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





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      DC 20549**





**FORM
      20-F**





**o
      REGISTRATION STATEMENT
      PURSUANT TO SECTION 12(b) OR 12(g)**


**OF
      THE SECURITIES EXCHANGE ACT OF 1934**





**OR**





**x
      ANNUAL REPORT PURSUANT
      TO SECTION 13 OR 15(d) OF THE**


**SECURITIES
      EXCHANGE ACT OF 1934**


**For
      the fiscal year ended: December 31, 2006**





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**





**OR**





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


**SECURITIES
      EXCHANGE ACT OF 1934**


**Date
      of event requiring this shell company report [     
]**





**For
      the transition period from [      ] to
      [      ]**





**Commission
      file number 333-132289**





**EMBRAER-EMPRESA
      BRASILEIRA DE AERONÁUTICA S.A.**


(Exact
      name of Registrant as specified in its charter)





**EMBRAER
      - Brazilian Aviation Company Inc.**


(Translation
      of Registrant’s name into English)





**Federative
      Republic of Brazil**


(Jurisdiction
      of Incorporation)





**Avenida
      Brigadeiro Faria Lima, 2170**


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


(Address
      of principal executive offices)







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





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





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





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




None.







**Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act.**




None.







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




739,903,914
      common shares, without par value




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




Yes  x  No
o




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




Yes  o  No
x




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




Yes  x  No
o




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




Large
      Accelerated Filer x    Accelerated
      Filer o  Non-accelerated
      filer o




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




Item
      17  o  Item
      18
x




**If
      this is an annual report, indicate by check mark whether the registrant is
      a
      shell company (as defined in Rule 12b-2 of the Exchange
      Act).**




Yes  o  No
x







**TABLE
      OF CONTENTS**





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





i


**INTRODUCTION**




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




**Corporate
      Reorganization**




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




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




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




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




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




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




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




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




**Presentation
      of Financial and Other Data**




***Financial
      Data***




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




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




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




ii




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




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




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




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




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




***Other
      Data and Backlog***




In
      this
      annual report:




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




·
            aircraft
                ranges are indicated in nautical
                miles;




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




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




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




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




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




iii




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




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




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




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




**Special
      Note Regarding Forward-Looking Statements**




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




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




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




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




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




·
            our
                level of debt;




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




·
            our
                expenditure plans;




·
            inflation
                and fluctuations in exchange rates;




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




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




·
            existing
                and future governmental regulation;
                and




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




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




iv


**PART
      I**




**ITEM
        1.** **IDENTITY
        OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS**




Not
      applicable.




**ITEM
        2.** **OFFER
        STATISTICS AND EXPECTED TIMETABLE**




Not
      applicable.




**ITEM
        3.** **KEY
        INFORMATION**




**3A.** **Selected
        Financial Data**




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




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




1




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





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


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


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


(4)
            Includes
                interest on shareholders’ equity.


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


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




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





(1)
            Deliveries identified by parentheses
              were
              aircraft delivered under operating leases.  (2)
            Since
                December 31, 2006, we have received five additional firm orders for
                our
                EMBRAER 170/190 jet family and six options for the EMBRAER 190 aircraft
                were converted into firm orders for that
                aircraft.




2




**Exchange
      Rates**




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




·
            the
                commercial rate exchange market,
                and




·
            the
                floating rate exchange market.




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




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




3




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




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




**Exchange
                Rate of*****Reais*****to US$1.00****Low**
            
            **High**
            
            **Average
                (1)**
            
            **Period-end****Year
                ended December 31,**2002
            
            
            2.2709
            
            
            3.9552
            
            
            2.9982
            
            
            3.53332003
            
            
            2.8219
            
            
            3.6623
            
            
            3.0600
            
            
            2.88922004
            
            
            2.6544
            
            
            3.2051
            
            
            2.9171
            
            
            2.65442005
            
            
            2.1633
            
            
            2.7621
            
            
            2.4125
            
            
            2.34072006
            
            
            2.0586
            
            
            2.3711
            
            
            2.1771
            
            
            2.13802007
                (through April 18)
            
            
            2.0231
            
            
            2.1556
            
            
            2.0886
            
            
            2.0365





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







Source:
      Central Bank.




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





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




**3B.** **Capitalization
      and Indebtedness**




Not
      applicable.




**3C.** **Reasons
      for the Offer and Use of Proceeds**




Not
      applicable.




4




**3D.** **Risk
      Factors** ****




**Risks
      Relating to Embraer**




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




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




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




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




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




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




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




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




5




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




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




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




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




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




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




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




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




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




·
            production
                rate shortfalls.




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




6




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




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




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




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




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




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




7




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




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




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




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




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




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




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




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




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




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




8




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




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




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




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




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




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




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




9




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




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




**Risks
      Relating to the Commercial Airline Industry**




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




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




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




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




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




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




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




10




**Risks
      Relating to Brazil**




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




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




·
            interest
                rates;




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




·
            currency
                fluctuations;




·
            inflation;




·
            liquidity
                of domestic capital and lending
                markets;




·
            tax
                policies; and




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




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




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




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




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




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




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




11




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




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




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




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




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




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




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




The
      market value of securities of Brazilian issuers is affected to varying degrees
      by economic and market conditions in other countries, including other Latin
      American and emerging market countries. Although economic conditions in such
      countries may differ significantly from economic conditions in Brazil, the
      reaction of investors to developments in these other countries may have an
      adverse effect on the market value of securities of Brazilian issuers. Crises
      in
      other emerging market countries may diminish investor interest in securities
      of
      Brazilian issuers, including ours. This
      could adversely affect the trading price of our common shares and ADSs, and
      could also make it more difficult for us to access the capital markets and
      finance our operations in the future on acceptable terms or at all.




12




**Risks
      Relating to our Common Shares and ADSs** ****




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




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




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




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




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




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




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




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




13




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




Our
      bylaws contain provisions that limit the right of a shareholder or group of
      shareholders, including brokers acting on behalf of one or more holders of
      ADSs,
      to exercise voting rights in respect of more than 5% of the outstanding shares
      of our capital stock at any general meeting of shareholders. See “Item 10B.
      Memorandum and Articles of Association 3⁄4 Description
      of Capital Stock 3⁄4 Voting
      Right of Shares— Common Shares—Limitation on the Voting Rights of Certain
      Holders of Common Shares.”




Our
      bylaws also contain provisions that limit the right of non-Brazilian
      shareholders to exercise voting rights in respect of more than two-thirds of
      the
      voting rights that may be exercised by Brazilian shareholders present at any
      general meeting of shareholders. This limitation will effectively prevent our
      takeover by non-Brazilian shareholders and limit the ability of non-Brazilian
      shareholders to effect control over us. See “Item 10B. Memorandum and Articles
      of Association 3⁄4 Description
      of Capital Stock—Voting Rights of Shares— Common Shares —Limitation on the
      Voting Rights of Non-Brazilian Shareholders.”




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




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




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




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




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




14




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




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




Sales
      of
      a substantial number of common shares,
      or the belief that this may occur, could decrease the trading price of our common shares
      and ADSs. In connection with the secondary offering of our shares by certain
      of
      our shareholders in February 2007, Caixa de Previdência dos Funcionários do
      Banco do Brasil, or PREVI, Fundação Sistel de Seguridade Social, or SISTEL and
      BNDES Participações S.A. 3⁄4 BNDESPAR,
      have agreed, subject to certain exceptions, not to, for 90 days as of February
      6, 2007, without the prior consent of J.P. Morgan Securities Inc. and Merrill
      Lynch, Pierce Fenner & Smith Incorporated on behalf of the international
      underwriters (1) offer, pledge, sell, or otherwise transfer or dispose of,
      directly or indirectly, any shares of our capital stock, including in the form
      of ADSs or any securities convertible into, exercisable or exchangeable for
      such
      shares or (2) enter into any swap or other agreement that transfers, in whole
      or
      in part, any of the economic consequences of ownership of any share of our
      capital stock. Our directors and officers have agreed to substantially similar
      lock-up provisions, subject to certain exceptions. After the expiration of
      the
      lock-up period, common shares owned by these shareholders become, subject to
      applicable law, eligible for sale. As a consequence of sales by existing
      shareholders, the market price of the common shares
      and, by extension, the ADSs may decrease significantly. As a result, the holders
      of the ADSs and/or common shares
      may not be able to sell their securities at or above the price they paid for
      them.




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




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




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




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




**ITEM
      4.** **INFORMATION
      ON THE COMPANY**




**4A.** **History
      and Development of the Company**




**General**




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




15




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




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




**Corporate
      Reorganization**




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




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




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




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




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




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




16




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




**Strategic
      Alliance and Growth Opportunities**




***Strategic
      Alliance with European Aerospace and Defense Group***




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




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




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




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




***Joint
      Ventur*** ***es
      and Acquisitions***




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




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




17




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




**Research
      and Development Costs and Capital Expenditures** ****




Research
      and development costs, including the development of the EMBRAER 170/190 jet
      family, were US$44.5 million in 2004, US$93.2 million in 2005 and US$112.7
      million in 2006 - net of cash contributions provided by risk-sharing partners.
      Research and development costs as a percentage of net sales were 1.3% in 2004,
      2.4% in 2005 and 2.9% in 2006. Research and development costs increased as
      a
      percentage of our net sales in 2005 mainly because we only recognized US$55.1
      million in contributions from our risk-sharing partners and also because of
      the
      16.8% appreciation of the *real* against
      the U.S. dollar during the period, as approximately 87% of our research and
      development costs are *real* -denominated
      The increase in our research and development costs in 2006 was mainly due to
      the
      development of our new executive jets and the 8.7% appreciation of the *real* against
      the U.S. dollar during the period and was partially offset by revenues of
      US$57.0 million, received under an agreement with Kawasaki Heavy Industries
      Ltd., or KHI, and Kawasaki Aeronáutica do Brasil Ltda., or KAB, in 2006
      (pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER
      195 aircraft) as well as by cash contributions from our risk-sharing partners
      in
      the amount of US$36 million as a result of the fulfillment of certain
      contractual milestones. See “ 3⁄4 Products 3⁄4 EMBRAER
      170/190 Jet Family.” Most of our research and development expenses are
      associated with a particular program, whether commercial or executive aviation.
      We do not record an expense for research and development of defense programs
      as
      these expenses are funded by the Brazilian government and other government
      customers.




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




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




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




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




18




**4B.** **Business
      Overview**




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




**Our
      Strengths**




We
      believe that our primary strengths are:




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




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




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




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




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




19




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




**Business
      Strategies**




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




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




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




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




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




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




20




**Commercial
      Aviation Business**




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




***Products***




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




***ERJ
      145 Regional Jet Family***




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




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




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




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




21




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




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




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




***EMBRAER
      170/190 Jet Family***




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




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




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




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




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




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




22




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




***EMB
      120 Brasília***




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




***Customers***




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




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




***Sales
      and Marketing***




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




23




***Production,
      New Orders and Options***




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




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




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




***Competition***




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




**30-60-seat
      category**




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




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




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




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




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




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




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




*We
      currently compete with the following aircraft in these
      categories:*




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




24




·
            ATR’s
                ATR72, a 72-seat turboprop;




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




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




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




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




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




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




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




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




**Defense
      and Government Business**




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




***Products***




**Tucano
      Family; AL-X**




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




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




25





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




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




***AM-X;
      AMX-T***




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




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




***Government
      Transport Aircraft***




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




26


***Other
      Projects and Activities***




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




***Competition***




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




**Executive
      Aviation Business**




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




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




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




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




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





27


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




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




**Other
      Related Businesses**




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




***After-Sales
      Customer Support; Spare Parts Business***




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




·
            field
                support;




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




·
            product
                warranty and repair administration;




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




·
            training.




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




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




28


***Subcontracting***




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




***General
      Aviation Aircraft***




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


**Aircraft
        Operating Lease Activities**
  In
        order to offer better financial support in the sales process, as well as
        reduce
        financial risks related to the re-marketing of aircraft, Embraer created,
        in
        2002, two subsidiary companies, ECC Leasing Co. Ltd. and ECC-Insurance &
Financial Co. Ltd.
 
 The
        mission of ECC Leasing Co. Ltd is to manage and remarket the aircraft portfolio
        that, as a result of contractual obligations, may be acquired by Embraer
        as
        trade-in and/or re-purchase transactions. The company also provides remarketing
        services to third parties involved in sales campaigns.
 
 The
        consolidated pre-owned aircraft business, since 2002, through ECC Leasing
        in
        Ireland, has contributed positively to the results of the company, reaching
        accumulated profits of US$8.5 million since its inception. Since then, sales
        campaigns for new aircraft, where the acceptance of trade-in aircraft as
        part of
        payment were conceded, have been successfully completed. Additional revenues
        have also been generated through the sale and lease of aircraft received
        as
        trade-in. Furthermore, leasing operations, involving Embraer170 and Embraer175
        pre-series aircraft, all contributed to the current results. As of December
        31,
        2006, ECC Leasing and two other Embraer subsidiaries had a total portfolio
        of 38
        aircraft, of which 30 were under operating lease.
 
 All
        sale and leasing transactions were executed practicing market rates, helping
        to
        preserve the value of Embraer’s products.
 
 The
        continued improvement in financial performance is directly related to ECC
        Leasing’s ability to renew lease agreements with similar conditions as
        those currently in place, as well as sell aircraft to operators, leasing
        companies and/or financial institutions, practicing values close to market
        rates
        without providing any type of Embraer guarantee.
 
 Furthermore,
        the upcoming results will be largely dependent on market conditions, aircraft
        availability levels, and the demand for regional jets in the 37-50 seat
        category. In this regard, new markets such as Russia and Latin America are
        important, however, risks related to operator credit and asset repossession
        must
        be adequately evaluated.


**Markets**




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




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




29


**Joint
      Ventures**




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




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




**Suppliers
      and Components; Risk-Sharing Arrangements**




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




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




30


***ERJ
      145 Regional Jet Family***




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




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




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




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




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




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




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




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




***EMBRAER
      170/190 Jet Family***




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




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




·
            Honeywell,
                which supplies the avionics
                systems;




31




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




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




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




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




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




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




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




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




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




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




***Executive
      Jets***




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




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




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




32


**Customer
      Service and Product Support**




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




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




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




**Aircraft
      Financing Arrangements** ****




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




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




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




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




33


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




**Intellectual
      Property**




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




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




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




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




**Government
      Regulation and Aircraft Certification**




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




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




34


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




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




**4C.** **Organizational
          Structure** ****




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




**4D.** **Property,
          Plants and Equipment**




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




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





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




35




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




3
            We
                acquired this facility in March
                2005.





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





**Production**




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




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




Production
      time for our EMBRAER 170 aircraft has been reduced from approximately seven
      months at the beginning of its production in March 2004 to approximately 4.1
      months at the end of 2005. We have the flexibility to increase production in
      the
      future in response to increased demand. We expect to increase our EMBRAER
      170/190 jet family production to 11 aircraft per month in 2007 and 14 aircraft
      per month in 2008. In addition, on June 1, 2006, we entered into an agreement
      with KHI and KAB, pursuant to which we began assembling the wings of the EMBRAER
      190 and EMBRAER 195 aircraft in order to meet demand for these types of
      aircraft. See “ 3⁄4 Products 3⁄4 EMBRAER
      170/190 Jet Family.”




36


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




**Environmental
      Matters** ****




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




***OGMA***




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




**Insurance** ****




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




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




37




**ITEM
        4A.** **UNRESOLVED
        STAFF COMMENTS**




We
      have
      no unresolved staff comments.




**ITEM
          5.** **OPERATING
          AND FINANCIAL REVIEW AND PROSPECTS**




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




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




38




**5A.** **Operating
          Results**




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




*The
      following discussion is based largely upon our current expectations about future
      events and trends affecting our business, actual results for our industry and
      performance could differ substantially. See “Introduction* *3⁄4* *Special
      Note Regarding Forward-Looking Statements.”*




***Commercial
      Aircraft***




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




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




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




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




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




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




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




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




39


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




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




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




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




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




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




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




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




***Executive
      Jets***




*Expected
      Market Trends*




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




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




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




40


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




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




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




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




*Our
      Executive Jets*




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




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




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




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




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




41


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




**Brazilian
      Economic Environment**




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




·  increased
      volatility in the market price of securities;




· significant
      decline in corporate earnings estimates;




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




· significant
      erosion of consumer confidence.




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




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




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




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




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




The
      government elected in 2002 has largely continued the macroeconomic policies
      of
      the previous administration, focusing on fiscal responsibility and the Brazilian
      economy has witnessed increased stability. In 2003, investor confidence
      rebounded as a result and the *real* appreciated by 18.2% against the U.S. dollar to R$2.889 per US$1.00 at December
      31, 2003. Inflation in 2003, as measured by the IGP-M, decreased to 8.7%.
      Brazil’s real GDP increased 0.5% in 2003, despite the constraints on economic
      growth caused by high interest rates that prevailed at the beginning of 2003
      as
      the Central Bank sought to combat inflationary pressures. President Luiz Inácio
      Lula da Silva was reelected in October 2006. See “Item 3D. Risk
      Factors 3⁄4 Risks
      Relating to Brazil 3⁄4 Brazilian
      political and economic conditions have a direct impact on our business and
      the
      trading price of our common shares and ADSs.”




42




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




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




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




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




**Effects
      of Inflation and Currency Exchange Fluctuations**




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





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





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




**Critical
      Accounting Estimates**




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




43


***Sales
      and Other Operating Revenues***




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




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




***Product
      Warranties***




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




***Guarantees
      and Trade-In Rights***




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




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




44


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




**Overview**




***Basis
      of Presentation***




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




***Operating
      Data***




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




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







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




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




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





***Net
      Sales***




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




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




45


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




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




***Cost
      of Sales and Services***




Our
      cost
      of sales and services consists primarily of:




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




·
            *Labor*—These
                costs are primarily*real*-denominated.




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




**Recent
      Developments**




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




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




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




46


**Results
        of Operations**
  The
        following table presents income statement data by business segment for the
        periods indicated.


**Summary
      Financial Data by Business**





**Operating
                Income****Year
                ended December 31,****2004**
            
            **2005**
            
            **2006***(in
                millions of dollars)*Net
                sales:Commercial
                Aviation
            
            
            US$2,579.4
            
            
            US$2,705.8
            
            
            US$2,453.0Defense
                and Government
            
            
            365.8
            
            
            423.8
            
            
            226.7Executive
                Aviation
            
            
            245.7
            
            
            278.0
            
            
            582.1Other
                related businesses
            
            
            249.6
            
            
            422.3
            
            
            545.63,440.5
            
            
            3,829.9
            
            
            3,807.4Cost
                of sales and services:Commercial
                Aviation
            
            
            (1,613.0
            )
            
            (1,867.4
            )
            
            (1,765.5
            )Defense
                and Government
            
            
            (291.4
            )
            
            (319.4
            )
            
            (174.1
            )Executive
                Aviation
            
            
            (181.5
            )
            
            (188.4
            )
            
            (396.2
            )Other
                related businesses
            
            
            (181.4
            )
            
            (296.6
            )
            
            (400.4
            )(2,267.3
            )
            
            (2,671.8
            )
            
            (2,736.2
            )Gross
                profit:Commercial
                Aviation
            
            
            966.4
            
            
            838.4
            
            
            687.6Defense
                and Government
            
            
            74.4
            
            
            104.4
            
            
            52.6Executive
                Aviation
            
            
            64.2
            
            
            89.6
            
            
            185.9Other
                related businesses
            
            
            68.2
            
            
            125.7
            
            
            145.11,173.2
            
            
            1,158.1
            
            
            1,071.2Operating
                expenses:Commercial
                Aviation
            
            
            (348.1
            )
            
            (425.6
            )
            
            (456.9
            )Defense
                and Government
            
            
            (59.8
            )
            
            (50.3
            )
            
            (37.9
            )Executive
                Aviation
            
            
            (28.6
            )
            
            (44.5
            )
            
            (130.4
            )Other
                related businesses
            
            
            (36.4
            )
            
            (32.3
            )
            
            (25.6
            )Unallocated
                corporate expenses
            
            
            (156.3
            )
            
            (97.5
            )
            
            (112.5
            )(629.2
            )
            
            (650.2
            )
            
            (763.4
            )Income
                from operations
            
            
            US$544.0
            
            
            US$507.9
            
            
            US$307.7




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




**Year
                ended December 31,****2004**
            
            **2005**
            
            **2006***(in
                millions of dollars, except percentages)*Net
                sales
            
            
            US$3,440.5
            
            
            100.0
            %
            
            US$3,829.9
            
            
            100.0
            %
            
            US$3,807.4
            
            
            100.0
            %Cost
                of sales and services
            
            
            (2,267.3
            )
            
            65.9
            
            
            (2,671.8
            )
            
            69.8
            
            
            (2,736.2
            )
            
            71.9Gross
                profit
            
            
            1,173.2
            
            
            34.1
            
            
            1,158.1
            
            
            30.2
            
            
            1,071.2
            
            
            28.1Operating
                expenseSelling
                expenses
            
            
            (342.9
            )
            
            10.0
            
            
            (269.7
            )
            
            7.0
            
            
            (374.1
            )
            
            9.8Research
                and development
            
            
            (44.5
            )
            
            1.3
            
            
            (93.2
            )
            
            2.4
            
            
            (112.7
            )
            
            2.9General
                and administrative expenses
            
            
            (139.4
            )
            
            4.1
            
            
            (205.2
            )
            
            5.4
            
            
            (235.5
            )
            
            6.2Employee
                profit sharing
            
            
            (61.2
            )
            
            1.8
            
            
            (56.1
            )
            
            1.5
            
            
            (42.7
            )
            
            1.1Other
                operating expenses, net
            
            
            (41.3
            )
            
            1.2
            
            
            (26.1
            )
            
            0.7
            
            
            1.7
            
            
            3⁄4Income
                from operations
            
            
            544.0
            
            
            15.8
            
            
            507.8
            
            
            13.3
            
            
            307.7
            
            
            8.1Non-operating
                income (expense)Interest
                income (expenses), net
            
            
            (38.0
            )
            
            1.1
            
            
            (1.7
            )
            
            3⁄4
            
            
            140.5
            
            
            3.7Exchange
                loss, net
            
            
            (12.2
            )
            
            0.4
            
            
            (15.2
            )
            
            0.4
            
            
            (4.1
            )
            
            0.1Other
                non-operating income (expenses), net
            
            
            (0.1
            )
            
            3⁄4
            
            
            9.1
            
            
            0.2
            
            
            3⁄4
            
            
            3⁄4Income
                before income taxes
            
            
            493.7
            
            
            14.3
            
            
            500.0
            
            
            13.1
            
            
            444.2
            
            
            11.7Income
                tax benefit (expenses)
            
            
            (112.1
            )
            
            3.3
            
            
            (41.6
            )
            
            1.1
            
            
            (44.4
            )
            
            1.2Income
                before minority interest and equity in income (loss) from
                affiliates
            
            
            381.5
            
            
            11.1
            
            
            458.4
            
            
            12.0
            
            
            399.8
            
            
            10.5Minority
                interest
            
            
            (1.3
            )
            
            3⁄4
            
            
            (9.6
            )
            
            0.3
            
            
            (9.6
            )
            
            0.3Equity
                in income (loss) from affiliates
            
            
            —
            
            
            3⁄4
            
            
            (3.1
            )
            
            0.1
            
            
            3⁄4
            
            
            3⁄4Net
                income
            
            
            US$380.2
            
            
            11.1
            %
            
            US$445.7
            
            
            11.6
            %
            
            US$390.1
            
            
            10.2




47


***2006
      Compared with 2005***




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




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




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




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




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




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




48


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




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




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




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




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




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




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




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




***2005
      Compared with 2004***




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




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




49


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




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




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




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




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




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




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




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




*Interest
      income (expenses), net.* Interest
      income (expenses), net, decreased from an expense of US$38.0 million in 2004
      to
      an expense of US$1.7 million in 2005, primarily related to the gains on
      prepayment of loans in the total amount of US$36.4 million (2004 3⁄4 US$8.2
      million). See Note 21 to our consolidated financial statements.




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




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




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




50




**5B.** **Liquidity
          and Capital Resources** ****




Our
      liquidity needs arise principally from research and development, capital
      expenditures, principal and interest payments on our debt, working capital
      requirements and distributions to shareholders. We generally rely on funds
      provided by operations, borrowings under our credit arrangements, cash
      contributions from risk-sharing partners, advance payments from customers and,
      to a lesser extent, capital increases to meet these needs. For
      further information, see “Item 4B. Business Overview3⁄4Suppliers
      and Components; Risk-Sharing Arrangements” and “Item 4B. Business
      Overview3⁄4Production
      Aviation Business3⁄4Production,
      New Orders and Options.”We believe that these sources of funds will be
      sufficient to fund our future liquidity needs, continue to develop and finalize
      the certification process of the EMBRAER 170/190 jet family, develop our new
      Phenom 100, Phenom 300 and Lineage 1000 executive jets, and make other planned
      capital expenditures and pay dividends. However, our customers may reschedule
      deliveries, fail to exercise options or cancel firm orders as a result of the
      economic downturn and the financial volatility in the commercial airline
      industry. In addition, our risk-sharing partners’ cash contributions are
      refundable under certain limited circumstances and we may need to find
      replacement sources of capital.




**Working
      Capital and Net Cash Provided by Operating Activities**




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




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




**Net
      Cash Used in Investing Activities**




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




**Capital
      Expenditures**




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




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




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




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




51




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




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




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




**Credit
      Facilities and Lines of Credit** ****




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




***Long-term
      facilities***




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




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




52


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




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




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




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




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




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




53


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




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




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




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




***Short-term
      facilities***




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




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




**Capital
      Contributions and Issuances of Capital Stock**




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




**Recently
      Issued Accounting Pronouncements**




In
      July
      2006, the FASB issued FASB Interpretation No. 48, or FIN 48, “Accounting for
      Uncertainty in Income Taxes 3⁄4 an
      interpretation of FASB Statement No. 109,” which clarifies the accounting for
      uncertainty in income taxes recognized in an entity’s financial statements in
      accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This
      Interpretation prescribes a recognition threshold and measurement attribute
      for
      the financial statement recognition and measurement of a tax position taken
      or
      expected to be taken in a tax return that is reflected in measuring current
      and
      deferred tax assets. This Interpretation also provides guidance on
      de-recognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition. This Interpretation is effective for fiscal
      years beginning after December 15, 2006. Earlier application is encouraged
      if
      the enterprise has not yet issued financial statements, including interim
      financial statements, in the period this interpretation is adopted. We are
      currently evaluating the potential impact of this interpretation on our
      financial statements.




54




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




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




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




**5C.** **Research
          and Development** ****




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




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




55




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




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




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




**5D.** **Trend
          Information**




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




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




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




**ERJ
                135:**




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





56





**ERJ
                140:**




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




**ERJ
                145:**




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




57




**EMBRAER
                170:**




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




**EMBRAER
                175:**




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




**EMBRAER
                190:**




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




58




**EMBRAER
                195:**




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





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




**5E.** **Off-Balance
          Sheet Arrangements**




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




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




**Guarantees**




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




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




59




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




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





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




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




**Trade-in
      Obligations**




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




**Financial
      and Residual Value Guarantees**




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




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




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




60


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




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




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




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




**5F.** **Tabular
          Disclosure of Contractual Obligations**




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




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




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




61




The
      above
      table does not reflect contractual commitments related to trade-in options
      and
      financial and residual value guarantees discussed in “Item 5E. Off-Balance Sheet
      Arrangements” above. See “Item 3D. Risk Factors 3⁄4 Risks
      Relating to Embraer 3⁄4 Our
      aircraft sales are subject to trade-in options and financial and residual value
      guarantees that may require us to make significant cash disbursements in the
      future.”




Purchase
      obligations consist of trade accounts payable and insurance
      payables.




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




**ITEM
          6.** **DIRECTORS,
          SENIOR MANAGEMENT AND EMPLOYEES**




**6A.** **Directors
          and Senior Management**




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




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




**Board
      of Directors**




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




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




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




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




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




62


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




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




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




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




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




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




63


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




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




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




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




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




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




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




64




**Executive
      Officers** ****




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




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




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




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




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




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




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




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




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




65




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




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




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




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




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




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




**6B.** **Compensation**




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




66




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




**Stock
      Option** **Plan**




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




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




**Profit
      Sharing Plan**




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




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




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




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




**6C.** **Board
          Practices**




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




67




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




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




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




**Conselho
      Fiscal**




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




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




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




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




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




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




68




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




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




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





(1)  Employed
      by SISTEL.




(2)  Employed
      by Cia. Bozano.




(3)  Employed
      by Banco do Brasil.




69





**Advisory
      and Executive Committee**




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




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




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




**6D.** **Employees**




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




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




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




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




**6E.** **Share
          Ownership**




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




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




70




**ITEM
          7.** **MAJOR
          SHAREHOLDERS AND RELATED PARTY TRANSACTIONS**




**7A.** **Major
          Shareholders**




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




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







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




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




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




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




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




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




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




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




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




**7B.** **Related
          Party Transactions**




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




**Brazilian
      Government**




The
      Brazilian government, principally through the Brazilian Air Force, has
      participated in the development of Embraer since its inception. For the years
      ended December 31, 2004 and 2005, 2006, the Brazilian government accounted
      for
      approximately 7.1%, 6.2% and 1.9% of our net sales, respectively. We expect
      to
      continue to be the primary source of new aircraft and spare parts and services
      for the Brazilian government. For a description of our transactions with the
      Brazilian government, see “Item 4B. Business Overview 3⁄4 Defense
      and Government Business.”




71




The
      Brazilian government plays a key role as:




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




·
            an
                export support agency through
                BNDES.




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




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




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




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




**7C.** **Interests
          of Experts and Counsel**




Not
      applicable.




**ITEM
          8.** **FINANCIAL
          INFORMATION**




**8A.** **Consolidated
          Statements and Other Financial Information**




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




**Legal
      Proceedings**




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




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




72




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




**Dividends
      and Dividend Policy** **** ****




***Amounts
      Available for Distribution***




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




·
            the
                legal reserve;




·
            a
                contingency reserve for anticipated losses;
                and




·
            an
                unrealized revenue reserve.




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




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




·
            the
                legal reserve;




·
            the
                investment and working capital
                reserve;




·
            retained
                earnings; and




·
            the
                contingency reserve for anticipated
                losses,




73


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




·
            price-level
                restatement of balance sheet
                accounts;




·
            the
                share of equity earnings of affiliated companies;
                and




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




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




·
            in
                the deduction of accumulated losses, whenever
                necessary;




·
            in
                the distribution of dividends, at any
                time;




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




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




The
      amounts available for distribution may be further increased by a reversion
      of
      the contingency reserve for anticipated losses constituted in prior years but
      not realized, or further increased or reduced as a result of the allocations
      of
      revenues to or from the unrealized revenue reserve. The amounts available for
      distribution are determined on the basis of financial statements prepared in
      accordance with the Brazilian Corporate Law method.





***Mandatory
      Distribution***




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




***Payment
      of Dividends*** ******




We
      are
      required by the Brazilian Corporate Law and by our bylaws to hold an annual
      shareholders’ meeting by the end of the fourth month after the end of each
      fiscal year at which, among other things, the shareholders have to decide on
      the
      payment of an annual dividend. The payment of annual dividends is based on
      the
      financial statements prepared for the relevant fiscal year. Under the Brazilian
      Corporate Law, dividends generally are required to be paid within 60 days
      following the date the dividend was declared, unless a shareholders’ resolution
      sets forth another date of payment, which, in either case, must occur prior
      to
      the end of the fiscal year in which the dividend was declared. A shareholder
      has
      a three-year period from the dividend payment date to claim dividends (or
      interest payments) in respect of its shares, after which the amount of the
      unclaimed dividends reverts to us.




74




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




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




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




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




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




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




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




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




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




75




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




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





(1)  Represents
      dividend payments.




(2)  Represents
      interest on shareholders’ equity.




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




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




We
      intend
      to declare and pay dividends and/or interest on shareholders’ equity, as
      required by the Brazilian Corporate Law and our bylaws. Our Board of Directors
      may approve the distribution of dividends and/or interest on shareholders’
equity, calculated based on our semiannual or quarterly financial statements.
      The declaration of annual dividends, including dividends in excess of the
      mandatory distribution, requires approval by the vote of the majority of the
      holders of our common stock. The amount of any distributions will depend on
      many
      factors, such as our results of operations, financial condition, cash
      requirements, prospects and other factors deemed relevant by our Board of
      Directors and shareholders. Within the context of our tax planning, we may
      in
      the future continue to determine that it is to our benefit to distribute
      interest on shareholders’ equity.




