Embraer - Empresa Brasileira de Aeronáutica

Embraer - Empresa Brasileira de Aeronáutica S.A.

Financial Statements for the Years Ended December 31, 2004 and 2003 and Independent Auditors’ Report Deloitte Touche Tohmatsu Auditores Independentes

INDEPENDENT AUDITORS’ REPORT

To the Shareholders and Management of


São José dos Campos - SP

1. We have audited the accompanying consolidated balance sheets of Embraer - Empresa

Brasileira de Aeronáutica S.A. and subsidiaries as of December 31, 2004 and 2003, and the

related statements of income, changes in shareholders’ equity and changes in financial

position for the years then ended, all expressed in Brazilian reais and prepared under the

responsibility of the Company’s management. Our responsibility is to express an opinion on

these financial statements.

2. We conducted our audits in accordance with generally accepted auditing standards in Brazil

and comprised: (a) planning of the work, taking into consideration the significance of the

balances, volume of transactions, and the accounting and internal control systems of the

Company and its subsidiaries; (b) checking, on a test basis, the evidence and records that

support the amounts and accounting information disclosed; and (c) evaluating the significant

accounting practices and estimates adopted by Company’s management and its subsidiaries,

as well as the presentation of the financial statements taken as a whole.

3. In our opinion, the financial statements referred to in paragraph 1 present fairly, in all

material respects, the consolidated financial positions of Embraer - Empresa Brasileira de

Aeronáutica S.A. and subsidiaries as of December 31, 2004 and 2003, and the results of

their operations, the changes in shareholders’ equity, and the changes in their financial

positions for the years then ended, in conformity with Brazilian accounting practices.

4. The accompanying financial statements have been translated into English for the

convenience of readers outside Brazil.

São Paulo, March 10, 2005

DELOITTE TOUCHE TOHMATSU José Domingos do Prado

Auditores Independentes Accountant

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EMBRAER - EMPRESA BRASILEIRA DE AERONÁUTICA S.A.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003

(Amounts in thousands of Brazilian reais, unless otherwise indicated)

1. OPERATIONS

The corporate purpose of Embraer - Empresa Brasileira de Aeronáutica S.A. (“the

Company”, “Embraer” or “parent company”) is the development, production and sale of jet

and turboprop aircraft for civil and defense aviation, aircraft for agricultural use, structural

components, mechanical and hydraulic systems and, technical activities related to the

production and maintenance of aerospace material.

2. BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

a) Presentation of financial statements

The financial statements were prepared in accordance with accounting practices adopted

in Brazil and additional regulations of the “Comissão de Valores Mobiliários - CVM”,

the Brazilian Securities Commission (the “CVM”), and are an English language

adaptation of the financial statements published in Brazil, for the convenience of readers

outside Brazil.

Certain accounting practices applied by the Company and its subsidiaries that conform

to accounting practices adopted in Brazil may not conform to generally accepted

accounting principles in countries where these financial statements may be used.

b) Operating activities of subsidiaries

These consolidated financial statements include the accounts of the Company and the

following subsidiaries:

Embraer Aircraft Holding Inc. - EAH

Wholly-owned subsidiary based in Fort Lauderdale, Florida, United States, responsible

for corporate and institutional activities with the following subsidiaries located in the

United States:

Embraer Services Inc. - ESI: provides support for the defense market program in the

United States.

Embraer Aircraft Customer Services, Inc. - EACS: selling spare parts, product

support and customer training in the United States, Canada, the Caribbean and the

United Kingdom.


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Embraer Marketing Corporation - EMC: responsible for sales representation,

marketing and promotion, for both commercial and corporate aviation.

Embraer Aircraft Maintenance Services Inc. - EAMS: has the activity of aircraft

maintenance services and components.

Aerochain® LLC: responsible for electronic commerce activity.

Embraer Engeneering Service Inc.: provides engineering services for Company’s

programs.

Embraer Investments Ltd.: has the purpose of the financial structuring of sales made

by the Company.

Trumpeter Inc.

This wholly-owned subsidiary, located in Wilmington, Delaware, United States, has a

25% interest in Expressprop LLC, which provides support for the sale of used EMB 120

Brasília aircraft.

Indústria Aeronáutica Neiva Ltda. - NEIVA

This wholly-owned subsidiary, located in Botucatu, São Paulo, Brazil, is engaged in the

production and sale of agricultural aircraft, as well as the production and assembly of

parts for aircraft manufactured by the Company.

ELEB - Embraer Liebherr Equipamentos do Brasil S.A.

Embraer holds 60% of the voting capital and Liebherr International AG 40% of this

Company, based at São José dos Campos, São Paulo, Brazil. Its business is to produce

and sell precision hydraulic and mechanical equipment for the aviation industry.

Embraer Aviation Europe SAS - EAE

Wholly-owned subsidiary, located in Le Bourget, France, with the following

subsidiaries:

Embraer Aviation International SAS - EAI: located at Le Bourget, France, provides

after-sales services in Europe, Africa and the Middle East.

Embraer Europe SARL - EES: located in Villepinte, north of Paris, France, provides

sales representation for the Company in Europe, Africa and the Middle East.


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Embraer Australia PTY Ltd. - EAL

This wholly-owned subsidiary, located in Melbourne, Australia, provides after-sales

support services to customers in Australasia, Asia and the region.

Embraer Credit Ltd. - ECL

This wholly-owned subsidiary, located in Wilmington, Delaware, United States,

supports sales operations.

Embraer Representation LLC - ERL

Located in Fort Lauderdale, Florida, United States, provides institutional representation

for the Company.

Embraer Spain Holding Co. SL - ESH

Located in Spain, its purpose is to coordinate investments in foreign subsidiaries,

including those focused on activities that support the sale of aircraft and management of

assets derived from these operations. The activities of ESH are operationalized by its

subsidiaries:

ECC Investment Switzerland AG: located in Switzerland, it has a 100% interest in

the capital of the subsidiaries ECC Insurance & Financial Co. Ltd. - ECC Insurance

and Embraer Finance Ltd. - EFL.

ECC Insurance & Financial Co. Ltd. - ECC Insurance: located in the Cayman

Islands, B.W.I., is a captive insurance company, that provides financial guarantees to

customers and/or financing agents involved in the structuring of aircraft sales.

