20-F 1 v113407_20f.htm Unassociated Document
As filed with the Securities and Exchange Commission on May 19, 2008

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, 2007

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.
6.375% Guaranteed Notes due 2017
 

 
Number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2007:


 
740,465,044 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 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 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 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 Accelerated Filer 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


 

     
Page
PART I 
 
   
ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
4
ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
4
ITEM 3.
KEY INFORMATION
4
 
3A.
Selected Financial Data
4
 
3B.
Capitalization and Indebtedness
7
 
3C.
Reasons for the Offer and Use of Proceeds
7
 
3D.
Risk Factors
8
ITEM 4.
INFORMATION ON THE COMPANY
18
 
4A.
History and Development of the Company
18
 
4B.
Business Overview
21
 
4C.
Organizational Structure
39
 
4D.
Property, Plants and Equipment
39
ITEM 4A
UNRESOLVED STAFF COMMENTS
41
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
41
 
5A.
Operating Results
41
 
5B.
Liquidity and Capital Resources
56
 
5C.
Research and Development
60
 
5D.
Trend Information
61
 
5E.
Off-Balance Sheet Arrangements
64
 
5F.
Tabular Disclosure of Contractual Obligations
66
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
67
 
6A.
Directors and Senior Management
67
 
6B.
Compensation
72
 
6C.
Board Practices
73
 
6D.
Employees
75
 
6E.
Share Ownership
75
ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
76
 
7A.
Major Shareholders
76
 
7B.
Related Party Transactions
77
 
7C.
Interests of Experts and Counsel
77
ITEM 8.
FINANCIAL INFORMATION
78
 
8A.
Consolidated Statements and Other Financial Information
78
 
8B.
Significant Changes
83
ITEM 9.
THE OFFER AND LISTING
83
 
9A.
Offer and Listing Details
83
 
9B.
Plan of Distribution
85
 
9C.
Markets
85
 
9D.
Selling Shareholders
88
 
9E.
Dilution
88
 
9F.
Expenses of the Issue
88
ITEM 10.
ADDITIONAL INFORMATION
88
 
10A.
Share Capital
88
 
10B.
Memorandum and Articles of Association
88
 
10C.
Material Contracts
103
 
10D.
Exchange Controls
103
 
10E.
Taxation
104
 
10F.
Dividends and Paying Agents
110
 
10G.
Statements by Experts
110
 
10H.
Documents on Display
110
 
10I.
Subsidiary Information
111
 
i


ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
112
ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
115
PART II
 
ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
115
ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
115
ITEM 15.
CONTROLS AND PROCEDURES
119
ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
120
ITEM 16B.
CODE OF ETHICS
120
ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
120
ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
121
ITEM 16E.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
122
PART III
 
ITEM 17.
FINANCIAL STATEMENTS
123
ITEM 18.
FINANCIAL STATEMENTS
123
ITEM 19.
EXHIBITS
123

ii


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 predecessor company, as a result of the merger of former Embraer with and into Embraer pursuant to the corporate reorganization described below), 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.
 
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. For further information on our corporate reorganization, see “Item 4A. History and Development of the Company—Corporate Reorganization.”
 
Presentation of Financial and Other Data
 
Financial Data
 
Our audited financial statements at December 31, 2006 and 2007 and for each of the years ended December 31, 2005, 2006 and 2007 are included in this annual report.
 
Our consolidated financial statements as of and for the years ended December 31, 2003 and 2004 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.
 
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. Translation gains and losses are recorded under foreign exchange loss, net in our statement of income.
 
In our 2005, 2006 and 2007 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.
 
In our Form 20-F/A filed with the U.S. Securities and Exchange Commission, or the SEC, on November, 26-2007, we restated our financial statements for the years ended December 31, 2004, 2005 and 2006. For further information, see “Item 15. Controls and Procedures” and Note 2(d) to our consolidated financial statements.

1


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 practices adopted 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 January 2009 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;
 
·
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 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.

2

 
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;
 
 
·
the effect of changing priorities or reductions in the Brazilians government or international government defense budgets on our revenues;
 
 
·
continued successful development and marketing of the EMBRAER 170/190 jet family, our line of executive jets (including 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.

3


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. Selected financial data as of and for the years ended December 31, 2005, 2006 and 2007 have been derived from our audited US GAAP financial statements and are included elsewhere in this annual report. The selected financial data presented for all other periods have been derived from our audited US GAAP financial statements not included herein.
 
   
At and for the year ended December 31,
 
   
2003
 
2004
 
2005
 
2006
 
2007
 
                       
   
(in US$ thousands, except per share/ADS data)
 
Statement of Income Data
                     
Net sales 
   
2,155,938
   
3,352,143
   
3,789,495
   
3,759,519
   
5,245,172
 
Cost of sales and services 
   
(1,374,637
)
 
(2,336,737
)
 
(2,738,907
)
 
(2,806,802
)
 
(4,093,504
)
Gross profit 
   
781,301
   
1,015,406
   
1,050,588
   
952,717
   
1,151,668
 
Operating expenses
                               
Selling expenses 
   
(179,119
)
 
(185,086
)
 
(159,799
)
 
(220,596
)
 
(361,306
)
Research and development 
   
(173,216
)
 
(44,506
)
 
(93,166
)
 
(112,743
)
 
(259,726
)
General and administrative 
   
(114,743
)
 
(139,357
)
 
(205,202
)
 
(235,505
)
 
(234,792
)
Employee profit sharing 
   
(20,399
)
 
(61,199
)
 
(56,051
)
 
(42,719
)
 
¾
 
Other operating income (expenses), net 
   
(29,060
)
 
(41,272
)
 
(26,079
)
 
1,677
   
78,361
 
Total operating expenses
   
(516,537
)
 
(471,420
)
 
(540,297
)
 
(609,886
)
 
(777,463
)
                                 
Income from operations 
   
264,764
   
543,986
   
510,291
   
342,831
   
374,205
 
Non-operating income (expense) 
                               