76




**8B.** **Significant
          Changes**




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




**ITEM
          9.** **THE
          OFFER AND LISTING**




**9A.** **Offer
          and Listing Details**




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




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




**Price
                in U.S. dollars**
              **per
                ADS****High**
            
            **Low**2002:Year
                end
            
            
            25.01
            
            
            12.852003:Year
                end
            
            
            35.45
            
            
            9.152004:Year
                end
            
            
            36.81
            
            
            23.282005:First
                quarter
            
            
            35.00
            
            
            29.70Second
                quarter
            
            
            33.95
            
            
            28.71Third
                quarter
            
            
            39.00
            
            
            30.37Fourth
                quarter
            
            
            41.78
            
            
            36.20Year
                end
            
            
            41.78
            
            
            28.712006:First
                quarter
            
            
            41.63
            
            
            37.00Second
                quarter
            
            
            39.04
            
            
            31.99Third
                quarter
            
            
            41.78
            
            
            33.53Fourth
                quarter
            
            
            43.50
            
            
            39.59Year
                end
            
            
            43.50
            
            
            31.992007First
                quarter
            
            
            46.23
            
            
            39.01Second
                quarter (through April 18)
            
            
            47.83
            
            
            45.85Month
                ended:October
                31, 2006
            
            
            43.50
            
            
            39.59November
                30, 2006
            
            
            42.87
            
            
            40.49December
                31, 2006
            
            
            43.46
            
            
            40.27January
                31, 2007
            
            
            41.36
            
            
            39.01February
                28, 2007
            
            
            46.23
            
            
            41.04March
                31, 2007
            
            
            45.86
            
            
            44.10April
                30, 2007 (through April 18)
            
            
            47.83
            
            
            45.85




77


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




**Nominal*****reais*****per**
              **preferred
                share****High**
            
            **Low**2001:Year
                end
            
            
            25.45
            
            
            7.652002:Year
                end
            
            
            15.30
            
            
            11.202003:Year
                end
            
            
            25.70
            
            
            8.102004:First
                quarter
            
            
            26.43
            
            
            20.30Second
                quarter
            
            
            23.50
            
            
            18.30Third
                quarter
            
            
            22.20
            
            
            18.20Fourth
                quarter
            
            
            22.50
            
            
            17.10Year
                end
            
            
            26.43
            
            
            17.102005:First
                quarter
            
            
            23.30
            
            
            19.80Second
                quarter
            
            
            20.75
            
            
            17.90Third
                quarter
            
            
            22.19
            
            
            18.50Fourth
                quarter
            
            
            23.73
            
            
            20.12Year
                end
            
            
            23.73
            
            
            17.902006:First
                quarter
            
            
            23.68
            
            
            19.86Second
                quarter (through June 2)
            
            
            20.50
            
            
            18.55Month
                ended:January
                31, 2006
            
            
            23.68
            
            
            21.55February
                28, 2006
            
            
            22.51
            
            
            19.90March
                31, 2006
            
            
            21.86
            
            
            19.86April
                30, 2006
            
            
            20.50
            
            
            19.20May
                31, 2006
            
            
            20.17
            
            
            18.55June
                30, 2006 (through June 2)
            
            
            19.70
            
            
            19.55




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




78




**Nominal*****reais*****per**
              **common
                share****High**
            
            **Low**2002:Year
                end
            
            
            14.00
            
            
            9.822003:Year
                end
            
            
            19.30
            
            
            7.002004:Year
                end
            
            
            20.30
            
            
            12.312005:First
                quarter
            
            
            17.90
            
            
            14.40Second
                quarter
            
            
            16.00
            
            
            13.50Third
                quarter
            
            
            16.50
            
            
            14.18Fourth
                quarter
            
            
            18.50
            
            
            14.90Year
                end
            
            
            18.50
            
            
            13.502006:First
                quarter
            
            
            22.90
            
            
            17.41Second
                quarter
            
            
            20.54
            
            
            18.38Third
                quarter
            
            
            22.51
            
            
            18.08Fourth
                quarter
            
            
            23.50
            
            
            21.31Year
                end
            
            
            23.50
            
            
            17.412007:First
                quarter
            
            
            24.00
            
            
            20.86Second
                quarter (through April 18)
            
            
            24.10
            
            
            23.40Month
                ended:October
                31, 2006
            
            
            23.12
            
            
            21.31November
                30, 2006
            
            
            23.08
            
            
            21.72December
                31, 2006
            
            
            23.50
            
            
            21.55January
                31, 2007
            
            
            22.08
            
            
            20.86February
                28, 2007
            
            
            24.00
            
            
            21.42March
                31, 2007
            
            
            23.99
            
            
            22.65April
                30, 2007 (through April 18)
            
            
            24.10
            
            
            23.40




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




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




**9B.** **Plan
          of Distribution**




Not
      applicable.




**9C.** **Markets**




**Trading
      on the São Paulo Stock Exchange** ****




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




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




79




In
      order
      to better control volatility, the São Paulo Stock Exchange adopted a “circuit
      breaker” system pursuant to which trading sessions may be suspended for a period
      of 30 minutes or one hour whenever the indices of this stock exchange fall
      below
      the limit of 10% and 15%, respectively, in relation to the index registered
      in
      the previous trading session.




The
      São
      Paulo Stock Exchange is less liquid than the NYSE and other major exchanges
      in
      the world. The São Paulo Stock Exchange had an aggregate market capitalization
      of approximately R$ 1.5 trillion,
      equivalent to US$ 722.6 billion
      at December
      31, 2006. In
      comparison, the NYSE had a market capitalization of approximately
      US$ 25 trillion
      at the same date. Although any of the outstanding shares of a listed company
      may
      trade on the São Paulo Stock Exchange, in most cases less than one-half of the
      listed shares are actually available for trading by the public, the remainder
      being held by small groups of controlling persons, by governmental entities
      or
      by one principal shareholder. At April 18 ,
      200 7,
      we
      accounted for approximately 1 % of
      the
      market capitalization of all listed companies on the São Paulo Stock
      Exchange.




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




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




***Novo
      Mercado*** **Corporate Governance Practices**




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




To
      become
      a Level 1 ( *Nível* 1)
      company, in addition to the obligations imposed by current Brazilian law, an
      issuer must agree to (a) ensure that shares of the issuer representing 25%
      of
      its total capital are effectively available for trading, (b) adopt offering
      procedures that favor widespread ownership of shares whenever making a public
      offering, (c) comply with minimum quarterly disclosure standards, (d) follow
      stricter disclosure policies, including regarding contracts with related
      parties, material contracts and transactions made by controlling shareholders,
      directors and officers involving securities issued by the issuer, (e) submit
      any
      existing shareholders’ agreements and stock option plans to the São Paulo Stock
      Exchange, and (f) make a schedule of corporate events available to shareholders.




To
      become
      a Level 2 ( *Nível* 2)
      company, in addition to the obligations imposed by current Brazilian law, an
      issuer must agree to (a) comply with all of the listing requirements for
      Level 1 companies, (b) grant tag-along rights for all shareholders in
      connection with a transfer of control of the company, offering the same price
      paid per share for controlling block common shares and 80% of the price paid
      per
      share of controlling block preferred shares, (c) grant voting rights to
      holders of preferred shares in connection with certain corporate restructurings
      and related party transactions, such as (i) any transformation of the
      company into another corporate form, (ii) any merger, consolidation or
      spin-off of the company, (iii) approval of any transactions between the
      company and its controlling shareholder, including parties related to the
      controlling shareholder, (iv) approval of any valuation of assets to be
      delivered to the company in payment for shares issued in a capital increase,
      (v) appointment of an expert firm to ascertain the fair value of the
      company in connection with any deregistration and delisting tender offer, and
      (vi) any changes to these voting rights, (d) have a board of directors
      comprised of at least five members, of which 20% must be independent directors,
      with a term limited to two years, (e) prepare annual financial statements
      in English, including cash flow statements, in accordance with international
      accounting standards, such as U.S. GAAP or International Financial Reporting
      Standards, (f) if it elects to delist from the Level 2 segment, hold a
      tender offer by the company’s controlling shareholder (the minimum price of the
      shares to be offered will be determined by an appraisal process), and
      (g) adhere exclusively to the rules of the São Paulo Stock Exchange
      Arbitration Chamber for resolution of disputes between the company and its
      investors.




80




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




**Regulation
      of Brazilian Securities Markets** ****




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




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




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




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




**Disclosure
      Requirements**




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




These
      requirements include provisions that:




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




81


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





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





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





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





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





·
            restrict
                the use of insider information.





**9D.** **Selling
          Shareholders**




Not
      applicable.




**9E.** **Dilution**




Not
      applicable.




**9F.** **Expenses
          of the Issue**




Not
      applicable.




**ITEM
          10.** **ADDITIONAL
          INFORMATION**




**10A.** **Share
          Capital**




Not
      applicable.




**10B.** **Memorandum
          and Articles of Association**




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




**Corporate
      Purposes**




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




82




**Description
      of Capital Stock**




***General***




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




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




***Common
      Shares*** ******




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




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




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




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




·
            the
                right to participate in the distribution of
                profits;




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




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




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




83


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




***Golden
      Share*** ******




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




***Voting
      Rights*** ***of Shares***




***Common
      Shares***




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




*Limitations
      on the Voting Rights of Certain Holders of Common Shares*




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




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




·
            they
                are parties in a voting agreement;




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




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




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




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




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




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




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




84




*Limitation
      on the Voting Rights of Non-Brazilian Shareholders*




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




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




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




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




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





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





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





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




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




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




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




85




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





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




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




***Example
      1***




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




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





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




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




86




***Example
      2***




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




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





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




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




***Example
      3***




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




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





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




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




87




***Example
      4***




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




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





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




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




***Shareholders’
      Agreement*** **




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




***Golden
      Share***




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




·
            change
                of our name and corporate purpose;




·
            amendment
                and/or application of our logo;




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




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




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




·
            transfer
                of our control;




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




88


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




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




**Disclosure
      of Significant Interest**




*Brazilian
      Requirements*




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




*Certain
      U.S. Legal Requirements*




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




***Form
      and Transfer***




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




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




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




**Board
      of Directors** ****




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




89




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




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




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




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




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




**Election
      of Board of Directors**




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




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




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




**Preemptive
      Rights**




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




90




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




**Redemption
      and Right of Withdrawal**




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




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




·
            reduce
                the mandatory distribution of
                dividends;




·
            change
                our corporate purpose;




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




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




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




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




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




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




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




91




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




**Mechanism
      to Promote Dispersed Ownership of Our Shares**




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




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




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




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




where:




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




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




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




92


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




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




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




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




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




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




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




**Arbitration**




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




**Going
      Private Process** ****




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




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




93




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




**Delisting
      from the** ***Novo
      Mercado***




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




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




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




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




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




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




94




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




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




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




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




*Majority
      of Independent Directors*




The
      NYSE
      rules require that a majority of the board must consist of independent
      directors. Independence is defined by various criteria, including the absence
      of
      a material relationship between the director and the listed company, which
      independence must be affirmatively determined by the board of directors.
      Likewise, the *Novo
      Mercado* Regulations requires that at least 20% of the members of the board of directors
      of a company listed on the *Novo
      Mercado* segment
      of the São Paulo Stock Exchange be independent. Independence of board members in
      accordance with the *Novo
      Mercado* Regulations is defined by criteria similar to those set forth in the NYSE rules.
      However, under the *Novo
      Mercado* Regulations and Brazilian law, neither our Board of Directors nor our management
      is required to test the independence of directors before their election to
      the
      board.




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




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




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




95




*Executive
      Sessions*




NYSE
      rules require that the non-management directors must meet at regularly scheduled
      executive sessions without management. The Brazilian Corporate Law does not
      have
      a similar provision. According to the Brazilian Corporate Law, up to one-third
      of the members of the board of directors can be elected from management.
      Maurício Novis Botelho, our president and CEO, is a member of our transition
      Board of Directors. The remaining non-management directors are not expressly
      empowered to serve as a check on management and there is no requirement that
      those directors meet regularly without management. As a result, the
      non-management directors on our board do not typically meet in executive
      session.




*Nominating/Corporate
      Governance Committee*




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




*Compensation
      Committee*




NYSE
      rules require that listed companies have a Compensation Committee composed
      entirely of independent directors and governed by a written charter addressing
      the committee’s required purpose and detailing its required responsibilities,
      which include, among other things, reviewing corporate goals relevant to CEO
      compensation, evaluating CEO performance and approving CEO compensation levels
      and recommending to the board non-CEO compensation, incentive-compensation
      and
      equity-based plans. We are not required under applicable Brazilian law to have
      a
      Compensation Committee. Under the Brazilian Corporate Law, the total amount
      available for compensation of our directors and executive officers and for
      profit-sharing payments to our executive officers is established by our
      shareholders at the annual general meeting. The Board of Directors is then
      responsible for determining the individual compensation and profit sharing
      of
      each executive officer, as well as the compensation of our board and committee
      members. In making such determinations, the board reviews the performance of
      the
      executive officers, including the performance of our CEO. Maurício Novis
      Botelho, our CEO and member of our transition Board of Directors, typically
      excuses himself from discussions regarding his performance and compensation.




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




*Audit
      Committee*




NYSE
      rules require that listed companies have an audit committee that (i) is composed
      of a minimum of three independent directors who are all financially literate,
      (ii) meets the SEC rules regarding audit committees for listed companies, (iii)
      has at least one member who has accounting or financial management expertise
      and
      (iv) is governed by a written charter addressing the committee’s required
      purpose and detailing its required responsibilities. However, as a foreign
      private issuer, we need only to comply with the requirement that the audit
      committee, or audit board in our case, meet the SEC rules regarding audit
      committees for listed companies. The Brazilian Corporate Law requires companies
      to have a non-permanent Conselho Fiscal composed of three to five
      members who are
      elected at the general shareholders’ meeting. The Conselho Fiscal operates
      independently from management and from a company’s external auditors. Its main
      function is to monitor the activities of management, examine the financial
      statements of each fiscal year and provide a formal report to our shareholders.




96




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




*Shareholder
      Approval of Equity Compensation Plans*




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




*Corporate
      Governance Guidelines*




NYSE
      rules require that listed companies adopt and disclose corporate governance
      guidelines. In addition to being subject to the *Novo
      Mercado* Regulations that include rules on corporate governance, we have not adopted
      any
      formal corporate governance guidelines. We have adopted and observe a disclosure
      policy, our Policy on Publicizing Acts or Relevant Facts, which requires the
      public disclosure of all relevant information pursuant to guidelines set forth
      by the CVM, as well as an insider trading policy, our Policy on Securities
      Transactions, which, among other things, establishes black-out periods and
      requires insiders to inform management of all transactions involving our
      securities.




*Code
      of Business Conduct and Ethics*




NYSE
      rules require that listed companies adopt and disclose a code of business
      conduct and ethics for directors, officers and employees, and promptly disclose
      any waivers of the code for directors or executive officers. Applicable
      Brazilian law does not have a similar requirement. However, in April 2004,
      we
      adopted a Code of Ethics and Conduct applicable to our officers, directors
      and
      employees worldwide, including at the subsidiary level. We believe this code
      substantially addresses the matters required to be addressed pursuant to the
      NYSE rules. A copy of our Code of Ethics and Conduct has been filed as Exhibit
      11.1 to this annual report. For a further discussion of our Code of Ethics
      and
      Conduct, see “Item 16B. Code of Ethics.”




*Internal
      Audit Function*




NYSE
      rules require that listed companies maintain an internal audit function to
      provide management and the audit committee with ongoing assessments of the
      company’s risk management processes and system of internal control. Our internal
      audit function is the responsibility of our risk and internal controls office,
      under the supervision of the Chief Financial Officer, assuring the necessary
      independence and competence to assess the design of our internal control over
      financial reporting, as well as to test its effectiveness as required by Section
      404 of the Sarbanes-Oxley Act of 2002.




**Sarbanes
      Oxley Act of 2002**




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




97




**10C.** **Material
          Contracts**




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




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




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




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




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




**10D.** **Exchange
          Controls**




There
      are
      no restrictions on ownership of our common shares by individuals or legal
      entities domiciled outside Brazil. However, the right to convert dividend
      payments and proceeds from the sale of common shares into foreign currency
      and
      to remit such amounts outside Brazil is subject to restrictions under foreign
      investment legislation which generally requires, among other things, the
      registration of the relevant investment with the Central Bank.




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




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




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




98




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




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




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




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




**10E.** **Taxation** ****




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




Although
      there presently is no income tax treaty between Brazil and the United States,
      the tax authorities of the two countries have had discussions that may culminate
      in such a treaty. No assurance can be given, however, as to if or when a treaty
      will enter into force or how it will affect the U.S. holders of common shares
      or
      ADSs.


**Material
        Brazilian Tax Consequences**
  *General.* The
        following discussion summarizes the material Brazilian tax consequences of
        the
        acquisition, ownership and disposition of common shares or ADSs, as the case
        may
        be, by a holder that is not considered domiciled in Brazil, (“non-Brazilian
        holder”), for purposes of Brazilian taxation.
  *Taxation
        of Dividends.* Dividends,
        including stock dividends and other dividends paid in property, paid by us
        to
        the depositary in respect of the ADSs, or to a non-Brazilian holder in respect
        of the common shares, are currently not subject to income withholding tax,
        provided that they are paid out of profits generated as of January 1, 1996
        (or
        out of reserves derived therefrom). We do not have retained earnings generated
        prior to January 1, 1996 (or reserves out of such earnings).


99




*Taxation
        of Gains.* According
        to Law No. 10,833, enacted on December 29, 2003, the disposition of assets
        located in Brazil, by a non-Brazilian holder, whether to another non-Brazilian
        holder or to a Brazilian holder, may be subject to taxation in Brazil.
        Accordingly, on the disposition of the common shares, which are considered
        assets located in Brazil, the non-Brazilian holder may be subject to income
        tax
        on the gains assessed, following the rules described below, regardless of
        whether the transactions are conducted in Brazil or abroad and with a Brazilian
        resident or not. Regarding ADSs, although we believe that the ADSs do not
        fall
        within the definition of assets located in Brazil for the purposes of Law
        No.
        10,833/03, considering the general and unclear scope of this law and the
        lack of
        any judicial court rulings in respect thereto, we are unable to predict whether
        our belief will ultimately prevail in the courts of Brazil. Thus, the gain
        on
        disposition of ADSs by a non-Brazilian holder to a resident in Brazil (or
        even
        to non-Brazilian resident in case the argument above does not prevail) may
        be
        subject to income tax in Brazil according to the rules described below for
        ADSs
        or those applicable to the disposition of common shares, when
        applicable.
  As
        a
        general rule, gains assessed are the positive difference between the amount
        in *reais* realized
        on the sale or exchange of a security and its acquisition cost measured in *reais* (without
        correction for inflation).
  The
        deposit of common shares in exchange for ADSs may be subject to Brazilian
        income
        tax on capital gains at the rate of 15% or 25%, in case of a non-Brazilian
        holder located in a tax haven jurisdiction (as defined below), if the
        acquisition cost of the common shares is lower than (1) the average price
        per
        common share on a Brazilian stock exchange on which the greatest number of
        such
        shares were sold on the day of deposit or (2) if no common shares were sold
        on
        that day, the average price on the Brazilian stock exchange on which the
        greatest number of common shares were sold in the 15 trading sessions
        immediately preceding such deposit. In such case, the difference between
        the
        average price of the common shares, calculated as above and the corresponding
        acquisition cost, will be considered a capital gain. There are arguments
        to
        support that such taxation is not applicable in case of non-Brazilian holders
        registered under Resolution No. 2,689 (“2,689 holder”) that are not located in a
        tax haven country or jurisdiction, which
        is
        defined as the jurisdiction that does not impose any income tax or which
        imposes
        such tax at a maximum rate of less than 20%, or in which the domestic
        legislation imposes restrictions on the disclosure of the shareholders’
composition or the ownership of the investment (“tax haven holder”) . The
        withdrawal of ADSs in exchange for common shares is not subject to Brazilian
        tax
        as far as the regulatory rules in respect to the registration of the investment
        before the Brazilian Central Bank are duly observed.
  Gains
        assessed on the disposition of the common shares carried out on the Brazilian
        stock exchange (which includes the transactions carried out on the organized
        over-the-counter market):
  ·
            are
                exempt from income tax when assessed by a non-Brazilian holder that
                is a
                2,689 holder and is not a tax haven holder ;
                or  ·
            are
                subject to income tax at a rate of 15% in any other case, including
                the
                gains assessed by a non-Brazilian holder that (i) is not a 2,689
                holder;
                or (ii) is a 2,689 holder but a tax haven holder. In these cases,
                a
                withholding income tax of 0.005% on the sale value shall be applicable
                and
                can be offset with the eventual income tax due on the capital
                gain.




100


Any
        other
        gains assessed on the disposition of the common shares that are not carried
        out
        on Brazilian stock exchanges are subject to income tax at a rate of 15%,
        except
        for tax haven holders, which, in this case, are subject to income tax at
        a rate
        of 25%. In case the gains are related to transactions conducted on the Brazilian
        non-organized over-the-counter market with intermediation, the withholding
        income tax of 0.005% on the sale value shall also be applicable and can be
        offset with the eventual income tax due on the capital gain.
  In
        the
        case of redemption of or capital reduction with payment in common shares
        or
        ADSs, the positive difference in *reais* between
        the amount effectively received by the non-Brazilian holder and the acquisition
        cost of the securities redeemed or returned, is treated as capital gain derived
        from sale or exchange of common shares not carried out in a Brazilian stock
        exchange market and is therefore subject to income tax at the rate of 15%
        or
        25%, as the case may be.
  Any
        exercise of preemptive rights relating to the common shares will not be subject
        to Brazilian taxation. Any gain on the sale or assignment of preemptive rights
        relating to our common shares by the depositary on behalf of holders of our
        ADSs
        will be subject to Brazilian income taxation according to the same rules
        applicable to the sale or disposition of common shares.
  *Taxation
        on Interest on Shareholders’ Equity*. Any payment of interest on
        shareholders’ equity (see “Item 8A. Consolidated Statements and Other Financial
        Information—Dividends and Dividend Policy—History of Dividend Payments and
        Dividend Policy and Additional Payments on Shareholders’ Equity”) to
        non-Brazilian holders of ADSs or common shares, is subject to Brazilian
        withholding tax at the rate of 15% at the time Embraer records such liability,
        whether or not the effective payment has been made at that time. In the case
        of
        non-Brazilian residents that are tax haven holders, the applicable rate for
        income tax is 25%. The Brazilian Corporation Law establishes that a notional
        interest charge attributed to shareholders’ equity can either be accounted for
        as part of the mandatory dividend or not. In the event that the payment of
        such
        interest is accounted for as part of the mandatory dividend, we would be
        required to pay an additional amount to ensure that the net amount received
        by
        the shareholders, after the income tax, is at least equal to the minimum
        mandatory dividend. The distribution of interest attributed to shareholders’
equity would be proposed by our Board of Directors and subject to subsequent
        declaration by the shareholders at a general meeting.
  *Taxation
        on Foreign Exchange Transactions* (“ *IOF/Câmbio* ”) *.* Pursuant
        to Decree No. 4,494 of December 3, 2002, the conversion into Brazilian currency
        of proceeds received by a Brazilian entity from a foreign investment in the
        Brazilian securities market (including those in connection with an investment
        in
        common shares or the ADSs and those under Resolution No. 2,689) and the
        conversion into foreign currency of proceeds received by a non-Brazilian
        holder
        is subject to IOF/Câmbio, the rate of which is currently 0% for most cases.
        However, the Minister of Finance has the power to increase the IOF/Câmbio rate
        at any time to a maximum of 25%, but only in relation to future exchange
        transactions.
  *Taxation
        on Bonds and Securities Transactions* (“ *IOF/Títulos* ”) *.* IOF/Títulos
        may be imposed on any transactions involving bonds and securities, even if
        these
        transactions are performed on the Brazilian stock, futures or commodities
        exchange. As a general rule, the rate of this tax is currently 0% for
        transactions involving common shares and ADSs, although the executive branch
        may
        increase such rate up to 1.5% per day, but only with respect to future
        transactions.


101




*Other
        Brazilian Taxes.* There
        are
        no Brazilian inheritance, gift or succession taxes applicable to the ownership,
        transfer or disposition of common shares or ADSs by a non-Brazilian holder,
        except for gift and inheritance taxes which are levied by some states of
        Brazil
        on gifts made or inheritances bestowed by non-Brazilian holder to individuals
        or
        entities resident or domiciled within such state in Brazil. There are no
        Brazilian stamp, issue, registration, or similar taxes or duties payable
        by
        holders of common shares or ADSs.
  *Transactions
        on Bank Accounts.* As
        a
        general rule, the *Contribuição
        Provisória sobre Movimentação Financeira,* the tax
        on transactions on bank accounts, or CPMF, is imposed on any debit to bank
        accounts at a rate of 0.38%. Therefore, transactions by the depositary or
        by
        holders of common shares that involve the transfer of Brazilian currency
        through
        Brazilian financial institutions could be subject to the CPMF tax. Currently,
        the funds transferred to Brazil to acquire shares on Brazilian stock exchanges
        and the remittance abroad of the proceeds earned on the disposition of common
        shares in Brazil are exempted from the CPMF. In addition, the CPMF rate is
        reduced to zero on withdrawals from bank accounts used to buy common shares
        in a
        public offering, provided that (i) the public offering is registered with
        the
        CVM and (ii) the issuer is listed on a Brazilian stock exchange.


**Material
      U.S. Federal Income Tax Consequences** ****




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




102




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




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




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




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




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




*Distributions
      on Embraer Common Shares or ADSs*




Subject
      to the discussion below under “—Passive Foreign Investment Company Rules,” the
      gross amount of any distributions (including distributions of notional interest
      charges attributed to shareholders’ equity) paid to U.S. Holders of Embraer
      common shares or ADSs (including Brazilian withholding taxes imposed on such
      distributions) will be treated as a dividend under Section 301 of the Code,
      to
      the extent paid out of current or accumulated earnings and profits of Embraer
      and its predecessor as determined under U.S. federal income tax principles.
      Such
      a dividend will be includable in the gross income of a U.S. Holder as ordinary
      income on the date received by the U.S. Holder. To the extent that the amount
      of
      any distribution exceeds Embraer’s current and accumulated earnings and profits
      for a taxable year (as determined under U.S. federal income tax principles),
      the
      distribution will first be treated as a tax-free return of capital to the extent
      of a U.S. Holder’s adjusted tax basis in the Embraer common shares or ADSs, and
      thereafter as capital gain.




As
      used
      below, the term “dividend” means a distribution that constitutes a dividend for
      U.S. federal income tax purposes under Section 316 of the Code.




Dividends
      paid by Embraer will not be eligible for the dividends received deduction
      allowed to corporations under the Code.




103




The
      amount of any dividend paid in *reais* will
      equal the U.S. dollar value of the *reais* calculated by reference to the exchange rate in effect on the date the dividend
      is received by the U.S. Holder regardless of whether the *reais* are
      converted into U.S. dollars. If the *reais* received
      as a dividend are not converted into U.S. dollars on the date of receipt, a
      U.S.
      Holder will have a tax basis in the *reais* equal to
      their U.S. dollar value on the date of receipt. Any gain or loss realized on
      a
      subsequent conversion or other disposition of the *reais* will be
      treated as U.S. source ordinary income or loss for U.S. federal income tax
      purposes.




Pursuant
      to Section 901 of the Code, a U.S. Holder will be entitled, subject to a number
      of complex limitations and conditions (including those discussed in Section
      904
      of the Code), to claim a U.S. foreign tax credit in respect of any Brazilian
      withholding taxes imposed on dividends received on Embraer’s common shares or
      ADSs. U.S. Holders who do not elect to claim a credit for foreign taxes may
      instead claim a deduction in respect of such Brazilian withholding taxes (in
      accordance with Sections 164 and 275 of the Code). Dividends received with
      respect to the Embraer common shares or ADSs will be treated as foreign source
      income for U.S. federal income tax purposes, subject to various classifications
      and other limitations. The rules relating to computing foreign tax credits
      are
      complex, and U.S. Holders are urged to consult their own tax advisors regarding
      the availability of foreign tax credits with respect to any Brazilian
      withholding taxes in regards of dividends paid on Embraer’s common shares or
      ADSs.




Distributions
      of additional Embraer common shares to U.S. Holders with respect to their common
      shares or ADSs that are made as part of a *pro
      rata* distribution to all shareholders of Embraer generally will not be subject to
      U.S. federal income tax.




Subject
      to certain exceptions for short-term and hedged positions, the amount of
      dividends received by certain U.S. Holders (including individuals) prior to
      January 1, 2011 with respect to the Embraer common shares or ADSs will be
      subject to taxation at a maximum rate of 15% if the dividends represent
“qualified dividend income.” Dividends paid on the Embraer common shares or ADSs
      will be treated as qualified dividend income if (i) the Embraer common shares
      or
      ADSs are readily tradable on an established securities market in the United
      States and (ii) neither Embraer nor its predecessor was in the year prior to
      the
      year in which the dividend was paid, and is not in the year in which the
      dividend is paid, a passive foreign investment company or “PFIC”. Under current
      guidance issued by the IRS, the ADSs of Embraer should qualify as readily
      tradable on an established securities market in the United States so long as
      they are listed on the NYSE, but no assurances can be given that the Embraer
      ADSs will be or remain readily tradable under future guidance. In the case
      of
      Embraer common shares held directly by U.S. Holders and not underlying an ADS,
      it is not clear whether dividends paid with respect to such shares will
      represent “qualified dividend income.” U.S. Holders holding Embraer common
      shares directly and not through an ADS are urged to consult their own tax
      advisors.




Based
      on
      its audited financial statements as well as relevant market and shareholder
      data, Embraer believes that neither it nor its predecessor was a PFIC for United
      States federal income tax purposes with respect to its 2006 taxable year. In
      addition, based on Embraer’s audited or projected financial statements and
      current expectations regarding the value and nature of its assets, the sources
      and nature of its income, and relevant market and shareholder data, Embraer
      does
      not anticipate becoming a PFIC for its 2007 taxable year. However, because
      this
      determination is based on the nature of Embraer’s income and assets from time to
      time, involves the application of complex tax rules, and since Embraer’s view is
      not binding on the courts or the IRS, no assurances can be provided that Embraer
      (or its predecessor) will not be considered a PFIC for the current, or any
      past
      or future tax year. The potential application of the PFIC rules is further
      discussed below.




The
      U.S.
      Treasury has announced its intention to promulgate rules pursuant to which
      holders of ADSs and intermediaries through whom such securities are held will
      be
      permitted to rely on certifications from issuers to establish that dividends
      are
      treated as qualified dividends. Because such procedures have not yet been
      issued, it is not clear whether Embraer will be able to comply with them. U.S.
      Holders of Embraer common shares and ADSs should consult their own tax advisors
      regarding the availability of the reduced dividend tax rate in light of their
      own particular circumstances.




104




*Sale,
      Exchange or Other Taxable Disposition of Embraer Common Shares or
      ADSs*




Subject
      to the discussion below under “—Passive Foreign Investment Company Rules” for
      U.S. federal income tax purposes, a U.S. Holder will recognize taxable gain
      or
      loss on any sale, exchange or other taxable disposition of Embraer common shares
      or ADSs in an amount equal to the difference between the amount realized on
      the
      sale, exchange or other taxable disposition and the U.S. Holder’s adjusted tax
      basis (determined in United States dollars) in the Embraer common shares or
      ADSs. Such gain or loss will generally be capital gain or loss and will be
      long-term capital gain or loss if the Embraer common shares or ADSs have a
      holding period of more than one year. Certain U.S. Holders (including
      individuals) may be eligible for preferential rates of U.S. federal income
      tax
      in respect of long-term capital gains. The deductibility of capital losses
      is
      subject to limitations under the Code.