Embraer Finance Ltd. - EFL: located in the Cayman Islands, B.W.I., provides

support for some of the Company’s purchase and sale operations, such as supporting

clients in obtaining third-party finance. As from December 24, 2004, it became a

wholly-owned subsidiary of ECC Investment Switzerland AG (previously a wholly-

-owned subsidiary of the Company).

ECC Leasing Co. Ltd.: located in Ireland, its objective is the lease and sale of used

aircraft.

On December 22, 2004, the subsidiary AIRHOLDINGS SGPS, S.A. was created, in

which ESH has a 99.9% interest.

On December 23, 2004, AIRHOLDING SGPS, S.A. acquired from Empresa Portuguesa

de Defesa - EMPORDEF 65% of the voting capital of OGMA - Indústria Aeronáutica

de Portugal S.A., a Portuguese aeronautical maintenance and production company. As

of December 31, 2004, this acquisition was in the process of evaluation by the European

authorities.


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All the shares acquired and the amounts paid for them will be deposited in a special

escrow deposit account opened at the depositary bank until final approval of the

operation by the European antitrust authorities.

On March 9, 2005, the European antitrust authorities approved the acquisition.

Harbin Embraer Aircraft Industry Company Ltd. - HEAI

Based in Harbin, capital of Heilongjiang province, People’s Republic of China, its

purpose is to manufacture aircraft of the ERJ 135/140/145 family, in order to meet

commercial air transportation market demand in China, for the range of 30 to 50 seats.

Embraer controls the business, with a 51% holding.

Canal Investments LLC

Wholly-owned subsidiary, based in Wilmington, Delaware, United States, is responsible

for electronic commerce assets.

ECC do Brasil Cia. de Seguros

A subsidiary in which the Company has an interest of 99.99%, based at São José dos

Campos, São Paulo, Brazil, incorporated on June 3, 2004 and approved by the Private

Insurance Agency (SUSEP) on October 13, 2004. Its purpose is to operate solely with

export credit insurance in the State of São Paulo.

The financial statements of subsidiaries based abroad are prepared according to

accounting practices compatible with those used by the parent company, and are

translated into Brazilian reais at the exchange rates in effect on the balance sheet date.

Intercompany balances, transactions and unrealized profits, net of income tax effects,

are eliminated in consolidation

Investments in affiliates in which the Company does not have control are accounted for

using the equity method.

We present below the reconciliation between the parent company’s financial statements

and the consolidated statements:

Net income for the

fiscal years ended

December 31,

Shareholder’s equity

as of December 31,

2004 2003 2004 2003

Parent company 1,278,089 646,943 4,606,560 3,898,415

Unearned income (*) (22,256) (59,290) (188,903) (166,647)

Consolidated 1,255,833 587,653 4,417,657 3,731,768

(*) The unearned income refers to sales of spare parts, aircraft and market exclusivity

rights.


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3. PRINCIPAL ACCOUNTING PRACTICES

a) Cash and cash equivalents

Temporary cash investments are reported at cost, plus income earned to the balance

sheet date or the value of quotas of investment funds.

b) Allowance for doubtful accounts

Recognized based on an individual analysis of receivables to an amount considered

sufficient to cover possible losses on receivables.

c) Inventories

Inventories, including spare parts, are stated at the lower of average production or

acquisition cost and market value. Inventories of work in progress and finished goods

are reduced, when applicable, to net realizable value after deduction for costs, taxes and

estimated selling expenses. A provision for potential losses is made when, based on

management’s estimate, the items are defined as obsolete or stocked to a quantity

exceeding that to be used in the project.

d) Other current and noncurrent assets

The other current and noncurrent assets are stated at cost or realizable value, including

income earned, where applicable.

e) Permanent assets

Investments in subsidiaries are valued using the equity method, eliminating unearned

income up to the balance sheet date. Other investments are stated at cost, monetarily

restated to December 31, 1995, net of the provision for losses necessary to adjust them

to market value, when applicable.

Translation gains or losses resulting from the effects of devaluation (or valuation) of the

Brazilian real, in the conversion of the financial statements of foreign subsidiaries to

calculate the equity gain and in the consolidation, are allocated to financial

expenses/income.

Property, plant and equipment are stated at cost, plus revaluations and monetarily

restated to December 31, 1995. Depreciation is computed using the straight-line

method, based on the estimated useful life of the assets. Improvements to existing assets

are added to property, plant and equipment and maintenance and repair costs are posted

to income, when incurred. Materials allocated to specific projects are added to fixed

assets in progress.


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Deferred charges are stated at cost, monetarily restated to December 31, 1995,

principally composed of research and development costs, including designs, engineering

projects, the construction of prototypes and machine tools, for subsequent amortization

based on the number of aircraft that the Company expects to sell. Contributions from

partners related to the development of new products are recognized in deferred charges

at the time when the contributions are no longer contingent.

f) Foreign currency transactions

Foreign currency transactions are recorded according to the exchange rate on the date of

the transaction. Foreign currency denominated assets or liabilities are translated using

the exchange rate on the balance sheet date. Exchange variations are recognized in the

statement of income as and when they occur.

g) Loans

Restated based on the monetary and exchange variations, plus the corresponding

interest charges incurred up to the balance sheet date.

h) Income and social contribution taxes

The income and social contribution taxes are calculated based on taxable income,

considering the temporary differences to the extent that realization is probable, and are

determined according to the legislation in effect and recorded on an accrual basis.

i) Product warranty

Warranty expenses related to aircraft and spare parts are recognized at the time of sale

based on the estimated amounts to be incurred. These estimates are based on historic

factors that include, among others, warranty claims and the corresponding costs of

repairs and replacements, the warranty given by the suppliers and contractual coverage

period. The warranty coverage period varies between 36 and 60 months. In some cases,

the Company is obliged to make modifications to the product due to requirements of the

aeronautical certification authorities. The costs foreseen for these modifications are

recorded at the time when the new requirements are known.

In certain situations, the Company may be obliged to make modifications to the

products after delivery due to the introduction of improvements in the performance of

aircraft. The costs related with these modifications are recorded when known.

j) Other current and long-term liabilities

Other current and long-term liabilities are stated at known or demandable amounts, plus

the respective monetary and exchange variation charges, where applicable.