Interest income (expenses), net  
   
(140,755
)
 
(38,000
)
 
(4,117
)
 
105,433
   
163,378
 
Foreign exchange loss, net 
   
(16,500
)
 
(12,218
)
 
(15,218
)
 
(4,098
)
 
(37,669
)
Other non-operating income (expenses), net 
   
711
   
(117
)
 
9,050
   
¾
   
¾
 
Total non-operating income (expense)  
   
(156,544
)
 
(50,335
)
 
(10,285
)
 
101,335
   
125,709
 
                                 
Income before income taxes 
   
108,220
   
493,651
   
500,006
   
444,166
   
499,914
 
Income tax benefit (expenses) 
   
27,990
   
(112,139
)
 
(41,569
)
 
(44,412
)
 
(2,745
)
Income before minority interest and results of affiliates  
   
136,210
   
381,512
   
458,437
   
399,754
   
497,169
 
Minority interest 
   
(217
)
 
(1,306
)
 
(9,622
)
 
(9,580
)
 
(8,180
)
Equity in results of affiliates 
   
51
   
   
(3,096
)
 
(34
)
 
316
 
Net income 
   
136,044
   
380,206
   
445,719
   
390,140
   
489,305
 
                                 
Earnings per share
                               
Common share – basic (3) 
   
0.18
   
0.50
   
0.58
   
0.53
   
0.66
 
Preferred share – basic (3) 
   
0.20
   
0.55
   
0.64
   
¾
   
¾
 
ADS – basic (3) 
   
0.79
   
2.18
   
2.55
   
2.11
   
2.64
 
Common share – diluted (3) 
   
0.18
   
0.49
   
0.58
   
0.53
   
0.66
 
Preferred share – diluted (3) 
   
0.20
   
0.54
   
0.63
   
¾
   
¾
 
ADS – diluted (3) 
   
0.78
   
2.17
   
2.54
   
2.10
   
2.64
 
Dividends per share
                               
Common share (1) (2) (3) 
   
0.088174
   
0.239678
   
0.260803
   
0.212420
   
0.17361
 
Preferred share (1) (2) (3) 
   
0.096991
   
0.263645
   
0.286880
   
¾
   
¾
 
ADS (1) (2) (3) 
   
0.387964
   
1.054580
   
1.147520
   
0.849680
   
0.69443
 
 
4


   
At and for the year ended December 31,
 
   
2003
 
2004
 
2005
 
2006
 
2007
 
                       
   
(in US$ thousands, except per share/ADS data)
 
Weighted averaged number of shares outstanding (in thousands)
                     
Common share – basic (3) 
   
242,544
   
242,544
   
242,544
   
739,904
   
740,142
 
Preferred share – basic (3) 
   
471,228
   
474,994
   
479,288
   
¾
   
¾
 
Common share – diluted (3) 
   
242,544
   
242,544
   
242,544
   
742,903
   
741,047
 
Preferred share – diluted (3) 
   
474,840
   
479,217
   
482,739
   
¾
   
¾
 
                                 
Balance Sheet Data
                               
Cash and cash equivalents 
   
1,265,820
   
963,818
   
1,339,159
   
1,209,396
   
1,307,366
 
Temporary cash investments 
   
4,320
   
396,958
   
574,395
   
555,795
   
1,185,745
 
Other current assets 
   
2,076,726
   
2,514,733
   
2,701,968
   
3,026,295
   
3,156,630
 
Property, plant and equipment, net 
   
402,663
   
381,265
   
388,362
   
412,244
   
565,979
 
Other long-term assets 
   
2,331,006
   
1,825,625
   
1,928,561
   
1,894,011
   
1,850,134
 
Total assets
   
6,080,535
   
6,082,399
   
6,932,445
   
7,097,741
   
8,065,854
 
Short-term loans and financing(4) 
   
517,014
   
513,281
   
475,305
   
503,047
   
932,669
 
Other current liabilities 
   
1,929,181
   
1,802,820
   
2,179,131
   
2,492,142
   
2,406,724
 
Long-term loans and financing(5) 
   
526,728
   
825,448
   
1,078,117
   
846,104
   
820,320
 
Other long-term liabilities 
   
1,925,776
   
1,565,539
   
1,532,863
   
1,318,253
   
1,587,992
 
Minority interest 
   
12,611
   
21,443
   
46,775
   
63,914
   
68,709
 
Shareholders’ equity 
   
1,169,225
   
1,353,868
   
1,620,254
   
1,874,281
   
2,249,440
 
Total liabilities and shareholders’ equity
   
6,080,535
   
6,082,399
   
6,932,445
   
7,097,741
   
8,065,854
 
 
   
At and for the year ended December 31,
 
   
2003
 
2004
 
2005
 
2006
 
2007
 
   
(in US$ thousands, except per share /ADS data)
 
Other Financial Data
                     
                       
Net cash provided by (used in) operating activities 
   
239,634
   
(398,846
)
 
346,909
   
386,933
   
52,034
 
Net cash used in investing activities 
   
(72,667
)
 
(59,104
)
 
(50,496
)
 
(179,518
)
 
(255,915
)
Net cash provided by (used in) financing activities 
   
403,791
   
105,220
   
24,916
   
(395,103
)
 
136,995
 
Depreciation and amortization 
   
58,877
   
59,685
   
61,491
   
63,859
   
58,798
 
______________________
 
(1)
Includes interest on capital.
 
(2)
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. As of April 1, 2006, each ADS represents four common shares and before such date each ADS represented four preferred shares. The dividends per ADSs reflect the underlying dividends per share multiplied by four.
 
(3)
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.
 
(4)
Excludes non-recourse and recourse debt. Includes current portion of long-term debt.
 
(5)
Excludes non-recourse and recourse debt.
 
