
million and we expect investments in property, plant and equipment to total
approximately US$58.0 million, which will primarily be related to improvements
to and expansion of our facilities, in particular for the production of the
EMBRAER 170/190 jet family, as well as our defense aircraft and corporate jets.

4B. Business Overview

We are one of the leading manufacturers of commercial aircraft in the
world, based on 2002 net sales of commercial aircraft, with a global customer
base. We focus primarily on manufacturing regional aircraft, which accounted
for 83.6% of our net sales in 2002. We are the leading supplier of defense
aircraft for the Brazilian Air

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Force based on number of aircraft sold, and we have also sold aircraft to
military forces in Europe and Latin America. In addition, we have developed a
new line of corporate jets based on one of our regional jets. For the year
ended December 31, 2002, we generated net sales of US$2,525.8 million, of which
approximately 97.7% was U.S. dollar-denominated. At June 30, 2003, we had a
total backlog in orders of US$10.3 billion, including 450 regional jets.

Our Strengths

We believe that our primary strengths are:

Leading Regional Jet Manufacturer with a Global Customer Base.We are a
leading manufacturer of regional and mid-capacity jets with a strong global
customer base. We have sold our regional jets to 31 customers in 20 countries.
Our customers include some of the largest regional airlines in the world.

Aircraft Design; Cost and Operating Efficiency.We produce 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. The flexibility of our regional jet families
also enables us to cost-effectively develop new aircraft to meet specific
customer needs and to target new markets.

Strategic Risk-Sharing Partners.With our regional and mid-capacity jet
families, 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 contributed their own funds to
research and develop these systems and components, thereby reducing our
development costs. These risk-sharing partners also funded 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.

Benefits of Funded Development of Defense Technology.Research and
development costs related to defense aircraft historically have been funded in
large part by the Brazilian government. We are able to apply the technological
developments we acquire from our defense technology to applications in our
commercial business. For example, we developed our regional jet family based
on the AM-X program developed for the Brazilian Air Force. In addition, we
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 fixed costs, allow
us to increase or decrease our production in response to market demand without
significantly impacting our margins.

Experienced and Highly Skilled Workforce. Our employees are experienced
and highly skilled. Over 23% of our workforce is comprised of engineers. Due
to the high level of knowledge and skill possessed by our employees, we are
able to efficiently pursue new programs and provide our customers with
additional technical expertise and guidance.

Business Strategies

Aggressively Market Our Mid-capacity Jet Family.We are aggressively
marketing our mid-capacity platform, the EMBRAER 170/190 jet family. 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, and also with
other airlines that are optimizing their fleet in order to adjust capacity to
meet demand in less dense routes. Additionally, we believe that our new
mid-capacity jet family will provide us with significant opportunities to
increase our competitiveness by offering our customers a full range of regional
aircraft.

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Develop Our Strategic Alliance with European Aerospace and Defense Group.
We believe our strategic alliance with the European Aerospace and Defense Group
will enhance our defense business. We intend to enhance our technological
capabilities and increase our production and marketing of innovative defense
products. We also intend to increase our international marketing presence for
our defense products through joint marketing efforts with members of the
European Aerospace and Defense Group.

Increase Focus on Customer Support.Providing high quality customer
support is critical to our ability to maintain long-term relationships with our
customers. As the number of our aircraft in operation continues to grow, we
have 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 our 2002 acquisition
of a Nashville, Tennessee aircraft service center. We intend to continue to
focus on providing our customers with high quality customer support.

Expand Risk-Sharing Arrangements.We intend to maintain or expand the
role of risk-sharing partners in the production process for our aircraft in
order to reduce production costs and streamline the management of our
suppliers. Having fewer suppliers enables us to minimize our production costs
while allocating additional risk for the production of integrated systems to
our risk-sharing partners.

Diversify Revenues.We intend to diversify our revenues through our
corporate jet segment and our defense segment.



| |  |  | Increase Penetration into the Defense Market.We plan to
develop and market additional defense products and thereby increase
sales in this segment of our business. We intend to increase our
participation in the international defense market by actively
marketing our existing products initially developed for the
Brazilian Air Force, including the EMB 145 AEW&C, the EMB 145 RS,
the EMB 145 MP and the Super Tucano (ALX).                                                                                                    
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Cost-Effectively Develop a Line of Corporate Jets.We have
developed the Legacy, a new line of corporate jets based on the ERJ
135 regional jet, to provide to businesses, including fractional
ownership companies, a cost-effective alternative to commercial
airline travel. In developing the Legacy, we used the same design
and risk-sharing arrangements of our ERJ 135 regional jet. As a
result, we were able to develop the Legacy without the substantial
financial investment normally associated with a new product launch.

Pursue Strategic Growth Opportunities.We intend to pursue strategic
growth opportunities, which may include joint ventures, acquisitions and other
strategic transactions. For example, we intend to expand our presence in China
through our joint venture with AVIC II. We believe that the market for
regional aircraft in China is strong and currently underserved. We believe
this market will create incremental growth for our future revenues.

Regional Aircraft Business

We design, develop and manufacture a range of regional aircraft. Our
regional aircraft business is our primary business, accounting for 83.6% of our
net sales for the year ended December 31, 2002.

Products

We developed the ERJ 145, a 50-passenger twin turbofan-powered regional
jet, 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-passenger 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 currently developing our 70-108 seat platform, the EMBRAER 170/190 jet
family, to serve the trend in the regional aircraft 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.

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ERJ 145 Regional Jet Family

The ERJ 145 is a twin turbofan-powered regional jet 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 and the Australian aviation authority in June
1998. 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 at 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 145 regional jet family also allows for standardized pilot
certification and maintenance procedures. 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.

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
long-range, or LR, version, which features a larger fuel tank, more powerful
engines and significantly greater maximum fully loaded range (l,700 nautical
miles) than the standard version. 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
long-range, or LR, version, which features a larger fuel tank, more powerful
engines and significantly greater maximum fully loaded range (1,630 nautical
miles) than the standard version. We began delivering the ERJ 140 in July
2001.

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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 will be a
70-passenger jet, and the EMBRAER 175 will be a 78-passenger jet, while the
EMBRAER 190 series will include the 98-passenger EMBRAER 190 and the
108-passenger EMBRAER 195.

We expect to receive certification of the EMBRAER 170 in 2003, the EMBRAER
175 in 2004, the EMBRAER 190 in 2005 and the EMBRAER 195 in 2006. The EMBRAER
170 made its maiden flight on February 19, 2002 and, as of June 2003, has flown
more than 2000 hours as part of its flight test program. We have completed the
joint design definition phase and are currently producing the first prototypes
of the EMBRAER 175 and EMBRAER 195. The EMBRAER 175 made its maiden flight on
June 14, 2003. We are currently in the preliminary development phase of the
EMBRAER 190.

We designed the EMBRAER 170/190 jet family to maximize the benefits of
commonality, with aircraft in the family sharing 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 regional jet family will have
engines fixed under its main wingsa design intended to enhance power,
improve fuel economy and minimize turnaround times. All of the aircraft models
will be powered by engines manufactured by General Electric and will 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
will have a maximum cruising speed of Mach .8, or 470 knots. The
EMBRAER 170 and the EMBRAER 175 will have maximum fully loaded
ranges of 1,800 and 1,600 nautical miles, respectively, and will be
available in long-range, or LR, versions, with maximum fully loaded
ranges of 2,100 and 1,900 nautical miles, respectively. The EMBRAER
190 and EMBRAER 195 will have maximum fully loaded ranges of 1,800
and 1,400 nautical miles, respectively, and will also be available
in LR versions with maximum fully loaded ranges of 2,300 and 1,800
nautical miles, respectively. The LR versions of all four jets in
the EMBRAER 170/190 jet family will feature larger fuel tanks and
more powerful engines than the standard versions of these aircraft.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Cabin and cargo space.We have enhanced passenger safety and
comfort in the EMBRAER 170/190 jet family. The aircrafts
double-bubble design will enable a four-abreast cabin, a wide
aisle, greater interior space and headroom and a larger baggage
floor compartment than the existing mid-capacity jets of our
competitors, as well as 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 regional aircraft 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, 2002, we have delivered
347 EMB 120 Brasílias for the regional market and five EMB 120 Brasílias for
the defense market. We currently manufacture the EMB 120 Brasília only upon
customer request.

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Customers

While we have focused our efforts on the U.S. and European markets to
date, we have achieved a diverse, global customer base for our aircraft,
principally in the regional jet market. Our major customers of regional
aircraft include some of the largest regional airlines in the world. As of
June 30, 2003, our largest customers are ExpressJet, American Eagle, JetBlue
Airways, US Airways, Wexford and SWISS. 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.

We generally sell our regional 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,
repurchase 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 cancellation provisions, repurchase and trade-in options and
financial and residual value guarantees that may reduce our cash flow or
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 regional airline market and our assessment of the current and future
needs of our customers. We actively market our aircraft to regional 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 vision of the market, competitive
analysis, product enhancement planning and airline analysis. In terms of
direct marketing to our customers, we rely heavily on addressing 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; Melbourne, Australia; Ft. Lauderdale, Florida, USA; Beijing,
China; and Singapore. We will sell our ERJ 145 regional jet family in the
Chinese market exclusively though our joint venture in China.

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 regional 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.

With respect to options to purchase our aircraft, we customarily receive
US$100,000 for each aircraft in the ERJ 145 regional jet family and US$200,000
for each aircraft in the EMBRAER 170/190 jet family. 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 contract. Once a customer decides to exercise an

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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 allowed customers to convert their firm
orders or options for one aircraft into firm orders or options for another
aircraft within the same regional jet family.

Competition

We generally face competition from major manufacturers in the
international regional 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. In the 30-60 seat category, the main competitor of the ERJ 135 and the
EMB 120 Brasília aircraft is the De Havilland DHC-8-200, a turboprop aircraft.
The main competitors of the ERJ 145 regional jet family are:



| |  |  | the CRJ-100/200/440, manufactured by Bombardier;                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the 328Jet previously developed and manufactured by
Fairchild Dornier and now manufactured to order by Avcraft
Aviation LLC;
|
| |  |  | the ATR-42, manufactured by ATR G.I.E., a joint
project of Italys Alenia Aerospaziale and EADS; and                        
|
| |  |  | the DHC-8-300, manufactured by De Havilland.                                                                                

Only Bombardiers CRJ-100/200/440 are jet aircraft. Fairchild Dornier
filed for bankruptcy protection in April 2002, and the 328Jet is currently
marketed and manufactured to order by Avcraft Aviation LLC. Given the success
of our regional jet family and the significant barriers to entry into the
market, due principally 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 increase our market share for the ERJ 145 regional jet
family.

In the 61-90 and 91-120 seat categories, we face our strongest
competition. Currently, there are three aircraft in the segment, De
Havillands DHC-8-400, a 72-seat turboprop, ATRs ATR72, a 72-seat turboprop,
and Bombardiers CRJ-700, a 70-seat regional jet, which was first delivered in
January 2001. Bombardier has also launched the larger CRJ-900 aircraft, which
seats 85 passengers and began deliveries in January 2003, before the expected
delivery of our EMBRAER 175. In the larger end of the category, Boeing has
launched the 717-200, a 106-112 seat jet. Furthermore, Airbus developed a 100+
seat jet, the A318, which was certified by the Joint Aviation Authority of
Europe, or JAA, in May 2003. 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 with our competitors on the basis of our global customer
base, aircraft performance, low operating costs, product development
experience, market acceptance, cabin design and aircraft price.

Defense Business

We design, develop, integrate and manufacture a wide range of defense
products, principally transport, training, light attack and surveillance
aircraft. We are the leading supplier of defense aircraft to the Brazilian Air
Force based on number of aircraft sold. 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, 2002, we had
sold 519 defense aircraft to the Brazilian government and 525 defense aircraft
to other military forces. Our defense business accounted for 5.0% of our net
sales for the year ended December 31, 2002.

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,

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including those of Brazil, the United Kingdom, France, Argentina, Egypt,
Colombia, Paraguay, Peru and Venezuela. We are developing the Super Tucano, or
the AL-X (Aeronave Leve de Ataque, or Light Attack Aircraft). The Super Tucano
offers 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. We are currently marketing the
Super Tucano. The AL-X is being developed under a contract with the Brazilian
Air Force, with FINEP providing US$21.7 million in research and development
debt financing, of which US$4.4 million was outstanding as of December 31,
2002. 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 76 of these aircraft and an
additional 23 options from the Brazilian Air Force. One prototype of the AL-X
has been flying since 1995, and the maiden flight of the first pre-production
aircraft occurred in May 1999. We expect first delivery to be made by the end
of 2003. 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.

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 to create the EMB 145 AEW&C, with ground remote
sensing capability to create the EMB 145 RS, and with marine remote sensing
capability to create 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. We, Ericsson and Thales are jointly
marketing these aircraft worldwide. At December 31, 2002, 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, and, as of
December 31, 2002, we had delivered four EMB 145 AEW&Cs and one EMB 145 RS. In
October 1999, the Greek government, represented by the Hellenic Air Force,
ordered four EMB 145 AEW&C aircraft that will be used in the Greek governments
aerospace early warning and control system. Under the same contract, the Greek
government purchased one ERJ 135 aircraft for special transportation and
support needs. In addition, in February 2001, the Mexican government ordered
one EMB 145 AEW&C aircraft and two EMB 145 MP aircraft.

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. Each of Embraer and the Italian partners supplies the other
with different key components and systems of the aircraft. In addition, each
of Embraer and the Italian partners is free to market the aircraft
independently and 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, of which 55 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. In September 1999, we
won the bid for a contract for the sale of a number of AMX-Ts to the Venezuelan
government.

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 will integrate multi-mode radar, advanced
navigation and attack systems and enhanced self-protection systems into the
existing aircraft under a

24



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program known as F-5BR. In March 2002, we formed a consortium with
Dassault, Thales and SNECMA to bid on the development and manufacture of up
to 24 fighter jets for the Brazilian Air Force. The planned jet, the Mirage
2000 BR, is modeled on the Dassault Mirage 2000-5 supersonic jet. As leaders
of the consortium, we would have coordination and management responsibilities
in the program. As a result of this consortium and as part of our strategic
alliance agreement, Dassault would transfer to us the technology for the
Mirage, enabling us to have full control over the project technology as well.
In addition, we intend to market our Legacy line of corporate jets to the
Brazilian and other governments, modified to meet the added security needs of
these customers. For example, we entered into a contract with the Belgian Air
Force for two EMB 135s and two EMB 145s modified to transport government
officials, of which two EMB 135s and one EMB 145 were delivered in 2001 and one
EMB 145 was delivered in 2002.

Competition

Our defense products 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 the Raytheon T-6A
Texan II. The EMB 145 AEW&C competes against the Northrop-Grumman E-2C II
Hawkeye 2000 and the Lockheed-Martin C-130J AEW&C. In addition, Boeing has
announced that it will develop the B737 AEW&C aircraft, with advanced warning
and remote sensor capabilities, which is expected to enter the market in 2005.
The AM-X/AMX-T competes with the British Aerospace Hawk-100, the Aermacchi
MB-339FD and the Aero Vodochody L-159.

Corporate Jet Business

We have developed a line of corporate jets, the Legacy, based on our ERJ
135 regional jet. We are marketing the new line of corporate jets to
businesses, including fractional ownership companies. Our corporate jet
business accounted for 5.7% of our net sales for the year ended December 31,
2002, resulting from the delivery of eight Legacy jets.

We offer our line of corporate jets in two versions: executive and
corporate shuttle. The Legacy was designed to provide customers with a
cost-effective alternative to commercial regional airline travel. 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 of our line of corporate jets have a
maximum cruising speed of Mach .8, or 470 knots.

We developed our line of corporate jets by building upon our extensive
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 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 does not require
separate FAA, European aviation authority or Brazilian aviation authority
approval. The executive version of the Legacy was certified by the Brazilian
aviation authority in December 2001, by the JAA in July 2002 and by the FAA in
August 2002. As a new entrant to the corporate jet market, we face significant
competition from companies with longer operating histories and established
reputations in this industry. Many of these manufacturers have greater
financial, marketing and other resources than we do. These competitors include
Dassault Aviation, Cessna Aircraft Co., Bombardier Inc., Israel Aircraft
Industries, General Dynamics and Raytheon.

We take orders and build backlog for our line of corporate jets in the
same manner as for our regional aircraft. We include an 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, three 5% progress payments
and full payment of the balance due upon delivery, in the same manner as for
our regional aircraft. We generally receive US$100,000 for each option to
purchase a corporate jet, with the terms of the options being substantially the
same as those for our regional aircraft.

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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. 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 aircraft and
crop dusters. Our other related businesses accounted for 5.7% of our net sales
for the year ended December 31, 2002.

We entered into a joint venture with Liebherr International AG to develop
and manufacture landing gear and high precision hydraulic equipment and provide
related services for Embraer and other clients around the world. In connection
with this joint venture, we formed a new subsidiary, ELEB, to which we
transferred all of our landing gear manufacturing activities, the employees and
some liabilities related to those activities. On May 22, 2000, Liebherr
International AG, acting in coordination with its subsidiary, Liebherr
Aerospace Lindenberg GmbH, and through its Brazilian affiliate, purchased 40%
of the capital stock of ELEB. Liebherr-Aerospace SAS is our risk-sharing
partner responsible for designing, developing and manufacturing the landing
gear assemblies for the new EMBRAER 170/190 jet family.

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 regional and defense 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;                                          
|
| |  |  | 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 grows. 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. As
we deliver the aircraft we have in our backlog, we expect our after-sales
support and spare parts business to grow proportionately. See Customer
Service and Product Support below for a further discussion of our customer
service facilities and arrangements.

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 six-passenger
aircraft are produced only on demand and are used by corporations as executive
aircraft and by air-taxi companies. At December 31, 2002, we had delivered a
total of 2,326 of these aircraft. We also developed a crop duster aircraft
pursuant to specifications of the Brazilian

26



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Ministry of Agriculture. These aircraft are produced only on demand. At
December 31, 2002, we had delivered a total of 862 of these aircraft.

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, 
|                            |       |     |                         
|                            |       |     | 2000                     |         |  | 2001 |         |         | 2002
|                            |       |     |                          |         |  |      |        
|                            |       |     | (in millions of dollars)
|Regional Aircraft:          |       |     |                          |         |  |      |         |         |      |     |         |        
|Americas (excluding Brazil) |       | US$ | 1,377.0                  |         |  | US$  | 1,800.7 |         |      | US$ | 1,772.2 |        
|Europe                      |       |     | 1,021.1                  |         |  |      | 644.5   |         |      |     | 290.5   |        
|Brazil                      |       |     |                         |         |  |      | 18.1    |         |      |     |        |        
|Other                       |       |     | 55.0                     |         |  |      | 89.2    |         |      |     | 47.6    |        
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|                            | Total |     | US$                      | 2,453.1 |  |      | US$     | 2,552.5 |      |     | US$     | 2,110.3 | 
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|Corporate Jets              |       |     |                          |         |  |      |         |         |      |     |         |        
|Americas (excluding Brazil) |       |     | 26.5                     |         |  |      | 72.6    |         |      |     | 86.6    |        
|Europe                      |       |     |                         |         |  |      |        |         |      |     | 58.3    |        
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|                            | Total |     | US$                      | 26.5    |  |      | US$     | 72.6    |      |     | US$     | 144.9   | 
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|Defense Aircraft            |       |     |                          |         |  |      |         |         |      |     |         |        
|Americas (excluding Brazil) |       |     |                         |         |  | US$  | 6.9     |         |      | US$ | 13.3    |        
|Europe                      |       |     | 26.8                     |         |  |      | 74.0    |         |      |     | 73.5    |        
|Brazil                      |       |     | 72.4                     |         |  |      | 43.1    |         |      |     | 40.5    |        
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|                            | Total |     | US$                      | 99.2    |  |      | US$     | 124.0   |      |     | US$     | 127.3   | 
|                            |       |     |                          |         |  |      |         |         |      |     |         |        
|Other Related Business      |       | US$ | 183.4                    |         |  | US$  | 177.9   |         |      | US$ | 143.3   |        
|                            |       |     |                          |         |  |      |         |         |      |     |         |        

In addition, in an attempt to expand into new markets, we entered into a
joint venture in December 2002 with Harbin Aircraft Industry (Group) Co., Ltd.
and Hafai 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 will
contribute US$12.8 million in cash and tooling to the joint venture in 2003.
Our joint venture partners have contributed the land use rights in Harbin,
China and will contribute US$12.7 million in cash and facilities to the joint
venture in 2003. First deliveries by the joint venture company are scheduled
for December 2003.

Suppliers and Components; Risk-Sharing Arrangements

We do not manufacture all of the parts and components used in the
production of our aircraft. Approximately 84% to 90% of the production costs
of our ERJ 145 regional jet family, 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 regional
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 regional jet business, 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

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expense. This dependence makes us susceptible to the performance, quality
and financial condition of these risk-sharing partners.

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, is a Spanish
company owned by Iberdrola S.A., a European power utility, and Banco
Bilbao Vizcaya, a large Spanish financial institution. Gamesa
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
Embraer. The partnering relationship with these suppliers results in lower
production costs and higher product quality for the ERJ 145 regional jet
family. Our line of corporate jets benefits from the risk-sharing arrangements
with Gamesa, Sonaca and ENAER. In addition, the interior of the executive
version of the Legacy will be provided by The Nordam Group, Inc.

Other 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 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.
Our ongoing supplier relationships depend on cooperation, performance and the
maintenance of competitive pricing.

EMBRAER 170/190 Jet Family

We are developing the EMBRAER 170/190 jet family together with
risk-sharing partners that will supply key systems for the aircraft. Our
supplier arrangements for the EMBRAER 170/190 jet family will differ from the
ERJ 145 regional jet family in that we intend to use fewer suppliers. In the
EMBRAER 170/190 jet family, each risk-sharing partner will be 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 will be supplied by companies that are not
risk-sharing partners. The assumption of responsibility for systems by our
risk-sharing partners lowers our capital expenditures and thereby decreases our
development risks, 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 supplies CF34-8E/l0E turbofan engines and
designs, develops and manufactures the engine nacelles;
| | - |  | ------------------------------------------------------------------------------------------------------------------

28



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| |  |  | Honeywell supplies the avionics systems;                                                                                                                                                                               
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Liebherr is responsible for designing, developing and manufacturing the landing gear assemblies;                                                                                                                       
|
| |  |  | Kawasaki, a Japanese company, 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., develops and produces the
aircrafts tail core, auxiliary power unit, electrical systems and
the air management system;
|
| |  |  | Sonaca is responsible for the aircrafts wing slats;                                                                                                                                                                   
|
| |  |  | Gamesa is responsible for the rear fuselage and the vertical and horizontal tail surfaces;                                                                                                                             
|
| |  |  | Latecoere, a French company, manufactures two of the three fuselage sections;                                                                                                                                          
|
| |  |  | C&D Aerospace designs, develops and manufactures the aircraft interior; and                                                                                                                                            
|
| |  |  | Grimes Aerospace Company, a U.S. company and a wholly owned
subsidiary of AlliedSignal Inc., develops and manufactures the
exterior and cockpit lighting.                                                              

If we cancel the development of the EMBRAER 170/190 jet family because we
are unable to obtain certification of the aircraft from the applicable
regulatory authorities or for other reasons, then we may be obligated to refund
up to the full amount of the cash contributions from these suppliers. However, we generally do not
need to refund these contributions as a result of insufficient market demand.
At the same time, our rights to the cash contributions also depend on
satisfactory completion of a number of steps in our production process. We
believe that these financial commitments are a strong endorsement of our
aircraft design and our ability to execute our business plan.

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

Customer Service and Product Support

Customer satisfaction and service is critical to our success. 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 have
also outsourced distribution services through a facility in Weybridge, United
Kingdom. 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
(CASC). We also intend to provide support services through our joint venture
in China for aircraft sold by the joint venture. In March 2002, we acquired
the operating assets of Celsius Aerotech Inc. in Nashville, Tennessee from
Reliance Aerotech Inc. We provide full service maintenance and repair services
for our regional and corporate aircraft at this Nashville service center,
enhancing our level of service to our customers in the United States. Through
our customer focus, we aim to enhance customer loyalty and, ultimately,
increase sales.

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

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to major customers prior to the first delivery of their aircraft and
provide advice on maintenance and operation. They also monitor our customers
spare parts needs and maintain customers inventories.

We provide 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, USA; Le Bourget, France; and Melbourne, Australia. 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 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
will provide 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. In addition, in 2001 we launched a new
website, AEROChain, to provide a web-based platform for the exchange of
information with our suppliers and customers. Through AEROChain, suppliers may
view supply chain information and customers may make purchases as well as
obtain technical services and learn aircraft maintenance, repair and overhaul
techniques.

Aircraft Financing Arrangements

We generally do not provide long-term financing directly to our customers.
We assist our customers in obtaining financing arrangements through different
sources such as leasing arrangements and the BNDES-eximprogram. In addition,
we help our customers qualify for the ProEx program. On a case by case basis,
we have provided short-term financing, at market rates, to customers who have
completed or are negotiating other financing arrangements and have not received
funding in time for delivery. We have also provided guarantees for a portion
of the financing of aircraft for certain of our customers. See Notes 7, 8 and
37 to our consolidated financial statements.

We assist customers in their aircraft financing through leasing
arrangements, principally through leasing companies, U.S. leveraged leases,
U.K. tax leases and French tax leases. These arrangements accounted for
approximately 64.0% of the firm orders (in terms of value) we had with our
customers at December 31, 2002. Leasing arrangements through leasing companies
generally involve the purchase by a leasing company of our aircraft 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. See Note 8 to our consolidated financial statements.

The BNDES-eximprogram, a Brazilian government-sponsored program, provides
our customers with direct financing for Brazilian exports of goods and
services. At December 31, 2002, approximately 48.0% of our backlog (in terms
of value) was financed by the BNDES-eximprogram.

Our customers also benefit from the ProEx program, a Brazilian
government-sponsored program of interest rate adjustments. Under the ProEx
program, which is intended to offset Brazils country risk, foreign customers
that buy selected products made in Brazil, such as our aircraft, receive the
benefits of interest rate discounts. A substantial percentage of our customers
benefit from the ProEx program.

See Item 3D. Risk FactorsRisks Relating to Embraer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 for a discussion of challenges to and
pending negotiations regarding the ProEx program.

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 and in
the European Union. At December 31, 2002, we had approximately 44 trademarks.
Our registered trademarks are generally renewed at the end of their validity
period,

30



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which usually runs from 10 years from the date of application for
registration. Brazil provides mechanisms to protect trademarks that are
similar to the federal registration systems available in the United States.

Government Regulation and Aircraft Certification

We are subject to regulation by several regulatory agencies, both in
Brazil and abroad. These agencies principally regulate certification of
aircraft and of manufacturers. We must obtain certification in each
jurisdiction in which our aircraft operate commercially. In addition, our
products are subject to regulation in Brazil and in each jurisdiction where our
customers are located. The competent authority for the certification of our
aircraft in Brazil is the Departamento de Aviação Civil, or DAC (Civil Aviation
Department), through the Brazilian Aviation Register  RAB, currently under the
supervision of the Ministry of Defense. However, the Brazilian Congress is
presently considering a proposed law that aims to replace the DAC with an
independent regulatory agency to be named Agência Nacional de Aviação Civil, or
ANAC (National Civil Aviation Agency), which will then be the competent
Brazilian authority for the ruling, supervision and certification of aircraft
and commercial aircraft operations. The aviation authorities in other
countries include the FAA, the JAA, the European aviation authority and the
Chinese aviation authority. Some countries simply validate and complement the
Brazilian aviation authoritys original certification, following their own
rules. The Brazilian aviation authority has entered into a bilateral
certification agreement with the FAA under which most of the FAAs
certification requirements are included in the Brazilian aviation authoritys
certification process. This cooperation among regulatory authorities leads to
a faster certification process. The ERJ 145 received certification 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 executive version of the Legacy 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 is expected to be certified by the Brazilian aviation
authority, the FAA and the JAA by the end of 2003. The EMBRAER 175, EMBRAER
190 and EMBRAER 195 will need to be certified by the relevant authority prior
to delivery.

The FAA exercises strong influence over other authorities, such as the
Brazilian aviation authority and the aviation authority in Canada, and its
regulatory approval process is frequently followed by other regulatory bodies,
such as the aviation authority in Australia. In Europe, 27 affiliated
countries operate under the rules of the JAA. The JAA is not a certification
authority itself, but makes recommendations to several national authorities,
such as the aviation authorities of Germany, France, the United Kingdom, Spain
and The Netherlands. A recommendation by the JAA is a requirement for
certification of an aircraft by the aviation authorities of most European
countries. Each affiliated country has the right to adopt new rules or
complement the JAAs recommendations as it sees fit. A new European aviation
authority is expected to be created, to be called the European Aviation Safety
Agency  EASA, and will replace the JAA. EASA will be the official
certification authority for the European Union in the near future.
Certification is an ongoing process. Significant changes in the design of an
aircraft may require a separate certification. For example, the LR version of
the ERJ 145 had to be certified separately by all relevant authorities due to
its structural and design changes. However, any change in the aircraft
certification rules themselves will not require recertification of an aircraft
already certified.

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.

31



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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 BNDES and Banco do Brasil S.A. We lease, own or have the
right to use the following properties:

|                                                   |  |                                         |  |         |             |             |  |            |    |       |      |  |   |  |  | 
|-------------------------------------------------- |  | --------------------------------------- |  | ------- | ----------- | ----------- |  | ---------- | -- | ----- | ---- |  | - |  |  | 
|                                                   |  |                                         |  |         |             | Approximate |  |            |    |       |      |  |   | 
|                                                   |  |                                         |  |         |             | square      |  | Owned/     |    | Lease
|Location                                           |  | Purpose                                 |  | footage |             | Leased      |  | expiration
|                                                   |  |                                         |  |         |             |             |  |           
|São José dos Campos, SP, Brazil                    |  | Headquarters, principal                 |  |         | 5,902,102   |             |  | Owned      |    |       |     | 
|                                                   |  | manufacturing facility                  |  |         |             |             |  |            |    |       |      |  |   | 
|                                                   |  | and support center                      |  |         |             |             |  |            |    |       |      |  |   | 
|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*     |    |       |     | 
|Gavião Peixoto, SP, Brazil                         |  | Testing and manufacturing facilities    |  |         | 191,648,512 |             |  |            | ** |       |      |  |  | 
|São Paulo, SP, Brazil                              |  | Administrative offices                  |  |         | 5,245       |             |  | Leased     |    |       | 2007 | 
|Ft. Lauderdale, Florida, U.S.A.                    |  | Support center                          |  |         | 91,500      |             |  | Leased     |    |       | 2020 | 
|West Palm Beach, Florida, U.S.A.                   |  | Engineering offices                     |  |         | 16,800      |             |  | Leased     |    |       | 2005 | 
|Dallas, Texas, U.S.A.                              |  | Administrative offices                  |  |         | 1,600       |             |  | Leased     |    |       | 2003 | 
|Nashville, Tennessee, U.S.A.                       |  | Aircraft maintenance and support center |  |         | 125,260     |             |  | Leased     |    |       | 2018 | 
|Le Bourget, France                                 |  | Support center                          |  |         | 33,500      |             |  | Leased     |    |       | 2008 | 
|Melbourne, Australia                               |  | Support center                          |  |         | 12,126      |             |  | Leased     |    |       | 2003 | 
|Beijing, China                                     |  | Representative offices                  |  |         | 1,709       |             |  | Leased     |    |       | 2004 | 
|Singapore                                          |  | Representative offices                  |  |         | 2,239       |             |  | Leased     |    |       | 2004 | 



---

| | *  | Land owned pursuant to a land use rights certificate.                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | ** | We currently have a temporary authorization from the State of São
Paulo to use this facility and expect to receive a concession for the
use of this facility as soon as legal formalities are satisfied.

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 regional and defense aircraft are located in
São José dos Campos in the State of São Paulo, Brazil. We reduced the aircraft
production time of our regional jet aircraft from eight months in 1996 to 3.7
months in 2002. From December 31, 1999 to December 31, 2000, we increased our
production rate from 12 to 16 aircraft per month. At March 31, 2001, our
production rate was 16 aircraft per month. We have since decreased our
production to 11 aircraft per month in response to decreased market demand
after the September 11th terrorist attacks and the global economic slowdown.
We have the flexibility to increase production in the future in response to
increased demand. We build the EMB 120 Brasília according to market demand and
adjust production accordingly. To accommodate our current production of the
ERJ 145 regional jet family and the start of production of the EMBRAER 170/190
jet family, as well as any production of the line of corporate jets, we have
expanded our production facilities and acquired new facilities and will
continue to coordinate with our risk-sharing partners.

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We are constructing a new facility in Gavião Peixoto, in the State of São
Paulo, Brazil, which we anticipate will be used to enhance our flight testing
capabilities and provide a final assembly line for our defense and corporate
aircraft. As of December 31, 2002, we had invested US$35.6 million in the
construction of this new facility. This facility has been operational since
November 2002 and consists of a runway and other features to handle our
development of supersonic aircraft technology, as well as to handle flight
tests for our EMBRAER 170/190 jet family. The runway has been completed, the
hangars have been built and we conducted our flight tests for the EMBRAER 170
from this runway. In addition, 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 is also in the process of building 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 that 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 2000, 2001 and 2002, we
invested US$0.6 million, US$1.1 million and US$1.0 million, respectively, in
environmental matters and we anticipate spending approximately US$1.2 million
on environmental matters in 2003 for expenditures relating to the portion of
construction of new facilities and modification of existing facilities relating
to environmental compliance and improvements.

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 have been increasing our coverage
for aviation products liability as our fleet has grown. 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.

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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 Brazilian
shareholders, filing financial statements with the Comissão de Valores
Mobilários, 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 the Brazilian Corporate Law.

5A. Operating Results

Critical Accounting Policies

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 portrayal of our financial condition and results of
operation often requires our management 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.

Sales and Other Operating Revenues

We generally recognize sales of our regional and commercial aircraft as
deliveries are made. In our defense aircraft 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. Revenue recognized under this method is based on our
estimate of our progress towards completion. Certain contracts contain
provisions for the redetermination of price based upon future economic
conditions. Anticipated losses, if any, under these contracts are accrued when
known and are recorded based on managements estimate of such losses.

Product Warranties

Generally, aircraft sales are accompanied by a standard warranty for
systems, accessories, equipment, parts and software manufactured by us. 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,
which are typically expressed as a percentage of the sales price of the
aircraft. 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. The warranty period ranges from
two years for spare parts to five years for components that are a part of the
aircraft when sold.

We have provided guarantees of specified minimum levels of aircraft
performance based on pre-determined operational targets. Costs resulting from
a failure to meet these targets cannot be established until after delivery of
the aircraft. In the event that these target levels are not met, we may be
obligated to pay amounts to the affected customers as reimbursement for their
incremental operating or service costs. Losses related to such performance
guarantees are recorded at the time they are known, or when circumstances
indicate that the aircraft is not expected to meet the minimum performance
requirements, based on managements estimate of our ultimate obligation under

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the guarantee. In some cases, we may also be obligated to make
modifications after aircraft delivery due to improvement or performance of
aircraft. The costs related to these modifications are accrued when known.

Guarantees, Repurchase Commitments and Trade-Ins

We have provided sales incentives in the form of financial and residual
value guarantees, repurchase commitments 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 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.

Credit Risk

Credit
risk is the risk that we may incur losses if counterparties to our
contracts do not pay amounts owed to us. Our primary credit risk derives
from the sales of aircraft, parts and related services to our
customers, including the financial obligations related to these sales.

We grant
credit to our customers for the sale of spare parts and services
based upon an evaluation of the customers financial condition
and credit history. Customer credit analyses are continuously
monitored and we establish an allowance for doubtful accounts based
upon factors that include the credit risk of specific customers and
historical aging, collection and write-off trends. Our historical
experience in collecting accounts receivable falls within the
recorded allowances.

We may
also have credit risk related to the sale of aircraft while our
customers are finalizing the financing structures for their purchases
from us. To minimize these risks, customer credit analyses are
continuously monitored and we work closely with the financial
institutions to help facilitate customer financing.

We have
recognized an allowance for doubtful accounts, which we believe is
sufficient to cover potential losses on the realization of accounts
receivable.

Property, Plant and Equipment

Property, plant and equipment are stated on our balance sheet at cost.
 Depreciation is calculated using the straight line
method over the estimated useful life or utility of the assets. Improvements
to existing property that significantly extend useful life or utility are
capitalized. We review long-lived assets for impairment annually or whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. Recoverability of assets to be held and used is
measured by comparison of the carrying amount of the asset to our estimate of
undiscounted future net cash flows expected to be generated by the asset. If
we conclude that an asset is impaired, we recognize the impairment as the
amount by which the carrying amount of the asset exceeds its fair value. We
report assets to be disposed of at the lower of the carrying amount or fair
value less cost to sell.

Provisions for Contingencies

We are subject to contingencies for labor, tax, commercial and civil
litigation in the ordinary course of our business. We record losses for these
contingencies when we determine that the loss is probable and can be reasonably
estimated. Our assessment of the probability and amount of loss is based on a
number of factors, including legal advice and our managements estimate of the
likely outcome.

Recent Trends in the Airline Industry

The commercial aviation industry has been negatively impacted by a number
of factors beginning in 2001. First, the U.S. and world economies have been
experiencing an economic downturn that began in 2001 and is characterized by
rapid declines in securities markets, a decline in productivity and an increase
in unemployment. Second, the terrorist attacks of September 11th caused an
immediate decline in airline travel and a high level of financial uncertainty
among the worldwide airline industry. Many airlines faced, and continue to
face, a reduction in demand, escalating insurance costs, increased security
costs, increasing fuel costs and, in some cases, credit downgrades, liquidity
concerns and bankruptcy. Finally, 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. As a result, we agreed to modify certain
delivery schedules to adjust to the changes in our customers businesses and
have reduced scheduled regional, corporate jet and government transportation
aircraft deliveries in 2002 to 131 aircraft as compared to planned 2002
deliveries of 205 at August 31,

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2001 and reduced 2003 scheduled deliveries to 110 aircraft from planned
2003 deliveries of 148 as of December 31, 2002. In addition, the economic
downturn has caused us to revise our risk metrics related to our financial
guarantees and re-evaluate our exposure. A further downturn in general
economic conditions could result in further reduction in the passenger aircraft
market, decreased orders for our regional aircraft, increased exposure to
financial guarantees and additional charges against income. We cannot, at this
time, predict the magnitude or duration of the impact that these events will
have on the airline industry as a whole and on our business in particular.

In addition, the above events 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.                                                          

The uncertainty surrounding U.S., Brazilian and global economies could in
turn lead to 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.

Brazilian Economic Environment

The Brazilian economy has been characterized by frequent and occasionally
drastic intervention by the Brazilian government and by volatile economic
cycles. The Brazilian government has often changed monetary, taxation, credit,
tariff and other policies to influence the course of Brazils economy. 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.
Furthermore, Brazilian courts may issue rulings that could adversely affect
foreign investors or Brazilian political and economic conditions. In late
September 1999, a court in the State of Minas Gerais ruled that the
representatives on the board of directors of the minority foreign private
partners of Companhia Energética de Minas Gerais, a privatized electric utility
in that state, could no longer have veto power over corporate actions. In late
October 2000, Brazils Federal Supreme Court ruled that employee accounts in
the Brazilian unemployment compensation fund for the months of January 1989 and
April 1990 should have been adjusted using the real inflation rate in those
months rather than the official inflation rate previously used. The Brazilian
government has reached an agreement with the labor unions on this matter and is
currently making settlement payments, which may have an adverse effect on
Brazils federal budget and, therefore, amounts available to us or our
customers under Brazilian government financing programs. Changes in monetary,
taxation, 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, as well
as the Brazilian governments response to such developments. See Item 3D.
Risk FactorsRisks Relating to Brazil.

Rapid changes in Brazilian political and economic conditions that have
occurred and may occur in the future will require continued emphasis on
assessing the risks associated with our activities and adjusting 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. See Item 3D. Risk FactorsRisks Relating to Brazil.

Brazilian economic conditions may also be negatively affected by economic
and political conditions elsewhere, particularly in other South American and
emerging market countries. Although economic conditions are different in each
country, the reaction of investors in one country, may cause the capital
markets in other countries to fluctuate. Developments or conditions on other
emerging market countries have at times significantly affected the

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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.

For example, since 1999, the Argentine economy has been in a recession
marked by reduced levels of consumption and investment, increasing unemployment
and declining gross domestic product. During late 2001, Argentine depositors
withdrew their money from banks and sought to remit such funds abroad. In
early December 2001, the government restricted the rights of such depositors to
withdraw their funds. The economic crisis gave rise to increasing political
instability and eventually led to the announcement by Argentina that it would
impose a moratorium on the payment of its foreign debt. On January 3, 2002,
Argentina formally defaulted on debt held by certain foreign creditors. On
January 7, 2002, Argentina announced that it was devaluing its peso by 29%,
ending the pesos decade-old one-to-one peg with the U.S. dollar. In 2002, the
Argentine peso experienced a devaluation of over 200% against the U.S. dollar.
The situation in Argentina has negatively affected investors perceptions of
risks in Brazil.

The recent political crisis in Venezuela may also influence investors
perception of risk in Brazil. The continuation of the Venezuelan and Argentine
crises presents causes for concern relating to Brazils economic stability.
Although market concerns that similar crises would ensue in Brazil have not yet
become a reality, the volatility in market prices for Brazilian securities
increased in 2001 and 2002. Instability in the Brazilian financial markets
caused by the Argentine and Venezuelan crises and other developments in the
international financial markets may adversely affect our financial condition
and, specifically, our ability to raise capital when needed and the market
price of the preferred shares and ADSs.

The Brazilian government has also proposed a broad tax reform in Brazil,
mainly designed to reduce the public deficit through the increase in tax
collection. It is expected that the final tax reform bill will be submitted to
the Brazilian Congress during 2003. It is anticipated that the reform will
include the creation of a value-added tax on goods and services that would
replace six existing taxes (including contribution for social purposes, the
federal tax on industrial products and the state tax on circulation of goods
and services). In addition, the Contribuição Provisória sobre Movimentação
Financeira-CPMF, a provisional levy on checking account transactions, would be
replaced by a permanent federal tax on financial transfers. We may have a
higher tax burden if the tax reform bill is approved and implemented.

Effects of Inflation and Currency Exchange Fluctuations

Until July 1994, Brazil had for many years experienced 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, Brazilian inflation as measured by the General Market Index and
published annually by Fundação Getúlio 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 year:

|                                        |  |      |     |      |  |      |      |      |  |      |     |   |  |  |      |   |  |  |      |  
|--------------------------------------- |  | ---- | --- | ---- |  | ---- | ---- | ---- |  | ---- | --- | - |  |  | ---- | - |  |  | ---- | -
|                                        |  | 1998 |     | 1999 |  | 2000 |      | 2001 |  | 2002
|                                        |  |      |     |      |  |      |      |      |  |     
|Inflation (General Market
Price Index)  |  |      | 1.8 | %    |  |      | 20.1 | %    |  |      | 9.9 | % |  |  | 10.4 | % |  |  | 25.3 | %
|Devaluation (appreciation)
(R$ vs. US$) |  |      | 8.3 | %    |  |      | 48.0 | %    |  |      | 9.3 | % |  |  | 18.7 | % |  |  | 52.3 | %

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 realdevalues against the U.S.
dollar and increases when the realappreciates. In addition, many financial
instruments denominated in reaisare indexed for inflation. In periods of
devaluation of the real, we report (a) a remeasurement loss on real-denominated
monetary assets, which is offset, at least in part, by monetary indexation of
real-denominated financial instruments and (b) a remeasurement gain on
real-denominated monetary liabilities, which is offset, at least in part, by
the monetary indexation of real-denominated financial instruments.

37



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Finally, because revenues in our defense business have historically been
denominated principally in reais, while our costs for materials for this
segment have been principally denominated in U.S. dollars, devaluation of the
realhas adversely affected margins in our defense business. However, at the
anniversary date of each contract we are able, under our defense contracts with
the Brazilian government, to adjust prospectively our prices (in reais) upward
to reflect the adverse effects of devaluation. As our defense business becomes
more international and our defense sales more U.S. dollar-denominated, we
expect that our defense business will be less exposed to devaluation of the
real.

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.

|                            |                                |  |                 |     |      |           |      |     |          |  |  |    | 
|--------------------------- | ------------------------------ |  | --------------- | --- | ---- | --------- | ---- | --- | -------- |  |  | -- | 
|                            |                                |  | At December 31,
|                            |                                |  |                
|                            |                                |  | 2000            |     | 2001 |           | 2002
|                            |                                |  |                 |     |      |           |     
|Regional                    |                                |  |                 |     |      |           |      |     |          |  |  |   
|Deliveries                  |                                |  |                 |     |      |           |      |     |          |  |  |   
|                            | ERJ 145                        |  |                 | 112 |      |           |      | 104 |          |  |  | 82 | 
|                            | ERJ 135                        |  |                 | 45  |      |           |      | 27  |          |  |  | 3  | 
|                            | ERJ 140                        |  |                 |    |      |           |      | 22  |          |  |  | 36 | 
|                            | EMB 120 Brasília               |  |                 |    |      |           |      | 2   |          |  |  |   | 
|Defense                     |                                |  |                 |     |      |           |      |     |          |  |  |   
|                            | Deliveries                     |  |                 | 2   |      |           |      | 3   |          |  |  | 7  | 
|Corporate                   |                                |  |                 |     |      |           |      |     |          |  |  |   
|                            | Deliveries                     |  |                 | 2   |      |           |      | 5   |          |  |  | 8  | 
|Other Operating Information |                                |  |                 |     |      |           |      |     |          |  |  |   
|                            | Total backlog (in millions)(1) |  | US$11,421       |     |      | US$10,693 |      |     | US$9,034 | 



---

|(1) |  | Subsequent to December 31, 2002, we received 126 net additional firm
orders for our EMBRAER 170/190 jet family.
|--- |  | ---------------------------------------------------------------------------------------------------------------

Net Sales

We generate revenue primarily from the sale of regional aircraft, which
historically consists of our ERJ 145 regional jet family and our EMB 120
Brasília. We also generate revenue from the sale of defense aircraft,
including the EMB 312 Tucano, the AM-X, and the EMB 145 AEW&C/RS/MP
surveillance aircraft, and from the sale of our Legacy corporate jets. Net
sales of regional aircraft and corporate aircraft are denominated in U.S.
dollars. Of defense net sales, sales to the Brazilian government accounted for
31.8% in 2002. 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) and
single-source supply of structural parts and mechanical and hydraulic systems
to other aircraft manufacturers.

We recognize revenue for the sale of our regional and corporate 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 regional and
corporate 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%

38



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##### 



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 customer advances as a liability on our balance
sheet and, when we deliver the aircraft, these payments are recorded as net
sales.

As a result of a decrease in the amounts available under the ProEx program
in 1999, we assisted some of our affected customers in restructuring their
financing arrangements. In cases where we were not able to restructure these
arrangements, we provided special price adjustments to these customers to
maintain the effective interest rates in their original financing arrangements.
Upon delivery of an aircraft to these customers, we record these price
adjustments as deductions from gross sales on our income statement and under
accounts payable on our balance sheet. These deductions amounted to 2.4% of
our net sales in 2000, 1.3% of our net sales in 2001, and 1.0% of our net sales
in 2002.