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k) Sales and other operating revenues

The sales revenues of regional and corporate aircraft and spare parts are generally

recognized at the time of delivery or shipment. In the defense segment, the operations

principally consist of long-term contracts, and the revenues are recognized according to

the percentage of completion method of accounting. Some contracts contain price

restatement clauses based on predefined indices and are recognized on an accrual basis.

Provisions for losses on sales contracts in the defense segment are recorded when there

is evidence that they will occur, and also based on the best estimates of management.

l) Stock options

The granting of stock options to employees does not result in an expense to be posted.

At the time the options are exercised, the purchase of stock by employees is recognized

as a capital increase in the amount of the acquisition price.

m) Use of estimates

Preparation of the financial statements requires management to make estimates and

adopt assumptions related to the assets and liabilities reported, the disclosure of

contingent assets and liabilities on the date of the financial statements and the amounts

of revenues and expenses reported during the corresponding periods. The actual results

may differ from these estimates.

n) Operations with derivatives

In operations with derivatives, the nominal values are not reported, but the unrealized

results are reported on the accrual basis, without marking these instruments to market

(Note 32).


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4. CASH AND CASH EQUIVALENTS

2004 2003

Cash and banks:

Reais 7,943 11,833

U.S. dollar 29,664 194,663

Other 25,827 8,855

Cash in transit 147,843 -

Short-term cash investments:

In Brazilian reais-

Investment funds 1,541,008 2,569,482

In U.S. dollars:

Fixed-term deposits 314,735 58,164

Investment funds 1,327,958 -

Overnight 67,060 815,059

Other currencies 1,706 548

3,463,744 3,658,604

The average annualized interest rates related to the short-term financial investments made in

Brazilian reais and U.S. dollars in the fiscal year ended December 31, 2004 were 14.4% and

1.8% (24.3% and 1.1% in the year 2003), respectively.

The short-term financial investments mainly correspond to quotas of investment funds and

fixed-term deposits, with an immediate liquidity market and terms of 90 days or less.

5. MARKETABLE SECURITIES

2004 2003

Debentures (a) 31,827 30,866

Provision for losses (31,827) -

National Treasury Notes (b) 74,469 74,124

Security certificates (c) 120,213 -

National Treasury Bills 3,847 -

198,529 104,990

Less- Current 124,061 12,480

Long term 74,468 92,510

(a) A provision was made for losses on debentures and the amount was charged to financial

expenses.


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(b) Refer to receivables represented by National Treasury Notes acquired by the Company

from its customers, related to equalization of the interest rate payable by the Export

Financing Program (PROEX) between the 11th

and 15th

years after the sale of the

corresponding aircraft, which were recognized at present value. The interest is

recognized as financial income since the Company has the possibility, intent and ability

to hold these bonds in portfolio to maturity.

(c) Refer to investments in Enhanced Equipment Trust Certificates - EETC. The certificates

are backed by leasing receivables from Expressjet with due dates up to 2019, and with

the guarantee of aircraft sold by the Company. They are marked to market as of

December 31, 2004 and Company’s management has no intention of maintaining them

in portfolio, and is monitoring the best time to sell them on the market.

6. ACCOUNTS RECEIVABLE

2004 2003

Brazilian Air Force 117,301 73,073

Domestic customers 17,871 13,446

Foreign customers 1,617,144 953,634

1,752,316 1,040,153

Less- Current 1,400,595 1,004,582

Long term 351,721 35,571

Of the amount consolidated, approximately 84.4% (57.0% in 2003) is in the process of

structuring the financing, basically related to the Commercial Aviation segment. Of the

remaining balance, R$55,041 (R$114,464 in 2003) refers to the Defense segment.

As of September 12, 2004, the American company US Airways, which in May 2003 signed

a contract for the purchase of 85 EMBRAER 170 aircraft, made a new Chapter 11 filing.

Up to December 31, 2004, 22 EMBRAER 170 aircraft had been delivered to US Airways.

On January 25, 2005, the United States Bankruptcy Court authorized US Airways to use the

advances previously made to the Company to settle its liabilities.

The balance receivable from this client as of December 31, 2004 is R$333,870 and

management believes that it will be fully realized.

The rollforward of the provision for doubtful accounts is as follows:

2004 2003

Beginning balance 70,094 86,502

Exchange variation (4,677) (11,429)

Addition 10,893 8,788

Reversal (12,442) (12,827)

Write-offs (1,490) (940)

Ending balance 62,378 70,094


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7. RECOVERABLE TAXES

2004 2003

ICMS (State VAT) and IPI (Federal VAT) 51,048 28,776

Withholding or prepaid income and social contribution taxes 6,662 48,958

PIS and COFINS (taxes on revenue) 32,908 5,146

Other 1,488 1,889

92,106 84,769

Less- Current 87,219 80,304

Long term (*) 4,887 4,465

(*) Refers to State VAT on the purchase of fixed assets.

8. OTHER CREDITS

2004 2003

Credits with suppliers 30,503 32,232

Advances to employees 17,064 18,663

Accounts receivable - BNDES 7,169 103,923

Receivable from SPCs (*) 243,073 -

Judicial deposits 43,739 37,788

Tax incentive - FINAM 9,604 9,604

Advances against commissions 7,574 13,060

Unearned gains on derivatives 13,031 8,150

Other 14,272 22,269

386,029 245,689

Less - Current 322,558 187,874

Long term 63,471 57,815

(*) Refer to receivables from Special Purpose Companies - SPCs which are secured by

aircraft for which the financial structuring of the sales has not yet been finalized.

9. DEPOSITS IN GUARANTEE

2004 2003

Guarantees for financing (a) 600,356 746,716

Guarantees for sales structure (b) 613,303 556,598

Supply guarantees (c) 60,027 65,338

Other 16,507 -

1,290,193 1,368,652

Less- Current 616,864 746,716

Long term 673,329 621,936

(a) U.S. dollar denominated short-term financial investments linked to the sales structures,

the release of which depends on completion of the structures. These investments are

remunerated based on the variation of the six-month LIBOR rate.


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(b) Amounts in U.S. dollars deposited in an escrow account as collateral for the financing

of certain aircraft sold. If the guarantor of the debt (unrelated party) is required to pay

the lender, the guarantor will be entitled to the amount in the escrow account. The

amount deposited will be released at the time of maturity of the financing contracts

(between 2013 and 2017), if the aircraft purchaser does not default on the loan. The

interest on the escrow account is added to the balance of principal and recognized by the

Company as financial income.