5

 
   
2003
 
2004
 
2005
 
2006
 
2007
 
Other Data:
                     
Aircraft delivered during period (1):
                     
To the Commercial Aviation Market
                     
ERJ 145 
   
57
   
87 (5
)
 
46
   
12
   
7
 
ERJ 135 
   
14
   
1 (1
)
 
2
   
   
 
ERJ 140 
   
16
   
   
   
   
 
EMBRAER 170 
   
   
46
   
46(1
)
 
32(2
)
 
11
 
EMBRAER 175 
   
   
   
14
   
11(1
)
 
34
 
EMBRAER 190 
   
   
   
12
   
40
   
68
 
EMBRAER 195 
   
   
   
12
   
3
   
10
 
To the Defense and Government Market
                               
EMB 120 Brasília 
   
   
   
   
   
1
 
Legacy 
   
   
   
6
   
   
1
 
EMB 145 
   
1
   
1
   
1
   
   
1
 
EMBRAER 170 
   
   
   
   
4(1
)
 
 
EMBRAER 190 
   
   
   
   
1
   
2
 
    EMB 145 AEW&C/RS/MP 
   
3
   
6
   
1
   
   
 
EMB 312 Tucano / AL-X/ Super Tucano 
   
   
7
   
24
   
14
   
28
 
To the Executive Aviation Market
                               
Legacy 600 
   
11 (2
)
 
13
   
14
   
27
   
35
 
EMB 135 
   
2
   
   
   
   
 
To the General Aviation Market
                               
Light Propeller Aircraft 
   
46
   
70
   
31
   
10
   
20
 
Total delivered 
   
150
   
231
   
197
   
154
   
218
 
Aircraft in backlog at the end of period:
                               
In the Commercial Aviation Market (2)
                               
EMB 120 Brasília 
   
   
   
   
1
   
 
ERJ 145 
   
144
   
66
   
10
   
53
   
46
 
ERJ 135 
   
17
   
17
   
15
   
1
   
 
ERJ 140 
   
20
   
20
   
20
   
   
 
EMBRAER 170 
   
120
   
112
   
104
   
29
   
31
 
EMBRAER 175
   
   
15
   
8
   
74
   
70
 
EMBRAER 190 
   
110
   
155
   
178
   
264
   
282
 
EMBRAER 195 
   
15
   
15
   
29
   
43
   
47
 
In the Defense and Government Market
                               
EMB 145 AEW&C/RS/MP 
   
7
   
1
   
   
   
 
EMB 312 Tucano/EMB 314/EP Super Tucano
   
76
   
69
   
93
   
80
   
104
 
EMB 145 
   
1
   
   
   
   
1
 
EMB 135 
   
   
   
   
   
2
 
Legacy 600 / Phenom 
   
5
   
5
   
   
1
   
3
 
EMBRAER 170/ EMBRAER 190
   
   
   
3
   
   
 
In the Executive Aviation Market
                               
Legacy 600/Phenom/Lineage 
   
27
   
4
   
15
   
384
   
766
 
In the General Aviation Market
                               
Light Propeller Aircraft 
   
11
   
25
   
6
   
   
 
Total backlog (in aircraft) 
   
553
   
504
   
481
   
930
   
1,352
 
Total backlog (in millions) 
 
US$
10,591
 
US$
10,097
 
US$
10,383
 
US$
14,806
 
US$
18,827
 
___________
(1) Deliveries identified by parentheses were aircraft delivered under operating leases.
(2) Since December 31, 2007, we have received 50 additional firm orders for our EMBRAER 170/190 jet family and 11 options for the EMBRAER 170/190 jet family were converted into firm orders.
 
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.
 
6

 
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.
 
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 30, 2008, the commercial selling rate for U.S. dollars was R$1,6872 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,
                 
2003
   
2.8219
   
3.6623
   
3.0600
   
2.8892
 
2004 .
   
2.6544
   
3.2051
   
2.9171
   
2.6544
 
2005
   
2.1633
   
2.7621
   
2.4125
   
2.3407
 
2006
   
2.0586
   
2.3711
   
2.1771
   
2.1380
 
2007
   
1.7325
   
2.1556
   
1.9500
   
1.7713
 
2008 (though April 30)
   
1.6575
   
1.8301
   
1.7246
   
1.6872
 

   
Exchange Rate of Reais to US$1.00
 
   
Low
 
High
 
Average(1)
 
Period-end
 
Month ended
                 
November 30, 2007
   
1.7325
   
1.8501
   
1.7966
   
1.7837
 
December 31, 2007
   
1.7616
   
1.8233
   
1.7860
   
1.7713
 
January 31, 2008
   
1.7414
   
1.8301
   
1.7743
   
1.7603
 
February 29, 2008
   
1.6715
   
1.7681
   
1.7277
   
1.6830
 
March 31, 2008
   
1.6700
   
1.7491
   
1.7076
   
1.7491
 
April 30, 2008
   
1.6575
   
1.7534
   
1.6889
   
1.6872
 
________________
Source: Central Bank.
(1) Represents the average of the exchange rates on the last day of each month during the relevant periods.
(2) Represents the average of the exchange rates 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.

7

 
 
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 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. 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. Further downturn in general economic conditions could result in further reduction in commercial aviation and decreased orders for our commercial aircraft. In the second half of 2007, the U.S and many of the world’s economies experienced downturns that continue and have been characterized by, among other effects, significant volatility in capital markets, and contractions of credit availability.
 
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 key customers and key suppliers, the loss of any of which could harm our business.
 
Commercial aircraft. As of March 31, 2008, all of our firm orders in backlog for the ERJ 145 regional jet family were attributable to a Chinese company, 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.