Any
      gain
      or loss recognized by a U.S. Holder from the sale, exchange or taxable
      disposition of Embraer common shares or ADSs generally will be gain or loss
      from
      U.S. sources for U.S. foreign tax credit purposes. Consequently, if a Brazilian
      withholding tax or capital gains tax is imposed pursuant to a sale of Embraer
      common shares or ADSs, U.S. Holders who do not have significant foreign source
      income might not be able to derive effective U.S. foreign tax credit benefit
      in
      respect of such Brazilian withholding tax or capital gains tax. The rules
      relating to foreign tax credits, including the amount of foreign income taxes
      that may be claimed as a credit in any given year, are complex and subject
      to
      limitations. You are urged to consult your own tax advisor regarding the
      application of the foreign tax credit rules to your particular
      circumstances.




*Passive
      Foreign Investment Company Rules*




If,
      during any taxable year of a non-U.S. corporation, 75% or more of the
      corporation’s gross income consists of certain types of “passive” income, or the
      average value during a taxable year of the “passive assets” of the corporation
      (generally assets that generate passive income) is 50% or more of the average
      value of all the corporation’s assets, the corporation will be treated as a PFIC
      under U.S. federal income tax law. If a corporation is treated as a PFIC, a
      U.S.
      Holder may be subject to increased tax liability upon the sale of its stock,
      or
      upon the receipt of certain dividends, unless such U.S. Holder makes an election
      to be taxed currently on its *pro
      rata* portion
      of the corporation’s income, whether or not such income is distributed in the
      form of dividends, or otherwise makes a “mark-to-market” election with respect
      to the corporation’s stock as permitted by the Code. In addition, as discussed
      above, a U.S. Holder would not be entitled to (if otherwise eligible for) the
      preferential reduced rate of tax payable on certain dividend income. As stated
      above, although no assurances can be given, based on Embraer’s operations,
      projections and business plans and the other items discussed above, Embraer
      does
      not believe that it (or its predecessor) was or currently is a PFIC, and does
      not expect to become a PFIC for its 2007 taxable year.




Any
      U.S.
      Holder who owns Embraer common shares or ADSs during any taxable year that
      Embraer is a PFIC would be required to file IRS Form 8621. U.S. Holders are
      urged to consult their own tax advisors regarding the potential application
      of
      the PFIC rules to the common shares or ADSs and the availability and
      advisability of making an election to avoid the adverse tax consequences of
      the
      PFIC rules should Embraer be considered a PFIC for any taxable
      year.




*Information
      Reporting and Backup Withholding*




In
      general, payments of dividends on Embraer common shares or ADSs, and payments
      of
      the proceeds of sale, exchange or other disposition of Embraer common shares
      or
      ADSs, paid within the United States or through certain United States-related
      financial intermediaries to a U.S. Holder may be subject to information
      reporting and backup withholding at a current maximum rate of 28% unless the
      U.S. Holder (i) is a corporation or other exempt recipient or (ii) in the case
      of backup withholding, provides an accurate taxpayer identification number
      and
      certifies that no loss of exemption from backup withholding has occurred. Backup
      withholding is not an additional tax. The amount of any backup withholding
      from
      a payment to a U.S. Holder will be allowed as a refund or a credit against
      the
      U.S. Holder’s U.S. federal income tax liability provided the required
      information is timely provided to the IRS.




**10F.** **Dividends
          and Paying Agents**




Not
      applicable.




105




**10G.** **Statements
          by Experts**




Not
      applicable.




**10H.** **Documents
          on Display**




We
      are
      subject to the periodic reporting and other informational requirements of the
      Exchange Act. Accordingly, we are required to file reports and other information
      with the U.S. Securities and Exchange Commission, or the SEC. You may inspect
      and obtain copies, at prescribed rates, of reports and other information filed
      by us with the SEC at its Public Reference Room maintained at 100 F Street,
      N.E., Washington, D.C. 20549. You may obtain information on the operation of
      the
      Public Reference Room by calling the SEC in the United States at 1-800-SEC-0330.
      You may also inspect and copy this material at the offices of the New York
      Stock
      Exchange, Inc., 20 Broad Street, New York, New York 10005.




We
      file
      our annual report on Form 20-F, including our financial statements, and other
      reports, including our reports on Form 6-K, electronically with the SEC. These
      filings are available at www.sec.gov. We also file financial statements and
      other periodic reports electronically with the CVM at its website,
      www.cvm.gov.br. Copies of our annual reports on Form 20-F and documents referred
      to in this annual report and our bylaws will be available for inspection upon
      request at our headquarters at Av. Brigadeiro Faria Lima, 2170, 12227-901 São
      José dos Campos, São Paulo, Brazil.




**10I.** **Subsidiary
          Information**




Not
      required.


106




**ITEM
          11.** **QUANTITATIVE
          AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**




We
      are
      exposed to various market risks, primarily related to potential loss arising
      from adverse changes in interest rates and foreign currency exchange rates.
      We
      have established policies and procedures to manage sensitivity to interest
      rate
      and foreign currency exchange rate risk. These procedures include the monitoring
      of our levels of exposure to each market risk, including an analysis based
      on
      forecast of future cash flows, the funding of variable rate assets with variable
      rate liabilities, and limiting the amount of fixed rate assets which may be
      funded with floating rate liabilities. We may also use derivative financial
      instruments to mitigate the effects of interest rate fluctuations and to reduce
      our exposure to exchange rate risk. The following sections address the
      significant market risks associated with our financial activities.




**Interest
      Rate Risk**




Our
      exposure to market risk for interest rate fluctuations principally relates
      to
      changes in the market interest rates of our U.S. dollar-denominated and *real* -denominated
      monetary liabilities, principally our short- and long-term debt obligations.
      Increases and decreases in prevailing interest rates generally translate into
      increases and decreases in interest expense. Additionally, the fair values
      of
      interest rate-sensitive instruments are also affected by general market
      conditions.




Our
      short- and long-term debt obligations totaled US$1,349.2 million at December
      31,
      2006 and were denominated in U.S. dollars, Brazilian *reais* and
      Euro. Of the total amount of debt denominated in U.S. dollars, US$1,017.1
      million, approximately US$762.0 million was fixed rate. The remaining floating
      rate U.S. dollar-denominated debt was indexed to six-month LIBOR. Of the
      US$298.2 of our Brazilian *reais* -denominated
      debt at December 31, 2006, US$291.9 million bears interest at a variable rate
      based on the TJLP, the long-term interest rate in Brazil. The TJLP was 6.85%
      per
      annum at December 31, 2006. We also maintain subsidiary lines of credit in
      an
      amount of US$6.3 million, which bear interest at a variable rate of 115% of
      the
      CDI, the interbank deposit rate in Brazil. Our Euro-denominated debt, totaling
      US$33.9 million, of which US$20.6 million was fixed rate and US$13.3
      million was indexed to a variable rate based on the Euribor .




The
      table
      below provides information about our short- and long-term debt obligations
      as of
      December 31, 2006 that are sensitive to changes in interest rates and foreign
      currency exchange rates.


**Outstanding
                  Amount By Year of Maturity****Weighted
                  Average Interest****Rate 2006**
              
              **Total
                  Outstanding****Amount**
              
              **2007**
              
              **2008**
              
              **2009**
              
              **20010**
              
              **2011**
              
              **2012**
              
              **Thereafter**
              
              **Total
                  Fair Value****Short
                  Term Debt**
              
              
              
              
              
              (in
                  thousands, except percentages)U.S.
                  dollars (LIBOR indexed)
              
              
              8.10
              %
              
              US$49,491
              
              
              US$49,491
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              US$67,984U.S.
                  dollars (fixed rate)
              
              
              6.25
              %
              
              164,396
              
              
              164,396
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              185,113*Reais*
                  (TJLP indexed)
              
              
              8.89
              %
              
              262,088
              
              
              262,088
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              304,921*Reais*
                  (CDI indexed)
              
              
              12.61
              %
              
              6,327
              
              
              6,327
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              6,514Euro
                  (fixed rate)
              
              
              3.97
              %
              
              20,593
              
              
              20,593
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              20,511Euro
                  (EURIBOR indexed)
              
              
              4.63
              %
              
              152
              
              
              152
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,186Total
                  short-term debt
              
              
              
              
              
              **US**$**503,047**
              
              
              **US**$**503,047**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **-**
              
              
              **US**$**587,229****Long
                  Term Debt**U.S.
                  dollars (LIBOR indexed)
              
              
              8.10
              %
              
              US$205,624
              
              
              -
              
              
              US$47,362
              
              
              US$42,544
              
              
              US$34,049
              
              
              US$25,555
              
              
              US$25,555
              
              
              US$30,559
              
              
              US$204,648U.S.
                  dollars (fixed rate)
              
              
              6.25
              %
              
              597,512
              
              
              -
              
              
              97,041
              
              
              20,352
              
              
              50,000
              
              
              119
              
              
              -
              
              
              430,000
              
              
              584,944*Reais*
                  (TJLP indexed)
              
              
              8.89
              %
              
              29,798
              
              
              -
              
              
              4,495
              
              
              6,468
              
              
              5,811
              
              
              5,287
              
              
              3,891
              
              
              3,846
              
              
              29,037*Reais*
                  (CDI indexed)
              
              
              12.61
              %
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Euro
                  (fixed rate)
              
              
              3.97
              %
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Euro
                  (EURIBOR indexed)
              
              
              4.63
              %
              
              13,170
              
              
              **-**
              
              
              5,670
              
              
              2,500
              
              
              2,500
              
              
              2,500
              
              
              -
              
              
              -
              
              
              10,974Total
                  long-term debt
              
              
              
              
              
              **US****$**846,104
              
              
              **-**
              
              
              **154,568**
              
              
              **71,864**
              
              
              **92,360**
              
              
              **33,461**
              
              
              **29,446**
              
              
              **464,405**
              
              
              **US****$**829,603**Total
                  debt**
              
              
              
              
              
              **US**$**1,349,151**
              
              
              **US**$**503,047**
              
              
              **US**$**154,568**
              
              
              **US**$**71,864**
              
              
              **US**$**92,360**
              
              
              **US**$**33,461**
              
              
              **US**$**29,446**
              
              
              **US**$**464,405**
              
              
              **US**$**1,416,832**




107




In
      order
      to manage our interest rate risk on our monetary liabilities, we have entered
      into a number of swaps, which effectively convert US$242.7 million of our
      floating interest rate U.S. dollar-denominated debt into U.S. dollar fixed
      interest rate denominated obligations. In addition, as of December 31, 2006,
      we
      had effectively converted US$19.6 million of our U.S. dollar fixed interest
      rate
      debt into CDI-based *reais* denominated obligations. These swaps did not affect the maturity or amortization
      schedule of our existing debt.




These
      swaps are not accounted for as hedging transactions under U.S. GAAP.
      Nevertheless, these swaps are recorded at fair value on our balance sheet,
      and
      we recognized an unrealized loss of US$11.3 million as of December 31, 2006
      as
      part of interest income (expense), net. For further information about the terms
      of these swap transactions, including notional amount, maturity date and fair
      value gains and losses, see Note 31 to our consolidated financial statements.




We
      do not
      currently have any derivative instruments that limit our exposure to changes
      in
      the TJLP because we believe that our total exposure, combined with the
      relatively low volatility of the TJLP, is unlikely to have a material effect
      on
      our company.




The
      table
      below provides information about our short- and long-term debt obligations
      as of
      December 31, 2006, after considering the effects of the above mentioned
      derivative transactions.




**Outstanding
                Amount By Year of Maturity****Weighted
                Average Interest****Rate 2006**
            
            **Total
                Outstanding****Amount**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **2012**
            
            **Thereafter**
            
            **Total
                Fair Value****Short
                Term Debt**
            
            
            
            
            
            (in
                thousands, except percentages)U.S.
                dollars (LIBOR indexed)
            
            
            8.03
            %
            
            US$12,396
            
            
            US$12,396
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$12,370U.S.
                dollars (fixed rate)
            
            
            6.53
            %
            
            186,537
            
            
            186,537
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            226,915*Reais*
                (TJLP indexed)
            
            
            8.89
            %
            
            262,089
            
            
            262,089
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            304,921*Reais*
                (CDI indexed)
            
            
            10.87
            %
            
            21,280
            
            
            21,280
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,326Euro
                (fixed rate)
            
            
            3.97
            %
            
            20,593
            
            
            20,593
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            20,511Euro
                (EURIBOR indexed)
            
            
            4.63
            %
            
            152
            
            
            152
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,186Total
                short-term debt
            
            
            
            
            
            **US$503,047**
            
            
            **US$503,047**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **-**
            
            
            **US$587,229****Long
                Term Debt**U.S.
                dollars (LIBOR indexed)
            
            
            8.03
            %
            
            US$50
            
            
            -
            
            
            US$50
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$175U.S.
                dollars (fixed rate)
            
            
            6.53
            %
            
            798,486
            
            
            -
            
            
            139,753
            
            
            62,895
            
            
            84,049
            
            
            25,674
            
            
            25,555
            
            
            460,560
            
            
            783,835*Reais*
                (TJLP indexed)
            
            
            8.89
            %
            
            29,798
            
            
            -
            
            
            4,495
            
            
            6,469
            
            
            5,811
            
            
            5,287
            
            
            3,891
            
            
            3,845
            
            
            29,037*Reais*
                (CDI indexed)
            
            
            10.87
            %
            
            4,600
            
            
            -
            
            
            4,600
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,582Euro
                (fixed rate)
            
            
            3.97
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Euro
                (EURIBOR indexed)
            
            
            4.63
            %
            
            13,170
            
            
            **-**
            
            
            5,670
            
            
            2,500
            
            
            2,500
            
            
            2,500
            
            
            -
            
            
            -
            
            
            10,974Total
                long-term debt
            
            
            
            
            
            **US**$**846,104**
            
            
            **-**
            
            
            **154,568**
            
            
            **71,864**
            
            
            **92,360**
            
            
            **33,461**
            
            
            **29,446**
            
            
            **464,405**
            
            
            **US**$**829,603****Total
                debt**
            
            
            
            
            
            **US**$**1,349,151**
            
            
            **US**$**503,047**
            
            
            **US**$**154,568**
            
            
            **US**$**71,864**
            
            
            **US**$**92,360**
            
            
            **US**$**33,461**
            
            
            **US**$**29,446**
            
            
            **US**$**464,405**
            
            
            **US**$**1,416,832**




**Foreign
      Currency Risk**




In
      managing our foreign currency risk, we focus on balancing our non-U.S.
      dollar-denominated assets against our non-U.S. dollar-denominated liabilities
      plus shareholders’ equity in relation to our forecasts of future cash flows.
      Beyond the foreign currency exposure related to our debt obligations as
      summarized above, we also have other assets and liabilities denominated in
      currencies other than the U.S. dollar. These monetary assets and liabilities
      are
      primarily cash and cash equivalents, accounts receivable and payable, deferred
      income taxes, dividends and certain other assets and liabilities and are
      primarily denominated in Brazilian *reais* .
      The
      effects on such assets and liabilities of the appreciation or devaluation of
      other foreign currencies against the U.S. dollar result in foreign exchange
      gains (losses) recognized on our income statement as interest income (expense),
      net.




108




The
      table
      below provides information about our assets and liabilities exposed to foreign
      currency risk as of December 31, 2006 as well as the derivative transactions
      outstanding at the same date:




**Total**
            
            **Outstanding
                Amount by Year of Maturity****Outstanding****Amount**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**
            
            **Total
                Fair Value****ASSETS*****Cash
                and cash equivalents***In
                *reais*
            
            
            US$343,442
            
            
            US$343,442
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$343,442In
                Euro
            
            
            19,136
            
            
            19,136
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            19,136In
                Chinese Yuan
            
            
            33,590
            
            
            33,590
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            33,590***Investments
                and temporary cash investments***In
                *reais*
            
            
            555,795
            
            
            555,795
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            555,795***Trade
                accounts receivable***In
                *Rreais*
            
            
            33,267
            
            
            33,267
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            33,267In
                Euro
            
            
            65,927
            
            
            65,927
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            65,927***Deferred
                income tax assets***In
                *reais*
            
            
            252,857
            
            
            107,304
            
            
            89,343
            
            
            24,756
            
            
            10,117
            
            
            8,469
            
            
            12,869
            
            
            252,857In
                Euro
            
            
            11,932
            
            
            11,932
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            11,932***Other
                assets***In
                *reais*
            
            
            56,765
            
            
            42,611
            
            
            14,154
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            56,765In
                Euro
            
            
            23,596
            
            
            8,430
            
            
            15,166
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            23,596In
                CNY
            
            
            8,734
            
            
            8,734
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,734**Total
                Assets in*****reais*******
            
            
            US$1,242,126
            
            
            US$1,082,419
            
            
            US$103,496
            
            
            US$24,756
            
            
            US$10,117
            
            
            US$8,469
            
            
            US$12,869
            
            
            US$1,242,126**Total
                Assets in Euro**
            
            
            US$120,590
            
            
            US$105,424
            
            
            15,166
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$120,590**Total
                Assets in Chinese Yuan**
            
            
            US$42,323
            
            
            US$42,323
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$42,323**LIABILITIES**LoansIn
                *reais*
            
            
            US$298,213
            
            
            US$268,415
            
            
            US$4,495
            
            
            US$6,468
            
            
            US$5,811
            
            
            US$5,287
            
            
            US$7,735
            
            
            US$340,472In
                Euro
            
            
            33,915
            
            
            20,745
            
            
            5,670
            
            
            2,500
            
            
            2,500
            
            
            2,500
            
            
            -
            
            
            33,671In
                Japanese Yen
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -***Accounts
                payable to suppliers***
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -In
                *reais*
            
            
            57,637
            
            
            57,637
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            57,637In
                Euro
            
            
            37,812
            
            
            37,812
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            37,812***Customer
                advances***
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -In
                *reais*
            
            
            22,171
            
            
            22,171
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            22,171***Other
                accounts payable & accrued liabilities***
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -In
                *reais*
            
            
            129,965
            
            
            129,077
            
            
            888
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            129,965In
                Euro
            
            
            35,263
            
            
            27,575
            
            
            7,688
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            35,263In
                CNY
            
            
            5,789
            
            
            5,789
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,789***Taxes
                and payroll charges payable***
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -In
                *reais*
            
            
            575,975
            
            
            244,424
            
            
            203,511
            
            
            56,392
            
            
            23,045
            
            
            19,290
            
            
            29,313
            
            
            575,975In
                Euro
            
            
            5,238
            
            
            5,238
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            5,238In
                Chinese Yuan
            
            
            8,442
            
            
            8,442
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            8,442***Accrued
                taxes on income***
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            -In
                r*eais*
            
            
            192
            
            
            192
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            192In
                Euro
            
            
            3,341
            
            
            3,341
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            3,341***Deferred
                income tax liabilities***In
                *reais*
            
            
            208,517
            
            
            24,079
            
            
            29,381
            
            
            31,084
            
            
            30,081
            
            
            30,438
            
            
            63,454
            
            
            208,517In
                Euro***Accrued
                dividends***In
                *reais*
            
            
            35,555
            
            
            35,555
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            35,555***Contingencies***In
                *reais*
            
            
            48,955
            
            
            20,775
            
            
            17,297
            
            
            4,793
            
            
            1,959
            
            
            1,640
            
            
            2,491
            
            
            48,955In
                Euro
            
            
            15,589
            
            
            15,024
            
            
            565
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            15,589-**Total
                liabilities in*****reais***
            
            
            US$1,377,180
            
            
            US$802,326
            
            
            US$255,572
            
            
            US$98,736
            
            
            US$60,896
            
            
            US$56,655
            
            
            US$102,994
            
            
            US$1,419,439**Total
                liabilities in Euro**
            
            
            US$131,158
            
            
            US$109,735
            
            
            US$13,923
            
            
            US$2,500
            
            
            US$2,500
            
            
            US$2,500
            
            
            -
            
            
            US$130,914**Total
                liabilities in Japanese Yen**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Total
                liabilities in Chinese Yuan**
            
            
            US$14,231
            
            
            US$14,231
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$14,231**Total
                exposure in*****reais***
            
            
            US$(135,055
            )
            
            US$280,093
            
            
            US$(152,075
            )
            
            US$(73,980
            )
            
            US$(50,779
            )
            
            US$(48,187
            )
            
            US$(90,125
            )
            
            US$(177,314
            )**Total
                exposure in Euro**
            
            
            US$(10,568
            )
            
            US$(4,311
            )
            
            US$1,243
            
            
            US$(2,500
            )
            
            US$(2,500
            )
            
            US$(2,500
            )
            
            -
            
            
            US$(10,324
            )**Total
                exposure in Japanese Yen**
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Total
                exposure in Chinese Yuan**
            
            
            US$28,092
            
            
            US$28,092
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$28,092





109




**Total**
            
            **Outstanding
                Amount by Year of Maturity****Outstanding****Amount**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **2011**
            
            **Thereafter**
            
            **Total
                Fair Value****DERIVATIVE
                INSTRUMENTS***Cross-currency
                interest rate swap contracts (US$Floating v. US$Fixed)*Notional
                amount
            
            
            US$239,371
            
            
            US$38,566
            
            
            US$42,544
            
            
            US$42,544
            
            
            US$34,049
            
            
            US$25,555
            
            
            US$56,114
            
            
            US$2,937Average
                interest paid in US$
            
            
            7.36
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Average
                interest received in US$
            
            
            Libor
                + 2.68
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -*Cross-currency
                interest rate swap contracts (US$v. R$)*Notional
                amount
            
            
            US$16,434
            
            
            US$11,646
            
            
            US$4,788
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$(15,236
            )Average
                interest paid in *eais*
            
            
            58.61%
                of CDI
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Average
                interest received in US$
            
            
            5.14
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -*Dual-currency
                interest rate swap contracts CDI v. the greater than exchange variation
                or
                CDI)*Notional
                amount
            
            
            US$6,289
            
            
            US$6,289
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            US$7Average
                interest paid in US$
            
            
            9.88
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Average
                interest received in JPY
            
            
            15.29
            %
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -**Net
                exposure of assets/liabilities**-
                In
                *reais*
            
            
            US$(157,778
            )
            
            US$262,158
            
            
            US$(156,863
            )
            
            US$(73,980
            )
            
            US$(50,779
            )
            
            US$(48,187
            )
            
            US$(90,125
            )
            
            --
                In
                Euro
            
            
            US$(10,568
            )
            
            US$(4,311
            )
            
            US$1,243
            
            
            US$(2,500
            )
            
            US$(2,500
            )
            
            US$(2,500
            )
            
            -
            
            
            --
                In
                Japanese Yen
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            --
                In
                Chinese Yuan
            
            
            US$28,092
            
            
            US$28,092
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -




**ITEM
          12.** **DESCRIPTION
          OF SECURITIES OTHER THAN EQUITY SECURITIES**




Not
      applicable.




**PART
      II**




**ITEM
          13.** **DEFAULTS,
          DIVIDEND ARREARAGES AND DELINQUENCIES**




No
      matters to report.




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




**Material
      Modifications to the Rights of Security Holders**




Set
      forth
      below is a summary of the modifications of the rights of the holders of former
      Embraer common and preferred shares as a result of the share exchange resulting
      from the merger of former Embraer with and into Embraer approved on March 31,
      2006. As a result of the merger, former Embraer ceased to exist and (1) each
      common share of former Embraer was exchanged for one common share of Embraer,
      (2) each preferred share of former Embraer was exchanged for one common share
      of
      Embraer, (3) each ADS of former Embraer, each of which represented four
      preferred shares of former Embraer was exchanged for one ADS of Embraer, each
      of
      which represents four common shares of Embraer, and (4) the golden share, a
      special class of common share of former Embraer held by the Federative Republic
      of Brazil, was exchanged for a special class of common share of
      Embraer.




This
      summary lists certain of the material differences but is not meant to be relied
      upon as an exhaustive list of the differences between the former Embraer common
      and preferred shares, and our common shares or a detailed description of the
      provisions discussed, and is qualified in its entirety by reference to the
      former Embraer bylaws, our bylaws, the Brazilian Corporate Law, the rules and
      regulations of the CVM, and the *Novo
      Mercado* Regulations.




110




***Comparison
      of Rights of Holders of Former Embraer Common Shares and Embraer Common
      Shares***




**Rights
                of Holders of Former Embraer**
              **Common
                Shares**
            
            **Rights
                of Holders of Embraer**
              **Common
                Shares**Voting
            
            Each
                former Embraer common share entitled its holder to one vote in the
                resolutions of a general meeting.
              
              Certain
                resolutions and acts of the shareholders and management of former
                Embraer
                were subject to the veto of theBrazilian
                Government, as holder of the Golden Share.
            
            Each
                of our common shares entitles its holder to one vote in the resolutions
                of
                a general meeting.
              
              In
                the resolutions of the general meeting: (1) no shareholder or group
                of
                shareholders, whether Brazilian or non-Brazilian, including brokers
                acting
                on behalf of one or more holders of ADSs, may exercise voting rights
                representing more than 5% of the number of shares into which the
                capital
                stock is divided; and (2) non-Brazilian shareholders and groups of
                non-Brazilian shareholders may not exercise voting rights representing
                more than 2⁄3 of the total of the votes conferred on the entirety of
                Brazilian shareholders present.
              
              Certain
                resolutions and acts of our shareholders and management will be subject
                to
                the veto of the Brazilian Government, as holder of the Golden
                Share.Maximum
                Shareholder Votes
            
            None.
            
            No
                shareholder or group of shareholders, whether Brazilian or non-Brazilian,
                may exercise voting rights representing more than 5% of our total
                capital
                stock.Non-Brazilian
                Shareholder Voting
            
            Ownership
                of former Embraer common shares by non-Brazilians was limited to
                40% of
                all former Embraer common shares. Non-Brazilian shareholders holding
                former Embraer common shares, within the 40% limitation, had full
                voting
                rights.
            
            Non-Brazilian
                shareholders and groups of non-Brazilian shareholders may not exercise
                voting rights representing more than 2⁄3 of the total of the votes conferred
                on the entirety of Brazilian shareholders present at the general
                meeting
                of our shareholders.Dividends
            
            Shareholders
                were entitled to receive, in each fiscal year, a mandatory dividend
                corresponding to a percentage equivalent to 25% of the net income
                for the
                fiscal year, subject to certain adjustments.
            
            Shareholders
                are entitled to receive, in each fiscal year, a mandatory dividend
                corresponding to a percentage equivalent to 25% of the net income
                for the
                fiscal year, subject to certain adjustments.Number
                of Directors; Qualifications
            
            The
                Board of Directors consisted of at least nine and no more than 18
                directors and their respective alternates, all of whom had to be
                shareholders.
            
            The
                Board of Directors consists of 11 members and their respective alternates,
                all of whom must be shareholders.Term
                of Directors
            
            The
                directors were elected at a general meeting for a term of three years,
                reelection being permitted.
            
            The
                transition Board of Directors has a term of office of three years,
                until
                the annual general meeting in 2009 that approves the financial statements
                for the fiscal year ended December 31, 2008. After such meeting,
                the term
                of office of the Board of Directors will be for two years, reelection
                being allowed.Removal
                of Directors and Filling of Vacancies
            
            In
                the event of impairment or a vacancy in the office of a member of
                the
                Board of Directors, his alternate assumed office until such impairment
                ceased or, in the event of avacancy,
                until the first general meeting subsequent thereto was held, which
                general
                meeting established a definitivealternatefor the remaining term of office. In case of simultaneous or successive
                vacancies in the offices of an effective director and his respectivealternate,
                the Board of Directors convened a general meeting to fill such
                offices.
            
            As
                already provided by the Brazilian Corporate Law and, therefore, applicable
                to holders of our common shares, whenever the election is conducted
                under
                the cumulative voting process, the dismissal of any member of the
                Board of
                Directors at a general meeting will immediately result in the dismissal
                of
                all the other members, thus requiring a new election; in other cases
                of
                vacancy, if there is no alternate, the entire Board of Directors
                will
                stand for election at the next general meeting.
              
              Any
                vacant offices that have not been filled, due to a tie, will be subject
                to
                a new voting, under the same process, after adjustment is made to
                the
                number of votes entitled to each shareholder based on the number
                of seats
                to be filled.Election
                of Directors
            
            In
                the election of the directors, the general meeting first established,
                by a
                majority vote, the number of directors to be elected that were not
                otherwise allocated as representatives of a certain person or group.
                If
                the process of cumulative voting had not been requested, the general
                meeting voted by means of a candidates roll previously registered
                with the
                presiding board, which candidates roll assured the shareholders that
                held,
                whether individually or in block, 20% or more of the former Embraer
                common
                shares had the right to appoint two effective directors and their
                respective alternates.
            
            Unless
                a 5% shareholder invokes the cumulative voting provision, the election
                of
                directors will be conducted under a system of slate voting, whereby
                voting
                on individual candidates will not be allowed; provided, however,
                that any
                shareholder who wishes to do so must appoint candidates at least
                ten days
                prior to the general meeting of shareholders at which the members
                of the
                Board of Directors will be elected.
              
              As
                already provided by the Brazilian Corporate Law and, therefore, applicable
                to holders of our common shares, shareholders representing at least
                5% of
                the corporate capital may request the election of directors by cumulative
                voting if notice is given to the company no later than 48 hours prior
                to
                the date for which the general meeting has been called.
              
              Each
                shareholder will have the right to cumulate their votes for one candidate
                and the respective alternate, or to distribute them among several
                candidates. The candidate(s) and respective alternate(s) that receive
                the
                higher number of votes will be declared
                elected.




111
 
 **Rights
                    of Holders of Former Embraer**
                  **Common
                    Shares**
                
                **Rights
                    of Holders of Embraer**
                  **Common
                    Shares**


Quorum
                of Shareholders for a General Meeting
            
            The
                quorum for convening a general meeting on first call was the presence
                of
                shareholders representing at least 25% of the voting capital; on
                second
                call, it was convened with the presence of any number of
                shares.
            
            The
                quorum for convening a general meeting on first call is the presence
                of
                shareholders representing at least 35% of the capital stock, except
                if the
                law requires a higher quorum; and on second call is the presence
                of
                shareholders representing at least 25% of the capital stock; and,
                on third
                call, the presence of any number of shareholders.Notice
                of Shareholders’ Meetings
            
            The
                first call of a general meeting was made 15 days in advance, and
                the
                second call was eight days in advance of the general
                meeting.
            
            A
                general meeting is called by the Board of Directors or, as provided
                by
                law, by shareholders or by the Conselho Fiscal, the first call being
                published at least 30 days in advance of the general meeting counting
                from
                the date of the first publication of the notice; if the meeting is
                not
                held because of a lack of quorum, a notice of second call will be
                published at least 15 days in advance of the general meeting; and,
                if
                again the meeting is not held, the third call will be published at
                least
                eight days in advance of the general meeting.Compulsory
                Acquisition of a Majority Shareholder
            
            None.
            
            Any
                shareholder or group of shareholders that acquires or becomes the
                holder,
                for any reason of: (i) 35% or more or the total shares issued by
                us; or
                (ii) of other rights, including beneficial ownership and trust, over
                shares issued by us that represent more than 35% of our capital,
                or an
                Acquiring Shareholder, will submit to the Brazilian Government, as
                holder
                of the Golden Share, through the Brazilian Ministry of Finance, a
                request
                to make a public tender offer for acquisition of all shares issued
                by us.
                If the request is denied, the Acquiring Shareholder, within a period
                of 30
                days as of communication of the denial, must sell all of the shares
                that
                exceed the 35% limit. During the period between the request to make
                the
                public tender offer and the reply from the Brazilian Government,
                the
                Acquiring Shareholder may not acquire or sell any shares or convertible
                securities issued by us.
              
              The
                price to be paid for each of our common shares in the public tender
                offer
                must be equal to or greater than the amount obtained by the following
                formula:
              
              “Acquisition
                Price” = Value of the Share + 50% Premium
              
              “Value
                of the Share” = the greater value between: (i) the highest unit
                quotation of the shares issued by us during the 12-month period prior
                to
                conducting the public tender offer recorded on any stock exchange
                in which
                the shares were traded; (ii) the highest price paid by the Acquiring
                Shareholder during the 36-month period prior to the public tender
                offer
                for a share or tranche of shares issued by us; (iii) the amount
                equivalent to 14.5 times our consolidated average EBITDA (determined
                in
                accordance with the bylaws), reduced by our net consolidated indebtedness,
                divided by the total number of shares issued; and (iv) the amount
                equivalent to 0.6 times the amount of our firm backlog orders, according
                to the last information disclosed by us, reduced by our net consolidated
                indebtedness, divided by the total number of shares issued by
                us.