Our sales contracts with our customers typically include adjustments to
the purchase price of the aircraft based on an escalation formula which
reflects, in part, inflation in the United States. With respect to options to
purchase our aircraft, we generally receive US$100,000 for each aircraft in the
ERJ 145 regional jet family and for each Legacy, US$200,000 for each aircraft
in the EMBRAER 170/190 jet family and US$50,000 for each EMB 120 Brasília. 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. We record each option payment as a customer advance on our balance
sheet. If an option is exercised, 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 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.                                                                                                                                                

39



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##### 



Results of Operations

The following table presents income statement data by business segment.

Summary Financial Data by Business

|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|--------------------------- | ------------------------------ | -------- | ------------------------ | -------- | -------- | ---------- | -------- | -------- | ---------- |  | -------- | -------- | -
|                            |                                |          | Operating income        
|                            |                                |          |                         
|                            |                                |          | Year ended December 31, 
|                            |                                |          |                         
|                            |                                |          | 2000                     |          | 2001     |            | 2002    
|                            |                                |          |                          |          |          |            |         
|                            |                                |          | (in millions of dollars)
|Net sales:                  |                                |          |                          |          |          |            |          |          |            |  |          |         
|                            | Regional                       |          | US$2,453.1               |          |          | US$2,552.5 |          |          | US$2,110.3 | 
|                            | Defense                        |          |                          | 99.2     |          |            |          | 124.0    |            |  |          | 127.3    |  
|                            | Corporate                      |          |                          | 26.5     |          |            |          | 72.6     |            |  |          | 144.9    |  
|                            | Other related businesses       |          |                          | 183.4    |          |            |          | 177.9    |            |  |          | 143.3    |  
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|                            |                                |          | 2,762.2                  |          |          |            | 2,927.0  |          |            |  | 2,525.8  |         
|Cost of sales and services: |                                |          |                          |          |          |            |          |          |            |  |          |         
|                            | Regional                       |          |                          | (1,692.3 | )        |            |          | (1,536.8 | )          |  |          | (1,243.9 | )
|                            | Defense                        |          |                          | (84.0    | )        |            |          | (105.2   | )          |  |          | (79.5    | )
|                            | Corporate                      |          |                          | (18.8    | )        |            |          | (47.0    | )          |  |          | (104.6   | )
|                            | Other related businesses       |          |                          | (84.2    | )        |            |          | (80.2    | )          |  |          | (103.7   | )
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|                            |                                |          | (1,879.3                 | )        |          |            | (1,769.2 | )        |            |  | (1,531.7 | )       
|Gross profit:               |                                |          |                          |          |          |            |          |          |            |  |          |         
|                            | Regional                       |          |                          | 760.8    |          |            |          | 1,015.7  |            |  |          | 866.4    |  
|                            | Defense                        |          |                          | 15.2     |          |            |          | 18.8     |            |  |          | 47.8     |  
|                            | Corporate                      |          |                          | 7.7      |          |            |          | 25.6     |            |  |          | 40.3     |  
|                            | Other related businesses       |          |                          | 99.2     |          |            |          | 97.7     |            |  |          | 39.6     |  
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|                            |                                |          | 882.9                    |          |          |            | 1,157.8  |          |            |  | 994.1    |         
|Operating expenses:         |                                |          |                          |          |          |            |          |          |            |  |          |         
|                            | Regional                       |          |                          | (122.6   | )        |            |          | (161.9   | )          |  |          | (177.5   | )
|                            | Defense                        |          |                          | (14.9    | )        |            |          | (20.9    | )          |  |          | (15.7    | )
|                            | Corporate                      |          |                          | (3.7     | )        |            |          | (9.3     | )          |  |          | (28.4    | )
|                            | Other related businesses       |          |                          | (52.5    | )        |            |          | (61.0    | )          |  |          | (30.8    | )
|                            | Unallocated corporate expenses |          |                          | (227.1   | )        |            |          | (253.3   | )          |  |          | (272.1   | )
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|                            |                                |          | (420.8                   | )        |          |            | (506.4   | )        |            |  | (524.5   | )       
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  
|Income from operations      |                                | US$462.1 |                          |          | US$651.4 |            |          | US$469.6 |           
|                            |                                |          |                          |          |          |            |          |          |            |  |          |          |  

40



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##### 



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,
|                                                     |                                                    |                         |                                             
|                                                     |                                                    |                         | 2000                                         |        | 2001 |  | 2002
|                                                     |                                                    |                         |                                              |        |      |  |     
|                                                     |                                                    |                         | (in millions of dollars, except percentages) |        |      |  |     
|Net sales                                            |                                                    | US$2,762.2              |                                              |        |      |  |      |  |  | 100.0 | %    |     | US$2,927.0 |  |          |        | 100.0 | % |      | US$2,525.8 |  |  |          | 100.0  | %
|Cost of sales and services                           |                                                    |                         | (1,879.3                                     | )      |      |  |      |  |  |       | 68.0 |     |            |  | (1,769.2 | )      |       |   | 60.4 |            |  |  | (1,531.7 | )      |   |  | 60.6 |    
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Gross profit                                         |                                                    |                         | 882.9                                        |        |      |  |      |  |  |       | 32.0 |     |            |  | 1,157.8  |        |       |   | 39.6 |            |  |  | 994.1    |        |   |  | 39.4 |    
|Operating expense                                    |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|                                                     | Selling expenses                                   |                         |                                              | (193.4 | )    |  |      |  |  |       |      | 7.0 |            |  |          | (212.1 | )     |   |      | 7.2        |  |  |          | (211.0 | ) |  |      | 8.4 | 
|                                                     | Research and development                           |                         |                                              | (69.6  | )    |  |      |  |  |       |      | 2.5 |            |  |          | (99.6  | )     |   |      | 3.4        |  |  |          | (158.5 | ) |  |      | 6.3 | 
|                                                     | General and administrative                         |                         |                                              | (96.6  | )    |  |      |  |  |       |      | 3.5 |            |  |          | (120.8 | )     |   |      | 4.1        |  |  |          | (109.7 | ) |  |      | 4.3 | 
|                                                     | Employee profit sharing                            |                         |                                              | (41.8  | )    |  |      |  |  |       |      | 1.5 |            |  |          | (43.7  | )     |   |      | 1.5        |  |  |          | (25.2  | ) |  |      | 1.0 | 
|                                                     | Stock compensation                                 |                         |                                              | (0.5   | )    |  |      |  |  |       |      |    |            |  |          | (1.1   | )     |   |      |           |  |  |          |       |   |  |      |    | 
|                                                     | Other operating expenses, net                      |                         |                                              | (19.6  | )    |  |      |  |  |       |      | 0.7 |            |  |          | (29.5  | )     |   |      | 1.0        |  |  |          | (20.5  | ) |  |      | 0.8 | 
|                                                     | Equity on income (loss) from affiliates            |                         |                                              | 0.8    |      |  |      |  |  |       |      |    |            |  |          | 0.3    |       |   |      |           |  |  |          | 0.4    |   |  |      |    | 
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Income from operations                               |                                                    |                         | 462.1                                        |        |      |  |      |  |  |       | 16.7 |     |            |  | 651.4    |        |       |   | 22.3 |            |  |  | 469.6    |        |   |  | 18.6 |    
|Non-operating income (expense)                       |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|                                                     | Interest income (expenses)                         |                         |                                              | (6.9   | )    |  |      |  |  |       |      | 0.2 |            |  |          | 47.5   |       |   |      | 1.6        |  |  |          | 80.5   |   |  |      | 3.2 | 
|                                                     | Financial transaction gain (loss), net             |                         |                                              | (24.6  | )    |  |      |  |  |       |      | 0.9 |            |  |          | (148.6 | )     |   |      | 5.1        |  |  |          | (135.6 | ) |  |      | 5.4 | 
|                                                     | Other non-operating income (expenses),
Net         |                         |                                              | 6.0    |      |  |      |  |  |       |      | 0.2 |            |  |          | (8.4   | )     |   |      | 0.3        |  |  |          | (1.4   | ) |  |      | 0.1 | 
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Income before income taxes                           |                                                    |                         | 436.6                                        |        |      |  |      |  |  |       | 15.8 |     |            |  | 541.8    |        |       |   | 18.5 |            |  |  | 413.0    |        |   |  | 16.4 |    
|                                                     | Provision for income taxes                         |                         |                                              | (117.4 | )    |  |      |  |  |       |      | 4.3 |            |  |          | (218.4 | )     |   |      | 7.5        |  |  |          | (188.5 | ) |  |      | 7.5 | 
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Income before minority interest                      |                                                    |                         | 319.2                                        |        |      |  |      |  |  |       | 11.6 |     |            |  | 323.4    |        |       |   | 11.0 |            |  |  | 224.5    |        |   |  | 8.9  |    
|                                                     | Minority interest                                  |                         |                                              | 1.5    |      |  |      |  |  |       |      | 0.1 |            |  |          | (0.4   | )     |   |      |           |  |  |          | (1.9   | ) |  |      | 0.1 | 
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Income before cumulative effect of
accounting change |                                                    |                         | 320.7                                        |        |      |  |      |  |  |       | 11.6 |     |            |  | 323.0    |        |       |   | 11.0 |            |  |  | 222.6    |        |   |  | 8.8  |    
|                                                     | Cumulative effect of accounting
change, net of tax |                         |                                              |       |      |  |      |  |  |       |      |    |            |  |          | 5.4    |       |   |      | 0.2        |  |  |          |       |   |  |      |    | 
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    
|Net income                                           |                                                    | US$320.7                |                                              |        |      |  |      |  |  | 11.6  | %    |     | US$328.4   |  |          |        | 11.2  | % |      | US$222.6   |  |  |          | 8.8    | %
|                                                     |                                                    |                         |                                              |        |      |  |      |  |  |       |      |     |            |  |          |        |       |   |      |            |  |  |          |        |   |  |      |    

2002 Compared with 2001

Net sales.Net sales decreased 13.7% from US$2,927.0 million in 2001 to
US$2,525.8 million in 2002. Regional net sales decreased 17.3% from US$2,552.5
million in 2001 to US$2,110.3 million in 2002. Defense net sales increased
2.7% from US$124.0 million in 2001 to US$127.3 million in 2002. Corporate net
sales increased 99.6% from US$72.6 million in 2001 to US$144.9 million in 2002.
Net sales from other related businesses decreased 19.5% from US$177.9 million
in 2001 to US$143.3 million in 2002.

The decrease in regional sales is primarily due to the rescheduling of
customer deliveries from 2002 to 2003 and thereafter, partially offset by a
better product mix and a higher average unit price. The increase in corporate
net sales resulted from the start of deliveries of the Legacy at the end of
2001. The decrease in net sales from other related businesses is mainly due to
a decrease in sales of spare parts, despite an increase in aircraft in service,
due to the economic downturn and our customers cost cutting measures.

41



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##### 



Cost of sales and services.Cost of sales and services decreased 13.4%
from US$1,769.2 million in 2001 to US$1,531.7 million in 2002, principally due
to the reduction in number of aircraft delivered during 2002. Cost of sales
and services as a percentage of net sales was relatively stable at 60.6% in
2002, in comparison to 60.4% in 2001.

Gross profit.Our gross profit decreased 14.1% from US$1,157.8 million in
2001 to US$994.1 million in 2002, primarily as a result of the reduction in
deliveries in the regional market. As a result of the decline in cost of sales
and services, our gross margin remained relatively stable at 39.6% in 2001
compared to 39.4% in 2002.

Operating expenses.Operating expenses increased 3.6% from US$506.4
million in 2001 to US$524.5 million in 2002. This increase was attributable
primarily to an increase of 37.2% in research and development from US$99.6
million in 2001 to US$158.5 million in 2002, principally related to higher
development costs for the EMBRAER 170/190 and the new versions of our other
regional and corporate jets as we approach the later stages of development.
Research and development is presented net of contributions from suppliers,
which are earned based on meeting specified milestones. In 2002, selling
expenses remained relatively stable, despite lower deliveries, due to both a
non-cash charge of US$14.5 million related to financial guarantees and a
US$11.6 million increase in our provision for warranties relating to extended
warranty terms for new aircraft deliveries. The US$14.5 million non-cash
charge was caused by the effect of the economic downturn in the airline
industry on our risk analysis of financial guarantees.

This increase in operating expenses was partially offset by a 9.2%
decrease in general and administrative expenses, from US$120.8 million in 2001
to US$109.7 million in 2002, a 42.3% decrease in profit sharing, from US$43.7
million in 2001 to US$25.2 million in 2002 and a 30.4% reduction in other
operating expenses, net, from US$29.5 million in 2001 to US$20.5 million in
2002.

The decrease in general and administrative expenses is primarily due to
the effects on the real-denominated portion of this item resulting from the
52.3% devaluation of the realduring 2002. The decrease in profit sharing is
related to the reduction in net income and dividends. Operating expenses as a
percentage of net sales increased from 17.3% in 2001 to 20.8% in 2002,
primarily as a result of the increases in research and development expenses as
well as the non-cash charge for guarantees and the increase in our provision
for warranties.

Interest income (expense).Interest income increased from US$47.5 million
in 2001 to US$80.5 million in 2002, despite lower average cash balances
primarily due to an increase of US$65.3 million in unearned gains on derivative
financial transactions and an increase in net monetary and exchange variations
due to the effects of the devaluation of the realon increased indexed net
liabilities in foreign currency, primarily taxes and social charges in dispute.
See Notes 18 and 22 to our consolidated financial statements.

Financial transaction gain (loss), net. Financial transaction loss, net
decreased from US$148.6 million in 2001 to US$135.6 million in 2002. These
amounts reflect the restatement of non-U.S. dollar-denominated assets and
liabilities into U.S. dollars and the decrease in net assets denominated in
reais, partially offset by a higher rate of devaluation of the reaisin 2002.

Other non-operating income (expense), net.Other non-operating expense,
net decreased from US$8.4 million in 2001 to US$1.4 million in 2002. The
decrease in 2002 was primarily due to a decrease in provisions for losses on
tax incentive investments from US$8.6 million in 2001 to US$0.7 million in
2002.

Provision for income taxes.Our provision for income taxes decreased from
US$218.4 million in 2001 to US$188.5 million in 2002 mainly due to lower
taxable profits under the Brazilian Corporate Law financial statements. Our
effective tax rate in 2002 was 45.6% as compared to 40.3% in 2001. Our
statutory tax rate in each year was 34%. The difference between the statutory
rate and the effective rates is due to differences in income before income
taxes under U.S. GAAP and the taxable income calculated under the Brazilian
Corporate Law.

Net income.As a result of the foregoing factors, our net income
decreased 32.2% from US$328.4 million in 2001 to US$222.6 million in 2002. Net
income decreased as a percentage of net sales. In 2001, net income was 11.2%
of net sales as compared to 8.8% in 2002.

42



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##### 



2001 Compared with 2000

Net sales.Net sales increased 6.0% from US$2,762.2 million in 2000 to
US$2,927.0 million in 2001. Regional net sales increased 4.1% from US$2,453.1
million in 2000 to US$2,552.5 million in 2001. Defense net sales increased
25.0% from US$99.2 million in 2000 to US$124.0 million in 2001. In 2000, we
entered the corporate jet market, which we account for as a separate business
segment. Corporate net sales increased 174.0% from US$26.5 million in 2000 to
US$72.6 million in 2001. Net sales from other related businesses decreased
3.0% from US$183.4 million in 2000 to US$177.9 million in 2001.

The increase in regional sales is primarily due to an increase in our
average unit price. The decrease in defense sales is primarily due to the
decrease in revenues related to research and development of the EMB 145
AEW&C/RS and the AL-X offset by the revenue resulting from deliveries of two
EMB 135s and one EMB 145 to the Belgian Government.

Cost of sales and services.Cost of sales and services decreased 5.9%
from US$1,879.3 million in 2000 to US$1,769.2 million in 2001, principally due
to decreased material costs resulting partially from contractual discounts and
a better product mix in 2001 and partially from write-offs of inventories in
2000.Cost of sales and services as a percentage of net sales decreased from
68.0% in 2000 to 60.4% in 2001.

Gross profit.Our gross profit increased 31.1% from US$882.9 million in
2000 to US$1,157.8 million in 2001. As a result, our gross margin increased
from 32.0% in 2000 to 39.6% in 2001, primarily as a result of the reduction in
cost of sales.

Operating expenses.Operating expenses increased 20.4% from US$420.8
million in 2000 to US$506.4 million in 2001. This increase was attributable
primarily to an increase of 43.1% in research and development from US$69.6
million in 2000 to US$99.6 million in 2001, a 9.6% increase in selling expenses
from US$193.4 million in 2000 to US$212.1 million in 2001, a 25.0% increase in
general and administrative expenses from US$96.6 million in 2000 to US$120.8
million in 2001 and a 51.0% increase in other operating expenses, net from
US$19.5 million in 2000 to US$29.5 million in 2001.

The increase in research and development is principally related to
development of the new EMBRAER 170/190 jet family. The increase in selling
expenses was directly attributable to the marketing campaign for the EMBRAER
170/190 jet family. In addition, we incurred expenses related to our expansion
into new markets such as Asia and China. The increase in administrative
expenses was partially due to the increase in technology expenses relating to
the implementation of an enterprise resource planning system and to the hiring
of new administrative personnel in order to accommodate the increased
production schedule expected at that time. As a result of the September 11th
terrorist attacks, some of our customers rescheduled deliveries. Although we
implemented certain cost containment programs, including a reduction of
workforce, these reductions were not fully implemented at the time that
deliveries were rescheduled.

The increase in other operating expenses, net is primarily due to US$7.9
million in engineering training and professional development expenses and a
non-recurring expense of US$4.5 million in restructuring costs in 2001 related
to headcount reduction.

Operating expenses as a percentage of net sales increased from 15.3% in
2000 to 17.3% in 2001, primarily as a result of the increases in research and
development expenses as well as selling, general and administrative expenses.

Interest income (expense).Interest income increased from interest
expenses of US$6.9 million in 2000 to interest income of US$47.5 million in
2001, primarily due to a significant increase in our average cash and cash
equivalent balances in the first three quarters of 2001.

Financial transaction gain (loss), net. Financial transaction loss, net
increased from US$24.6 million in 2000 to US$148.6 million in 2001. These
amounts reflect the restatement of non-U.S. dollar-denominated assets and
liabilities into U.S. dollars. The increase from 2000 to 2001 is due to the
increase in the rate of devaluation of reaisagainst the U.S. dollar over net
assets denominated in reais.

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Other non-operating income (expense), net.Other non-operating income
(expense), net decreased from an income of US$6.0 million in 2000 to an expense
of US$8.4 million in 2001. The decrease in 2001 was primarily due to a gain of
US$12.9 million recognized in 2000 resulting from the sale of shares of our
subsidiary ELEB-Embraer Liebherr Equipamentos do Brasil S.A. to Liebherr
International AG.

Provision for income taxes.Our provision for income taxes increased from
US$117.4 million in 2000 to US$218.4 million in 2001 mainly due to our higher
taxable profits under the Brazilian Corporate Law financial statements as well
as the fact that in 2000 our provision for income taxes was reduced by US$27.5
million related to an adjustment of valuation allowance for deferred tax
assets. Our effective tax rate in 2001 was 40.3% as compared to 26.9% in 2000,
as compared to a statutory tax rate in each year of 34%. The difference
between the statutory rate and the effective rates is due to differences in
income before income taxes under U.S. GAAP and the taxable income calculated
under the Brazilian Corporate Law.

In 2001, we recorded a gain of US$5.4 million related to our
implementation of FASB 133 in January 2001. As a result, we recognized a gain
related to the adjustment of the value of certain of our derivative instruments
to fair value. Losses related to these instruments were recognized prior to
our adoption of FASB 133.

Net income.As a result of the foregoing factors, our net income
increased 2.4% from US$320.7 million in 2000 to US$328.4 million in 2001. Net
income remained relatively stable as a percentage of net sales. In 2000, net
income was 11.6% of net sales as compared to 11.2% in 2001.

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. We believe that
these sources of funds will be sufficient to fund our future liquidity needs,
develop the EMBRAER 170/190 jet family, 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 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$877.5 million at December 31, 2001
and US$871.2 million at December 31, 2002. Working capital remained relatively
flat. We had decreased inventories of US$150.3 million as a result of the
reduced production of the ERJ 145 regional jet family, partially offset by
increased inventories for the EMBRAER 170/190 jet family. Offsetting this
decrease was a US$139.1 million increase in accounts receivable due primarily
to our continuing to deliver aircraft to customers that had not yet finalized
their financing arrangements. As of December 31, 2002, 68% of our short-term
trade accounts receivable related to financing that had been approved by BNDES
at that time and for which disbursements were pending and 23% of which related
to financing that was being negotiated and finalized.

We
generated net cash provided by operating activities of US$507.7 million in
2002, as compared to net cash used in operating activities of US$263.2 million
in 2001 and net cash provided by operating activities of US$1,120.0 million in
2000. Net cash provided by operating activities increased in 2002 despite the
decrease in our income from operations principally due to decreases in
inventories in 2002 and a significant increase in trade accounts receivable in
2001 following September 11th. Cash contributions from suppliers increased
US$91.8 million due to the increase in the aggregate development costs for
EMBRAER 170/190 during the later stages of development. At December 31, 2002,
advances from customers totaled US$504.9 million, 81.1% of which represented
current liabilities.

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

Our net cash provided by (used in) financing activities decreased from net
cash provided by financing activities of US$98.4 million in 2001 to net cash
used in financing activities of US$399.4 million in 2002. The decrease was
primarily due to reduced borrowings. Our net cash provided by (used in)
financing activities increased from net cash used in financing activities of
US$130.4 million in 2000 to net cash provided in financing activities of
US$98.4 million in 2001.

We significantly extended the maturity profile of our debt in 2002. At
December 31, 2002, we had total debt of US$552.6 million under our financing
arrangements described below, 55.8% of which consisted of long-term debt and
44.2% of which consisted of short-term debt. In comparison, we had total debt
of US$771.7 million at December 31, 2001 and US$456.0 million at December 31,
2000, consisting of 31.8% and 20.0% of long-term debt. Our total debt
decreased from 2001 to 2002 largely due to a reduced level of new borrowings.

Total debt consists of amounts recorded as loans on our balance sheet and
excludes non-recourse debt associated with customer financing arrangements
transacted through special purposes entities, or SPEs. In structured
financings, an SPE purchases 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 purchase through an SPE,
and a portion of the credit risk and the management responsibility associated
with the SPE remain with that third party. Under U.S. GAAP, leasing
transactions made through an SPE must be consolidated if the equity
contribution of independent third parties is less than 3% of the fair value of
the SPEs assets, as discussed in EITF 90-15. Some of the SPEs through which
we sell aircraft were formed without any equity contribution and, therefore,
are consolidated. We also have a temporary variable interest in other leasing
transactions that are pending receipt of equity contributions and therefore,
under FAS 144 adopted in 2002, are required to be consolidated.

The effect of consolidating these SPEs resulted in non-recourse debt at
December 31, 2002, reflected as a separate line item on our balance sheets, of
US$941.9 million and collateralized accounts receivable of the same amount. We
have no actual obligation for US$803.5 million of this debt
other than potentially under existing financial guarantees. The remaining
US$138.4 million of debt is recourse to us as a result of our guarantees of the
temporary debt financing that is in place while equity contributions are
pending. The non-recourse debt is collateralized by the collateralized
accounts receivable and by the financed aircraft. 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 Note 8 to
our consolidated financial statements.

During 2002, British Airways returned to an SPE two ERJ 145s with a total
outstanding amount of underlying debt of US$22 million, which has been
consolidated by us. These aircraft serve as collateral for the non-recourse
debt and we have begun remarketing them. Until they are remarketed,
we are making interest payments on the underlying debt under our
financial guarantee obligations.

FASB Interpretation No. 46, issued in January 2003, will require us to
re-evaluate our consolidation of all SPEs. See Recent Accounting
Standards below for a further discussion of FASB Interpretation No. 46. See
our discussion of these items in Notes 4, 8 and 37 to our consolidated
financial statements.

Credit Facilities and Lines of Credit

Long-term facilities

We maintain credit facilities with BNDES primarily to fund development
costs of the ERJ 145, of which US$47.9 million was outstanding at December 31,
2002, and with FINEP primarily to fund development costs of the AL-X, of which
US$5.4 million was outstanding at December 31, 2002. Amounts borrowed from
BNDES are secured by first, second and third mortgages on our properties in
Brazil. The interest rates on these facilities are either fixed at 5.5% per
annum or range from TJLP plus 3.0% to TJLP plus 5.5% per annum plus, for BNDES
borrowings, we paid fees at the rate of 0.35% of the sales price of 420 ERJ
145s sold between January 1, 1997 and August 1, 2002.

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We have a credit facility with the Tokyo Branch of The Chase Manhattan
Bank under which we borrowed the Japanese yen equivalent of US$150.0 million,
principally to fund our purchase of aircraft component parts, of which US$125.1
million remains outstanding. The interest rate under this facility is equal to
the twelve-month Japanese interbank deposit rate, or JIBOR, plus 1.1% per
annum. On September 20, 2002, we secured a US$100.0 million credit facility
with Mitsui & Co., Ltd. and borrowed the full amount available thereunder.
This loan matures in 2009 and bears interest at an interest rate of LIBOR plus
2.2%. The facility is guaranteed by Unibanco  União de Bancos Brasileiros SA.
If we fail to maintain a minimum of 100 firm orders during the duration of the
facility or fail to obtain certification of the EMBRAER 170 prior to December
2003, Mitsui & Co. Ltd has the right to declare all amounts outstanding under
this facility due and payable. We also have US$100.0 million credit facility
with Santander Central Hispano Benelux S.A. to fund our purchases of wings and
other equipment from Gamesa. As of December 31, 2002, US$14.0 million was
outstanding under this facility and we have additional availability of US$86.0
million through December 2003. Amounts outstanding under this facility bear
interest at a fixed rate of 4.49% per annum. We recently signed a credit
agreement with Sumitomo Mitsui Banking Corp. and other lenders providing for a
term loan of US$200.0 million, at a rate of LIBOR plus 2.97% per
annum, to purchase materials for the manufacture of the EMBRAER
170/190 jet family. We
expect to borrow the full amount under this facility in early July and have
entered into a swap transaction effectively converting the total debt to
real-denominated CDI-based obligations.

We have various other loans and credit agreements with aggregate
outstanding borrowings of US$113.1 million at December 31, 2002. Each of our
long-term financing arrangements includes 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, 2002
and none of which are expected to have a material effect on our business. See
Note 20 to our consolidated financial statements for further information on
these financing arrangements.

Short-term facilities

We obtain short-term financing primarily from Brazilian banks in the form
of advances against exchange contracts that we enter into with those banks
relating to payments we are entitled to receive within a period of not more
than 360 days prior to delivery of aircraft. At December 31, 2002, we had
US$80.3 million outstanding under these arrangements.

In addition, we maintain short-term import financing lines of credit in
Brazil. As of December 31, 2002, US$32.8 million was outstanding under these
lines of credit. We maintain subsidiary lines of credit from time to time to
finance working capital requirements for these subsidiaries. At December 31,
2002, we had US$33.1 million of outstanding debt under these lines of credit.
See Note 20 to our consolidated financial statements for further information on
our short-term financing arrangements.

Net Cash Used in Investing Activities

Our net cash used in investing activities was US$200.8 million in 2002,
compared to US$275.2 million in 2001 and US$104.4 million in 2000. The
decrease in 2002 was mainly due a higher level of escrow deposits
 and compulsory loans made in 2001, primarily deposits
collateralizing financing guarantees for certain aircraft sold, which
increased US$98.7
million in 2001 as compared to a US$36.5 million increase in 2002.

Capital Expenditures

We recorded additions to property, plant and equipment of US$127.8 million
in 2002, US$143.8 million in 2001 and US$114.2 million in 2000. These
expenditures related to construction of facilities, improvements to our plant
and production facilities and modifications for the production of new aircraft
models.

We expect our future capital expenditures to decrease in 2003 as we
finalize construction and modifications of our facilities. We expect
investments in property, plant and equipment to total approximately US$58
million in 2003 and an additional US$44 million in 2004, primarily related to
the production of the EMBRAER 170/190 jet family, as well as our defense
aircraft and corporate jets.

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Capital Contributions and Issuances of Capital Stock

During 2002, we received capital contributions in the aggregate amount of
US$1.2 million, representing the issuance of preferred shares upon the exercise
of options. During 2002, we issued 2,261,313 preferred shares at a weighted
average exercise price of R$1.75 per share. In addition, in June 2003, 360,000
preferred shares were issued upon the exercise of options at an exercise price
of R$1.25 per share.

Contractual Obligations and Commercial Commitments

The following table and discussion provide additional disclosure regarding
our material contractual obligations and commercial commitments as of December 31, 2002.

|                            |       |          |            |      |          |             |             |             |          |       |         |          |  |         |          |  |             |  |       |  | 
|--------------------------- | ----- | -------- | ---------- | ---- | -------- | ----------- | ----------- | ----------- | -------- | ----- | ------- | -------- |  | ------- | -------- |  | ----------- |  | ----- |  | 
|                            |       |          |            |      |          |             | Less than 1 |             |          |       |         |          |  |         |          |  | More than 5
|Contractual Obligations     |       | Total    |            | year |          | 1 - 3 years |             | 3 - 5 years |          | years
|                            |       |          |            |      |          |             |             |             |          |      
|Loans                       |       | US$541.2 |            |      | US$242.3 |             |             | US$173.0    |          |       | US$80.4 |          |  | US$45.5 |         
|Capital lease obligations   |       |          | 12.8       |      |          |             | 7.9         |             |          |       | 4.5     |          |  |         | 0.4      |  |             |  |      | 
|Operating leases            |       |          | 11.4       |      |          |             | 2.2         |             |          |       | 3.4     |          |  |         | 1.1      |  |             |  | 4.7   | 
|Purchase obligations        |       |          | 327.7      |      |          |             | 327.7       |             |          |       |        |          |  |         |         |  |             |  |      | 
|Other long-term liabilities |       |          | 1,232.0    |      |          |             | 96.5        |             |          |       | 353.9   |          |  |         | 208.5    |  |             |  | 573.1 | 
|                            | Total |          | US$2,125.1 |      |          | US$676.6    |             |             | US$534.8 |       |         | US$290.4 |  |         | US$623.3 | 

The above table does not reflect contractual commitments related to
repurchase and trade-in options and financial and residual value guarantees
discussed in Off-Balance Sheet Arrangements below. See Item 3D. Risk
FactorsOur aircraft sales are subject to cancellation provisions,
repurchase and trade-in options and financial and residual value guarantees
that may reduce our cash flow or require us to make significant cash
disbursements in the future.

Purchase obligations consist of accounts payable to suppliers and
insurance payables.

Other long-term liabilities include non-recourse debt in the total amount
of US$873.0 million that relates to obligations of SPEs. 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.

Off-Balance Sheet Arrangements

We participate in a number of off-balance sheet arrangements, principally
relating to repurchase and trade-in obligations, guarantees and variable
interests in unconsolidated SPEs. We also have a number of swap
transactions that are described in Item 11. Quantitative
and Qualitative Disclosures about Market Risk.

Repurchase and Trade-in Obligations

We may have to repurchase a number of our aircraft. Under the relevant
purchase contracts, the price per aircraft of any required repurchase is less
than the original purchase price of the aircraft and less than our estimate at
that time of the market value of the relevant aircraft type in future years
(based on third party appraisals of aircraft valuations). If we are required
to repurchase all of the relevant aircraft under our repurchase obligation,
which covers the period from 2003 to 2007, we could be required to pay up to
approximately US$500 million for these aircraft. Based on our current
estimates and third party appraisals, we believe that any repurchased aircraft
could be sold without any material gain or loss.

At December 31, 2002, 34 of our regional jets were subject to trade-in
options and additional aircraft may become subject to trade-in options upon
delivery. These options provide that the trade-in price can be applied to the
price of an upgraded model or any of our other aircraft. The trade-in price is
determined in the manner discussed above for regional jets and as a percentage
of original purchase price for our corporate jets. We may be required to

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accept trade-ins at trade-in 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.

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, we were required to pay the full
aggregate amount of outstanding residual value guarantees and we were not able
to sell or lease any of the aircraft to offset our obligations, our maximum
exposure under these guarantees (less provisions and liabilities) would have
been US$1.4 billion as of December 31, 2002. We have deposited US$187.4
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, 2002) and
from other offsetting collections would exceed our exposure by US$326 million.

Our residual value guarantees typically ensure that in the 15th year after
delivery, the relevant aircraft will have a residual market value of 10% to 27%
of the original sale price. In the event of a decrease in the market value of
the underlying aircraft, we will bear the difference between the then market
value of the aircraft and the guaranteed residual value. 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.

Variable Interests in
Unconsolidated Entities

We are currently assessing the application of FIN 46 as it relates to our
variable interests in unconsolidated SPEs. As discussed above, some of our
sales transactions are structured financings through which an SPE purchases the
aircraft, pays us the full purchase price and leases the related aircraft to
the ultimate customer. Our variable interests in these SPEs typically include
financial guarantees in favor of the third party financial institution or
equity investors. Our exposure related to unconsolidated SPEs is included in
the above amounts. Upon effectiveness of FIN 46, discussed below, we may
consolidate additional SPE financing transactions which would result in
additional non-recourse debt and collateralized accounts receivable on our
balance sheet.

We continually re-evaluate our risk under our guarantees and repurchase
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 37 to our consolidated financial statements for
a further discussion of these off-balance sheet arrangements.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 143, Accounting for
Asset Retirement Obligations, which is effective as of January 1, 2003. SFAS
No. 143 addresses financial and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement costs.
We have determined that the implementation of this standard will not have a
material effect on our consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This standard requires costs
associated with exit or disposal activities to be recognized when they are
incurred. The requirements of SFAS No. 146 apply prospectively to activities
that are initiated after December 31, 2002, and, consequently, we cannot
reasonably estimate the impact of adopting these new rules until and unless we
undertake the relevant activities in the future.

In November 2002, the FASB issued Interpretation No. 45, or FIN 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to a
guarantors accounting for

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and disclosure of certain guarantees issued. FIN 45 requires enhanced
disclosures for certain guarantees. It will also require certain guarantees
that are issued or modified after December 31, 2002, including certain
third-party guarantees, to be initially recorded on the balance sheet at fair
value. For guarantees issued before December 31, 2002, liabilities are
recorded when and if payments become probable and estimable. We expect FIN 45
to have the general effect of delaying recognition of a certain portion of the
revenue for product sales that are accompanied by certain third-party
guarantees. The financial statement recognition provisions are effective
prospectively, and we cannot reasonably estimate the impact of adopting FIN 45
until guarantees are issued or modified in future periods, at which time their
results will be initially reported in our financial statements. See Note 37 to
our consolidated financial statements for more information on our guarantees.

In January 2003, the FASB issued Interpretation No. 46, or FIN 46,
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to the consolidation of certain entities. First, FIN 46 will require
identification of our participation in variable interest entities, or VIE,
which are defined as entities with a level of invested equity that is not
sufficient to fund future activities to permit them to operate on a stand-alone
basis, or whose equity holders lack certain characteristics of a controlling
financial interest. For entities identified as VIE, FIN 46 sets forth a model
to evaluate potential consolidation based on an assessment of which party to
the VIE, if any, bears a majority of the exposure to its expected losses, or
stands to gain from a majority of its expected returns. FIN 46 also sets forth
certain disclosures regarding interests in VIE that are deemed significant,
even if consolidation is not required. We are currently assessing the
application of FIN 46 as it relates to our variable interests. See Note 37 to
our consolidated financial statements.

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 Embraer are divided into two categories, research and development expense
and additions to fixed assets. The 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 2000, 2001 and 2002 were US$69.6
million, US$99.6 million and US$158.5 million, respectively, net of cash
contributions provided by risk-sharing partners. We estimate that our research
and development costs for 2003 will be approximately US$167.0 million. We do
not record an expense for research and development of defense programs as they
are funded by the Brazilian government and other government customers. Most of
our research and development expenses are associated with a particular program,
whether regional, corporate or defense.

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

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5D. Trend Information

The following table summarizes our regional aircraft sales order book at
June 30, 2003. Our total backlog at that date, including corporate jets and
defense aircraft, was US$10.3 billion.

|                       |                  |  |        |     |         |  |            |     |         |  |  |     |            |  |  |     | 
|---------------------- | ---------------- |  | ------ | --- | ------- |  | ---------- | --- | ------- |  |  | --- | ---------- |  |  | --- | 
|                       |                  |  | Firm   |     |         |  |            |     |         |  |  |     | Firm Order
|                       |                  |  | Orders |     | Options |  | Deliveries |     | Backlog
|                       |                  |  |        |     |         |  |            |     |        
|In the Regional Market |                  |  |        |     |         |  |            |     |         |  |  |     |            |  |  |    
|                       | EMB 120 Brasília |  |        | 352 |         |  |            |    |         |  |  | 352 |            |  |  |    | 
|                       | ERJ 145          |  |        | 581 |         |  |            | 434 |         |  |  | 502 |            |  |  | 79  | 
|                       | ERJ 135          |  |        | 121 |         |  |            | 6   |         |  |  | 100 |            |  |  | 21  | 
|                       | ERJ 140          |  |        | 174 |         |  |            | 45  |         |  |  | 68  |            |  |  | 106 | 
|                       | EMBRAER 170      |  |        | 119 |         |  |            | 157 |         |  |  |    |            |  |  | 119 | 
|                       | EMBRAER 190      |  |        | 110 |         |  |            | 120 |         |  |  |    |            |  |  | 110 | 
|                       | EMBRAER 195      |  |        | 15  |         |  |            | 32  |         |  |  |    |            |  |  | 15  | 

For additional information regarding trends in our business, see Item 4B.
Business OverviewBusiness Strategies and Item 5A. Operating Results.
For risks affecting our business, see Item 3D. Risk Factors.

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 at least nine and at most eighteen members, and our Diretoria, or
committee of officers, composed of at least four members (each an executive
officer). We have a permanent Conselho Fiscal, or audit board, which is
composed of five members.

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 provide that the Chief Executive Officer of Embraer is
automatically a member of the board of directors. As a result, Maurício Novis
Botelho, currently President and Chief Executive Officer of Embraer, is a
member of the board of directors. Our controlling shareholders, Cia. Bozano,
PREVI and SISTEL, have entered into a shareholders agreement which provides
that when they appoint members of our board of directors at shareholders
meetings, they will each appoint two representatives (and alternates), and
together they will vote to elect two representatives (and alternates) of the
European Aerospace and Defense Group and one representative (and alternate) of
the Brazilian government. This representative of the Brazilian government is
in addition to the representative that the Brazilian government is entitled to
appoint directly. See Item 7A. Major ShareholdersVoting RightsShareholders Agreement for more information on the shareholders agreement.
In addition, our bylaws provide that our employees are entitled to two
representatives (and alternates) on our board of directors, who are elected at
the annual shareholders meeting.

All members of the board of directors serve three-year terms. The terms
of all current members expire in April 2004. Set forth below are the names,
ages, positions and brief biographical descriptions of the members of the board
of directors at June 16, 2003.

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|                                      |  |     |    |          |  |                                           |  |            |      | 
|------------------------------------- |  | --- | -- | -------- |  | ----------------------------------------- |  | ---------- | ---- | 
|                                      |  |     |    |          |  |                                           |  | Year First
|Name                                  |  | Age |    | Position |  | Elected                                  
|                                      |  |     |    |          |  |                                          
|Carlyle Wilson                        |  |     | 74 |          |  | Chairman of the Board of Directors        |  |            | 2000 | 
|Nélio Henriques Lima                  |  |     | 51 |          |  | Deputy-Chairman of the Board of Directors |  |            | 2001 | 
|Maurício Novis Botelho                |  |     | 60 |          |  | President and Chief Executive Officer     |  |            | 2000 | 
|Vitor Sarquis Hallack                 |  |     | 50 |          |  | Member of the Board of Directors          |  |            | 1995 | 
|Juarez Martinho Quadros do Nascimento |  |     | 59 |          |  | Member of the Board of Directors          |  |            | 1998 | 
|Fernando Antônio Pimentel de Melo     |  |     | 49 |          |  | Member of the Board of Directors          |  |            | 2000 | 
|Luiz Felipe P. Lampreia               |  |     | 61 |          |  | Member of the Board of Directors          |  |            | 2001 | 
|Reginaldo dos Santos                  |  |     | 61 |          |  | Member of the Board of Directors          |  |            | 2001 | 
|Paulo Cesar de Souza Lucas            |  |     | 43 |          |  | Member of the Board of Directors          |  |            | 1999 | 
|Mario Hipólito Silva                  |  |     | 38 |          |  | Member of the Board of Directors          |  |            | 2001 | 
|Dietrich Russell                      |  |     | 61 |          |  | Member of the Board of Directors          |  |            | 2000 | 
|Isaac Marcel Picciotto                |  |     | 59 |          |  | Member of the Board of Directors          |  |            | 2003 | 
|Henrique Pizzolato                    |  |     | 50 |          |  | Member of the Board of Directors          |  |            | 2003 | 

Carlyle Wilson.Mr. Wilson has been with the Bozano group since 1972.
Mr. Wilson is an executive director of Cia. Bozano and a board member of Bozano
Holdings Ltd. Since 1992, Mr. Wilson has been a board member of Berneck
Aglomerados, a wood fiber-board manufacturing company. In addition, since
1980, Mr. Wilson has been a board member of Bozano, Simonsen Centros
Comerciais S.A., a shopping center administration company, and since 1986 has
been a board member of GD Empreendimentos Imobiliários S.A., a real estate
company. From January 1995 to January 2000, Mr. Wilson was an alternate board
member of Embraer. Mr. Wilson is a representative of Cia. Bozano, and his
business address is Rua Visconde de Ouro Preto, 5, 10th floor, 22250-180 Rio de
Janeiro, RJ, Brazil.

Nélio Henriques Lima.Mr. Lima has worked for Banco do Brasil and PREVI
since 1974, having held several positions. Since January 1999, he has been the
Executive Superintendent of PREVI. From January 1995 to January 1997, he was
the operations manager of PREVI, and from January 1997 to January 1999, he was
the executive manager of PREVI. Mr. Lima was a member of the audit committee
of La Fonte Participações S.A., a holding company, and Seguradora Brasileira de
Crédito a Exportação S.A., an insurance company, and a member of the board of
directors of Organização Social Bioamazônia, a biotechnology company, from
January 1999 to December 1999. He was also a member of the board of directors
of Tele Norte Leste Participações S.A., a telecommunications company, from
September 2000 to April 2001. Mr. Lima is a representative of PREVI, and his
business address is Praia de Botafogo, 501, 4th floor, 22250-040 Rio de
Janeiro, RJ, Brazil.

Maurício Novis Botelho.Mr. Botelho has been President and Chief
Executive Officer of Embraer since September 1995, as well as an executive
officer and/or chairman of the board of several of Embraers subsidiaries. Mr.
Botelho served as chief executive officer 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 chief
executive officer of CMW Equipamentos S.A., or CMW, an industrial automation
company, from 1985 to 1995. He was also the chief executive officer 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. Mr. Botelhos business address is the address of our
principal executive offices.

Vitor Sarquis Hallack.Mr. Hallack has been with the Bozano group since
1993. He is an executive director of Cia. Bozano and a board member and an
executive director of Bozano Holdings Ltd. He was an executive officer of
Banco Bozano Simonsen S.A. from April 1998 to May 2000. Mr. Hallack was the
chief financial officer of Companhia Siderúrgica Paulista  COSIPA from
September 1993 to December 1994. Prior to 1993, Mr. Hallack was the chief
financial officer of Companhia Vale do Rio Doce, a mining company. Mr. Hallack

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is a representative of Cia. Bozano, and his business address is Rua Visconde de
Ouro Preto, 5, 10th floor, 22250-180 Rio de Janeiro, RJ, Brazil.

Juarez Martinho Quadros do Nascimento.Mr. Nascimento was the Minister of
Communications of the Brazilian government from April 2002 to December 2002.
From 1997 to April 2002, he was the executive secretary of the Communications
Ministry of the Brazilian government and the chairman of the board of directors
of Telecomunicações Brasileiras S.A.  Telebrás, a telecommunications company,
also known as Telebrás. Mr. Nascimento was the secretary of inspection and
concession of the Communications Ministry from 1995 to 1997. From 1990 to
1995, he was an officer of Telebrás, ending his tenure there during 1995 as the
assistant to the deputy chief executive officer and the public services
department officer. Mr. Nascimento is a representative of SISTEL, and his
business address is SCN Quadra 01, Suite 308, 70711-000, Brasília, DF, Brazil.

Fernando Antônio Pimentel de Melo.Mr. Melo has been the Officer of
Social Security of SISTEL since 1991 and the Superintendent Officer of SISTEL
since 1999. He has also been a member of the board of directors of Companhia
de Aços Especiais Itabira  Acesita, a steel company, and of Telesp
Participações S/A since December 1999, Americel S.A. since April 1999, and
Telet S.A. since April 2000, all telecommunications companies. Mr. Melo was
also the vice-president of SINDAPP  Sindicato Nacional das Entidades de
Previdência Privada, having been elected in December 1998 for the term of three
years. He is a representative of SISTEL, and his business address is SEP Sul
702/902, Conj. B, Bloco A, Ed. Gal. Alencastro, 4th floor, 70390-025 Brasília,
DF, Brazil.

Luiz Felipe P. Lampreia.Mr. Lampreia was the Foreign Relations Minister
of the Brazilian government from January 1995 to January 2001. Mr. Lampreia
has held several positions in the Brazilian government, both in Brazil and
abroad, since 1963. From 1992 to 1993, he was the Secretary General of Foreign
Relations of the Brazilian government. From 1993 to 1994, Mr. Lampreia was
Brazils ambassador to various international organizations located in Geneva,
and participated in the creation of the WTO. Mr. Lampreia is a representative
of the Brazilian government and was appointed by our controlling shareholders.
His business address is Av. Ataulfo de Paiva, 341, Suite 605, 22440-030 Rio de
Janeiro, RJ, Brazil.

Reginaldo dos Santos.Mr. Santos has been a Lieutenant-Brigadier in the
Brazilian Air Force since March 2000 and is currently the General Director of
the Department of Research and Development of the Brazilian Air Force. Mr.
Santos has held various positions in the Brazilian armed forces since 1958,
when he began his military career. Mr. Santos is a representative of the
Brazilian government and was appointed by our controlling shareholders. His
business address is Air Force Command, Department of Research and Development,
Esplanada dos Ministérios, Bloco M, 3rd floor, 70045-900 Brasília, DF,
Brazil.

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 employees. Mr. Lucas business address is the address of
our principal executive offices.

Mario Hipólito Silva.Mr. Silva has been an employee in our production
line since 1996 and a union representative for our metallurgical employees
since 1997. He is a representative of our employees. Mr. Silvas business
address is the address of our principal executive offices.

Dietrich Russell.Mr. Russell has been the Executive Vice President of
the Aeronautics Division for EADS since July 2000. From 1972 until 1995, Mr.
Russell worked for the Mannesmann Group in various capacities and divisions,
culminating in his service as chairman of the board of management of Mannesmann
Anlagenbau AG. Mr. Russell was also a member of the board of management of
Daimler-Benz Aerospace AG, currently known as EADS, and was responsible for the
Aircraft Group between October 1995 and April 1997. Thereafter, he was
responsible for the Civil Aircraft and Helicopters Group of Daimler-Benz
Aerospace board of management until March 1998. In April 1998, Mr. Russell was
appointed chief operating officer of the Airbus Industrie division of EADS, a
position he held until July 2000. Mr. Russell is a representative of the
European Aerospace and Defense Group, and his business address is 1, Avenue
Didier Daurat, 31700 Blagnac, France.