8

 
In addition, at March 31, 2008, 42.3% of our firm orders in backlog for the EMBRAER 170/190 jet family were for JetBlue Airways and US Airways, in North America, HNA Group in China and the new Brazilian airline recently founded by David Neeleman. Furthermore, in 2007 we signed firm orders with the following new clients: Suzuyo and Japan Airlines (JAL) from Japan, TACA from Equador, NAS Air from Saudi Arabia, Flybaboo from Switzerland, and Lufthansa, and Air France/ KLM from Europe. In addition, in the Commercial Aviation segment, Air Canada and Republic/Chautauqua accounted for 13.1% and 12.6% of our total net sales in 2007. We believe that we will continue to depend on a number of key customers, and 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 approximately 28% of our defense and government sales for the year ended December 31, 2007. 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. In 2007, deliveries of equipment for one of our defense products were temporarily suspended due to export control requirements. 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 or to comply with regulatory requirements (including export control requirements) 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.

9

 
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 2007, we were not required to accept aircraft for trade-in and at December 31, 2007, 18 additional commercial aircraft were subject to trade-in options to be exercised until 2010. 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$2,208.0 million as of December 31, 2007. For further discussion of these off-balance sheet arrangements, see Note 35 to our consolidated financial statements. We have deposited US$287.5 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, 2007) and from other offsetting collections, such as cash deposits, would be US$2,352.7 million as of December 31, 2007. As a result, we would be obligated to make substantial payments that are not recoverable through proceeds from aircraft sales or leases, particularly if in the future, we were not able to remarket any of the aircraft to offset our obligations 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 the 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 in that year.

10

 
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.
 
Any future government subsidies supporting any of our major competitors may cause the cost-competitiveness of our aircraft to suffer and our sales to decline.
 
In July 2007, Brazil and the OECD (Organization for Economic Co-operation and Development) countries entered into an agreement to establish a “level -playing field” for official export financing support of aircraft. Export Credit Agencies , or ECAs, from signatory countries are required to offer the same financial terms and conditions when financing sales of competing aircraft. The effect of the agreement is to focus on the price and quality of aircraft products offered by aircraft manufacturers rather than on the financial packages offered by their respective governments. As a result of the agreement financing support by the Brazilian Government to the potential purchasers of our aircraft will contain similar terms and conditions offered by Boeing, Airbus and Bombardier to such purchasers. By the end of 2007, BNDES started to offer financing to our customers under terms and conditions required by the agreement. To the extent we do not continue to maintain the pricing advantage and quality of our aircraft, our future sales may be negatively affected. In addition, aircraft manufacturers from countries which are not signatories to the agreement may be able to offer financing packages which will negatively affect the cost competitiveness of our products.
 
Brazilian Government budgetary constraints could reduce amounts available to our customers under government-sponsored financing programs.
 
From 1996 through 2007, approximately 32% of the total value of our exports sales was subject to financing by BNDES. As a government agency BNDES relies on funds allocated by the Brazilian national budget. We can not assure you that the Brazilian government will continue to provide sufficient funding in the national budget for the financing of our aircraft or that other sources of funding will be available to our customers in the market. The loss or significant reduction of funds available to our customers, without an adequate substitute, could lead to fewer sales and result 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.

11

 
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 certain milestones for each of these aircraft are not reached.
 
We have arrangements with our risk-sharing partners, pursuant to which they have contributed to us, in cash, a total of US$350.1 million as of December 31, 2007 and we expect to receive an additional US$30.9 million in future years for the development of the EMBRAER 170/190 jet family and of the Phenom 100 and Phenom 300. Cash contributions do not have to be returned by us to the risk-sharing partners upon the achievement of certain milestones. As of December 31, 2007, US$237.9 million of these cash contributions had become non-refundable. If we cancel the production of any 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 required to refund US$112.2 million of the total cash contributions already received. We expect the certification of the Phenom 100 and Phenom 300 to be granted in the second half of 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 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. Additionally, Chinese, Russian and Japanese companies are developing mid-capacity jets and already have firm orders in backlog.
 
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. Some of our competitors in the business jet market 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. We cannot assure you that we will be able to compete successfully in our markets in the future.
 
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 in our statements of income. As of December 31, 2007, we had obtained preliminary injunctions permitting us not to pay certain taxes, in the total amount, including interest, of US$565.0 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.

12

 
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 30-60 and 60-90 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, or ANAC (Agência Nacional de Aviação Civil), 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 can 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.

13

 
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. While the re-elected president has, to date, largely continued the policies of his previous administration, it is impossible to predict 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 experienced extremely high rates of inflation in the past. More recently, Brazil’s annual rate of inflation was 12.4% in 2004, 1.2% in 2005, 3.8% in 2006 and 7.7% in 2007 (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.

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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 exchange rate (R$/US$) increased by 9.3% in 2000 and 18.7% in 2001. In 2002, the exchange rate (R$/US$) also increased 52.3%, due in part to political uncertainty surrounding the Brazilian political elections and the global economic slowdown. Although the exchange rate (R$/US$) decreased 18.2%, 8.1%, 11.8%, 8.7%, 17.2% and 1.3% in 2003, 2004, 2005, 2006, 2007 and the first three months of 2008, respectively, no assurance can be given that the real will not further appreciate or depreciate against the U.S. dollar.
 
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.
 
Appreciation of the real against the U.S. dollar may also have an adverse impact on the competitiveness of our products as approximately 13% of our production inputs, including labor costs, are incurred and denominated in reais. Therefore, appreciations of the real against the U.S. dollar or other currencies increases the costs of our products when measured in U.S dollars, and may result in a decrease in our margins.
 
Economic developments and investor perceptions of risk in other countries, including 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. For example, the recent uncertainty in the economies of U.S. and other OECD countries has caused a retraction of credit on a worldwide basis, significant volatility in the international capital markets (including Brazil) and diminished investor interest in securities of Brazilian issuers, including ours. Future crises in other countries 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.

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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 change of control, change of name, trademark or corporate purpose and over the creation or alteration of our defense programs, and its interests could conflict with the interests of the holders of our common shares or ADSs.
 
The Brazilian government holds one share of a special class of our common stock called a “golden share,” which carries veto power over change of control, change of our name, trademark or corporate purpose and over the creation or alteration of our 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.
 

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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.
 
Our bylaws contain provisions that limit the voting rights of certain shareholders including non-Brazilian shareholders.
 