Seeking to ensure profitability with the term of the guarantee, in 2004 Embraer invested

part of this balance, amounting to R$112,016 (US$42,200 thousand), in structured

notes. These notes provided an interest income of R$1,941 (US$731 thousand) in 2004,

which was incorporated into the principal and recognized as financial income for the

period. In the case of a default by Embraer, the maturity dates of these notes would be

anticipated, and the Company would be subject to realizing them under market

conditions which, if inferior to the amounts originally invested, would result in the

redemption being equal to the amount invested. Default events that could result in the

anticipated maturity of the notes, most commonly applicable in this market are, among

others: (i) insolvency of or Chapter 11 filing by Embraer; and (ii) default or

restructuring of the Embraer debt in financing contracts.

(c) Amounts deposited in an escrow account as a guarantee of supplying the object of the

sales contract.

10. INVENTORIES

2004 2003

Finished products 271,218 156,592

Work-in-process (a) 1,779,218 1,403,636

Raw materials 1,143,013 889,460

Spare parts 552,059 496,189

Spare parts pool (b) 92,419 70,336

Used aircraft for sale (c) 92,405 62,680

Supplies 2,793 2,360

Inventory in transit 291,303 175,626

Advances to suppliers 78,706 307,013

Provision for obsolescence (d) (233,559) (217,795)

4,069,575 3,346,097

Less- Current 4,017,330 3,303,411

Long term 52,245 42,686

(a) Include pre-series aircraft of the EMBRAER 170/190 and ERJ 135 programs in the

amount of R$557,598 (R$340,454 in 2003), used for testing to obtain aircraft

certification. After the certification campaigns, the Company intends to sell these

aircraft.

(b) The Company maintains a pool of spare parts for the exclusive use of clients that

contracted the Exchange Pool Program. This program envisages that the clients can

exchange a damaged component for a component in a similar state but functioning, as

defined in the Program. This stock is depreciated using the straight-line method based

on an estimated useful life between seven and ten years and an average residual value of

35%, which the Company believes to be the approximate utilization time. The accrued

depreciation value as of December 31, 2004 is R$38,009 (R$27,650 in 2003).


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The revenues from the Exchange Pool Program are recognized monthly over the term of

the contract and consist partially of a fixed rate and partially a variable rate, directly

related to the number of hours flown of the aircraft covered. These rates are recorded as

revenue of the program. During 2004 and 2003, the Company recognized R$39,867 and

R$34,545, respectively, as revenues related to the Exchange Pool Program.

(c) Refers to one Legacy aircraft, six EMB 120 and one Ipanema (three EMB 120 in 2003),

available for sale, which are recorded at the purchase cost or realization value,

whichever is lower.

(d) It was constituted for items with no movements for more than two years and without

any prospect of a defined use in the production program. Provisions were made to cover

possible losses on the stores inventory and excessive or obsolete products in progress.

The rollforward of the provision is shown below:

2004 2003

Beginning balance 217,795 217,198

Provision 78,565 49,673

Write-off (59,576) (39,262)

Effect of exchange variation (3,225) (9,814)

Ending balance 233,559 217,795

Less- Current 193,385 190,145

Long term 40,174 27,650

11. PREPAID EXPENSES

2004 2003

Insurance (a) 31,035 28,637

Credit insurance (b) 24,927 99,144

Commercial concessions (c) 26,615 22,029

Customer training (c) 10,489 9,521

Other 4,836 6,439

97,902 165,770

Less- Current 81,878 79,235

Long term 16,024 86,535

(a) Basically composed of insurance premiums for policies to cover fire, loss of profit,

third-party liability, aeronautical products and vehicles.

(b) Credit insurance related to a line of financing abroad.

(c) Commercial concessions and customer training represent credits for spare parts and the

training of pilots, engineers and cabin crew granted to clients on the sale of the aircraft.

These credits are foreseen in the sale contracts and included in the overall selling price

of the aircraft. The real delivery time of the parts and provision of these services may be

different from the aircraft delivery time. These amounts reflect the cost of these

concessions incurred before the delivery of the aircraft and will be recognized as

expenses during the term of the sales contract, simultaneously with the revenues derived

from aircraft deliveries.


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12. INVESTMENTS

a) Amounts of investments

2004 2003

In subsidiaries:

OGMA - Indústria Aeronáutica de Portugal S.A. (i) 41,219 -

41,219 -

In affiliates:

Expressprop LLC (ii) 12,729 13,855

53,948 13,855

(i) This company was not consolidated because the acquisition was in the process of

evaluation by the antitrust authorities of Portugal, Germany and Italy (Note 2).

(ii) The Company indirectly holds 25% and Continental Airlines Finance Corporation

75% of the capital of Expressprop LLC. This affiliate provides support for the sale

of used EMB 120 Brasília aircraft. The investment is carried under the equity

method of accounting. As of December 31, 2004, this affiliate did not record

income and in 2003 the income was R$584.

b) Information related with direct subsidiaries

2004 2003

Ownership

- %

Shareholders’

equity

Net income

(loss)

Shareholders’

equity

Net income

(loss)

Embraer Aircraft Holding Inc. - EAH 100.00 212,894 10,346 220,465 701

Embraer Finance Ltd. - EFL - - 52,454 (88,706) (33,617)

Trumpeter Inc. 100.00 12,167 (35) 13,282 119

Indústria Aeronáutica Neiva Ltda. -

NEIVA 100.00 38,122 6,623 31,500 8,550

ELEB - Embraer Liebherr

Equipamentos do Brasil S.A. 60.00 74,712 12,434 67,425 11,683

Embraer Aviation Europe SAS -

EAE 100.00 125,532 25,952 97,457 41,853

Embraer Europe SARL - EES - - 858 2,113 886

Embraer Australia PTY Limited -

EAL 100.00 (5,607) (8,071) 2,579 1,676

Embraer Spain Holding Co. SL -

ESH 100.00 354,335 22,147 335,041 (8,417)

Embraer Credit Ltd. - ECL 100.00 (6,071) 4,838 (11,874) (2,425)

Embraer Representation LLC - ERL 100.00 45,543 38,986 7,137 7,137

Canal Investments LLC 100.00 12,996 (4,258) - (21,024)