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Isaac Marcel de Piccioto.Mr. Piccioto has been the Corporate Vice
President Strategy for the Business Group Airborne Systems at ThalesTM since
2001. Prior to that, he occupied several management positions at ThalesTM from
1990 to 2000. He was Vice President International Business Development at
Philips from 1988 to 1990. From 1974 to 1986, Mr. Piccioto was Corporate Vice
President International Marketing, Export Sales
Director, Director for Europe, North America and Asia Pacific at Matra. Mr.
Piccioto is a representative of the European Aerospace and Defense Group and
his business address is 2, Avenue Gay Lussac, 78851 Elancourt Cedex, France.

Henrique Pizzolato.Mr. Pizzolato has been the Marketing and
Communications Officer for the Banco do Brasil since February 2003. From June
1998 to May 2002, he was the Director of Social Security at PREVI. He was also
a member of the Board of Banco do Brasil from 1993 to 1996. In addition, Mr.
Pizzolato was a member of the board of directors of Telecentrosul and Brasil
Telecom, telecommunications companies, from 1999 to 2000. He is a
representative of PREVI and his business address is SBS Quadro 1, Bloco C, Loto
32, 70073-93 Brasilia, DF, Brazil.

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.

The executive officers are elected by the board of directors for a
three-year term, and any executive officer may be removed by the board of
directors before the expiration of his term. Set forth below are the names,
ages, positions and brief biographical descriptions of our executive officers
at June 16, 2003.

|                                    |  |     |    |          |  |                                                                |  |            |      | 
|----------------------------------- |  | --- | -- | -------- |  | -------------------------------------------------------------- |  | ---------- | ---- | 
|                                    |  |     |    |          |  |                                                                |  | Year First
|Name                                |  | Age |    | Position |  | Elected                                                       
|                                    |  |     |    |          |  |                                                               
|Maurício Novis Botelho              |  |     | 60 |          |  | President and Chief Executive Officer                          |  |            | 1995 | 
|Antonio Luiz Pizarro Manso          |  |     | 58 |          |  | Executive Vice-President Corporate and Chief
Financial Officer |  |            | 1995 | 
|Satoshi Yokota                      |  |     | 62 |          |  | Executive Vice-President-Development and Industry              |  |            | 1997 | 
|Frederico Pinheiro Fleury
   Curado |  |     | 41 |          |  | Executive Vice-President-Civil Aircraft                        |  |            | 1997 | 
|Romualdo Monteiro de Barros         |  |     | 54 |          |  | Executive Vice-President-Defense Market                        |  |            | 1997 | 
|Horácio Aragonés Forjaz             |  |     | 51 |          |  | Executive Vice-President-Corporate Communications              |  |            | 1998 | 
|Carlos Rocha Villela                |  |     | 47 |          |  | Vice-President and General Counsel                             |  |            | 1999 | 

Maurício 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 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.

Satoshi Yokota.Prior to becoming Executive Vice-President-Development
and Industry 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.

Frederico Pinheiro Fleury Curado.Prior to becoming Executive
Vice-President-Civil Aircraft 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,

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procurement, information technology, contracts and
sales. Mr. Curado is also a director and/or secretary of several of Embraers
subsidiaries.

Romualdo Monteiro de Barros.Prior to becoming Executive
Vice-President-Defense Market of Embraer in 1997, Mr. Barros was the officer
responsible for business development at OTL, later named Stelar Telecom, from
1994 to 1997.

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.

Carlos Rocha Villela.Prior to becoming Vice-President and General
Counsel of Embraer in 1999, Mr. Villela was the general counsel of Odebrecht
Química S.A., a chemical company, since 1994. Mr. Villela is also a director,
executive officer and/or secretary of several of Embraers subsidiaries.

6B. Compensation

For the fiscal year ended December 31, 2002, the aggregate compensation
(including benefits in kind granted) that we paid to members of the board of
directors and the executive officers for services in all capacities was
approximately US$6.2 million. In addition, in 2002, the executive officers
received pension benefits, instituted in January 1999, of approximately
US$64,173 as of December 31, 2002. The members of our board of directors did
not receive any such benefits. The board members and executive officers did
not receive any compensation (including benefits in kind) from any of our
subsidiaries. At December 31, 2002, none of the board 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.

In addition, at June 16, 2003, the board members and executive officers
owned an aggregate of 19 common shares and 3,606,780 preferred 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.

Under the terms of the plan, we were authorized to grant options to
purchase up to 25,000,000 preferred 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 19,665,000 preferred shares at a weighted
average exercise price of R$9.17 per share. The options granted to each
employee will 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. As of June 16, 2003, 7,556,313 of the total options granted had
been exercised. Of the total number of options granted, options to purchase an
aggregate of 7,200,000 preferred shares have been granted to our executive
officers at a weighted average exercise price of R$5.30 per share, of which
4,445,000 were exercised during the period from January 1, 2001 through June
16, 2003.

Profit Sharing Plan

Pursuant to Brazilian federal law, companies operating in Brazil are
required to share profits with employees beginning from and after fiscal year
1996. However, we understand that no government regulation currently exists
for determining how the profits should be distributed. Prior to 1998, we did
not have a profit sharing plan. However, in light of our continuing financial
recovery since then, we implemented a profit sharing plan in 1998 that ties
employee profit sharing to dividend payments.

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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 exceptional employees, on a discretionary basis. We
believe that this policy encourages individual employees to meet our production
goals.

For the 2000 fiscal year, we distributed US$41.8 million to employees, for
the 2001 fiscal year, we distributed US$43.7 million to employees and for the
2002 fiscal year, we distributed US$25.2 million to employees.

6C. Board Practices

All members of our board of directors serve three-year terms and the terms
of all current members expire in April 2004. See Directors and Senior
ManagementBoard of Directors for the year each of the members of our board
of directors was first elected.

The executive officers are elected by the board of directors for a
three-year term, and any executive officer may be removed by the board of
directors before the expiration of his term. See Directors and Senior
ManagementExecutive Officers for the year each of our executive officers
was first elected.

None of our directors or executive officers is party to an employment
contract providing for benefits upon termination of employment.

Audit Board

Under the Brazilian Corporate Law, the conselho fiscal(audit board) is a
corporate body independent of management and a companys external auditors. A
Brazilian audit board is not equivalent to, or comparable with, a U.S. audit
committee. The primary responsibility of the audit board is to review
managements activities and the financial statements, and to report its
findings to the shareholders. Under the Brazilian Corporate Law, the audit
board may not contain members that are on the board of directors, on the
executive committee, our employees, 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 the audit board members to
receive as remuneration at least 10% of the average amount paid to each
executive officer. The Brazilian Corporate Law requires an audit board to be
composed of a minimum of three and a maximum of five members and their
respective alternates.

We have a permanent audit board whose members are elected at the annual
shareholders meeting, with terms lasting until the next annual shareholders
meeting after their election. Under the Brazilian Corporate Law, holders of
preferred shares have the right to elect separately one member of the audit
board. Also, under the Brazilian Corporate Law, minority groups of
shareholders that hold at least 10% of the voting shares also have the right to
elect separately one member of the audit board. In any event, however, the
common shareholders have the right to elect the majority of the members of the
audit board. Set forth below are the names and positions of the members of our
audit board and their respective alternates.

|                                  |  |                  |  |                    |      | 
|--------------------------------- |  | ---------------- |  | ------------------ | ---- | 
|Name                              |  | Position         |  | Year First Elected
|                                  |  |                  |  |                   
|Luiz Tacca Júnior                 |  | Effective member |  |                    | 1995 | 
|Robson de Araújo Jorge            |  | Alternate        |  |                    | 2000 | 
|Carlos Alberto de Castro Monteiro |  | Effective member |  |                    | 2001 | 
|Tarcísio Luiz Silva Fontenele     |  | Alternate        |  |                    | 2001 | 
|José Mauro Laxe Vilela            |  | Effective member |  |                    | 2003 | 
|Alberto Carlos Monteiro dos Anjos |  | Alternate        |  |                    | 2003 | 
|Paulo Oscar França                |  | Effective member |  |                    | 2003 | 
|Ernesto Francisco Magdalena       |  | Alternate        |  |                    | 2003 | 
|Celene Carvalho de Jesus          |  | Effective member |  |                    | 2003 | 
|Nilo Ribeiro Calvalcanti          |  | Alternate        |  |                    | 2003 | 

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6D. Employees

We employed a total of 10,334, 11,048 and 12,227 people at December 31,
2000, 2001 and 2002, respectively. Approximately 94.1% of our workforce is
employed in Brazil. Of the total workforce at December 31, 2002, 47.8% are
directly involved in the production process, 22.3% are engaged in research and
development, 7.8% are administrative employees involved in support of the
production process and 22.1% are other administrative employees. Most of our
technical staff is trained at leading Brazilian engineering schools, including
theInstituto 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, theSindicato dos Metalúrgicos (Union of Metallurgical Workers)
or theSindicato 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, 2002,
approximately 80.5% of our employees were non-union. 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 new facility in São José dos
Campos to provide newly graduated engineers with specialized training in
aerospace engineering. In addition, we provide a masters in business
administration course for our administrative personnel at our executive
offices, conducted byFundação Getúlio Vargas, a business administration
university in São Paulo.

6E. Share Ownership

At June 16, 2003, the board members and executive officers owned an
aggregate of 19 common shares and 3,606,780 preferred shares. None of the
officers or directors individually own more than 1% of the outstanding common
shares or preferred shares. As of June 16, 2003, our executive officers also
owned options to purchase an aggregate of 2,755,000 preferred shares at
per-share purchase prices ranging from R$1.65 to R$23.00. As of the same date,
none of our directors owned any options to purchase shares of common or
preferred stock.

See 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 1,500,000,000 shares, with a total
aggregate of 713,334,355 shares issued and outstanding at June 16, 2003. Of
this total, 242,544,448 are common shares (including one special golden share
held by the Brazilian government) and 470,789,907 are non-voting preferred
shares. The following table sets forth share ownership information for each of
our shareholders that beneficially owns 5% or more of any class of our equity
securities and for our executive officers and board members at June 16, 2003,
including 2,997,545 preferred shares underlying the options exercisable within
60 days of the date of this annual report.

|                                       |       |  |               |             |                  |  |              |  |     |  |             |             |     |  |      |  |  |  |             |             |  |  |       |  | 
|-------------------------------------- | ----- |  | ------------- | ----------- | ---------------- |  | ------------ |  | --- |  | ----------- | ----------- | --- |  | ---- |  |  |  | ----------- | ----------- |  |  | ----- |  | 
|                                       |       |  | Common Shares |             | Preferred Shares |  | Total shares
|                                       |       |  |               |             |                  |  |             
|                                       |       |  | Shares        |             | (%)              |  | Shares       |  | (%) |  | Shares      |             | (%)
|                                       |       |  |               |             |                  |  |              |  |     |  |             |             |    
|PREVI(1)                               |       |  | 57,594,479    |             |                  |  | 23.8         |  |     |  | 60,872,078  |             |     |  | 12.9 |  |  |  | 118,466,557 |             |  |  | 16.5  | 
|SISTEL(2)                              |       |  | 48,508,890    |             |                  |  | 20.0         |  |     |  | 5,233,725   |             |     |  | 1.1  |  |  |  | 53,742,615  |             |  |  | 7.5   | 
|Cia. Bozano(3)(4)                      |       |  | 48,509,220    |             |                  |  | 20.0         |  |     |  | 18,786,588  |             |     |  | 4.0  |  |  |  | 67,295,808  |             |  |  | 9.4   | 
|Bozano Holdings Ltd.(3)(4)             |       |  |              |             |                  |  |             |  |     |  | 18,896,920  |             |     |  | 4.0  |  |  |  | 18,896,920  |             |  |  | 2.6   | 
|BNDESPAR(5)                            |       |  | 3,734,893     |             |                  |  | 1.5          |  |     |  | 46,929,918  |             |     |  | 9.9  |  |  |  | 50,664,811  |             |  |  | 7.1   | 
|Dassault Aviation(6)                   |       |  | 13,744,186    |             |                  |  | 5.7          |  |     |  | 1,953,132   |             |     |  | **   |  |  |  | 15,697,318  |             |  |  | 2.2   | 
|ThalesTM(6)                            |       |  | 13,744,186    |             |                  |  | 5.7          |  |     |  | 1,953,132   |             |     |  | **   |  |  |  | 15,697,318  |             |  |  | 2.2   | 
|EADS(6)                                |       |  | 13,744,186    |             |                  |  | 5.7          |  |     |  | 1,953,132   |             |     |  | **   |  |  |  | 15,697,318  |             |  |  | 2.2   | 
|SNECMA(6)                              |       |  | 7,276,332     |             |                  |  | 3.0          |  |     |  | 1,034,010   |             |     |  | **   |  |  |  | 8,310,342   |             |  |  | 1.2   | 
|BB Banco de Investimento, S.A.(7)      |       |  | 3,015,562     |             |                  |  | 1.2          |  |     |  | 2,890,909   |             |     |  | **   |  |  |  | 5,906,471   |             |  |  | **    | 
|União Federal/Brazilian Government(8)  |       |  | 1,850,495     |             |                  |  | **           |  |     |  | 499,415     |             |     |  | **   |  |  |  | 2,349,910   |             |  |  | **    | 
|Officers and directors as a group(9)   |       |  | 19            |             |                  |  | **           |  |     |  | 4,161,780   |             |     |  | **   |  |  |  | 4,161,799   |             |  |  | **    | 
|Other(10)                              |       |  | 30,822,000    |             |                  |  | 12.7         |  |     |  | 308,622,713 |             |     |  | 65.1 |  |  |  | 339,457,502 |             |  |  | 47.4  | 
|                                       |       |  |               |             |                  |  |              |  |     |  |             |             |     |  |      |  |  |  |             |             |  |  |       | 
|                                       | Total |  |               | 242,544,448 |                  |  |              |  |     |  |             | 473,787,452 |     |  |      |  |  |  |             | 716,344,689 |  |  |       |  | 
|                                       |       |  |               |             |                  |  |              |  |     |  |             |             |     |  |      |  |  |  |             |             |  |  |       | 
|Percentage of total shares outstanding |       |  |               |             |                  |  | 33.9         |  |     |  |             |             |     |  | 66.1 |  |  |  |             |             |  |  | 100.0 | 



---

|**   |  | Less than 1%.                                                                                                                                                                                                                                                                                                                               
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(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)  |  | The above table does not reflect any exchangeable notes issued by BNDES
that may be currently owned by Bozano Holdings Ltd.                                                                                                                                                                                                                 
|    
|(4)  |  | Cia. Bozano and Bozano Holdings Ltd. are owned and controlled by Julio
Bozano. All preferred shares owned by Cia. Bozano and Bozano Holdings
Ltd. 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.
|    
|(5)  |  | BNDESPAR is a wholly owned subsidiary of Banco Nacional de
Desenvolvimento Econômico e SocialBNDES, the government-owned national
development bank of Brazil                                                                                                                                                                               
|    
|(6)  |  | Member of the European Aerospace and Defense Group.                                                                                                                                                                                                                                                                                         
|    
|(7)  |  | BB Banco de Investimento, S.A. is an affiliate of the Brazilian
government-owned Banco do Brasil S.A.                                                                                                                                                                                                                                       
|    
|(8)  |  | The Brazilian government also holds the golden share.                                                                                                                                                                                                                                                                                     
|    
|(9)  |  | The number of preferred shares includes 555,000 preferred shares
underlying options which are exercisable within 60 days of the date of
this annual report.                                                                                                                                                                                 
|    
|(10) |  | The number of preferred shares includes 2,442,545 preferred shares
underlying options which are exercisable within 60 days of the date of
this annual report.                                                                                                                                                                               

Other than as discussed in Item 4. Information on the Company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 June 16, 2003, we had 25,219 holders, either directly or through ADSs,
of preferred shares, and 4,167 holders of record of common shares. On June 16,
2003, an aggregate of 209,410,561 preferred shares were held, either directly
or through ADSs, by 188 record holders, including DTC, in the United States.

57



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##### 



Voting Rights

Voting Rights of the Common
Shares

Each common share entitles the holder thereof to one vote at our annual
and special shareholders meetings.

Shareholders Agreement

Each of Cia. Bozano, PREVI and SISTEL, our controlling shareholders, has
agreed to comply with the terms of a shareholders agreement entered into on
July 24, 1997, as amended, which governs matters relating to their equity
ownership of Embraer for a ten-year term and can be successively renewed for
five-year terms. According to the shareholders agreement, when appointing the
members of our board of directors at shareholders meetings, our controlling
shareholders have agreed to appoint two representatives (and alternates) of
each one of the controlling shareholders and to vote together to elect two
representatives (and alternates) of the European Aerospace and Defense Group
and one representative (and alternate) of the Brazilian government.

Our controlling shareholders have also agreed in the shareholders
agreement that the Chairman of our board of directors will be chosen by
agreement among them every 18 months and that the Chairman shall be one of
their representatives. In the event that our controlling shareholders cannot
agree on who will be the Chairman of the board, the order in which their
representatives will take turns as Chairman shall be decided by lottery.

In accordance with the shareholders agreement, our controlling
shareholders may not sell, assign, contribute as capital, pledge or in any
other way transfer, dispose of or create a lien on the common shares tied to
control of Embraer held by them, except as provided for in the shareholders
agreement or if the transaction is previously authorized in writing by the
other parties. According to the shareholders agreement, if any controlling
shareholder wishes to sell, assign, transfer or in any way dispose of part or
all of its common shares tied to control of Embraer, whether or not together
with other shares of Embraer of any kind or class, the other controlling
shareholders shall have a right of first refusal to acquire the shares being
offered.

The shareholders agreement provides that our controlling shareholders
shall meet or shall manifest their position by fax or any other electronic
means in connection with any shareholders meeting or meeting of the board of
directors, as the case may be, when any of the following matters involving us
or any of our subsidiaries shall be decided:



| |  |  | amendment to the bylaws, except when required by law;                                                                                                         
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | increase of capital by subscription, creation of a new class
of shares, change in the characteristics of the existing shares or
reduction of capital;         
|
| |  |  | issuance of debentures convertible into shares, subscription
warrants and options for the purchase of shares;                                                 
|
| |  |  | merger or spin-off;                                                                                                                                           
|
| |  |  | liquidation, dissolution and voluntary acts of financial reorganization;                                                                                      
|
| |  |  | acquisition or sale of participation in other companies,
except special purpose companies that are necessary or desirable in
our business of selling aircraft;
|
| |  |  | establishment of a dividend policy which differs from that
provided for in the bylaws as the minimum dividend;                                                
|
| |  |  | approval of new investments and/or financing and/or sale of
investments in an amount higher than that agreed upon by the parties
from time to time;           

58



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##### 





| |  |  | approval and change of long-term business plans;                                                                                                                                                   
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | determination of the remuneration of, and participation in our profits by, our managers;                                                                                                           
|
| |  |  | selection, hiring and firing of our executive officers;                                                                                                                                            
|
| |  |  | choosing our external auditors;                                                                                                                                                                    
|
| |  |  | granting liens on, or guarantees in favor of, real or
personal property or obligations of management except for those
necessary or desirable in our business of manufacturing and selling
aircraft;
|
| |  |  | sale of a substantial part of our permanent assets; and                                                                                                                                            
|
| |  |  | use of profits.                                                                                                                                                                                    

The shareholders agreement also states that our controlling shareholders
will vote in favor of maintaining and increasing our strategic relationship
with the Brazilian Armed Forces, particularly with the Brazilian Air Force, in
order to assure that we continue to prioritize our relationship with Brazil,
without prejudice to our other corporate interests.

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 to and/or extension of our logo;                                                                                                                                                              
|
| |  |  | creation and/or alteration of military programs (whether or not involving Brazil);                                                                                                                      
|
| |  |  | third party training in technology for military programs;                                                                                                                                               
|
| |  |  | discontinuance of the supply of military airplane maintenance and replacement parts;                                                                                                                    
|
| |  |  | transfer of share control; and                                                                                                                                                                          
|
| |  |  | any change to the list of corporate actions over which the
golden share carries veto power, to the structure and composition of
the board of directors, and to the rights conferred to the golden
share.

Voting Rights of the Preferred
Shares

Preferred shares do not entitle the holder to vote except as set forth
below. However, holders of preferred shares are entitled to attend meetings of
shareholders and to participate in the discussion of matters submitted for
consideration.

The Brazilian Corporate Law requires that non-voting preferred shares
which are entitled to receive fixed or minimum dividends shall acquire voting
rights in the event a company fails to pay, from one to three consecutive
fiscal years as established in the bylaws, the fixed or minimum dividend to
which such shares are entitled. Because our preferred shares are not entitled
to fixed or minimum dividends, they cannot acquire voting rights under this
rule. However, our preferred shares are entitled to their share of any
mandatory dividends distributions that we

59



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##### 



make. See Item 8A. Consolidated Statements and Other Financial
InformationDividends and Dividend PolicyAmounts Available for Distribution.

Any change in the preference or rights of preferred shares, or the
creation of a class of shares having priority or preference over preferred
shares, requires approval by at least half of all outstanding voting shares and
either (1) prior approval of holders of a majority of the outstanding preferred
shares at a special meeting of holders of preferred shares or (2) subsequent
ratification by holders of a majority of the outstanding preferred shares. In
such special meetings, each preferred share will entitle the holder thereof to
one vote.

Pursuant to the recent amendments to the Brazilian Corporate Law,
shareholders that together hold preferred shares representing at least 10% of
our total share capital are entitled to appoint a member of our board of
directors. To date, none of our directors was appointed by our preferred
shareholders.

7B. Related Party Transactions

We have engaged in a number of transactions with our subsidiaries, the
Brazilian government and affiliates of Cia. Bozano, as described below.
According to the shareholders agreement, our controlling shareholders will not
permit us to engage in transactions or arrangements with any of our affiliates
on a basis or terms less favorable to us than would be obtainable at that time
from an unaffiliated third party in an arms-length transaction or other
arrangement.

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, 2000, 2001 and 2002, the Brazilian government accounted for
approximately 2.6%, 1.5% and 1.6% 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 OverviewDefense Business.

The Brazilian government plays a key role as:



| |  |  | a source for research and development debt financing through
technology development institutions such as FINEP and BNDES; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an export support agency through BNDES.                                                                                      

See Item 4B. Business OverviewAircraft Financing Arrangements, Item
3D. Risk FactorsRisks Related to Embraer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 and Item 3D. Risk FactorsRisks Related to EmbraerBrazilian
government budgetary constraints could reduce amounts available to our
customers under government-sponsored financing programs.

We maintain credit facilities with BNDES and FINEP, primarily to fund
development costs of the ERJ 145 and AL-X, of which US$47.9 million and US$5.4
million was outstanding, respectively, at December 31, 2002. Amounts borrowed
from BNDES are secured by first, second and third mortgages on Embraers
properties in Brazil. The interest rates under our FINEP credit facility range
from TJLP plus 3.0% to TJLP plus 5.5% per annum. The interest rates under our
BNDES credit facility are either fixed at 5.5% per annum or range from TJLP plus 3.3% to TJLP plus 4.4%, plus fees at
the rate of 0.35% of the sales price of 420 ERJ 145s sold between January 1,
1997 and August 1, 2002.

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

60



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##### 



In connection with a private offering of exchangeable notes by BNDES
completed on June 19, 2001, we became party to a registration rights agreement
pursuant to which we agreed, among other things, to register resales of the
ADSs and underlying preferred shares relating to the exchangeable notes. We
agreed to indemnify the initial purchasers of these notes and holders selling
under our resale registration statement against certain liabilities under the
Securities Act, or to contribute to payments that they may be required to make
in respect of those liabilities.

In February and March of 1999, we sold a total of 83,330 debentures with a
principal amount of R$1,800 per debenture with a term of seven years, mostly to
BNDESPAR, a wholly owned subsidiary of BNDES. We coupled each debenture with
100 detachable subscription warrants issued in five series. Each warrant
entitled its holder to subscribe for ten preferred shares or, under some
limited circumstances, ten common shares of Embraer. In February 2000, holders
exercised 833,500 of these subscription warrants, resulting in our issuing
8,335,000 preferred shares at an issue price of R$2.1998 per share. After that
date, BNDESPAR became the only holder of subscription warrants. In July 2000,
BNDESPAR exercised 105,700 of the subscription warrants, resulting in our
issuing 1,057,000 preferred shares at an issue price of R$2.4769 per share. On
May 3, 2001, BNDESPAR exercised its remaining 7,393,800 warrants in exchange
for 73,938,000 preferred shares at an issue price of R$2.4769 per share.

We have entered into numerous financing transactions from time to time in
the past with the Brazilian government-owned Banco do Brasil S.A. and its
affiliates. At December 31, 2000, 2001 and 2002, we maintained
cash investments
of US$46.9 million, US$69.5 million and US$74.1 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, 2000, 2001 and 2002 equaled US$331.0 million, US$182.3 million
and US$213.1 million, respectively. In addition, BB Banco de Investimento,
S.A., an affiliate of Banco do Brasil S.A., was an underwriter in a secondary
offering in Brazil, completed on June 19, 2001, in which some of our
shareholders sold an aggregate of 6,900,000 of our preferred shares.

European Aerospace and Defense Group

Thales, a member of the European Aerospace and Defense Group, is also a
joint venture partner with the General Electric Company in a company called GE
Capital Aviation Training Limited, or GECAT. We have entered into an agreement
with GECAT whereby GECAT will provide training for the EMBRAER 170/190 jet
family on a non-exclusive basis. We will pay GECAT for the training services
to be provided by GECAT to our customers for the EMBRAER 170/190 jet family and
for each component of the system to be supplied by GECAT to provide training
for our customers for the EMBRAER 170/190 jet family, which system includes
flight simulators, courseware, training media, computer-based training, and
training courses.

In March 2002, we formed a consortium with Dassault, Thales and SNECMA to
bid on the development and manufacture of up to 24 fighter jets for the
Brazilian Air Force. The planned jet, the Mirage 2000 BR, is modeled on the
Dassault Mirage 2000-5 supersonic jet. As leaders of the consortium, we would
have coordination and management responsibilities in the program. As a result
of this consortium and as part of our strategic alliance agreement, Dassault
would transfer to us the technology for the Mirage, enabling us to have full
control over the project technology as well. The selection of the winner of
the bid has not yet been made.

Cia. Bozano

From time to time we hold temporary cash investments through Cia. Bozano.
At December 31, 2002, we had US$151,000 of such temporary investments.

See Note 33 to our consolidated financial statements for more information
regarding related party transactions.

7C. Interests of Experts and Counsel

Not applicable.

61



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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, and we have already settled
several of them, 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 will 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 social 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 social 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 (expense) item of our statements of income. As of
December 31, 2002, we had obtained preliminary injunctions for not paying or
recovering past payments in the total amount, including interest, of US$186.9
million, which is included as a liability 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 certain taxes and
social charges and Note 18 to our consolidated financial statements for a
further discussion of these challenges.

In addition, we are involved in other legal proceedings, including tax
disputes, all of which are in the ordinary course of business. Our management
believes that none of these other proceedings, if adversely determined, would
materially or adversely affect our business, financial condition or results of
operations. See Note 19 to our consolidated financial statements for a further
discussion of the legal proceedings we face.

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, 2002, the balance of our legal reserve was US$76.2 million, which
was equal to 8.5% of our paid-in capital at December 31, 2002.

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

62



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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,

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 shareholders approval, our board
of directors may allocate at least 5% of our net income to an investment and
working capital reserve. 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). The balance of the investment and working capital
reserve plus the balance of other profit reserves (except the contingency
reserve for anticipated losses and the unrealized revenue reserve) may not be
higher than our capital. 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 distributable amount has been fixed at an
amount equal to not less than 25% of the amounts available for distribution, to
the extent amounts are available for distribution. On May 5, 1997, Law No.
9,457 became effective, granting holders of preferred stock not carrying a
right to fixed or minimum dividends, such as our preferred shares, a statutory
right to receive dividends in an amount per share of at least 10% more than the
amount per share paid to holders of common stock.

63



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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. As our preferred shares are
not entitled to a fixed or minimum dividend, our ability to suspend the
mandatory distribution of dividends applies to the holders of preferred shares
and, consequently, to the holders of ADSs.

Payment of Dividends

We are required by the Brazilian Corporate Law and by our bylaws to hold
an annual shareholders meeting by 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.

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
preferred 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
preferred 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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 dailypro
rata
variation of the TJLP and cannot exceed the greater of:

64



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| |  |  | 50% of net income (after taking into account the provisions
for theContribuição 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 preferred 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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.

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

|                      |  |                                        |  |                   |      | 
|--------------------- |  | -------------------------------------- |  | ----------------- | ---- | 
|                      |  |                                        |  | Total amount of  
|Date of approval      |  | Period in which profits were generated |  | distribution     
|                      |  |                                        |  |                  
|                      |  |                                        |  | (US$ in millions)
|September 18, 1998(1) |  | First two quarters of 1998             |  |                   | 18.0 | 
|March 30, 1999(1)     |  | Remaining two quarters of 1998         |  |                   | 27.7 | 
|September 28, 1999(1) |  | First two quarters of 1999             |  |                   | 20.8 | 
|January 31, 2000(1)   |  | Remaining two quarters of 1999         |  |                   | 48.3 | 
|March 24, 2000(2)     |  | First quarter of 2000                  |  |                   | 11.2 | 
|June 16, 2000(2)      |  | Second quarter of 2000                 |  |                   | 11.0 | 
|July 6, 2000(1)       |  | First two quarters of 2000             |  |                   | 44.2 | 
|September 22, 2000(2) |  | Third quarter of 2000                  |  |                   | 15.0 | 
|December 15, 2000(2)  |  | Fourth quarter of 2000                 |  |                   | 17.1 | 
|March 16, 2001(1)     |  | Remaining two quarters of 2000         |  |                   | 51.4 | 
|March 16, 2001(2)     |  | First quarter of 2001                  |  |                   | 15.7 | 
|June 13, 2001(2)      |  | Second quarter of 2001                 |  |                   | 18.0 | 
|September 14, 2001(1) |  | First two quarters of 2001             |  |                   | 53.4 | 
|September 14, 2001(2) |  | Third quarter of 2001                  |  |                   | 18.1 | 
|December 15, 2001(2)  |  | Fourth quarter of 2001                 |  |                   | 24.6 | 
|March 19, 2002(1)     |  | Remaining two quarters of 2001         |  |                   | 43.1 | 
|March 19, 2002(2)     |  | First quarter of 2002                  |  |                   | 25.4 | 
|June 14, 2002(2)      |  | Second quarter of 2002                 |  |                   | 20.9 | 
|September 13, 2002(2) |  | Third quarter of 2002                  |  |                   | 17.0 | 
|December 13, 2002(2)  |  | Fourth quarter of 2002                 |  |                   | 19.8 | 
|December 13, 2002(2)  |  | 1998 and 1999                          |  |                   | 20.5 | 



---

|(1) |  | Represents dividend payments.               
|--- |  | --------------------------------------------
|   
|(2) |  | Represents interest on shareholders equity.

Further, on June 16, 2003, our Board of Directors approved the payment of
interest on shareholders equity for the first two quarters of 2003 in the
total amount of R$76.7 million to be paid on August 15, 2003, which, translated
using the exchange rate on June 16, 2003, would be equivalent to US$26.8
million.

On March 1, 2002, we issued 88,430,168 preferred shares in the form of a
stock dividend to each holder of common and preferred shares at that date, at
the rate of 0.142106 new preferred shares for each existing share.

65



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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 determining that it is to our benefit to distribute
interest on shareholders equity.

8B. Significant Changes

No significant changes or events have occurred after the close of the
balance sheet date at December 31, 2002, 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 under the symbol ERJ.
In addition, our preferred shares are traded on the São Paulo Stock Exchange
under the symbol EMBR4. Each ADS represents four preferred shares.

The reported high and low closing sale prices in U.S. dollars for the ADSs
on the New York Stock Exchange for the periods indicated are set forth in the
following table:

|             |                                  |  |                       |       |     |  |  |       | 
|------------ | -------------------------------- |  | --------------------- | ----- | --- |  |  | ----- | 
|             |                                  |  | Price in U.S. dollars
|             |                                  |  | per ADS              
|             |                                  |  |                      
|             |                                  |  | High                  |       | Low
|             |                                  |  |                       |       |    
|2000:        |                                  |  |                       |       |     |  |  |      
|             | Year end (from July 20)          |  |                       | 39.75 |     |  |  | 18.50 | 
|2001:        |                                  |  |                       |       |     |  |  |      
|             | First quarter                    |  |                       | 41.75 |     |  |  | 34.50 | 
|             | Second quarter                   |  |                       | 45.50 |     |  |  | 36.00 | 
|             | Third quarter                    |  |                       | 39.45 |     |  |  | 11.95 | 
|             | Fourth quarter                   |  |                       | 22.20 |     |  |  | 11.45 | 
|             | Year end                         |  |                       | 45.50 |     |  |  | 11.45 | 
|2002:        |                                  |  |                       |       |     |  |  |      
|             | First quarter                    |  |                       | 25.01 |     |  |  | 19.85 | 
|             | Second quarter                   |  |                       | 23.77 |     |  |  | 19.09 | 
|             | Third quarter                    |  |                       | 21.20 |     |  |  | 13.30 | 
|             | Fourth quarter                   |  |                       | 16.47 |     |  |  | 12.85 | 
|             | Year end                         |  |                       | 25.01 |     |  |  | 12.85 | 
|2003:        |                                  |  |                       |       |     |  |  |      
|             | First quarter                    |  |                       | 16.27 |     |  |  | 9.15  | 
|             | Second quarter (through June 16) |  |                       | 20.26 |     |  |  | 9.48  | 
|Month ended: |                                  |  |                       |       |     |  |  |      
|             | December 31, 2002                |  |                       | 16.05 |     |  |  | 14.43 | 
|             | January 31, 2003                 |  |                       | 16.27 |     |  |  | 13.40 | 
|             | February 28, 2003                |  |                       | 13.92 |     |  |  | 9.15  | 
|             | March 31, 2003                   |  |                       | 11.97 |     |  |  | 9.48  | 
|             | April 30, 2003                   |  |                       | 14.59 |     |  |  | 12.38 | 
|             | May 31, 2003                     |  |                       | 15.37 |     |  |  | 14.00 | 
|             | June 30, 2003 (through June 16)  |  |                       | 20.26 |     |  |  | 14.92 | 

66



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The table below sets forth, for the periods indicated, the reported high
and low closing sale prices in nominalreais for preferred shares on the São
Paulo Stock Exchange. The preferred shares have not traded every day on which
the São Paulo Stock Exchange was open. The common shares are also listed and
traded on the São Paulo Stock Exchange.

|             |                                  |  |                   |       |     |  |  |       | 
|------------ | -------------------------------- |  | ----------------- | ----- | --- |  |  | ----- | 
|             |                                  |  | Nominal
reais per
|             |                                  |  | preferred share  
|             |                                  |  |                  
|             |                                  |  | High              |       | Low
|             |                                  |  |                   |       |    
|1998:        |                                  |  |                   |       |     |  |  |      
|             | Year end                         |  |                   | 2.23  |     |  |  | 1.15  | 
|1999:        |                                  |  |                   |       |     |  |  |      
|             | Year end                         |  |                   | 8.15  |     |  |  | 1.15  | 
|2000:        |                                  |  |                   |       |     |  |  |      
|             | Year end                         |  |                   | 18.30 |     |  |  | 7.20  | 
|2001:        |                                  |  |                   |       |     |  |  |      
|             | First quarter                    |  |                   | 21.50 |     |  |  | 17.82 | 
|             | Second quarter                   |  |                   | 25.45 |     |  |  | 19.40 | 
|             | Third quarter                    |  |                   | 23.30 |     |  |  | 8.30  | 
|             | Fourth quarter                   |  |                   | 13.20 |     |  |  | 7.65  | 
|             | Year end                         |  |                   | 25.45 |     |  |  | 7.65  | 
|2002:        |                                  |  |                   |       |     |  |  |      
|             | First quarter                    |  |                   | 15.20 |     |  |  | 11.66 | 
|             | Second quarter                   |  |                   | 15.30 |     |  |  | 11.20 | 
|             | Third quarter                    |  |                   | 15.19 |     |  |  | 12.30 | 
|             | Fourth quarter                   |  |                   | 15.00 |     |  |  | 12.40 | 
|             | Year end                         |  |                   | 15.30 |     |  |  | 11.20 | 
|2003:        |                                  |  |                   |       |     |  |  |      
|             | First quarter                    |  |                   | 14.05 |     |  |  | 8.10  | 
|             | Second quarter (through June 16) |  |                   | 14.31 |     |  |  | 9.84  | 
|Month ended: |                                  |  |                   |       |     |  |  |      
|             | December 31, 2002                |  |                   | 14.00 |     |  |  | 13.46 | 
|             | January 31, 2003                 |  |                   | 14.05 |     |  |  | 12.21 | 
|             | February 28, 2003                |  |                   | 12.29 |     |  |  | 8.10  | 
|             | March 31, 2003                   |  |                   | 10.14 |     |  |  | 8.13  | 
|             | April 30, 2003                   |  |                   | 10.96 |     |  |  | 9.84  | 
|             | May 31, 2003                     |  |                   | 11.15 |     |  |  | 10.25 | 
|             | June 30, 2003 (through June 16)  |  |                   | 14.31 |     |  |  | 11.01 | 

On June 16, 2003, we had 25,219 holders, either directly or through ADSs,
of preferred shares, and 4,167 holders of record of common shares. On June 16,
2003, an aggregate of 209,410,561 preferred shares were held, either directly
or through ADSs, by 188 record holders, including DTC, in the United States.

On June 16, 2003, the closing sale price for our preferred shares on the
São Paulo Stock Exchange was R$14.12, which is equivalent to US$19.77 per
ADS. On the same date, the closing sale price for our ADSs on the New York
Stock Exchange was US$19.63. The ADSs are issued under a deposit agreement and
JPMorgan Chase Bank serves as depositary under that
agreement.

9B. Plan of Distribution

Not applicable.

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9C. Markets

Trading on the São Paulo Stock Exchange

On January 27, 2000, protocols were signed in order to merge the nine
Brazilian stock exchanges. Pursuant to the protocols, publicly traded
Brazilian companies securities are traded on the São Paulo Stock Exchange, and
Brazilian government debt securities are traded on, and privatization auctions
are carried out at, the Rio de Janeiro Stock Exchange. Trading on each
exchange is limited to member brokerage firms and a limited number of
authorized non-members. The CVM and the São Paulo Stock Exchange have
discretionary authority to suspend trading in shares of a particular issuer.
Trading in securities listed on the São Paulo Stock Exchange may be effected
off the exchange, although such trading is limited.

The preferred shares are listed and traded on the São Paulo Stock
Exchange. Trades in our preferred 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 theCBLCCompanhia Brasileira de
Liquidação e Custódia, the clearinghouse for the São Paulo Stock Exchange,
which maintains accounts for member brokerage firms. The seller is ordinarily
required to deliver the shares to the exchange on the second business day
following the trade date.

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 New York Stock
Exchange and other major exchanges in the world. The São Paulo Stock Exchange
had an aggregate market capitalization of approximately US$156.9 billion at May
31, 2003. In comparison, the New York Stock Exchange had a market
capitalization of approximately US$13.9 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 fewer 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 May 31, 2003, we accounted for approximately 1.6% 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 New York Stock Exchange or other major
exchanges. During the one year period ended May 31, 2003, the five most
actively traded shares represented approximately 41.6% of the total volume of
shares traded on 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 legislation.

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 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

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information regarding a material event or has provided inadequate
responses to the inquiries by the CVM or the São Paulo Stock Exchange.

The Brazilian securities law, the Brazilian Corporate Law and the
regulations issued by the CVM, the National Monetary Council and the Central
Bank provide for, among other things, disclosure requirements, restrictions on
insider trading and price manipulation, and protection of minority
shareholders. However, the Brazilian securities markets are not as highly
regulated and supervised as the U.S. securities markets or markets in other
jurisdictions.

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 preferred 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 preferred
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 preferred shares, or distributions
relating to the preferred shares, unless the holder obtains a new electronic
certificate of registration or registers its investment in the preferred shares
under Resolution No. 2,689.

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 material information concerning our capital stock, and
a brief summary of certain significant provisions of our bylaws and the
Brazilian Corporate Law. 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, 2002, our capital stock consisted of a total of
712,974,356 outstanding shares, without par value, of which 242,544,448 were
common shares, including one special class of common share known as the golden
share, held by the Brazilian government, and 470,429,907 were preferred
shares. Our bylaws authorize the board of directors to increase the capital
stock up to 500,000,000 common shares and up to 1,000,000,000 preferred 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. Under
the Brazilian Corporate Law, however, the number of non-voting preferred shares
may not exceed two-thirds of the total number of shares. According to the
edital (invitation to bid) issued by the Brazilian government in connection
with our privatization in 1994, non-Brazilians may not hold in excess of 40% of
our common shares. There is no similar restriction on ownership of our
preferred shares.

Common Shares

Each common share entitles the holder thereof to one vote at our annual
and special shareholders meetings. 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 our principal place of business, currently São José dos Campos,
at least fifteen days prior to the meeting. The quorum to hold shareholders
meetings on first call is generally 25% of the shares entitled to vote, and on
second call the meetings can be held with the presence of any number of the
shares entitled to vote.

According to the Brazilian Corporate Law, the common shares are entitled
to dividends in proportion to their share of the amount available for
distribution, subject to any preference of the preferred shares. 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,
also subject to the preference of the preferred shares.

Preferences of Preferred
Shares

According to our bylaws, the preferred shares are non-voting except under
limited circumstances and, upon any liquidation of the Company, are entitled to
priority over the common shares in the return of capital in proportion to their
share of our net worth. In addition, according to our bylaws, the preferred
shares are not entitled to fixed or minimum dividend payments. However, under
the Brazilian Corporate Law, preferred shares, not entitled to fixed or minimum
dividend payments, are entitled to receive dividends in an amount per share
that is 10% greater than the dividends payable on our common shares. See Item
8A. Consolidated Statements and Other Financial InformationDividends and
Dividend Policy for a more complete description of mandatory annual
distributions on our preferred stock.

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 to and/or extension of our logo;                                        
|
| |  |  | creation and/or alteration of military programs (whether or not involving Brazil);

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| |  |  | third party training in technology for military programs;                                                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | discontinuance of the supply of military airplane maintenance and replacement parts;                                                                                                                    
|
| |  |  | transfer of share control; and                                                                                                                                                                          
|
| |  |  | any change to the list of corporate actions over which the
golden share carries veto power, to the structure and composition of
the board of directors, and to the rights conferred to the golden
share.

Voting Rights of the Preferred
Shares

Preferred shares do not entitle the holder to vote except as set forth
below. However, holders of preferred shares are entitled to attend meetings of
shareholders and to participate in the discussion of matters submitted for
consideration.

The Brazilian Corporate Law requires that non-voting preferred shares
which are entitled to receive fixed or minimum dividends shall acquire voting
rights in the event a company fails to pay, from one to three consecutive
fiscal years as established in the bylaws, the fixed or minimum dividend to
which such shares are entitled. Because our preferred shares are not entitled
to fixed or minimum dividends, they cannot acquire voting rights under this
rule. However, our preferred shares are entitled to their share of any
mandatory dividends distributions that we make. See Item 8A. Consolidated
Statements and Other Financial InformationDividends and Dividend
PolicyAmounts Available for Distribution.

Any change in the preference or rights of preferred shares, or the
creation of a class of shares having priority or preference over preferred
shares, requires approval by at least half of all outstanding voting shares and
either (1) prior approval of holders of a majority of the outstanding preferred
shares at a special meeting of holders of preferred shares or (2) subsequent
ratification by holders of a majority of the outstanding preferred shares. The
meeting may be called by publication of a notice in theDiário Oficial do
Estado de São Paulo and in a newspaper of general circulation in our principal
place of business, currently São José dos Campos, at least fifteen days prior
to the meeting. In such special meetings, each preferred share will entitle
the holder thereof to one vote.

Conversion Rights

The shareholders may authorize the conversion of the common shares into
preferred shares on a voluntary basis and in the proportion of the requests
received, in case the requests are higher than the authorized amount of the
conversion; provided that, as a result of such conversion, the number of
non-voting shares, such as our preferred shares, remains below the limit of
two-thirds of our capital stock.

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 foreign investor are made in the same way and
executed by that investors local agent on the investor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
custody with 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

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in custody with 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 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.

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

Our by-laws 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 have the power to authorize 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 Brazilian Corporate Law or our bylaws that
directors retire upon reaching a certain age. In addition, our bylaws do not
provide for the reelection 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.

Limitations on Share Ownership

According to theedital (invitation to bid) issued by the Brazilian
government in connection with our privatization in 1994, non-Brazilians may not
hold in excess of 40% of our common shares. There is no similar restriction on
ownership of our preferred shares. However, foreign investments must be
registered with the Central Bank and/or CVM, as the case may be. See Item
10D. Exchange Controls. In addition, there are no legal limitations on the
rights of non-resident or foreign shareholders to exercise their voting rights
as shareholders.

There are no provisions in our bylaws with respect to the disclosure of
share ownership. Notwithstanding, Brazilian Corporate Law states that a
corporation shall provide information regarding their share registry book to
any person, provided that such information is necessary to protect any rights
or clarify situations involving interests of (i) the requesting person, (ii) a
shareholder or (iii) the securities market.

Changes to the Brazilian Corporate Law

The Brazilian Congress enacted Law No. 10,303 on October 31, 2001, which
modified several provisions of the Brazilian Corporate Law and became effective
with respect to us in March 2002. According to this new law, preferred
shareholders who own at least 10% of the total share capital of a company and
common shareholders who own at least 15% of the total common shares of a
company are each are entitled to elect, in a separate election, a
representative to the board of directors. If preferred shareholders and common
shareholders cannot separately achieve the 10% and 15% levels, respectively,
preferred shareholders and common shareholders who together own at least 10% of
the total share capital of a company will be entitled to elect, in a separate
election, a representative to the board of directors. Law 10,303 also modified
the minimum rights attributed to preferred shares, appraisal rights, share
redemption procedures and requirements for the disclosure of trades by
insiders.

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10C. Material Contracts

Joint Venture with Liebherr International AG

We entered into a joint venture with Liebherr International AG to develop
and manufacture landing gear and high precision hydraulic equipment and provide
related services for Embraer and other clients around the world. In connection
with this joint venture, we formed a new subsidiary, ELEB, to which we
transferred all of our landing gear manufacturing activities, the employees and
some liabilities related to those activities on December 1, 1999. On May 22,
2000, Liebherr International AG, acting in coordination with its subsidiary,
Liebherr Aerospace Lindenberg GmbH, and through its Brazilian affiliate,
purchased 40% of the capital stock of ELEB. Liebherr-Aerospace SAS is our
risk-sharing partner responsible for designing, developing and manufacturing
the landing gear assemblies for the new EMBRAER 170/190 jet family.

10D. Exchange Controls

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

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 both equity offerings of our preferred 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 on 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 preferred 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 preferred 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 preferred shares are held pursuant to Resolution No.
2,689 by a duly registered investor or a holder of preferred 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 preferred 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 Preferred Shares and the
ADSsIf holders of ADSs exchange the ADSs for preferred shares, they risk
losing the ability to remit foreign currency abroad and Brazilian tax
advantages and Item 10E. TaxationBrazilian Tax Consequences.