112




***Comparison
      of Rights of Holders of Former Embraer Preferred Shares and Embraer Common
      Shares***




Below
      is
      a summary comparison of the material changes in the rights that resulted from
      holders of former Embraer preferred shares becoming holders of Embraer common
      shares.




**Rights
                of Holders of Former Embraer**
              **Preferred
                Shares**
            
            **Rights
                of Holders of Embraer**
              **Common
                Shares**Voting
            
            Preferred
                shares were not entitled to vote at a general meeting. Preferred
                shareholders could attend a general meeting and take part in the
                discussion of matters presented at the meeting.
            
            Each
                of our common shares entitles its holder to one vote in the resolutions
                of
                a general meeting.
              
              In
                the resolutions of the general meeting: (1) no shareholder or group
                of
                shareholders, whether Brazilian or non-Brazilian, including brokers
                acting
                on behalf of one or more holders of ADSs, may exercise voting rights
                representing more than 5% of the number of shares into which the
                capital
                stock is divided; and (2) the set of non-Brazilian shareholders and
                groups
                of shareholders may not exercise voting rights representing more
                than
                two-thirds of the total of the votes conferred on the entirety of
                Brazilian shareholders present.
              
              Certain
                resolutions and acts of our shareholders and management are subject
                to the
                veto of the Brazilian Government, as holder of the Golden
                Share.Dividends
            
            Preferred
                shares were entitled to the receipt of dividends per share at least
                10%
                higher than those conferred to each common share. Shareholders were
                entitled to receive, in each fiscal year, a mandatory dividend
                corresponding to a percentage equivalent to 25% of the net income
                for the
                fiscal year, subject to certain adjustments.
            
            There
                is no dividend preference among shareholders. The shareholders will
                be
                entitled to receive, in each fiscal year, a mandatory dividend
                corresponding to a percentage equivalent to 25% of the net income
                for the
                fiscal year, subject to certain adjustments.Priority
                in Capital Stock Reimbursements
            
            Preferred
                shares were entitled to at least a 10% premium over that received
                by
                common shares in the event of a reimbursement of capital.
            
            There
                is no preference among shareholders in the event of a reimbursement
                of
                capital.





**Use
      of Proceeds**




Not
      applicable.




**ITEM
          15.** **CONTROLS
          AND PROCEDURES**




**Disclosure
      Controls and Procedures**




Our
      president and CEO, Maurício Novis Botelho, and our executive vice-president
      corporate and chief financial officer, Antonio Luiz Pizarro Manso, after
      evaluating, together with management, the effectiveness of the design and
      operation of our disclosure controls and procedures (as defined in Exchange
      Act
      Rules 13a-15(e) and 15d-15(e)) as of December 31, 2006, the end of the period
      covered by this report, have concluded that, as of such date, our disclosure
      controls and procedures were adequate and effective to ensure information
      required to be disclosed by us in the reports that we file or submit under
      the
      Exchange Act is recorded, processed, summarized and reported, within the time
      periods specified in the SEC’s rules and forms, and that material
      information relating to us and our consolidated subsidiaries was be made known
      to them by others within our company and our consolidated subsidiaries during
      the period in which this annual period applies.




113




**Management’s
      Report on Internal Control over Financial Reporting**




Our
      management is responsible for establishing and maintaining effective internal
      control over financial reporting as defined in Rules 13a-15(f) under the
      Securities Exchange Act of 1934. Our internal control over financial reporting
      is designed to provide reasonable assurance to our management and board of
      directors regarding the preparation and fair presentation of published financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Therefore, even those systems determined to
      be
      effective can provide only reasonable assurance with respect to financial
      statement preparation and presentation.




Management
      assessed the effectiveness of our internal control over financial reporting
      as
      of December 31, 2006. In making this assessment, management used the criteria
      set forth by the Committee of Sponsoring Organizations of the Treadway
      Commission (COSO) in Internal Control—Integrated Framework. Based on this
      assessment, management has concluded that, as of December 31, 2006, our internal
      control over financial reporting is effective based on those
      criteria.




Management’s
      assessment of the effectiveness of internal controls over financial reporting
      as
      of December 31, 2006 has been audited by Deloitte Touche Tohmatsu Auditores
      Independentes, the independent registered public accounting firm who also
      audited our consolidated financial statements. Deloitte Touche Tohmatsu
      attestation report on management’s assessment of the our internal controls over
      financial reporting is included herein.




**Changes
      in Internal Controls**




There
      were no changes in our company’s internal control over financial reporting that
      occurred during the period covered by this annual report that have materially
      affected, or are reasonably likely to materially affect, our company’s internal
      control over financial reporting.




**ITEM
      16A.**  **AUDIT
      COMMITTEE FINANCIAL EXPERT**




Our
      Board
      of Directors has determined that Taiki Hirashima, a member of our Conselho
      Fiscal, is an “audit committee financial expert” as defined by current SEC
      rules. Furthermore, Mr. Hirashima is an independent member of our Conselho
      Fiscal as required by the NYSE rules and regulations. For a discussion of the
      role of our Conselho Fiscal, see “Item 6C. Board Practices—Conselho
      Fiscal.”




**ITEM
      16B.**  **CODE
      OF ETHICS**




Our
      Board
      of Directors has adopted a Code of Ethics and Conduct applicable to our
      directors, officers and employees worldwide, including our principal executive
      officer, principal financial officer and controller. A copy of our Code of
      Ethics and Conduct has been filed as Exhibit 11.1 to this annual
      report.




**ITEM
      16C.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES** ****




The
      following table sets forth by category of service the total fees for services
      performed by Deloitte Touche Tohmatsu during the fiscal years ended December
      31,
      2005 and December 31, 2006:




114




**2005**
            
            **2006**(*in
                thousands*)Audit
                Fees
            
            
            US$1,093
            
            
            US$1,886Audit-Related
                Fees
            
            
            621
            
            
            434Tax
                Fees
            
            
            508
            
            
            807All
                Other Fees
            
            
            68
            
            
            148Total
            
            
            US$2,290
            
            
            US$3,275




**Audit
      Fees**




Audit
      fees in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche
      Tohmatsu in connection with the audit of our annual financial statements under
      Brazilian GAAP, which are published in Brazil, and our annual financial
      statements under U.S. GAAP and for the review of our financial information
      included in our annual report on Form 20-F, reviews of quarterly financial
      statements, which are submitted on Form 6-K, and statutory audits of our
      subsidiaries.




**Audit-Related
      Fees**




Audit-related
      fees in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche
      Tohmatsu in connection with the review of our internal control system and
      assistance in complying with the requirements of the Sarbanes-Oxley Act of
      2002.




**Tax
      Fees**




Tax
      fees
      in 2006 and 2005 consisted of the aggregate fees billed by Deloitte Touche
      Tohmatsu in connection with services for tax compliance and tax advice, mainly
      comprised of the review of income tax returns in the several jurisdictions
      in
      which we operate and assistance with other tax filings in foreign jurisdictions,
      as well as assistance to our tax committee to ensure compliance with Brazilian
      tax requirements.




**All
      Other Fees**




We
      did
      not pay any other fees to Deloitte Touche Tohmatsu in 2006 other than those
      described above.




Other
      fees paid to Deloitte Touche Tohmatsu in 2005 consisted of the aggregate fees
      billed primarily in connection with human resources related consulting services.




**Pre-Approval
      Policies and Procedures**




Our
      Board
      of Directors approves all audit, audit-related services, tax services and other
      services provided by Deloitte Touche Tohmatsu. Any services provided by Deloitte
      Touche Tohmatsu that are not specifically included within the scope of the
      audit
      must be pre-approved by our Board of Directors in advance of any engagement.
      Pursuant to Rule
      2-01
      of Regulation S-X, audit
      committees are permitted to approve certain fees for audit-related services,
      tax
      services and other services pursuant to a *de
      minimis* exception
      prior to the completion of an audit engagement. In 2005 and 2006, none of the
      fees paid to Deloitte Touche Tohmatsu were approved pursuant to the *de
      minimis* exception.




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




We
      are in
      full compliance with the listing standards for audit committee pursuant to
      Exchange Act Rule 10A-3. For a further discussion of our Conselho Fiscal and
      the
      audit committee exemption, see “Item 6C. Board Practices—Conselho
      Fiscal.”




115




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




In
      2006,
      neither we nor any affiliated purchaser purchased or repurchased any of our
      equity securities.




116




**PART
        III**


**ITEM
          17.** **FINANCIAL
          STATEMENTS**




We
      have
      responded to Item 18 in lieu of responding to this item.




**ITEM
          18.** **FINANCIAL
          STATEMENTS**


Our
      consolidated financial statements, together with the Independent Auditors’
Report thereon, are filed as part of this annual report and are located
      following the signature page hereof.




**ITEM
          19.** **EXHIBITS** ****




Exhibit
                  Number
              
              Description1.1
              
              Bylaws
                  of Embraer (English translation) incorporated herein by reference
                  from
                  Exhibit 3.2 to Embraer’s Registration Statement No.
                  333-132289.2.1
              
              Form
                  of Amended and Restated Deposit Agreement among Embraer, Morgan
                  Guaranty
                  Trust Company of New York, as depositary, and the Holders from
                  time to
                  time of American Depositary Shares issued thereunder, including
                  the Form
                  of American Depositary Receipts, incorporated herein by reference
                  to
                  Exhibit 99(a) to Embraer’s Registration Statement
                  No. 333-133162.2.2
              
              Indenture,
                  dated as of October 25, 2006, among Embraer Overseas Limited,
                  Embraer-Empresa Brasileira de Aeronáutica S.A., The Bank of New York, as
                  Trustee, Registrar, Transfer Agent, and Principal Paying Agent,
                  and The
                  Bank of New York (Luxembourg) S.A., as Luxembourg Paying Agent
                  and
                  Transfer Agent, incorporated herein by reference from Exhibit 4.1
                  to
                  Embraer’s Registration Statement No. 333-141629.2.3
              
              The
                  registrant hereby agrees to furnish to the SEC, upon request, copies
                  of
                  certain instruments defining the rights of holders of long-term
                  debt of
                  the kind described in Item 2(b)(i) of the Instructions as to Exhibits
                  in
                  Form 20-F.4.1*
              
              Shareholders’
                  Agreement executed by Embraer and Liebherr International AG on
                  May 22,
                  2000, incorporated herein by reference from Exhibit 10.5 to Embraer’s
                  Registration Statement No. 333-12220.4.2
              
              Protocol
                  of Merger and Justification of Embraer-Empresa Brasileira de Aeronáutica
                  S.A. with and into Rio Han Empreendimentos e Participações S.A., dated as
                  of January 19, 2006, and exhibits thereto, or Merger Agreement
                  (English
                  translation), incorporated herein by reference from Exhibit 2.1
                  to
                  Embraer’s Registration Statement No. 333-132289.4.3
              
              Lease
                  Agreement, as amended, between Howard County and Embraer Aircraft
                  Corporation, dated as of April 21, 1998, incorporated herein by
                  reference
                  from Exhibit 10.6 to Embraer’s Registration Statement No.
                  333-12220.4.4
              
              Lease
                  Agreement, as amended, between the Paris Airport and Embraer, dated
                  as of
                  January 1, 1999, together with an English translation, incorporated
                  herein
                  by reference from Exhibit 10.6 to Embraer’s Registration Statement No.
                  333-12220.8.1
              
              List
                  of Embraer’s subsidiaries.
  117
 11.1
              
              Code
                  of Ethics and Conduct, incorporated herein by reference from Exhibit
                  11.1
                  to Embraer’s Annual Report on Form 20-F for the fiscal year ended December
                  31, 2003.12.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Executive
                  Officer.12.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Chief Financial
                  Officer.13.1
              
              Section
                  1350 Certification of Chief Executive Officer.13.2
              
              Section
                  1350 Certification of Chief Financial
                  Officer.





*  Embraer
      has been granted confidential treatment for portions of this Exhibit.
      Accordingly, portions thereof have been omitted and were filed separately with
      the SEC.




118


**SIGNATURES**




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




EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA
              S.A.Date:
              April 23, 2007
            By:
            /s/MAURICIO
              NOVIS BOTELHOName:Maurício
              Novis BotelhoTitle:President
              and Chief Executive Officer




Date:
              April 23, 2007
            By:
            /s/
              ANTONIO
              LUIZ PIZARRO MANSOName:Antonio
              Luiz Pizarro MansoTitle:
                Executive Vice-President Corporate and
              ChiefFinancial
                Officer









**INDEX
        TO FINANCIAL STATEMENTS**
 
 PageIndex
                  to Financial Statements
              
              
              F-1Report
                  of Independent Registered Public Accounting Firm
              
              
              F-2Consolidated
                  Balance Sheets at December 31, 2005 and 2006
              
              
              F-4Consolidated
                  Statements of Income and Comprehensive Income for the Years Ended
                  December
                  31, 2004, 2005 and 2006
              
              
              F-6Consolidated
                  Statements of Cash Flows for the Years Ended December 31, 2004,
                  2005 and
                  2006
              
              
              F-7Consolidated
                  Statements of Shareholders’ Equity for the Years Ended December 31, 2004,
                  2005 and 2006
              
              
              F-8Notes
                  to Consolidated Financial Statements for the Years Ended December
                  31,
                  2004, 2005 and 2006
              
              
              F-9
 
 F-1
  REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To
        the
        Shareholders and Management of
 EMBRAER
        -
        Empresa Brasileira de Aeronáutica S.A.
 São
        Paulo
        - SP
  1.  We have
        audited the accompanying consolidated balance sheets of EMBRAER - Empresa
        Brasileira de Aeronáutica S.A. (a Brazilian Corporation) and subsidiaries as of
        December 31, 2006 and 2005, and the related consolidated statements of
        income, change in stockholders' equity, and cash flows for each of the three
        years in the period ended December 31, 2006. **** We
        also
        have audited management's assessment, included in the accompanying Management’s
        Report on Internal Control over Financial Reporting, that the Company maintained
        effective internal control over financial reporting as of December 31, 2006,
        based on *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission.  The
        Company's management is responsible for these financial statements, for
        maintaining effective internal control over financial reporting, and for
        its
        assessment of the effectiveness of internal control over financial
        reporting.  Our responsibility is to express an opinion on these financial
        statements, an opinion on management's assessment, and an opinion on the
        effectiveness of the Company's internal control over financial reporting
        based
        on our audits.
  2.
        We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require that
        we plan and perform the audit to obtain reasonable assurance about whether
        the
        financial statements are free of material misstatement and whether effective
        internal control over financial reporting was maintained in all material
        respects.  Our audit of financial statements included examining, on a test
        basis, evidence supporting the amounts and disclosures in the financial
        statements, assessing the accounting principles used and significant estimates
        made by management, and evaluating the overall financial statement presentation.
        Our audit of internal control over financial reporting included obtaining
        an
        understanding of internal control over financial reporting, evaluating
        management's assessment, testing and evaluating the design and operating
        effectiveness of internal control, and performing such other procedures as
        we
        considered necessary in the circumstances.  We believe that our audits
        provide a reasonable basis for our opinions.
  3.
        A
        company's internal control over financial reporting is a process designed
        by, or
        under the supervision of, the company's principal executive and principal
        financial officers, or persons performing similar functions, and effected
        by the
        company's board of directors, management, and other personnel to provide
        reasonable assurance regarding the reliability of financial reporting and
        the
        preparation of financial statements for external purposes in accordance with
        generally accepted accounting principles.  A company's internal control
        over financial reporting includes those policies and procedures that (1)
        pertain
        to the maintenance of records that, in reasonable detail, accurately and
        fairly
        reflect the transactions and dispositions of the assets of the company; (2)
        provide reasonable assurance that transactions are recorded as necessary
        to
        permit preparation of financial statements in accordance with generally accepted
        accounting principles, and that receipts and expenditures of the company
        are
        being made only in accordance with authorizations of management and directors
        of
        the company; and (3) provide reasonable assurance regarding prevention or
        timely
        detection of unauthorized acquisition, use, or disposition of the company's
        assets that could have a material effect on the financial
        statements.
  4.
        Because of the inherent limitations of internal control over financial
        reporting, including the possibility of collusion or improper management
        override of controls, material misstatements due to error or fraud may not
        be
        prevented or detected on a timely basis.  Also, projections of any
        evaluation of the effectiveness of the internal control over financial reporting
        to future periods are subject to the risk that the controls may become
        inadequate because of changes in conditions, or that the degree of compliance
        with the policies or procedures may deteriorate.
  F-2
  5.
        In our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of EMBRAER
        -
        Empresa Brasileira de Aeronáutica S.A. and subsidiaries as of December 31, 2006
        and 2005, and the results of their operations and their cash flows for each
        of
        the three years in the period ended December 31, 2006, in conformity with
        accounting principles generally accepted in the United States of America. 
Also in our opinion, management's assessment that the Company maintained
        effective internal control over financial reporting as of December 31, 2006,
        is
        fairly stated, in all material respects, based on the criteria established
        in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission. 
Furthermore, in our opinion, the Company maintained, in all material respects,
        effective internal control over financial reporting as of December 31, 2006,
        based on the criteria established in *Internal
        Control—Integrated Framework* issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission *.*
   Deloitte
        Touche Tohmatsu Auditores Independentes
  São
        Paulo, Brazil
 April
        18,
        2007
  F-3
  EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  CONSOLIDATED
        BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2006
 (In
        thousands of U.S. dollars - US$)
 
 ASSETS
              
              Notes
              
              2005
              
              2006CURRENT
                  ASSETSCash
                  and cash equivalents
              
              
              5
              
              
              1,339,159
              
              
              1,209,396Temporary
                  cash investments
              
              
              6
              
              
              574,395
              
              
              555,795Trade
                  accounts receivable, net
              
              
              7
              
              
              445,520
              
              
              272,153Customer
                  and commercial financing
              
              
              8
              
              
              147,118
              
              
              16,215Collateralized
                  accounts receivable
              
              
              9
              
              
              65,440
              
              
              70,980Inventories
              
              
              10
              
              
              1,477,559
              
              
              2,047,244Deferred
                  income taxes
              
              
              27
              
              
              121,376
              
              
              116,510Guarantee
                  deposits
              
              
              11
              
              
              247,613
              
              
              301,670Other
                  assets
              
              
              11
              
              
              197,342
              
              
              169,758Total
                  current assets
              
              
              
              
              
              4,615,522
              
              
              4,759,721LONG
                  TERM ASSETSTrade
                  accounts receivable
              
              
              7
              
              
              5,304
              
              
              22,109Customer
                  and commercial financing
              
              
              8
              
              
              460,044
              
              
              552,751Collateralized
                  accounts receivable
              
              
              9
              
              
              788,780
              
              
              748,742Property,
                  plant and equipment, net
              
              
              13
              
              
              388,362
              
              
              412,244Investments
              
              
              12
              
              
              31,433
              
              
              33,844Deferred
                  income taxes
              
              
              27
              
              
              302,304
              
              
              340,659Guarantee
                  deposits
              
              
              11
              
              
              273,181
              
              
              289,050Other
                  assets
              
              
              11
              
              
              67,515
              
              
              156,581Total
                  long-term assets
              
              
              
              
              
              2,316,923
              
              
              2,555,980TOTAL
                  ASSETS
              
              
              
              
              
              6,932,445
              
              
              7,315,701
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-4
 EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  CONSOLIDATED
        BALANCE SHEETS AS OF DECEMBER 31, 2005 AND 2006
 (In
        thousands of U.S. dollars - US$)
 
 LIABILITIES
                  AND SHAREHOLDERS’ EQUITY
              
              Notes
              
              2005
              
              2006CURRENT
                  LIABILITIESLoans
                  and financing
              
              
              19
              
              
              475,305
              
              
              503,047Non-recourse
                  and recourse debt
              
              
              9
              
              
              321,172
              
              
              388,380Capital
                  lease obligations
              
              
              20
              
              
              2,753
              
              
              2,388Trade
                  accounts payable
              
              
              
              
              
              728,011
              
              
              912,753Advances
                  from customers
              
              
              16
              
              
              485,958
              
              
              544,802Other
                  payables and accrued liabilities
              
              
              15
              
              
              405,965
              
              
              433,291Taxes
                  and payroll charges payable
              
              
              17
              
              
              113,360
              
              
              136,950Contingencies
              
              
              18
              
              
              19,826
              
              
              31,175Deferred
                  income taxes
              
              
              27
              
              
              22,153
              
              
              23,609Accrued
                  taxes on income
              
              
              
              
              
              37,122
              
              
              6,848Dividends
                  payable
              
              
              
              
              
              42,811
              
              
              35,555Total
                  current liabilities
              
              
              
              
              
              2,654,436
              
              
              3,018,798LONG-TERM
                  LIABILITIESLoans
                  and financing
              
              
              19
              
              
              1,078,117
              
              
              846,104Non-recourse
                  and recourse debt
              
              
              9
              
              
              498,081
              
              
              441,378Capital
                  lease obligations
              
              
              20
              
              
              2,216
              
              
              3,453Advances
                  from customers
              
              
              16
              
              
              97,024
              
              
              183,639Contribution
                  from suppliers
              
              
              14
              
              
              97,852
              
              
              92,217Taxes
                  and payroll charges payable
              
              
              17
              
              
              513,743
              
              
              455,048Other
                  payables and accrued liabilities
              
              
              15
              
              
              125,006
              
              
              107,512Deferred
                  income taxes
              
              
              27
              
              
              165,250
              
              
              195,988Contingencies
              
              
              18
              
              
              33,691
              
              
              33,369Total
                  long-term liabilities
              
              
              
              
              
              2,610,980
              
              
              2,358,708MINORITY
                  INTEREST
              
              
              
              
              
              46,775
              
              
              63,914SHAREHOLDERS’
                  EQUITYStatutory
                  capital-Preferred
                  (without par value, 1,000,000,000 shares authorized; 479,287,609
                  shares
                  issued and outstanding at December 31, 2005)
              
              
              
              
              
              882,627
              
              
              -Common
                  (at December 31, 2005, 500,000,000 shares authorized and 242,544,447
                  shares issued and outstanding; without par value, 1,000,000,000
                  shares
                  authorized and 739,903,913 shares issued and outstanding as of
                  December
                  31, 2006)
              
              
              
              
              
              298,397
              
              
              1,434,406Special
                  common share (R$ 1 par value, 1 share authorized, issued and outstanding
                  at December 31, 2006 and 2005)
              
              
              
              
              
              -
              
              
              -Additional
                  paid-up capital
              
              
              
              
              
              8,353
              
              
              -Legal
                  reserve
              
              
              
              
              
              126,711
              
              
              13,797Appropriate
                  retained earnings
              
              
              
              
              
              305,914
              
              
              422,334Accumulated
                  other comprehensive income (loss)
              
              
              
              
              
              (1,748
              )
              
              3,744Total
                  shareholders’ equity
              
              
              
              
              
              1,620,254
              
              
              1,874,281TOTAL
                  LIABILITIES AND SHAREHOLDERS' EQUITY
              
              
              
              
              
              6,932,445
              
              
              7,315,701
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-5
  EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  CONSOLIDATED
        STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
        thousands of U.S. dollars - US$, except earnings per share )
 
 Notes
              
              2004
              
              2005
              
              2006GROSS
                  SALESForeign
                  market
              
              
              
              
              
              3,170,832
              
              
              3,526,848
              
              
              3,669,148Domestic
                  market
              
              
              
              
              
              282,287
              
              
              312,507
              
              
              146,063Sales
                  deductions
              
              
              
              
              
              (12,586
              )
              
              (9,448
              )
              
              (7,808
              )NET
                  SALES
              
              
              
              
              
              3,440,533
              
              
              3,829,907
              
              
              3,807,403Cost
                  of sales and services
              
              
              
              
              
              (2,267,330
              )
              
              (2,671,816
              )
              
              (2,736,234
              )GROSS
                  PROFIT
              
              
              
              
              
              1,173,203
              
              
              1,158,091
              
              
              1,071,169OPERATING
                  INCOME (EXPENSES)Selling
                  expenses
              
              
              
              
              
              (342,883
              )
              
              (269,747
              )
              
              (374,140
              )Research
                  and development
              
              
              
              
              
              (44,506
              )
              
              (93,166
              )
              
              (112,743
              )General
                  and Administrative expenses
              
              
              
              
              
              (139,357
              )
              
              (205,202
              )
              
              (235,505
              )Employee
                  profit sharing
              
              
              
              
              
              (61,199
              )
              
              (56,051
              )
              
              (42,719
              )Other
                  operating income (expenses), net
              
              
              28
              
              
              (41,272
              )
              
              (26,079
              )
              
              1,677INCOME
                  FROM OPERATIONS
              
              
              
              
              
              543,986
              
              
              507,846
              
              
              307,739Interest
                  income (expenses), net
              
              
              21
              
              
              (38,000
              )
              
              (1,672
              )
              
              140,525Exchange
                  loss, net
              
              
              29
              
              
              (12,218
              )
              
              (15,218
              )
              
              (4,098
              )Other
                  non-operating income (expenses), net
              
              
              
              
              
              (117
              )
              
              9,050
              
              
              -INCOME
                  BEFORE INCOME TAXES
              
              
              
              
              
              493,651
              
              
              500,006
              
              
              444,166Income
                  tax (expense)
              
              
              27
              
              
              (112,139
              )
              
              (41,569
              )
              
              (44,412
              )INCOME
                  BEFORE MINORITY INTEREST AND EQUITY LOSS FROM AFFILIATES
              
              
              
              
              
              381,512
              
              
              458,437
              
              
              399,754Minority
                  interest
              
              
              
              
              
              (1,306
              )
              
              (9,622
              )
              
              (9,580
              )Equity
                  in loss from affiliates
              
              
              
              
              
              -
              
              
              (3,096
              )
              
              (34
              )NET
                  INCOME
              
              
              
              
              
              380,206
              
              
              445,719
              
              
              390,140OTHER
                  COMPREHENSIVE INCOME
              
              
              
              
              
              5,174
              
              
              (4,632
              )
              
              9,287COMPREHENSIVE
                  INCOME
              
              
              
              
              
              385,380
              
              
              441,087
              
              
              399,427EARNINGS
                  PER SHARE
              
              
              25Basic-Common
              
              
              
              
              
              0.4970
              
              
              0.5790
              
              
              0.5273Preferred
              
              
              
              
              
              0.5467
              
              
              0.6369Diluted-Common
              
              
              
              
              
              0.4940
              
              
              0.5762
              
              
              0.5252Preferred
              
              
              
              
              
              0.5434
              
              
              0.6338WEIGHTED
                  AVERAGE SHARES (in thousands )Basic-Common
              
              
              
              
              
              242,544
              
              
              242,544
              
              
              739,904Preferred
              
              
              
              
              
              474,994
              
              
              479,288Diluted-Common
              
              
              
              
              
              242,544
              
              
              242,544
              
              
              742,903Preferred
              
              
              
              
              
              479,217
              
              
              482,739
 
 The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-6
  EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
        thousands of U.S. dollars - US$)
 
  2004
              
              2005
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  income
              
              
              380,206
              
              
              445,719
              
              
              390,140Adjustments
                  to reconcile net income to net cashprovided
                  by (used in) operating activities:Depreciation
              
              
              59,685
              
              
              61,491
              
              
              63,859Allowance
                  for doubtful accounts
              
              
              908
              
              
              2,109
              
              
              8,231Write
                  down for inventory obsolescence
              
              
              28,827
              
              
              21,851
              
              
              16,569Loss
                  on property, plant and equipment disposals
              
              
              178
              
              
              750
              
              
              885Deferred
                  income taxes
              
              
              4,511
              
              
              (42,270
              )
              
              (1,295
              )Accrued
                  interest in excess of interest paid (paid in excess of
                  accrued)
              
              
              (30,276
              )
              
              5,123
              
              
              551Equity
                  in loss from affiliates
              
              
              -
              
              
              3,096
              
              
              34Minority
                  interest
              
              
              1,306
              
              
              9,622
              
              
              9,580Exchange
                  loss, net
              
              
              12,218
              
              
              15,218
              
              
              4,098Other
              
              
              (3,508
              )
              
              (154
              )
              
              (1,546
              )Changes
                  in assets and liabilities:Temporary
                  cash investments
              
              
              (402,147
              )
              
              (179,676
              )
              
              18,600Trade
                  accounts receivable and customer and commercial financing ,
                  net
              
              
              (266,652
              )
              
              (241,606
              )
              
              186,612Inventories
              
              
              (340,608
              )
              
              (90,802
              )
              
              (583,269
              )Other
                  assets
              
              
              (21,259
              )
              
              (120,079
              )
              
              33,482Trade
                  accounts payable
              
              
              136,554
              
              
              172,591
              
              
              181,639Other
                  payables and accrued liabilities
              
              
              45,791
              
              
              41,555
              
              
              (24,663
              )Accrued
                  taxes on income
              
              
              10,497
              
              
              24,305
              
              
              (32,321
              )Contribution
                  from suppliers
              
              
              (94,921
              )
              
              (42,185
              )
              
              (5,635
              )Advances
                  from customers
              
              
              (80,024
              )
              
              103,819
              
              
              145,460Taxes
                  and payroll charges payable
              
              
              167,096
              
              
              124,756
              
              
              (35,105
              )Contingencies
              
              
              (7,228
              )
              
              31,676
              
              
              11,027Net
                  cash provided by (used in) operating activities
              
              
              (398,846
              )
              
              346,909
              
              
              386,933CASH
                  FLOWS FROM INVESTING ACTIVITIESProceeds
                  from sales of property, plant and equipment
              
              
              163
              
              
              557
              
              
              697Escrow
                  deposits
              
              
              (15,417
              )
              
              (164
              )
              
              (88,554
              )Additions
                  to property, plant and equipment
              
              
              (50,075
              )
              
              (51,766
              )
              
              (90,761
              )Other
              
              
              6,225
              
              
              877
              
              
              (900
              )Net
                  cash used in investing activities
              
              
              (59,104
              )
              
              (50,496
              )
              
              (179,518
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESRepayment
                  of loans
              
              
              (1,295,315
              )
              
              (1,308,817
              )
              
              (1,497,751
              )Proceeds
                  from borrowings
              
              
              1,587,504
              
              
              1,523,261
              
              
              1,258,249Dividends
                  and/or interest on capital paid
              
              
              (185,537
              )
              
              (198,945
              )
              
              (157,771
              )Proceeds
                  from issuance of shares
              
              
              3,250
              
              
              12,104
              
              
              5,116Payments
                  of capital lease obligations
              
              
              (4,682
              )
              
              (2,687
              )
              
              (2,946
              )Net
                  cash provided by financing activities
              
              
              105,220
              
              
              24,916
              
              
              (395,103
              )Effect
                  of exchange rate changes on cash and cash equivalents
              
              
              50,728
              
              
              54,012
              
              
              57,924Net
                  increase (decrease) in cash and cash equivalents
              
              
              (302,002
              )
              
              375,341
              
              
              (129,763
              )Cash
                  and cash equivalents, at beginning of year
              
              
              1,265,820
              
              
              963,818
              
              
              1,339,159Cash
                  and cash equivalents, at end of year
              
              
              963,818
              
              
              1,339,159
              
              
              1,209,396SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATIONPlease
                  see note 36.
  The
        accompanying notes are an integral part of these consolidated financial
        statements.
 