Our bylaws contain provisions that limit the right of a shareholder or group of shareholders, including brokers acting on behalf of one or more holders of ADSs, to exercise voting rights in respect of more than 5% of the outstanding shares of our capital stock at any general meeting of shareholders. See “Item 10B. Memorandum and Articles of Association¾Description of Capital Stock¾Voting Right of Shares— Common Shares—Limitation on the Voting Rights of Certain Holders of Common Shares.”
 
Our bylaws also contain provisions that limit the right of non-Brazilian shareholders to exercise voting rights in respect of more than two-thirds of the voting rights that may be exercised by Brazilian shareholders present at any general meeting of shareholders. This limitation will effectively prevent our takeover by non-Brazilian shareholders and limit the ability of non-Brazilian shareholders to effect control over us. See “Item 10B. Memorandum and Articles of Association¾Description of Capital Stock—Voting Rights of Shares— Common Shares —Limitation on the Voting Rights of Non-Brazilian Shareholders.”
 
Holders of ADSs may not be able to exercise their voting rights.
 
Holder of ADSs may only exercise their voting rights with respect to the underlying common shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, ADS holders must vote by giving voting instructions to the depositary. Upon receipt of the voting instructions of the ADS holder, the depositary will vote the underlying common shares in accordance with these instructions. Otherwise, ADS holders will not be able to exercise their right to vote unless they surrender the ADS for cancellation in exchange for the common shares. Pursuant to our bylaws, the first call for a shareholders’ meeting must be published at least 30 days in advance of the meeting, the second call must be published at least 15 days in advance of the meeting, and the third call, if necessary, must be published at least eight days in advance of the meeting. When a shareholders’ meeting is convened, holders of ADSs may not receive sufficient advance notice to surrender the ADS in exchange for the underlying common shares to allow them to vote with respect to any specific matter. If we ask for voting instructions, the depositary will notify ADS holders of the upcoming vote and will arrange to deliver the proxy card. We cannot assure that ADS holders will receive the proxy card in time to ensure that they can instruct the depositary to vote the shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. As a result, holders of ADSs may not be able to exercise their voting rights.
 
The relative volatility and illiquidity of the Brazilian securities markets may substantially limit the ability of holders of our common shares or the ADSs to sell the common shares underlying 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.
 
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.”

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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. 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 55-12-3927-4404. 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.
 
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.

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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 ultra-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.
 
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 ThalesTM, 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 our outstanding common stock from our existing common shareholders at that time. Most of the common stock purchased was owned by our former controlling shareholders.

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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, 2008, each of Dassault and Safran, individually, held shares representing 0.9% and 1.1% of our total capital stock, respectively. ThalesTM sold all of its shares in October 2006 and EADS sold all of its shares in a secondary offering in February 2007.

The relationship that developed as a result of our alliance between the European Aerospace and Defense Group 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 ThalesTM 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.
 
We intend to review strategic growth opportunities, which may include joint ventures and acquisitions, and other strategic transactions and enhance our existing relationship with significant world players in the aerospace industry, including any of the members of the European Aerospace and Defense Group.
 
Joint Ventures and Acquisitions
 
Formed in 1999, ELEB – Embraer Liebherr Equipamentos do Brasil S.A. is a joint venture owned 60% by us and 40% by Liebherr Aerospace SAS. ELEB is an aerospace system and component manufacturer and its main products include: landing gear systems, hydraulics and electro-mechanical sub-assemblies, such as actuators, valves, accumulators and pylons.
 
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 us and EADS acquired 65% of OGMA’s shares through a newly created holding company, AIRHOLDING, SGPS, S.A. At that time we 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.
 
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.

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Research and Development Costs and Capital Expenditures 
 
Research and development costs, including the development of the EMBRAER 170/190 jet family, were US$93.2 million in 2005, US$112.7 million in 2006 and US$259.7 million in 2007 – net of cash contributions provided by risk-sharing partners. Research and development costs as a percentage of net sales were 2.5% in 2005, 3.0% in 2006 and 5.0% in 2007. The increase in our research and development costs in 2006 was mainly due to the development of our new executive jets and the 9.5% 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$36.0 million as a result of the fulfillment of certain contractual milestones. See “¾Products¾EMBRAER 170/190 Jet Family.” In 2007 our Board of Directors approved investments of US$320 million for the next five years for studies regarding new technologies of materials, fuel options and product development. After their first flights in the second half of 2007, both the Lineage 1000 and Phenom 100 jets entered their testing phases, which demanded higher research and development investments. In 2007, the exchange rate (R$/US$) decreased 17.2% from R$2.1380 to R$1.7713 per US$1.00 against the dollar, also impacting our research and development costs. Most of our research and development expenses are associated with a particular commercial or executive aviation. program 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 these 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 July 2007 the Phenom 100 flew for the first time, completing an important milestone in its certification process. As of December 2007, we had three pre-serial aircraft working on the flight test phase and certification process.
 
In May 2006, we launched another executive jet, the Lineage 1000, in the ultra-large category. The Lineage 1000 is 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 2008, we expect research and development costs to total approximately US$243.0 million, excluding contributions from risk-sharing partners, but including US$123 million in costs related to the development of our Phenom jets, US$48 million in costs related to our commercial aviation programs and US$72 million in costs related to the development of technology.
 
Our total disbursements in property, plant and equipment were of US$51.8 million in 2005, US$90.8 million in 2006 and US$208.9 million in 2007. 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 2008 and 2009, we expect disbursements in property, plant and equipment to total approximately US$330.0 million and US$270.0 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 aviation services operations.
 