Harbin Embraer Aircraft Industry

Company Ltd. 51.00 66,754 7,438 18,386 (7,814)

ECC do Brasil Cia. de Seguros 99.99 3,777 177 - -


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c) Transactions with related parties are as follows:

Short term Long term

Assets Liabilities Assets Liabilities Financial result Operating profit

2004 2003 2004 2003 2004 2003 2004 2003 2004 2003 2004 2003

Air Force Command 117,301 17,522 104,883 92,998 - - - - - - 733,912 160,422

“Banco Nacional de Desenvolvimento Econômico e Social - BNDES” 1,633 97,403 853,133 29,620 5,535 6,520 15,067 22,979 (18,178) (5,140) - -

“Financiadora de Estudos e Projetos - FINEP” - - 5,045 6,366 - - 18,160 3,688 (1,848) (1,242) - -

European Aerospace and Defense Group - EADG - - 3,083 2,494 - - - - - - (10,743) (6,323)

Banco do Brasil S.A. (*) 2,217,658 2,139,136 81,485 228,620 - - 331,885 - 37,806 89,467 - -

2,336,592 2,254,061 1,047,629 360,098 5,535 6,520 365,112 26,667 17,780 83,085 723,169 154,099

(*) Previ, one of the Company’s controlling shareholders, is controlled by Banco do Brasil S.A., which is in turn controlled by the Brazilian government. As a result, the Company considers

Banco do Brasil S.A. to be a related party.

The asset values basically refer to: (i) accounts receivable for the sale of spare parts and aircraft and product development, under similar

conditions to those applied to third parties, considering the volumes, terms and risks involved; (ii) amounts withheld by the BNDES awaiting

finalization of export documentation; and (iii) balances of short-term financial investments under normal market conditions.

In liabilities, the amounts basically refer to: (i) the purchase of aircraft components and spare parts under conditions similar to those used with

third parties, considering the volumes, terms and risks involved; (ii) advances received on account of sales contracts, according to the

contractual clauses; (iii) financing for product research and development at market interest rates for this kind of financing; and (iv) loans and

financing under normal market conditions.

The income accounts are basically composed of: (i) sale of aircraft, components and replacement parts and product development for the defense

market, under similar conditions to those used with third parties, considering the volumes, terms and risks involved; (ii) financial income

derived from short-term financial investments; and (iii) interest charges on financing for product research and development, financing imports

and advances from foreign exchange contracts.


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13. PROPERTY, PLANT AND EQUIPMENT

2004 2003

Average annual

depreciation rate

(%)

Restated

cost

Accumulated

depreciation Net Net

Land - 17,060 - 17,060 17,060

Buildings and improvements to land 3.54 529,898 (159,414) 370,484 362,472

Installation 8.47 208,399 (149,539) 58,860 61,453

Machinery and equipment 9.25 414,151 (259,940) 154,211 144,292

Furniture and fixtures 9.65 41,882 (23,132) 18,750 17,231

Vehicles 14.03 10,941 (7,715) 3,226 2,835

Aircraft (*) 6.56 387,286 (61,147) 326,139 409,920

Computers and peripherals 18.29 98,024 (73,145) 24,879 27,731

Software 16.79 141,336 (71,309) 70,027 80,776

Other - 23,609 (1,799) 21,810 17,263

Advances to suppliers - 263 - 263 1,237

Construction in progress - 29,144 - 29,144 35,321

1,901,993 (807,140) 1,094,853 1,177,591

(*) These aircraft are allocated for use in testing, corporate flights and operational leasing. As of December

31, 2004, the Company possessed 7 EMB 120, 7 ERJ 145, 2 ERJ 135, 4 Legacy and 3 other models. Of

these, 17 aircraft were on lease, 1 available for leasing and 5 for testing and corporate flights.

On December 30, 1988 and April 30, 1991, the Company recorded revaluations of its

operational assets. The residual balances of these revaluations as of December 31, 2004 and

2003 were R$95,526 and R$103,354, respectively. The corresponding revaluation reserve

was used for a capital increase and, except for the portion related with real estate, was

included in the calculation of taxable income for income tax purposes. The depreciation

rates of the revalued assets were established based on the revised estimate of the useful life

of the assets, according to the technical appraisal report.

14. DEFERRED CHARGES

The balances were represented by:

2004 2003

Accumulated

Programs Cost amortization Net Net

ERJ 135/140/145 (*) 770,489 (559,310) 211,179 241,772

EMBRAER 170/190 977,165 (39,187) 937,978 929,838

Other 34,114 (5,318) 28,796 7,692

1,781,768 (603,815) 1,177,953 1,179,302

(*) Includes research and development costs of the Legacy corporate jet.

Refer to the costs incurred in developing each new aircraft, including support services,

productive labor, machine tools, material and direct labor allocated to the construction of

prototype aircraft or significant components. The costs of flight and ground testing are also

included, together with subsequent design changes.


22

The deferred charges are amortized as from the time the benefits begin to be generated,

based on the number of aircraft that is estimated to be sold, according to each project, being

the amortized amounts appropriated to production cost.

In the case of projects that have been interrupted or those whose realization is considered to

be improbable, the deferred charges are written off or reduced to the net estimated recovery

value.

ERJ 135/140/145

Refers to the family of regional jets comprising the ERJ 135, ERJ 140 and ERJ 145,

certified to operate with 37, 44 and 50 seats, respectively, which have around 96% of

common parts and components.

Based on the ERJ 135 platform, a new aircraft was developed for corporate use, called the

Legacy, in the executive and shuttle versions.

As of December 31, 2004, the position of deliveries and firm orders is as follows:

Deliveries Firm orders

ERJ 135 106 17

EMB 135 12 -

ERJ 140 74 20

ERJ 145 618 66

EMB 145 4 -

Legacy 33 9

The aircraft designated as EMB 135 and EMB 145 are models that are not designed for

companies in the regional aviation market.

The EMB 145 platform was modified and developed for use by the Brazilian, Greek and

Mexican governments. The models are the EMB 145 AEW&C - Airborne Early Warning

and Control and EMB 145 MP - Marine Remote Sensing Aircraft. As of December 31,

2004, the Company had one firm order for this aircraft.

In 2004, three aircraft were delivered for use by the Greek government and three for use by

the Mexican government.