 F-7
  EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  CONSOLIDATED
        STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
        thousands of U.S. dollars - US$)
 
 Additional
              
              
              
              
              
              AccumulatedCapital
              
              paid-up
              
              
              
              Appropriated
              
              otherCommon
              
              Preferred
              
              capital
              
              Legal
              
              Retained
              
              comprehensiveShares
              
              Amount
              
              Shares
              
              Amount
              
              earnings
              
              reserve
              
              Earnings
              
              (loss)
                  income
              
              TotalBALANCE
                  AT DECEMBER 31, 2003
              
              
              242,544,448
              
              
              207,014
              
              
              473,501,135
              
              
              688,039
              
              
              8,353
              
              
              87,368
              
              
              180,741
              
              
              (2,290
              )
              
              1,169,225Capital
                  increase
              
              
              -
              
              
              -
              
              
              2,296,285
              
              
              3,250
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              3,250Capitalization
                  of reserves
              
              
              -
              
              
              33,187
              
              
              -
              
              
              64,849
              
              
              -
              
              
              -
              
              
              (98,036
              )
              
              -
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              380,206
              
              
              -
              
              
              380,206Legal
                  reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              24,075
              
              
              (24,075
              )
              
              -
              
              
              -Dividends
                  / Interest on equity
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (203,998
              )
              
              -
              
              
              (203,998
              )Expired
                  dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              11
              
              
              -
              
              
              11Currency
                  translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              5,174
              
              
              5,174BALANCE
                  AT DECEMBER 31, 2004
              
              
              242,544,448
              
              
              240,201
              
              
              475,797,420
              
              
              756,138
              
              
              8,353
              
              
              111,443
              
              
              234,849
              
              
              2,884
              
              
              1,353,868Capital
                  increase
              
              
              -
              
              
              -
              
              
              3,490,189
              
              
              12,104
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              12,104Capitalization
                  of reserves
              
              
              -
              
              
              58,196
              
              
              -
              
              
              114,385
              
              
              -
              
              
              -
              
              
              (172,581
              )
              
              -
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              445,719
              
              
              -
              
              
              445,719Legal
                  reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              15,268
              
              
              (15,268
              )
              
              -
              
              
              -Dividends
                  / Interest on equity
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (186,837
              )
              
              -
              
              
              (186,837
              )Expired
                  dividends
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              32
              
              
              -
              
              
              32Currency
                  translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (4,632
              )
              
              (4,632
              )BALANCE
                  AT DECEMBER 31, 2005
              
              
              242,544,448
              
              
              298,397
              
              
              479,287,609
              
              
              882,627
              
              
              8,353
              
              
              126,711
              
              
              305,914
              
              
              (1,748
              )
              
              1,620,254Capital
                  increase
              
              
              1,292,094
              
              
              5,116
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              5,116Restructuring
                  of the company
              
              
              16,779,763
              
              
              248,266
              
              
              -
              
              
              -
              
              
              (8,353
              )
              
              (126,711
              )
              
              (109,407
              )
              
              (3,795
              )
              
              -Conversion
                  preferred shares into common shares
              
              
              479,287,609
              
              
              882,627
              
              
              (479,287,609
              )
              
              (882,627
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Net
                  income
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              390,140
              
              
              -
              
              
              390,140Legal
                  Reserve
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              13,797
              
              
              (13,797
              )
              
              -
              
              
              -Dividends
                  / Interest on equity
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (150,516
              )
              
              -
              
              
              (150,516
              )Currency
                  translation adjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              8,533
              
              
              8,533Post-retirement
                  benefits - Adoption SFAS 158 (net of tax of $476)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              754
              
              
              754BALANCE
                  AT DECEMBER 31, 2006
              
              
              739,903,914
              
              
              1,434,406
              
              
              -
              
              
              -
              
              
              -
              
              
              13,797
              
              
              422,334
              
              
              3,744
              
              
              1,874,281
  The
        accompanying notes are an integral part of these consolidated financial
        statements
 
 F-8
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 1.
              THE
                  COMPANY AND ITS OPERATIONS
  Embraer
        -
        Empresa Brasileira de Aeronáutica S.A. (the “Company”), previously Rio Han Empreendimentos e Participações S.A. (see below),
        i s
        a
        publicly-held company incorporated under the laws of the Federative Republic
        of
        Brazil. Originally formed in 1969 by the Brazilian government, the Company
        was
        privatized in 1994. The
        corporate purpose of the Company is the development, production and sale
        of jet
        and turboprop aircraft for civil and defense aviation, aircraft for agricultural
        use, structural components, mechanical and hydraulic systems and technical
        activities related to the production and maintenance of aerospace
        material.
  The
        Company has grown from a government-controlled company established to develop
        and produce aircraft for the Brazilian Air Force into a public company that
        produces aircraft for commercial, business jet and defense purposes. Through
        its
        evolution, the Company has obtained, developed and enhanced its engineering
        and
        technological capabilities through its own development of products for the
        Brazilian Air Force and through joint product development with foreign companies
        on specific projects. The Company has applied these capabilities that it
        gained
        from its defense business to develop its commercial and executive aviation
        aircraft businesses.
  At
        the
        Extraordinary General Meeting of the shareholders held on March 31, 2006,
        shareholders approved the proposal for corporate restructuring of the Company
        presented by the Board of Directors on January 19, 2006, resulting in the
        merger
        of the former Embraer into its Parent Company, Rio Han Empreendimentos e
        Participações S.A. The Parent Company, which had no operations up to the date of
        the merger, adopted the corporate name of Embraer - Empresa Brasileira de
        Aeronáutica S.A.
  As
        established in the merger protocol, the equity variations of the former Embraer
        from September 30, 2005 (base date for the merger) to December 31, 2005 were
        recorded by the Company directly in retained earnings. The Company recorded
        the
        equity variations from January 1 to March 31, 2006 in results of operations.
        The
        December 31, 2006 financial statements are being compared to those of former
        Embraer.
  The
        objective of this restructuring was to provide improved access to the capital
        markets, to sustain the growth of Embraer’s businesses. This restructuring
        permitted the Company’s registration in a special listing segment of the São
        Paulo Stock Exchange (BOVESPA), called the New Market (“Novo Mercado”).
        Furthermore, the Company no longer has a defined controlling group, and the
        capital now comprises only common stock, assuring voting rights for all the
        shareholders. The notice of relevant fact providing details of this transaction
        was published on January 20, 2006.
  The
        Company has wholly-owned consolidated subsidiaries and/or commercial
        representative offices located in Brazil, the United States, France, Spain,
        China and Singapore, mainly engaged in sales marketing and post
        sales/maintenance services.
  F-9
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 In
        December 2004, a consortium formed by the Company and the European Aeronautic
        Defense and Space Company (“EADS”) was declared the winner in the privatization
        of OGMA - Indústria Aeronáutica de Portugal S.A. (“OGMA”). For this purpose,
        Embraer and EADS formed a holding company, AIRHOLDING, SGPS, S.A. (AIRHOLDING),
        controlled by Embraer, owning 99%, and EADS owning 1%. In March 2006 EADS
        exercised its option to increase its interest in AIRHOLDING to 30%. Conclusion
        of this acquisition was subject to final approval from the relevant European
        antitrust authorities, which occurred in March 9, 2005. Therefore, the entity
        was consolidated by the Company as of December 31, 2005. The stake acquired
        through AIRHOLDING SGPS, S.A., represents 65% of OGMA’s total capital and the
        total consideration paid amounted to €11.4 million, equivalent to $15,417. The
        acquisition was accounted for as a business combination according to SFAS
        141 as
        of December 31, 2005 (Note 12).
  2.
              PRESENTATION
                  AND CONSOLIDATION OF FINANCIAL
                  STATEMENTS
  (i)
              The
                  financial statements have been prepared in accordance with accounting
                  principles generally accepted in the United States of America (“US GAAP”),
                  which differ in certain respects from accounting principles applied
                  by the
                  Company in its financial statements prepared in accordance with
                  Brazilian
                  accounting practices (“BR GAAP”).
  (ii)
              The
                  consolidated financial statements include the accounts of (i) the
                  Company
                  and all majority-owned
                  subsidiaries in which the Company directly or indirectly has either
                  a
                  majority of the equity of the subsidiary or otherwise has management
                  control and (ii) special purpose entities - SPEs for which the
                  Company was
                  considered to be the primary beneficiary according to FIN 46-R
                  -
                  “Consolidation of Variable Interest Entities”.
                  All intercompany accounts and transactions arising from consolidated
                  entities have been eliminated.
  (iii)
              A
                  substantial portion of the Company's sales is destined to export
                  markets
                  and a substantial leveloffinancing, manufacturing and other costs is denominated in U.S.
                  dollars
                  (US$). The Company presents its financial statements in accordance
                  with
                  Statement of Financial Accounting Standards ("SFAS") No. 52 - "Foreign
                  Currency Translation". The Company's Board of Directors and management
                  have historically considered that the U.S. dollar has been, and
                  remains in
                  their opinion, the currency in which the Company principally operates.
                  Accordingly, the Company's management has concluded that its functional
                  currency is currently the U.S.
                  dollar.
 
 (iv)
              For
                  US GAAP purposes, the Company has elected the U.S. dollar as its
                  reporting
                  currency, as it believes such presentation is more meaningful to
                  readers.
  (v)
              For
                  subsidiaries whose particular functional currency is other than
                  the U.S.
                  dollar, asset and liability accounts are translated into the Company’s
                  reporting currency usingexchange rates in effect at the date of the balance sheet, and
                  income and
                  expense items are translated using weighted average exchange rates.
                  Resulting translation adjustments are reported in a separate component
                  of
                  shareholders’ equity, as a cumulative translation adjustment -
                  CTA.
  F-10
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 3.
                  SUMMARY
                      OF SIGNIFICANT ACCOUNTING
                      POLICIES
 
 a)
              Cash
                  and cash equivalents
  Cash
        and
        cash equivalents consist of cash on hand in banks and highly liquid investments,
        such as certificates of deposit, time deposits, treasury notes and other
        money
        market investments with original maturity of 90 days or less.
  b)
              Temporary
                  cash investments
  Debt
        securities with original maturities greater than 90 days, which are held
        through
        exclusive investment funds required to be consolidated in accordance with
        FIN
        46-R are classified as temporary cash investments.
  c)
              Allowance
                  for doubtful accounts
  The
        allowance for doubtful accounts is recorded based on an analysis of accounts
        receivable in an amount considered sufficient to cover probable losses on
        uncollectible accounts receivable.
  d)
              Inventories
  Inventories
        are stated at the lower of average production or acquisition cost or market
        value. Inventories of work in process and finished goods are reduced, when
        applicable, to net realizable value after deduction for costs, taxes and
        selling
        expenses. The Company writes down inventory when items are determined to
        be
        obsolete or are held in quantities that are in excess of projected usage
        based
        on management’s estimate of net realizable values.
  On
        January 1, 2006 the Company adopted Statement Financial Accounting Standards
        No.
        151, “Inventory Costs an amendment of ARB No. 43, Chapter 4”. The adoption of
        SFAS 151 did not have a material impact on the company’s financial statements
        for 2006.
  e)
              Spare
                  part exchange pools
 
 Based
        on
        formal contractual arrangements with customers, certain spare parts are
        segregated and placed in exchange pools for the exclusive use of customers
        participating in such programs, which may withdraw for use an equivalent
        functioning part, as defined, from an exchange pool in exchange for an
        unserviceable part, as needed. Parts placed in exchange pools are depreciated
        using the straight-line method over estimated useful lives of 7 to 10 years
        and
        considering estimated residual values of 20% to 50% of original cost, which
        management believes approximate the usage and change in value of the items.
        Costs to refurbish parts placed in exchange pools are expensed as incurred.
        Items in exchange pools are classified as other long-term assets on the
        consolidated balance.
  F-11
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 f)
              Customer
                  and commercial financing
  Customer
        and commercial financing consists of notes receivable originated from financed
        aircraft sales, and used aircraft assets either under operating leases or
        available for lease and/or sale.
  Notes
        receivable are stated at cost plus accrued interest and reduced by valuation
        allowances, when necessary, which are determined by the Company considering
        the
        customer credit rating and related collateral attached to the respective
        notes
        receivable, if any.
  Aircraft
        under operating leases are recorded at cost, net of accumulated depreciation,
        which is calculated from the beginning of the lease term using the straight-line
        method over the estimated useful life and considering a residual value at
        the
        end of the lease term. Income from operating leases is recognized ratably
        over
        the lease term and recorded as net sales in the customer services and others
        segment.
  The
        Company reviews aircraft under operating leases for impairment when events
        or
        circumstances indicate that the carrying amount of the assets may not be
        recoverable. An asset under an operating lease is considered to be impaired
        when
        the expected undiscounted cash flows over its remaining useful life is less
        than
        its carrying value. Various assumptions are used to determine the expected
        undiscounted cash flow. These assumptions include lease rates, lease terms,
        periods in which the asset may be held in preparation for a follow-on lease,
        maintenance costs, remarketing costs and the expected useful life of the
        asset.
        The determination of expected lease rates is generally based on independent
        reference values obtained from publications and similar aircraft sales in
        the
        secondary market. The Company uses historical information and current economic
        trends to develop the remaining assumptions. When there is an indication
        that an
        asset is impaired, the impairment loss recorded represents the excess of
        the
        carrying value over the estimated fair value.
  Used
        aircraft available for lease are stated at their acquisition cost. The Company
        performs a comparison between the individual aircraft cost and its estimated
        market value, based on third party appraisal estimates for each aircraft.
        Any
        resulting deficiencies are recorded as a reduction of the carrying value
        of the
        aircraft and charged to other operating expenses.
  g)
              Property,
                  plant and equipment
  Property,
        plant and equipment are stated at cost including applicable construction-period
        interest. Materials allocated to specific projects are added to construction
        in
        progress and, in accordance with the provisions of SFAS No. 34, “Capitalization
        of Interest Costs”, interest incurred on borrowings is capitalized to the extent
        that borrowings do not exceed construction in progress. The credit is recorded
        as a reduction of interest expense. Interest costs capitalized in 2004, 2005
        and
        2006 were $393, $733 and $871, respectively.
  F-12
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Assets
        acquired through capital lease arrangements are capitalized and depreciated
        over
        the expected useful lives of the assets, in accordance with SFAS No. 13 -
        “Accounting for Leases”.
 
 Costs
        incurred for the development of computer software for internal use are
        capitalized in accordance with Statement of Position (SOP) No. 98-1,
        “Accounting for the Costs of Computer Software Developed or Obtained for
        Internal Use”.
  Depreciation
        is calculated using the straight-line method over the estimated useful lives
        of
        the assets disclosed in Note 13. Improvements to existing property that
        significantly extend the useful life or the utility of the asset are
        capitalized, while maintenance and repair costs are charged to expense as
        incurred.
  Long-lived
        assets held for sale are stated at the lower of cost or fair value. Long-lived
        assets held for use are subject to an impairment assessment if the carrying
        value is no longer recoverable based upon the undiscounted future cash flows
        of
        the asset. The amount of the impairment is the difference between the carrying
        amount and the estimated fair value of the asset. No impairment losses on
        fixed
        assets were recorded in 2004, 2005 or 2006.
  h)
              Marketing
                  and advertising expenses
  The
        Company expenses the costs of marketing and advertising as incurred and such
        expenses amounted to $7,350, $7,074 and $13,309 for 2004, 2005 and 2006,
        respectively. These amounts are reported in the consolidated statements of
        income and comprehensive income as selling expenses.
  In
        addition to the marketing and advertising expenses above, the Company has
        participated in some air show fairs to promote its products and improve its
        relationship with current and prospective customers. The amounts expensed
        in
        such fairs totaled $6,649, $9,437 and $13,812 for 2004, 2005 and 2006
        respectively.
  i)
              Investments
  The
        Company uses the equity method of accounting for its long-term investments
        in
        which it owns more than 20% but less than 50% of the investee’s voting stock and
        has the ability to exercise significant influence over the operating and
        financial policies of the investee. Under the equity method, the Company
        records
        its proportionate share in the investee’s earnings, reduced by dividends
        received.
  Marketable
        debt and equity securities are accounted for in accordance with SFAS No.
        115,
“Accounting for Certain Investments in Debt and Equity Securities”. Investments
        in marketable securities which the Company has the ability and intent to
        hold to
        maturity are classified as held-to-maturity and are reported at amortized
        cost,
        while securities that are purchased for trading purposes are classified as
        trading securities and marked to market with the effects of changes in fair
        value recorded on statement of income and comprehensive income. Declines
        in the
        fair value of held-to-maturity securities below their cost that are deemed
        to be
        other-than-temporary are recorded as permanent write-downs with a charge
        to
        interest income (expense), net the statement of income and comprehensive
        income.
  F-13
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 j)
              Product
                  warranties
  Warranty
        costs related to sales of aircraft and parts are recognized as a selling
        expense
        at the time of sale based on estimated amounts of warranty costs anticipated
        to
        be incurred. These estimates are based on factors that consider, among other
        factors, historical warranty claims and cost experience, warranty coverage
        available from suppliers, type and duration of warranty coverage, and the
        volume
        and mix of aircraft sold and in service. The warranty period typically ranges
        from two years for spare parts up to five years for aircraft
        components.
 
 Provisions
        for warranties are included in “other payable and accrued liabilities” (Note
        15).
  k)
              Contingencies
                  and guarantees
  Losses
        for contingencies related to labor, tax, civil and commercial litigation
        are
        recorded when they are determined to be probable and can be reasonably
        estimated. These estimates are based on the opinion of legal counsel and
        management’s estimate as to the likely outcome of the outstanding matters and
        the estimated amount of loss at the balance sheet dates.
  In
        accordance with FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s
        Accounting and Disclosure Requirements for Guarantees, Including Indirect
        Guarantees of the Indebtedness of Others”, certain guarantees that are issued or
        modified after December 31, 2002, including third-party guarantees, are
        initially recorded on the balance sheet at fair value. Liabilities for
        guarantees issued on or before December 31, 2002 are recorded when and if
        payments become probable and estimable. FIN 45 has the general effect of
        delaying recognition of a portion of the revenue for product sales that are
        accompanied by certain third-party guarantees. During 2004, 2005 and 2006,
        the
        fair value of guarantees recorded by the Company was expenses of $11,865,
        $4,469
        and a income of $1,603, in 2006.
 
 l)
              Post-retirement
                  benefits
  The
        Company participates in a defined contribution pension plan that provides
        pension benefits for its employees. Expense is recognized as the amount of
        the
        required contribution for the period and is recorded on the accrual
        basis.
  F-14
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Certain
        wholly-owned subsidiaries in the United States of America sponsored a defined
        benefit pension plan, which was terminated and liquidated during 2006, and
        a
        post-retirement medical benefit plan. The Company accounted for such benefits
        in
        accordance with SFAS No. 87 - “Employers’ Accounting for Pensions” and SFAS No.
        106 - “Employers’ Accounting for Postretirement Benefits Other Than Pensions”,
        respectively.
  The
        funded status of the defined benefit pension and post-retirement medical
        benefit
        plans is recorded by the Company based on the funded status of each plan
        as of
        the balance sheet dates. The net periodic cost of the Company’s post-retirement
        medical benefit plan and the terminated defined benefit pension is (was)
        determined using the projected unit credit method and several actuarial
        assumptions, the most significant of which are the discount rate, the long-term
        rate of return on plan assets and the medical cost trend rate (rate of growth
        of
        medical costs).
  In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement
        Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS
        158"). SFAS 158 requires an entity to recognize in its statement of financial
        position the overfunded or underfunded status of its defined benefit
        postretirement plans, measured as the difference between the fair value of
        the
        plan assets and the benefit obligation. SFAS 158 also requires an entity
        to
        recognize changes in the funded status of a defined benefit postretirement
        plan
        within accumulated other comprehensive income, net of tax, to the extent
        such
        changes are not recognized in earnings as components of periodic net benefit
        cost. The Company adopted the aforementioned provisions of SFAS 158 on December
        31, 2006. The impact of adopting SFAS 158 on the Company's consolidated
        financial position is discussed further in Note 22. Additionally, SFAS 158
        requires companies to measure plan assets and benefit obligations at their
        year-end balance sheet date. This requirement, which is effective for fiscal
        years ending after December 15, 2008, will have no effect on the Company
        since
        its post-retirement medical plan assets and liabilities are measured as of
        December 31. The Company adopted this standard at December 31, 2006, which
        resulted in a decrease in long-term liabilities of $754 and an adjustment
        to
        accumulated other comprehensive income of $754.
 
 m)
              Employee
                  profit sharing plan
  The
        Company maintains a profit sharing plan linked to dividend payments to
        shareholders and to action plans and specific goals, established and agreed
        upon
        yearly, that provides employees of the Company and some subsidiaries the
        right
        to share in the Company’s profits. The amounts recorded for profit sharing
        expense are accrued in accordance with the variable compensation policy renewed
        by the Board of Directors in November 2005.
  n)
              Revenue
                  recognition
  The
        Company recognizes revenues of the commercial aviation and executive aviation
        segments when title and risk of loss is transferred to customers, which is
        generally when the aircraft are delivered to customers.
  F-15
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated.
 In
        the
        defense and government segments, a significant portion of revenues is derived
        from long-term development contracts for the Brazilian and foreign governments,
        for which the Company recognizes revenues under the percentage of completion
        (“POC”) method. Such contracts contain provisions for price escalation based on
        a mix of indexes related of raw material and labor cost. From time to time,
        the
        Company reassesses the expected margins of certain long-term contracts,
        adjusting their revenue recognition based upon costs and project completion
        forecast.
  Revenues
        under exchange pool programs are recognized monthly over the contract term
        and
        consist partly of a fixed fee and partly of a variable fee, directly related
        to
        actual flight hours of the covered aircraft. During 2004, 2005 and 2006,
        the
        Company recognized revenues of $13,626, $26,022 and $39,311, respectively,
        from
        exchange pool arrangements, which are reported as net sales in the accompanying
        consolidated statements of income and comprehensive income (customer services
        and other).
 
 Revenue
        is recognized net of indirect sales taxes.
 
 o)
              Research
                  and development
  Research
        and development costs are expensed when incurred and are recorded net of
        amounts
        contributed by risk-sharing suppliers. Amounts received from risk-sharing
        suppliers as contributions for research and development activities are
        classified as contributions from suppliers and recognized as revenue only
        when
        the Company has met its obligations under the provisions of the related supply
        agreements. Net research and development expense was $44,506, $93,166 and
        $112,743 for 2004, 2005 and 2006, respectively. In 2004, 2005 and 2006, Embraer
        recognized income of $108,640, $55,085 and $36,003, respectively, related
        to
        payments previously received from risk-sharing partners related to the
        certification of the EMBRAER 170, EMBRAER 175 and EMBRAER 190 and the
        fulfillment of other contractual milestones.
  p)
              Stock
                  compensation
  In
        December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This
        statement revised SFAS No. 123, “Accounting for Stock-Based Compensation”,
        amended SFAS No. 95, “Statement of Cash Flows”, and superseded APB No. 25,
“Accounting for Stock Issued to Employees”. SFAS 123(R) requires companies to
        apply a fair-value based measurement method in accounting for share-based
        payment transactions with employees and to record compensation expense for
        all
        share awards granted, and to awards modified, repurchased or cancelled after
        the
        required effective date. In addition, companies are required to record
        compensation expense (as previous awards continue to vest) for the unvested
        portion of previously granted awards that remain outstanding at the date
        of
        adoption. SFAS 123R is effective for annual periods beginning after June
        15,
        2005, which is the Company’s fiscal 2006. The Company has a share-based
        compensation plan as described in Note 26. On January 1, 2006, the Company
        adopted statement of Financial Accounting Standards No. 123R, "Shared-Based
        Payment," ("SFAS No. 123R”) using the modified prospective application
        transition method. Under the modified prospective method, compensation cost
        is
        recognized for all share-based payments granted after the adoption of SFAS
        No.
        123R and for all awards granted to employees prior to the adoption of SFAS
        No.
        123R that were unvested on the adoption date. The adoption of SFAS 123R did
        not
        have a material impact on the Company’s financial statements for 2006 because no
        new share-based payments have been granted by the Company after the adoption
        of
        SFAS No. 123R and the awards granted to employees prior to the adoption of
        SFAS
        No. 123R that were unvested were not significant. In accordance with the
        modified prospective application transition method, the Company's consolidated
        financial statements for prior periods have not been restated to reflect,
        and do
        not include, the impact of SFAS No. 123(R).
  F-16
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Prior
        to
        the adoption of SFAS 123R, the Company applied Accounting Principles Board
        Opinion No. 25, “Accounting for Stock Issued to Employees” in accounting for its
        employee stock compensation plan. Under such standard, the Company recorded
        an
        expense for stock-based compensation in an amount equal to the excess of
        the
        quoted market price over the option exercise price on the grant dates, if
        any. Since
          there were no options granted in 2004 and 2005, there would be no impact
          if the
          Company had applied the provisions of SFAS 123 “Accounting for Stock based
          Compensations.”
  q)
              Income
                  taxes
  Income
        taxes in Brazil are comprised of federal income tax and social contribution
        tax.
        There are no state or local income taxes in Brazil. The enacted income tax
        rates
        applicable for the years ended December 31, 2004, 2005 and 2006 are as
        follows:
  Federal
                  income tax rate
              
              
              25
              %Social
                  contribution tax rate
              
              
              9
              %Combined
                  tax rate
              
              
              34
              %
  The
        Company records income taxes in accordance with SFAS No. 109, "Accounting
        for
        Income Taxes". The effects of adjustments made to reflect the US GAAP
        requirements, as well as the differences between the tax basis and the amounts
        included in the BR GAAP have been recognized as temporary differences for
        the
        purpose of recording deferred income taxes, except that, in accordance with
        paragraph 9(f) of SFAS No. 109, deferred taxes have not been recorded for
        differences relating to certain assets and liabilities that are remeasured
        from
        Brazilian *reais* to
        US$ at
        historical exchange rates and that result from changes in exchange rates
        or
        indexing to inflation in local currency for tax purposes.
 
 r)
              Derivative
                  financial instruments
  The
        Company accounts for derivative financial instruments pursuant to SFAS No.
        133,
“Accounting for Derivative Instruments and Hedging Activities”, as amended. This
        standard requires that all derivative instruments be recognized in the financial
        statements and measured at fair value regardless of the purpose or intent
        for
        holding them. The Company’s derivative financial instruments have not qualified
        for hedge accounting designation for purposes of SFAS No. 133. Accordingly,
        changes in the fair value of these derivative financial instruments are recorded
        in income and classified as a component of interest income (expense), net
        in the
        consolidated statements of income and comprehensive income (Note
        21).
  F-17
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 s)
              Comprehensive
                  income
  SFAS
        No.
        130, “Reporting Comprehensive Income”, establishes standards for reporting and
        display of comprehensive income and its components in financial statements.
        It
        requires that all items that are required to be recognized under accounting
        standards as components of comprehensive income be reported in a financial
        statement that is displayed with the same prominence as other financial
        statements. Comprehensive income of the Company consists of net income, the
        effects of foreign currency translation adjustments and commenting in 2006,
        the
        effects of recording the funded status of post-employment benefit plans in
        accordance with SFAS No. 158.
  t)
              Compensated
                  absences
  The
        liability for future compensation of employee vacations earned is fully accrued
        as benefits are earned.
 
 u)
              Use
                  of estimates
  The
        preparation of the financial statements in conformity with generally accepted
        accounting principles requires management to make estimates and adopt
        assumptions that affect the reported amounts of assets and liabilities,
        disclosure of contingent assets and liabilities and the fair value of financial
        instruments on the balance sheet dates and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results may differ from such
        estimates.
  
 v)
              Adoption
                  of Securities and Exchange Commission Staff Accounting Bulletin
                  No. 108.
                  In September 2006, the Securities and Exchange Commission issued
                  Staff
                  Accounting Bulletin No. 108, "Considering the Effects of Prior
                  Year
                  Misstatements when Quantifying Misstatements in Current Year Financial
                  Statements" ("SAB 108"). SAB 108 provides guidance on how prior
                  year
                  misstatements should be taken into consideration when quantifying
                  misstatements in current year financial statements for purposes
                  of
                  determining whether the current year's financial statements are
                  materially
                  misstated. SAB 108 is effective for fiscal years ending after November
                  15,
                  2006. The adoption of SAB 108 did not have a material impact on
                  the
                  Company's consolidated financial position, annual results of operations
                  or
                  cash flows.
  F-18
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 4.
              RECENTLY
                  ISSUED ACCOUNTING PRONOUNCEMENTS - NOT YET
                  ADOPTED
  In
        July
        2006, the FASB issued FASB Interpretation No. 48 ("FIN 48"), "Accounting
        for
        Uncertainty in Income Taxes--an Interpretation of FASB Statement No. 109"
        which
        clarifies the accounting for and disclosure of uncertain tax positions. This
        guidance seeks to reduce the diversity in practice associated with certain
        aspects of the recognition and measurement related to tax positions with
        uncertainty. FIN 48 requires that a tax position taken or expected to be
        taken
        in a tax return be recognized in the financial statements when it is more
        likely
        than not (i.e., a likelihood of more than fifty percent) that the position
        would
        be sustained upon examination by tax authorities. A recognized tax position
        is
        then measured at the largest amount of benefit that is greater than fifty
        percent likely of being realized upon ultimate settlement. The Company will
        adopt the provisions of FIN 48 effective January 1, 2007. Management is
        evaluating the potential impact of this interpretation on the Company’s
        financial statements but does not anticipate any material impact on
        it.
 
 In
        September 2006, the FASB issued Statement of Financial Accounting Standards
        No.
        157, "Fair Value Measurements" ("SFAS 157"), which is effective for financial
        statements issued for fiscal years beginning after November 15, 2007. Therefore,
        the Company expects to adopt SFAS 157 at the beginning of fiscal 2008. This
        standard clarifies the definition of fair value, establishes a framework
        for
        using fair value to measure assets and liabilities, and expands the disclosures
        on fair value measurements. This standard also responds to investors’ requests
        for expanded information about the extent to which companies measure assets
        and
        liabilities at fair value, the information used to measure fair value and
        the
        effect of fair value measurements on earnings. SFAS 157 applies whenever
        other
        standards require (or permit) assets or liabilities to be measured at fair
        value. The standard does not expand the use of fair value in any new
        circumstances. The Company does not expect the adoption of SFAS 157 to have
        a
        material impact on the Company's consolidated financial position, annual
        results
        of operations or cash flows.
 
 In
        February 2007, the FASB issued Statement of Financial Accounting Standards
        No.
        159, "The Fair Value Option for Financial Assets and Financial Liabilities,
        including an amendment of FASB Statements No. 115" ("SFAS No. 159"). SFAS
        No.
        159 permits entities to choose, at specified election dates, to measure eligible
        items at fair value (the "fair value option"). A business entity shall report
        unrealized gains and losses on items for which the fair value option has
        been
        elected in earnings at each subsequent reporting period. This accounting
        standard is effective as of the beginning of an entity's first fiscal year
        that
        begins after November 15, 2007. The effect, if any, of adopting SFAS No.
        159 on
        the Company's consolidated financial position, annual results of operations
        or
        cash flows has not been finalized.
  F-19
 EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 5.  CASH
        AND
        CASH EQUIVALENTS
  At
                  December 31,2005
              
              2006Cash
                  and bank balancesIn
                  Brazilian*reais
                  - R$*
              
              
              21,925
              
              
              10,231In
                  U.S. dollar - US$
              
              
              14,359
              
              
              24,441In
                  other currencies
              
              
              37,979
              
              
              79,737Cash
                  equivalentsDenominated
                  in US$ (i)
              
              
              1,064,935
              
              
              751,331Denominated
                  in*R$*(ii)
              
              
              188,814
              
              
              333,211Denominated
                  in other currencies
              
              
              11,147
              
              
              10,4451,339,159
              
              
              1,209,396
  (i)
              Represents
                  time deposits and overnight funds deposited overseas by consolidated
                  subsidiaries; the average annualized interest rate for the year
                  ended
                  December 31, 2006 was 5.29% (2005 - 3.27%).
  (ii)
              Mainly
                  represented by money market funds at several financial institutions,
                  primarily comprised of debt instruments classified as held for
                  trading
                  purposes under SFAS 115. These funds are exclusively for the benefit
                  of
                  the Company and managed by third parties who charge a monthly commission
                  fee. The funds are comprised of investments that have daily liquidity
                  and
                  are marked-to-market on a daily basis with changes in fair value
                  reflected
                  in results of operations. The target returns are specified with
                  each
                  financial institution based on a percentage of the CDI (Brazilian
                  Interbank Deposit Rate). In 2006, the weighted average annualized
                  interest
                  income rate was 15.38% (2005 - 19.15%) compared to 15.04% of the
                  CDI in
                  the same period (2005 - 18.99%).
 
 6.  TEMPORARY
        CASH INVESTMENTS
  At
                  December 31,2005
              
              2006Temporary
                  cash investments
              
              
              574,395
              
              
              555,795574,395
              
              
              555,795
 
 At
        December 31, 2006 and 2005, the Company held investments in private investment
        money market funds primarily comprised of debentures issued by private companies
        and notes issued by the Brazilian federal government. The securities included
        in
        the portfolio of the private investment funds have daily liquidity and are
        marked-to-market on a daily basis. The Company considers these investments
        as
        securities held for trading purposes, with changes in the fair value reflected
        in results of operations.
  F-20
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 These
        private investment funds do not have significant financial obligations. Any
        financial obligations are limited to asset management and custodial fees,
        audit
        fees and similar expenses. There are no consolidated assets of the Company
        that
        are collateral for these obligations and the creditors of the funds do not
        have
        recourse against the general credit of the Company.
 