4B.
Business Overview
 
We are one of the leading manufacturers of commercial aircraft in the world, based on 2007 net sales of commercial aircraft, with a global customer base. Our focus is achieving customer satisfaction with a range of products and services addressing the commercial airline, executive jet and defense markets and aviation services. Our commercial aviation business accounted for 64.4% of our net sales in 2007. We are the leading supplier of defense aircraft for the Brazilian Air Force based on number of aircraft sold, and we have sold aircraft to military forces in Europe, Asia and Latin America. Our defense and government business accounted for 6.6% of our net sales in 2007. We have developed a line of executive jets based on one of our regional jet platforms and 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 16.0% of our net sales in 2007. 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. Our aviation services business accounted for 10.1% of our net sales in 2007. Other related businesses, accounted for 3.0% of our net sales in 2007. For the year ended December 31, 2007, we generated net sales of US$5,245.2 million, of which more than 90% was U.S. dollar-denominated. On March 31, 2008, we had a total firm order backlog of US$20.3 billion, including 509 aircraft sold by the commercial aviation segment.

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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 64 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, which allow us to increase or decrease our production in response to market demand.
 
Experienced and Highly Skilled Workforce. Our employees are experienced and highly skilled. 17.4% 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, 2008, we had more than 850 units of the ERJ 145 jet in commercial 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, 2008, 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.

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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 midsize” jet, and are developing the Phenom 100, Phenom 300 and Lineage 1000, executive jets in the “very light,” “light” and “ultra large” segments, respectively. We have endeavored to understand and respond to market and customer needs, continually improving the product and customer support for our executive jets.
 
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. In 2007 we created a new business area called Aviation Services. We also started the construction of a service center at Williams Gateway Airport in Mesa, Arizona and another service center at Bradley International Airport in Windsor Locks , Connecticut.
 
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 increased our customer service capabilities with the acquisition of OGMA in 2004 through a consortium led by us with EADS’ participation.
 
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, 2007.
 
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 the EMBRAER 170/190 jet family, our 70-122 seat platform, 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.

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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. In October 2007, we delivered our 1000th ERJ 145 aircraft, manufactured at Harbin Embraer Aircraft Industry Co. Ltd. to the HNA Group.
 
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.
 
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 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.

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EMBRAER 170/190 Jet Family
 
The EMBRAER 170/190 jet family provides our customers with a choice of four aircraft in the mid-capacity passenger range. The EMBRAER 170 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, by EASA in July 2006 and by the FAA in August 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.
 
 
·
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, 2007, we have delivered 352 EMB 120 Brasília for the regional market and six EMB 120 Brasília for the defense market. We currently manufacture the EMB 120 Brasília only upon customer request.

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Customers
 
While we have focused our efforts on the U.S. and European markets to date, we also have customers in the Americas, 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, 2008, our largest customers were JetBlue Airways, US Airways, HNA Group, and the new Brazilian airline recently founded by David Neeleman. For a discussion of these significant customer relationships, see “Item 3D. Risk Factors—Risks Relating to Embraer—We depend on 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, 22 of which were delivered as of March 31, 2008.
 
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.
 
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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 against the following aircraft in these categories:
 
 
·
De Havilland’s DHC-8-400, a 72-seat turboprop, produced by Bombardier;
 
 
·
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 new developments in this market segment from current and new competitors:
 
·
Sukhoi’s RRJ, a 75- and 95-seat regional jet, which is officially scheduled to enter into service at the end of 2008;
 
 
·
AVIC I’s ARJ21, a 90- to 105-seat regional jet, which is officially scheduled to enter into service in 2009;
 
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·
Bombardier’s CSeries jet, which seats 110 to 130 passengers, is expected to be launched in 2008 and to enter into service by 2013 - the target market for the CSeries jet is traditionally dominated by Boeing and Airbus; and
 
 
·
Mitsubishi Heavy Industries‘ 75 and 96 seat regional jet, which was launched in March 2008, and is expected to enter into service by 2013.
 
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, 2007, we had sold 566 defense aircraft to the Brazilian government and 576 defense aircraft to other military forces. Our defense and government business accounted for 6.6% of our net sales for the year ended December 31, 2007.
 
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 provided 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, seven aircraft were delivered in 2004, 24 were delivered in 2005, four were delivered in 2006 and an additional 18 aircraft were delivered in 2007. These aircraft are 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 up to 2007 15 aircraft were delivered to that customer.

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EMB 145 AEW&C; EMB 145 RS; EMB 145 MP
 
We have configured a special version of the ERJ 145 with an advanced early warning and control system – the EMB 145 AEW&C, with ground remote sensing capability – the EMB 145 RS, and with marine remote sensing capability – the EMB 145 MP. The EMB 145 AEW&C’s advanced phased-array radar and mission system, developed by Ericsson, is capable of conducting surveillance and providing air traffic control in support of aviation authorities. The EMB 145 RS is designed to carry out ground surveillance and environmental protection activities using advanced synthetic aperture radar, capable of providing day/night and all weather images of the ground over large areas, with multi-spectral sensors developed by subcontractors in the United States. The EMB 145 MP is designed to carry out maritime patrol and anti-submarine warfare missions, using maritime and ground surveillance radar, electro-optical sensors, and communications and other surveillance equipment developed by Ericsson and ThalesTM. We, Ericsson and ThalesTM 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 aircraft, modified to meet added security needs, to the Brazilian and other governments. Prior to 2005 we delivered modified EMB 135 and 145 aircraft to the Belgian, Greek, and Colombian Air Forces. In June 2005, Satena the state-owned Colombian airline, 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. In 2007 we delivered one Legacy 600 to the Angolan Government, and one ERJ 145 to the Nigerian Government.
 
Other Projects and Activities
 
In December 2000, we were selected by the Brazilian government to perform a structural and electronics upgrade of the Brazilian Air Force’s F-5 fighter jets. As the prime contractor, we 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. In August 2007, we received the first AMX jet from the Brazilian Air Force (Força Aérea Brasileira – FAB) to have its systems and technology updated. The goal of the modernization project for the AMX jets, called A-1 by the FAB, is to keep the fleet of 53 on active duty for another 20 years.
 
Competition
 
Our defense systems aircraft faces a stiff competition from various manufacturers, from different countries in each market segment, and many of which have greater resources than we do.
 