Preemptive Rights

Each of our shareholders has a general preemptive right to subscribe for
shares or securities convertible into shares in any capital increase, 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

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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.

In the event of a capital increase by means of the issuance of new shares,
holders of ADSs, or of preferred shares, would, except under 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 preferred 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 Preferred Shares and the ADSsHolders of our ADSs
might be unable to exercise preemptive rights with respect to the preferred
shares.

Redemption and Right of Withdrawal

According to our bylaws, our common shares and preferred shares are not
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 dissenting
shareholders of Embraer (including any holder of preferred shares) in the event
that at least half of all voting shares outstanding authorize us:



| |  |  | to create preferred shares or to increase disproportionately
an existing class of preferred shares relative to the other class of
shares, unless such action is provided for or authorized by the
bylaws;                                                                                                                                                                      
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to modify a preference, privilege or condition of redemption
or amortization conferred on one or more classes of preferred
shares, or to create a new class with greater privileges than the
existing classes of preferred shares;                                                                                                                                             
|
| |  |  | to reduce the mandatory distribution of dividends;                                                                                                                                                                                                                                                                                                                             
|
| |  |  | to change our corporate purpose;                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | to merge us into another company or to consolidate us with
another company, subject to the conditions set forth in the
Brazilian Corporate Law;                                                                                                                                                                                                                                
|
| |  |  | to transfer all of our shares to another company in order to
make us a wholly owned subsidiary of such company, known as
incorporação de ações;                                                                                                                                                                                                                                
|
| |  |  | to acquire control of another company at a price which
exceeds the limits set forth in the Brazilian Corporate Law;                                                                                                                                                                                                                                                            
|
| |  |  | to participate in a centralized group of companies as defined
under the Brazilian Corporate Law and subject to the conditions set
forth therein; or                                                                                                                                                                                                                            
|
| |  |  | to 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 Brazilian Corporate Law.

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

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Only holders of shares adversely affected by the changes mentioned in the
first and second items above may withdraw their shares. The right of
withdrawal lapses 30 days after publication of the minutes of the relevant
shareholders meeting. In the first two cases mentioned above, however, the
resolution is subject to the prior approval or subsequent ratification by
holders of a majority of the outstanding preferred shares, which must be
obtained at a special meeting held within one year. In such cases, the 30-day
term is counted from the date the minutes of the special meeting are published.
We would be entitled to reconsider any action giving rise to withdrawal rights
within ten days following the expiration of such rights if the withdrawal of
shares of dissenting shareholders would jeopardize our financial stability. In
addition, the rights of withdrawal in the fifth and eighth bullet points above
may be exercised by holders of shares under other limited circumstances.

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 of a date within 60 days of such
shareholders meeting.

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.

10E. Taxation

This summary contains a description of certain Brazilian and U.S. federal
income tax consequences of the purchase, ownership and disposition of preferred
shares or ADSs by a holder, also called a U.S. holder, that is the beneficial
owner of preferred shares or ADSs and that is a citizen or resident alien of
the United States or a U.S. domestic corporation or that otherwise will be
subject to U.S. federal income tax on a net income basis in respect of
preferred shares or ADSs, but it does not purport to be a comprehensive
description of all of the tax considerations that may be relevant to a decision
to purchase preferred shares or ADSs. In particular, this summary deals only
with U.S. holders that will hold preferred shares or ADSs as capital assets and
does not address the tax treatment of U.S. holders that own or are treated as
owning 10% or more of our voting shares or that may be subject to special tax
rules, such as banks, insurance companies, dealers in securities or currencies,
individual retirement and other tax deferred accounts, tax-exempt
organizations, persons that will hold preferred shares or ADSs as a position in
a straddle, a hedging transaction or a conversion transaction for tax
purposes, and persons that have a functional currency other than the U.S.
dollar. Further, if a partnership (including for this purpose any entity
treated as a partnership for U.S. federal income tax purposes) is a beneficial
owner of preferred shares or ADSs, the treatment of a partner in a partnership
will generally depend upon the status of a partner and upon the activities of
the partnership. A holder of preferred shares or ADSs that is a partnership
and partners in such partnership should consult their tax advisors. The
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 preferred shares or ADSs.

Brazilian Tax Consequences

General. The following discussion summarizes the material Brazilian tax
consequences of the acquisition, ownership and disposition of preferred shares
or ADSs, as the case may be, by a holder that is not domiciled in Brazil, also
called a non-Brazilian holder, for purposes of Brazilian taxation and, in the
case of a holder of preferred shares, which has registered its investment in
preferred shares at the Central Bank as a U.S. dollar investment.

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Pursuant to Brazilian law, investors may invest in the preferred 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.

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 preferred 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).

Taxation of Gains. Gains realized outside Brazil by a non-Brazilian
holder on the disposition of ADSs to another non-Brazilian holder are not
subject to Brazilian tax.

The deposit of preferred shares in exchange for ADSs may be subject to
Brazilian capital gains at the rate of 15% if the amount previously registered
with the Central Bank as a foreign investment in the preferred shares is lower
than (1) the average price per preferred share on a Brazilian stock exchange on
which the greatest number of such shares were sold on the day of deposit or (2)
if no preferred shares were sold on that day, the average price on the
Brazilian stock exchange on which the greatest number of preferred shares were
sold in the fifteen trading sessions immediately preceding such deposit. In
such a case, the difference between the amount previously registered and the
average price of the preferred shares, calculated as above, will be considered
a capital gain. Such taxation is not applicable in case of investors
registered under Resolution No. 2,689 which are not located in a tax haven
jurisdiction. The withdrawal of ADSs in exchange for preferred shares is not
subject to Brazilian tax. On receipt of the underlying preferred shares, the
non-Brazilian holder registered under Resolution No. 2,689 will be entitled to
register the U.S. dollar value of such shares with the Central Bank as
described below in Registered Capital. However, if this non-Brazilian
holder does not register under Resolution No. 2,689, it will be subject to
the less favorable tax treatment described below.

Non-Brazilian holders are not subject to tax in Brazil on gains realized
on sales of preferred shares that occur abroad to persons who are not resident
in Brazil. Non-Brazilian holders are generally subject to income tax imposed
at a rate of 15% on gains realized on sales or exchanges of the preferred
shares that involve a resident of Brazil, if the transaction is carried out
outside of any Brazilian stock, future or commodities exchange. Gains realized
by a non-Brazilian holder upon redemption of preferred shares will be treated
as a gain from the disposition of such shares to a Brazilian resident occurring
outside of any Brazilian stock, future and commodities exchange and,
accordingly, will be subject to tax at a rate of 15%.

Non-Brazilian holders are subject to income tax imposed at a rate of 20%
on gains realized on sales or exchanges in Brazil of preferred shares that
occur on the Brazilian exchanges unless such a sale is made by a non-Brazilian
holder which is not resident in a tax haven jurisdiction and (1) such sale is
made within five business days of the withdrawal of such preferred shares in
exchange for ADSs and the proceeds thereof are remitted abroad within such
five-day period or (2) such sale is made under Resolution No. 2,689 by
registered non-Brazilian holders who obtain registration with the CVM. In
these two cases, the gains realized are exempt from income tax. The gain
realized is the difference between the amount in reais realized on the sale or
exchange and the acquisition cost measured inreais, without any correction for
inflation, of the shares sold. The gain realized as a result of a
transaction that occurs other than on the São Paulo Stock Exchange will be the
positive difference between the

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amount realized on the sale or exchange and the acquisition cost of the
preferred shares, both such values to be taken into account in reais; there are
grounds, however, to hold that the gain realized should be calculated based
on the foreign currency amount registered with the Central Bank, such foreign
currency amount to be translated into reais at the commercial market rate on
the date of such sale or exchange. There is no assurance that the current
preferential treatment for holders of the ADSs and some non-Brazilian holders
of the preferred shares under Resolution No. 2,689 will continue or will not
change in the future.

Any exercise of preemptive rights relating to the preferred shares will
not be subject to Brazilian taxation. Any gain on the sale or assignment of
preemptive rights relating to our preferred 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 preferred shares,
unless such sale or assignment is performed on the São Paulo Stock Exchange by
an investor under Resolution No. 2,689 who is not a resident in a tax haven
jurisdiction, in which case the gains are exempt from income tax.

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 holders of
ADSs or preferred shares, whether or not they are Brazilian residents, 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 resident in a tax
haven jurisdiction, the applicable rate for income tax is 25%. Current
Brazilian Corporate 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 case 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 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 of Foreign Exchange Transactions (IOF/Câmbio). Pursuant to
Decree No. 2,219 of May 2, 1997, 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 preferred 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 a tax on exchange transactions known as IOF, the rate of which is
currently 0%. However, according to Law No. 8,894/94, 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). Law No.
8,894/94 created the Tax on Bonds and Securities Transactions, or IOF/Títulos,
which may be imposed on any transactions involving bonds and securities, even
if these transactions are performed on the Brazilian stock, futures or
commodities exchange. The applicable rate of this tax is currently 0%,
although the executive branch may increase such rate up to 1.5% per day, but
only with respect to future transactions.

Other Brazilian Taxes. There are no Brazilian inheritance, gift or
succession taxes applicable to the ownership, transfer or disposition of
preferred shares or ADSs by a non-Brazilian holder, except for gift and
inheritance taxes which are levied by some states of Brazil on gifts made or
inheritances bestowed by individuals or entities not resident or domiciled in
Brazil within such state to individuals or entities resident or domiciled
within such state in Brazil. There are no Brazilian stamp, issue,
registration, or similar taxes or duties payable by holders of preferred shares
or ADSs.

Transactions on Bank Accounts (CPMF). 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.
Therefore, transactions by the depositary or by holders of preferred shares
that involve the transfer of Brazilian currency through Brazilian financial
institutions will be subject to the CPMF tax. When a non-Brazilian holder
transfers the proceeds from the sale or assignment of preferred shares by an
exchange transaction, the CPMF tax is levied on the amount to be remitted
abroad inreais. If we have to perform any exchange transaction in connection
with ADSs or preferred shares, we will also be subject to the CPMF tax. The
CPMF tax is generally imposed on bank account debits, at the current
rate of .38%. The CPMF tax was originally scheduled to expire on

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June 16, 2002. However, the Brazilian Congress has approved an extension
of the CPMF tax until 2004 and is discussing a permanent extension of the tax.
In the event we perform any exchange transaction in connection with ADSs or
preferred shares, we will be responsible for collecting the CPMF tax.

Beneficiaries Resident or Domiciled in Tax Havens or Low Tax
Jurisdictions. Law No. 9,779, dated as of January 1, 1999, states that, with
the exception of limited prescribed circumstances, income derived from
operations by a beneficiary resident or domiciled in a country considered a tax
haven is subject to withholding income tax at the rate of 25%. Tax havens are
considered to be countries which do not impose any income tax or which impose
such tax at a maximum rate of less than 20%. Accordingly, if the distribution
of interest attributed to shareholders equity is made to a beneficiary
resident or domiciled in a tax haven jurisdiction, the applicable income tax
rate will be 25% instead of 15%. Capital gains are not subject to this 25%
tax, even if the beneficiary is resident in a tax haven jurisdiction. See
Taxation of Gains.

Registered Capital. The amount of an investment in preferred shares held
by a non-Brazilian holder who obtains registration under Resolution No. 2,689,
or by the depositary representing such holder, is eligible for registration
with the Central Bank; such registration (the amount so registered being called
registered capital) allows the remittance outside Brazil of foreign currency,
converted at the commercial market rate, acquired with the proceeds of
distributions on, and amounts realized with respect to dispositions of, such
preferred shares. The registered capital for each preferred share purchased as
part of the international offering, or purchased in Brazil after that date, and
deposited with the depositary will be equal to its purchase price in U.S.
dollars. The registered capital for a preferred share that is withdrawn upon
surrender of an ADS will be the U.S. dollar equivalent of:



| |  |  | the average price of a preferred share on the Brazilian stock
exchange on which the greatest number of such shares were sold on
the day of withdrawal; or                                                                   
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | if no preferred shares were sold on that day, the average
price on the Brazilian stock exchange on which the greatest number
of preferred shares were sold in the 15 trading sessions immediately
preceding such withdrawal.

The U.S. dollar value of the average price of preferred shares is
determined on the basis of the average of the U.S. dollar/real commercial
market rates quoted by the Central Bank information system on that date (or, if
the average price of preferred shares is determined under the second option
above, the average of such average quoted rates on the same 15 dates used to
determine the average price of preferred shares).

A non-Brazilian holder of preferred shares may experience delays in
effecting such registration, which may delay remittances abroad. Such a delay
may adversely affect the amount, in U.S. dollars, received by the non-Brazilian
holder. See Item 3D. Risk FactorsRisks Relating to BrazilExchange rate
instability may result in uncertainty in the Brazilian economy and the
Brazilian securities market and could lower the market value of the preferred
shares and the ADSs.

U.S. Federal Income Tax Consequences

In general, for U.S. federal income tax purposes, U.S. holders that are
beneficial owners of ADSs will be treated as the beneficial owners of the
preferred shares represented by those ADSs.

Taxation of Dividends. Distributions with respect to the preferred shares
or the ADSs (other than distributions in redemption of the preferred shares
subject to Section 302(b) of the U.S. Internal Revenue Code of 1986 (also
called the Code) or in a liquidation of Embraer) (including distributions of
notional interest charges attributed to shareholders equity, as described
above in Brazilian Tax ConsequencesTaxation on Interest on Shareholders
Equity) will, to the extent made from current or accumulated earnings and
profits of Embraer as determined under U.S. federal income tax principles,
constitute dividends for U.S. federal income tax purposes. Whether such
current or accumulated earnings and profits will be sufficient for all such
distributions on the preferred shares or ADSs to qualify as dividends for U.S.
federal income tax purposes depends on the future profitability of Embraer and
other factors, many of which are beyond our control. To the extent that such a
distribution exceeds the amount of Embraers earnings and profits, it will be
treated as a non-taxable return of

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capital to the extent of the U.S. holders adjusted tax basis in the
preferred shares or ADSs, and thereafter as capital gain (provided that the
preferred shares or ADSs are held as capital assets). As used below, the term
dividend means a distribution that constitutes a dividend for U.S. federal
income tax purposes. Cash dividends (including amounts withheld in respect of
Brazilian taxes) paid with respect to:



| |  |  | the preferred shares generally will be includible in the
gross income of a U.S. holder as ordinary income on the day on which
the dividends are received by the U.S. holder; or                
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the preferred shares represented by ADSs generally will be
includible in the gross income of a U.S. holder as ordinary income
on the day on which the dividends are received by the depositary;

and, in either case, these dividends will not be eligible for the dividends
received deduction allowed to corporations, but may be taxed at a preferential
rate under recently enacted legislation, as discussed below.

Dividends paid inreais will be includible in the income of a U.S. holder
in a U.S. dollar amount calculated by reference to the exchange rate in effect
on the day they are received by the U.S. holder, in the case of preferred
shares, or the depositary, in the case of preferred shares represented by ADSs,
regardless of whether the payment is in fact converted to U.S. dollars.

If dividends paid in reais are converted into U.S. dollars on the day they
are received by the U.S. holder or the depositary, as the case may be, U.S.
holders should not be required to recognize foreign currency gain or loss in
respect of the dividend income. Generally, any gain or loss resulting from
currency exchange fluctuations during the period from the date the dividend
payment is included in the gross income of a U.S. holder through the date such
payment is converted into dollars (or otherwise disposed of) will be treated as
U.S. source ordinary income or loss. However, U.S. holders should consult
their own tax advisors regarding the treatment of any foreign currency gain or
loss if any reais received by the U.S. holder or the depositary are not
converted into U.S. dollars on the date of receipt.

Dividends received by most U.S. holders will constitute foreign source
passive income or, in the case of some U.S. holders such as banks, financial
services income for U.S. foreign tax credit purposes. Subject to limitations
under U.S. federal income tax law concerning credits or deductions for foreign
taxes, the Brazilian withholding tax will be treated as a foreign income tax
eligible for credit against a U.S. holders U.S. federal income tax liability
(or at a U.S. holders election, may be deducted in computing taxable income).
The rules with respect to foreign tax credits are complex and U.S. holders are
urged to consult their tax advisors regarding the availability of the foreign
tax credit under their particular circumstances. The Internal Revenue Service,
or IRS, has expressed concern that intermediaries in connection with depository
arrangements may be taking actions that are inconsistent with the claiming of
foreign tax credits by U.S. persons who are holders of depositary shares.
Accordingly, investors should be aware that the discussion above regarding the
availability of foreign tax credits for Brazilian withholding tax on dividends
paid with respect to preferred shares represented by ADSs could be affected by
future action taken by the IRS.

Section 305 of the Code provides special rules for the tax treatment of
preferred stock. According to the U.S. Treasury Regulations under that
section, the term preferred stock generally refers to stock which enjoys
limited rights and privileges (generally associated with specified dividend and
liquidation priorities), but does not participate in corporate growth to any
significant extent. While the preferred shares have some preferences over our
common shares, the preferred shares are not fixed as to dividend payments or
liquidation value; thus, it is not entirely clear whether the preferred shares
will be treated as preferred stock or common stock within the meaning of
section 305 of the Code. If the preferred shares are treated as common stock
for purposes of section 305, distributions to U.S. holders of additional shares
of such common stock or preemptive rights relating to such common stock
with respect to their preferred shares or ADSs that are made as part of a pro
rata distribution to all our shareholders likely will not be treated as
dividend income for U.S. federal income tax purposes. On the other hand, if
the preferred shares are treated as preferred stock within the meaning of
section 305, then, in addition to being taxable on cash distributions as
described above, a U.S. holder will be taxable on distributions of additional
shares or preemptive rights (including amounts withheld in respect of any
Brazilian taxes). In that event, the amount

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of such distribution (and the basis of the new shares or preemptive rights
so received) will equal the fair market value of the shares or preemptive
rights on the date of distribution.

Taxation of Capital Gains. Deposits and withdrawals of preferred shares
by U.S. holders in exchange for ADSs will not result in the realization of gain
or loss for U.S. federal income tax purposes.

Gain or loss realized by a U.S. holder on the sale, redemption or other
disposition of preferred shares or ADSs will be subject to U.S. federal income
taxation as capital gain or loss in an amount equal to the difference between
such U.S. tax holders adjusted basis in the preferred shares or the ADSs and
the amount realized on the disposition. As further discussed below, capital
gains of individuals derived with respect to capital assets held for more than
one year may be eligible for various reduced rates of taxation. The
deductibility of capital losses is subject to limitations. Any gain or loss
realized by a U.S. holder will generally be treated as a U.S. source gain or
loss.

If a Brazilian withholding tax is imposed on the sale or disposition of
preferred shares or ADSs (see
Brazilian Tax Consequences), the amount realized by a U.S. holder will
include the gross amount of the proceeds of such sale or disposition before
deduction of the Brazilian withholding tax. The availability of U.S. foreign
tax credits for these Brazilian taxes and any Brazilian taxes imposed on
distributions that do not constitute dividends for U.S. tax purposes is subject
to various limitations and involves the application of rules that depend on a
U.S. holders particular circumstances. U.S. holders are urged to consult
their own tax advisors regarding the application of the foreign tax credit
rules to their investment in, and disposition of, preferred shares or ADSs.

Passive Foreign Investment Companies. 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 passive foreign investment
company, or 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 preferred shares or ADSs, 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, a
U.S. holder would not be entitled to (if otherwise eligible for) the
preferential reduced rate of tax payable on certain dividend income under
recently enacted United States tax legislation, as discussed below. Based on
our operations and business plans, we do not believe that we are currently a
PFIC, and do not expect to become a PFIC in the foreseeable future.

Information Reporting and Backup Withholding. Information reporting
requirements will apply to dividends in respect of the preferred shares or ADSs
or the proceeds received on the sale, exchange, or redemption of the preferred
shares or ADSs paid within the United States (and, in some cases, outside of
the United States) to U.S. holders other than some exempt recipients (such as
corporations), and a 28% backup withholding may apply to such amounts if the
U.S. holder fails to provide an accurate taxpayer identification number or to
report interest and dividends required to be shown on its federal income tax
returns. The amount of any backup withholding from a payment to a U.S. holder
will be allowed as a credit against the U.S. holders U.S. federal income tax
liability, provided that the required information is furnished to the IRS.

Recent United States Tax Law Changes Applicable to Individuals. Recently
enacted United States tax legislation (the 2003 Tax Act) generally has
reduced the rates of tax payable by individuals (as well as certain trusts and
estates) on certain items of income. For example, for capital assets held for
over one year and sold or exchanged on or after May 2, 2003 but in taxable
years beginning before January 1, 2009, the maximum rate of tax generally will
be the 15% (rather than the higher rates of tax generally applicable to items
of ordinary income). Further, qualified dividend income received by
individuals in taxable years beginning after December 31, 2002 and beginning
before January 1, 2009, generally will be taxed at rates applicable to these
capital gains (i.e., a maximum rate of 15%) rather than the higher rates
applicable to other items of ordinary income. For this purpose, qualified
dividend income generally includes dividends paid on stock in United States
corporations as well as dividends paid on stock in foreign corporations if,
among other things, (1) the stock of the foreign corporation is readily
tradable on an established securities market in the United States, or (2) the
foreign corporation is eligible for

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the benefits of a comprehensive income tax treaty with the United States,
such qualifying treaties to be identified by the Secretary of the United States
Treasury Department. For this purpose, stock should be treated as so traded if
an ADR or ADS backed by such stock is so traded. The precise extent to which
dividends paid on stock by foreign corporations will constitute qualified
dividend income and the effect of such status on the ability of a taxpayer to
utilize associated foreign tax credits is not entirely clear, but it is
anticipated that there will be administrative pronouncements concerning these
provisions in the future. Holders are urged to consult their own tax advisors
regarding the impact of the provisions of the 2003 Tax Act on their particular
situations.

10F. Dividends and Paying Agents

Not applicable.

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
Commission. You may inspect and copy reports and other information to be filed
by us at the Public Reference Room maintained by the Commission at 450 Fifth
Street, N.W., Washington D.C. 20549. You may obtain copies of these materials
from the Public Reference Room of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. You may obtain information on
the operation of the Commissions Public Reference Room by calling the
Commission in the United States at 1-800-SEC-0330. 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 Commission. These filings are available at
www.sec.gov. We also file financial statements and other periodic reports
electronically with the CVM at their 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.

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 a 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 also use derivative financial instruments to mitigate the
effects of interest rate fluctuations and to reduce our exposure to exchange
rate risk, but not for speculative purposes. 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 assets and liabilities, principally our
short-term investments (classified as cash and cash equivalents on our balance
sheet) and short- and long-term debt

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obligations. Increases and decreases in prevailing interest rates
generally translate into increases and decreases in interest expense on debt
and interest income on monetary assets. Additionally, the fair values of
interest rate-sensitive instruments are also affected by general market
conditions.

Monetary Assets. We primarily invest in short-term financial assets with
low risk, such as bank certificates of deposit and money market funds
denominated in Brazilianreais and U.S. dollars, which generally earn interest
based on the Brazilian overnight rate for interbank deposits, referred to as
the CDI, or the quoted bank rates for U.S. time deposits or overnight funds.
At December 31, 2002, our short-term investments totaled US$656.8 million, of
which US$280.8 million was represented by U.S. dollar investments and the
equivalent of US$376.0 million was represented by Brazilian investments. Our
Brazilian certificates of deposit and financial investment funds guarantee a
minimum rate of return, usually 101% of the CDI. The annualized weighted
average interest rate earned on our U.S. dollar time deposits was 1.95% and on
our Brazilian investments was 19.22%.

Monetary Liabilities. Our short- and long-term debt obligations totaled
US$552.6 million at December 31, 2002 and were primarily denominated in U.S.
dollars, Brazilian reais and Japanese yen. Of the total amount of debt
denominated in U.S. dollars, US$373.6 million, approximately US$221.0 million
was fixed rate. The remaining floating rate U.S. dollar-denominated debt was
indexed to either six-month or 12-month LIBOR. All of our Brazilian
reais-denominated debt, totaling US$24.1 million at December 31, 2002, bears
interest at a variable rate based on the TJLP, the long-term interest rate in
Brazil. The TJLP ranged from 9.5% per annum to 10.0% per annum during 2002.
Of the US$152.1 million of Japanese yen-denominated debt, US$27.1 million was
fixed rate. The remaining floating rate debt was indexed to the Japanese
interbank deposit rate, or JIBOR.

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The table below provides information about our short- and long-term debt
obligations as of December 31, 2002 that are sensitive to changes in interest
rates and foreign currency exchange rates.

|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |         |         | 
|--------------- | ---------------------------- | --------------------- |  | --------------- | - | ----------- | ------- | ------- | ------- | -------------------------------------- | ------- | ------- | ------- | ---- | ------ | ---------------------------------- | ------ | ---------- | ------ | ---------- | ------ | --- | ------ | ------ | ------ | --- | ------ | ------ | ------ | --- | ------ | ------ | ------ | --- | ------- | ------- | ------- | 
|                |                              |                       |  |                 |   |             |         |         |         | Outstanding amount by year of maturity |         |        
|                |                              |                       |  | Weightedaverage |   | Total       |         |        
|                |                              |                       |  | interest        |   | outstanding |         |         |         | Total                                 
|                |                              |                       |  | rate 2002       |   | amount      |         | 2003    |         | 2004                                   |         | 2005    |         | 2006 |        | 2007                               |        | Thereafter |        | Fair Value
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |           
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        | (in thousands, except percentages) |        |            |        |            |        |     |        |        |        |     |        |       
|Short-term
debt |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                | U.S. dollars (LIBOR indexed) |                       |  | 5.55            | % |             | US$     | 25,647  |         |                                        | US$     | 25,647  |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     | US$     | 30,693  |        
|                | U.S. dollars (fixed rate)    |                       |  | 5.44            |   |             |         | 176,451 |         |                                        |         | 176,451 |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 177,326 |        
|                | Reais (TJLP indexed)         |                       |  | 13.58           |   |             |         | 8,253   |         |                                        |         | 8,253   |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 9,309   |        
|                | EURO (LIBOR indexed)         |                       |  | 3.27            |   |             |         | 2,754   |         |                                        |         | 2,754   |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 2,785   |        
|                | Japanese yen (JIBOR indexed) |                       |  | 1.15            |   |             |         | 31,321  |         |                                        |         | 31,321  |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 30,761  |        
|                | Japanese yen (fixed rate)    |                       |  | 1.67            |   |             |         | 100     |         |                                        |         | 100     |         |      |        |                                   |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 494     |        
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                |                              | Total short-term debt |  |                 |   |             |         |         | 244,526 |                                        |         |         | 244,526 |      |        |                                    |       |            |        |            |       |     |        |        |       |     |        |        |       |     |        |        |       |     |         |         | 251,369 | 
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|Long-term debt  |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                | U.S. dollars (LIBOR indexed) |                       |  | 5.55            | % |             | US$     | 126,948 |         |                                        |         |        |         |      | US$    | 22,588                             |        |            | US$    | 24,360     |        |     | US$    | 20,000 |        |     | US$    | 20,000 |        |     | US$    | 40,000 |        |     | US$     | 121,602 |        
|                | U.S. dollars (fixed rate)    |                       |  | 5.44            |   |             |         | 44,578  |         |                                        |         |        |         |      |        | 6,064                              |        |            |        | 20,764     |        |     |        | 4,742  |        |     |        | 3,858  |        |     |        | 9,151  |        |     |         | 42,612  |        
|                | Reais (TJLP indexed)         |                       |  | 13.58           |   |             |         | 15,868  |         |                                        |         |        |         |      |        | 7,875                              |        |            |        | 5,434      |        |     |        | 664    |        |     |        | 1,056  |        |     |        | 840    |        |     |         | 14,080  |        
|                | Japanese yen (JIBOR indexed) |                       |  | 1.15            |   |             |         | 93,758  |         |                                        |         |        |         |      |        | 31,253                             |        |            |        | 31,253     |        |     |        | 31,252 |        |     |        |       |        |     |        |       |        |     |         | 82,495  |        
|                | Japanese yen (fixed rate)    |                       |  | 1.67            |   |             |         | 26,958  |         |                                        |         |        |         |      |        | 26,958                             |        |            |        |           |        |     |        |       |        |     |        |       |        |     |        |       |        |     |         | 24,042  |        
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                |                              | Total long-term debt  |  |                 |   |             |         |         | 308,110 |                                        |         |         |        |      |        |                                    | 94,737 |            |        |            | 81,811 |     |        |        | 56,657 |     |        |        | 24,914 |     |        |        | 49,991 |     |         |         | 284,831 | 
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        
|Total debt      |                              |                       |  |                 |   | US$         | 552,636 |         |         | US$                                    | 244,526 |         |         | US$  | 94,737 |                                    |        | US$        | 81,811 |            |        | US$ | 56,657 |        |        | US$ | 24,914 |        |        | US$ | 49,991 |        |        | US$ | 536,200 |        
|                |                              |                       |  |                 |   |             |         |         |         |                                        |         |         |         |      |        |                                    |        |            |        |            |        |     |        |        |        |     |        |        |        |     |        |        |        |     |         |        

In order to better match our interest risk on our monetary assts to our
monetary liabilities, we have entered into a number of swaps, primarily
effectively converting our fixed and floating rate U.S. dollar-denominated debt
and fixed and floating rate yen-denominated debt into CDI-based
reais-denominated obligations. Specifically, as of December 31, 2002, we had
effectively converted US$101.1 million of our U.S. dollar floating rate debt,
US$70.7 million of our U.S. dollar fixed rate debt, the yen equivalent of
US$97.4 million of our yen floating rate debt and the yen equivalent of US$27.1
million of our yen floating rate debt into the reais equivalent of US$296.2
million of CDI-based reais-denominated obligations. The weighted average
interest rate of these CDI-based obligations for 2002 was 14.9%. Through
these swaps, we have also effectively converted the yen equivalent of US$27.7
million of our yen-denominated floating rate debt to an equivalent amount of
U.S. dollar obligations with a fixed interest rate of 5.8% per annum. These
swaps did not affect the maturity or amortization schedule of our existing
debt.

Because these swaps are not accounted for as hedging transactions under
U.S. GAAP, these swaps are recorded at fair value on our balance sheet, and we
recognized an unrealized gain of US$49.7 million in 2002 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 34 to our consolidated financial statements.

We believe our remaining potential risk for debt indexed to LIBOR is not
material because these rates have historically been lower and more stable than
interest rates in Brazil. 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 lower volatility of the TJLP, is
unlikely to have a material effect on our company.

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 and
short-term investments as summarized above, we also have other assets and
liabilities denominated in currencies other than the U.S. dollar. These assets
and liabilities are primarily cash and cash equivalents, accounts receivable
and payable, income taxes, dividends and certain other assets and liabilities
and are primarily denominated in Brazilian reais. At December 31, 2002, the
net position of these real-denominated assets and liabilities, before taking
into account the swap agreements discussed above, was a net asset of US$81.1
million. Since we have effectively converted $296.2 million of our U.S. dollar
and yen-denominated liabilities into real-denominated obligations, our
effective exposure to fluctuations in the real is net real-denominated
liabilities of US$215.1 million as of December 31, 2002. As a

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result, we are exposed primarily to fluctuations in the real/dollar
exchange rate to the extent of these net liabilities. The effects of the
devaluation of the real on real-denominated net assets result in foreign
exchange losses and the effects on real-denominated net liabilities result in
foreign exchange gains.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

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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

No matters to report.

ITEM 15. CONTROLS AND PROCEDURES

Our president and chief executive officer, Maurício Novis Botelho, and
our executive vice-president corporate and chief financial officer, Antonio
Luiz Pizarro Manso, after evaluating the effectiveness of our disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c)and
15d-14(c)) as of June 26, 2003, have concluded that, as of such date, our
disclosure controls and procedures were effective to ensure that material
information relating to us and our consolidated subsidiaries would be made
known to them by others within our company and our consolidated subsidiaries.

There were no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the date of their evaluation, nor were there any significant
deficiencies or material weaknesses in our internal controls. As a result, no
corrective actions were required or taken.

ITEM 16. [Reserved]

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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).                                                                                                                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                                             
|2.1     |  | Shareholders Agreement dated July 24, 1997, as amended, together with an
English translation, incorporated herein by reference to Exhibit 9.1 to
Embraers Registration Statement No. 333-12220.                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                             
|2.2     |  | Form of 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 4.1 to
Embraers Registration Statement No. 333-12220.
|        |  |                                                                                                                                                                                                                                                                                                                                             
|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     |  | 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.                                                                                                
|        |  |                                                                                                                                                                                                                                                                                                                                             
|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.                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                                             
|8.1     |  | List of Embraers subsidiaries.                                                                                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                                             
|23.1    |  | Consent of Deloitte Touche Tohmatsu.                                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                                             
|99.1    |  | Certification pursuant to 18 U.S.C. Section 1350 of Chief Executive
Officer dated June 30, 2003.                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                                             
|99.2    |  | Certification pursuant to 18 U.S.C. Section 1350 of Chief Financial
Officer dated June 30, 2003.                                                                                                                                                                                                                                            
|       
|*       |  | Embraer has been granted confidential treatment for portions of this
Exhibit. Accordingly, portions thereof have been omitted and were filed
separately with the Commission.                                                                                                                                                                

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SIGNATURES

Pursuant to the requirements of Section 12 of the Securities and Exchange
Act of 1934, the Registrant hereby certifies that it meets all of the
requirements for filing this Annual Report on Form 20-F and has duly caused
this Annual Report or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized.

| |  |                                 |  |                                                                                    
| |  | ------------------------------- |  | -----------------------------------------------------------------------------------
| |  | EMBRAER
 EMPRESA BRASILEIRA DE
| |  |                                 |  | AERONÁUTICA S.A.                                                                   
| |  |                                 |  |                                                                                    
| |  | By:                             |  | /s/ Antonio Luiz Pizarro Manso                                                     
| |  |                                 |  |                                                                                    
| |  |                                 |  | Name: Antonio Luiz Pizarro Manso                                                   
| |  |                                 |  | Title:   Executive
Vice-President Corporate and Chief
            Financial Officer
| |  |                                 |  |                                                                                    
| |  | By:                             |  | /s/ Carlos Rocha Villela                                                           
| |  |                                 |  |                                                                                    
| |  |                                 |  | Name: Carlos Rocha Villela                                                         
| |  |                                 |  | Title:   Vice-President and General Counsel                                        





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INDEX TO FINANCIAL STATEMENTS

|                                                                                                                |  |      |     | 
|--------------------------------------------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                                                                |  | Page
|                                                                                                                |  |     
|Index to Financial Statements                                                                                   |  |      | F-1 | 
|Independent Auditors Report                                                                                    |  |      | F-3 | 
|Consolidated Balance Sheets at December 31, 2001 and 2002                                                       |  |      | F-4 | 
|Consolidated Statements of Income and Comprehensive Income for the
Years Ended December 31, 2000, 2001 and 2002 |  |      | F-5 | 
|Consolidated Statements of Shareholders Equity for the
Years Ended December 31, 2000, 2001 and 2002            |  |      | F-6 | 
|Consolidated Statements of Cash Flows for the
Years Ended December 31, 2000, 2001 and 2002                      |  |      | F-8 | 
|Notes to Consolidated Financial Statements for the
Years Ended December 31, 2000, 2001 and 2002                 |  |      | F-9 | 

F-1



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| |                                     
| | ------------------------------------
| | Embraer - Empresa Brasileira        
| | de Aeronáutica S.A.                 
| |                                     
| | Consolidated Financial Statements   
| | for the Years Ended                 
| | December 31, 2000, 2001 and 2002 and
| | Independent Auditors Report        

F-2



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INDEPENDENT AUDITORS REPORT

To the Board of Directors and Shareholders of
Embraer - Empresa Brasileira de Aeronáutica S.A.
São Paulo - SP - Brazil



|1. |  | We have audited the accompanying consolidated balance sheets of Embraer -
Empresa Brasileira de Aeronáutica S.A. and subsidiaries (the Company) as
of December 31, 2001 and 2002, and the related consolidated statements of
income and comprehensive income, cash flows and shareholders equity for
each of the years in the three-year period ended December 31, 2002. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for
our opinion.
|  
|3. |  | 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, 2001 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 2002, in conformity with accounting principles
generally accepted in the United States of America.                                                                                                                                                                                
|  
|4. |  | As discussed in note 34 to the consolidated financial statements,
effective January 1, 2001 the Company changed its method of accounting for
derivative financial instruments to conform to Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Financial
Instruments and Hedging Activities, as amended.                                                                                                                                                                                                                                                                                                                                    

/s/ Deloitte Touche Tohmatsu

June 18, 2003
São Paulo, Brazil

F-3



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)

|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|---------------------------------------------------------------- |  | ----- | --- | ---- |  | ---- | --------- | - |  |  | --------- | -
|                                                                 |  | Notes |     | 2001 |  | 2002
|                                                                 |  |       |     |      |  |     
|ASSETS                                                           |  |       |     |      |  |      |           |   |  |  |           |  
|CURRENT ASSETS                                                   |  |       |     |      |  |      |           |   |  |  |           |  
|Cash and cash equivalents                                        |  |       | (5  | )    |  |      | 749,302   |   |  |  | 656,822   |  
|Trade accounts receivable, net of allowance of 23,700 and 24,490 |  |       | (6  | )    |  |      | 596,801   |   |  |  | 735,927   |  
|Customer and Commercial Financing                                |  |       | (7  | )    |  |      |          |   |  |  | 18,973    |  
|Collateralized accounts receivable and nonrecourse debt          |  |       | (8  | )    |  |      | 16,315    |   |  |  | 68,872    |  
|Inventories                                                      |  |       | (9  | )    |  |      | 1,015,081 |   |  |  | 864,800   |  
|Deferred income tax assets                                       |  |       | (29 | )    |  |      | 98,756    |   |  |  | 90,014    |  
|Other assets                                                     |  |       | (10 | )    |  |      | 89,093    |   |  |  | 77,715    |  
|Total current assets                                             |  |       |     |      |  |      | 2,565,348 |   |  |  | 2,513,123 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|NONCURRENT ASSETS                                                |  |       |     |      |  |      |           |   |  |  |           |  
|Held to maturity investments                                     |  |       | (11 | )    |  |      | 35,651    |   |  |  | 23,263    |  
|Collateralized accounts receivable and nonrecourse debt          |  |       | (8  | )    |  |      | 306,033   |   |  |  | 873,046   |  
|Customer and commercial financing                                |  |       | (7  | )    |  |      | 28,672    |   |  |  | 59,401    |  
|Inventories                                                      |  |       | (9  | )    |  |      | 22,714    |   |  |  | 15,518    |  
|Property, plant and equipment, net                               |  |       | (13 | )    |  |      | 366,481   |   |  |  | 436,715   |  
|Investments                                                      |  |       | (12 | )    |  |      | 4,362     |   |  |  | 4,745     |  
|Deferred income taxes                                            |  |       | (29 | )    |  |      | 85,139    |   |  |  | 72,827    |  
|Other assets                                                     |  |       | (10 | )    |  |      | 146,387   |   |  |  | 286,826   |  
|Total noncurrent assets                                          |  |       |     |      |  |      | 995,439   |   |  |  | 1,772,341 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|TOTAL ASSETS                                                     |  |       |     |      |  |      | 3,560,787 |   |  |  | 4,285,464 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|LIABILITIES AND SHAREHOLDERS EQUITY                             |  |       |     |      |  |      |           |   |  |  |           |  
|CURRENT LIABILITIES                                              |  |       |     |      |  |      |           |   |  |  |           |  
|Loans                                                            |  |       | (20 | )    |  |      | 526,550   |   |  |  | 244,526   |  
|Capital lease obligation                                         |  |       | (21 | )    |  |      | 8,985     |   |  |  | 7,949     |  
|Nonrecourse debt                                                 |  |       | (8  | )    |  |      | 16,315    |   |  |  | 68,872    |  
|Accounts payable to suppliers                                    |  |       | (14 | )    |  |      | 265,593   |   |  |  | 323,115   |  
|Customer advances                                                |  |       | (17 | )    |  |      | 385,265   |   |  |  | 409,258   |  
|Other accounts payable and accrued liabilities                   |  |       | (16 | )    |  |      | 277,779   |   |  |  | 297,463   |  
|Taxes and social charges payable                                 |  |       | (18 | )    |  |      | 132,288   |   |  |  | 199,857   |  
|Contingencies                                                    |  |       | (19 | )    |  |      | 4,395     |   |  |  | 5,244     |  
|Accrued taxes on income                                          |  |       | (29 | )    |  |      | 48,379    |   |  |  | 49,218    |  
|Accrued dividends                                                |  |       | (26 | )    |  |      | 22,314    |   |  |  | 36,431    |  
|Total current liabilities                                        |  |       |     |      |  |      | 1,687,863 |   |  |  | 1,641,933 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|LONG-TERM LIABILITIES                                            |  |       |     |      |  |      |           |   |  |  |           |  
|Loans                                                            |  |       | (20 | )    |  |      | 245,186   |   |  |  | 308,110   |  
|Capital lease obligation                                         |  |       | (21 | )    |  |      | 7,640     |   |  |  | 4,895     |  
|Nonrecourse debt                                                 |  |       | (8  | )    |  |      | 306,033   |   |  |  | 873,046   |  
|Customer advances                                                |  |       | (17 | )    |  |      | 106,594   |   |  |  | 95,625    |  
|Contribution from suppliers                                      |  |       | (15 | )    |  |      | 143,615   |   |  |  | 235,445   |  
|Taxes and social charges payable                                 |  |       | (18 | )    |  |      | 21,380    |   |  |  | 16,117    |  
|Other accounts payable and accrued liabilities                   |  |       | (16 | )    |  |      | 3,183     |   |  |  | 2,794     |  
|Contingencies                                                    |  |       | (19 | )    |  |      | 10,767    |   |  |  | 9,093     |  
|Total long-term liabilities                                      |  |       |     |      |  |      | 844,398   |   |  |  | 1,545,125 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|MINORITY INTEREST                                                |  |       |     |      |  |      | 8,170     |   |  |  | 8,226     |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|SHAREHOLDERS EQUITY                                             |  |       | (25 | )    |  |      |           |   |  |  |           |  
|Statutory capital:                                               |  |       |     |      |  |      |           |   |  |  |           |  
|Common                                                           |  |       |     |      |  |      | 50,263    |   |  |  | 207,014   |  
|Preferred                                                        |  |       |     |      |  |      | 380,317   |   |  |  | 684,078   |  
|Additional
paid-in capital - Stock Option                        |  |       |     |      |  |      | 8,353     |   |  |  | 8,353     |  
|Legal reserve                                                    |  |       |     |      |  |      | 59,162    |   |  |  | 76,172    |  
|Retained earnings (restricted)                                   |  |       |     |      |  |      | 523,834   |   |  |  | 123,399   |  
|Accumulated other comprehensive income                           |  |       |     |      |  |      | (1,573    | ) |  |  | (8,836    | )
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|Total shareholders equity                                       |  |       |     |      |  |      | 1,020,356 |   |  |  | 1,090,180 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                       |  |       |     |      |  |      | 3,560,787 |   |  |  | 4,285,464 |  
|                                                                 |  |       |     |      |  |      |           |   |  |  |           |  

F-4



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands of U.S. dollars except per share data)

|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |         | 
|---------------------------------------------------- | --------- |  | ----- | - | ---- |  | -------------------------------- | ------- | ---- |  | ---------- | ------- |  |  | ---------- | ------- | 
|                                                     |           |  |       |   |      |  | For the years ended December 31,
|                                                     |           |  |       |   |      |  |                                 
|                                                     |           |  | Notes |   | 2000 |  | 2001                             |         | 2002
|                                                     |           |  |       |   |      |  |                                  |         |     
|GROSS SALES                                          |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|Foreign market                                       |           |  |       |   |      |  | 2,771,847                        |         |      |  | 2,902,936  |         |  |  | 2,493,313  |        
|Domestic market                                      |           |  |       |   |      |  | 56,301                           |         |      |  | 62,702     |         |  |  | 58,342     |        
|Sales deductions                                     |           |  |       |   |      |  | (65,986                          | )       |      |  | (38,643    | )       |  |  | (25,855    | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|NET SALES                                            |           |  |       |   |      |  | 2,762,162                        |         |      |  | 2,926,995  |         |  |  | 2,525,800  |        
|Cost of sales and services                           |           |  |       |   |      |  | (1,879,318                       | )       |      |  | (1,769,234 | )       |  |  | (1,531,720 | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|GROSS PROFIT                                         |           |  |       |   |      |  | 882,844                          |         |      |  | 1,157,761  |         |  |  | 994,080    |        
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|OPERATING EXPENSES                                   |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|Selling expenses                                     |           |  |       |   |      |  | (193,420                         | )       |      |  | (212,057   | )       |  |  | (211,015   | )      
|Research and development                             |           |  |       |   |      |  | (69,593                          | )       |      |  | (99,566    | )       |  |  | (158,499   | )      
|General and administrative                           |           |  |       |   |      |  | (96,645                          | )       |      |  | (120,787   | )       |  |  | (109,673   | )      
|Employee profit sharing                              |           |  | (24   | ) |      |  | (41,770                          | )       |      |  | (43,746    | )       |  |  | (25,222    | )      
|Stock compensation                                   |           |  | (28   | ) |      |  | (510                             | )       |      |  | (1,074     | )       |  |  |           |        
|Other operating expense, net                         |           |  | (30   | ) |      |  | (19,518                          | )       |      |  | (29,463    | )       |  |  | (20,498    | )      
|Equity in income (loss) from affiliates              |           |  | (12   | ) |      |  | 753                              |         |      |  | 310        |         |  |  | 389        |        
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|INCOME FROM OPERATIONS                               |           |  |       |   |      |  | 462,141                          |         |      |  | 651,378    |         |  |  | 469,562    |        
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|Interest income (expense), net                       |           |  | (22   | ) |      |  | (6,874                           | )       |      |  | 47,502     |         |  |  | 80,456     |        
|Financial transaction loss, net                      |           |  | (31   | ) |      |  | (24,637                          | )       |      |  | (148,637   | )       |  |  | (135,647   | )      
|Other nonoperating income (expense), net             |           |  | (32   | ) |      |  | 5,955                            |         |      |  | (8,426     | )       |  |  | (1,394     | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|INCOME BEFORE INCOME TAXES                           |           |  |       |   |      |  | 436,585                          |         |      |  | 541,817    |         |  |  | 412,977    |        
|Provision for income taxes                           |           |  | (29   | ) |      |  | (117,379                         | )       |      |  | (218,394   | )       |  |  | (188,502   | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|INCOME BEFORE MINORITY INTEREST                      |           |  |       |   |      |  | 319,206                          |         |      |  | 323,423    |         |  |  | 224,475    |        
|Minority interest                                    |           |  |       |   |      |  | 1,522                            |         |      |  | (423       | )       |  |  | (1,883     | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE |           |  |       |   |      |  | 320,728                          |         |      |  | 323,000    |         |  |  | 222,592    |        
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX   |           |  | (34   | ) |      |  |                                 |         |      |  | 5,440      |         |  |  |           |        
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|NET INCOME                                           |           |  |       |   |      |  | 320,728                          |         |      |  | 328,440    |         |  |  | 222,592    |        
|Foreign currency translation adjustments, net of tax |           |  |       |   |      |  | (1,090                           | )       |      |  | 2,998      |         |  |  | (7,263     | )      
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|COMPREHENSIVE INCOME                                 |           |  |       |   |      |  | 319,638                          |         |      |  | 331,438    |         |  |  | 215,329    |        
|                                                     |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|EARNINGS PER SHARE                                   |           |  | (27   | ) |      |  |                                  |         |      |  |            |         |  |  |            |        
|Basic:                                               |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|                                                     | Common    |  |       |   |      |  |                                  | 0.55    |      |  |            | 0.48    |  |  |            | 0.30    | 
|                                                     | Preferred |  |       |   |      |  |                                  | 0.61    |      |  |            | 0.53    |  |  |            | 0.33    | 
|Diluted:                                             |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|                                                     | Common    |  |       |   |      |  |                                  | 0.48    |      |  |            | 0.46    |  |  |            | 0.30    | 
|                                                     | Preferred |  |       |   |      |  |                                  | 0.53    |      |  |            | 0.50    |  |  |            | 0.33    | 
|WEIGHTED AVERAGE SHARES (thousands of shares)        |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|Basic:                                               |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|                                                     | Common    |  |       |   |      |  |                                  | 242,544 |      |  |            | 242,544 |  |  |            | 242,544 | 
|                                                     | Preferred |  |       |   |      |  |                                  | 308,401 |      |  |            | 402,035 |  |  |            | 454,414 | 
|Diluted:                                             |           |  |       |   |      |  |                                  |         |      |  |            |         |  |  |            |        
|                                                     | Common    |  |       |   |      |  |                                  | 242,544 |      |  |            | 242,544 |  |  |            | 242,544 | 
|                                                     | Preferred |  |       |   |      |  |                                  | 392,954 |      |  |            | 433,386 |  |  |            | 459,415 | 

The notes are an integral part of the consolidated financial statements.