 7.  TRADE
        ACCOUNTS RECEIVABLE
  At
                  December 31,2005
              
              2006Commercial
                  Aviation
              
              
              99,515
              
              
              -Defense
                  and Government-
                  Brazilian Air Force
              
              
              120,910
              
              
              87,268-
                  Other
              
              
              49,673
              
              
              26,103Customer
                  Services and others
              
              
              205,972
              
              
              212,865476,070
              
              
              326,236Less
                  allowance for doubtful accounts receivable
              
              
              (25,246
              )
              
              (31,974
              )450,824
              
              
              294,262Less
                  - current portion
              
              
              445,520
              
              
              272,153Long-term
                  portion
              
              
              5,304
              
              
              22,109
 
  Unbilled
        accounts receivable totaled $14,786 at December 31, 2006 (2005 - $76,759)
        referring to revenues from long-term defense contracts recognized under the
        percentage of completion method.
  The
        allowance for doubtful accounts is summarized as follows:
  Year
                  ended at December 31,2004
              
              2005
              
              2006Beginning
                  balance
              
              
              24,259
              
              
              23,497
              
              
              25,246Write-offs
              
              
              (6,033
              )
              
              (360
              )
              
              (1,503
              )Additions
              
              
              5,271
              
              
              2,109
              
              
              8,231Ending
                  balance
              
              
              23,497
              
              
              25,246
              
              
              31,974
 
 F-21
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Major
        customers
  In
        2004,
        2005 and 2006, the Company had sales to customers that individually accounted
        for more than 10% of the Company’s sales for the respective year. Shown below is
        the percentage of total net sales and accounts receivable for each
        customer.
  Net Sales (%)2004
              
              2005
              
              2006Commercial
                  AviationContinental/ExpressJet
              
              
              12.4
              
              
              11.7
              
              
              4.6American
                  Eagle
              
              
              19.8
              
              
              10.3
              
              
              -Republic/Chautauqua
              
              
              14.3
              
              
              17.5
              
              
              6.7US
                  Airways
              
              
              13.6
              
              
              1.7
              
              
              1.5Air
                  Canada
              
              
              -
              
              
              11.4
              
              
              11.5Jet
                  Blue
              
              
              -
              
              
              -
              
              
              11.1
  8.  CUSTOMER
        AND COMMERCIAL FINANCING
  At
                  December 31,2005
              
              2006Notes
                  receivable (i)
              
              
              287,926
              
              
              217,393Operating
                  lease equipment, at cost, less accumulated depreciation of$29,127
                  and $36,081 as of December 31, (ii)
              
              
              319,236
              
              
              351,573607,162
              
              
              568,966Current
                  portion
              
              
              147,118
              
              
              16,215Long-term
                  portion
              
              
              460,044
              
              
              552,751
  (i)
        Notes
        receivable represent sales financing, indexed at average interest rates of
        5.9%
        per year with maturities through 2021. The maturity schedule is as follows
        at
        December 31, 2006:
  Year
              
              20062007
              
              
              16,2152008
              
              
              14,8832009
              
              
              9,3622010
              
              
              9,8872011
              
              
              10,4452012
              
              
              11,038Thereafter
              
              
              145,563Total
              
              
              217,393
  F-22
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 (ii)
        Operating lease equipment includes used turboprop and jet aircraft which
        are
        either under operating lease agreements or available for remarketing. In
        2005,
        there were 9 available for remarketing in the amount of $72,969, which 2
        were
        sold, 5 were leased and there are still 2 available for sale. Rental income
        for
        leased aircraft amounted to $16,006, $26,202 and $ 34,785 for 2004, 2005
        and
        2006, respectively.
  Minimum
        future rentals on non-cancelable operating leases for each of the five
        succeeding years are as follows at December 31, 2006:
  Year
              
              20062007
              
              
              42,6602008
              
              
              41,2472009
              
              
              31,4242010
              
              
              21,0002011
              
              
              9,347
  9.
              COLLATERALIZED
                  ACCOUNTS RECEIVABLE AND NON-RECOURSE AND RECOURSE
                  DEBT
  Some
        of
        the Company’s sales transactions are structured financing through which an SPE
        purchases the aircraft, pays the Company the purchase price on delivery or
        at
        the conclusion of the sales financing structure, and leases the related aircraft
        to the ultimate customer. A third-party financial institution facilitates
        the
        financing of the aircraft purchase through a SPE, and a portion of the credit
        risk remains with the third party. The Company may provide financial guarantees
        and/or residual value guarantees in favor of the financial institution, as
        well
        as act as the equity participant in such financial structuring
        process.
  As
        from
        2004, the Company adopted FIN 46-R, “Consolidation of Variable Interest Entities
        an interpretation of ARB 51”, and began to consolidate variable interest
        entities in which it has a variable interest that will absorb a majority
        of the
        entity's expected losses if they occur, receive a majority of the entity's
        expected residual returns if they occur, or both. Accordingly, SPEs owned
        by
        third parties where the Company is the primary beneficiary are consolidated
        on
        the Company ́s financial statements.
  Generally,
        the underlying lease transactions qualify as sales-type leases and, as a
        result,
        the consolidation of these SPEs results in an amount of investments in minimum
        lease payments receivable and residual value, gross of unearned income in
        the
        amount of $1,413,040 and $1,360,253, and a net amount of $854,220 and $819,722
        as of December 31, 2005 and 2006, respectively, which are being presented
        as
        collateralized accounts receivable.
  F-23
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Such
        consolidation has also resulted in an amount of non-recourse debt of $558,409
        and $511,181, and an amount of recourse debt of $260,844 and $318,577, as
        of
        December 31, 2005 and 2006, respectively.
  The
        components of investment in sales-type leases at December 31 were as follows:
 
 2005
              
              2006Minimum
                  lease payments receivable
              
              
              842,222
              
              
              773,015Estimated
                  residual value of leased assets
              
              
              570,818
              
              
              587,238Unearned
                  income
              
              
              (558,820
              )
              
              (540,531
              )Investments
                  in sales-type lease
              
              
              854,220
              
              
              819,722Less
                  - current portion
              
              
              65,440
              
              
              70,980Long-term
                  portion
              
              
              788,780
              
              
              748,742
  The
          Residual Value of the sales-type lease assets is estimated at the lease
          inception based on a number of factors, including the estimated future
          market
          value of our aircraft based on third party appraisals, including information
          developed from similar aircraft remarketing in the secondary market. The
          Company
          quarterly reassess the sales-type lease investment amount for impairment
          based
          on third party appraisals and credit rating for customers.
 Maturities
        of minimum lease payments receivable are summarized as follows:
  Year
              
              At
                  December 31, 20062007
              
              
              70,9802008
              
              
              68,9232009
              
              
              57,9772010
              
              
              56,9292011
              
              
              54,0202012
              
              
              57,753After
                  2012
              
              
              406,433773,015
  10.
                INVENTORIES
  At
                  December 31,2005
              
              2006Finished
                  goods
              
              
              86,635
              
              
              289,212Work-in-process
                  (i)
              
              
              677,174
              
              
              744,284Raw
                  materials
              
              
              599,667
              
              
              825,235Inventory
                  in transit
              
              
              103,425
              
              
              171,289Advances
                  to suppliers
              
              
              10,658
              
              
              17,2241,477,559
              
              
              2,047,244
  The
        amounts presented above are net of obsolescence provision.
  F-24
  EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
        thousands of U.S. dollars, unless otherwise stated)
 
  (i)
              Includes
                  $141,743 related to 8 pre-series aircraft (2005 - $206,438 related
                  to 12
                  aircraft) of the EMBRAER 170/190 family and one Legacy, which were
                  in
                  construction or in use under the certification campaign.
  11.
              OTHER
                  ASSETS
  At
                  December 31,2005
              
              2006Guarantee
                  deposits (i)
              
              
              520,794
              
              
              590,720Restricted
                  cash from consolidated sales type lease
              
              
              10,851
              
              
              9,717Credits
                  with suppliers (ii)
              
              
              8,530
              
              
              17,492Prepaid
                  expenses (iii)
              
              
              14,664
              
              
              21,120Taxes
                  recoverable (v)
              
              
              45,981
              
              
              54,283Advances
                  to employees
              
              
              7,156
              
              
              9,321Compulsory
                  loans and bank guarantee deposits
              
              
              17,317
              
              
              16,322Commission
                  advances
              
              
              2,853
              
              
              5,361Escrow
                  deposits
              
              
              20,316
              
              
              108,870Prepaid
                  insurance
              
              
              16,544
              
              
              14,479Exchange
                  pools
              
              
              33,746
              
              
              29,889Unrealized
                  gains on derivatives (Note 31)
              
              
              330
              
              
              4,122Accounts
                  Receivable-National Bank for Economic and Social Development -
                  BNDES
                  (iv)
              
              
              63,725
              
              
              1,809Other
              
              
              22,844
              
              
              33,554785,651
              
              
              917,059Less-
                  Current portion
              
              
              444,955
              
              
              471,428Long-term
                  portion
              
              
              340,696
              
              
              445,631
  (i)
              Guarantee
                  deposits are mainly represented by:
  (a)
              $272,661
                  refers to amounts deposited in guaranteed deposits as collateral
                  for
                  financing and residual value guarantees of certain aircraft sold
                  (see note
                  34) (2005 - $249,673). If the guarantor of the debt (an unrelated
                  third
                  party) is required to pay the creditors of such financing arrangement
                  or
                  the residual value guarantee, the guarantor has the right to withdraw
                  from
                  the escrow account. The deposited amounts will be released when
                  the
                  financing contracts mature (from 2013 to 2021) if no default by
                  the buyers
                  of the aircraft occurs or the aircraft market price is above the
                  residual
                  value guarantee. The interest earned on the escrow funds is added
                  to the
                  balance in escrow and is recorded as interest income by the Company.
                  In
                  order to earn a better interest rate on such guarantee deposits,
                  in 2004,
                  the Company structured notes in the face amount of $123,400 with
                  the
                  depositary bank which generated interest in the amount of $7,581
                  in 2006
                  (2005 - $6,940), which was added to the principal amount and recognized
                  in
                  the consolidated statements of income and comprehensive income.
                  This yield
                  enhancement was obtained through a credit default swap (CDS) transaction
                  which provides to the note holder the right of early redemption
                  of the
                  note in case of a credit event by the Company. Upon such credit
                  event, the
                  note may be redeemed by the holder at the greater of the note’s market
                  value or its original face amount, which would result in a loss
                  of all
                  interest accrued on such note to
                  date.
 F-25
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 
  (b)
                $318,059
                    (2005 -$260,764) relates to amounts deposited with a third party
                    financial
                    institution as a pledge under a specific sale financing
                    structure.
  (ii)
                Credits
                    with suppliers represent price discounts, rebates and free aircraft
                    parts
                    to be received from suppliers in connection with purchases
                    made.
  (iii)
                Prepaid
                    expenses represent credits for parts and the training of pilots,
                    mechanics
                    and flight attendants granted to customers in connection with
                    the sale of
                    aircraft. Such credits are stated in the sales contract in terms
                    of number
                    of aircraft sold and are included in the overall sales price
                    of the
                    aircraft. The actual delivery of such parts and services may
                    be different
                    from that of the aircraft. The amounts reflect the cost of such
                    concessions provided in advance of the aircraft delivery. These
                    amounts
                    will be recognized as selling expense in the periods aircraft
                    deliveries
                    are made and the corresponding revenues are
                    recognized.
  (iv)
                Refers
                    to credits derived from financing pending receipt from the
                    BNDES.
 
 (v)
                Refers
                    mainly to PIS/COFINS and ICMS tax credits recoverable on purchases
                    of
                    production inputs.
  12.
                INVESTMENTS
  At
                    December 31,2005
                
                2006Held-to-maturity
                    securities - NTNs (i)
                
                
                31,269
                
                
                32,840Other
                
                
                164
                
                
                1,00431,433
                
                
                33,844
  (i)
                Refers
                    to debt securities, represented by National Treasury Notes, acquired
                    by
                    the Company from customers, related to the equalization of interest
                    rates
                    to be paid by the Export Financing Program - PROEX between the
                    11thand 15thyear after the sale of the related aircraft, recorded at its
                    present
                    value. The interest earned is added to the balance and recorded
                    as
                    interest income, as the Company has the intent to hold these
                    securities
                    until maturity.
  On
          March
          9, 2005, the Company acquired 65% of the voting capital of OGMA, a Portuguese
          aeronautical maintenance and production company (Note 1).  The acquisition
          has been accounted for as a business combination under SFAS 141, “Business
          Combinations” and OGMA’s financial statements included on the Company’s
          consolidated financial statements as from that date.  The pro forma effects
          of the OGMA acquisition on the Company’s historical consolidated financial
          statements are not material.
  F-26
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  The
          aggregate purchase price was $15,417 (or €11,388), which generated negative
          goodwill of $ 18,854. The following table summarizes the purchase price
          allocation made to determine the negative goodwill on this
          acquisition:
  As
                    of March 9,2005Net
                    Assets
                
                
                52,724Percentage
                    acquired
                
                
                65
                %Historical
                    net assets acquired
                
                
                34,271Purchase
                    Price
                
                
                15,417Net
                    Value to be allocated
                
                
                18,854AllocationFiscal
                    and Legal Contingencies
                
                
                (3,129
                )Warranties
                
                
                (411
                )Dismissal
                
                
                (6,960
                )Commitment
                    Investments
                
                
                (2,556
                )Accounts
                    payable to seller
                
                
                (2,405
                )Total
                    Allocation
                
                
                (15,461
                )Excess
                    of fair value
                
                
                (3,393
                )
  The
          excess of fair value of acquired net assets over cost generated based on
          the
          purchase price allocation above was recorded in other non-operating income
          (expenses), net for the year ended December 31, 2005.
 
 13.
                PROPERTY,
                    PLANT AND EQUIPMENT, NET
 
 Estimated
                
                At
                    December 31,useful
                
                2005
                
                2006life
                
                
                
                Accumulated
                
                
                
                
                
                Accumulated(years)
                
                Cost
                
                depreciation
                
                Net
                
                Cost
                
                depreciation
                
                NetLand
                
                
                -
                
                
                2,512
                
                
                -
                
                
                2,512
                
                
                2,483
                
                
                -
                
                
                2,483Buildings
                    and land improvements
                
                
                10
                    to 48
                
                
                222,925
                
                
                68,938
                
                
                153,987
                
                
                234,407
                
                
                71,312
                
                
                163,095Installations
                
                
                10
                    to 31
                
                
                84,963
                
                
                59,545
                
                
                25,418
                
                
                84,552
                
                
                62,552
                
                
                22,000Machinery
                    and equipment
                
                
                5
                    to 17
                
                
                266,437
                
                
                203,902
                
                
                62,535
                
                
                290,377
                
                
                223,713
                
                
                66,664Tooling
                
                
                10
                
                
                124,229
                
                
                52,912
                
                
                71,317
                
                
                148,781
                
                
                66,699
                
                
                82,083Furniture
                    and fixtures
                
                
                5
                    to 10
                
                
                25,574
                
                
                18,072
                
                
                7,502
                
                
                28,233
                
                
                19,435
                
                
                8,798Vehicles
                
                
                5
                    to 14
                
                
                9,613
                
                
                7,471
                
                
                2,142
                
                
                10,556
                
                
                8,234
                
                
                2,322Aircraft
                    (i)
                
                
                5
                    to 20
                
                
                14,191
                
                
                7,683
                
                
                6,508
                
                
                18,650
                
                
                10,799
                
                
                7,851Computers
                    and peripherals
                
                
                5
                
                
                102,776
                
                
                83,721
                
                
                19,055
                
                
                94,978
                
                
                83,728
                
                
                11,250Software
                
                
                5
                
                
                78,157
                
                
                60,962
                
                
                17,195
                
                
                84,355
                
                
                67,580
                
                
                16,775Other
                
                
                5
                
                
                21,813
                
                
                14,988
                
                
                6,825
                
                
                16,703
                
                
                7,911
                
                
                8,791Construction
                    in progress
                
                
                -
                
                
                13,366
                
                
                -
                
                
                13,366
                
                
                20,132
                
                
                -
                
                
                20,132966,556
                
                
                578,194
                
                
                388,362
                
                
                1,034,207
                
                
                621,963
                
                
                412,244
 
 (i)
          These
          aircraft are used for external demonstration and for internal use
          purposes.
  F-27
 
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  14.
                CONTRIBUTION
                    FROM SUPPLIERS
  The
          Company has agreements with certain key suppliers for the participation
          in
          research and development activities. Certain supply agreements require
          that such
          suppliers provide cash contributions to the Company as compensation for
          their
          participation as suppliers in such programs. As part of the related supply
          agreements, these contributions are subject to the Company meeting certain
          performance milestones, including successful certification of the aircraft,
          first delivery and minimum number of aircraft deliveries. The Company records
          such contributions as a liability when received and as reduction to research
          and
          development when contractual milestones are achieved.
  15.
                OTHER
                    PAYABLES AND ACCRUED LIABILITIES
  At
                    December 31,2005
                
                2006Accounts
                    payable
                
                
                41,666
                
                
                68,663Deferred
                    income (i)
                
                
                56,377
                
                
                51,060Product
                    warranties (ii)
                
                
                90,904
                
                
                97,354Product
                    improvement liabilities (ii)
                
                
                40,350
                
                
                43,509Commercial
                    incentives (iii)
                
                
                23,599
                
                
                38,072Technical
                    assistance and training (iii)
                
                
                37,641
                
                
                48,254Accrued
                    payroll and related charges
                
                
                79,701
                
                
                90,335Accrued
                    employee profit sharing
                
                
                33,662
                
                
                29,097Post-retirement
                    benefits (Note 22)
                
                
                3,637
                
                
                4,963Insurance
                
                
                5,313
                
                
                4,857Provision
                    related to financial guarantees (Note 34)
                
                
                54,011
                
                
                32,402Unrealized
                    losses on derivatives (Note 31)
                
                
                18,450
                
                
                15,236Other
                
                
                45,660
                
                
                17,001530,971
                
                
                540,803Less-Current
                    portion
                
                
                405,965
                
                
                433,291Long-term
                    portion
                
                
                125,006
                
                
                107,512
  (i)
                Refers
                    to certain aircraft sales that, due to contractual contingent
                    obligations,
                    are accounted for as operating
                    leases.
  F-28
 
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  (ii)
                Represent
                    accruals for product liability programs including warranty and
                    contractual
                    obligations to implement improvements in aircraft sold to meet
                    contractual
                    performance indices.
 
 (iii)
                Amounts
                    represent accruals for customer sales concessions and allowances
                    including
                    spare parts, commercial rebates and services related to technical
                    assistance and training of mechanics and
                    crews.
  16.
                ADVANCES
                    FROM CUSTOMERS
  At
                    December 31,2005
                
                2006Denominated
                    in:US$
                
                
                566,422
                
                
                706,270Brazilian*reais*
                
                
                16,560
                
                
                22,171582,982
                
                
                728,441Less-Current
                    portion
                
                
                485,958
                
                
                544,802Long-term
                    portion
                
                
                97,024
                
                
                183,639
  The
          advances denominated in Brazilian *reais* are
          presented in US$ in the above table at the exchange rates prevailing at
          the
          respective balance sheet dates. The allocation between current and long-term
          portions is based on the contractual terms for delivery of the related
          aircraft.
  17.
                TAXES
                    AND PAYROLL CHARGES PAYABLE
  At
                    December 31,2005
                
                2006Refinanced
                    INSS / FUNRURAL (social security contribution on rural worker’s
                    compensation)
                
                
                56,415
                
                
                16,014Current
                    taxes (other than taxes on income)
                
                
                27,939
                
                
                43,464Disputed
                    taxes and social charges (i)
                
                
                542,749
                
                
                532,520627,103
                
                
                591,998Less-current
                    portion
                
                
                113,360
                
                
                136,950Long-term
                    portion
                
                
                513,743
                
                
                455,048
  (i)
          The
          Company is challenging in Court the merit and constitutionality of several
          taxes
          and has obtained writs of mandamus or injunctions to avoid payment of such
          taxes. Pending a final decision on such cases, the Company is recognizing
          as
          expenses the total amount of the legal obligations and accruing interest
          calculated based on the SELIC (Central Bank overnight rate) on those
          liabilities, as it would be required to do if the Company is unsuccessful
          in
          these lawsuits. SELIC represented a nominal variation of 15.08 % for the
          year
          ended December 31, 2006 (2005 - 14.12%). The principal taxes being challenged
          in
          court are as follows:
  ·
                The
                    Company is questioning in Court certain changes in rates and
                    tax basis of
                    PIS (Social Contribution on Gross Revenue) and COFINS (Social
                    Contribution
                    on Billing), determined by Law no 9.718/98 from January 1, 1999 (PIS and
                    COFINS) and Law 10.637/02 from December 30, 2002 (PIS). Total
                    amount
                    accrued amounts to $214,160 as of December 31, 2006 ($178,838
                    as of
                    December 31, 2005).
  F-29
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  ·
                The
                    Company is required to pay to the government a tax called SAT
                    (Workers
                    Compensation Insurance) at a rate of 3% of wages. In December
                    1998, the
                    Company obtained a preliminary injunction to reduce the tax rate
                    from 3%
                    to 1%, and the difference has been accrued and amounts to $61,648
                    at
                    December 31, 2006 ($45,280 as of December 31,
                    2005).
 
 ·
                In
                    April 1999, the Company obtained a Writ of Mandamus that authorized
                    the
                    offset of tax payments (INSS - social security contribution),
                    which were
                    made in August, September and October 1989, against future payments,
                    due
                    to a rate increase from 10% to 20%, which the Company believes
                    was
                    unconstitutional. The amount of $25,587 was accrued as of December
                    31,
                    2006 ($21,585 as of December 31, 2005).
  ·
                IPI
                    (Federal VAT) - The Company is claiming the right to offset IPI
                    credits on
                    the acquisition of non-taxable or zero-rate raw materials against
                    income
                    and social contribution taxes. The amount of taxes accrued but
                    not paid
                    related to this claim as of December 31, 2006 was $43,992 ($147,522
                    as of
                    December 31, 2005). Such reduction was originated by the partial
                    payment
                    of the IPI tax under dispute, which was benefited with a reduction
                    in the
                    interest and fines amounts, based on Provisional Measure 303,
                    of June 29,
                    2006, resulting in reversals of provisions shown in the consolidated
                    statements of income and comprehensive income in the Financial
                    Expense and
                    Other Operating Income respectively.
  ·
                The
                    Company is challenging the payment of the social contribution
                    incurred on
                    export sales revenues. The amount of taxes accrued but not paid
                    related to
                    this claim was $178,179 as of December 31, 2006 ($140,977 as
                    of December
                    31, 2005).
  18.
                CONTINGENCIES
  Based
          on
          an analysis of each claim and on consultation with its outside legal counsel,
          the Company has recognized provisions for probable losses arising from
          its legal
          proceedings involving tax, labor and civil matters, as shown below:
 
 At
                    December 31,2005
                
                2006Labor
                    contingencies (i)
                
                
                24,561
                
                
                32,244Tax
                    contingencies (ii)
                
                
                26,682
                
                
                21,667Civil
                    disputes
                
                
                2,274
                
                
                2,582Other
                    contingencies
                
                
                -
                
                
                8,05153,517
                
                
                64,544Less-current
                    portion
                
                
                19,826
                
                
                31,175Long-term
                    portion
                
                
                33,691
                
                
                33,369
  (i)
                The
                    labor lawsuits relate to claims brought by unions on behalf of
                    employees
                    or by individuals, in which former employees are individually
                    claiming
                    overtime, productivity premiums, reinstatement, allowances and
                    retroactive
                    salary increases and adjustments.
  F-30
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  A
          lawsuit
          claiming a retroactive salary increase was brought by the labor union in
          June
          1991 in the name of all employees of the Company which worked at November
          1990.
          The objective of the claim is to make the salary increase granted by the
          Company
          in January and February 1991 retroactive to November and December 1990,
          through
          an agreement with the employees’ union. As of December 31, 2006, approximately
          97% of current and former employees have agreed to settlements. Another
          on going
          claim relates to monetary restatements associated with the “ *Plano
          Collor”* and *“Plano
          Verão” (Brazilian economic recovery plans)* on the
          FGTS (employee severance pay fund) penalty paid by the Company for employees
          dismissed between December 1988 and April 1990. In the opinion of the legal
          advisors, the chances of success in this suit are remote.
  (ii)
                This
                    provision relates to income tax and social contributions contingencies
                    resulted from notices of assessment received from Brazilian Federal
                    Revenue Department. The company is challenging de applicability
                    of these
                    assessments and waits for a final
                    decision.
  19.
                  LOANS
                      AND FINANCING
  Summary
  Final
                
                
                
                At
                    December 31,Description
                
                Maturity
                
                Currency
                
                Annual
                    interest rate - %
                
                2005
                
                2006**Foreign
                    Currency**Materials
                    acquisition
                
                2011
                
                U.S.
                    dollar
                
                4.12
                    to 8.05;
                
                526,224
                
                229,049LIBOR
                    plus 1.75 to 2.70(1)2006
                
                Japanese
                    yen
                
                JIBOR
                    plus 1.05(2)
                
                31,443
                
                -Export
                    financing
                
                2010
                
                U.S.
                    dollar
                
                7.81
                
                50,846
                
                50,824Advances
                    on foreign exchange contracts
                
                2007
                
                U.S.
                    dollar
                
                5.42
                    to 5.98
                
                96,763
                
                7,265Project
                    development
                
                2016
                
                U.S.
                    dollar
                
                LIBOR
                    plus 2.50 to 3.50
                
                182,360
                
                182,353Working
                    capital
                
                2011
                
                Euro
                
                Euribor
                    plus 1.5(3)
                
                25,324
                
                33,9153.65%
                    a 6.00%2017
                
                U.S.
                    dollar
                
                LIBOR
                    plus 2,70%
                
                416,677
                
                536,9063.65
                    to 7.7;Property
                    and Equipment Additions
                
                2008
                
                U.S.
                    dollar
                
                Libor
                    plus 3.40
                
                -
                
                10,6262.39
                    to 3.27Subtotal
                
                
                
                
                
                
                
                1,329,637
                
                1,050,938**Local
                    Currency**Project
                    development
                
                2013
                
                
                
                TJLP
                    plus 1.00 to 6.00(4)
                
                13,891
                
                34,526Export
                    financing
                
                2008
                
                
                
                TJLP
                    plus 2.20
                
                201,277
                
                257,360Working
                    capital
                
                2007
                
                
                
                115%
                    of the CDI(5)
                
                5,775
                
                6,327Property
                    and equipment additions
                
                2006
                
                
                
                TJLP
                    plus 3.00 to 4.35
                
                2,842
                
                -Subtotal
                
                
                
                
                
                
                
                223,785
                
                298,213Total
                    debt
                
                
                
                
                
                
                
                1,553,422
                
                1,349,151Less-Current
                    portion
                
                
                
                
                
                
                
                475,305
                
                503,047Long-term
                    portion
                
                
                
                
                
                
                
                1,078,117
                
                846,104
  (1) 
          LIBOR means London Interbank Offered Rate.
  F-31
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  (2) 
          JIBOR means Japanese Interbank Offered Rate.
  (3)
           Euribor means Euro Interbank Offered Rate.
  (4) 
          The annualized TJLP (Government nominal long-term interest rate), fixed
          quarterly, was 6.85 at December 31, 2006 (2005 - 9.75%).
  (5)
           CDI means Brazilian Interbank Offered Rate.
  As
          of
          December 31, 2006 the Company maintains availability to disburse up to
          US$ 500
          million under a Standby Facility. The cost to maintain the availability
          of the
          line was accounted as financial expense and no disbursement has been made
          under
          this facility in 2006.
 
 In
          October 2006, Embraer’s subsidiary Embraer Overseas Limited issued Guaranteed
          Notes due 2017 with an aggregate principal amount of US$400 million, bearing
          a
          6.375% coupon rate, in an offering that were registered at in the US Securities
          and Exchange Commission within 180 days from its issuance. The notes are
          unconditionally guaranteed by Embraer.
 
 The
          foreign currency exchange rates (expressed in units per US$1.00) related
          to the
          Company’s main debt instruments were as follows:
  At
                    December 31,2005
                
                2006Brazilian*reais*
                
                
                2.3407
                
                
                2.1380Euro
                
                
                1.1830
                
                
                1.3191Japanese
                    yen
                
                
                118.0205
                
                
                119.110
  F-32
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  Maturities
          of long-term debt, including accrued interest, are as follows:
  Year
                
                20062008
                
                
                154,5682009
                
                
                71,8642010
                
                
                92,3602011
                
                
                33,4612012
                
                
                29,4462013
                    and thereafter
                
                
                464,405846,104
  The
          table
          below provides the weighted average interest rates on loans by currency
          as of
          December 31:
  2005
                
                2006U.S.
                    dollars
                
                
                6.53
                %
                
                6.63
                %Brazilian*reais*
                
                
                12.28
                %
                
                9.12
                %Japanese
                    yen
                
                
                1.17
                %
                
                -Euro
                
                
                3.67
                %
                
                3.84
                %
  Of
          the
          total $1,349,151 indebtedness of the Company as of December 31, 2006, $214,728
          is secured by a combination of mortgages on real estate, mortgages on pre-series
          aircraft , mortgages on machinery, equipment and inventories and by an
          escrow
          account.
 