The Super Tucano competes in the basic/advanced training market with the Pilatus PC-9M (basic) and PC-21 (advanced) aircraft, the Beechcraft T-6A / B (basic/advanced) and the Korea Aerospace Industries KT-1 (basic). In the Light Attack market the Super Tucano competes with Beechcraft AT-6 and Korea Aerospace Industries KO-1.

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In the special mission aircraft market, that includes Airborne Early Warning & Control, Remote Sensing, Airborne Ground Surveillance, Maritime Patrol, Anti-Surface Warfare and Multi-mission Aircraft, there are several platforms with a wide range of sensors combination that may compete with our products: Bombardier Global Express, Boeing 737, Northrop Grumman E-2C/D Hawkeye, Gulfstream G550, SAAB 2000, Alenia ATR 42 / 72, EADS CASA CN-235 / C-295, Bombardier Dash 8, among others.
 
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 16.0% of our net sales for the year ended December 31, 2007, resulting from the delivery of 35 Legacy 600 jets. On March 31, 2008, our firm orders in backlog for our executive jets totaled US$5.2 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. The 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. The Phenom 100 maiden flight took place in June 2007, the first flight was preceded by several weeks of ground tests. The results confirmed the Phenom 100’s operations throughout ground vibration, flight control, low and high-speed taxiing, and systems functionality and integration tests.
 
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.

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.

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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.
 
Aviation Services
 
We provide after-sales customer support services and manufacture and market spare parts for the fleets of our commercial, executive and defense and government customers. Activities in this segment include the sale of spare parts, maintenance and repair, training and other product support services. Revenues for the aviation services segment accounted for 10.1% of our net sales for the year ended December 31, 2007. 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 ten 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 the end of 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 for 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.
 
Other Related Businesses
 
We recognize revenues related to selling of used aircraft or leasing to customers primarily through our leasing subsidiary, ECC Leasing Co. Ltd. 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 planes and crop dusters, also known as light aircraft. Our other related businesses accounted for 3.0% of our net sales for the year ended December 31, 2007.
 
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.

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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, 2007, 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, 2007, we had delivered a total of 1,042 of these aircraft, including 23 in 2007. We had no crop duster aircraft in backlog at December 31, 2007.
 
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, We 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 us as trade-in and/or re-purchase transactions. We also provide 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 our results, reaching accumulated net income of US$26.4 million up to December 31, 2007, since its inception. Since then, sales campaigns of 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. During this period up to December 31, 2007, ECC Leasing and two other Embraer subsidiaries managed a total portfolio of 57 aircraft, of which 29 aircraft were under operating lease and 28 aircraft were sold to airlines, corporations and government entities in North America, South America, Asia and Europe.
 
All sale and leasing transactions were executed based on market rates, thereby sustaining the present and future values of our products.
 
The continued improvement in financial performance is directly related to ECC Leasing’s ability to renew lease contracts with similar conditions as those currently in place, as well as to sell aircraft to operators, leasing companies and/or financial institutions, at values close to market rates and without providing any type of Embraer guarantee.
 
Furthermore, the results of ECC Leasing Co. Ltd and ECC-Insurance & Financial Co. Ltd will be largely dependent on market conditions, aircraft availability levels, and the demand for regional jets in the 37 to 50 seat category. Although new markets such as Russia and Latin America are important, the higher risks related to operator credit and asset repossession demand that these risks 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,
 
   
2005
 
2006
 
2007
 
   
(in US$ millions)
 
               
Commercial Aviation
             
Americas (excluding Brazil)
 
 
2,176.4
 
 
1,407.0
 
 
2,277.9
 
Europe
   
247.9
   
430.1
   
485.8
 
Brazil
   
   
   
 

32

 
 
Year ended December 31,
 
   
2005
 
2006
 
2007
 
   
(in US$ millions)
 
Other 
   
207.7
   
516.1
   
612.9
 
Total
 
 
2,632.0
 
 
2,353.2
 
 
3,376.6
 
                     
Executive Aviation
                   
Americas (excluding Brazil) 
   
155.8
   
304.8
   
302.2
 
Europe 
   
100.3
   
161.3
   
484.2
 
Brazil 
   
   
   
27.7
 
Other 
   
22.0
   
116.0
   
23.9
 
Total 
 
 
278.1
 
 
582.1
 
 
838.0
 
                     
Defense and Government
                   
Americas (excluding Brazil) 
   
33.9
   
142.1
   
156.7
 
Europe 
   
8.3
   
13.4
   
29.2
 
Brazil 
   
230.3
   
71.2
   
96.9
 
Other 
   
151.2
   
   
63.6
 
Total
 
 
423.7
 
 
226.7
 
 
346.4
 
                     
Aviation Services
                   
Americas (excluding Brazil) 
   
174.2
   
180.2
   
213.9
 
Europe 
   
196.9
   
237.0
   
227.6
 
Brazil
   
15.5
   
50.2
   
46.4
 
Other 
   
0.7
   
12.4
   
40.3
 
Total 
 
 
387.3
 
 
479.8
 
 
528.2
 
                     
Other Related Businesses 
                   
Americas (excluding Brazil) 
   
5.1
   
92.7
   
69.3
 
Europe 
   
5.9
   
-
   
6.4
 
Brazil 
   
57.4
   
25.0
   
78.0
 
Other 
   
-
   
-
   
2.3
 
Total 
 
 
68.4
 
 
117.7
 
 
156.0
 
 
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 granted the joint venture a license for 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 of 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, 2008, Harbin Embraer Aircraft Industry Company Ltd. had secured contracts with four Chinese airlines for a total of 66 ERJ 145 aircraft, 22 of which were delivered as of March 31, 2008. In October 2007, the 1000th jet of the ERJ 145 family was delivered at Harbin Embraer Aircraft Industry Co. Ltd.
 
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, and will begin 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.

33

 
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. 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. 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 key customers and key suppliers, the loss of any of which could harm our business.”
 