F-5



---



##### 



EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands of U.S. dollars except share data)

|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |         | 
|------------------------------- | --------------------------------- |  | ----------------- | - | --------- |  | ------ | - | ------ |  | --------------------------------------- | ---------- | ------------ |  | ---------------------------- | ------- | ----------------------------------- |  | ----- | - |  |  | ------ | - |  |  | -------- | - |  |  | ------ | - |  |  | --------- | ------- | 
|                                |                                   |  | Statutory capital |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |       
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   | 
|                                |                                   |  | Common            |   | Preferred |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |      
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                    
|                                |                                   |  | Shares            |   | Amount    |  | Shares |   | Amount |  | Additionalpaid-in capital -stock option |            | LegalReserve |  | Retainedearnings(restricted) |         | Accumulatedothercomprehensiveincome |  | Total
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |      
|BALANCE ON DECEMBER 31, 1999    |                                   |  | 242,544,448       |   |           |  | 50,263 |   |        |  | 294,253,609                             |            |              |  | 49,461                       |         |                                     |  | 6,769 |   |  |  | 17,995 |   |  |  | 243,894  |   |  |  | (3,481 | ) |  |  | 364,901   |        
|Capital increase:               |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |        
|                                | In cash                           |  |                   |  |           |  |        |  |        |  |                                         | 65,095,603 |              |  |                              | 235,460 |                                     |  |       |  |  |  |        |  |  |  |          |  |  |  |        |  |  |  |           | 235,460 | 
|                                | Debentures converted into capital |  |                   |  |           |  |        |  |        |  |                                         | 11,579,127 |              |  |                              | 11,708  |                                     |  |       |  |  |  |        |  |  |  |          |  |  |  |        |  |  |  |           | 11,708  | 
|Stock option compensation       |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  | 510   |   |  |  |       |   |  |  |         |   |  |  |       |   |  |  | 510       |        
|Net income                      |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | 320,728  |   |  |  |       |   |  |  | 320,728   |        
|Legal reserve                   |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  | 17,066 |   |  |  | (17,066  | ) |  |  |       |   |  |  |          |        
|Cash dividends declared         |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | (146,857 | ) |  |  |       |   |  |  | (146,857  | )      
|Currency translation adjustment |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  |         |   |  |  | (1,090 | ) |  |  | (1,090    | )      
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |        
|BALANCE ON DECEMBER 31, 2000    |                                   |  | 242,544,448       |   |           |  | 50,263 |   |        |  | 370,928,339                             |            |              |  | 296,629                      |         |                                     |  | 7,279 |   |  |  | 35,061 |   |  |  | 400,699  |   |  |  | (4,571 | ) |  |  | 785,360   |        
|Capital increase:               |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |        
|                                | In cash                           |  |                   |  |           |  |        |  |        |  |                                         | 6,084,220  |              |  |                              | 1,761   |                                     |  |       |  |  |  |        |  |  |  |          |  |  |  |        |  |  |  |           | 1,761   | 
|                                | Debentures converted into capital |  |                   |  |           |  |        |  |        |  |                                         | 91,156,035 |              |  |                              | 81,927  |                                     |  |       |  |  |  |        |  |  |  |          |  |  |  |        |  |  |  |           | 81,927  | 
|Stock option compensation       |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  | 1,074 |   |  |  |       |   |  |  |         |   |  |  |       |   |  |  | 1,074     |        
|Net income                      |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | 328,440  |   |  |  |       |   |  |  | 328,440   |        
|Legal reserve                   |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  | 24,101 |   |  |  | (24,101  | ) |  |  |       |   |  |  |          |        
|Cash dividends declared         |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | (181,204 | ) |  |  |       |   |  |  | (181,204  | )      
|Currency translation adjustment |                                   |  |                  |   |           |  |       |   |        |  |                                        |            |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  |         |   |  |  | 2,998  |   |  |  | 2,998     |        
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |        
|BALANCE ON DECEMBER 31, 2001    |                                   |  | 242,544,448       |   |           |  | 50,263 |   |        |  | 468,168,594                             |            |              |  | 380,317                      |         |                                     |  | 8,353 |   |  |  | 59,162 |   |  |  | 523,834  |   |  |  | (1,573 | ) |  |  | 1,020,356 |        
|                                |                                   |  |                   |   |           |  |        |   |        |  |                                         |            |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |   |  |  |        |   |  |  |           |        

(Continues)

F-6



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|(In thousands of U.S. dollars except share data) |  | (Continuation)
|------------------------------------------------ |  | --------------

|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |          |   |  |        |   |  |  |           |       | 
|------------------------------- | -------------------------- |  | ----------------- | - | --------- |  | ------- | ------- | ------ |  | --------------------------------------- | --------- | ------------ |  | ---------------------------- | ------- | ----------------------------------- |  | ----- | - |  |  | ------ | - |  |  | -------- | -------- | - |  | ------ | - |  |  | --------- | ----- | 
|                                |                            |  | Statutory capital |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   |  |  |       
|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   | 
|                                |                            |  | Common            |   | Preferred |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |      
|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                    
|                                |                            |  | Shares            |   | Amount    |  | Shares  |         | Amount |  | Additionalpaid-in capital -stock option |           | LegalReserve |  | Retainedearnings(restricted) |         | Accumulatedothercomprehensiveincome |  | Total
|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |      
|BALANCE ON DECEMBER 31, 2001    |                            |  | 242,544,448       |   |           |  | 50,263  |         |        |  | 468,168,594                             |           |              |  | 380,317                      |         |                                     |  | 8,353 |   |  |  | 59,162 |   |  |  | 523,834  |          |   |  | (1,573 | ) |  |  | 1,020,356 |      
|Capital increase:               |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |          |   |  |        |   |  |  |           |      
|                                | In cash                    |  |                   |  |           |  |         |        |        |  |                                         | 2,261,313 |              |  |                              | 1,194   |                                     |  |       |  |  |  |        |  |  |  |          |         |   |  |        |  |  |  |           | 1,194 | 
|                                | Capitalization of reserves |  |                   |  |           |  |         | 156,751 |        |  |                                         |          |              |  |                              | 302,567 |                                     |  |       |  |  |  |        |  |  |  |          | (459,318 | ) |  |        |  |  |  |           |      | 
|Net income                      |                            |  |                  |   |           |  |        |         |        |  |                                        |           |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | 222,592  |          |   |  |       |   |  |  | 222,592   |      
|Legal reserve                   |                            |  |                  |   |           |  |        |         |        |  |                                        |           |              |  |                             |         |                                     |  |      |   |  |  | 17,010 |   |  |  | (17,010  | )        |   |  |       |   |  |  |          |      
|Cash dividends declared         |                            |  |                  |   |           |  |        |         |        |  |                                        |           |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | (146,713 | )        |   |  |       |   |  |  | (146,713  | )    
|Expired dividends               |                            |  |                  |   |           |  |        |         |        |  |                                        |           |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  | 14       |          |   |  |       |   |  |  | 14        |      
|Currency translation adjustment |                            |  |                  |   |           |  |        |         |        |  |                                        |           |              |  |                             |         |                                     |  |      |   |  |  |       |   |  |  |         |          |   |  | (7,263 | ) |  |  | (7,263    | )    
|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |          |   |  |        |   |  |  |           |      
|BALANCE ON DECEMBER 31, 2002    |                            |  | 242,544,448       |   |           |  | 207,014 |         |        |  | 470,429,907                             |           |              |  | 684,078                      |         |                                     |  | 8,353 |   |  |  | 76,172 |   |  |  | 123,399  |          |   |  | (8,836 | ) |  |  | 1,090,180 |      
|                                |                            |  |                   |   |           |  |         |         |        |  |                                         |           |              |  |                              |         |                                     |  |       |   |  |  |        |   |  |  |          |          |   |  |        |   |  |  |           |      

The notes are an integral part of the consolidated financial statements.

F-7



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)

|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |          |        |  
|--------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------------------------------------- | ---------- | -------------------------------- | ------- | ---- | ---------- | -------- | ------ | - | ---------- | -------- | ------ | -
|                                                                                  |                                                |                                                 |            | For the years ended December 31,
|                                                                                  |                                                |                                                 |            |                                 
|                                                                                  |                                                |                                                 |            | 2000                             |         | 2001 |            | 2002    
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |         
|CASH FLOWS - OPERATING ACTIVITIES                                                 |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Net income                                                                        |                                                |                                                 | 320,728    |                                  |         |      | 328,440    |          |        |   | 222,592    |         
|Adjustments to reconcile net income to net cash
provided by operating activities: |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|                                                                                  |                                                | Depreciation                                    |            |                                  | 30,596  |      |            |          | 46,417 |   |            |          | 55,602 |  
|                                                                                  |                                                | Provision for doubtful accounts                 |            |                                  | 6,105   |      |            |          | 6,938  |   |            |          | 1,436  |  
|                                                                                  |                                                | Provision for inventory obsolescence            |            |                                  | 32,150  |      |            |          | 12,968 |   |            |          | 22,061 |  
|                                                                                  |                                                | Deferred income and social contribution tax     |            |                                  | (17,125 | )    |            |          | 41,333 |   |            |          | 21,054 |  
|                                                                                  |                                                | Cumulative effect of accounting change          |            |                                  |        |      |            |          | (5,440 | ) |            |          |       |  
|                                                                                  |                                                | Gain on sale of minority interest in subsidiary |            |                                  | (12,935 | )    |            |          |       |   |            |          |       |  
|                                                                                  |                                                | Loss on the disposition of assets               |            |                                  | 986     |      |            |          | 966    |   |            |          | 1,119  |  
|                                                                                  |                                                | Stock compensation                              |            |                                  | 510     |      |            |          | 1,074  |   |            |          |       |  
|                                                                                  |                                                | Equity in income from affiliates                |            |                                  | (753    | )    |            |          | (310   | ) |            |          | (389   | )
|                                                                                  |                                                | Accrued interest recorded in loans              |            |                                  | 42,453  |      |            |          | 33,285 |   |            |          | 22,712 |  
|                                                                                  |                                                | Minority interests                              |            |                                  | (1,522  | )    |            |          | 423    |   |            |          | 1,883  |  
|                                                                                  |                                                | Other                                           |            |                                  | 9,463   |      |            |          | (9,351 | ) |            |          | (7,243 | )
|Changes in assets and liabilities:                                                |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|                                                                                  | Trade accounts receivable                      |                                                 |            | 124,317                          |         |      |            | (438,021 | )      |   |            | (140,562 | )     
|                                                                                  | Inventories                                    |                                                 |            | 124,486                          |         |      |            | (434,571 | )      |   |            | 135,416  |       
|                                                                                  | Other assets                                   |                                                 |            | 13,599                           |         |      |            | (59,792  | )      |   |            | (712,111 | )     
|                                                                                  | Accounts payable to suppliers                  |                                                 |            | 66,860                           |         |      |            | (1,299   | )      |   |            | 57,522   |       
|                                                                                  | Other accounts payable and accrued liabilities |                                                 |            | 156,941                          |         |      |            | 34,093   |        |   |            | 638,865  |       
|                                                                                  | Accrued taxes on income                        |                                                 |            | 25,282                           |         |      |            | 8,469    |        |   |            | 839      |       
|                                                                                  | Customers advances                             |                                                 |            | 50,691                           |         |      |            | 117,521  |        |   |            | 13,024   |       
|                                                                                  | Contribution from suppliers                    |                                                 |            | 120,420                          |         |      |            | 1,945    |        |   |            | 91,830   |       
|                                                                                  | Contingency                                    |                                                 |            | (7,263                           | )       |      |            | 90       |        |   |            | (825     | )     
|                                                                                  | Taxes and social charges payable               |                                                 |            | 33,985                           |         |      |            | 51,662   |        |   |            | 82,858   |       
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Net cash provided by (used in) operating activities                               |                                                |                                                 | 1,119,974  |                                  |         |      | (263,160   | )        |        |   | 507,683    |         
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|CASH FLOWS - INVESTING ACTIVITIES                                                 |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Purchase of property, plant and equipment                                         |                                                |                                                 | (114,227   | )                                |         |      | (143,828   | )        |        |   | (127,746   | )       
|Proceeds from the sale of property, plant and equipment                           |                                                |                                                 | 1,026      |                                  |         |      |           |          |        |   | 790        |         
|Proceeds from the sale of minority interest of subsidiary                         |                                                |                                                 | 22,205     |                                  |         |      |           |          |        |   |           |         
|Customer
and commercial financing - net additions                                 |                                                |                                                 | (83        | )                                |         |      | (13,735    | )        |        |   | (49,701    | )       
|Held to maturity investment                                                       |                                                |                                                 | (2,701     | )                                |         |      | (18,932    | )        |        |   | 12,388     |         
|Guarantee deposits and compulsory loans                                           |                                                |                                                 | (10,650    | )                                |         |      | (98,677    | )        |        |   | (36,521    | )       
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Net cash used in investing activities                                             |                                                |                                                 | (104,430   | )                                |         |      | (275,172   | )        |        |   | (200,790   | )       
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|CASH
FLOWS - FINANCING ACTIVITIES                                                 |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Repayment of loans                                                                |                                                |                                                 | (1,344,246 | )                                |         |      | (1,210,155 | )        |        |   | (1,103,848 | )       
|Proceeds from borrowings                                                          |                                                |                                                 | 1,112,096  |                                  |         |      | 1,495,119  |          |        |   | 868,046    |         
|Proceeds from the issuance of shares                                              |                                                |                                                 | 235,460    |                                  |         |      | 1,761      |          |        |   | 1,194      |         
|Dividends paid                                                                    |                                                |                                                 | (126,293   | )                                |         |      | (179,491   | )        |        |   | (134,421   | )       
|Payments of refinanced taxes                                                      |                                                |                                                 | (2,599     | )                                |         |      | (1,618     | )        |        |   | (20,552    | )       
|Payments on capital lease obligations                                             |                                                |                                                 | (4,816     | )                                |         |      | (7,213     | )        |        |   | (9,792     | )       
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Net cash provided (used) by financing activities                                  |                                                |                                                 | (130,398   | )                                |         |      | 98,403     |          |        |   | (399,373   | )       
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Net increase (decrease) in cash and equivalents                                   |                                                |                                                 | 885,146    |                                  |         |      | (439,929   | )        |        |   | (92,480    | )       
|Cash and cash equivalents at beginning of year                                    |                                                |                                                 | 304,085    |                                  |         |      | 1,189,231  |          |        |   | 749,302    |         
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Cash and cash equivalents at end of year                                          |                                                |                                                 | 1,189,231  |                                  |         |      | 749,302    |          |        |   | 656,822    |         
|                                                                                  |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|SUPPLEMENTAL CASH FLOW DISCLOSURES                                                |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|Cash paid during the year for:                                                    |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|                                                                                  | Income taxes                                   |                                                 |            | 108,939                          |         |      |            | 166,891  |        |   |            | 79,860   |       
|                                                                                  | Interest                                       |                                                 |            | 44,051                           |         |      |            | 34,358   |        |   |            | 32,396   |       
|Noncash transactions:                                                             |                                                |                                                 |            |                                  |         |      |            |          |        |   |            |         
|                                                                                  | Conversion of debentures to capital            |                                                 |            | 11,708                           |         |      |            | 81,927   |        |   |            |         |       
|                                                                                  | Lease of assets                                |                                                 |            | 7,480                            |         |      |            | 11,019   |        |   |            | 6,010    |       

The notes are an integral part of the consolidated financial statements.

F-8



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(In thousands of U.S. dollars except per share data)



|1. |  | OPERATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Embraer - Empresa Brasileira de Aeronáutica S.A. (the Company) is engaged
in the design, development, production and marketing of a range of jet and
turboprop aircraft for regional airline and defense use, of light
reciprocating and turboprop aircraft for general aviation, corporate and
agricultural uses and of aviation-related structural parts and mechanical
and hydraulic systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|2. |  | PRESENTATION OF FINANCIAL STATEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  
|   |  | The consolidated financial
statements of Embraer - Empresa Brasileira de
Aeronáutica S.A. and its subsidiaries have been prepared in conformity with
accounting principles generally accepted in the United States of America
(U.S. GAAP), which require management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue and
expenses during the reporting periods and require the disclosure of
contingent assets and liabilities as of the date of the financial
statements. The consolidated financial statements include estimates used in
the determination of items including, among others, the allowance for
doubtful accounts and notes receivable, the selection of useful lives of
property, plant and equipment, provisions necessary for asset impairment,
the valuation allowance related to deferred income taxes, the reporting of
contingent obligations and employee post-retirement benefits. Actual results
may vary from estimates.



| | a) |  | Basis of presentation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The consolidated financial statements have been prepared in accordance
with U.S. GAAP, which differs in certain significant respects from the
Brazilian accounting principles applied by the Company in its statutory
financial statements prepared in accordance with Brazilian corporate
legislation (Brazilian corporate law).                                                                                                                                                                                                                                                 
|
| |    |  | Up to December 31, 2000, as permitted, the Company presented its
consolidated financial statements in accordance with generally accepted
accounting principles in Brazil (Brazilian GAAP), stated in Brazilian
reais (R$), using the price-level accounting methodology prescribed by
the Brazilian Federal Accountancy Council, which differs in certain
significant respects from U.S. GAAP and Brazilian corporate law.
Previously, amounts of net income and shareholders equity under
Brazilian GAAP were reconciled to those that would have been reported
under U.S. GAAP.

F-9



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |    |  | Beginning January 1, 2001, the Company is presenting its consolidated
financial statements in accordance with U.S. GAAP, stated in U.S. dollars
(US$), as it believes such presentation is more meaningful to readers.
The Company exports more than 97% of its products and operates in an
industry that uses the U.S. dollar as its primary currency of reference.
The Board of Directors and management have historically considered the
U.S. dollar as the Companys functional currency. Accordingly, the
Companys management has concluded that the Companys functional currency
is and will continue to be the U.S. dollar. For consistent presentation,
the consolidated financial statement information has been restated in
accordance with U.S. GAAP for all periods presented.                                                                                                                               
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The Company and its subsidiaries maintain their financial records in
local currency. For operations with the U.S. dollar as the functional
currency, the U.S. dollar amounts have been remeasured from local
currency in accordance with the criteria set forth in Statement of
Financial Accounting Standards No. 52 - Foreign Currency Translation
(SFAS No. 52). Nonmonetary balance sheet items (including inventories;
prepaid expenses; property, plant and equipment; certain deferred assets
and liabilities; and equity) and the related income statement accounts
are remeasured using prevailing historical rates as of the date of the
related transaction. Monetary assets and liabilities (including cash and
cash equivalents; accounts and notes receivable; deferred taxes, accounts
payable and accrued liabilities; and debt) are remeasured using rates in
effect at the date of the balance sheet.
|
| |    |  | For foreign operations with functional currencies other than the U.S.
dollar, asset and liability accounts are translated using 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.
Gains and losses resulting from transactions denominated in currencies
other than the functional currency are recognized in the statements of
income.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | As a result of the remeasurement of amounts to the functional currency
and other adjustments related to the differences in accounting principles
between U.S. GAAP and Brazilian GAAP, the amounts of net income and
shareholders equity as reported in the consolidated financial statements
presented herein differ from that included in the Companys statutory
accounting records.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| | b) |  | Principles of consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | The consolidated financial statements of the Company, together with its
subsidiaries, include the accounts of all majority-owned subsidiaries.
Investments in affiliates for which the Company does not have control,
but has the ability to exercise significant influence over the operating
and financial policies, are accounted for under the equity method with
the Companys share of net earnings and losses from these investments
recorded in the consolidated statements of income. Intercompany profits,
transactions and balances have been eliminated in consolidation. Certain
reclassifications have been made to prior periods to conform with the
current reporting.                                                                                                                                                                                                                                     

F-10



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| | c) |  | Operating activities of subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The following is a brief summary of the operating activities of the
Companys subsidiaries:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |    |  | Embraer Aircraft Holding Inc. - EAH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |    |  | On January 1, 2002, ownership of certain subsidiaries in the United
States, including Embraer Services Inc. - ESI, Embraer Aircraft Customer
Services Inc. - EACS (formerly Embraer Aircraft Corporation - EAC), both
directly controlled by Embraer until December 31, 2001; Embraer Marketing
Corporation - EMC, responsible for commercial representation, marketing
and promotion for commercial and corporate aviation, Embraer Aircraft
Maintenance Services Inc. - EAMS and AEROChain LLC (responsible for
e-commerce activities), were transferred to a new holding company,
Embraer Aircraft Holding Inc. - EAH, located in Fort Lauderdale, Florida,
and formed as a wholly-owned subsidiary of the Company. In addition, a
new subsidiary of the Company was created in the United States, Embraer
Representation LLC - ERL.
|
| |    |  | At the end of 2001, the Company signed a contract with Reliance Aerotech
Inc. for the acquisition of operating assets of Celsius Aerotech Inc.,
located in Nashville, Tennessee.This transaction was concluded in March
2002 for the price of $13,601 and the operations are being conducted by
Embraer Aircraft Maintenance Services Inc. - EAMS. This unit provides
maintenance services for aircraft and components.                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | Embraer Services Inc. - ESI, located in Dallas, Texas, provides support
in the United States for the development activities of the EMB 145
special configurations contracted under the SIVAM Program (Integrated
Surveillance System for the Amazon Region) to carry out remote vigilance
and air patrol missions, as well as engineering services for Embraer
programs.                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | Embraer Finance Ltd. - EFL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    |  | This wholly-owned subsidiary located in the Cayman Islands, B.W.I.,
provides support in the purchasing and sales activities of the Company,
as well as assisting customers in obtaining financing from third parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Trumpeter Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |    |  | This wholly-owned subsidiary located in Wilmington, Delaware, USA, has a
25% interest in Expressprop LLC, which provides support for the sale of
used EMB 120 Brasília aircraft.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |    |  | Indústria Aeronáutica
Neiva Ltd. - NEIVA                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | This wholly-owned subsidiary located in Botucatu, São Paulo, Brazil, is
involved in the production and sale of agricultural aircraft, as well as
the production and assembly of parts for the EMB 120 Brasília, ERJ 145,
ERJ 140 and ERJ 135 aircraft.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    |  | On June 17, 2002, this company was changed from a Brazilian corporation
to a limited liability company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-11



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  |  | ELEB - Embraer Liebherr Equipamentos do Brasil S.A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Based in São José dos Campos, São Paulo , Brazil, its principal business
is produce and sell precision hydraulic and mechanical equipment for the
aviation industry. Embraer has 60% of the capital and Liebherr
International AG 40%.                                                                                                                                                                                                                                                                                 
|
| |  |  | Embraer Aviation Europe SAS - EAE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | In 2001, this wholly-owned subsidiary located at Le Bourget, north of
Paris, France, became the holding company of Embraer Aviation
International SAS - EAI, which represents the Company in Europe, Africa
and the Middle East by providing after-sales support.                                                                                                                                                                                                                                                      
|
| |  |  | Embraer Europe SARL - EES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | This wholly-owned subsidiary located at Villepinte, north of Paris,
France, provides sales representation for the Company in Europe, Africa
and the Middle East.                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Embraer Australia PTY Ltd. - EAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | This wholly-owned subsidiary located at Melbourne, Australia, provides
services and after-sales support to customers in Oceania, Asia and that
region.                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Embraer Credit Ltd. - ECL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | This wholly-owned subsidiary located at Wilmington, Delaware, USA,
supports sales operations.                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | Embraer Representation LLC - ERL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | This wholly-owned subsidiary located in Fort Lauderdale, Florida, formed
on January 1, 2002, provides support to Embraers products.                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | Embraer Spain Holding Co. SL - ESH                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | On September 27, 2002, this wholly-owned subsidiary was formed in Spain
for the purpose of coordinating the investments of the international
subsidiaries, including those related to aircraft sales support and the
management of assets involved in those operations. ESHs activities will
be conducted by its subsidiary ECC Investment Switzerland, AG located in
Switzerland, which owns 100% of ECC Insurance & Financial Co. Ltd.(ECC
Insurance), a captive insurance company, located in the Cayman Islands.
|
| |  |  | ECC Insurance & Financial Co. Ltd. provides financial guarantees to
customers and/or financing agents involved in the structuring of aircraft
sales.                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | ECC Leasing Co. Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | On September 18, 2002, the Company established a new subsidiary ECC
Leasing Co. Ltd., located in Ireland, for the purpose of leasing and
selling used aircraft.                                                                                                                                                                                                                                                                                                                                                        

F-12



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  |  | Harbin Embraer Aircraft Industry Company Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company entered into a joint venture in December 2002 with Harbin
Aircraft Industry (Group) Co., Ltd. and Hafai Aviation Industry Co.,
Ltd., subsidiaries of China Aviation Industry Corp. II, or AVIC II, to
provide for the manufacture, sales and after-sales support of the ERJ 145
regional jet family. The Company owns 51% of the equity of the joint
venture company, Harbin Embraer Aircraft Industry Company Ltd. The
Company has licensed to the joint venture the exclusive rights to
produce, sell and provide support for the ERJ 145 regional jet family in
the Chinese market, and the Company will contribute US$12.8 million in
cash and tooling to the joint venture in 2003. The Companys joint
venture partners have contributed the land use rights in Harbin, China
and will contribute US$12.7 million in cash and facilities to the joint
venture in 2003. First deliveries by the joint venture company are
scheduled for December 2003.



|3. |  | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- |  | ------------------------------------------



| | a) |  | Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Cash and cash equivalents consist of highly liquid instruments, such as
certificates of deposit, time deposits, treasury notes and other money
market instruments, which have original maturities of three months or
less.                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | b) |  | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |    |  | The allowance for doubtful accounts is recorded based on an analysis of
accounts receivables in an amount considered sufficient to cover probable
losses on receivables.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | c) |  | Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |    |  | Inventories, including spare parts, 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.
Inventories of raw materials are reduced to market value based on the
average cost compared with the average cost of replacement. An allowance
is established for potential losses 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.  
|
| |    |  | Exchange Pool inventories are segregated and placed into the exchange pool
for exclusive use by customers who participate in the program. Costs to
refurbish parts may be capitalized based on certain dollar thresholds.
Costs below these thresholds are expensed as incurred. The Exchange Pool
inventory is depreciated using the straight-line method over an estimated
useful life of 7 years and an estimated residual value of 20%, which the
Company believes approximates the usage and change in value of the
Exchange Pool each year. The Exchange Pool inventory is classified as
long-term in the consolidated balance sheets.

F-13



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| | d) |  | Aircraft valuation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | To the extent that the Company has used aircraft deemed available for
sale, such aircraft are stated at the lower of cost or fair value and are
included in inventory (see note 9). The Company also reviews its
obligations under used aircraft purchase commitments, residual value
guarantees and trade-in allowances relative to the aircrafts anticipated
fair value, and records any deficiency as a charge to earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |    |  | The Company analyzes fair value by using third party appraisals of
aircraft value, including information developed from the sale of similar
aircraft in the secondary market.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Impairment review for equipment under operating leases and held for
re-lease:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |  | The Company reviews these assets for impairment when events or
circumstances indicate that the carrying amount of these assets may not
be recoverable. An asset under operating lease or held for re-lease is
considered impaired when the expected undiscounted cash flow over the
remaining useful life is less than the book value. Various assumptions
are used when determining the expected undiscounted cash flow. These
assumptions include lease rates, lease term(s), periods in which the
asset may be held in preparation for a follow-on lease, maintenance
costs, remarketing costs and the life of the asset. The determination of
expected lease rates is generally based on outside publications and
observing similar aircraft in the secondary market. The Company uses
historical information and current economic trends to determine the
remaining assumptions. When impairment is indicated for an asset, the
amount of impairment loss is the excess of carrying value over fair
value.
|
| | e) |  | Long-lived assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |    |  | As of January 1, 2002, the Company adopted SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. Long-lived assets
deemed 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 fair value of the asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | f) |  | 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 a reduction of
interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |    |  | The costs incurred for the development of computer software for internal
use are capitalized in accordance with Statement of Position (SOP) 98-1,
Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F-14



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |    |  | Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets. Improvements to existing property
that significantly extend the useful life or utility of the asset are
capitalized while maintenance and repair costs are charged to expense as
incurred.                                                                                                                                                                                                                                                                                                                                                   
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | g) |  | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    |  | Investments are classified as Other assets on the Consolidated Balance
Sheets. The Company classifies investments as operating assets. Operating
investments are strategic in nature, which means they are integral
components of the Companys operations. Earnings from operating
investments are related to the Companys share of income or loss from
certain equity method investments and are recorded in Equity in income
(loss) from affiliates. Other than temporary losses on operating
investments are recorded in Income/(loss) from operating investments,
net.                                                                    
|
| |    |  | Certain investments are accounted for under SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Held-to-maturity
securities are National Treasury notes for which the Company has the
positive intent and ability to hold to maturity. Held-to-maturity
securities are reported at amortized cost.                                                                                                                                                                                                                                                                                                                      
|
| | h) |  | Loans and financing                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |    |  | The amounts of loans, capital leases and obligations include accrued
interest and applicable monetary exchange incurred but not paid to the
balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | i) |  | Leasing transactions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |    |  | Payments related to assets under agreements classified as operating
leases are recognized in expense on a straight-line basis over the
contractual term of the lease. For leases classified as capital leases,
the leased asset is capitalized and the corresponding lease liability is
recognized in the balance sheet as the present value of the minimum lease
payments. The asset is depreciated using the straight-line method over
the shorter of the lease term or the estimated useful life of the asset.
Payments made under the lease are recorded as interest expense and as a
principal reduction of the related capital lease obligation.
|
| | j) |  | Product warranties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |    |  | 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, typically expressed as a percentage of revenue. These estimates
are based on factors that include, among other things, historical
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 years for spare parts and up to five years for aircraft
components.                                                         

F-15



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |    |  | Certain sales contracts contain provisions for guarantees of certain
minimum levels of aircraft performance subsequent to delivery based on
predetermined operational targets. If the aircraft subject to such
guarantees do not achieve the minimum performance indices after delivery,
the Company may be obligated to reimburse its customers for the implied
incremental operational and service costs incurred based on formulas
defined in the related agreements. Losses related to such performance
guarantees are recorded at the time such losses are known, or when
circumstances indicate that the aircraft is not expected to meet the
minimum performance requirements, based on managements estimate of the
Companys ultimate obligation under the guarantee. In some cases, the
Company may be obligated to make modifications to the products after the
delivery due to introduction of improvements or performance of the
aircrafts. The costs related to these modifications are accrued when they
are known.
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Warranty expense is recorded as a component of selling expenses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | k) |  | Provisions for contingencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | 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 and are based on managements estimates. These
estimates are based on legal advice and managements estimate as to the
likely outcome of the outstanding matters and the estimated amount of
loss at the balance sheet date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |    |  | The Companys EAH subsidiary sponsors a defined benefit post-retirement
plan that provides pension and post-retirement medical benefits. The
estimated costs of benefits under the plan are accrued over the expected
employee service periods                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | m) |  | Employee profit sharing plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |    |  | The Company maintains a profit sharing plan that provides employees of
the Company and its 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 approved by the Board of
Directors in April 1996.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-16



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| | n) |  | Sales and other operating revenues                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Revenues are generally recognized for the sale of regional aircraft and
parts when shipped or when the customer has accepted delivery. In the
defense aircraft segment, operations consist principally of performing
work under long-term development contracts for the Brazilian and other
Governments and revenues are recognized in accordance with the
percentage of completion method. Certain contracts contain provisions
for the redetermination of price based upon future economic conditions.
Anticipated losses on contracted sales in the defense aircraft segment
are recognized when they become known and are recorded based on
managements estimate of such losses. Revenues recognized under the
defense segment represented 3.6%, 4.2% and 5.0 % of net sales in 2000,
2001 and 2002, respectively.                   
|
| |    |  | The Company maintains a pool of spare parts for exclusive use by
customers (the Exchange Pool). Customers may withdraw for use an
equivalent functioning part, as defined, from the Exchange Pool in
exchange for an unserviceable part, as needed. Customers are billed a
service fee based on a per flight hour per aircraft basis and a monthly
on-site inventory availability fee. Revenues under the Exchange Pool
program are recognized when services are provided and as actual flight
hours are incurred and recorded as net sales.                                                                                                                                                                                                                                                                                              
|
| | 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 deferred and recognized only when the Company
has met its obligations under the provisions of the related supply
agreements related to such contributions. Net research and development
expense was $69,593, $99,566 and $158,499 for 2000, 2001 and 2002,
respectively.                                                                                                                                                                                                                                                                                                                         
|
| | p) |  | Stock compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |    |  | SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123),
encourages, but does not require, companies to record compensation cost
for stock-based employee compensation plans at fair value. The Company
has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related Interpretations. Accordingly, the Company records expense in an
amount equal to the excess of the quoted market price over the option
price on the grant date. Such expense is typically recognized at the
grant date as awards are for past employee service. As described in note
28, the Company has granted options to certain employees to purchase
stock at prices below market.

F-17



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| | q) |  | Income and social contribution taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | The provision for income taxes includes federal income tax and social
contribution taxes and is computed at current tax rates, less tax
credits. Taxes are adjusted both for items that do not have tax
consequences and for the cumulative effect of any changes in tax rates
from those previously used to determine deferred tax assets or
liabilities. The provision for income taxes includes amounts that are
currently payable, plus changes in deferred tax assets and liabilities
that arise because of temporary differences between the time when items
of income and expense are recognized for financial reporting and income
tax purposes. Deferred tax assets and liabilities are recognized under
the liability method for temporary differences between the financial
accounting and income tax basis of assets and liabilities. Deferred tax
assets are reduced by a valuation allowance to an amount that management
believes is more likely than not to be realized.
|
| |    |  | In years with operations resulting in net taxable income, Brazilian
companies may elect to apply a portion up to 2.7% of their income tax
liability to investment securities of specific projects sponsored by the
government in certain industries or in less developed regions of the
country. At the time such investment payment options are made, the
corresponding amount is charged to a noncurrent asset account, net of
valuation reserve, and credited to income, thereby reducing the provision
for income tax.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | r) |  | Derivatives financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |    |  | Effective January 1, 2001, 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. Changes in the fair value of derivative instruments are
either recognized periodically in income or shareholders equity (as a
component of accumulated other comprehensive income), depending on their
use and designation. The Companys derivative financial instruments have
not qualified for hedge accounting designation for purposes of SFAS No.
133. Changes in the fair value of these derivative financial instruments
are recorded in income and are classified as a component of interest
income (expense) in the consolidated statements of income.                                          
|
| |    |  | The adoption of SFAS No. 133 in 2001 resulted in a transition gain of
$5,440, net of related deferred income taxes of $2,802, which was
recorded as a cumulative effect of an accounting change in the
consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | 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
consists of net income and the effects of foreign currency translation
adjustments.                                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-18



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|4. |  | NEW ACCOUNTING PRONOUNCEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is effective January 1, 2003. This standard addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated retirement
costs. The Company has determined that the implementation of this standard
will not have a material effect on its financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|  
|   |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This standard requires costs associated
with exit or disposal activities to be recognized when they are incurred.
The requirements of SFAS No. 146 apply prospectively to activities that are
initiated after December 31, 2002, and as such, the Company cannot
reasonably estimate the impact of adopting these new rules until and unless
it undertakes relevant activities in future periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  
|   |  | In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of the Indebtedness of Others, which
clarifies the requirements of SFAS No. 5, Accounting for Contingencies,
relating to a guarantors accounting for and disclosures of certain
guarantees issued. FIN 45 requires enhanced disclosures for certain
guarantees. It also will require certain guarantees that are issued or
modified after December 31, 2002, including certain third-party guarantees,
to be initially recorded on the balance sheet at fair value. For guarantees
issued on or before December 31, 2002, liabilities are recorded when and if
payments become probable and estimable. The Company expects FIN 45 to have
the general effect of delaying recognition for a portion of the revenue for
product sales that are accompanied by certain third-party guarantees. The
financial statement recognition provisions are effective prospectively, and
the Company cannot reasonably estimate the impact of adopting FIN 45 until
guarantees are issued or modified in future periods, at which time their
results will be initially reported in the financial statements. See Note 37.
|  
|   |  | In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, relating to consolidation of certain entities. First, FIN 46
will require identification of the Companys participation in variable
interests entities (VIE), which are defined as entities with a level of
invested equity that is not sufficient to fund future activities to permit
them to operate on a standalone basis, or whose equity holders lack certain
characteristics of a controlling financial interest. For entities identified
as VIE, FIN 46 sets forth a model to evaluate potential consolidation based
on an assessment of which party to the VIE, if any, bears a majority of the
exposure to its expected losses, or stands to gain from a majority of its
expected returns. FIN 46 also sets forth certain disclosures regarding
interests in VIE that are deemed significant, even if consolidation is not
required. The Company is currently assessing the application of FIN 46 as it
relates to its variable interests. See Note 37.                                                                                     

F-19



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|5. |  | CASH AND CASH EQUIVALENTS
|-- |  | -------------------------

|                        |                     |                              |         |                 |         |      |         |  |         | 
|----------------------- | ------------------- | ---------------------------- | ------- | --------------- | ------- | ---- | ------- |  | ------- | 
|                        |                     |                              |         | At December, 31
|                        |                     |                              |         |                
|                        |                     |                              |         | 2001            |         | 2002
|                        |                     |                              |         |                 |         |     
|Cash and bank accounts  |                     |                              | 26,743  |                 |         |      | 26,108  | 
|Short-term investments: |                     |                              |         |                 |         |      |         | 
|                        | In U.S. dollars:    |                              |         |                 |         |      |         |  |        
|                        |                     | Time deposits                |         |                 | 104,025 |      |         |  | 176,750 | 
|                        |                     | Overnight funds              |         |                 | 41,440  |      |         |  | 55,823  | 
|Investments funds       |                     |                              |        |                 |         |      | 25,547  | 
|                        | In Brazilian reais: |                              |         |                 |         |      |         |  |        
|                        |                     | Bank certificates of deposit |         |                 |        |      |         |  | 11,701  | 
|                        |                     | Investments funds            |         |                 | 577,094 |      |         |  | 360,893 | 
|                        |                     |                              |         |                 |         |      |         | 
|                        |                     |                              | 749,302 |                 |         |      | 656,822 | 
|                        |                     |                              |         |                 |         |      |         | 



|   |  | The average annualized interest rates related to the investments in U.S.
dollars and Brazilian reais for the year ended December 31, 2002 were 1.95%
and 19.22% (2.50% and 17.52% in 2001), respectively. These investments are
stated at cost plus accrued interest at the balance sheet date.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | TRADE ACCOUNTS RECEIVABLE                                                                                                                                                                                                                                                                      

|                              |  |                 |         |      |  |  |         | 
|----------------------------- |  | --------------- | ------- | ---- |  |  | ------- | 
|                              |  | At December 31,
|                              |  |                
|                              |  | 2001            |         | 2002
|                              |  |                 |         |     
|Foreign customers (a)         |  |                 | 594,921 |      |  |  | 618,511 | 
|Brazilian Air Force (b)       |  |                 | 18,494  |      |  |  | 12,704  | 
|Domestic customers            |  |                 | 7,086   |      |  |  | 3,858   | 
|Accounts receivable-BNDES (c) |  |                 |        |      |  |  | 125,344 | 
|                              |  |                 |         |      |  |  |         | 
|                              |  |                 | 620,501 |      |  |  | 760,417 | 
|                              |  |                 |         |      |  |  |         | 



| | (a) |  | At December 31, 2002 68% of this balance corresponds to structured
financing already approved by BNDES, which funds are expected to be
delivered to the Company during the first half of 2003, such related
transactions may be consolidated in the future, according to provisions
in note 37; 23% of the balance refers to financing being negotiated and
structured; and the remaining balance refer to accounts receivable from
sales of spare parts.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | At December 31, 2001 and 2002, accounts receivable from the
Brazilian Air Force include the unbilled portion of revenues recognized
under the percentage of completion method in the amounts of $15,102 and
$4,304, respectively. The remaining balance refers to billed amounts
for aircraft and spare parts sales.                                                                                                                                     
|
| | (c) |  | Refers to funds retained by BNDES, pending completion of the export
documentation, which is expected to take place in the first semester of 2003.                                                                                                                                                                                                                                                                                                        

F-20



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The allowance for doubtful accounts is summarized as follows:
| |  | -------------------------------------------------------------

|                               |  |      |        |      |  |  |        |  
|------------------------------ |  | ---- | ------ | ---- |  |  | ------ | -
|                               |  | 2001 |        | 2002
|                               |  |      |        |     
|Beginning balance              |  |      | 17,239 |      |  |  | 23,700 |  
|Write-offs                     |  |      | (477   | )    |  |  | (646   | )
|Provision for bad debt expense |  |      | 6,938  |      |  |  | 1,436  |  
|                               |  |      |        |      |  |  |        |  
|Ending balance                 |  |      | 23,700 |      |  |  | 24,490 |  
|                               |  |      |        |      |  |  |        |  



|7. |  | CUSTOMER AND COMMERCIAL FINANCING                                                                                                                                                                                                                                                               
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Aircraft financing and operating lease equipment is recorded at cost
depreciated over its useful life to an estimated salvage value, using the
straight-line method.                                                                                                                            
|  
|   |  | Aircraft financing operating leases equipment relates to leases of 5 used
EMB 120 Brasilia turboprop aircraft and one used ERJ 145 aircraft. Aircraft
financing notes receivable represents sales financing for 2 EMB 120, one
Legacy corporate jet and 10% of the value of each of 11 ERJ 145s.
|  
|   |  | Customer and commercial financing consists of the following:                                                                                                                                                                                                                                    

|                         |                                                                                                      |  |                 |        |      |  |        |        | 
|------------------------ | ---------------------------------------------------------------------------------------------------- |  | --------------- | ------ | ---- |  | ------ | ------ | 
|                         |                                                                                                      |  | At December 31,
|                         |                                                                                                      |  |                
|                         |                                                                                                      |  | 2001            |        | 2002
|                         |                                                                                                      |  |                 |        |     
|Aircraft financing:      |                                                                                                      |  |                 |        |      |  |        |       
|                         | Notes receivable                                                                                     |  |                 | 13,735 |      |  |        | 46,012 | 
|                         | Operating lease equipment, at cost, less accumulated
depreciation of 15,037 and 11,554, respectively |  |                 | 15,779 |      |  |        | 33,320 | 
|Less valuation allowance |                                                                                                      |  | (842            | )      |      |  | (958   | )     
|                         |                                                                                                      |  |                 |        |      |  |        |        | 
|                         |                                                                                                      |  | 28,672          |        |      |  | 78,374 |       
|Less-Current Portion     |                                                                                                      |  |                |        |      |  | 18,973 |       
|                         |                                                                                                      |  |                 |        |      |  |        |        | 
|Long Term Portion        |                                                                                                      |  | 28,672          |        |      |  | 59,401 |       
|                         |                                                                                                      |  |                 |        |      |  |        |        | 



| |  | Interest rates on notes receivable range from 7.5% to 12.0% and six-month
LIBOR plus 2.5 per annum.                                                                                                                                                                                                                      
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Aircraft financing is collateralized by security in cash and the related
asset, and the Company has not experienced problems in accessing such
collateral. However, the value of the related asset is closely tied to
commercial airline performance and may be subject to reduced valuation with
market decline.        
|
| |  | Income recognition is generally suspended for receivables at the date when a
full recovery of income and principal becomes doubtful. Income recognition
is resumed when the receivables become contractually current and performance
is demonstrated by the customer. There are no impaired receivables in 2001
and 2002.