 Restrictive
          covenants
  Loan
          agreements with certain financial institutions, representing $337,535 at
          December 31, 2006 (2005 - $891,025), $255,587 of which was classified as
          long-term (2005 - $799,457), contain certain restrictive covenants, as
          per usual
          market practices, which require that the Company maintain a maximum leverage
          ratio of 3.5 : 1 (debt to EBITDA - earnings before interest, taxes, depreciation
          and amortization);, minimum debt service coverage ratio of 3.0 : 1 (EBITDA
          to
          financial expenses) and Company’s shareholders’ equity must be higher than R$2.3
          billion. In addition, there are other general restrictions related to new
          pledges of assets, significant changes in ownership control of the Company,
          disposition of assets, dividend payments during an event of default and
          transactions with affiliates.
  As
          of
          September 30, 2006 , the Company has obtained from IFC - International
          Finance
          Corporation, the consent to maintain the total debt to EBITDA ratio above
          3.5 :
          1 for the periods ending September 30 and December, 31, 2006.
  As
          a
          result, as of December 31, 2006, the Company was compliant with all restrictive
          covenants.
  F-33
 
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  20.
                OPERATING
                    AND CAPITAL LEASE OBLIGATIONS
  The
          Company and its subsidiaries lease certain land, equipment, computers and
          peripherals under non-cancelable agreements classified as operating leases.
          Rental expense for leased properties under operating leases was $2,698,
          $2,183
          and $5,367 for 2004, 2005 and 2006, respectively.
  Future
          minimum operating lease payments under non-cancelable lease agreements
          are as
          follows:
  Year
                
                20062007
                
                
                3,2402008
                
                
                2,4202009
                
                
                1,2522010
                
                
                8622011
                
                
                744Thereafter
                
                
                9,60618,124
  Obligations
          under capital leases mainly relate to the lease of software and equipment
          with
          terms ranging from 2007 to 2013 and implicit interest rates which range
          from
          5.7% to 10.3% per annum. The related software and equipment are being
          depreciated over 5 years. Future minimum lease payments under this lease
          agreement, including implicit interest, are as follows:
 
 Year
                
                20062007
                
                
                2,7652008
                
                
                1,6942009
                
                
                8052010
                
                
                5122011
                
                
                473Thereafter
                
                
                829Total
                
                
                7,078Less-Implicit
                    interest
                
                
                (1,237
                )Capital
                    lease obligations
                
                
                5,841Less-Current
                    portion
                
                
                2,388Long-term
                    portion
                
                
                3,453
  F-34
 
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  21.
                INTEREST
                    INCOME (EXPENSE), NET
  Interest
          income (expense), net is comprised of:
  Year
                    ended at December 31,2004
                
                2005
                
                2006Interest
                    expenses:Interest
                    and commissions on loans
                
                
                (56,234
                )
                
                (73,145
                )
                
                (87,623
                )Interest
                    on taxes and payroll charges under litigation (Notes 17 and 18)
                    and
                    Interest on refinanced taxes
                
                
                (32,845
                )
                
                (63,174
                )
                
                (40,921
                )CPMF
                    (tax on bank account transactions)
                
                
                (13,919
                )
                
                (17,197
                )
                
                (23,625
                )Structured
                    financing costs
                
                
                (47,220
                )
                
                (12,481
                )
                
                (4,707
                )Other
                
                
                (14,952
                )
                
                (6,933
                )
                
                (4,770
                )(165,170
                )
                
                (172,930
                )
                
                (161,647
                )Interest
                    income:Temporary
                    cash investments
                
                
                104,002
                
                
                109,659
                
                
                161,956Gain
                    on early repayment of loans
                
                
                8,128
                
                
                36,417
                
                
                46,970Interest
                    on NTN, trade accounts receivable, collateralized accounts receivable
                    andguarantee
                    deposits (Notes 9, 11 and 12)
                
                
                44,333
                
                
                38,422
                
                
                93,431Other
                
                
                4,636
                
                
                8,792
                
                
                2,470161,099
                
                
                193,290
                
                
                304,827Gain
                    (loss) on derivatives
                
                
                (10,083
                )
                
                (6,434
                )
                
                7,634Monetary
                    and exchange variations of long term debt
                
                
                (23,846
                )
                
                (15,598
                )
                
                (10,289
                )Interest
                    income (expenses), net
                
                
                (38,000
                )
                
                (1,672
                )
                
                140,525
  22.
                  POST-RETIREMENT
                      BENEFITS
  Defined
          Contribution Pension Plan
  The
          Company and certain subsidiaries sponsor a defined contribution pension
          plan for
          their employees, in which participation is optional. The plan is managed
          by a
          Brazilian pension fund controlled by Banco do Brasil, a related party.
          The
          contributions of the Company and its subsidiaries to the plan in 2004,
          2005 and
          2006 were $ 7,500, $ 9,986 and $12,904, respectively.
  F-35
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  Defined
          Benefit Plan
  Embraer
          Aircraft Holding Inc. - EAH, and some of its subsidiaries, sponsor a defined
          benefit plan for their employees, which included a pension plan and a
          post-retirement medical care plan. The pension plan (“Pension Plan”) was amended
          and restated, effective January 1, 2002, for changes effected by the Economic
          Growth and Tax Relief Reconciliation Act of 2001 - (“EGTRRA”). The amended and
          restated plan provided that an employee is not eligible to participate
          in the
          Plan if the employee was not first employed by the Company prior to October
          1,
          2001.
  In
          September 2005, the Company approved termination of the defined benefit
          pension
          plan. Regulatory approval for termination of the pension plan was obtained
          in
          March 2006, upon which the termination became effective. As a result, the
          Plan’s
          participants became fully vested in their accounts and the Plan’s net assets
          were distributed to the Plan participants during the second quarter of
          2006.
  Effective
          December 31, 2006, the Company adopted SFAS No. 158, which requires that
          the
          Consolidated Statements of Financial Position reflect the funded status
          of the
          pension and postretirement plans. The funded status of the plans is measured
          as
          the difference between the plan assets at fair value and the projected
          benefit
          obligation. We have recognized the underfunded status of the post-retirement
          medical care plan in Accrued post-retirement benefits liability included
          in
          long-term liabilities.
  At
          December 31, 2006, previously unrecognized differences between actual amounts
          and estimates based on actuarial assumptions are included in accumulated
          other
          comprehensive income in our consolidated statements of financial position
          as
          required by SFAS No. 158. In future reporting periods, the difference between
          actual amounts and estimates based on actuarial assumptions will be recognized
          in other comprehensive income in the period in which they occur.
  The
          adoption of SFAS No. 158 resulted in a net decrease in long-term liabilities
          of
          $754, consisting of an increase in deferred income tax liabilities of $476
          and a
          decrease in accrued post-retirement benefits of $1,230. The offsetting
          amount of
          $754 was included as an adjustment to accumulated other comprehensive income
          as
          of December 31, 2006.
  Expected
          costs of providing post-retirement medical benefits to employees and their
          beneficiaries and covered dependents are accrued during the years that
          employees
          render the necessary service. The
          change in the benefit obligations for the years ended December 31, 2005 and
          2006 is summarized as follows:
  Pension
                    benefits
                
                Other
                    post-retirementbenefits2005
                
                2006
                
                2005
                
                2006Benefit
                    obligation - beginning of year
                
                
                7,716
                
                
                8,607
                
                
                7,120
                
                
                8,868Amendments
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,628
                )Service
                    cost
                
                
                -
                
                
                -
                
                
                836
                
                
                801Interest
                    cost
                
                
                435
                
                
                103
                
                
                436
                
                
                420Actuarial
                    (gain) loss
                
                
                749
                
                
                835
                
                
                577
                
                
                (367
                )Participant
                    contributions
                
                
                -
                
                
                -
                
                
                14
                
                
                18Benefits
                    paid to participants
                
                
                (293
                )
                
                (5
                )
                
                (115
                )
                
                (155
                )Settlement
                
                
                -
                
                
                (9,540
                )
                
                -
                
                
                -Benefit
                    obligations - end of year
                
                
                8,607
                
                
                -
                
                
                8,868
                
                
                6,957
  F-36
 
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  The
          change in plan assets for the years ended December 31, 2005 and 2006 is
          as
          follows:
 
 Pension
                    benefits
                
                Other
                    post-retirement benefits2005
                
                2006
                
                2005
                
                2006Fair
                    value of plan assets - beginningof
                    year
                
                
                9,217
                
                
                8,775
                
                
                1,968
                
                
                1,965Employer
                    contributions
                
                
                -
                
                
                598
                
                
                44
                
                
                -Actual
                    return on plan assets
                
                
                (149
                )
                
                173
                
                
                54
                
                
                166Participant
                    contributions
                
                
                -
                
                
                -
                
                
                14
                
                
                18Benefits
                    paid to participants
                
                
                (293
                )
                
                (5
                )
                
                (115
                )
                
                (155
                )Settlements
                
                
                -
                
                
                (9,540
                )
                
                -
                
                
                -401(h)
                    receivable
                
                
                -
                
                
                (1
                )
                
                -
                
                
                -Fair
                    value of plan assets - end of year
                
                
                8,775
                
                
                -
                
                
                1,965
                
                
                1,994
  The
          net
          prepaid (accrued) benefit cost as of December 31, 2005 and 2006 is included
          in
          the caption “other payables and accrued liabilities” in the accompanying balance
          sheets and its components are summarized as follows:
  Pension
                    benefits
                
                Other
                    post-retirement benefits2005
                
                2006
                
                2005
                
                2006Funded
                    status
                
                
                167
                
                
                -
                
                
                (6,903
                )
                
                (4,963
                )Unamortized
                    prior service cost
                
                
                -
                
                
                -
                
                
                (577
                )
                
                -Unrecognized
                    net (gain) loss
                
                
                1,377
                
                
                -
                
                
                2,299
                
                
                -Prepaid
                    (accrued) benefit cost
                
                
                1,544
                
                
                -
                
                
                (5,181
                )
                
                (4,963
                )
  The
          principal actuarial assumptions utilized at December 31, 2005 and 2006
          are as
          follows:
  Pension
                    benefits (%)
                
                Other
                    post-retirement benefits (%)2005
                
                2006
                
                2005
                
                2006Average
                    discount rate
                
                
                4.89
                
                
                4.73
                
                
                5.75
                
                
                5.75Expected
                    return on plan assets
                
                
                6.00
                
                
                6.00
                
                
                7.75
                
                
                7.75
  The
          Company does not expect any employer contribution to be made during 2007
          to the
          post-retirement medical care plan. The following benefit payments, which
          reflect
          expected future service, as appropriate, are expected to be paid to participants
          under the post-retirement medical plan:
  Other
                    post-retirement
                    benefits2007
                
                
                2242008
                
                
                2352009
                
                
                2382010
                
                
                2722011
                
                
                3062012
                    - 2015
                
                
                2,209
  F-37
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
  Regarding
          the cash flow of Pension Benefits, with the termination and liquidation
          of the
          Pension Plan in 2006, there will be no future contributions or benefit
          payments
          in 2007 or beyond.
  The
          components of net periodic benefit cost as of December 31, 2004, 2005 and
          2006
          are as follows:
  Pension
                    benefits
                
                Other
                    post-retirement benefits2004
                
                2005
                
                2006
                
                2004
                
                2005
                
                2006Service
                    cost
                
                
                -
                
                
                -
                
                
                -
                
                
                691
                
                
                836
                
                
                801Interest
                    cost
                
                
                479
                
                
                435
                
                
                103
                
                
                362
                
                
                436
                
                
                420Expected
                    return on plan assets
                
                
                (655
                )
                
                (541
                )
                
                (129
                )
                
                (144
                )
                
                (149
                )
                
                (144
                )Amortization
                    of transition obligation
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Amortization
                    of prior service cost
                
                
                -
                
                
                -
                
                
                -
                
                
                (46
                )
                
                (45
                )
                
                (169
                )Amortization
                    of loss
                
                
                -
                
                
                -
                
                
                36
                
                
                69
                
                
                100
                
                
                103Effect
                    of curtailment
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    periodic benefit cost (benefit)
                
                
                (176
                )
                
                (106
                )
                
                10
                
                
                932
                
                
                1,178
                
                
                1,011
  The
          net
          benefit cost (benefit) is included in selling, general and administrative
          expenses in the accompanying consolidated statements of income and comprehensive
          income.
  For
          measurement purposes, an annual rate of increase in the per capita cost
          of
          covered health and dental care benefits of 10%, 9% and 8%, was assumed
          for 2004,
          2005 and 2006, respectively. The rate is expected to decrease gradually
          to 5% by
          2009. Assumed health care cost trend rates have a significant effect on
          the
          amounts reported for the post-retirement health care plan. A one percentage
          point change in assumed health care cost trend rates would have the following
          effects:
  One
                    percentage pointIncrease
                
                DecreaseEffect
                    on total of service and interest cost components
                
                
                250
                
                
                (198
                )Effect
                    on the post-retirement benefit obligation
                
                
                1,195
                
                
                (972
                )
  F-38
 EMBRAER
        - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 FOR
        THE
        YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
        thousands of U.S. dollars, unless otherwise stated)
 
  23.  SHAREHOLDERS’
        EQUITY
  Each
        of
        our common shares is generally empowered with one vote at general and special
        meetings of our shareholders, subject to certain limitations, according to
        the
        bylaw of the Company. Pursuant to our bylaws and São Paulo Stock Exchange
        listing agreement in connection with the listing of the Company shares on
        the
        Novo Mercado, the Company cannot issue shares without voting rights or with
        other restrictions voting rights.
  Special
        common share - golden share
  The
        Brazilian Government holds one special common share, with the same voting
        rights
        as other holders of common shares; however, the Brazilian Government has
        certain
        special rights as established in article 9 of the Company ́s bylaws.
  The
        special class share grants the Brazilian Government the power of veto on
        the
        following matters:
  i)
              Change
                  of the Company’s name or its corporate
                  objective.
  ii)
              Alteration
                  and/or application of the Company’s
                  logo;
  iii)
              Creation
                  and/or alteration of military programs, whether or not the Federal
                  Republic of Brazil is involved.
  iv)
              Training
                  third parties in technology for military
                  programs.
  v)
              Interruption
                  of the supply of maintenance and spare parts for military
                  aircraft;
  vi)
              Transfer
                  of the Company's stock control;
  vii)
              Any
                  changes in (1) the provisions of the above-mentioned article or
                  of article
                  4, the main clause of art. 11, arts 12, 15 and 16, sub-item III
                  of art.
                  19, paragraphs 1 and 2 of art. 28, sub-item X of art. 34, sub-item
                  XII of
                  art. 40 or Chapter VII; or (2) the rights attributed by the bylaws
                  to the
                  special class share.
  Legal
        reserve
  Brazilian
        corporations are required to allocate 5% of annual net income to a legal
        reserve
        until that reserve equals 20% of capital, or that reserve plus other capital
        reserve equals 30% of capital; thereafter, allocations to this reserve are
        not
        mandatory. This reserve can only be used to increase share capital or to
        offset
        accumulated losses.
  Appropriated
        retained earnings
  Retained
        earnings are statutorily restricted by a reserve for discretionary
        appropriations (“Reserve for Investments and Working Capital”), which was
        ratified by the Company’s shareholders for plant expansion and other capital
        projects. The amount restricted is based on an approved capital budget presented
        by management. After completion of such projects, the Company may elect to
        retain the amounts in this reserve until the shareholders vote to transfer
        all
        or a portion of the reserve to capital or to retained earnings, from which
        a
        cash dividend may then be paid.
  F-39
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 The
        Company’s Board of Directors decided to submit for approval at its Ordinary
        Shareholders’ Meeting the appropriation of 100% of net income for the year,
        after allocation to the legal reserve and for dividend distribution, as a
        reserve for investments and working capital, mainly designated for:
  ·
              Research
                  and development - Development of the EMBRAER 170/190 family and
                  a new
                  family of executive jets.
  ·
              New
                  technologies, processes and management models in order to improve
                  the
                  Company’s results, competencies and productivity, and investments in
                  subsidiaries.
  24.  DIVIDENDS
  Brazilian
        legislation permits the payment of cash dividends only from retained earnings
        and certain reserves determined as per the Company's statutory accounting
        records in BR GAAP. As of December 31, 2006, the earnings and reserves available
        for distribution as dividends, upon approval by the Company's shareholders,
        were
        $436,131 (2005 - $305,914). The dividends are calculated using the BR GAAP
        figures and are paid in Brazilian *reais* .
  In
        conformity with the Company’s bylaws, shareholders are entitled to minimum
        dividends equivalent to 25% of annual net income computed in accordance with
        BR
        GAAP. The Company’s preferred shares did not have voting rights but had priority
        in capital redemption and, in accordance with prevailing corporate legislation,
        were entitled to dividends in an amount 10% greater than those payable to
        the
        common shares. As a result of the corporate restructuring completed in March
        2006, the Company no longer has preferred shares in its capital
        structure.
  The
        Company has elected to pay interest on shareholders’ equity, calculated on a
        quarterly basis in accordance with Article 9 of Law No. 9249/95 based on
        the
        TJLP (Brazilian long-term interest rate), for deductibility purposes in
        computing income and social contribution taxes, and charged directly to
        shareholders’ equity for reporting purposes, in compliance with CVM Instruction
        No. 207/96. The amount paid to shareholders as interest on shareholders’ equity,
        net of any withholding tax, may be included as part of any mandatory
        distributable dividend amount.
  F-40
 EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 Dividends
        paid are as follows:
  Dividends per shareAmountsApproval
                  date
              
              (in
                  thousands)
              
              Common
              
              PreferredUS$
              
              R$
              
              US$
              
              R$
              
              US$
              
              R$**2004:**March
                  12, 2004 - interest on capital
              
              
              34,723
              
              
              100,998
              
              
              0.0455
              
              
              0.1322
              
              
              0.0500
              
              
              0.1454June
                  25, 2004 - interest on capital
              
              
              51,489
              
              
              160,002
              
              
              0.0673
              
              
              0.2092
              
              
              0.0741
              
              
              0.2301September
                  20, 2004 - interest oncapital
              
              
              55,959
              
              
              160,058
              
              
              0.0731
              
              
              0.2091
              
              
              0.0805
              
              
              0.2300December
                  17, 200 - interest oncapital
              
              
              61,827
              
              
              164,115
              
              
              0.0807
              
              
              0.2143
              
              
              0.0888
              
              
              0.2357Total
                  dividends in 2004
              
              
              203,998
              
              
              585,173**2005:**March
                  11, 2005 - interest on capital
              
              
              39,959
              
              
              106,542
              
              
              0.0521
              
              
              0.1389
              
              
              0.0573
              
              
              0.1528June
                  3, 2005 - interest on capital
              
              
              47,156
              
              
              110,836
              
              
              0.0615
              
              
              0.1445
              
              
              0.0676
              
              
              0.1590September
                  16, 2005 - interest oncapital
              
              
              51,097
              
              
              113,551
              
              
              0.0665
              
              
              0.1478
              
              
              0.0731
              
              
              0.1625December
                  19, 2005 - interest oncapital
              
              
              48,247
              
              
              112,932
              
              
              0.0627
              
              
              0.1469
              
              
              0.0690
              
              
              0.1616Total
                  dividends in 2005
              
              
              186,459
              
              
              443,861**2006:**June
                  12, 2006 - interest on capital
              
              
              51,868
              
              
              114,440
              
              
              0.0702
              
              
              0.1549
              
              
              -
              
              
              -September
                  15, 2006 - interest on capital
              
              
              42,370
              
              
              92,337
              
              
              0.0574
              
              
              0.1250
              
              
              -
              
              
              -September
                  15, 2006 - dividends
              
              
              16,318
              
              
              35,561
              
              
              0.0221
              
              
              0.0481
              
              
              -
              
              
              -December
                  15, 2006 - interest on capital
              
              
              39,960
              
              
              84,993
              
              
              0.0537
              
              
              0.1149
              
              
              -
              
              
              -Total
                  dividends in 2006
              
              
              150,516
              
              
              327,331
  25.  EARNINGS
        PER SHARE
  Up
        to
        2005, the Company’s capital stock was comprised of preferred and common shares.
        Preferred shares were entitled to receive dividends 10% greater than dividends
        allocated to common shares. Accordingly, basic and diluted earnings per share
        presented below for the years ended December 31, 2005 and 2004 were computed
        based on the two class method, considering an allocation of undistributed
        earning to common an preferred shares on a 100 to 110 basis, respectively,
        based
        on the weighted average number of shares outstanding during the period to
        total
        shares (allocation percentage). Because the allocation percentage for each
        class
        differs for basic and diluted earnings per share, allocated undistributed
        earnings differ for each calculation.
  Basic
        earnings per common share was computed by dividing net income available to
        common shareholders by the weighted average number of common shares outstanding
        during the period. Net income available to common shareholders was computed
        by
        deducting distributed and undistributed net income available to preferred
        shareholders from net income. Basic earnings per preferred share was computed
        by
        dividing net income available to preferred shareholders by the weighted average
        number of preferred shares outstanding. Net income available to preferred
        shareholders corresponds to the sum of preferred stock dividends and the
        preferred shareholders’ portion of undistributed net income. Undistributed net
        income is computed by deducting total dividends (the sum of preferred and
        common
        stock dividends) from net income.
  F-41
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 In
        2006,
        as a result of the Company’s restructuring in March 2006, the capital stock is
        composed of common shares only. Accordingly, all undistributed earnings are
        allocated to common shares.
  Diluted
        earnings per share is computed similarly to basic earnings per share except
        that
        the outstanding shares are increased to include the number of additional
        shares
        that would have been outstanding if the potential dilutive shares attributable
        to stock options had been issued during the respective periods, utilizing
        the
        treasury stock method.
  F-42
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 The
        computation of basic and diluted earnings per share for the years ended December
        31, 2004, 2005 and 2006 is as follows:
  Years
                  Ended December 31 (in thousands, except per share data)2004
              
              2005
              
              2006Common
              
              Preferred
              
              Total
              
              Common
              
              Preferred
              
              Total
              
              CommonBasic
                  numerator:Actual
                  dividends declared/paid
              
              
              64,675
              
              
              139,323
              
              
              203,998
              
              
              58,870
              
              
              127,965
              
              
              186,835
              
              
              150,516Basic
                  allocated undistributed earnings
              
              
              55,864
              
              
              120,344
              
              
              176,208
              
              
              81,572
              
              
              177,312
              
              
              258,884
              
              
              239,624Allocated
                  net income available for common and preferred shareholders
              
              
              120,539
              
              
              259,667
              
              
              380,206
              
              
              140,442
              
              
              305,277
              
              
              445,719
              
              
              390,140Basic
                  denominator:Weighted
                  average shares
              
              
              242,544
              
              
              474,994
              
              
              
              
              
              242,544
              
              
              479,288
              
              
              
              
              
              739,904Basic
                  earnings per share
              
              
              0.4970
              
              
              0.5467
              
              
              
              
              
              0.5790
              
              
              0.6369
              
              
              
              
              
              0,5273Diluted
                  numerator:Actual
                  dividends declared/paid
              
              
              64,284
              
              
              139,714
              
              
              203,998
              
              
              58,581
              
              
              128,254
              
              
              186,835
              
              
              150,516Diluted
                  allocated undistributed earnings
              
              
              55,527
              
              
              120,681
              
              
              176,208
              
              
              81,172
              
              
              177,712
              
              
              258,884
              
              
              239,624119,811
              
              
              260,395
              
              
              380,206
              
              
              139,753
              
              
              305,966
              
              
              445,719
              
              
              390,140Allocated
                  net income available for common and preferred shareholders
              
              
              119,811
              
              
              260,395
              
              
              380,206
              
              
              139,753
              
              
              305,966
              
              
              445,719
              
              
              390,140Allocated
                  diluted net income available for common and preferred
                  shareholders
              
              
              119,811
              
              
              260,395
              
              
              380,206
              
              
              139,753
              
              
              305,966
              
              
              445,719
              
              
              390,140Diluted
                  denominator:Weighted
                  average shares outstanding
              
              
              242,544
              
              
              474,994
              
              
              
              
              
              242,544
              
              
              479,288
              
              
              
              
              
              739,904Dilutive
                  effects of stock options
              
              
              -
              
              
              4,223
              
              
              
              
              
              -
              
              
              3,451
              
              
              
              
              
              2,999Diluted
                  weighted average shares
              
              
              242,544
              
              
              479,217
              
              
              
              
              
              242,544
              
              
              482,739
              
              
              
              
              
              742,903Diluted
                  earnings per share
              
              
              0.4940
              
              
              0.5434
              
              
              
              
              
              0.5762
              
              
              0.6338
              
              
              
              
              
              0,5250
  F-43
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 26.  STOCK
        COMPENSATION
  On
        April
        17, 1998, the Company’s shareholders approved a stock option plan for management
        and employees, including those of the Company’s subsidiaries, subject to
        restrictions based on continuous employment with the Company for at least
        two
        years. The Administration Committee, which was appointed by the Board of
        Directors on the same date, is responsible for managing the plan.
  Under
        the
        terms of the plan, options for 25,000,000 preferred shares were authorized
        to be
        granted up to May 2003. Options were granted with an exercise price equal
        to the
        weighted average price of the Company’s preferred shares traded on the BOVESPA
        (São Paulo Stock Exchange) in the 60 trading days prior to the grant date,
        increased or decreased by 30%, as defined by the Administration Committee.
        Such
        percentage is deemed to offset unusual fluctuations in the market price during
        this 60-day-period. These options generally vest 30% after three years, 30%
        after four years, and 40% after five years, if the employee is still employed
        by
        the Company on each date. The options expire seven years from the date of
        grant.
        The right to grant options under the plan terminated five years after the
        date
        of the first grant.
  As
        of
        December 31, 2006, the Administration Committee had made seven grants,
        equivalent to 400 lots of 50,000 shares each, totaling 18,941,578 preferred
        shares, net of 1,058,422 shares which were forfeited, as the grantees are
        no
        longer employees of the Company.
  After
        the corporate restructuring, all the preferred
        shares were converted into common shares.
  During
        2004, 2005 and 2006, 2,296,285, 3,490,189 and 1,292,094 options were exercised,
        in the total amount of $3,250, $12,104 and $5,116 respectively.
  In
        connection with the 14.2106% stock dividend approved at the Extraordinary
        Shareholders’ Meeting on March 1, 2002, the Administration Committee granted
        additional 25,576 options to purchase preferred shares to holders of vested
        options as of the record date. In addition, all non-vested option holders
        were
        offered an additional grant of 14.2106% of the options held. The total number
        of
        additional options granted was 637,318, with an exercise price of R$14.99
        (which
        was higher than the market price of the preferred stock on the date of
        grant).
  Information
        regarding options granted to management and employees is shown on the following
        table (options in thousands):
  F-44
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 
 2004
              
              2005
              
              2006Thousands
                of
                  options
              
              Weighted
                average
                exercise
                price
                  R$)
              
              Thousandsof
                  options
              
              Weighted
                average
                exercise
                price
                  (R$)
              
              Thousands
                of
                  options
              
              Weighted
                average
                exercise
                price
                  (R$)Outstanding
                  at beginning of year
              
              
              9,985
              
              
              10.55
              
              
              7,639
              
              
              12.37
              
              
              3,761
              
              
              15.14Exercised
              
              
              (2,296
              )
              
              4.15
              
              
              (3,490
              )
              
              8.29
              
              
              (1,292
              )
              
              8.61Canceled
                  or expired
              
              
              (50
              )
              
              23.00
              
              
              (388
              )
              
              22.00
              
              
              (243
              )
              
              20.87Outstanding
                  at end of year
              
              
              7,639
              
              
              12.37
              
              
              3,761
              
              
              15.14
              
              
              2,225
              
              
              18.30Exercisable
                  at end of year
              
              
              3,946
              
              
              10.22
              
              
              3,167
              
              
              13.85
              
              
              2,225
              
              
              18.30
  The
        weighted average grant date fair value of options granted in 2001, the last
        year
        in which options were granted, was $5.83. The estimated fair values of the
        options were computed using the *Black-Scholes* option
        pricing model based on the U.S. dollar to Brazilian real exchange rates in
        effect on the date of grant and using the following weighted average
        assumptions: 5 years of expected option life; 60% of expected volatility;
        3% of
        dividend yield and 13.4% of risk-free interest rate.
  The
        following table summarizes information about stock options outstanding at
        December 31, 2006 (options in thousands):
  Exercise
                price
                  (R$)
              
              Number
                  of
                outstanding
                stock
                options
              
              Options
                exercisable
              
              Weighted
                average
                remaining
                contractual
                life
                  (years)8.11
              
              
              280
              
              
              280
              
              
              0.313.70
              
              
              450
              
              
              450
              
              
              0.814.99
              
              
              260
              
              
              260
              
              
              1.123.00
              
              
              1.235
              
              
              1.235
              
              
              1.4
  The
        following table summarizes information about outstanding stock options by
        anticipated vesting date and at December 31, 2006 (options in
        thousands):
  Grant
                  dates
              
              Vesting date
              
              Expiration
                  date
              
              Weighted
                average
                exercise
                price
                  (R$)
              
              Number
                  of
                outstanding
                stock
                  options
                (thousands)May
                  2000
              
              
              May
                  2003
              
              
              May
                  2007
              
              
              9.15
              
              
              71November
                  2000
              
              
              November
                  2003
              
              
              November
                  2007
              
              
              13.86
              
              
              120May
                  2000 and 2001
              
              
              May
                  2004
              
              
              May
                  2007 and 2008
              
              
              20.97
              
              
              448November
                  2000
              
              
              November
                  2004
              
              
              November
                  2007
              
              
              13.85
              
              
              142May
                  2000 and 2001
              
              
              May
                  2005
              
              
              May
                  2007 and 2008
              
              
              17.69
              
              
              628November
                  2000
              
              
              November
                  2005
              
              
              November
                  2007
              
              
              13.86
              
              
              251May
                  2001
              
              
              May
                  2006
              
              
              May
                  2008
              
              
              22.07
              
              
              565Total
              
              
              
              
              
              
              
              
              
              
              
              2,225
  Since
        there were no options granted or modifications of existing options in 2004,
        2005
        and 2006, no stock option compensation expense was recorded for such years.
        The
        effects of the adoption of SFAS No. 123R in 2006 were no material and no
        stock
        option compensation expense was recorded on outstanding stock options that
        were
        unvested as of January 1, 2006.
  F-45
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 27.  INCOME
        TAXES
  Income
        tax expense is comprised of the following:
  For
                  the year ended December 31,2004
              
              2005
              
              2006Current
              
              
              (107,628
              )
              
              (83,839
              )
              
              (45,707
              )Deferred-Temporary
                  differences-Additions
              
              
              1,505
              
              
              40,844
              
              
              189Tax
                  loss carryforwardsAdditions
                  (reversions)
              
              
              (6,016
              )
              
              1,426
              
              
              1,106Total
                  deferred
              
              
              (4,511
              )
              
              42,270
              
              
              1,295Income
                  tax expense
              
              
              (112,139
              )
              
              (41,569
              )
              
              (44,412
              )
  The
        reconciliation of reported income tax expense to the amount calculated based
        on
        the combined statutory tax rate is summarized as follows:
  For
                  the year ended December 31,2004
              
              2005
              
              2006Income
                  before taxes as reported in the accompanyingconsolidated
                  financial statements
              
              
              493,651
              
              
              500,006
              
              
              444,166Combined
                  statutory income tax rate
              
              
              34
              %
              
              34
              %
              
              34
              %Tax
                  expense at statutory income tax rate
              
              
              167,841
              
              
              170,002
              
              
              151,016Permanent
                  differences:Nondeductible
                  expenses
              
              
              1,548
              
              
              1,882
              
              
              6,397Translation
                  effects
              
              
              10,238
              
              
              (45,587
              )
              
              (48,077
              )Dividends
                  paid as interest on capital
              
              
              (69,359
              )
              
              (63,524
              )
              
              (45,627
              )Change
                  in valuation allowance for deferred tax assets
              
              
              366
              
              
              (9,292
              )
              
              491Reversal
                  of tax incentives
              
              
              (1,029
              )
              
              (1,221
              )
              
              -Research
                  and Development
              
              
              -
              
              
              -
              
              
              (16,943
              )Equity
                  in loss from affiliates
              
              
              -
              
              
              (1,053
              )
              
              (12
              )Other
              
              
              2,534
              
              
              (9,638
              )
              
              (2,833
              )Income
                  tax expense as reported in the income statement
              
              
              112,139
              
              
              41,569
              
              
              44,412
 
 F-46
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 The
        Company’s deferred tax assets and liabilities are comprised of tax loss
        carryforwards and effects resulted from temporary differences as
        follows:
  At
                  December 31,2005
              
              2006Deferred
                  tax assets on:Tax
                  loss carryforwards (i)
              
              
              7,300
              
              
              8,897Temporary
                  differences:Accrual
                  for product warranties and improvements
              
              
              44,192
              
              
              46,538Accrued
                  taxes other than taxes on income
              
              
              86,596
              
              
              95,450Deferred
                  charges, except research and development
              
              
              144,591
              
              
              162,587Other
                  accrued expenses not deductible for tax purposes
              
              
              70,661
              
              
              65,630Differences
                  in bases of property, plant and equipment
              
              
              9,346
              
              
              9,634Differences
                  in inventory basis
              
              
              31,999
              
              
              35,637Post-retirement
                  benefits accrual
              
              
              1,255
              
              
              1,943Other
              
              
              30,975
              
              
              34,579Valuation
                  allowance (ii)
              
              
              (3,235
              )
              
              (3,726
              )Total
                  deferred tax assets
              
              
              423,680
              
              
              457,169Deferred
                  tax liabilities on:Temporary
                  differences:Differences
                  in bases of property, plant and equipment
              
              
              (18,175
              )
              
              (14,390
              )Research
                  and development
              
              
              (157,392
              )
              
              (195,878
              )Other
              
              
              (11,836
              )
              
              (9,329
              )Total
                  deferred tax liabilities
              
              
              (187,403
              )
              
              (219,597
              )Net
                  deferred tax asset
              
              
              236,276
              
              
              237,572
  (i)  Tax
        loss
        carryforwards are derived from:
  At
                  December 31,2005
              
              2006Brazilian
                  entities
              
              
              2,972
              
              
              3,371Foreign
                  subsidiaries
              
              
              4,328
              
              
              5,526Total
              
              
              7,300
              
              
              8,897
  Tax
        losses originated from the Brazilian entities do not have expiration dates
        but
        utilization is limited to 30% of the taxable income for each period. Tax
        losses
        in foreign subsidiaries are also not subject to any statute of
        limitation.
  (ii)
              The
                  recorded valuation allowance relates to tax loss carryforwards
                  of foreign
                  subsidiaries, which cannot be offset against taxable income in
                  Brazil. The
                  recorded valuation allowance reduces deferred tax assets to the
                  amount
                  that is more likely than not to be realized.
  F-47
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 28.  OTHER
        OPERATING INCOME (EXPENSES), NET
  Other
        operating expenses, net are composed of the following income (expense)
        items:
  For
                  the year endedDecember
                  31,2004
              
              2005
              
              2006Product
                  modifications
              
              
              (50
              )
              
              (253
              )
              
              (1,622
              )Employee
                  education, training and professional development
              
              
              (3,536
              )
              
              (4,064
              )
              
              (6,771
              )Provision
                  for contingencies and disputed taxes
              
              
              (22,342
              )
              
              (17,183
              )
              
              3,775Contractual
                  fines
              
              
              3,680
              
              
              7,340
              
              
              12,709Other
                  operating expenses from consolidated sales-type leases, net
                  (i)
              
              
              (20,766
              )
              
              (9,938
              )
              
              (11,666
              )Net
                  Gain (loss) on sale of investments in sale-type leaseinvestments
              
              
              3,645
              
              
              (294
              )
              
              (924
              )Sale
                  of pre-series aircraft
              
              
              -
              
              
              -
              
              
              9,891Other
              
              
              (1,903
              )
              
              (1,686
              )
              
              (3,715
              )(41,272
              )
              
              (26,078
              )
              
              1,677
  (i)  Represents
        a loss from recognized valuation allowance on sales-type lease
        investments.
  29.  EXCHANGE
        GAIN (LOSS), NET
  Exchange
        gains and losses result from the remeasurement of the balance sheet accounts
        from the local currency to the functional currency as follows:
  For
                  the year endedDecember
                  31,2004
              
              2005
              
              2006Assets:Cash
                  and cash equivalents
              
              
              50,728
              
              
              54,715
              
              
              23,812Trade
                  accounts receivable
              
              
              136
              
              
              (1,704
              )
              
              (700
              )Other
                  assets
              
              
              (354
              )
              
              7,237
              
              
              11,078Exchange
                  gain on assets
              
              
              50,510
              
              
              60,248
              
              
              34,190
 
 F-48
 EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 
 Liabilities:Trade
                  accounts payable
              
              
              (51,304
              )
              
              (63,352
              )
              
              (8,086
              )Income
                  taxes
              
              
              (548
              )
              
              (58
              )
              
              (12,274
              )Provisions
              
              
              (6,798
              )
              
              (11,018
              )
              
              (3,887
              )Other
                  liabilities
              
              
              (4,078
              )
              
              (1,038
              )
              
              (14,041
              )Exchange
                  loss on liabilities
              
              
              (62,728
              )
              
              (75,466
              )
              
              (38,288
              )Exchange
                  loss, net
              
              
              (12,218
              )
              
              (15,218
              )
              
              (4,098
              )
  30.
        RELATED-PARTY TRANSACTIONS
  Brazilian
        Government
 
 PREVI,
        one of the Company’s shareholders, is controlled by Banco do Brasil, which is
        controlled by the Brazilian government. As a result, the Company considers
        Banco
        do Brasil to be a related party, as well as the Brazilian Air Force and BNDES
        (National Bank for Economic and Social Development), which are also controlled
        by the Brazilian government.
 