EMBRAER 170 and EMBRAER 190

This family of commercial jets is composed of the EMBRAER 170, with a capacity between

70 and 78 seats, the EMBRAER 175, between 78 and 86 seats, the EMBRAER 190 from 98

to 106 seats, and the EMBRAER 195, from 108 to 118 seats.

In February 2004, the EMBRAER 170 obtained type homologation certification from the

Brazilian, United States and European authorities. In March 2004 the first units of this

model were delivered to the operators Alitália, LOT Polish and US Airways.


23

The second model is the EMBRAER 175, which made its maiden flight on June 14, 2003.

On December 23, 2004, the Aerospace Technical Center, the Brazilian authority responsible

for the certification of aircraft, issued the Type Homologation Certificate and, on January 7,

2005, the Type Certificate was issued by the European Aviation Safety Agency - EASA.

The EMBRAER 190 and EMBRAER 195 are under development, and made their maiden

flights on June 14 and December 7, 2004, respectively, beginning their testing and

certification campaigns.

As of December 31, 2004, the position of deliveries and firm orders is as follows:

Deliveries Firm orders

EMBRAER 170 46 112

EMBRAER 175 - 15

EMBRAER 190 - 155

EMBRAER 195 - 15

The consolidated costs incurred up to December 31, 2004 for research and development per

aircraft family, together with the order backlog, are presented below:

Stated in thousands of

Brazilian reais,

except for number of aircraft

ERJ

135/140/145 (*)

EMBRAER

170/190

Deferred cost 770,489 977,165

Accumulated amortization (559,310) (39,187)

Net 211,179 937,978

Number of aircraft projected for the program as of

December 31, 2004 960 920

Number of aircraft as of December 31, 2004:

Deliveries 847 46

Firm order backlog 112 297

Options with exercise date in (unaudited):

2005 100 93

2006 131 59

2007 76 58

After 33 220

Total options 340 430

Grand total 1,299 773

(*) The number of aircraft includes the order backlog for the Legacy, EMB 135 and EMB

145, but does not include the order backlog for the EMB 145 SA, EMB 145 RS and

EMB 145 MP.


24

15. LOANS

a) Composition

Currency

Annual interest

rate - % 2004 2003

Foreign currency:

Material acquisition US$ 4.12 to 7.50;

LIBOR +

2.00 to 5.50

988,548 791,712

JPY JIBOR + 1.05 192,478 387,483

Export financing US$ LIBOR + 1.50 - 29,497

Advances on foreign exchange

contracts

US$ 2.50 to 4.95 127,504 520,820

Project development US$ LIBOR + 3.00;

basket of

currencies BNDES

+ 3.00

11,066 23,569

Resolution No. 63 US$ 7.08;

LIBOR + 2.70

170,821 -

Working capital Euro

US$

2.00 to 6.00

3.12 to 11.93;

LIBOR + 2.15 to

2.97

16,194

1,146,657

24,763

1,055,656

Property, plant and equipment

acquisitions US$ 10.15

6,595

116,493

2,659,863 2,949,993

Local currency:

Project development TJLP + 1.00 to

6.00

51,870 61,248

Pre-shipment TJLP + 2.40 824,727 -

Working capital 115% CDI 13,498 -

Purchase of fixed assets TJLP + 3.00 to

3.90

3,744

5,131

893,839 66,379

3,553,702 3,016,372

Less- Current 1,362,546 1,493,895

Long term 2,191,156 1,522,477


25

b) Long-term maturities

Year 2004

2006 531,701

2007 792,098

2008 443,601

2009 351,809

2010 69,275

2011 2,672

2,191,156

c) Currency analysis

The total debt is denominated in the following currencies:

Exchange rate as of

12.31.04

(in relation to

R$1.00) 2004 2003

Brazilian real 1.00 893,839 66,379

U.S. dollar 2.6544 2,451,191 2,537,747

Euro 3.61949 16,194 24,763

Japanese yen 0.025935 192,478 387,483

3,553,702 3,016,372

The fluctuations in exchange rates in relation to the Brazilian real were the following:

Year ended

December 31,

- %

2004 2003

U.S. dollar (8.13) (18.23)

Euro (0.85) (1.37)

Japanese yen (4.00) (9.30)

The total debt in Brazilian reais is subject to interest based on the variation of the Long-

term Interest Rate (TJLP) and the Interbank Deposit Certificate (CDI).

The annualized variations of these indexes in 2004 were 9.75% and 16.17% and in 2003

were 11.00% and 23.25%, respectively.

d) Interest and guarantees

The foreign currency loans as of December 31, 2004 are subject to exchange variation

plus an average annual weighted interest rate of 5.38% per annum (4.47% in 2003); the

loans in local currency as of December 31, 2004 are subject to an average annual

weighted interest rate of 12.35% (14.66% in 2003).


26

Real estate, machines, equipment, commercial pledges and bank guarantees were given

in guarantee for the loans in the amount of R$1,056,135. Of this amount, R$177,280

corresponds to second mortgages on property and R$177,280 to third mortgages. The

loans of the subsidiaries are guaranteed by the parent company to the amount of

R$157,776.

Restrictive clauses

The long-term financing agreements are subject to restrictive clauses, in line with

normal market practices, which establish that the ratio of total consolidated

indebtedness/EBITDA (Earnings Before Interest, Taxes, Depreciation and

Amortization) may not exceed 3.0:1, and also limits for debt service cover using the

EBITDA/net financial expense ratio, which must be higher than 3.0:1.

They also include the customary restrictions on the degree of financial leverage, level of

indebtedness of subsidiaries, creation of new encumbrances on assets, significant

changes in the Company’s stock control, sale of assets, payment of dividends above the

minimum compulsory dividend according to the legislation in the case of default on

financing and transactions with affiliated companies, together with maintaining an order

backlog of at least 100 firm orders for new aircraft during the effective term of the

agreement.

As of December 31, 2004, the Company was in compliance with all these clauses.

16. SUPPLIERS

2004 2003

Foreign suppliers:

Risk partners (*) 846,286 662,055

Other 581,859 466,400

Domestic suppliers 58,249 39,007

1,486,394 1,167,462

Less- Current 1,477,236 1,167,462

Long term 9,158 -

(*) The Company’s risk partners develop and produce significant components of aircraft,

including engines, hydraulic components, avionics, wings, tail section, interior, part of

the fuselage, etc. Certain contracts signed between the Company and these risk partners

are characterized as being long term and include the deferral of payments for

components and systems for a negotiated term until after delivery.