F-21



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | As of December 31, 2002 the Company had three used aircraft ( EMB 120 )
available for lease, for which the Company does not expect any loss.                                                                                                                                
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Impairments primarily result from deteriorated aircraft values and airline
customer credit ratings for financing lease assets and reduced estimated
cash flows for operating lease assets. Impairments for the years ended
December 31, 2001 and 2002, were not significant.
|
| |  | See Note 35 for a discussion regarding the creditworthiness of
counterparties in customer and commercial financing arrangements.                                                                                                                                            
|
| |  | Scheduled payments on customer and commercial financing are as follows:                                                                                                                                                                                                     

|            |  |            |        |           |  |  |       | 
|----------- |  | ---------- | ------ | --------- |  |  | ----- | 
|            |  | Principal  |        |           |  | 
|            |  | payments   |        | Operating
|            |  | on notes   |        | lease    
|Year        |  | receivable |        | payments 
|            |  |            |        |          
|2003        |  |            | 18,973 |           |  |  | 3,492 | 
|2004        |  |            | 13,572 |           |  |  | 1,450 | 
|2005        |  |            | 936    |           |  |  | 1,082 | 
|2006        |  |            | 1,009  |           |  |  | 992   | 
|2007        |  |            | 1,089  |           |  |  | 137   | 
|Beyond 2007 |  |            | 10,433 |           |  |  |      | 
|            |  |            |        |           |  |  |       | 
|            |  |            | 46,012 |           |  |  | 7,153 | 
|            |  |            |        |           |  |  |       | 



|8. |  | COLLATERALIZED ACCOUNTS RECEIVABLE AND NONRECOURSE DEBT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|   |  | Some of the Companys sales transactions are structured financings through
which a Special Purpose Entity - SPE purchases the aircraft, pays the
Company 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
the aircraft purchase through an SPE, and a portion of the credit risk and
the management responsibility associated with the SPE remain with the third
party. The Company may provide financial guarantees and/or residual value
guarantees in favor of the financial institution.
|  
|   |  | In accordance with Emerging Issues Task Force Issue No. 90-15, Impact of
Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in
Leasing Transactions, the Company has concluded that certain of these
leasing transactions made through an SPE must be consolidated if the equity
contribution of independent third parties is less than 3% of the fair value
of the SPEs assets. Some of the SPEs through which the Company sells
aircraft were formed without any equity contribution and, therefore, have
been consolidated.                                                                                                           
|  
|   |  | Generally, the underlying lease transactions qualify for sales-type lease
accounting and as such, the consolidation of these SPEs transactions
resulted in an amount of investments in minimum lease payments and in
sales-type leases of $440,452 and $1,606,578 and $322,348 and $941,918 at
December 31, 2001 and 2002 respectively, which are being presented as
collateralized accounts receivable.                                                                                                                                                                                                                                                        

F-22



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Such consolidation has also resulted in an amount of non-recourse debt of
$322,348 and $803,517 at December 31, 2001 and 2002, respectively, and in an
amount of recourse debt of $138,401 at December 31, 2002. The non-recourse
debt is collateralized in favor of the financial institution by accounts
receivable and by the financed aircraft. The impacts on the consolidated
statements of income and cash flows were not material as the terms of the
underlying lease and the debt are substantially the same.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2002, British Airways returned to an SPE 2 ERJ 145s, with a total
outstanding amount of underlying debt of $22 million which has been
consolidated by the Company. These aircraft serve as collateral for the
non-recourse debt and the Company has begun remarketing them.                                                                                                                                                                                                                                     
|
| |  | The maturities under the collateralized accounts receivable and the
non-recourse and recourse debt are summarized as follows:                                                                                                                                                                                                                                                                                                                                                                                          

|            |  |                 |         |      |  |  |         | 
|----------- |  | --------------- | ------- | ---- |  |  | ------- | 
|            |  | At December 31,
|            |  |                
|Year        |  | 2001            |         | 2002
|            |  |                 |         |     
|2002        |  |                 | 16,315  |      |  |  |        | 
|2003        |  |                 | 25,225  |      |  |  | 68,872  | 
|2004        |  |                 | 25,337  |      |  |  | 67,262  | 
|2005        |  |                 | 25,982  |      |  |  | 90,171  | 
|2006        |  |                 | 27,223  |      |  |  | 85,140  | 
|2007        |  |                 | 24,532  |      |  |  | 86,398  | 
|Beyond 2008 |  |                 | 177,734 |      |  |  | 544,075 | 
|            |  |                 |         |      |  |  |         | 
|            |  |                 | 322,348 |      |  |  | 941,918 | 
|            |  |                 |         |      |  |  |         | 



|9. |  | INVENTORIES
|-- |  | -----------

|                         |  |                 |           |      |  |  |         | 
|------------------------ |  | --------------- | --------- | ---- |  |  | ------- | 
|                         |  | At December 31,
|                         |  |                
|                         |  | 2001            |           | 2002
|                         |  |                 |           |     
|Finished goods           |  |                 | 64,189    |      |  |  | 61,229  | 
|Work-in-process          |  |                 | 335,999   |      |  |  | 259,739 | 
|Raw materials            |  |                 | 487,126   |      |  |  | 357,948 | 
|Inventory in transit     |  |                 | 78,968    |      |  |  | 74,768  | 
|Advances to suppliers    |  |                 | 45,566    |      |  |  | 102,796 | 
|Used aircraft for resale |  |                 | 2,181     |      |  |  | 7,578   | 
|Supplies                 |  |                 | 1,052     |      |  |  | 742     | 
|Exchange pool, net       |  |                 | 22,714    |      |  |  | 15,518  | 
|                         |  |                 |           |      |  |  |         | 
|                         |  |                 | 1,037,795 |      |  |  | 880,318 | 
|Less- Current portion    |  |                 | 1,015,081 |      |  |  | 864,800 | 
|                         |  |                 |           |      |  |  |         | 
|Long-term portion        |  |                 | 22,714    |      |  |  | 15,518  | 
|                         |  |                 |           |      |  |  |         | 

F-23



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The balances of inventory are presented net of applicable allowances for
obsolete and excess inventory as well as for adjustments to reduce certain
inventories to the lower of cost or market. A summary of the allowance is as
follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |                   |  |                 |        |      |  |         |         |  
|-------------- | ----------------- |  | --------------- | ------ | ---- |  | ------- | ------- | -
|               |                   |  | At December 31,
|               |                   |  |                
|               |                   |  | 2001            |        | 2002
|               |                   |  |                 |        |     
|Allowance:     |                   |  |                 |        |      |  |         |        
|               | Beginning balance |  |                 | 90,152 |      |  |         | 101,004 |  
|               | Allowance         |  |                 | 12,968 |      |  |         | 22,061  |  
|               | Disposals         |  |                 | (2,116 | )    |  |         | (15,796 | )
|               |                   |  |                 |        |      |  |         |         |  
|Ending balance |                   |  | 101,004         |        |      |  | 107,269 |        
|               |                   |  |                 |        |      |  |         |         |  



|    |  | The Company has an Exchange Pool Program, for which inventory in the
amounts of, $22,714 and $15,518 at December 31, 2001 and 2002, respectively,
are segregated and placed into the Exchange Pool for exclusive use by
customers in the program. Customers may withdraw for use an equivalent
functioning part, as defined, from the Exchange Pool in exchange for an
unserviceable part, as needed. Costs to refurbish parts may be capitalized
based on certain dollar thresholds. Costs below these thresholds are
expensed as incurred. The Exchange Pool inventory is depreciated using the
straight-line method over an estimated useful life of 7 years and an
estimated residual value of 20%, which the Company believes approximates the
usage and change in value of the Exchange Pool each year. The Exchange Pool
inventory is classified as long-term in the consolidated balance sheets.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During 2000, 2001 and 2002, the Company recognized $2,046, $8,320 and
$9,604, respectively, in revenue related to the Exchange Pool, which is
included in net sales in the accompanying consolidated statements of income.
Amounts capitalized and expensed for refurbishments were not material during
the years ended December 31, 2001 and 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|10. |  | OTHER ASSETS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                               |  |                 |         |      |  |  |         | 
|---------------------------------------------- |  | --------------- | ------- | ---- |  |  | ------- | 
|                                               |  | At December 31,
|                                               |  |                
|                                               |  | 2001            |         | 2002
|                                               |  |                 |         |     
|Guarantee deposits (a)                         |  |                 | 124,254 |      |  |  | 187,356 | 
|Credits with suppliers (b)                     |  |                 | 28,887  |      |  |  | 21,113  | 
|Spare parts and training concession (c)        |  |                 | 15,984  |      |  |  | 8,465   | 
|Value-added tax credits                        |  |                 | 14,654  |      |  |  | 11,403  | 
|Advances to employees                          |  |                 | 12,294  |      |  |  | 5,049   | 
|Credit insurance (d)                           |  |                 | 8,209   |      |  |  | 28,071  | 
|Compulsory loans, guarantee and other deposits |  |                 | 7,417   |      |  |  | 9,547   | 
|Commission Advances                            |  |                 | 5,137   |      |  |  | 5,293   | 
|Judicial deposits                              |  |                 | 5,058   |      |  |  | 5,357   | 
|Insurance                                      |  |                 | 4,774   |      |  |  | 8,851   | 
|Unrealized gains on fair value of derivatives  |  |                 |        |      |  |  | 71,776  | 
|Other                                          |  |                 | 8,812   |      |  |  | 2,260   | 
|                                               |  |                 |         |      |  |  |         | 
|                                               |  |                 | 235,480 |      |  |  | 364,541 | 
|Less- Current portion                          |  |                 | 89,093  |      |  |  | 77,715  | 
|                                               |  |                 |         |      |  |  |         | 
|Long-term portion                              |  |                 | 146,387 |      |  |  | 286,826 | 
|                                               |  |                 |         |      |  |  |         | 

F-24



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| | (a) |  | Guarantee deposits represent U.S. dollar amounts deposited in an
escrow account as collateral for financing and residual value guarantee
of certain aircraft sold (see Note 37). 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 the escrow funds. The deposited amounts will be
released when the financing contracts mature (from 2013 to 2017) if no
default by the buyers of the aircraft occurs or the aircrafts 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.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Credits with suppliers represent price discounts, rebates and free
aircraft parts to be received from suppliers in connection with
purchases made.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (c) |  | Spare parts and training concessions 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 in
expense over the related period of the sales contract as aircraft
deliveries are made with the corresponding revenue.                                                
|
| | (d) |  | Premium on credit insurance relates to costs incurred in connection
with a foreign line of financing. The premium is being amortized over
the financing term through 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



|11. |  | HELD TO MATURITY INVESTMENTS
|--- |  | ----------------------------

|                              |  |                 |        |      |  |  |        | 
|----------------------------- |  | --------------- | ------ | ---- |  |  | ------ | 
|                              |  | At December, 31
|                              |  |                
|                              |  | 2001            |        | 2002
|                              |  |                 |        |     
|National Treasury Notes - NTN |  |                 | 35,651 |      |  |  | 23,263 | 



|    |  | Refers to receivables, represented by National Treasury Notes, acquired
by the Company from customers, related to the equalization of interest rates
to be paid by Programa de Financiamento às Exportações
- PROEX between the
11th and 15th year after the sale of the related aircraft, recorded at
present value. The interest earned is added to the balance and recorded as
interest income, as the Company has the ability and the intent to hold these
securities until maturity.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|12. |  | INVESTMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

|                      |                 |  |                 |       |      |  |       |       | 
|--------------------- | --------------- |  | --------------- | ----- | ---- |  | ----- | ----- | 
|                      |                 |  | At December 31,
|                      |                 |  |                
|                      |                 |  | 2001            |       | 2002
|                      |                 |  |                 |       |     
|Affiliated companies: |                 |  |                 |       |      |  |       |      
|                      | Expressprop LLC |  |                 | 4,357 |      |  |       | 4,745 | 
|                      | Others          |  |                 | 5     |      |  |       |      | 
|                      |                 |  |                 |       |      |  |       |       | 
|                      |                 |  | 4,362           |       |      |  | 4,745 |      
|                      |                 |  |                 |       |      |  |       |       | 

F-25



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|    |  | Embraer owns 25% and Continental Airlines Finance Corporation 75% of the
capital stock of Expressprop LLC. This affiliate provides support for the
sale of used EMB 120 Brasília aircraft. The Companys investment is
accounted for under the equity method and as such, income from affiliates
represents the Companys share of net income or loss. The net income of this
affiliate was $3,011, $1,241 and $1,552 for the years ended December 31,
2000, 2001 and 2002, respectively.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|13. |  | PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                |  |             |    |      |         |              |         |             |        |      |         |              |        |     |         |  |         |             |         |  |         |  |         |  |        |  |         | 
|------------------------------- |  | ----------- | -- | ---- | ------- | ------------ | ------- | ----------- | ------ | ---- | ------- | ------------ | ------ | --- | ------- |  | ------- | ----------- | ------- |  | ------- |  | ------- |  | ------ |  | ------- | 
|                                |  |             |    |      |         | 2001         |         | 2002       
|                                |  | Estimated   |    |      |         |             
|                                |  | Useful life |    |      |         |              |         | Accumulated |        |      |         |              |        |     |         |  |         | Accumulated |         |  |         | 
|                                |  | (years)     |    | Cost |         | depreciation |         | Net         |        | Cost |         | depreciation |        | Net
|                                |  |             |    |      |         |              |         |             |        |      |         |              |        |    
|Land                            |  |             |    |      |         |              | 2,512   |             |        |      |        |              |        |     | 2,512   |  |         |             | 2,489   |  |         |  |        |  |        |  | 2,489   | 
|Buildings and land
improvements |  | 10 to 48    |    |      | 112,499 |              |         |             | 37,730 |      |         |              | 74,769 |     |         |  | 134,831 |             |         |  | 42,158  |  |         |  | 92,673 | 
|Installations                   |  | 10 to 31    |    |      | 71,660  |              |         |             | 45,950 |      |         |              | 25,710 |     |         |  | 80,482  |             |         |  | 49,652  |  |         |  | 30,830 | 
|Machinery and equipment         |  | 5 to 17     |    |      | 141,434 |              |         |             | 92,987 |      |         |              | 48,447 |     |         |  | 158,078 |             |         |  | 102,844 |  |         |  | 55,234 | 
|Tooling                         |  |             | 10 |      |         |              | 85,419  |             |        |      | 21,053  |              |        |     | 64,366  |  |         |             | 101,489 |  |         |  | 26,970  |  |        |  | 74,519  | 
|Furniture and fixtures          |  | 5 to 10     |    |      | 15,429  |              |         |             | 8,843  |      |         |              | 6,586  |     |         |  | 17,642  |             |         |  | 8,760   |  |         |  | 8,882  | 
|Vehicles                        |  | 5 to 14     |    |      | 4,422   |              |         |             | 2,390  |      |         |              | 2,032  |     |         |  | 4,560   |             |         |  | 2,807   |  |         |  | 1,753  | 
|Aircraft (a)                    |  | 5 to 10     |    |      | 36,766  |              |         |             | 5,870  |      |         |              | 30,896 |     |         |  | 80,328  |             |         |  | 9,666   |  |         |  | 70,662 | 
|Computers and peripherals       |  |             | 5  |      |         |              | 72,582  |             |        |      | 35,638  |              |        |     | 36,944  |  |         |             | 84,209  |  |         |  | 47,455  |  |        |  | 36,754  | 
|Software                        |  |             | 5  |      |         |              | 37,542  |             |        |      | 10,549  |              |        |     | 26,993  |  |         |             | 50,466  |  |         |  | 17,848  |  |        |  | 32,618  | 
|Others                          |  |             | 5  |      |         |              | 13,567  |             |        |      | 2,958   |              |        |     | 10,609  |  |         |             | 5,870   |  |         |  | 2,569   |  |        |  | 3,301   | 
|Construction in progress        |  |             |   |      |         |              | 36,617  |             |        |      |        |              |        |     | 36,617  |  |         |             | 27,000  |  |         |  |        |  |        |  | 27,000  | 
|                                |  |             |    |      |         |              |         |             |        |      |         |              |        |     |         |  |         |             |         |  |         |  |         |  |        |  |         | 
|                                |  |             |    |      |         |              | 630,449 |             |        |      | 263,968 |              |        |     | 366,481 |  |         |             | 747,444 |  |         |  | 310,729 |  |        |  | 436,715 | 
|                                |  |             |    |      |         |              |         |             |        |      |         |              |        |     |         |  |         |             |         |  |         |  |         |  |        |  |         | 



|(a) |  | These aircrafts are used for external demonstration and for internal
use.
|--- |  | -------------------------------------------------------------------------



|    |  | Interest capitalized during the construction period related to property,
plant and equipment amounted to $129, $737 and $329 in 2000 , 2001 and 2002,
respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|14. |  | ACCOUNTS PAYABLE TO SUPPLIERS                                                                                                                                      

|                   |                       |  |                 |         |      |  |         |         | 
|------------------ | --------------------- |  | --------------- | ------- | ---- |  | ------- | ------- | 
|                   |                       |  | At December 31,
|                   |                       |  |                
|                   |                       |  | 2001            |         | 2002
|                   |                       |  |                 |         |     
|Foreign suppliers: |                       |  |                 |         |      |  |         |        
|                   | Risk-sharing partners |  |                 | 61,808  |      |  |         | 85,345  | 
|                   | Others                |  |                 | 187,360 |      |  |         | 226,491 | 
|Local suppliers    |                       |  | 16,425          |         |      |  | 11,279  |        
|                   |                       |  |                 |         |      |  |         |         | 
|                   |                       |  | 265,593         |         |      |  | 323,115 |        
|                   |                       |  |                 |         |      |  |         |         | 



| |  | The Companys risk-sharing partners develop and manufacture significant
portions of the Companys aircraft, including the engines, hydraulic
components, avionics, wings, interior and parts of the fuselage and tail.
The Companys contracts with risk-sharing partners are long term in nature
and include deferral of payments for components and systems for a negotiated
period of time after the delivery of such components and systems.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-26



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|    |  | Once risk-sharing partners have been selected and the 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 expense.
This dependence makes the Company susceptible to the risks of performance,
product quality and financial condition of these risk-sharing partners.                                                                                                                                                                                                                                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|15. |  | CONTRIBUTION FROM SUPPLIERS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | The Company has agreements with certain key suppliers for the participation
in research and development activities. Certain of the supply agreements
require such suppliers provide cash contributions to the Company in
compensation for its research and development activities. 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 when received as a liability and
subsequently recognizes them in income as a reduction of research and
development costs when such milestones are met. The following summarizes the
activity related to contributions from suppliers:

|                                                    |  |                 |         |      |  |  |         |  
|--------------------------------------------------- |  | --------------- | ------- | ---- |  |  | ------- | -
|                                                    |  | At December 31,
|                                                    |  |                
|                                                    |  | 2001            |         | 2002
|                                                    |  |                 |         |     
|Balance at beginning of year                        |  |                 | 141,670 |      |  |  | 143,615 |  
|Receipts of investments from risk-sharing suppliers |  |                 | 16,079  |      |  |  | 92,831  |  
|Reduction of research and development expense       |  |                 | (14,134 | )    |  |  | (1,001  | )
|                                                    |  |                 |         |      |  |  |         |  
|Balance at end of year                              |  |                 | 143,615 |      |  |  | 235,445 |  
|                                                    |  |                 |         |      |  |  |         |  

F-27



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|16. |  | OTHER ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|--- |  | ----------------------------------------------

|                                                 |  |                 |         |      |  |  |         | 
|------------------------------------------------ |  | --------------- | ------- | ---- |  |  | ------- | 
|                                                 |  | At December 31,
|                                                 |  |                
|                                                 |  | 2001            |         | 2002
|                                                 |  |                 |         |     
|Due to Brazilian Air Force (a)                   |  |                 | 2,156   |      |  |  | 2,239   | 
|Product warranties (b)                           |  |                 | 51,570  |      |  |  | 72,211  | 
|Product improvement liabilities (b)              |  |                 | 43,246  |      |  |  | 43,228  | 
|Commercial rebates (c)                           |  |                 | 20,625  |      |  |  | 6,839   | 
|Customer credits (c)                             |  |                 | 23,665  |      |  |  | 24,775  | 
|Technical assistance and training (c)            |  |                 | 19,165  |      |  |  | 25,557  | 
|Accrued employee vacation                        |  |                 | 38,213  |      |  |  | 30,252  | 
|Accrued employee profit sharing                  |  |                 | 25,510  |      |  |  | 18,510  | 
|Accrued pension and benefits                     |  |                 | 5,154   |      |  |  | 3,766   | 
|Unrealized losses on fair value of derivatives   |  |                 | 15,506  |      |  |  | 22,117  | 
|Reserve for losses under contractual obligations |  |                 | 8,996   |      |  |  | 6,010   | 
|Insurance                                        |  |                 | 2,891   |      |  |  | 4,603   | 
|Accrued financial guarantees (see note 37)       |  |                 |        |      |  |  | 14,509  | 
|Other                                            |  |                 | 24,265  |      |  |  | 25,641  | 
|                                                 |  |                 |         |      |  |  |         | 
|                                                 |  |                 | 280,962 |      |  |  | 300,257 | 
|Less- Current portion                            |  |                 | 277,779 |      |  |  | 297,463 | 
|                                                 |  |                 |         |      |  |  |         | 
|Long-term portion                                |  |                 | 3,183   |      |  |  | 2,794   | 
|                                                 |  |                 |         |      |  |  |         | 



| | (a) |  | Amounts payable to the Brazilian Air Force represent materials
related to the delivery of AM-X aircraft.                                                                                              
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Amounts represent accruals for product liability programs including
warranty and contractual obligations to implement improvements in
aircraft sold to meet contractual performance indices.          
|
| | (c) |  | Amounts represent accruals for customer sales incentives and
allowances including free parts, finance incentives and free services
including technical assistance and training of mechanics and crews.



|17. |  | CUSTOMER ADVANCES
|--- |  | -----------------

|                      |                 |  |                 |         |      |  |         |         | 
|--------------------- | --------------- |  | --------------- | ------- | ---- |  | ------- | ------- | 
|                      |                 |  | At December 31,
|                      |                 |  |                
|                      |                 |  | 2001            |         | 2002
|                      |                 |  |                 |         |     
|Denominated in:       |                 |  |                 |         |      |  |         |        
|                      | U.S. dollars    |  |                 | 441,493 |      |  |         | 483,880 | 
|                      | Brazilian reais |  |                 | 50,366  |      |  |         | 21,003  | 
|                      |                 |  |                 |         |      |  |         |         | 
|                      |                 |  | 491,859         |         |      |  | 504,883 |        
|Less- Current portion |                 |  | 385,265         |         |      |  | 409,258 |        
|                      |                 |  |                 |         |      |  |         |         | 
|Long-term portion     |                 |  | 106,594         |         |      |  | 95,625  |        
|                      |                 |  |                 |         |      |  |         |         | 

F-28



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|    |  | The foreign currency advances denominated in Brazilian reais are presented
in U.S. dollars in the above chart 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|18. |  | TAXES AND SOCIAL CHARGES PAYABLE                                                                                                                                                                                                                                                                                   

|                                      |                                  |  |                 |        |      |  |         |        | 
|------------------------------------- | -------------------------------- |  | --------------- | ------ | ---- |  | ------- | ------ | 
|                                      |                                  |  | At December 31,
|                                      |                                  |  |                
|                                      |                                  |  | 2001            |        | 2002
|                                      |                                  |  |                 |        |     
|Refinanced taxes:                     |                                  |  |                 |        |      |  |         |       
|                                      | INSS (social charges on payroll) |  |                 | 22,832 |      |  |         | 14,421 | 
|                                      | FNDE (education tax on payroll)  |  |                 | 3,074  |      |  |         |       | 
|                                      |                                  |  |                 |        |      |  |         |        | 
|                                      |                                  |  | 25,906          |        |      |  | 14,421  |       
|Current taxes                         |                                  |  | 11,344          |        |      |  | 14,677  |       
|Contingent tax and social charges (a) |                                  |  | 116,418         |        |      |  | 186,876 |       
|                                      |                                  |  |                 |        |      |  |         |        | 
|                                      |                                  |  | 153,668         |        |      |  | 215,974 |       
|Less- Current maturities              |                                  |  | 132,288         |        |      |  | 199,857 |       
|                                      |                                  |  |                 |        |      |  |         |        | 
|Long-term portion                     |                                  |  | 21,380          |        |      |  | 16,117  |       
|                                      |                                  |  |                 |        |      |  |         |        | 



| |  | The above taxes represent taxes and social charges other than those related
to income. The Company has received authorization by the Brazilian tax
authorities to pay certain of its tax obligations over time. The outstanding
balances of these deferred taxes as of December 31, 2002 are subject to
monthly interest of 1%, which is added to the principal amount.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The maturities of the above taxes and social charges are as follows:                                                                                                                                                                                                                                                                                                   

|             |  |                 |         |      |  |  |         | 
|------------ |  | --------------- | ------- | ---- |  |  | ------- | 
|             |  | At December 31,
|             |  |                
|Year         |  | 2001            |         | 2002
|             |  |                 |         |     
|2002         |  |                 | 132,288 |      |  |  |        | 
|2003         |  |                 | 2,020   |      |  |  | 199,857 | 
|2004         |  |                 | 2,020   |      |  |  | 4,746   | 
|2005         |  |                 | 2,020   |      |  |  | 1,371   | 
|2006         |  |                 | 2,020   |      |  |  | 1,319   | 
|2007         |  |                 | 2,020   |      |  |  | 1,319   | 
|2008 to 2013 |  |                 | 11,280  |      |  |  | 7,362   | 
|             |  |                 |         |      |  |  |         | 
|             |  |                 | 153,668 |      |  |  | 215,974 | 
|             |  |                 |         |      |  |  |         | 



| | (a) |  | The Company is challenging in court the constitutionality of the
nature and modifications in rates and the increase in the calculation
base of certain taxes and social charges in order to obtain writs of
mandamus or injunctions to avoid payments or recover past payments. As
of December 31, 2002, the Company had obtained preliminary injunctions
for not paying or recovering past payments of taxes and social charges
in the total amount of $186,876, monetarily restated. The monetary
restatement is being charged to interest income (expense). The subject
taxes and social charges are as follows:
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-29



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  |  | Beginning January 1, 1999, the tax bases of PIS and COFINS (taxes on
sales) have been expanded. The Company obtained a preliminary
injunction to prevent payment of the related tax and has accrued the
amount of $67,145.                                                                                                                                            
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company is required to pay 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 payment from 3% to 1%, and the difference has
been accrued in the amount of $9,574.                                                                  
|
| |  |  | In April 1999, the Company obtained a writ of mandamus to
offset social charges payments (INSS - National Institute of Social
Security), which were made in August, September and October 1989,
against future payments due to a rate increase from 10% to 20%,
which has been considered unconstitutional. The amount of $28,245 is
recorded as an accrued liability.
|
| |  |  | The Company administratively requested the compensation of
VAT credits generated from the acquisition of consumable materials
used in the production of finished products for export to be offset
with other taxes. The amount of taxes outstanding without the
benefit of offset was $42,550 at December 31, 2002.                                                   
|
| |  |  | Income tax and social contribution
tax on income - The
Company is claiming the suspension of the social contribution tax on
export sales and the right to offset income and social contribution
taxes with IPI (VAT) credits on the acquisition of non-taxable or
zero rate raw materials. The amount of taxes was $36,216.                                           
|
| |  |  | The Company has taken tax credits of $3,146 related to
monetary correction of carry forward losses. Such tax credit are
still pending of approval by tax authority and accordingly a
provision has been recorded.                                                                                                                                                     



|19. |  | CONTINGENCIES
|--- |  | -------------

|                        |  |                 |        |      |  |  |        | 
|----------------------- |  | --------------- | ------ | ---- |  |  | ------ | 
|                        |  | At December 31,
|                        |  |                
|                        |  | 2001            |        | 2002
|                        |  |                 |        |     
|Labor contingencies (a) |  |                 | 4,451  |      |  |  | 3,262  | 
|Import tax (b)          |  |                 | 579    |      |  |  | 930    | 
|FUNDAF (c)              |  |                 | 4,215  |      |  |  | 2,785  | 
|Tax contingencies (d)   |  |                 | 5,917  |      |  |  | 6,336  | 
|Civil (e)               |  |                 |       |      |  |  | 1,024  | 
|                        |  |                 |        |      |  |  |        | 
|                        |  |                 | 15,162 |      |  |  | 14,337 | 
|Less-Current Portion    |  |                 | 4,395  |      |  |  | 5,244  | 
|                        |  |                 |        |      |  |  |        | 
|Long Term Portion       |  |                 | 10,767 |      |  |  | 9,093  | 
|                        |  |                 |        |      |  |  |        | 



| | (a) |  | 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.



| |     |  | A lawsuit claiming a retroactive salary increase was brought by the
union in June 1991 in the name of all employees of the Company 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, 2002, 97% of current and former employees have
agreed to settlements. The Company is currently attempting to settle
this case with the employees who have not yet settled.                                                                                                               
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The total exposure of the labor litigation mentioned above is
approximately $5,470. The proceedings are in various stages awaiting
judgment. Based on opinions of the Companys legal counsel, the amount
accrued is considered sufficient by management.                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (b) |  | This provision relates to import duty and VAT (IPI) tax on imported
materials for two flight simulators which must be exported to be exempt
from such taxes. As a result of default by the customer, these products
were exported after the previously established period. The tax
authorities have assessed the Company the related taxes and the Company
is currently discussing payment terms.                                                                                                                                                                                                                                                                         
|
| | (c) |  | This provision relates to a tax entitled FUNDAF (Special Fund for
Development and Improvement of Taxation), assessed by the federal tax
authorities on customs clearance of imported materials in October 1999.
The Company is currently challenging the legality of the tax.                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (d) |  | This provision relates to various tax contingencies including a
deficiency notice received from the Federal Revenue Department, certain
social contributions whose applicability are currently being challenged
and certain nationalization taxes calculated based upon concessionary
acts.                                                                                                                                                                                                                                                                                                                                                                               
|
| | (e) |  | Gaplan Administradora de Bens S/C Ltd. filed suit against Indústria
Aeronáutica Neiva Ltd. related to a Consortium and Aircraft Delivery
Guarantee it entered into with Neiva for the period from 1988 to 1997,
under which Neiva was obligated to deliver a certain number of light
aircraft, in a determined period, with a standard configuration at the
time of fabrication, directly to the customers. Gaplan alleged delays
in aircraft deliveries, which caused the termination of the contracts
by customers who are claiming refund of the progress payments,
financial losses due to increases in terms and prices, and a reduction
in administrative charges.
|
| |     |  | On November 4, 2002, Neiva was ordered to pay a total of $2,200 by a
lower court. Based on legal counsel assessment and management estimates,
the Company recognized a liability of $1,024 in the financial statements
as of December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | In addition, the Company is involved in other legal proceedings, all of
which arose in the ordinary course of business. In the opinion of
management, none of these proceedings is expected to have a material
adverse effect on the financial position or results of operations of the
Company.                                                                                                                                                                                                                                                                                                                                                                          

F-31



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|20. |  | LOANS
|--- |  | -----

|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         |  |  | 
|------------------------ | ---------------------------------- |  |  | -------- |  | -------- | -------------- | ----------------- | ------------------------------------------------ | ---- |  | ------- |  |  | ------- | ------------ |  |  | ------- |  |  | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         | Balances at 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         | December 31,
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |             
|                         |                                    |  |  | Maturity |  | Currency |                | Interest rate - % |                                                  | 2001 |  | 2002   
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |        
|U.S. dollars:            |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|                         | FINAMEX - export financing         |  |  | 2004     |  |          | U.S. dollar    |                   | LIBOR + 1.50                                     |      |  | 10,437  |  |  |         | 10,330       | 
|                         | Materials acquisition              |  |  | 2007     |  |          | U.S. dollar    |                   | 4.09 to 8.31;LIBOR + 2.15 to 4.00                |      |  | 174,608 |  |  |         | 99,709       | 
|                         | Advances on export sales
contracts |  |  | 2003     |  |          | U.S. dollar    |                   | 3.50 to 5.30                                     |      |  | 220,033 |  |  |         | 80,256       | 
|                         | Project development                |  |  | 2008     |  |          | U.S. dollar    |                   | LIBOR + 3.00                                     |      |  | 15,360  |  |  |         | 12,092       | 
|                         | Working capital                    |  |  | 2009     |  |          | U.S. dollar    |                   | 3.00 to 5.48; LIBOR + 2.15                       |      |  | 109,464 |  |  |         | 147,076      | 
|                         | Property and equipment acquisition |  |  | 2014     |  |          | U.S. dollar    |                   | 5.45 to 11.80                                    |      |  | 9,908   |  |  |         | 24,161       | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Total                    |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 539,810 |              |  |  | 373,624 | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Brazilian currency:      |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|                         | Project development                |  |  | 2008     |  |          | Brazilian real |                   | TJLP (long-terminterest rate) plus 3.00 to 5.50  |      |  | 39,736  |  |  |         | 22,635       | 
|                         | Property and equipment acquisition |  |  | 2007     |  |          | Brazilian real |                   | TJLP (long-term interest rate) plus 3.30 to 4.40 |      |  | 1,689   |  |  |         | 1,486        | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Total                    |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 41,425  |              |  |  | 24,121  | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Other foreign currency:  |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|                         | Materials acquisition              |  |  | 2006     |  |          | Japanese yen   |                   | 1.66 to 1.68; JIBOR + 1.05                       |      |  | 182,871 |  |  |         | 152,137      | 
|                         | Working capital                    |  |  | 2003     |  |          | Euro           |                   | 3.49 to 5.50                                     |      |  | 7,630   |  |  |         | 2,754        | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Total                    |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 190,501 |              |  |  | 154,891 | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Total                    |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 771,736 |              |  |  | 552,636 | 
|Less- Current maturities |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 526,550 |              |  |  | 244,526 | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Long-term portion        |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 245,186 |              |  |  | 308,110 | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 
|Accrued interest         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  | 13,432  |              |  |  | 5,870   | 
|                         |                                    |  |  |          |  |          |                |                   |                                                  |      |  |         |  |  |         |              |  |  |         | 

F-32



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The following summarizes the maturities of long-term debt including accrued
interest:
| |  | -------------------------------------------------------------------------------------

|     |  |                 |         |      |  |  |         | 
|---- |  | --------------- | ------- | ---- |  |  | ------- | 
|     |  | At December 31,
|     |  |                
|Year |  | 2001            |         | 2002
|     |  |                 |         |     
|2003 |  |                 | 87,016  |      |  |  |        | 
|2004 |  |                 | 88,265  |      |  |  | 94,434  | 
|2005 |  |                 | 41,107  |      |  |  | 81,998  | 
|2006 |  |                 | 28,798  |      |  |  | 56,559  | 
|2007 |  |                 |        |      |  |  | 24,914  | 
|2008 |  |                 |        |      |  |  | 22,003  | 
|2009 |  |                 |        |      |  |  | 21,349  | 
|2010 |  |                 |        |      |  |  | 1,237   | 
|2011 |  |                 |        |      |  |  | 1,301   | 
|2012 |  |                 |        |      |  |  | 1,367   | 
|2013 |  |                 |        |      |  |  | 1,437   | 
|2014 |  |                 |        |      |  |  | 1,511   | 
|     |  |                 |         |      |  |  |         | 
|     |  |                 | 245,186 |      |  |  | 308,110 | 
|     |  |                 |         |      |  |  |         | 



| |  | The foreign currency exchange rates (expressed in units per US$1.00) related
to the above debt instruments were as follows:
| |  | ---------------------------------------------------------------------------------------------------------------------------

|                |  |                 |          |      |  |  |          | 
|--------------- |  | --------------- | -------- | ---- |  |  | -------- | 
|                |  | At December 31,
|                |  |                
|                |  | 2001            |          | 2002
|                |  |                 |          |     
|Brazilian reais |  |                 | 2.3204   |      |  |  | 3.5333   | 
|Euro            |  |                 | 0.8893   |      |  |  | 1.0475   | 
|Japanese yen    |  |                 | 131.2760 |      |  |  | 118.8690 | 



| |  | Total debt denominated in Brazilian reais is subject to monetary restatement
based on the variation of the Brazilian long-term interest rate - TJLP. The
annualized variations of this index were 10.00% for 2001 and 2002.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company and its subsidiaries partially hedge their foreign currency
liabilities. See further details at note 34.                                                                                                       
|
| |  | The following summarizes the weighted average interest rates by currency
denomination of outstanding borrowings at December 31:                                                                                            

|                |  |      |       |      |  |  |       |  
|--------------- |  | ---- | ----- | ---- |  |  | ----- | -
|                |  | 2001 |       | 2002
|                |  |      |       |     
|U.S. dollars    |  |      | 5.45  | %    |  |  | 5.33  | %
|Brazilian reais |  |      | 13.63 | %    |  |  | 13.61 | %
|Other           |  |      | 1.29  | %    |  |  | 1.24  | %



| |  | Total debt interest, including amounts capitalized, leasing interest and
interest on debentures, was $44,112, $36,001 and $32,083 for the years ended
December 31, 2000, 2001 and 2002, and interest payments were $44,051,
$34,358 and $32,396, respectively.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-33



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|    |  | The Company maintains lines of credit from time to time to finance working
capital requirements in the aggregate principal amount of $6.3 million. At
December 31, 2002, $5.2 million aggregate principal was outstanding under
these lines of credit. The interest rates on outstanding borrowings under
these revolving lines of credit range from 3.4% to 6.0% per annum.                                                                                                                                                                                                                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | As of December 31, 2000, 2001 and 2002, management believes the Company was
in compliance with all financial covenants and restrictions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|    |  | The Company renegotiated reductions in the spreads on loans from the BNDES
(National Economic and Social Development Bank) from 4.5% for the FINEM line
(a line of credit made available by BNDES to Brazilian corporations) and
6.5% for the import line to 3.0% and 5.5% per year, respectively, and on the
collateral amount, effective January 1, 1997. Because of these decreases,
the Company pays fees to the BNDES of 0.35% of the sales price of each ERJ
145 aircraft sold, limited to 420 aircraft sold between January 1, 1997 and
December 31, 2005. These royalties are recorded as a component of interest
expense. In April 2002, the 420th ERJ 145 aircraft was delivered.
|   
|    |  | Collateral for part of these loans includes the pledge of property and
inventories in the amount of $62,290. Of this amount, $50,174 is related to
a second and third mortgage on real estate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|21. |  | OPERATING AND CAPITAL LEASE OBLIGATIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|    |  | The Company and its subsidiaries lease certain land, equipment and computers
and peripherals under noncancelable agreements classified as operating
leases. Rental expense for leased properties was $412, $659 and $2,118 for
2000, 2001 and 2002, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | Future minimum lease payments under noncancelable lease agreements are as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|           |  |       |        | 
|---------- |  | ----- | ------ | 
|Year       |  | Total
|           |  |      
|2003       |  |       | 2,227  | 
|2004       |  |       | 1,937  | 
|2005       |  |       | 1,489  | 
|2006       |  |       | 646    | 
|2007       |  |       | 480    | 
|Thereafter |  |       | 4,619  | 
|           |  |       |        | 
|           |  |       | 11,398 | 
|           |  |       |        | 



| |  | The installations of Embraer
Aircraft Customer Services Inc - EACS are
located on land leased under a lease extending through the year 2020. The
lease includes a clause which obligates EACS to make investments, totaling
$10 million. This obligation has been fully satisfied.                                                                          
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Obligations under capital leases relate to the lease of software and
equipment with terms ranging from 2003 to 2006 and implicit interest rates
which range from 8.2% to 15.5%. The related software and equipment is being
depreciated over 5 years. Future minimum lease payments under this lease
agreement, including implicit interest, are as follows:

F-34



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

|                         |  |       |        | 
|------------------------ |  | ----- | ------ | 
|Year                     |  | Total
|                         |  |      
|2003                     |  |       | 9,125  | 
|2004                     |  |       | 4,283  | 
|2005                     |  |       | 890    | 
|2006                     |  |       | 438    | 
|                         |  |       |        | 
|Total                    |  |       | 14,736 | 
|Less- Implicit interest  |  |       | 1,892  | 
|                         |  |       |        | 
|Capital lease obligation |  |       | 12,844 | 
|Less- Current portion    |  |       | 7,949  | 
|                         |  |       |        | 
|Long-term portion        |  |       | 4,895  | 
|                         |  |       |        | 



|22. |  | INTEREST INCOME (EXPENSE), NET                                         
|--- |  | -----------------------------------------------------------------------
|   
|    |  | The following summarizes the components of interest income and expense:

|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|------------------------------ | ------------------------------------------------------------------------------ |  | ------------------ | ------- | ---- |  | ------- | ------- | - |  | ------- | ------- | -
|                               |                                                                                |  | For the year ended
|                               |                                                                                |  | December 31,      
|                               |                                                                                |  |                   
|                               |                                                                                |  | 2000               |         | 2001 |  | 2002   
|                               |                                                                                |  |                    |         |      |  |        
|Interest expense:              |                                                                                |  |                    |         |      |  |         |         |   |  |         |        
|                               | Interest and commissions on loans                                              |  |                    | (42,652 | )    |  |         | (33,694 | ) |  |         | (27,540 | )
|                               | Interest on taxes, social charges and contributions under
litigation (note 18) |  |                    | (11,744 | )    |  |         | (7,231  | ) |  |         | (18,356 | )
|                               | Interest and premium on debentures                                             |  |                    | (2,020  | )    |  |         | (627    | ) |  |         |        |  
|                               | CPMF (tax on bank account transactions)                                        |  |                    | (11,176 | )    |  |         | (12,651 | ) |  |         | (12,063 | )
|                               | Interest on refinanced taxes                                                   |  |                    | (1,225  | )    |  |         | (987    | ) |  |         | (903    | )
|                               | Amortization of deferred credit insurance                                      |  |                    | (1,883  | )    |  |         | (2,111  | ) |  |         | (2,291  | )
|                               | Royalties to BNDES on aircraft sold                                            |  |                    | (5,964  | )    |  |         | (5,512  | ) |  |         | (1,417  | )
|                               | Structuring finance costs                                                      |  |                    | (1,146  | )    |  |         | (2,118  | ) |  |         | (5,401  | )
|                               | Tax on interest on foreign loan                                                |  |                    | (2,850  | )    |  |         | (1,089  | ) |  |         | (967    | )
|                               | Other                                                                          |  |                    | (5,733  | )    |  |         | (4,665  | ) |  |         | (9,690  | )
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|                               |                                                                                |  | (86,393            | )       |      |  | (70,685 | )       |   |  | (78,628 | )      
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|Interest income:               |                                                                                |  |                    |         |      |  |         |         |   |  |         |        
|                               | Temporary cash investments                                                     |  |                    | 70,567  |      |  |         | 131,310 |   |  |         | 82,097  |  
|                               | Interest on NTN, customers accounts receivable and
guarantee deposits         |  |                    | 7,193   |      |  |         | 15,467  |   |  |         | 15,676  |  
|                               | Discount on payment in advance                                                 |  |                    | 1,717   |      |  |         | 1,372   |   |  |         | 732     |  
|                               | Other                                                                          |  |                    | 7,255   |      |  |         | 7,732   |   |  |         | 1,750   |  
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|                               |                                                                                |  | 86,732             |         |      |  | 155,881 |         |   |  | 100,255 |        
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|                               | Monetary and exchange variations, net                                          |  |                    | (4,905  | )    |  |         | (22,045 | ) |  |         | 9,170   |  
|                               | Unearned gain (loss) on derivatives                                            |  |                    | (2,308  | )    |  |         | (15,649 | ) |  |         | 49,659  |  
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  
|Interest income (expense), net |                                                                                |  | (6,874             | )       |      |  | 47,502  |         |   |  | 80,456  |        
|                               |                                                                                |  |                    |         |      |  |         |         |   |  |         |         |  

F-35



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|23. |  | SUPPLEMENTARY RETIREMENT PLAN
|--- |  | -----------------------------



| |  | Defined Contribution                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company and its subsidiaries sponsor a defined contribution pension plan
for their employees. The plan is a private, defined contribution plan where
participation is optional. The plan is administered by a Brazilian pension
fund administrator controlled by Banco do Brasil. The Companys and its
subsidiaries contributions to the plan in 2000, 2001 and 2002 were $3,916,
$4,494 and $5,169, respectively.                                                                                                                                                                        
|
| |  | Defined Benefit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | The Embraer Aircraft Holding, Inc. sponsors a defined benefit pension plan
for some of its employees and also a post retirement health care plan.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | The 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 provides for: an increase in
elective deferral limits to 100%, an increase in compensation limits to
$200,000, catch-up contributions and a two (2) year graded vesting schedule
for employer matching contributions. In addition, the name of the Plan was
changed to the Embraer Aircraft Holding, Inc. 401(k) Retirement Plan
(formerly Embraer Aircraft Corporation 401(k) Retirement Plan).
|
| |  | The expected cost of providing postretirement medical benefits to an
employee and the employees beneficiaries and covered dependents are accrued
during the years that employees renders the necessary service.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The change in benefit obligation for the years ended December 31, 2000, 2001
and 2002 is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                       |  |                  |       |          |  |      |        |      |  |      |        |      |  |                 |       |   |  |  |       |   |  |  |       |  
|-------------------------------------- |  | ---------------- | ----- | -------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | --------------- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                       |  |                  |       |          |  |      |        |      |  |      |        |      |  | Post-retirement
|                                       |  | Pension benefits |       | benefits
|                                       |  |                  |       |         
|                                       |  | 2000             |       | 2001     |  | 2002 |        | 2000 |  | 2001 |        | 2002
|                                       |  |                  |       |          |  |      |        |      |  |      |        |     
|Benefit obligation - beginning of year |  |                  | 7,863 |          |  |      | 9,443  |      |  |      | 10,365 |      |  |                 | 3,138 |   |  |  | 3,877 |   |  |  | 4,768 |  
|Service cost                           |  |                  | 1,091 |          |  |      | 1,420  |      |  |      | 1,501  |      |  |                 | 300   |   |  |  | 421   |   |  |  | 359   |  
|Interest cost                          |  |                  | 510   |          |  |      | 654    |      |  |      | 819    |      |  |                 | 229   |   |  |  | 280   |   |  |  | 260   |  
|Plan amendments                        |  |                  | 585   |          |  |      |       |      |  |      | 324    |      |  |                 |      |   |  |  |      |   |  |  |      |  
|Actuarial (gain) loss                  |  |                  | (373  | )        |  |      | (891   | )    |  |      | 3,702  |      |  |                 | 294   |   |  |  | 255   |   |  |  | (518  | )
|Benefits paid to participants          |  |                  | (233  | )        |  |      | (261   | )    |  |      | (475   | )    |  |                 | (84   | ) |  |  | (65   | ) |  |  | (119  | )
|                                       |  |                  |       |          |  |      |        |      |  |      |        |      |  |                 |       |   |  |  |       |   |  |  |       |  
|Benefit obligation - end of year       |  |                  | 9,443 |          |  |      | 10,365 |      |  |      | 16,236 |      |  |                 | 3,877 |   |  |  | 4,768 |   |  |  | 4,750 |  
|                                       |  |                  |       |          |  |      |        |      |  |      |        |      |  |                 |       |   |  |  |       |   |  |  |       |  

F-36



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The change in plan assets for the years ended December 31, 2000, 2001 and
2002 is as follows:
| |  | ---------------------------------------------------------------------------------------------

|                                              |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |       |   |  |  |       |   |  |  |       |  
|--------------------------------------------- |  | ---------------- | ----- | -------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | --------------- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                              |  |                  |       |          |  |      |       |      |  |      |       |      |  | Post-retirement
|                                              |  | Pension benefits |       | benefits
|                                              |  |                  |       |         
|                                              |  | 2000             |       | 2001     |  | 2002 |       | 2000 |  | 2001 |       | 2002
|                                              |  |                  |       |          |  |      |       |      |  |      |       |     
|Fair value of plan assets -
beginning of year |  |                  | 4,244 |          |  |      | 4,980 |      |  |      | 6,010 |      |  |                 | 1,748 |   |  |  | 2,046 |   |  |  | 2,009 |  
|Employer contributions                        |  |                  | 911   |          |  |      | 1,218 |      |  |      | 3,000 |      |  |                 | 358   |   |  |  |      |   |  |  |      |  
|Actual return on plan assets                  |  |                  | 58    |          |  |      | 73    |      |  |      | (290  | )    |  |                 | 24    |   |  |  | 28    |   |  |  | (92   | )
|Benefits paid to participants                 |  |                  | (233  | )        |  |      | (261  | )    |  |      | (475  | )    |  |                 | (84   | ) |  |  | (65   | ) |  |  | (119  | )
|                                              |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |       |   |  |  |       |   |  |  |       |  
|Fair value of plan assets -
end of year       |  |                  | 4,980 |          |  |      | 6,010 |      |  |      | 8,245 |      |  |                 | 2,046 |   |  |  | 2,009 |   |  |  | 1,798 |  
|                                              |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |       |   |  |  |       |   |  |  |       |  



| |  | The components of accrued benefit cost at December 31, 2000, 2001 and 2002
are as follows:
| |  | ------------------------------------------------------------------------------------------

|                                   |  |                  |        |          |  |      |        |      |  |      |        |      |  |                 |        |   |  |  |        |   |  |  |        |  
|---------------------------------- |  | ---------------- | ------ | -------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | --------------- | ------ | - |  |  | ------ | - |  |  | ------ | -
|                                   |  |                  |        |          |  |      |        |      |  |      |        |      |  | Post-retirement
|                                   |  | Pension benefits |        | benefits
|                                   |  |                  |        |         
|                                   |  | 2000             |        | 2001     |  | 2002 |        | 2000 |  | 2001 |        | 2002
|                                   |  |                  |        |          |  |      |        |      |  |      |        |     
|Funded status                      |  |                  | (4,463 | )        |  |      | (4,355 | )    |  |      | (7,991 | )    |  |                 | (1,831 | ) |  |  | (2,759 | ) |  |  | (2,952 | )
|Unrecognized transition obligation |  |                  | 124    |          |  |      | 86     |      |  |      | 49     |      |  |                 |       |   |  |  |       |   |  |  |       |  
|Unamortized prior service cost     |  |                  | 386    |          |  |      | 361    |      |  |      | 640    |      |  |                 | (38    | ) |  |  | (31    | ) |  |  | (24    | )
|Unrecognized net loss              |  |                  | 2,581  |          |  |      | 1,922  |      |  |      | 6,350  |      |  |                 | 596    |   |  |  | 933    |   |  |  | 633    |  
|                                   |  |                  |        |          |  |      |        |      |  |      |        |      |  |                 |        |   |  |  |        |   |  |  |        |  
|Accrued benefit cost               |  |                  | (1,372 | )        |  |      | (1,986 | )    |  |      | (952   | )    |  |                 | (1,273 | ) |  |  | (1,857 | ) |  |  | (2,343 | )
|                                   |  |                  |        |          |  |      |        |      |  |      |        |      |  |                 |        |   |  |  |        |   |  |  |        |  



| |  | The accrued benefit cost as of December 31, 2000, 2001 and 2002 is included
in other accounts payable and accrued liabilities in the accompanying
balance sheets.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The weighted average assumptions at December 31, 2000, 2001 and 2002 are as
follows:                                                                             

|                               |  |                      |  |              |  |      |      |      |  |      |      |      |  |  |      |  |  |                 |  |  |  |  |      |  |  |  |      |  |  |  |      | 
|------------------------------ |  | -------------------- |  | ------------ |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- |  |  | --------------- |  |  |  |  | ---- |  |  |  | ---- |  |  |  | ---- | 
|                               |  |                      |  |              |  |      |      |      |  |      |      |      |  |  |      |  |  | Post-retirement
|                               |  | Pension benefits (%) |  | benefits (%)
|                               |  |                      |  |             
|                               |  | 2000                 |  | 2001         |  | 2002 |      | 2000 |  | 2001 |      | 2002
|                               |  |                      |  |              |  |      |      |      |  |      |      |     
|Average discount rate          |  |                      |  |              |  |      | 6.50 |      |  |      | 7.50 |      |  |  | 6.75 |  |  |                 |  |  |  |  | 6.75 |  |  |  | 7.75 |  |  |  | 7.25 | 
|Expected return on plan assets |  |                      |  |              |  |      | 7.75 |      |  |      | 7.75 |      |  |  | 7.75 |  |  |                 |  |  |  |  | 7.75 |  |  |  | 7.75 |  |  |  | 7.75 | 
|Rate of compensation increase  |  |                      |  |              |  |      | 6.00 |      |  |      | 5.50 |      |  |  | 5.50 |  |  |                 |  |  |  |  | 6.00 |  |  |  | 5.50 |  |  |  | 5.50 | 

F-37



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The components of net periodic benefit cost as of December 31, 2000, 2001
and 2002 were as follows:
| |  | ---------------------------------------------------------------------------------------------------

|                                      |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |      |   |  |  |      |   |  |  |      |  
|------------------------------------- |  | ---------------- | ----- | -------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | --------------- | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                      |  |                  |       |          |  |      |       |      |  |      |       |      |  | Post-retirement
|                                      |  | Pension benefits |       | benefits
|                                      |  |                  |       |         
|                                      |  | 2000             |       | 2001     |  | 2002 |       | 2000 |  | 2001 |       | 2002
|                                      |  |                  |       |          |  |      |       |      |  |      |       |     
|Service cost                          |  |                  | 1,091 |          |  |      | 1,420 |      |  |      | 1,501 |      |  |                 | 300  |   |  |  | 421  |   |  |  | 359  |  
|Interest cost                         |  |                  | 510   |          |  |      | 654   |      |  |      | 819   |      |  |                 | 229  |   |  |  | 279  |   |  |  | 260  |  
|Expected return on plan assets        |  |                  | (341  | )        |  |      | (410  | )    |  |      | (491  | )    |  |                 | (135 | ) |  |  | (156 | ) |  |  | (151 | )
|Amortization of transition obligation |  |                  | 38    |          |  |      | 38    |      |  |      | 37    |      |  |                 |     |   |  |  |     |   |  |  |     |  
|Amortization of prior service cost    |  |                  | 26    |          |  |      | 25    |      |  |      | 45    |      |  |                 | (7   | ) |  |  | (7   | ) |  |  | (7   | )
|Amortization of loss                  |  |                  | 131   |          |  |      | 105   |      |  |      | 57    |      |  |                 |     |   |  |  | 47   |   |  |  | 25   |  
|                                      |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |      |   |  |  |      |   |  |  |      |  
|Net periodic benefit cost             |  |                  | 1,455 |          |  |      | 1,832 |      |  |      | 1,968 |      |  |                 | 387  |   |  |  | 584  |   |  |  | 486  |  
|                                      |  |                  |       |          |  |      |       |      |  |      |       |      |  |                 |      |   |  |  |      |   |  |  |      |  



| |  | The net benefit cost is included in selling, general and administrative
expenses in the accompanying consolidated statements of income.                                                                                                                                                 
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | For measurement purposes, an annual rate of increase in the per capita cost
of covered health and dental care benefits of 6%, 9% and 14% was assumed for
2000, 2001 and 2002, respectively. The rate was assumed to remain at 9%
through 2004, then decrease gradually to 4.5% for 2014.
|
| |  | Assumed health care cost trend rates have a significant effect on the
amounts reported for the post-retirement medical benefit 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: |               |  |                      |     |          |  |      |     
|                                                         | Service cost  |  |                      | 448 |          |  |      | (289 | )
|                                                         | Interest cost |  |                      | 300 |          |  |      | (226 | )
|Effect on the post-retirement benefit obligation         |               |  | 830                  |     |          |  | (684 | )   



|24. |  | EMPLOYEE PROFIT SHARING                                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company has an employee profit sharing policy (PLR) linked to dividend
payments to shareholders and to action plans and specific goals which are
established and agreed upon at the beginning of each year. During the years
2000, 2001 and 2002, the Company recognized profit sharing expense of
$41,770, $43,746 and $25,222, respectively.