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.

34

 
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;
 
 
·
Liebherr, which is responsible for designing, developing and manufacturing the landing gear assemblies;
 
 
·
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 final assembly of the wings of the EMBRAER 190 and EMBRAER 195 aircraft and paid us compensation of US$57 million. 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 Corporation, the supplier of hydraulic systems.

35

 
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$350.1 million as of December 31, 2007 and we expect to receive an additional US$30.9 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, 2007, US$237.9 million of these cash contributions had become non-refundable. If we cancel the 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$112.2 million of the total cash contributions already received. We expect 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.
 
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 started the construction of a service center at Williams Gateway Airport in Mesa, Arizona and another service center at Bradley International Airport in Windsor Locks, Connecticut.
 
We have dedicated teams in the United States, Europe and Brazil to focus exclusively on enhancing customer support. In addition, for each of our key customers, we have assigned senior relationship managers that are responsible for enhancing our relationships with these customers. We also provide direct field support with on-site technical representatives at several of our major customers’ facilities. These on-site representatives are assigned to major customers prior to the first delivery of their aircraft and provide advice on maintenance and operation. They also monitor our customers’ spare part needs and maintain customers’ inventories.
 
We operate support centers that are available 24 hours a day, seven days per week, in our São José dos Campos facility, as well as in Ft. Lauderdale, Florida, and Le Bourget, France. We train pilots, co-pilots, flight attendants and mechanics at these locations. We operate advanced flight simulators for our ERJ 145 regional jet family and for the Legacy 600 at our Florida facility under an agreement with FlightSafety International, Inc., a business specializing in flight simulation. We have entered into an agreement with GE Capital Aviation Training Limited, or GECAT, a joint venture between General Electric Company and Thales™, whereby GECAT provides training for the EMBRAER 170/190 jet family on a non-exclusive basis. We also provide field service and on-the-job training for airline personnel. For example, we routinely dispatch one of our pilots to fly with an operator’s crew during the introduction of an aircraft into a customer’s regular routes. We also provide technical publications with up-to-date technical information on our aircraft. 

36

 
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 time of the delivery of the aircraft to the airlines, timing may optimal 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 at the time of the aircraft delivery.
 
The BNDES-exim sponsored program, a Brazilian government program, provides our customers with direct financing. From 1995 through 2007, approximately 28% of the total value of our export sales was financed by the BNDES-exim Program.
 
Because of the high acceptance of the EMBRAER 170/190 family (“E-Jets”) by the aircraft finance community and the value of these assets as collateral (including in terms of residual values), as of December 31 2007, we have been able to deliver, for the commercial aviation segment, 334 E-jets with no government or official financing. Currently, the market offers many different structures to finance the E-jets, although the most common ones are debt and lease financing. Debt financing represents 39% of the total aircraft delivered between 1995 and 2007 with funds provided to our customers by commercial banks, capital markets and BNDES. 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 July 2007, Brazil and the OECD countries entered into an agreement to establish a “level -playing field” for official export financing support of aircraft. ECAs from signatory countries are required to offer the same financial terms and conditions when financing sales of competing aircraft. The effect of the agreement is to focus on the price and quality of aircraft products offered by aircraft manufacturers rather than on the financial packages offered by their respective governments. As a result of the agreement financing support by the Brazilian Government to the potential purchasers of our aircraft will contain similar terms and conditions offered by Boeing, Airbus and Bombardier to such purchasers. By the end of 2007, BNDES started to offer financing to our customers under terms and conditions required by the agreement.
 
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, 2007, we had 60 trademarks. Our registered trademarks are generally renewed at the end of their validity period, which usually runs from ten 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.

37

 
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, 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.
 
Once an aircraft is certified by the ANAC 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 ANAC. 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.
 
The certification history of our aircraft is as follows:
 
 
·
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.
 
38

 
 
·
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, by EASA in July 2006 and by the FAA in August 2007.
 
The certification of the Phenom 100 and the Lineage 1000 is expected to occur in the second half of 2008 and the certification of the Phenom 300 is expected to occur in the second half of 2009.
 
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 is filed as Exhibit 8.1 to this annual report.
 
4D.
Property, Plant 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
 
2010
Ft. Lauderdale, Florida, U.S.A. 
 
Support center
 
91,500
 
Leased
 
2020
Nashville, Tennessee, U.S.A. 
 
Aircraft maintenance and support center
 
316,128
 
Leased
 
2018
2028
Alverca, Portugal(3) 
 
Aircraft maintenance and support center
 
417,000
 
Leased
 
2035
Le Bourget, France 
 
Support center
 
33,500
 
Leased
 
2008
Villepinte, France 
 
Representative offices
 
70,202
 
Leased
 
2014
Beijing, China 
 
Representative offices
 
3,444
 
Leased
 
2010
Singapore 
 
Representative offices
 
2,303
 
Leased
 
2009
________________
(1) The land is owned pursuant to a land use rights certificate.
(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.

39

 
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 4.5 months at the end of 2007. We have the flexibility to increase production in the future in response to increased demand. We achieved the production rate of 14 aircraft per month at the end of 2007 for the EMBRAER 170/190 jet family, due to the reorganization of some industrial processes, and the implementation of a third shift in our workforce. In addition, in June 2006, we entered into an agreement with KHI and KAB, pursuant to which we began assembling the wings of the EMBRAER 190 and EMBRAER 195 aircraft in order to meet demand for these types of aircraft. See “¾Products¾EMBRAER 170/190 Jet Family.”
 
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 test runway and other features to handle the assemble of our defense and government programs, an MRO facility, and the Phenom´s production hangar in Gavião Peixoto.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 2005, 2006 and 2007, we invested US$3.8 million, US$4.6 million and US$5.1 million respectively, in environmental matters and we expect to spend approximately US$11.6 million on environmental matters in 2008 with expenditures relating to the portion of construction of new facilities and modification of existing facilities relating to environmental compliance and improvements.

40

 
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 environment