After having selected the risk partners and initiated the aircraft development and

production program, it is difficult to replace them. In some cases, like that of the

engines, the aircraft is specially designed to accommodate a given component, which

cannot be replaced by another supplier without incurring delays and significant

additional expenses. This dependence makes the Company susceptible to the

performance, quality and financial position of its risk partners.


27

17. ACCOUNTS PAYABLE

2004 2003

Brazilian Air Force (a) 5,599 5,860

Insurance 14,841 15,263

Materials pending 23,555 2,001

Commercial rebates (b) 34,017 11,743

Pension plan contribution 1,156 1,612

Customer credits (c) 17,509 37,835

Advance for capital increase - 18,388

Accounts payable (d) 61,145 51,169

157,822 143,871

Less- Current 129,952 95,077

Long term 27,870 48,794

(a) Represent materials for the AM-X program to be delivered.

(b) Refer to credits in spare parts given to customers as an incentive for aircraft sales.

(c) Represent amounts provisioned to compensate customers for certain financing costs.

(d) Basically represent expenses incurred up to the balance sheet date whose payments were

made in the subsequent period.

18. CONTRIBUTIONS FROM PARTNERS

2004 2003

Current 9,554 4,934

Long term 371,715 678,841

Total 381,269 683,775

The Company has agreements with certain key suppliers, here called partners, to participate

in research and development. Certain supply agreements require the supplier to contribute

cash to the Company as a compensation for its research and development. As part of this

supply agreement, the contributions are tied to compliance by the Company with certain

important stages of development, including aircraft certification, first delivery and minimum

number of aircraft delivered. The Company records these contributions when received as

long-term liabilities, which will not be claimed if the contractual objectives are achieved. As

and when the objectives are achieved, these amounts are deducted from the aircraft

development costs.


28

19. ADVANCES FROM CUSTOMERS

2004 2003

Local currency 37,178 94,951

Foreign currency 1,234,753 1,575,276

1,271,931 1,670,227

Less- Current 996,896 1,350,857

Long term 275,035 319,370

Advances from customers in foreign currency are subject to exchange variation based on the

U.S. dollar. The segregation between short and long term is done based on the contractual

delivery times for the corresponding aircraft, parts, components and services.

20. TAXES AND SOCIAL CHARGES PAYABLE

2004 2003

INSS (social security charge) - current 16,841 16,440

INSS - installments (*) 42,733 47,059

ICMS 36,741 1,984

FGTS (severance fund) 8,100 6,942

IRRF (withheld income tax) 11,511 19,598

Income and social contribution taxes 33,982 4,983

PIS/COFINS 1,656 3,333

Other 11,173 8,528

162,737 108,867

Less- Current 125,183 67,490

Long term 37,554 41,377

(*) Interest of 1% per month.

Long-term due dates

Year 2004

2006 4,952

2007 4,952

2008 4,952

2009 4,952

2010 4,952

2011 4,952

2012 4,952

2013 2,890

37,554


29

21. OTHER PROVISIONS

2004 2003

Payroll 136,855 121,066

Accrued retirement and pension benefit 7,420 7,273

Employee profit sharing 97,252 35,993

Product warranty (a) 201,973 229,843

Product improvements (a) 101,907 124,038

Technical assistance/training (b) 71,790 46,626

Unrealized losses on derivatives 54,104 164,734

Provision for financial guarantees (c) 196,788 159,911

Other 25,946 9,061

894,035 898,545

(a) Represent provisions related to products, including warranty and contractual obligations

to install improvements in aircraft delivered, for the purpose of ensuring that the

performance indicators assumed in the contract will be achieved.

(b) Refer to expenses related to the contractual obligation to supply technical assistance and

training for customers’ mechanics and crew members for aircraft already delivered and

to be delivered.

(c) Refers to the provision made by ECC Insurance & Financial Co. Ltd. to cover possible

losses with guarantees provided to customers/financial agents involved in structuring

the financing of aircraft sales (see Note 33).

22. CONTINGENCIES

2004 2003

Tax contingencies 1,215,839 906,581

Labor contingencies 41,776 38,162

Civil contingencies 5,044 3,973

1,262,659 948,716

Less- Current 237,806 872,267

Long term 1,024,853 76,449

The Company is questioning at the administrative and judicial levels the constitutionality of

the nature, calculation base, modifications in rates and expansion in the calculation bases of

certain taxes, charges and social contributions, to avoid payment or recovery of payments

made on previous periods. The Company, through administrative and legal action, obtained

means to not pay or offset the payment of taxes and charges and social contribution. The

amounts of the unpaid taxes, based on preliminary judicial rulings, are provisioned and

restated until a final ruling has been obtained. The principal cases of a tax nature in progress

are the following:


30

a) Social security contributions - the Company is contesting the legality of the Rural

Workers Assistance and Social Security Fund (Funrural), the collection of late

payments and increase in the rate of the National Social Security Institute (INSS)

contribution and the rate of the occupational accident insurance. These lawsuits are at

the 2nd

and 3rd

court levels, respectively. In the opinion of the legal advisers, the

probability of a successful outcome in the case questioning the increase in the INSS rate

is possible, the collection of arrears penalties is probable and the Funrural case is

considered to be remote. The amount involved in these cases is R$227,082.

b) Income tax (IR) and Social Contribution on Net Income (CSLL) - the Company is

claiming suspension of the social contribution tax on exports and the right to offset IR

and CSLL using credits for the Excise Tax (IPI) referring to the acquisition of

nontaxable or at a zero rate raw materials. The first case is at the 2nd

court level and the

second at the 1st level and the probability of successful outcomes in these cases was

considered by the legal advisers as possible and remote, respectively. The amount

involved in these cases is R$599,827.

c) Social Integration Program (PIS)/Public Service Employee Savings Program (PASEP)

and Social Contribution on Billing (COFINS) - the Company is questioning the

expansion of the calculation base of PIS/PASEP and COFINS. These lawsuits are the 1st

and 2nd

judicial levels, respectively. In the opinion of the legal advisers, success in these

cases was considered possible. The amount involved in the cases is R$348,027. During

the current fiscal year, the Company reviewed the calculation base of the PIS and

COFINS contributions, resulting in a reversal of the provision of R$44,303, as a

balancing item to the financial expenses caption.