F-38



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|25. |  | SHAREHOLDERS EQUITY                                                                                                                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Companys authorized statutory capital consists of 1,500,000,000 shares
of which the following were outstanding as of December 31, 2002:

|                     |  |          |             |        |  |  |         | 
|-------------------- |  | -------- | ----------- | ------ |  |  | ------- | 
|Classes of shares    |  | Quantity |             | Amount
|                     |  |          |             |       
|Common shares        |  |          | 242,544,447 |        |  |  | 207,014 | 
|Special common share |  |          | 1           |        |  |  |        | 
|Preferred shares     |  |          | 470,429,907 |        |  |  | 684,078 | 
|                     |  |          |             |        |  |  |         | 
|                     |  |          | 712,974,355 |        |  |  | 891,092 | 
|                     |  |          |             |        |  |  |         | 



| |  | The Companys preferred shares do not have voting rights but have priority
in capital redemption and, in accordance with present corporate law, have
the right to dividends in an amount 10% greater than those payable to the
common shares. In connection with the 4th Series Debenture, as stipulated in
the debenture indenture, $28,090 of the statutory preferred share capital is
legally designated as a capital reserve due to the conversion of such
Debentures.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Special common share -
golden share                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | One special common share (golden share) is held by the Brazilian
Government. As holder of the golden share, the Brazilian Government is
entitled to the same voting rights as the other holders of common shares. In
addition, the golden share carries veto power over the following actions:                                                                                                                                                                          



| |  |  | Change of the Company name and purpose.                                                                                                                                                                  
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Amendment to and/or extention of the Company logo.                                                                                                                                                       
|
| |  |  | Creation an/or extention of military programs whether or not
involving, the Federative Republic of Brazil.                                                                                               
|
| |  |  | Third party training in technology for military programs.                                                                                                                                                
|
| |  |  | Discontinuance of supply of military airplane maintenance and replacement parts.                                                                                                                         
|
| |  |  | Transfer of share control.                                                                                                                                                                               
|
| |  |  | Any change to the list of corporate actions over which the golden
share carries veto power, to the structure and composition of the Board
of Directors, and to the rights attributed to the golden share.

F-39



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Composition of shareholders as of December 31
| |  | ---------------------------------------------

|                                                                 |  |          |             |                       |  |      |             |      |  |      |             |      |  |  |             |  |  |  |        |  |  |  |        | 
|---------------------------------------------------------------- |  | -------- | ----------- | --------------------- |  | ---- | ----------- | ---- |  | ---- | ----------- | ---- |  |  | ----------- |  |  |  | ------ |  |  |  | ------ | 
|                                                                 |  | Quantity |             | Total equity interest
|                                                                 |  |          |             |                      
|                                                                 |  | Common   |             | Preferred             |  | %   
|                                                                 |  |          |             |                       |  |     
|Shareholders                                                     |  | 2001     |             | 2002                  |  | 2001 |             | 2002 |  | 2001 |             | 2002
|                                                                 |  |          |             |                       |  |      |             |      |  |      |             |     
|Caixa de Previdência
dos Funcionários do
Banco do Brasil -
Previ |  |          | 57,594,480  |                       |  |      | 57,594,480  |      |  |      | 60,872,078  |      |  |  | 60,872,078  |  |  |  | 16.67  |  |  |  | 16.62  | 
|Fundação SISTEL de
Seguridade Social                             |  |          | 48,508,890  |                       |  |      | 48,508,890  |      |  |      | 18,814,826  |      |  |  | 8,600,725   |  |  |  | 9.47   |  |  |  | 8.01   | 
|Cia. Bozano                                                      |  |          | 48,509,220  |                       |  |      | 48,509,220  |      |  |      | 25,703,908  |      |  |  | 23,968,612  |  |  |  | 10.44  |  |  |  | 10.17  | 
|Bozano Holdings, Ltd.                                            |  |          |            |                       |  |      |            |      |  |      | 23,896,920  |      |  |  | 23,896,920  |  |  |  | 3.36   |  |  |  | 3.35   | 
|BNDES Participações
S.A. - BNDESPAR                              |  |          | 1,054,400   |                       |  |      | 3,734,893   |      |  |      | 60,271,801  |      |  |  | 47,941,318  |  |  |  | 8.63   |  |  |  | 7.25   | 
|Dassault Aviation                                                |  |          | 13,744,186  |                       |  |      | 13,744,186  |      |  |      | 1,953,132   |      |  |  | 1,953,132   |  |  |  | 2.21   |  |  |  | 2.20   | 
|Thomson CSF/Thales                                               |  |          | 13,744,186  |                       |  |      | 13,744,186  |      |  |      | 1,953,132   |      |  |  | 1,953,132   |  |  |  | 2.21   |  |  |  | 2.20   | 
|EADS                                                             |  |          | 13,744,186  |                       |  |      | 13,744,186  |      |  |      | 1,953,132   |      |  |  | 1,953,132   |  |  |  | 2.21   |  |  |  | 2.20   | 
|SNECMA                                                           |  |          | 7,276,332   |                       |  |      | 7,276,332   |      |  |      | 1,034,010   |      |  |  | 1,034,010   |  |  |  | 1.17   |  |  |  | 1.17   | 
|Brazilian Government
(including golden
share)                    |  |          | 3,514,388   |                       |  |      | 1,850,495   |      |  |      | 499,415     |      |  |  | 499,415     |  |  |  | 0.56   |  |  |  | 0.33   | 
|Others                                                           |  |          | 34,854,180  |                       |  |      | 33,837,580  |      |  |      | 271,216,240 |      |  |  | 297,757,433 |  |  |  | 43.07  |  |  |  | 46.50  | 
|                                                                 |  |          |             |                       |  |      |             |      |  |      |             |      |  |  |             |  |  |  |        |  |  |  |        | 
|                                                                 |  |          | 242,544,448 |                       |  |      | 242,544,448 |      |  |      | 468,168,594 |      |  |  | 470,429,907 |  |  |  | 100.00 |  |  |  | 100.00 | 
|                                                                 |  |          |             |                       |  |      |             |      |  |      |             |      |  |  |             |  |  |  |        |  |  |  |        | 



| |  | Equity transactions                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On June 16, 2003, the Board of Directors approved the payment of interest on
shareholders equity for the first two quarters of 2003 in the total amount
of R$76.7 million to be paid on August 15, 2003, which, translated using the
exchange rate on June 16, 2003, would be equivalent to $26.8 million.                                                                                                                
|
| |  | On March 21, 2003, the Board of Directors approved an addition to capital of
$191,142 without issuance of shares, from the reserve for investments and
working capital , subject to ratification at the Extraordinary Shareholders
Meeting scheduled for April 28, 2003.                                                                                                                                                  
|
| |  | In June, September, October and December 2002, 2,261,313 options for
preferred shares were exercised for an aggregate exercise price of $1,194.                                                                                                                                                                                                                                                                            
|
| |  | The Extraordinary Shareholders Meeting on March 1, 2002 approved the
addition of $236,149 to capital from the reserve for investments and working
capital, without issuance of shares and attributable to all shareholders.                                                                                                                                                                                               
|
| |  | Also, the same Extraordinary Shareholders Meeting approved the addition of
$223,169 to capital from the reserve for investments and working capital,
with the issuance of 88,430,168 preferred shares in a form of stock
dividend, attributed to all common and preferred shareholders, in proportion
to their participation in capital at that date, at the rate of 0.142106 new
preferred share for each existing share.
|
| |  | As a result of the stock dividend, shareholders of the Company on March 1,
2002, received additional preferred share based the proportion mentioned
above. The additional shares were distributed on March 1, 2002. All
per-share amounts and number of shares outstanding in this report have been
restated for the stock dividend.                                                                                       

F-40



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The amount for the preferred shares issued from the capitalization of
reserves was determined based on the net book value of the Companys shares
as of September 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The preferred shares attributed to the stock dividend have the same
characteristics as the existing preferred shares. The new preferred shares
issued by the Company did not have rights to dividends for the year ended
December 31, 2001.                                                                                                                                                                                                                                                                                                                                               
|
| |  | In June and November 2001, 4,935,000 employee stock options were exercised
for an aggregate exercise price of $1,761.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | In June and July of 2000, the Company completed a public offering of 52.8
million preferred shares, represented by 13.2 million ADSs, for $235,460,
net of transaction expenses of $9,909.                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | 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.                                                                                                                                                                                                                                
|
| |  | Retained earnings (restricted)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | 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.
|
| |  | At their annual meeting, the Companys shareholders approved 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 for:                                                                                                                                                                                                                                                                                                                                             



| |  |  | Research and development - Development of the EMBRAER 170/190
family, new versions and modifications for the ERJ 145 family and
Legacy corporate jet.       
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | New technologies, processes and management models in order to
improve the Companys results, competencies and productivity, and
investments in subsidiaries.



|26. |  | DIVIDENDS                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Brazilian law permits the payment of cash dividends only from retained
earnings and certain reserves registered in the Companys statutory
accounting records. At December 31, 2002, the earnings and reserves
available for distribution as dividends, upon approval by the Companys
shareholders, were $123,399. Dividends are calculated on the Companys
statutory adjusted net income for the year, which is determined using the
equity method of accounting for subsidiaries.

F-41



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | In conformity with the Companys bylaws, shareholders are entitled to
minimum dividends equivalent to 25% of annual net income computed in
accordance with the accounting principles emanating from Brazilian corporate
law. The Companys preferred shares do not have voting rights but have
priority in capital redemption and, in accordance with present corporate
law, have the right to dividends in an amount 10% greater than those payable
to the common shares.                                                            
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company has elected to pay interest on shareholders capital, calculated
on a quarterly basis in accordance with article 9 of Law No. 9,249/95 based
on the TJLP, 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 net worth, net of any withholding
tax, may be included as part of any mandatory distributable dividends
amount.
|
| |  | The dividends declared and approved in 2000, 2001 and 2002 are composed as
follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |         | 
|----------------------- | ----------------------------------------------------- | ------- | ------- | ------ |  | --------- | ------------------- | ------- |  |  |  | ------- | 
|                        |                                                       |         |         |        |  |           | Dividends per share
|                        |                                                       |         |         |        |  |           |                    
|Approval date           |                                                       | Amounts |         | Common |  | Preferred
|                        |                                                       |         |         |        |  |          
|2000:                   |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|                        | February 15, 2000 - dividends                         |         |         | 48,252 |  |           |                     | 0.08522 |  |  |  | 0.09374 | 
|                        | March 24, 2000 - interest on capital                  |         |         | 11,209 |  |           |                     | 0.01941 |  |  |  | 0.02135 | 
|                        | June 16, 2000 - interest on capital                   |         |         | 11,039 |  |           |                     | 0.01911 |  |  |  | 0.02102 | 
|                        | July 6, 2000 - dividends                              |         |         | 44,205 |  |           |                     | 0.07654 |  |  |  | 0.08420 | 
|                        | September 22, 2000 - interest on capital              |         |         | 15,027 |  |           |                     | 0.02310 |  |  |  | 0.02541 | 
|                        | December 15, 2000 - interest on capital               |         |         | 17,125 |  |           |                     | 0.02632 |  |  |  | 0.02895 | 
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|Total dividends in 2000 |                                                       |         | 146,857 |        |  |           |                     |         |  |  |  |        
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|2001:                   |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|                        | March 16, 2001 - dividends                            |         |         | 51,448 |  |           |                     | 0.07908 |  |  |  | 0.08699 | 
|                        | March 16, 2001 - interest on capital                  |         |         | 15,661 |  |           |                     | 0.02407 |  |  |  | 0.02648 | 
|                        | June 13, 2001 - interest on capital                   |         |         | 17,963 |  |           |                     | 0.02392 |  |  |  | 0.02632 | 
|                        | September 14, 2001 - dividends                        |         |         | 53,418 |  |           |                     | 0.07064 |  |  |  | 0.07770 | 
|                        | September 14, 2001 - interest on capital              |         |         | 18,102 |  |           |                     | 0.02394 |  |  |  | 0.02633 | 
|                        | December 15, 2001 - interest on capital               |         |         | 24,612 |  |           |                     | 0.03249 |  |  |  | 0.03574 | 
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|Total dividends in 2001 |                                                       |         | 181,204 |        |  |           |                     |         |  |  |  |        
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|2002:                   |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|                        | March 19, 2002 - dividends                            |         |         | 43,100 |  |           |                     | 0.05690 |  |  |  | 0.06259 | 
|                        | March 19, 2002 - interest on capital                  |         |         | 25,353 |  |           |                     | 0.03347 |  |  |  | 0.03681 | 
|                        | June 14, 2002 - interest on capital                   |         |         | 20,929 |  |           |                     | 0.02763 |  |  |  | 0.03039 | 
|                        | September 13, 2002 - interest on capital              |         |         | 17,022 |  |           |                     | 0.02244 |  |  |  | 0.02468 | 
|                        | December 13, 2002 - interest on capital               |         |         | 19,804 |  |           |                     | 0.02606 |  |  |  | 0.02867 | 
|                        | December 13, 2002 - interest on capital 1998
and 1999 |         |         | 20,505 |  |           |                     | 0.02699 |  |  |  | 0.02969 | 
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        
|Total dividends in 2002 |                                                       |         | 146,713 |        |  |           |                     |         |  |  |  |        
|                        |                                                       |         |         |        |  |           |                     |         |  |  |  |        

F-42



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|27. |  | EARNINGS PER SHARE                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Because the preferred and common shareholders have different dividend,
voting and liquidation rights, basic and diluted earnings per share have
been calculated using the two-class method. The two-class method is an
earnings allocation formula that determines earnings per share for preferred
and common shares according to the dividends to be paid as required by the
Companys bylaws and participation rights in undistributed earnings.
Effective January 1, 1997, preferred shareholders are entitled to receive
per-share dividends of at least 10% greater than the per-share dividends
paid to common shareholders. Undistributed earnings, therefore, have been
allocated to common and preferred shareholders on a 100 to 110 basis,
respectively, based upon 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 is 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
is computed by deducting distributed and undistributed net income available
to preferred shareholders from net income. Net income available to preferred
shareholders is the sum of the 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, including the premiums accrued related to redeemable
preferred stock) from net income.                                                                                                                                                                                                                                                                                                                                 
|   
|    |  | 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 and convertible debt with warrants had
been issued during the respective periods, utilizing the treasury stock
method. In computing the effect of convertible debt, the net income
available for distribution is adjusted to add back the interest recognized
in the period associated with convertible debt.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   
|    |  | All share and per share amounts have been restated for the effects of the
stock split as described in Note 25.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-43



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

The computation of basic and diluted earnings per share is as follows:



|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |         | 
|---------------------------------------------------------------------------- | -------------------------------------------- |  | --------------------------------------------------- | ------- | -------------------- |  | ------- | ------- | ------ |  | --------- | ------- | ----- |  | ------- | ------- |  |  | ------- | ------- |  |  | ------- | ------- | 
|                                                                             |                                              |  | In thousands, except per share data and percentages
|                                                                             |                                              |  |                                                    
|                                                                             |                                              |  | At December 31, 2000                                |         | At December 31, 2001
|                                                                             |                                              |  |                                                     |         |                     
|                                                                             |                                              |  | Common                                              |         | Preferred            |  | Total   |         | Common |  | Preferred |         | Total
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |      
|Basic numerator:                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             | Actual dividends declared                    |  |                                                     | 61,224  |                      |  |         | 85,633  |        |  |           | 146,857 |       |  |         | 64,181  |  |  |         | 117,023 |  |  |         | 181,204 | 
|                                                                             | Basic allocated undistributed earnings (a)   |  |                                                     | 72,486  |                      |  |         | 101,385 |        |  |           | 173,871 |       |  |         | 52,150  |  |  |         | 95,086  |  |  |         | 147,236 | 
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Allocated net income available for common and preferred shareholders         |                                              |  | 133,710                                             |         |                      |  | 187,018 |         |        |  | 320,728   |         |       |  | 116,331 |         |  |  | 212,109 |         |  |  | 328,440 |        
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Basic denominator:                                                           |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             | Weighted average shares                      |  |                                                     | 242,544 |                      |  |         | 308,401 |        |  |           |         |       |  |         | 242,544 |  |  |         | 402,035 |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             | Basic earnings per share                     |  |                                                     | 0.55    |                      |  |         | 0.61    |        |  |           |         |       |  |         | 0.48    |  |  |         | 0.53    |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Diluted numerator:                                                           |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             | Actual dividends declared                    |  |                                                     | 61,224  |                      |  |         | 85,633  |        |  |           | 146,857 |       |  |         | 64,181  |  |  |         | 117,023 |  |  |         | 181,204 | 
|                                                                             | Diluted allocated undistributed earnings (a) |  |                                                     | 63,221  |                      |  |         | 112,670 |        |  |           | 175,891 |       |  |         | 49,861  |  |  |         | 98,002  |  |  |         | 147,863 | 
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             |                                              |  | 124,445                                             |         |                      |  | 198,303 |         |        |  | 322,748   |         |       |  | 114,042 |         |  |  | 215,025 |         |  |  | 329,067 |        
|Allocated net income available for common and preferred shareholders         |                                              |  | 115,281                                             |         |                      |  | 205,447 |         |        |  | 320,728   |         |       |  | 110,753 |         |  |  | 217,687 |         |  |  | 328,440 |        
|Interest expense on convertible debt (b)                                     |                                              |  | 726                                                 |         |                      |  | 1,294   |         |        |  | 2,020     |         |       |  | 211     |         |  |  | 416     |         |  |  | 627     |        
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Allocated diluted net income available for common and preferred shareholders |                                              |  | 116,007                                             |         |                      |  | 206,741 |         |        |  | 322,748   |         |       |  | 110,964 |         |  |  | 218,103 |         |  |  | 329,067 |        
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Diluted denominator:                                                         |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|                                                                             | Weighted average shares outstanding          |  |                                                     | 242,544 |                      |  |         | 308,401 |        |  |           |         |       |  |         | 242,544 |  |  |         | 402,035 |  |  |         |         | 
|                                                                             | Dilutive effects of convertible debt (b)     |  |                                                     |        |                      |  |         | 75,314  |        |  |           |         |       |  |         |        |  |  |         | 24,646  |  |  |         |         | 
|                                                                             | Dilutive effects of stock options (b)        |  |                                                     |        |                      |  |         | 9,239   |        |  |           |         |       |  |         |        |  |  |         | 6,705   |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Diluted weighted average shares (c)                                          |                                              |  | 242,544                                             |         |                      |  | 392,954 |         |        |  |           |         |       |  | 242,544 |         |  |  | 433,386 |         |  |  |         |        
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        
|Diluted earnings per share                                                   |                                              |  | 0.48                                                |         |                      |  | 0.53    |         |        |  |           |         |       |  | 0.46    |         |  |  | 0.50    |         |  |  |         |        
|                                                                             |                                              |  |                                                     |         |                      |  |         |         |        |  |           |         |       |  |         |         |  |  |         |         |  |  |         |        

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |         | 
|---------------------------------------------------------------------------- | -------------------------------------------- |  | --------------------------------------------------- | ------- | --------- |  | ------- | ------- |  |  | ------- | ------- | 
|                                                                             |                                              |  | In thousands, except per share data and percentages
|                                                                             |                                              |  |                                                    
|                                                                             |                                              |  | At December 31, 2002                               
|                                                                             |                                              |  |                                                    
|                                                                             |                                              |  | Common                                              |         | Preferred |  | Total  
|                                                                             |                                              |  |                                                     |         |           |  |        
|Basic numerator:                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             | Actual dividends declared                    |  |                                                     | 47,932  |           |  |         | 98,781  |  |  |         | 146,713 | 
|                                                                             | Basic allocated undistributed earnings (a)   |  |                                                     | 24,790  |           |  |         | 51,089  |  |  |         | 75,879  | 
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Allocated net income available for common and preferred shareholders         |                                              |  | 72,722                                              |         |           |  | 149,870 |         |  |  | 222,592 |        
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Basic denominator:                                                           |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             | Weighted average shares                      |  |                                                     | 242,544 |           |  |         | 454,414 |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             | Basic earnings per share                     |  |                                                     | 0.30    |           |  |         | 0.33    |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Diluted numerator:                                                           |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             | Actual dividends declared                    |  |                                                     | 47,932  |           |  |         | 98,781  |  |  |         | 146,713 | 
|                                                                             | Diluted allocated undistributed earnings (a) |  |                                                     | 24,607  |           |  |         | 51,272  |  |  |         | 75,879  | 
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             |                                              |  | 72,539                                              |         |           |  | 150,053 |         |  |  | 222,592 |        
|Allocated net income available for common and preferred shareholders         |                                              |  | 72,186                                              |         |           |  | 150,406 |         |  |  | 222,592 |        
|Interest expense on convertible debt (b)                                     |                                              |  |                                                    |         |           |  |        |         |  |  |        |        
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Allocated diluted net income available for common and preferred shareholders |                                              |  | 72,186                                              |         |           |  | 150,406 |         |  |  | 222,592 |        
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Diluted denominator:                                                         |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|                                                                             | Weighted average shares outstanding          |  |                                                     | 242,544 |           |  |         | 454,414 |  |  |         |         | 
|                                                                             | Dilutive effects of convertible debt (b)     |  |                                                     |        |           |  |         |        |  |  |         |         | 
|                                                                             | Dilutive effects of stock options (b)        |  |                                                     |        |           |  |         | 5,001   |  |  |         |         | 
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Diluted weighted average shares (c)                                          |                                              |  | 242,544                                             |         |           |  | 459,415 |         |  |  |         |        
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        
|Diluted earnings per share                                                   |                                              |  | 0.30                                                |         |           |  | 0.33    |         |  |  |         |        
|                                                                             |                                              |  |                                                     |         |           |  |         |         |  |  |         |        



|(a) |  | The Company calculates earnings per share on common and preferred shares
under the two-class method. Effective January 1, 1997, preferred
shareholders are entitled to receive per share dividends of at least 10%
greater than the per share dividends paid to common shareholders.
Undistributed earnings, therefore, from January 1, 1997 forward have been
allocated to common and preferred shareholders on a 100 to 110 basis,
respectively, based upon 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 purposes, allocated undistributed earnings differ for
such calculations.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | For purposes of computing diluted earnings per share, the convertible
debt (including subscription warrants) and outstanding stock options are
assumed to be converted into common and preferred shares using the
treasury stock method. The related interest expense related to the
convertible debt is added back to arrive at allocated diluted net income
available for common and preferred shareholders.                                                                                                                                                                                                                                                                                                                                         
|   
|(c) |  | The effect of the stock split (see note 25) is reflected retroactively
for all of the period presented for purpose of computing basic and diluted
Earnings per Share EPS.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-44



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|28. |  | 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 are
authorized to be granted. Options are 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 5 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 terminates five years after the first grant.
|   
|    |  | As of December 31, 2002, the Administration Committee had made seven grants,
equivalent to 400 lots of 50,000 shares each, totaling 19,665,000 preferred
shares, net of 335,000 shares which were forfeited, as the grantees are no
longer employees of the Company. During 2000 and 2001, the Company granted
options with exercises prices below the market value of the underlying stock
on the date of grant which resulted in noncash compensation expense of $510
and $1,074, respectively. In June and November 2001, 4,935,000 options were
exercised, in the total amount of $1,761. During 2002, 2,261,313 options
were exercised, in the total amount of $1,194.                                                                                                                                          
|   
|    |  | In connection with the 14.2106% stock dividend approved at the Extraordinary
Shareholders Meeting on March 1, 2002 (see Note 25), the Administration
Committee granted an 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 number options held. The total of these additional grants were 637,318
grants 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
in the following table (options in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

|                                  |  |         |        |            |  |          |      |            |  |         |        |            |  |  |       |  |  |          |        |   |  |  |       | 
|--------------------------------- |  | ------- | ------ | ---------- |  | -------- | ---- | ---------- |  | ------- | ------ | ---------- |  |  | ----- |  |  | -------- | ------ | - |  |  | ----- | 
|                                  |  | 2000    |        | 2001       |  | 2002    
|                                  |  |         |        |            |  |         
|                                  |  |         |        |            |  | Weighted |      |            |  |         |        | Weighted   |  |  |       |  |  | Weighted
|                                  |  |         |        |            |  | average  |      |            |  |         |        | average    |  |  |       |  |  | average 
|                                  |  |         |        |            |  | exercise |      |            |  |         |        | exercise   |  |  |       |  |  | exercise
|                                  |  | Options |        | price (R$) |  | Options  |      | price (R$) |  | Options |        | price (R$)
|                                  |  |         |        |            |  |          |      |            |  |         |        |           
|Outstanding at beginning of year  |  |         | 12,550 |            |  |          | 1.80 |            |  |         | 17,800 |            |  |  | 4.07  |  |  |          | 14,815 |   |  |  | 7.63  | 
|Granted                           |  |         | 5,250  |            |  |          | 9.49 |            |  |         | 2,050  |            |  |  | 23.00 |  |  |          |       |   |  |  |      | 
|Bonus (March 1st)                 |  |         |       |            |  |          |     |            |  |         |       |            |  |  |      |  |  |          | 26     |   |  |  |      | 
|Adhesion of the bonus (March 1st) |  |         |       |            |  |          |     |            |  |         |       |            |  |  |      |  |  |          | 637    |   |  |  | 14.99 | 
|Exercised                         |  |         |       |            |  |          |     |            |  |         | (4,935 | )          |  |  | 1.19  |  |  |          | (2,261 | ) |  |  | 1.76  | 
|Canceled or expired               |  |         |       |            |  |          |     |            |  |         | (100   | )          |  |  | 23.00 |  |  |          | (85    | ) |  |  | 8.73  | 
|                                  |  |         |        |            |  |          |      |            |  |         |        |            |  |  |       |  |  |          |        |   |  |  |       | 
|Outstanding at end of year        |  |         | 17,800 |            |  |          | 4.07 |            |  |         | 14,815 |            |  |  | 7.63  |  |  |          | 13,132 |   |  |  | 8.98  | 
|                                  |  |         |        |            |  |          |      |            |  |         |        |            |  |  |       |  |  |          |        |   |  |  |       | 
|Exercisable at end of year        |  |         |       |            |  |          |     |            |  |         | 180    |            |  |  | 1.65  |  |  |          | 812    |   |  |  | 3.56  | 
|                                  |  |         |        |            |  |          |      |            |  |         |        |            |  |  |       |  |  |          |        |   |  |  |       | 

F-45



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The weighted average grant date fair values of options granted in 2000, 2001
and 2002 was $2.65, $5.83 and $ 2.39, respectively. 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:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |             |  |            |    |          |  |               |     |   |  |  |       |   |  | 
|---- |  | ----------- |  | ---------- | -- | -------- |  | ------------- | --- | - |  |  | ----- | - |  | 
|     |  | Expected    |  | Expected   |    | Dividend |  | Risk-free    
|     |  | option life |  | Volatility |    | Yield    |  | interest rate
|     |  |             |  |            |    |          |  |              
|2000 |  | 5 years     |  |            | 50 | %        |  |               | 3.0 | % |  |  | 13.40 | %
|2001 |  | 5 years     |  |            | 60 | %        |  |               | 3.0 | % |  |  | 13.40 | %
|2002 |  | 5 years     |  |            | 60 | %        |  |               | 3.0 | % |  |  | 10.00 | %



| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The following table summarizes information about stock options outstanding
at December 31, 2002 (options in thousands):

|           |  |             |        |             |  |              |     |           |  |          |     | 
|---------- |  | ----------- | ------ | ----------- |  | ------------ | --- | --------- |  | -------- | --- | 
|           |  |             |        |             |  |              |     |           |  | Weighted
|           |  | Number of   |        |             |  |              |     | average  
|           |  | outstanding |        |             |  |              |     | remaining
|Exercise   |  | stock       |        | Options     |  | contractual 
|price (R$) |  | options     |        | exercisable |  | life (years)
|           |  |             |        |             |  |             
|(*)        |  |             | 6      |             |  |              | 6   |           |  |          | 2.9 | 
|0.75       |  |             | 240    |             |  |              |    |           |  |          | 2.4 | 
|1.07       |  |             | 60     |             |  |              |    |           |  |          | 2.4 | 
|1.65       |  |             | 3,408  |             |  |              | 390 |           |  |          | 3.2 | 
|5.22       |  |             | 1,630  |             |  |              | 405 |           |  |          | 3.9 | 
|8.11       |  |             | 3,950  |             |  |              |    |           |  |          | 4.4 | 
|13.70      |  |             | 1,250  |             |  |              |    |           |  |          | 4.9 | 
|14.99      |  |             | 638    |             |  |              | 11  |           |  |          | 5.4 | 
|23.00      |  |             | 1,950  |             |  |              |    |           |  |          | 5.4 | 
|           |  |             |        |             |  |              |     |           |  |          |     | 
|           |  |             | 13,132 |             |  |              | 812 |           |  |          | 4.2 | 
|           |  |             |        |             |  |              |     |           |  |          |     | 



|(*) |  | Stock options granted without exercise price (see stock split
mentioned above), but must be exercised with other options.
|--- |  | -------------------------------------------------------------------------------------------------------------------------

F-46



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The following table summarizes information about outstanding stock options
by anticipated vesting date and outstanding at December 31, 2002 (options in
thousands):
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                             |  |               |  |                              |  |            |       |               |  |  |        | 
|---------------------------- |  | ------------- |  | ---------------------------- |  | ---------- | ----- | ------------- |  |  | ------ | 
|                             |  |               |  |                              |  | Weighted   |       |               |  | 
|                             |  |               |  |                              |  | average    |       | Number of    
|                             |  | Vesting       |  |                              |  | exercise   |       | outstanding  
|Grant dates                  |  | date          |  | Expiration date              |  | price (R$) |       | stock options
|                             |  |               |  |                              |  |            |       |              
|November 1998                |  | November 2001 |  | November 2005                |  |            | 1.44  |               |  |  | 51     | 
|May 1998 and 1999            |  | May 2002      |  | May 2005 and 2006            |  |            | 1.65  |               |  |  | 225    | 
|November 1998 and 1999       |  | November 2002 |  | November 2005 and 2006       |  |            | 4.61  |               |  |  | 536    | 
|May 1998, 1999 and 2000      |  | May 2003      |  | May 2005 and 2006            |  |            | 4.82  |               |  |  | 2,556  | 
|November 1998, 1999
and 2000 |  | November 2003 |  | November 2005, 2006
and 2007 |  |            | 5.74  |               |  |  | 1,760  | 
|May 1999, 2000 and 2001      |  | May 2004      |  | May 2006, 2007 and 2008      |  |            | 8.71  |               |  |  | 3,103  | 
|November 1999 and 2000       |  | November 2004 |  | November 2006 and 2007       |  |            | 8.56  |               |  |  | 1,138  | 
|May 2000 and 2001            |  | May 2005      |  | May 2007 and 2008            |  |            | 12.32 |               |  |  | 2,312  | 
|November 2000                |  | November 2005 |  | November 2007                |  |            | 13.85 |               |  |  | 566    | 
|May 2001                     |  | May 2006      |  | May 2008                     |  |            | 22.05 |               |  |  | 885    | 
|                             |  |               |  |                              |  |            |       |               |  |  |        | 
|                             |  |               |  |                              |  |            | Total |               |  |  | 13,132 | 
|                             |  |               |  |                              |  |            |       |               |  |  |        | 



| |  | The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, compensation cost has
been recognized for grants of stock options based on market prices and grant
prices at the date of grant. Had compensation cost for the Companys
stock-based compensation plans been determined in accordance with the
provisions of SFAS No. 123 Accounting for Stock-based Compensation, the
Companys U.S. GAAP net income and earnings per share would have been
changed to the pro forma amounts indicated below:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |           |  |         |      |      |  |         |      |  |  |         |      | 
|---------------------------------------- | --------- |  | ------- | ---- | ---- |  | ------- | ---- |  |  | ------- | ---- | 
|                                         |           |  | 2000    |      | 2001 |  | 2002   
|                                         |           |  |         |      |      |  |        
|Net income under U.S. GAAP - as reported |           |  | 320,728 |      |      |  | 328,440 |      |  |  | 222,592 |     
|Net
income under U.S. GAAP - pro forma |           |  | 307,310 |      |      |  | 318,151 |      |  |  | 221,132 |     
|EARNINGS PER SHARE                       |           |  |         |      |      |  |         |      |  |  |         |     
|Basic - as reported:                     |           |  |         |      |      |  |         |      |  |  |         |     
|                                         | Common    |  |         | 0.55 |      |  |         | 0.48 |  |  |         | 0.30 | 
|                                         | Preferred |  |         | 0.61 |      |  |         | 0.53 |  |  |         | 0.33 | 
|Basic - pro forma:                     |           |  |         |      |      |  |         |      |  |  |         |     
|                                         | Common    |  |         | 0.53 |      |  |         | 0.46 |  |  |         | 0.30 | 
|                                         | Preferred |  |         | 0.58 |      |  |         | 0.51 |  |  |         | 0.33 | 
|Diluted - as reported:                   |           |  |         |      |      |  |         |      |  |  |         |     
|                                         | Common    |  |         | 0.48 |      |  |         | 0.46 |  |  |         | 0.30 | 
|                                         | Preferred |  |         | 0.53 |      |  |         | 0.50 |  |  |         | 0.33 | 
|Diluted - pro forma:                   |           |  |         |      |      |  |         |      |  |  |         |     
|                                         | Common    |  |         | 0.46 |      |  |         | 0.44 |  |  |         | 0.30 | 
|                                         | Preferred |  |         | 0.50 |      |  |         | 0.49 |  |  |         | 0.33 | 



| |  | The pro forma amounts reflected above are not representative of the
effects on reported earnings per share future years.
| |  | --------------------------------------------------------------------------------------------------------------------------

F-47



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|29. |  | INCOME AND SOCIAL CONTRIBUTION TAX                             
|--- |  | ---------------------------------------------------------------
|   
|    |  | The following is an analysis of the provision for income taxes:

|                           |                         |                                                |          |                                 |         |      |          |      |         |   |          |   |         |  
|-------------------------- | ----------------------- | ---------------------------------------------- | -------- | ------------------------------- | ------- | ---- | -------- | ---- | ------- | - | -------- | - | ------- | -
|                           |                         |                                                |          | For the year ended December 31,
|                           |                         |                                                |          |                                
|                           |                         |                                                |          | 2000                            |         | 2001 |          | 2002
|                           |                         |                                                |          |                                 |         |      |          |     
|Current                    |                         |                                                | (134,504 | )                               |         |      | (177,061 | )    |         |   | (167,448 | )
|Deferred:                  |                         |                                                |          |                                 |         |      |          |      |         |   |          |  
|                           | Temporary differences:  |                                                |          |                                 |         |      |          |      |         |   |          |   |        
|                           |                         | Additions                                      |          |                                 | 60,222  |      |          |      | 35,301  |   |          |   | (5,535  | )
|                           | Tax loss carryforwards: |                                                |          |                                 |         |      |          |      |         |   |          |   |        
|                           |                         | Utilized to offset taxable income for the year |          |                                 | (70,636 | )    |          |      | (75,577 | ) |          |   | (10,651 | )
|                           |                         | Change in valuation allowance                  |          |                                 | 27,539  |      |          |      | (1,057  | ) |          |   | (4,868  | )
|                           |                         |                                                |          |                                 |         |      |          |      |         |   |          |  
|Total deferred             |                         |                                                | 17,125   |                                 |         |      | (41,333  | )    |         |   | (21,054  | )
|                           |                         |                                                |          |                                 |         |      |          |      |         |   |          |  
|Provision for income taxes |                         |                                                | (117,379 | )                               |         |      | (218,394 | )    |         |   | (188,502 | )
|                           |                         |                                                |          |                                 |         |      |          |      |         |   |          |  



| |  | Brazilian income taxes comprise federal income tax and social contribution
tax. In 2000, 2001 and 2002 the rate was 25% for income tax, and for social
contribution rates were 12% in January 2000 and 9% from February 2000 to
December 2002 resulting in a combined statutory tax rate of approximately
34% in 2000, 2001 and 2002.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-48



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The following is a reconciliation of the reported income tax expense
(benefit) and the amount calculated by applying the combined statutory tax
rate of 34% in 2000, 2001 and 2002:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |         |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------- |  | ------------------------------- | ------- | ---- |  | ------- | ------- | - |  | ------- | ------- | -
|                                                                                      |                                                                 |  | For the year ended December 31,
|                                                                                      |                                                                 |  |                                
|                                                                                      |                                                                 |  | 2000                            |         | 2001 |  | 2002   
|                                                                                      |                                                                 |  |                                 |         |      |  |        
|Income before taxes as reported in the accompanying
consolidated financial statements |                                                                 |  | 436,585                         |         |      |  | 541,817 |         |   |  | 412,977 |        
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|Tax expense at the combined statutory rate                                            |                                                                 |  | 148,439                         |         |      |  | 186,067 |         |   |  | 140,412 |        
|Permanent additions:                                                                  |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      | Nondeductible expenses                                          |  |                                 | 2,204   |      |  |         | 3,911   |   |  |         | 2,299   |  
|                                                                                      | Stock option compensation                                       |  |                                 | 168     |      |  |         | 354     |   |  |         |        |  
|                                                                                      | Financial transaction gain (loss)                               |  |                                 | 34,948  |      |  |         | 65,397  |   |  |         | 83,110  |  
|                                                                                      | Other                                                           |  |                                 | 1,216   |      |  |         | 2,974   |   |  |         | 3,565   |  
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      |                                                                 |  | 38,536                          |         |      |  | 72,636  |         |   |  | 88,974  |        
|Permanent exclusions:                                                                 |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      | Dividends - interest on capital                                 |  |                                 | (17,951 | )    |  |         | (25,778 | ) |  |         | (35,453 | )
|                                                                                      | Gain on equity investment                                       |  |                                 | (6,594  | )    |  |         |        |   |  |         |        |  
|                                                                                      | Reversal of tax incentives                                      |  |                                 | (12,831 | )    |  |         | (14,980 | ) |  |         | (12,822 | )
|                                                                                      | Expense of global equity offering                               |  |                                 | (3,270  | )    |  |         |        |   |  |         |        |  
|                                                                                      | Others                                                          |  |                                 | (1,411  | )    |  |         |        |   |  |         |        |  
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      |                                                                 |  | (42,057                         | )       |      |  | (40,758 | )       |   |  | (48,275 | )      
|Other items:                                                                          |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      | Income tax rate difference                                      |  |                                 |        |      |  |         |        |   |  |         | 3,085   |  
|                                                                                      | Interest on capital of subsidiaries eliminated in
consolidation |  |                                 |        |      |  |         | (608    | ) |  |         | (562    | )
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|Subtotal                                                                              |                                                                 |  |                                |         |      |  | (608    | )       |   |  | 2,523   |        
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|                                                                                      |                                                                 |  | 144,918                         |         |      |  | 217,337 |         |   |  | 183,634 |        
|Change in valuation allowance on deferred tax assets                                  |                                                                 |  | (27,539                         | )       |      |  | 1,057   |         |   |  | 4,868   |        
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        
|Provision for income tax as reported in the
accompanying statements of income         |                                                                 |  | 117,379                         |         |      |  | 218,394 |         |   |  | 188,502 |        
|                                                                                      |                                                                 |  |                                 |         |      |  |         |         |   |  |         |        



| |  | Income tax payments, net of tax incentives, were $108,939, $166,891 and
$79,860 in 2000, 2001 and 2002, respectively.
| |  | ---------------------------------------------------------------------------------------------------------------------

F-49



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The Companys net deferred tax asset is comprised of the following:
| |  | -------------------------------------------------------------------

|                                    |                                       |                                                        |         |                 |         |      |         |        |         |  
|----------------------------------- | ------------------------------------- | ------------------------------------------------------ | ------- | --------------- | ------- | ---- | ------- | ------ | ------- | -
|                                    |                                       |                                                        |         | At December 31,
|                                    |                                       |                                                        |         |                
|                                    |                                       |                                                        |         | 2001            |         | 2002
|                                    |                                       |                                                        |         |                 |         |     
|Deferred tax assets on:             |                                       |                                                        |         |                 |         |      |         |       
|                                    | Income tax losses                     |                                                        |         | 21,427          |         |      |         | 11,107 |        
|                                    | Social contribution tax losses        |                                                        |         | 783             |         |      |         | 452    |        
|                                    | Valuation allowance                   |                                                        |         | (5,054          | )       |      |         | (9,922 | )      
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|                                    | Effect of tax loss carryforwards, net |                                                        |         | 17,156          |         |      |         | 1,637  |        
|                                    | Temporary differences:                |                                                        |         |                 |         |      |         |        |        
|                                    |                                       | Accrual for product warranties and improvements        |         |                 | 31,068  |      |         |        | 39,326  |  
|                                    |                                       | Accrued taxes, other than taxes on income              |         |                 | 38,523  |      |         |        | 28,622  |  
|                                    |                                       | Deferred charges, principally research and development |         |                 | 45,746  |      |         |        | 44,358  |  
|                                    |                                       | Other accrued expenses not deductible for tax purposes |         |                 | 17,389  |      |         |        | 25,226  |  
|                                    |                                       | Difference in bases of property, plant and equipment   |         |                 | 20,051  |      |         |        | 27,881  |  
|                                    |                                       | Inventory allowances                                   |         |                 | 8,604   |      |         |        | 14,343  |  
|                                    |                                       | Pension accrual                                        |         |                 | 1,344   |      |         |        | 1,141   |  
|                                    |                                       | Unrealized losses on derivative transactions           |         |                 | 5,926   |      |         |        |        |  
|                                    |                                       | Other                                                  |         |                 | 33,550  |      |         |        | 10,244  |  
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|                                    |                                       |                                                        | 202,201 |                 |         |      | 191,141 |       
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|Total deferred tax assets           |                                       |                                                        | 219,357 |                 |         |      | 192,778 |       
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|Deferred income tax liabilities on: |                                       |                                                        |         |                 |         |      |         |       
|                                    | Temporary differences:                |                                                        |         |                 |         |      |         |        |        
|                                    |                                       | Difference in bases of property, plant and equipment   |         |                 | (26,395 | )    |         |        | (22,542 | )
|                                    |                                       | Contributions from suppliers                           |         |                 | (4,664  | )    |         |        | (4,848  | )
|                                    |                                       | Other                                                  |         |                 | (4,403  | )    |         |        | (2,547  | )
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|Total deferred tax liabilities      |                                       |                                                        | (35,462 | )               |         |      | (29,937 | )     
|                                    |                                       |                                                        |         |                 |         |      |         |        |        
|Net deferred tax asset              |                                       |                                                        | 183,895 |                 |         |      | 162,841 |       
|                                    |                                       |                                                        |         |                 |         |      |         |        |        



| |  | As of December 31, 2002, the Company and its subsidiaries had tax loss
carryforwards for income and social contribution taxes, which can be used to
offset future taxable income and for which there are no expiration dates for
utilization. The tax loss carryforwards are composed as follows:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-50



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

|     |  |                      |        |              |  |        |       | 
|---- |  | -------------------- | ------ | ------------ |  | ------ | ----- | 
|     |  | At December 31, 2002
|     |  |                     
|     |  |                      |        |              |  | Social
|     |  | Income               |        | contribution
|Year |  | tax                  |        | tax         
|     |  |                      |        |             
|1993 |  |                      | 4,474  |              |  |        | 2,666 | 
|1994 |  |                      | 1,692  |              |  |        |      | 
|1995 |  |                      | 1,210  |              |  |        | 977   | 
|1996 |  |                      | 755    |              |  |        | 523   | 
|1997 |  |                      | 886    |              |  |        | 824   | 
|1998 |  |                      | 4      |              |  |        | 4     | 
|1999 |  |                      | 23     |              |  |        | 23    | 
|2000 |  |                      | 5      |              |  |        | 5     | 
|2001 |  |                      | 1,649  |              |  |        |      | 
|2002 |  |                      | 33,730 |              |  |        |      | 
|     |  |                      |        |              |  |        |       | 
|     |  |                      | 44,428 |              |  |        | 5,022 | 
|     |  |                      |        |              |  |        |       | 



| |  | The Company follows the policy of recognizing deferred tax assets on tax
loss carryforwards only when realization is probable. During 2000, based on
an assessment of future taxable income and given the Companys improved
profitability and the expected increases in sales and backlog, the
previously recorded valuation allowance against tax loss carryforwards was
reduced by $27.5 million. Valuation allowances associated with other
temporary tax differences were not required due to their nature.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Increase in the valuation allowance in 2001 and 2002 related to tax loss
carryforwards of foreign subsidiaries which can not be offset against
taxable income in Brazil.                                                                                                                                                                                                                                                                                                                                        
|
| |  | Management believes that the recorded valuation allowance reduces deferred
tax assets to an amount that is more likely than not to be realized. Based
on internal studies and projections, management believes that the present
net amounts should be realized within five years.                                                                                                                                                                                                                               

F-51



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|30. |  | OTHER OPERATING EXPENSE, NET                                                     
|--- |  | ---------------------------------------------------------------------------------
|   
|    |  | Other operating expense, net is composed of the following income (expense)
items:

|                                                     |  |                    |         |      |  |      |         |   |  |  |         |  
|---------------------------------------------------- |  | ------------------ | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                                     |  | For the year ended
|                                                     |  | December 31,      
|                                                     |  |                   
|                                                     |  | 2000               |         | 2001 |  | 2002
|                                                     |  |                    |         |      |  |     
|Production process improvements                      |  |                    | (4,872  | )    |  |      | (7,564  | ) |  |  |        |  
|Product modifications                                |  |                    | (3,866  | )    |  |      | (3,672  | ) |  |  | (961    | )
|Pre-operational cost of Gavião Peixoto               |  |                    |        |      |  |      | (1,916  | ) |  |  | (3,856  | )
|Education, training and professional development (a) |  |                    |        |      |  |      | (7,929  | ) |  |  | (12,963 | )
|Restructuring costs (b)                              |  |                    |        |      |  |      | (4,521  | ) |  |  |        |  
|Provision for contingencies                          |  |                    | (6,528  | )    |  |      | (1,930  | ) |  |  | (6,185  | )
|Provision for losses on contractual obligations (c)  |  |                    | (6,000  | )    |  |      |        |   |  |  |        |  
|Contractual fines                                    |  |                    | 3,815   |      |  |      | 4,004   |   |  |  | 4,117   |  
|Expense reimbursement                                |  |                    | 566     |      |  |      | 988     |   |  |  | 4,692   |  
|Insurance recoveries                                 |  |                    | 3,017   |      |  |      | 1,431   |   |  |  | 88      |  
|Other                                                |  |                    | (5,650  | )    |  |      | (8,354  | ) |  |  | (5,430  | )
|                                                     |  |                    |         |      |  |      |         |   |  |  |         |  
|                                                     |  |                    | (19,518 | )    |  |      | (29,463 | ) |  |  | (20,498 | )
|                                                     |  |                    |         |      |  |      |         |   |  |  |         |  



|(a) |  | Refers to training and professional development provided to Company
employees.                                                                                                                        
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(b) |  | Restructuring costs relate to the cost of employee terminations
resulting from adapting the work force to production postponements.                                                                   
|   
|(c) |  | Provision for losses on contractual obligations relate to
anticipated cost overruns expected to be incurred in the manufacturing
of the AL-X for the Brazilian Air Force, which were recorded in 2000.