 The
        Brazilian government, principally through the Brazilian Air Force, has
        participated in the development of Embraer since its inception. For the years
        ended December 31, 2004, 2005 and 2006, the Brazilian Air Force accounted
        for
        approximately 7.1%, 6.2% and 1.9% of the Company’s net sales, respectively. The
        Company expects to continue to be the primary source of new aircraft and
        spare
        parts and services for the Brazilian Air Force.
  BNDES
        and
        Banco do Brasil have several transactions with the Company, mainly represented
        by support in debt financing and other ordinary bank transactions, such as
        being
        the depositary for part of the Company’s cash equivalents and a provider of
        certain credit line facilities.
  Transactions
        with such related parties are summarized as follows:
 
 December
                  31, 2006Brazilian
              
              Banco
                  doAir
                  Force
              
              Brasil
                  S.A.
              
              BNDES
              
              Total**Assets**Cash
                  and cash equivalents
              
              
              -
              
              
              78,747
              
              
              -
              
              
              78,747Trade
                  accounts receivable
              
              
              87,268
              
              
              -
              
              
              -
              
              
              87,268Other
                  assets
              
              
              -
              
              
              327,776
              
              
              1,809
              
              
              329,585**Liabilities**Loans
                  and financing
              
              
              -
              
              
              66,745
              
              
              292,318
              
              
              359,063Recourse
                  and non-recourse debt
              
              
              -
              
              
              318,577
              
              
              511,181
              
              
              829,758Advances
                  from customers
              
              
              17,450
              
              
              -
              
              
              -
              
              
              17,450Other
                  payables and accrued liabilities
              
              
              -
              
              
              -
              
              
              -
              
              
              -**Results
                  of operations (for the year ended December 31,
                  2006)**Net
                  sales
              
              
              70,806
              
              
              -
              
              
              -
              
              
              70,806Interest
                  income
              
              
              -Interest
                  expenses
              
              
              -
              
              
              19,954
              
              
              18,075
              
              
              38,029
 
 F-49
  EMBRAER
          - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THE
          YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
          thousands of U.S. dollars, unless otherwise stated)
 December
                  31, 2005Brazilian
              
              Banco
                  doAir
                  Force
              
              Brasil
                  S.A.
              
              BNDES
              
              Total**Assets**Cash
                  and cash equivalents
              
              
              -
              
              
              203,587
              
              
              -
              
              
              203,587Trade
                  accounts receivable
              
              
              120,910
              
              
              -
              
              
              -
              
              
              120,910Other
                  assets
              
              
              -
              
              
              260,764
              
              
              63,725
              
              
              324,489**Liabilities**Loans
                  and financing
              
              
              
              
              
              119,783
              
              
              209,293
              
              
              329,076Recourse
                  and non-recourse debt
              
              
              -
              
              
              260,844
              
              
              558,409
              
              
              819,253Advances
                  from customers
              
              
              18,881
              
              
              -
              
              
              -
              
              
              18,881Other
                  payables and accrued liabilities
              
              
              524
              
              
              -
              
              
              -
              
              
              524**Results
                  of operations (for the year ended December 31,
                  2005)**Net
                  sales
              
              
              237,342
              
              
              -
              
              
              -
              
              
              237,342Interest
                  income
              
              
              -
              
              
              27,364
              
              
              -
              
              
              27,364Interest
                  expenses
              
              
              -
              
              
              16,503
              
              
              3,431
              
              
              19,934
 
 December
                  31, 2004Brazilian
              
              Banco
                  doAir
                  Force
              
              Brasil
                  S.A.
              
              BNDES
              
              Total**Results
                  of operations (for the year ended December 31,
                  2004)**Net
                  sales
              
              
              246,104
              
              
              -
              
              
              -
              
              
              246,104Interest
                  income
              
              
              -
              
              
              23,186
              
              
              -
              
              
              23,186Interest
                  expenses
              
              
              -
              
              
              10,264
              
              
              6,213
              
              
              16,477
  F-50
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 European
        Aerospace and Defense Group
  As
        a
        result of share capital organization of the Company, such group has no longer
        the right to appoint two members of the Board of Directors of the Company
        and is
        no longer recognized as a group for voting purposes.
  Despite
        of this the Company entered into commercial transactions with such shareholders,
        Dassault Aviation, EADS and SAFRAN, which together form the European Aerospace
        and Defense Group (“EADG”). EADG holds approximately 5,36% of our outstanding
        voting shares. Such transactions represented the purchase of certain equipment
        and services in the ordinary course of its business and amounted to $3,672,
        $2,175 and $2,831 for 2004, 2005 and 2006, respectively.
  31. FINANCIAL
        INSTRUMENTS AND RISK MANAGEMENT
  Overview
  The
        Company is primarily engaged in the assembly and sale of aircraft to various
        markets throughout the world. More than 90% of the Company’s sales are exported
        and are U.S. dollar-denominated, which is the Company’s functional currency.
        Nevertheless, a significant portion of the Company’s labor costs and other local
        overheads are Brazilian *real-* denominated.
        Therefore, the Company maintains certain monetary assets and liabilities,
        mainly
        represented by recoverable and payable taxes, cash equivalents and loans
        in
        Brazilian *reais* ,
        targeting to balance its non-U.S. dollar-denominated assets against its non-
        U.S. dollar-denominated liabilities plus shareholders’ equity in relation to its
        forecasts of future cash flows.
 
 The
        Company’s primary market risks include fluctuations in interest rates and
        foreign currency exchange rates. The Company has established policies and
        procedures to manage sensitivity to interest rate and foreign currency exchange
        rate risk. These procedures include monitoring the Company’s level of exposure
        to each market risk, including the analysis of the amounts based on a forecast
        of future cash flows, the matching of variable rate assets with variable
        rate
        liabilities, and limiting the amount of fixed rate assets which may be funded
        with floating rate liabilities. These procedures may also include the use
        of
        derivative financial instruments to mitigate the effects of interest rate
        fluctuations and to reduce the exposure to exchange rate risk. By using
        derivative instruments the Company exposes itself to credit risk, as further
        discussed in Note 32.
  Interest
        rate risk management
  Interest
        rate risk is the risk that the Company will incur economic losses due to
        adverse
        changes in interest rates. This interest rate exposure principally relates
        to
        changes in the market interest rates affecting the Company’s loans.
  The
        Company’s U.S. dollar-denominated debt bears interest at fixed or variable
        interest rates based on 6-month or 12-month LIBOR. The Company’s foreign
        currency debt is primarily denominated in Brazilian *reais* and
        European Union *euro.* The
        Brazilian *real-* denominated
        debt bears interest at a variable rate based on TJLP, the long-term interest
        rate in Brazil, and the European Union *euro* -denominated
        debt bears interest at fixed rates.
  F-51
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 The
        Company’s interest rate risk management strategy may use derivative instruments
        to reduce fluctuations attributable to interest rate volatility.
  Exchange
        rate risk management
  Exchange
        rate risk is the risk that changes in foreign currency exchange rates may
        cause
        the Company to incur losses, leading to a reduction in assets or an increase
        in
        liabilities. The Company’s primary exposures to foreign currency exchange
        fluctuations are the Brazilian real/U.S. dollar and Euro/U.S. dollar exchange
        rates. As previously discussed in the overview section of this Note, the
        Company
        aims to hedge its exposure in foreign currencies through (i) balancing its
        non-U.S. dollar-denominated assets against its non-U.S. dollar-denominated
        liabilities and (ii) using derivative instruments. The Company typically
        uses
        derivatives such as foreign currency forward and swap contracts to implement
        this strategy.
  Derivative
        financial instruments
  Derivative
        instruments outstanding as of December 31 are as follows:
  2006Agreed
              
              Gain/(loss)Notional
              
              Maturity
              
              average
              
              FairUnderline
                  Transactions
              
              Type
              
              amount
              
              date
              
              rate
              
              valueImport
                  financing
              
              
              Swap
                  ( interest + US$ into R$ + CDI +Fixed interest rate)
              
              
              16,434
              
              
              2007
                  to 2008
              
              
              58,61%
                  of CDI
              
              
              (15,236
              )Working
                  capital / Import financing
              
              
              Swap
                  (variable interest into fixed interest - US$)
              
              
              239,371
              
              
              2007
                  to 2016
              
              
              7,36%
              
              
              2,937Working
                  capital
              
              
              Swap
                  (CDI into dual currency - the greater than exchange variation or
                  CDI)
              
              
              6,289
              
              
              2007
              
              
              100%
                  exchange variation (US$-R$) or 75% CDI
              
              
              7Total
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (12,292
              )
  2006Original
              
              Negotiated
              
              National
              
              Gain
                  /(loss)Underline
                  Transactions
              
              Type
              
              Currency
              
              Currency
              
              Amount
              
              FairvalueSuppliers
              
              
              NDF
              
              
              GBP
              
              
              BRL
              
              
              7,402
              
              
              409Accounts
                  Receivable
              
              
              NDF
              
              
              USD
              
              
              BRL
              
              
              100,000
              
              
              769TOTAL
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,178
  F-52
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 2005Gain/Agreed
                        
                        (loss)Notional
                        
                        Maturity
                        
                        average
                        
                        FairUnderline
                            Transactions
                        
                        Type
                        
                        amount
                        
                        date
                        
                        rate
                        
                        valueImport
                            financing
                        
                        
                        Swap
                            ( interest + US$ into R$ + CDI +Fixed interest rate)
                        
                        
                        37,904
                        
                        
                        2006
                            to 2008
                        
                        
                        59.82%
                            of CDI
                        
                        
                        (19,629
                        )Working
                            capital / Import financing
                        
                        
                        Swap
                            (variable interest into fixed interest - US$)
                        
                        
                        605,901
                        
                        
                        2007
                            to 2016
                        
                        
                        8.05%
                        
                        
                        3,050Import
                            financing
                        
                        
                        Swap
                            (JIBOR + JPY into US$ + fixed interest rate)
                        
                        
                        33,541
                        
                        
                        2006
                        
                        
                        4.35%
                        
                        
                        (1,541
                        )Total
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (18,120
                        )
  32.  CONCENTRATION
        OF CREDIT RISK
  Credit
        risk is the risk that the Company may incur losses if counterparties to the
        Company’s contracts do not pay amounts owed to the Company. The Company’s
        primary credit risk derives from the sales of aircraft, spare parts and related
        services to its customers, including the financial obligations related to
        these
        sales discussed in Notes 9 and 31.
  Financial
        instruments which may potentially subject the Company to concentrations of
        credit risk include (i) cash and cash equivalents, (ii) trade and other accounts
        receivable, (iii) advances to suppliers and (iv) financial derivative contracts.
        The Company limits its credit risk associated with cash and cash equivalents
        by
        placing its investments with investment grade rated institutions in short-term
        securities and mutual funds. With respect to trade accounts receivable, the
        Company limits its credit risk by performing ongoing credit evaluations.
        All
        such customers are meeting current commitments, are operating within established
        credit limits and are considered by management to represent an acceptable
        credit
        risk level. The Company believes that no additional credit risk beyond amounts
        provided for collection losses is inherent in the Company’s trade accounts
        receivable. Advances to suppliers are made only to select long-standing
        suppliers. The financial condition of such suppliers is analyzed on an ongoing
        basis to limit credit risk. The Company addresses credit risk related to
        derivative instruments by restricting the counterparties of such derivative
        to
        major financial institutions.
  F-53
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 The
        Company may also have credit risk related to the sale of aircraft while its
        customers are finalizing the financing structures for their purchases from
        the
        Company. To minimize these risks, customer credit analyses are continuously
        monitored and the Company works closely with the financial institutions to
        help
        facilitate customer financing.
  33.
        FAIR
        VALUE OF FINANCIAL INSTRUMENTS
  The
        following estimated fair value amounts have been determined using available
        market information and appropriate valuation methodologies. However,
        considerable judgment is required to interpret market data and to develop
        the
        estimates of fair value. Accordingly, the estimates presented herein are
        not
        necessarily indicative of the amounts the Company could realize in a current
        market exchange. The use of different market assumptions and/or estimation
        methodologies may have a material effect on the estimated fair
        values.
  The
        following methods and assumptions were used to estimate the fair value of
        each
        class of financial instruments for which it is practicable to estimate that
        value. Potential income tax ramifications related to the realization of
        unrealized gains and losses that would be incurred in an actual sale or
        settlement have not been taken into consideration.
  The
        carrying amounts for cash and cash equivalents, trading debt securities,
        accounts and notes receivable and current liabilities approximates their
        fair
        values. The fair value of held-to-maturity securities is estimated using
        the
        discounted cash flows method. The fair value of long-term debt is based on
        the
        discounted value of contractual cash flows. The discount rate is estimated
        using
        the rates currently offered for debt with similar characteristics and remaining
        maturities.
  F-54
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 The
        estimated fair values of financial instruments are as follows:
  2005
              
              2006Carrying
              
              Fair
              
              Carrying
              
              Fairamounts
              
              value
              
              amounts
              
              valueFinancial
                  assets:Cash
                  and cash equivalents
              
              
              1,339,159
              
              
              1,339,159
              
              
              1,209,396
              
              
              1,209,396Temporary
                  cash investments
              
              
              574,395
              
              
              574,395
              
              
              555,795
              
              
              555,795Trade
                  accounts receivable, net
              
              
              450,824
              
              
              450,824
              
              
              294,262
              
              
              294,262Guarantee
                  deposits (Note 11)
              
              
              546,806
              
              
              546,806
              
              
              607,109
              
              
              607,109Held-to-maturity
                  securities
              
              
              31,269
              
              
              30,311
              
              
              32,932
              
              
              31,785Derivatives
              
              
              330
              
              
              330
              
              
              4,122
              
              
              4,122Financial
                  liabilities:Loans
                  and financing
              
              
              1,553,422
              
              
              1,554,905
              
              
              1,349,151
              
              
              1,416,832Trade
                  accounts payable
              
              
              731,384
              
              
              731,384
              
              
              912,753
              
              
              912,753Derivatives
              
              
              18,450
              
              
              18,450
              
              
              15,236
              
              
              15,236
  34.  OFF-BALANCE
        SHEET ARRANGEMENTS
  In
        the
        normal course of business, the Company participates in certain off-balance
        sheet
        arrangements, including guarantees, repurchase obligations, trade-in and
        product
        warranty commitments, as discussed below:
  Guarantees
  Financial
        guarantees are triggered if customers do not perform their obligation to
        serve
        the debt during the term of the financing under the relevant financing
        arrangements. Financial guarantees provide credit support to the guaranteed
        party to mitigate default-related losses. The underlying assets collateralize
        these guarantees. The value of the underlying assets may be adversely affected
        by an economic or industry downturn. Upon an event of default, the Company
        usually is the agent for the guaranteed party for the refurbishment and
        remarketing of the underlying asset. The Company may be entitled to a fee
        for
        such remarketing services. Typically a claim under the guarantee shall be
        made
        only upon surrender of the underlying asset for remarketing.
  Residual
        value guarantees provide a third party with a specific guaranteed asset value
        at
        the end of the financing agreement. In the event of a decrease in market
        value
        of the underlying asset, the Company shall bear the difference between the
        specific guaranteed amount and the actual fair market value. The Company’s
        exposure is mitigated by the fact that, in order to benefit from the guarantee,
        the guaranteed party has to make the underlying assets meet tight specific
        return conditions.
  F-55
  EMBRAER
            - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THE
            YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
            thousands of U.S. dollars, unless otherwise stated)
 The
        following table provides quantitative data regarding the Company’s guarantees to
        third parties. The maximum potential payments represent the worst-case scenario,
        and do not necessarily reflect the results expected by the Company. Estimated
        proceeds from performance guarantees and underlying assets represent the
        anticipated values of assets the Company could liquidate or receive from
        other
        parties to offset its payments under guarantees.
  Description
              
              2005
              
              2006Maximum
                  financial guarantees
              
              
              1,768,030
              
              
              1,741,559Maximum
                  residual value guarantees
              
              
              878,249
              
              
              930,002Mutually
                  exclusive exposure (*)
              
              
              (415,460
              )
              
              (433,112
              )Provisions
                  and liabilities recorded
              
              
              (54,011
              )
              
              (116,402
              )Off-balance
                  sheet exposure
              
              
              2,176,807
              
              
              2,122,047Estimated
                  proceeds from performance guarantees and underlying assets
              
              
              2,127,208
              
              
              2,177,379
  (*)  In
        the
        event both guarantees were issued for the same underlying asset, the residual
        value guarantees can only be exercised if the financial guarantees have expired
        without having been triggered and, therefore, their distinct effects have
        not
        been combined to calculate the maximum exposure.
 
 As
        discussed in Note 11, as of December 31, 2005 and 2006, the Company maintained
        escrow deposits in the total amount of $249,673 and $272,661, respectively,
        in
        favor of third parties for whom it has provided financial and residual value
        guarantees in connection with certain aircraft sales financing
        structures.
  Aircraft
        Trade-In Options
  In
        connection with the signing of a purchase contract for new aircraft, the
        Company
        may provide trade-in options to its customers. These options provide a customer
        with the right to trade-in existing aircraft upon the purchase of a new
        aircraft. As of December 31, 2006, 13 commercial aircrafts were subject to
        trade-in options, and additional aircraft may become subject to trade-in
        options
        due to new trade-in contracts. The trade-in price is based on third-party
        appraisals related to the forecasted fair value of each specific aircraft.
        In
        2006, we were required to accept 02 aircrafts for trade-in.
  Product
        Warranties
  The
        Company provides product warranties in conjunction with certain product sales.
  Generally,
        aircraft sales are accompanied by a standard warranty for systems, accessories,
        equipment, parts and software manufactured by the Company. Warranty expense
        related to aircraft and parts is recognized at the time of sale based on
        estimated amounts of warranty costs anticipated to be incurred. These estimates
        are based on factors that include, among other things, warranty claim and
        cost
        experience, warranty coverage available from suppliers, type and duration
        of
        warranty coverage and the volume and mix of aircraft sold and in service.
        The
        warranty period typically ranges from two to five years.
  F-56
 EMBRAER
              - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THE
              YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 Product
        and performance provisions are included in other payables and accrued
        liabilities and had the following activity ended December 31, 2006:
  (US$
                  million)
              
              At
                December
                31,
                  2005
              
              Additions
              
              Reductions
                  for
                payments
                made/reversals
              
              At
                December
                31,
                  2006Product
                  warranties
              
              
              90,904
              
              
              34,431
              
              
              (27,981
              )
              
              97,354Product
                  improvement liabilities
              
              
              40,350
              
              
              13,330
              
              
              (10,172
              )
              
              43,509
  35.  SEGMENT
        INFORMATION
  The
        Company is organized based on the products and services it offers. Under
        this
        organizational structure, the Company operates in the following segments:
        commercial aviation, defense and government, executive aviation and customer
        services and others.
  Commercial
        aviation segment
  The
        commercial aviation segment includes the development, production and marketing
        of commercial jets and provision of related support services, principally
        to the
        airline industry worldwide. The Company’s products in the commercial aviation
        segment are organized around product families, including the ERJ 145 family,
        the
        EMBRAER 170/190 family and the EMB 120 Brasília.
 
 The
        ERJ
        145 family is composed of the ERJ 135, ERJ 140 and ERJ 145 aircraft, certified
        to operate with 37, 44 and 50 seats, respectively. These aircraft share
        approximately 96% of common parts and components.
 
 The
        EMBRAER 170 was certified by the Brazilian aviation authority, the FAA, the
        JAA,
        EASA and the authority of Poland in February 2004, and deliveries of the
        EMBRAER
        170 began in March 2004. The EMBRAER 175 was certified by the Brazilian aviation
        authority in December 2004, by EASA in January 2005 and in July 2005 by TCCA,
        the Canadian certification authority. The EMBRAER 190 was certified by the
        Brazilian aviation authority in August 2005 and by the FAA in September 2005,
        and the EMBRAER 195 made its maiden flight in December 2004. We have concluded
        the flight tests for the EMBRAER 195 and expect to receive FAA certification
        during 2007.
 
 The
        EMB
        120 Brasília is a 30-seat turboprop aircraft that has been operating since 1985.
        Since its introduction in 1985 and through December 31, 2006, we have
        delivered 352 EMB 120 Brasília for the regional market and five EMB 120 Brasília
        for the defense market. We currently manufacture the EMB 120 Brasília only upon
        customer request.
  F-57
 EMBRAER
              - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THE
              YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 The
        commercial aviation segment is subject to both operational and external risks.
        Operational risks that can seriously disrupt the Company’s ability to make
        timely delivery of its commercial aviation aircraft and meet its contractual
        commitments include execution of internal performance plans, regulatory
        certifications of the Company's commercial aviation aircraft by the U.S.
        Government and foreign governments, collective bargaining labor disputes
        and
        performance issues with key suppliers and subcontractors.
  The
        Company’s principal operations are in Brazil, with some key suppliers and
        subcontractors located in the United States, Europe and South America. External
        risks include adverse governmental export and import policies, factors that
        result in significant and prolonged disruption to air travel worldwide, and
        other factors that affect the economic viability of the airline industry.
        Examples of external risks include the volatility of aircraft fuel prices,
        global trade policies, worldwide political stability and economic growth,
        acts
        of aggression that impact the perceived safety of commercial flight and a
        competitive industry environment.
  Defense
        and government segment
  Operations
        in the defense and government segment involve research, development, production,
        modification and support of military aircraft, products and related systems.
        Although some military aircraft are contracted in the commercial environment,
        the Company’s primary customer is the Brazilian Air Force. In the defense and
        government segment, the Company has the following products:
  ·
              The
                  Super Tucano - a light attack and training aircraft also know as
                  AL-X,
  ·
              The
                  AMX, an advanced ground attack jet, developed and manufactured
                  through an
                  industrial cooperation agreement between Brazil and
                  Italy.
  ·
              Intelligence
                  surveillance, and reconnaissance special mission aircraft based
                  on the
                  platform of the ERJ 145. These aircraft include the EMB 145 AEW&C -
                  Airborne Early Warning and Control, the EMB 145 RS - Remote Sensing,
                  and
                  the EMB 145 MP - Marine Remote
                  Sensing.
  The
        Brazilian Air Force is the major customer of the Company’s defense products. A
        decrease in defense spending by the Brazilian government due to defense spending
        cuts and general budgetary constraints or other factors could adversely affect
        the Company’s defense sales and defense research and development.
  Executive
        jet segment
  We
        have
        developed a line of executive jets, the Legacy 600, and are developing
        additional executive jets in the very light, light and ultra-large segments
        -
        the Phenom 100, Phenom 300 and Lineage 1000, respectively. We are marketing
        our
        executive jets to companies, including fractional ownership companies, and
        high
        net-worth individuals.
  F-58
 EMBRAER
              - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THE
              YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 Customer
        services and others
  The
        customer services and others segment relates mainly to (i) after-sales customer
        support services, including maintenance and training, (ii) aircraft operating
        leases and (iii) the manufacture and marketing of spare parts for the Company’s
        aircraft. In addition, the Company sells structural parts and mechanical
        and
        hydraulic systems to certain specified customers. The Company also manufactures,
        on a limited basis and upon customer request, general aviation propeller
        aircraft and crop dusters.
  Other
        unallocated costs include corporate costs not allocated to the operating
        segments and include costs attributable to stock-based compensation. Unallocated
        capital expenditures and depreciation relate primarily to shared services
        assets.
 
 The
        following table provides geographic information regarding net sales. The
        geographic allocation is based on the location of the operator of the
        aircraft.
 
 Net
                  sales by geographic area
              
              2004
              
              2005
              
              2006The
                  Americas without Brazil-Commercial
                  Aviation
              
              
              2,189,405
              
              
              2,250,169
              
              
              1,506,868Defense
                  and Government
              
              
              92,135
              
              
              33,927
              
              
              142,099Executive
                  Aviation
              
              
              204,914
              
              
              155,764
              
              
              304,756Customer
                  Services and Others
              
              
              130,054
              
              
              145,921
              
              
              220,9652,616,508
              
              
              2,585,781
              
              
              2,174,688Brazil-Defense
                  and Government
              
              
              246,104
              
              
              230,286
              
              
              71,203Customer
                  Services and Others
              
              
              51,332
              
              
              72,773
              
              
              75,191297,436
              
              
              303,059
              
              
              146,394Europe-Commercial
                  Aviation
              
              
              296,885
              
              
              247,976
              
              
              430,080Defense
                  and Government
              
              
              20,906
              
              
              8,347
              
              
              13,405Executive
                  Aviation
              
              
              -
              
              
              100,253
              
              
              161,314Customer
                  Services and Others
              
              
              54,372
              
              
              202,862
              
              
              237,002372,163
              
              
              559,438
              
              
              841,801Others-Commercial
                  Aviation
              
              
              93,159
              
              
              207,652
              
              
              516,098Defense
                  and Government
              
              
              6,622
              
              
              151,237
              
              
              -Executive
                  Aviation
              
              
              40,800
              
              
              22,036
              
              
              116,010Customer
                  Services and Others
              
              
              13,845
              
              
              703
              
              
              12,412154,427
              
              
              381,628
              
              
              644,520Total
              
              
              3,440,533
              
              
              3,829,907
              
              
              3,807,403
  F-59
 EMBRAER
              - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THE
              YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 The
        following table presents income statement information by operating
        segment:
  Operating income
              
              2004
              
              2005
              
              2006Net
                  sales-Commercial
                  Aviation
              
              
              2,579,449
              
              
              2,705,797
              
              
              2,453,046Defense
                  and Government
              
              
              365,767
              
              
              423,796
              
              
              226,707Executive
                  Aviation
              
              
              245,714
              
              
              278,054
              
              
              582,080Customer
                  Services and Others
              
              
              249,603
              
              
              422,260
              
              
              545,5703,440,533
              
              
              3,829,907
              
              
              3,807,403Cost
                  of sales and services-Commercial
                  Aviation
              
              
              (1,613,028
              )
              
              (1,867,357
              )
              
              (1,765,467
              )Defense
                  and Government
              
              
              (291,400
              )
              
              (319,428
              )
              
              (174,131
              )Executive
                  Aviation
              
              
              (181,457
              )
              
              (188,437
              )
              
              (396,199
              )Customer
                  Services and Others
              
              
              (181,445
              )
              
              (296,594
              )
              
              (400,437
              )(2,267,330
              )
              
              (2,671,816
              )
              
              (2,736,234
              )Gross
                  profit-Commercial
                  Aviation
              
              
              966,421
              
              
              838,440
              
              
              687,579Defense
                  and Government
              
              
              74,367
              
              
              104,368
              
              
              52,576Executive
                  Aviation
              
              
              64,257
              
              
              89,617
              
              
              185,881Customer
                  Services and Others
              
              
              68,158
              
              
              125,666
              
              
              145,1331,173,203
              
              
              1,158,091
              
              
              1,071,169Operating
                  expenses-Commercial
                  Aviation
              
              
              (348,115
              )
              
              (425,659
              )
              
              (456,948
              )Defense
                  and Government
              
              
              (59,782
              )
              
              (50,267
              )
              
              (37,988
              )Executive
                  Aviation
              
              
              (28,556
              )
              
              (44,474
              )
              
              (130,390
              )Customer
                  Services and Others
              
              
              (36,455
              )
              
              (32,339
              )
              
              (25,602
              )Unallocated
                  corporate expenses
              
              
              (156,309
              )
              
              (97,505
              )
              
              (112,502
              )(629,217
              )
              
              (650,244
              )
              
              (763,430
              )Income
                  from operations
              
              
              543,986
              
              
              507,847
              
              
              307,739
  The
        following tables present other information about the Company’s operating
        segments:
  Property,
                  plant and equipment, net
              
              2005
              
              2006Commercial
                  Aviation
              
              
              59,456
              
              
              117,655Defense
                  and Government
              
              
              51,326
              
              
              50,791Customer
                  Services and Others
              
              
              17,148
              
              
              42,625Unallocated
              
              
              260,432
              
              
              201,173Total
              
              
              388,362
              
              
              412,244
 
 F-60
 EMBRAER
              - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.
  NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THE
              YEARS ENDED DECEMBER 31, 2004, 2005 AND 2006
 (In
              thousands of U.S. dollars, unless otherwise stated)
 Trade
                  accounts receivable, net
              
              2005
              
              2006Commercial
                  Aviation
              
              
              99,515
              
              
              -Defense
                  and Government
              
              
              170,583
              
              
              113,371Customer
                  Services and Others
              
              
              180,726
              
              
              180,891Total
              
              
              450,824
              
              
              294,262
 
 Advances
                  from customers
              
              2005
              
              2006Commercial
                  Aviation
              
              
              440,157
              
              
              403,706Defense
                  and Government
              
              
              85,562
              
              
              92,548Executive
                  Aviation
              
              
              29,540
              
              
              195,746Customer
                  Services and Others
              
              
              27,723
              
              
              36,441Total
              
              
              582,982
              
              
              728,441
  36.
        SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION.
  The
        following are the supplemental disclosure of cash flow information:
  2004
              
              2005
              
              2006Cash
                  paid during the year for:Income
                  taxes
              
              
              11,032
              
              
              21,698
              
              
              89,899Interest
              
              
              53,488
              
              
              65,964
              
              
              99,611Non-cash
                  financing and investing transactions:Assets
                  acquired as capital lease
              
              
              427
              
              
              3,754
              
              
              3,918Dividends
                  payable
              
              
              54,959
              
              
              42,811
              
              
              35,555Property,
                  plant and equipment, net (OGMA acquisition)
              
              
              -
              
              
              10,286
              
              
              -Loans
                  and financing (OGMA acquisition)
              
              
              -
              
              
              31,730
              
              
              -
  *
          *
          *
 F-61