F-52



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|31. |  | FINANCIAL TRANSACTION LOSS, NET                                                                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Financial transaction gains and losses results from the remeasurement of the
balance sheet accounts from the local currency to the functional currency as
follows:

|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  
|------------------------------------ | ------------------------- |  | ------------------ | ------- | ---- |  | -------- | -------- | - |  | -------- | -------- | -
|                                     |                           |  | For the year ended
|                                     |                           |  | December 31,      
|                                     |                           |  |                   
|                                     |                           |  | 2000               |         | 2001 |  | 2002    
|                                     |                           |  |                    |         |      |  |         
|Assets:                              |                           |  |                    |         |      |  |          |          |   |  |          |         
|                                     | Cash and cash equivalents |  |                    | (42,282 | )    |  |          | (204,160 | ) |  |          | (211,482 | )
|                                     | Accounts receivable       |  |                    | (81     | )    |  |          | (717     | ) |  |          | (3,574   | )
|                                     | Other                     |  |                    | 5,005   |      |  |          | (5,334   | ) |  |          | (17,698  | )
|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  
|Transaction (loss) on assets, net    |                           |  | (37,358            | )       |      |  | (210,211 | )        |   |  | (232,754 | )       
|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  
|Liabilities:                         |                           |  |                    |         |      |  |          |          |   |  |          |         
|                                     | Accounts payable          |  |                    | 2,267   |      |  |          | 26,038   |   |  |          | 62,492   |  
|                                     | Income taxes              |  |                    | 316     |      |  |          | (371     | ) |  |          | 4,208    |  
|                                     | Dividends                 |  |                    | 709     |      |  |          | 11,165   |   |  |          | (256     | )
|                                     | Provisions                |  |                    | 6,231   |      |  |          | 15,809   |   |  |          | 17,777   |  
|                                     | Other                     |  |                    | 3,198   |      |  |          | 8,933    |   |  |          | 12,886   |  
|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  
|Transaction gain on liabilities, net |                           |  | 12,721             |         |      |  | 61,574   |          |   |  | 97,107   |         
|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  
|Transaction loss, net                |                           |  | (24,637            | )       |      |  | (148,637 | )        |   |  | (135,647 | )       
|                                     |                           |  |                    |         |      |  |          |          |   |  |          |          |  



|32. |  | OTHER NONOPERATING INCOME (EXPENSE), NET                            
|--- |  | --------------------------------------------------------------------
|   
|    |  | Other non-operating income (expenses) is comprised of the following:

|                                                    |  |                    |        |      |  |      |        |   |  |  |        |  
|--------------------------------------------------- |  | ------------------ | ------ | ---- |  | ---- | ------ | - |  |  | ------ | -
|                                                    |  | For the year ended
|                                                    |  | December 31,      
|                                                    |  |                   
|                                                    |  | 2000               |        | 2001 |  | 2002
|                                                    |  |                    |        |      |  |     
|Net loss on sales on fixed assets                   |  |                    | (66    | )    |  |      | (142   | ) |  |  | (145   | )
|Provision for losses on tax incentive investments   |  |                    | (7,390 | )    |  |      | (8,567 | ) |  |  | (733   | )
|Gain on sale of minority interest of subsidiary (a) |  |                    | 12,935 |      |  |      |       |   |  |  |       |  
|Valuation allowance on fixed assets                 |  |                    |       |      |  |      | (518   | ) |  |  |       |  
|Other                                               |  |                    | 476    |      |  |      | 801    |   |  |  | (516   | )
|                                                    |  |                    |        |      |  |      |        |   |  |  |        |  
|                                                    |  |                    | 5,955  |      |  |      | (8,426 | ) |  |  | (1,394 | )
|                                                    |  |                    |        |      |  |      |        |   |  |  |        |  



|(a) |  | The gain on sale of minority interest in subsidiary in 2000,
resulted from the sale of a 40% minority interest in the Companys
subsidiary ELEB - Embraer Liebherr Equipamentos do Brasil S.A.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-53



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##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|33. |  | TRANSACTIONS WITH RELATED PARTIES
|--- |  | ---------------------------------

|                     |                             |                            |  |                 |        |      |  |      |        |   |  |  |        | 
|-------------------- | --------------------------- | -------------------------- |  | --------------- | ------ | ---- |  | ---- | ------ | - |  |  | ------ | 
|                     |                             |                            |  | At December 31,
|                     |                             |                            |  |                
|                     |                             |                            |  | 2000            |        | 2001 |  | 2002
|                     |                             |                            |  |                 |        |      |  |     
|Brazilian Air Force: |                             |                            |  |                 |        |      |  |      |        |   |  | 
|                     | Current assets/liabilities: |                            |  |                 |        |      |  |      |        |   |  |  |       
|                     |                             | Accounts receivable        |  |                 | 30,841 |      |  |      | 18,494 |   |  |  | 12,704 | 
|                     |                             | Customers advances        |  |                 | 20,144 |      |  |      | 46,451 |   |  |  | 99,290 | 
|                     |                             | Accounts payable           |  |                 | 3,161  |      |  |      | 2,156  |   |  |  | 2,239  | 
|                     | Income (expense):           |                            |  |                 |        |      |  |      |        |   |  |  |       
|                     |                             | Sales                      |  |                 | 77,482 |      |  |      | 45,703 |   |  |  | 53,167 | 
|                     |                             | Recovery of cost           |  |                 |       |      |  |      | (75    | ) |  |  |       | 
|Cia. Bozano:         |                             |                            |  |                 |        |      |  |      |        |   |  | 
|                     | Interest income (expenses): |                            |  |                 |        |      |  |      |        |   |  |  |       
|                     |                             | Temporary cash investments |  |                 | 151    |      |  |      |       |   |  |  |       | 



| |  | The Company has engaged in a number of transactions with the Brazilian Air
Force and Cia. Bozano as shown above.                                  
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Brazilian Government, principally through the Brazilian Air Force, has
participated in the development of the Company and plays a key role as:



| |  |  | A source for research and development debt financing through
technology development institutions such as FINEP (Financiadora de
Estudos e Projetos, a Brazilian Government financing agency) and the
BNDES (National Economic and Social Development Bank).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | An export support agency through the BNDES.                                                                                                                                                                                                                



|    |  | The Company maintains credit facilities with the BNDES and FINEP of which
$47,879 and $5,373 principal amount, respectively, was outstanding at
December 31, 2002. In addition, as described in note 20, the Company
renegotiated reductions in the interest rates on loans from the BNDES.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|34. |  | DERIVATIVE FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|    |  | 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 the monitoring of the Companys
levels of exposure to each market risk, including the analysis of the
amounts based on a 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. 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.

F-54



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Interest rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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 related to the
Companys cash and cash equivalents and its debt. The Company primarily
invests in short-term financial assets with low risk, such as bank
certificates of deposit and money market funds denominated in Brazilian
reais, which generally earn interest based on the Brazilian overnight
interest rate for interbank deposits or the quoted bank rates for U.S. time
deposits or overnight funds (see note 5). The Companys U.S. dollar
denominated debt bears interest at fixed rates or variable rates based on 6
month or 12 month LIBOR. The Companys foreign currency denominated debt is
primarily denominated in Brazilian reais and Japanese yen. The Brazilian
real denominated debt bears interest at a variable rate based on TJLP, the
long-term interest rate in Brazil, and the Japanese yen denominated debt
bears interest at fixed rates or variable rates based on JIBOR (Japanese
interbank deposit rates). The Company continuously monitors market interest
rates, and may use derivative instruments to hedge these risks.
|
| |  | Exchange rate risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Exchange rate risk is the risk that changes in foreign currency exchange
rates may cause the Company to incur losses due to fluctuations in exchange
rates, leading to a reduction in amounts billed or an increase in loan
amounts. The Companys primary exposures to foreign currency exchange
fluctuations are the Brazilian real/U.S. dollar and Japanese yen/U.S. dollar
exchange rates. As 97.7% of the Companys net sales for the year ended
December 31, 2002 were denominated in U.S. dollars and as this situation may
continue for the next few years, the Company considers anticipated future
sales in the foreign markets as a natural hedge for its liabilities
denominated in foreign currencies. The Companys foreign currency risk
management strategy may also use derivative instruments to protect against
foreign exchange rate volatility, which could impair the value of certain of
the Companys assets. The Company typically uses foreign currency forward
and swap contracts to implement this strategy.                                                                                                                                                                                                                                      
|
| |  | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | As discussed above, the Companys exposures to interest rate and exchange
rate risk are managed, in part, with the use of derivative financial
instruments. The Company generally uses interest rate swap and foreign
currency forward and swap contracts to hedge the exposures to the exchange
rate and interest rate risk on its loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | Effective January 1, 2001, the Company accounts for derivatives pursuant to
SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. This standard requires that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the
fair value of derivatives are recorded each period in income or other
comprehensive income, depending on whether the derivative is designated as
part of hedge transaction and on the type of hedge transaction. The
ineffective portion of all hedges is recognized in income. The Companys
derivative financial instruments have not qualified for hedge accounting
designation for purposes of SFAS No. 133. As such, changes in the fair value
of the derivatives are recorded in income as a component of interest income
(expense) in the consolidated statements of income.                                                                                                                                                                                                                                                                                                                                                                                               

F-55



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | In connection with the adoption of SFAS No. 133 on January 1, 2001 the
Company accordingly recorded a cumulative effect of account change to income
in the amount of $5,440, net of related taxes of $2,802.                                                                                     
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The purpose of derivative instruments contracted by the Company is to
protect the Companys operations from exchange rate risks and interest rate
fluctuations; they are not utilized for speculative purposes. As of December
31, the derivative financial instruments consist of the following:

|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   |        |   |        |  | 
|---------------- | ---------- | ------------------- | --------------- | ------ | ------- | ---- | -------- | ---- | -------- | ----- | ------- | ----------------- | ---- |  | ------ | - | ------ | - | ------ |  | 
|2002            
|                
|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   |        |   | Gain  
|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   | (Loss)
|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  | Agreed |   |       
|                 |            |                     |                 |        |         |      | Notional |      | Maturity |       | average |                   | Fair
|Purpose          |            | Type                |                 | amount |         | date |          | rate |          | value
|                 |            |                     |                 |        |         |      |          |      |          |      
|Import financing |            | Swap - JPY into R$  |                 |        | 124,862 |      |          |      | 2006     |       |         | 76.59% of CDI (*) |      |  | 20,200 |  
|Import financing |            | Swap - US$ into R$  |                 |        | 167,519 |      |          |      | 2009     |       |         | 89.84% of CDI (*) |      |  | 38,206 |  
|Import financing |            | Swap - JPY into US$ |                 |        | 26,564  |      |          |      | 2006     |       |         | 5.80% per year    |      |  | (222   | )
|Accounts         |            | Non Deliverable     |                 |        | 59,984  |      |          |      | 2003     |       |         |                   |     |  |        |   |        |  
|                 | receivable |                     | Forward (NDF) - |        |         |      |          |      |          |       |         |                   |      |  |        |   |        |   |       
|                 |            | US$ into R$         |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   | (8,525 | )
|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   |        |   |        | 
|Total            |            |                     |                 |        |         |      | 378,929  |      |          |       |         |                   |      |  |        |   |        |   | 49,659 | 
|                 |            |                     |                 |        |         |      |          |      |          |       |         |                   |      |  |        |   |        |   |        | 

|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        |        |        |        |        |      |         |  
|---------------- |  | ------------------------------- |  | ------ | ------ | -------- | ------- | -------- | ---- | ------- |  | ----------------- | ------ | ------ | ------ | ------ | ------ | ---- | ------- | -
|2001            
|                
|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        |        |        |        |        | Gain
|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        |        |        | (Loss)
|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        | Agreed |        |       
|                 |  |                                 |  |        |        | Notional |         | Maturity |      | Average |  | Fair             
|Purpose          |  | Type                            |  | amount |        | date     |         | rate     |      | value  
|                 |  |                                 |  |        |        |          |         |          |      |        
|Import financing |  | Swap - JPY into R$              |  |        | 26,701 |          |         |          | 2004 |         |  | 86.17%of CDI (*)  |        |        | (7,035 | )     
|Import financing |  | Swap - US$ into R$              |  |        | 20,841 |          |         |          | 2003 |         |  | 87.50% of CDI (*) |        |        | (1,587 | )     
|Import financing |  | Swap - JPY into US$             |  |        | 33,205 |          |         |          | 2006 |         |  | 5.80% per year    |        |        | (2,152 | )     
|Import financing |  | Non Deliverable Forward (NDF) - |  |        |        |          |         |          |      |         |  |                   |        |        |        |        |        |     
|                 |  | JPY into US$                    |  |        | 21,672 |          |         |          | 2002 |         |  |                   | 102.61 |        |        |        | (4,732 | )   
|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        |        |        |        |        |      |         |  
|Total            |  |                                 |  |        |        |          | 102,419 |          |      |         |  |                   |        |        |        |        |        |      | (15,506 | )
|                 |  |                                 |  |        |        |          |         |          |      |         |  |                   |        |        |        |        |        |      |         |  

(*) CDI - Interbank Deposit Rates.

F-56



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



|35. |  | SIGNIFICANT GROUP CONCENTRATIONS 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, parts and
related services to its customers, including the financial obligations
related to these sales discussed in Note 8 and 37.                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | The Company grants credit to its customers for the sale of spare parts and
services based upon an evaluation of the customers financial condition and
credit history. Customer credit analyses are continuously monitored and the
Company establishes an allowance for doubtful accounts based upon factors
that include the credit risk of specific customers and historical aging,
collection and write-off trends. The Companys historical experience in
collecting accounts receivable falls within the recorded allowances. Based
on these factors, the Company believes no additional credit risk beyond
amounts provided for collection losses is inherent in the Companys trade
accounts receivable.
|   
|    |  | 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. The Company has
recognized an allowance for doubtful accounts, which it believes is
sufficient to cover potential losses on the realization of accounts
receivable.                                                                                                                                                                                  
|   
|    |  | Financial instruments involving potential credit risk are predominantly with
commercial aircraft customers and the Brazilian Air Force. Of the $760,417
in accounts receivable included in the consolidated balance sheet at
December 31, 2002, $719,953 related to commercial aircraft customers and
$40,464 related to the Brazilian and other Governments. In addition, during
2002, Continental Express, Solitair Wexford/Chautauqua and American Eagle
Corporation represented 37.3%, 6.8% and 17.5% of all Company sales,
respectively.                                                                                                                                                                  
|   
|36. |  | DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The estimated fair values of the Companys financial assets and liabilities
are presented below and have been determined using available market
information and appropriate valuation methodologies. However, considerable
judgment was required in interpreting market data to produce the estimated
fair values. Accordingly, the estimates presented below are not necessarily
indicative of the amounts that could be realized 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.                                                                                                              
|   
|    |  | Cash and cash equivalents, trade accounts receivable, other assets, other
accounts payable and accrued expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The carrying values of cash and cash equivalents, trade accounts receivable,
other assets, other accounts payable and accrued expenses approximate their
fair value given their short term nature. Customer advances and
contributions from suppliers are not included in the analysis of fair value,
as it is not expected that such amounts will be repaid in cash.                                                                                                                                                                                                                                                                                                                                          

F-57



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Loans                                                                                                                                                                                                                                                                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Loans are subject to interest at rates as set forth in note 20. The
estimated fair value of loans was calculated based on the present value of
future cash payments using interest rates that are currently available to
the Company for the issuance of debt with similar terms and maturities. The
estimated fair value of the loans, including short-term installments, is as
follows:

|           |  |                 |         |      |  |  |         | 
|---------- |  | --------------- | ------- | ---- |  |  | ------- | 
|           |  | At December 31,
|           |  |                
|           |  | 2001            |         | 2002
|           |  |                 |         |     
|Book value |  |                 | 771,736 |      |  |  | 552,636 | 
|Fair value |  |                 | 764,655 |      |  |  | 536,200 | 



| |  | Financed taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The conditions are similar to the usual terms for financed taxes and there
are no material differences related to interest rates applicable to loans.
The estimated fair value was calculated based on the present value of future
cash payments using interest rates that are currently available to the
Company for issuance of debt with similar terms and maturities. The
estimated fair value for the financed taxes, including short-term
installments, is as follows:

|           |  |                 |        |      |  |  |        | 
|---------- |  | --------------- | ------ | ---- |  |  | ------ | 
|           |  | At December 31,
|           |  |                
|           |  | 2001            |        | 2002
|           |  |                 |        |     
|Book value |  |                 | 25,906 |      |  |  | 14,421 | 
|Fair value |  |                 | 13,872 |      |  |  | 9,291  | 



|37. |  | OFF-BALANCE-SHEET ARRANGEMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company participates in certain off-balance sheet arrangements, as
defined by SEC, including certain guarantees and variable interests in
unconsolidated entities, as discussed below.                                                                                                                                                                                                                                                                                            
|   
|    |  | Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | In November 2002, the FASB issued an Interpretation No. 45 (FIN 45), namely,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to
guarantors accounting for and disclosures of certain guarantees issued.
Refer to Note 4 for more information about the impact of FIN 45 on the
Companys financial statements.

F-58



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Third Party Guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Financial guarantees are triggered if customers do not perform its
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 downturn. Upon an event of default,
the Company usually acts as an 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 provides a third party with a specific guaranteed
asset value typically 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.                                                                                                                                                                                                                                                     
|
| |  | The following table provides quantitative data regarding the Companys
guarantees to third parties. The maximum potential payments represent a
worst-case scenario, and do not necessarily reflect the expected results
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.                                                                                                                                                                                                                                                                                                               

|                                                                     |  |                 |       |      |  |  |       |  
|-------------------------------------------------------------------- |  | --------------- | ----- | ---- |  |  | ----- | -
|                                                                     |  | At December 31,
|                                                                     |  |                
|(US$ millions)                                                       |  | 2001            |       | 2002
|                                                                     |  |                 |       |     
|Maximum financial guarantees                                         |  |                 | 948   |      |  |  | 1,175 |  
|Maximum residual value guarantees                                    |  |                 | 556   |      |  |  | 624   |  
|Mutually exclusive exposure (1)                                      |  |                 | (350  | )    |  |  | (362  | )
|Provisions and liabilities                                           |  |                 |      |      |  |  | (15   | )
|                                                                     |  |                 |       |      |  |  |       |  
|Off-balance sheet exposure                                           |  |                 | 1,154 |      |  |  | 1,422 |  
|Estimated proceeds from performance guarantees and
underlying assets |  |                 | 1,564 |      |  |  | 1,748 |  



| | (1) | In the event both guarantees were issued for the same underlying
asset, the residual 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     | The Company provides premium payments to its Captive Insurance affiliate to
assume such liabilities. The premium liability amount is considered to be
sufficient to cover the Companys estimate of future payments it may incur
as part of fulfilling of its guarantee obligations.         

F-59



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The Company has developed a financial and residual value guarantee
stochastic assessment methodology and implemented a model, which allows for
monitoring of its guarantees portfolio and actively manage the associated
risks. Such methodology demands a constant trend analysis for the underlying
assets values and their intrinsic volatility, as well as a proactive credit
monitoring.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Aircraft Repurchase Options: The Company is contingently liable for
repurchasing of a number of aircraft sold under sales contracts that provide
the customer with the right to sell the aircraft back to the Company in the
future, according to defined price rules. These put options may become
exercisable at various times from 2003 to 2006 and can be exerted at
customers sole discretion. The put price per aircraft under the repurchase
option is less than the original sales price of the aircraft and less than
managements estimation for the future market value of the relevant aircraft
during the exercise period as assessed at the date of sale. If the Company
is required to repurchase all of the relevant aircraft under the Companys
repurchase obligations, the Company may be required to pay up to
approximately $500 million for these aircraft. Based on the Companys
current estimation and third-party appraisals related to the forecasted fair
values of the aircraft, management believes that at December 31, 2001 and
2002, any repurchased aircraft could be sold in the market without a
material gain or loss.
|
| |  | Aircraft Trade-In Options: The Company is also subject to trade-up options
for 34 firm aircraft. These options provide that the trade-up price can be
applied to the purchase of a brand-new upgraded aircraft. The trade-up price
is based on a percentage of the original purchase price of the aircraft. The
Company continues to monitor all trade-in commitments to anticipate adverse
developments. Based on the Companys current estimation and third-party
appraisals, management believes that any potential aircraft accepted under
trade-in could be sold in the market without a material gain or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | As discussed in Note 10, at December 31, 2001 and 2002 the Company has
maintained escrow deposits in amount of $124,254 and $187,356 in favor of
third parties who have provided financial guarantees and residual value
guarantees in connection with certain aircraft sales financing structures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | 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, typically expressed as a percentage of revenue. These estimates
are based on factors that include, among other things, historical 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-60



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Certain sales contracts contain provisions for guarantees of certain minimum
levels of aircraft performance subsequent to delivery based on predetermined
operational targets. If the aircraft subject to such guarantees do not
achieve the minimum performance indices after delivery, the Company may be
obligated to reimburse its customers for the implied incremental operational
and service costs incurred based on formulas defined in the related
agreements. Losses related to such performance guarantees are recorded at
the time such losses are known, or when circumstances indicate that the
aircraft is not expected to meet the minimum performance requirements, based
on managements estimate of the Companys ultimate obligation under the
guarantee.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table summarizes product warranty activity recorded during
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                 |  |             |      |            |  |           |      |                |  |  |       |   |  |  |      | 
|-------------------------------- |  | ----------- | ---- | ---------- |  | --------- | ---- | -------------- |  |  | ----- | - |  |  | ---- | 
|                                 |  |             |      |            |  | Additions |      | Reductions for |  |  |       |  
|                                 |  | At December |      | for New    |  | Payments  |      | At December   
|(US$ millions)                   |  | 31, 2001    |      | Warranties |  | Made      |      | 31, 2002      
|                                 |  |             |      |            |  |           |      |               
|Product warranty liabilities (*) |  |             | 51.6 |            |  |           | 43.4 |                |  |  | (22.8 | ) |  |  | 72.2 | 



|    |  | (*) Amounts included in other accounts payable and accrued liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Material Variable Interests in Unconsolidated Entities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|    |  | The Company is currently assessing the application of FIN 46 as it relates
to its variable interests (see Note 4). As discussed in Note 8, some of the
Companys sales transactions are structured financings through which a
Special Purpose Entity - SPE purchases the aircraft, pays the Company the
full purchase price on delivery or at the conclusion of the sales financing
structure, and leases the related aircraft to the ultimate customer. The
Companys variable interests in these VIEs typically include financial
guarantees in favor of the third party financial institution or investors.
Exposures related to unconsolidated entities have been included in the table
above.
|   
|    |  | While the Company is currently not required to consolidate all of these
financing transactions, specifically for transactions with respect to 54
aircraft, as of December 31, 2002 where a third-party has sufficient equity
investments, the Company is unable to definitively conclude at this time
whether consolidation or disclosure will be required for these financing
transaction upon full adoption of FIN 46.                                                                                                                                                                                                                                                                           
|   
|38. |  | SEGMENT INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|    |  | The Company is organized based on the products and services it offers. Under
this organizational structure, the Company operates in the following four
principal segments: regional aircraft, defense aircraft, corporate jet and
other related businesses.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|    |  | Regional aircraft segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|    |  | The Regional aircraft segments operations principally involve the
development, production and marketing of commercial jet aircraft and
providing related support services, principally to the regional airline
industry worldwide. The Companys products in the regional aircraft segment
are organized around product families, including the ERJ 135/140/145 family,
the EMBRAER 170/190 family and the EMB 120 Brasília.                                                                                                                                                                                                                                                                      

F-61



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | 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 Company relies
on a limited number of customers for a substantial portion of its total net
sales. The Companys largest customers for these aircraft are Continental
Express and American Eagle.                                                                                                                                                                                                                                                                                                                         
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The Company is developing a new family of commercial jets composed of the
EMBRAER 170 for 70 passengers, EMBRAER 175 for 78 passengers, EMBRAER 190
for 98 passengers and EMBRAER 195 for 108 passengers. As of December 31,
2002, the Company had 118 firm orders for this aircraft family. The first
model to reach full development is the EMBRAER 170, whose prototype was
officially introduced on October 29, 2001. On February 19, 2002, the EMBRAER
170 made its first flight, initiating the certification and test flight
campaign.                                                                                                                                                                                                 
|
| |  | The EMB 120 Brasília is a 30-seat turboprop aircraft that has been operating
since 1985. As of December 31, 2002, 352 aircraft had been delivered.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | The regional aircraft segment is subject to both operational and external
business environment risks. Operational risks that can seriously disrupt the
Companys ability to make timely delivery of its commercial jet aircraft and
meet its contractual commitments include execution of internal performance
plans, regulatory certifications of the Companys commercial 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 business environment 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 commercial airline industry. Examples of factors relating
to external business environment 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 aircraft segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | Operations in the defense aircraft segment principally involve research,
development, production, modification and support of military defense
aircraft, products and related systems. Although some military defense
aircraft products are contracted in the commercial environment, the
Companys primary customer is the Brazilian Air Force. In the defense
aircraft segment, the Company has the following products:                                                                                                                                                                                                                                                                                                                     



| |  |  | The EMB 312, in two platforms, the basic Tucano and the
Super-Tucano - EMB 314. Also, the Super Tucano is being used as a
platform of the AL-X, aircraft developed for the Brazilian Air Force.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The AM-X, an advanced ground attack jet, developed and manufactured
through an industrial cooperation agreement between Brazil and Italy.                                                      

F-62



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  |  | A modified platform of the ERJ 145 is in the development stage (EMB 145
AEW&C  Airborne Early Warning and Control aircraft, EMB 145 RS  Remote
Sensing aircraft and EMB 145 MP  Marine Remote Sensing aircraft) for use
by the Brazilian, Mexican and Greek governments. As of December 31, 2002,
the Company had 10 firm orders for this aircraft.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The Brazilian Air Force is the largest customer of the Companys defense
aircraft products. A decrease in defense spending by the Brazilian
government due to defense spending cuts and general budgetary constraints or
other factors could materially adversely affect the Companys defense sales
and defense research and development.                                                                                                                                                                                                                                                                           
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Corporate jet segment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | The Company developed a line of corporate jets, based on the ERJ 135
regional jet. The Legacy, as the corporate jet is named, is being the
marketed by the Company to businesses, including fractional ownership
companies, in two versions  the executive version and corporate shuttle
version.                                                                                                                                                                                                                                                                                                                   
|
| |  | Other related businesses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The other related businesses segment relates to after-sales customer support
services and the manufacture and marketing of spare parts for the Companys
aircraft. Activities in this segment include the sale of spare parts,
maintenance and repair, training and other product support services. In
addition, the Company provides structural parts and mechanical and hydraulic
systems to Sikorsky Corporation for its production of helicopters. The
Company also manufactures, on a limited basis and upon customer request,
general aviation propeller aircraft, such as executive aircraft and crop
dusters.
|
| |  | The Company has entered into a joint venture with Liebherr International AG
to develop and manufacture landing gear and high precision hydraulic
equipment and to provide related services for the Company and clients around
the world.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Significant customers                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | During 2000, 2001 and 2002, the Company had significant customers which each
represented more than 10% of sales for the respective year. The percentages
below show the percentage of total net sales and accounts receivable for
each customer.                                                                                                                                                                                                                                                                                                                                                                     

|         |                         |  |               |      |                 |  |      |      |      |  |      |      |  |  |          |      |  |  |  |      | 
|-------- | ----------------------- |  | ------------- | ---- | --------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | -------- | ---- |  |  |  | ---- | 
|         |                         |  |               |      |                 |  |      |      |      |  |      |      |  |  | Accounts
|         |                         |  | Net Sales (%) |      | Receivables (%)
|         |                         |  |               |      |                
|         |                         |  | 2000          |      | 2001            |  | 2002 |      | 2001 |  | 2002
|         |                         |  |               |      |                 |  |      |      |      |  |     
|Regional |                         |  |               |      |                 |  |      |      |      |  |      |      |  |  |          |      |  |  |  |     
|         | Continental/Express Jet |  |               | 18.7 |                 |  |      | 23.1 |      |  |      | 37.3 |  |  |          | 56.6 |  |  |  | 36.4 | 
|         | American Eagle          |  |               | 13.7 |                 |  |      | 14.5 |      |  |      | 17.5 |  |  |          |     |  |  |  |     | 
|         | Republic                |  |               | 7.3  |                 |  |      | 15.7 |      |  |      | 6.8  |  |  |          | 17.9 |  |  |  | 1.4  | 
|Defense  |                         |  |               |      |                 |  |      |      |      |  |      |      |  |  |          |      |  |  |  |     
|         | Brazilian Air Force     |  |               | 2.6  |                 |  |      | 1.5  |      |  |      | 1.6  |  |  |          | 2.8  |  |  |  | .7   | 

F-63



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | Backlog                                                                                                                                                                                                                                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | At December 31, 2002 the Company had $9.0 billion in backlog representing
528 aircraft among all segments.                                                                                                                                                                                                                               
|
| |  | Segment financial information                                                                                                                                                                                                                                                                                                            
|
| |  | The information in the following tables is derived directly from the
Companys internal financial reports used for corporate management purposes.
The expenses, assets and liabilities attributable to corporate activities
are not allocated to the operating segments. Approximately 4% of operating
assets are located outside Brazil.
|
| |  | Other unallocated costs include corporate costs not allocated to the
operating segments and include the 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,
presented in millions of U.S. dollars. The geographic allocation is based on
the location of the operator of the aircraft.                                                                                                                                      

|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|---------------------------- |  | ------------------------ | ------- | ----------------------------- | ------- | ---- | ------- | ---- | ------- |  | ------- |  | ------- | 
|                             |  |                          |         | Net sales by geographic area 
|                             |  |                          |         | (in millions of U.S. dollars)
|                             |  |                          |         |                              
|                             |  |                          |         | Year ended December 31,      
|                             |  |                          |         |                              
|                             |  |                          |         | 2000                          |         | 2001 |         | 2002
|                             |  |                          |         |                               |         |      |         |     
|The Americas without Brazil: |  |                          |         |                               |         |      |         |      |         |  |         | 
|                             |  | Regional                 |         |                               | 1,377.0 |      |         |      | 1,800.7 |  |         |  | 1,772.2 | 
|                             |  | Defense                  |         |                               |        |      |         |      | 6.9     |  |         |  | 13.3    | 
|                             |  | Corporate                |         |                               | 26.5    |      |         |      | 72.6    |  |         |  | 86.6    | 
|                             |  | Other related businesses |         |                               | 95.5    |      |         |      | 93.2    |  |         |  | 78.1    | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|                             |  |                          | 1,499.0 |                               |         |      | 1,973.4 |      |         |  | 1,950.2 | 
|Brazil:                      |  |                          |         |                               |         |      |         |      |         |  |         | 
|                             |  | Regional                 |         |                               |        |      |         |      | 18.1    |  |         |  |        | 
|                             |  | Defense                  |         |                               | 72.4    |      |         |      | 43.1    |  |         |  | 40.5    | 
|                             |  | Other related businesses |         |                               | 27.7    |      |         |      | 18.9    |  |         |  | 20.1    | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|                             |  |                          | 100.1   |                               |         |      | 80.1    |      |         |  | 60.6    | 
|Europe:                      |  |                          |         |                               |         |      |         |      |         |  |         | 
|                             |  | Regional                 |         |                               | 1,021.1 |      |         |      | 644.5   |  |         |  | 290.5   | 
|                             |  | Defense                  |         |                               | 26.8    |      |         |      | 74.0    |  |         |  | 73.5    | 
|                             |  | Corporate                |         |                               |        |      |         |      |        |  |         |  | 58.3    | 
|                             |  | Other related businesses |         |                               | 51.7    |      |         |      | 64.0    |  |         |  | 43.2    | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|                             |  |                          | 1,099.6 |                               |         |      | 782.5   |      |         |  | 465.5   | 
|Others:                      |  |                          |         |                               |         |      |         |      |         |  |         | 
|                             |  | Regional                 |         |                               | 55.0    |      |         |      | 89.2    |  |         |  | 47.6    | 
|                             |  | Other related businesses |         |                               | 8.5     |      |         |      | 1.8     |  |         |  | 1.9     | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|                             |  |                          | 63.5    |                               |         |      | 91.0    |      |         |  | 49.5    | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 
|Total                        |  |                          | 2,762.2 |                               |         |      | 2,927.0 |      |         |  | 2,525.8 | 
|                             |  |                          |         |                               |         |      |         |      |         |  |         |  |         | 

F-64



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The following table presents income statement information by operating
segment, presented in millions of U.S. dollars.
| |  | ----------------------------------------------------------------------------------------------------------------------

|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|--------------------------- | ------------------------------ |  | ----------------------------- | -------- | ---- |  | -------- | -------- | - |  | -------- | -------- | -
|                            |                                |  | Operating income             
|                            |                                |  | (in millions of U.S. dollars)
|                            |                                |  |                              
|                            |                                |  | Year ended December 31,      
|                            |                                |  |                              
|                            |                                |  | 2000                          |          | 2001 |  | 2002    
|                            |                                |  |                               |          |      |  |         
|Net sales:                  |                                |  |                               |          |      |  |          |          |   |  |          |         
|                            | Regional                       |  |                               | 2,453.1  |      |  |          | 2,552.5  |   |  |          | 2,110.3  |  
|                            | Defense                        |  |                               | 99.2     |      |  |          | 124.0    |   |  |          | 127.3    |  
|                            | Corporate                      |  |                               | 26.5     |      |  |          | 72.6     |   |  |          | 144.9    |  
|                            | Other related businesses       |  |                               | 183.4    |      |  |          | 177.9    |   |  |          | 143.3    |  
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|                            |                                |  | 2,762.2                       |          |      |  | 2,927.0  |          |   |  | 2,525.8  |         
|Cost of sales and services: |                                |  |                               |          |      |  |          |          |   |  |          |         
|                            | Regional                       |  |                               | (1,692.3 | )    |  |          | (1,536.8 | ) |  |          | (1,243.9 | )
|                            | Defense                        |  |                               | (84.0    | )    |  |          | (105.2   | ) |  |          | (79.5    | )
|                            | Corporate                      |  |                               | (18.8    | )    |  |          | (47.0    | ) |  |          | (104.6   | )
|                            | Other related businesses       |  |                               | (84.2    | )    |  |          | (80.2    | ) |  |          | (103.7   | )
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|                            |                                |  | (1,879.3                      | )        |      |  | (1,769.2 | )        |   |  | (1,531.7 | )       
|Gross profit:               |                                |  |                               |          |      |  |          |          |   |  |          |         
|                            | Regional                       |  |                               | 760.8    |      |  |          | 1,015.7  |   |  |          | 866.4    |  
|                            | Defense                        |  |                               | 15.2     |      |  |          | 18.8     |   |  |          | 47.8     |  
|                            | Corporate                      |  |                               | 7.7      |      |  |          | 25.6     |   |  |          | 40.3     |  
|                            | Other related businesses       |  |                               | 99.2     |      |  |          | 97.7     |   |  |          | 39.6     |  
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|                            |                                |  | 882.9                         |          |      |  | 1,157.8  |          |   |  | 994.1    |         
|Operating expenses:         |                                |  |                               |          |      |  |          |          |   |  |          |         
|                            | Regional                       |  |                               | (122.6   | )    |  |          | (161.9   | ) |  |          | (177.5   | )
|                            | Defense                        |  |                               | (14.9    | )    |  |          | (20.9    | ) |  |          | (15.7    | )
|                            | Corporate                      |  |                               | (3.7     | )    |  |          | (9.3     | ) |  |          | (28.4    | )
|                            | Other related businesses       |  |                               | (52.5    | )    |  |          | (61.0    | ) |  |          | (30.8    | )
|                            | Unallocated corporate expenses |  |                               | (227.1   | )    |  |          | (253.3   | ) |  |          | (272.1   | )
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|                            |                                |  | (420.8                        | )        |      |  | (506.4   | )        |   |  | (524.5   | )       
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  
|Income from operations      |                                |  | 462.1                         |          |      |  | 651.4    |          |   |  | 469.6    |         
|                            |                                |  |                               |          |      |  |          |          |   |  |          |          |  

F-65



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.



| |  | The following tables present other information about the Companys operating
segments, presented in millions of U.S. dollars.
| |  | -----------------------------------------------------------------------------------------------------------------------------

|                         |  |                               |       |      |      |  |       |  |  |  |       | 
|------------------------ |  | ----------------------------- | ----- | ---- | ---- |  | ----- |  |  |  | ----- | 
|                         |  | Fixed assets                 
|                         |  | (in millions of U.S. dollars)
|                         |  |                              
|                         |  | At December 31,              
|                         |  |                              
|                         |  | 2000                          |       | 2001 | 2002
|                         |  |                               |       |      |     
|Regional                 |  |                               | 27.4  |      |      |  | 29.0  |  |  |  | 39.9  | 
|Defense                  |  |                               | 55.2  |      |      |  | 51.6  |  |  |  | 46.4  | 
|Other related businesses |  |                               | 6.5   |      |      |  | 6.6   |  |  |  | 7.3   | 
|Unallocated              |  |                               | 165.9 |      |      |  | 279.3 |  |  |  | 343.1 | 
|                         |  |                               |       |      |      |  |       |  |  |  |       | 
|Total                    |  |                               | 255.0 |      |      |  | 366.5 |  |  |  | 436.7 | 
|                         |  |                               |       |      |      |  |       |  |  |  |       | 

|                         |  |                               |      |      |  |      |      |  |  |  |      | 
|------------------------ |  | ----------------------------- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                         |  | Depreciation expense         
|                         |  | (in millions of U.S. dollars)
|                         |  |                              
|                         |  | At December 31,              
|                         |  |                              
|                         |  | 2000                          |      | 2001 |  | 2002
|                         |  |                               |      |      |  |     
|Regional                 |  |                               | 9.9  |      |  |      | 15.0 |  |  |  | 9.8  | 
|Defense                  |  |                               | 0.9  |      |  |      | 4.0  |  |  |  | 1.7  | 
|Other related businesses |  |                               | 1.8  |      |  |      | 4.1  |  |  |  | 1.8  | 
|Unallocated              |  |                               | 18.0 |      |  |      | 23.3 |  |  |  | 42.3 | 
|                         |  |                               |      |      |  |      |      |  |  |  |      | 
|Total                    |  |                               | 30.6 |      |  |      | 46.4 |  |  |  | 55.6 | 
|                         |  |                               |      |      |  |      |      |  |  |  |      | 

|                         |  |                               |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ----------------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | Trade accounts receivable    
|                         |  | (in millions of U.S. dollars)
|                         |  |                              
|                         |  | At December 31,              
|                         |  |                              
|                         |  | 2000                          |       | 2001 |  | 2002
|                         |  |                               |       |      |  |     
|Regional                 |  |                               | 64.6  |      |  |      | 493.3 |  |  |  | 655.6 | 
|Defense                  |  |                               | 31.8  |      |  |      | 44.1  |  |  |  | 31.4  | 
|Other related businesses |  |                               | 86.9  |      |  |      | 83.1  |  |  |  | 73.4  | 
|                         |  |                               |       |      |  |      |       |  |  |  |       | 
|Total                    |  |                               | 183.3 |      |  |      | 620.5 |  |  |  | 760.4 | 
|                         |  |                               |       |      |  |      |       |  |  |  |       | 

F-66



---



##### 



Embraer - Empresa Brasileira de Aeronáutica S.A.

|                         |  |                               |       |      |  |      |       |  |  |  |       | 
|------------------------ |  | ----------------------------- | ----- | ---- |  | ---- | ----- |  |  |  | ----- | 
|                         |  | Customers advances           
|                         |  | (in millions of U.S. dollars)
|                         |  |                              
|                         |  | At December 31,              
|                         |  |                              
|                         |  | 2000                          |       | 2001 |  | 2002
|                         |  |                               |       |      |  |     
|Regional                 |  |                               | 339.2 |      |  |      | 231.2 |  |  |  | 193.8 | 
|Defense                  |  |                               | 17.6  |      |  |      | 179.1 |  |  |  | 221.7 | 
|Corporate                |  |                               |      |      |  |      | 31.2  |  |  |  | 41.1  | 
|Other related businesses |  |                               | 17.5  |      |  |      | 50.3  |  |  |  | 48.3  | 
|                         |  |                               |       |      |  |      |       |  |  |  |       | 
|Total                    |  |                               | 374.3 |      |  |      | 491.8 |  |  |  | 504.9 | 
|                         |  |                               |       |      |  |      |       |  |  |  |       | 



|39. |  | WORLD TRADE ORGANIZATION  WTO                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | In July 1998, the Canadian Government initiated a proceeding with the World
Trade Organization  WTO, challenging the Brazilian Governments Export
Financing Program - PROEX (the most relevant subsidy challenged being
interest rate discounts up to 3.8% per year on export financing).                                                                                                                                                                                                                                                          
|   
|    |  | In December 2000, the Brazilian Government changed the PROEX export
incentive legislation to comply with the WTO ruling on the aforementioned
proceeding. In relation to export financing for regional aircraft, the
Brazilian Government also established an interest rate discount for each
case based on the Commercial Interest Reference Rate established on a
monthly basis by the Organization for Economic Cooperation and
Development -
OECD. The Brazilian Government maintained the interest rate discount at a
maximum of 2.5% per annum.
|   
|    |  | The Canadian Government declared that the modifications made by Brazil were
unsatisfactory and fell short of compliance with the regulations established
by the WTO. As a result, in February 2001, a new panel was appointed to
determine whether the WTO rulings were in fact implemented by Brazil.                                                                                                                                                                                                                                               
|   
|    |  | In July 2001, the panel issued a report, concluding that the modifications
made by the Brazilian Government to the PROEX Program comply with the WTOs
ruling.                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | Based on declarations by the Brazilian Government that it will honor
commitments assumed, management does not expect a significant impact on the
backlog nor on the competitiveness of its products.                                                                                                                                                                                                                                                                                                                                                 

F-67