Labor contingencies

The labor contingencies are characterized by claims brought by unions representing the

employees or individual suits in which former employees individually claim overtime,

productivity, reinstatement, allowances, losses and damages, occupational sicknesses,

backdating of salary increases and readjustments.

The principal claims pending were filed by the union in June 1991 in the name of all the

employees employed by the Company in November 1990. This suit seeks to apply a salary

increase given by the Company in January and February 1991 backdated to November and

December 1990. Up to December 31, 2004, approximately 97% of the employees and

former employees had made settlements with the Company and the remainder are

negotiating. Another suit claims the monetary restatement of the Verão and Collor economic

plans on the 40% penalty on the Government Severance Indemnity Fund for Employees

(FGTS) paid to employees dismissed between December 1988 and April 1990.

The total exposure of these cases is estimated to be approximately R$55,000. The

proceedings are at various levels awaiting judgment. Based on the opinions issued by the

Company’s legal advisers and the success of certain judgments and negotiations that are

expected to occur, the amount provisioned is considered adequate by management.


31

Civil

Suit filed by Gaplan Administradora de Bens S/C Ltda. against the subsidiary Indústria

Aeronáutica Neiva Ltda. - NEIVA, related to the “Guarantee to Supply Aircraft and Pool

Purchase” agreement signed with Embraer for the period from 1988 to 1997, in which it

undertook to supply a given number of aircraft within the stipulated period, according to a

standardized series configuration at the time of manufacture, directly to the pool purchasing

members. The plaintiff alleges late delivery of the aircraft, which led to termination by the

pool purchasing members, who demanded the return of the installments paid, financial

losses in detriment to the increase in the term of the pool purchase and price alterations, in

addition to a reduction in the administration fee. The maximum exposure of the case is

approximately R$10,088.

According to the opinion of the legal advisers, the possibility of the loss of part of the

amount claimed is probable and the parent company made a provision in the amount of

R$5,044 in the financial statements as of December 31, 2004.

In addition, the Company is involved in other litigation, in addition to the cases mentioned

previously, all as a result of the normal course of business. In the opinion of management,

none of these cases is expected to have a material effect on the Company’s financial

position or results of operations.

For certain cases the Company maintains judicial deposits recorded under noncurrent assets

(see Note 8).

23. DIVIDENDS AND INTEREST ON CAPITAL

Under the terms of the bylaws, shareholders holding shares of any kind are entitled to a

dividend of at least 25% of net income for the year. The preferred shares do not have voting

rights, but do have priority in the reimbursement of capital and are entitled to dividends

10% higher than those allocated to the holders of common shares.

Embraer’s Board of Directors, subject to approval by the General Shareholders’ Meeting

that will analyze the accounts and financial statements for the 2004 fiscal year, approved the

following amounts to be distributed related with interest on capital, as an interim dividend:

Date of Amount per share Date of

approval Base Period Amount Common Preferred payment

03/12/04 1st quarter of 2004 100,998 0.13223 0.14545 04/08/04

06/25/04 2nd

quarter of 2004 160,002 0.20923 0.23015 07/15/04

09/20/04 3rd

quarter of 2004 160,058 0.20913 0.23005 10/15/04

12/17/04 4th

quarter of 2004 164,115 0.21427 0.23570 01/14/05

585,173


32

The dividends were calculated as follows:

2004 2003

Net income for the fiscal year (see Note 2) 1,278,089 646,943

Statutory reserve (63,905) (32,347)

Net income after statutory reserve 1,214,184 614,596

Minimum compulsory dividend (25%) 303,546 153,649

Proposed dividend:

Interest on capital 585,173 195,200

Withholding income tax on interest on capital (82,012) (21,479)

Total shareholder remuneration 503,161 173,721

Interim payments (357,428) (68,279)

Interest on capital payable 145,733 105,442

Dividends payable from prior years 149 191

Total of dividends and interest on capital payable 145,882 105,633

Amount of dividend per share:

Common stock - R$ 0.76486 0.2561

Preferred stock - R$ 0.84135 0.2817

24. SHAREHOLDERS’ EQUITY

a) Capital

The authorized capital is divided into 500,000,000 common shares and 1,000,000,000

preferred shares.

The Company’s capital, subscribed and paid up as of December 31, 2004, is

represented by:

Shares Number R$

Common 242,544,447 1,061,700

Special common 1 -

Preferred 475,797,420 2,082,728

Total 718,341,868 3,144,428

b) Special common share (golden share)

The Federal Government holds one special common share. As the holder of this share, it

has the same voting rights as the other holders of common shares. In addition, the

special class share has a power of veto on the following matters:

i. Change of Company’s name and corporate purpose.


33

ii. Alteration and/or application of the Company’s logo.

iii. Creation and/or alteration of military programs, involving or not the Federal

Republic of Brazil.

iv. Training third parties in technology for military programs.

v. Interruption to the supply of maintenance and spare parts for military aircraft.

vi. Transfer of stock control.

vii. Any changes in the powers and rights of the special class share and the structure

and composition of the Board of Directors.

c) Stockholdings

Number Percentage of

Common Preferred total capital - %

Shareholders 12.31.04 12.31.03 12.31.04 12.31.03 12.31.04 12.31.03

Caixa de Previdência dos

Funcionários do Banco

do Brasil - Previ 57,335,379 57,594,480 59,240,778 60,872,078 16.23 16.54

Fundação SISTEL de

Seguridade Social 48,508,890 48,508,890 1,762,316 2,175,725 7.00 7.08

Cia. Bozano 48,509,220 48,509,220 18,786,588 18,786,588 9.37 9.40

Bozano Holdings, Ltd. - - 8,896,920 8,896,920 1.24 1.24

BNDES Participações

S.A. - BNDESPAR 3,488,893 3,734,893 45,831,196 46,929,918 6.87 7.08

Dassault Aviation 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19

Thomson CSF/Thales 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19

EADS 13,744,186 13,744,186 1,953,132 1,953,132 2.19 2.19

SNECMA 7,276,332 7,276,332 1,034,010 1,034,010 1.16 1.16

Federal Union 1,850,495 1,850,495 499,415 499,415 0.33 0.33

Other 34,342,681 33,837,580 333,886,801 328,447,085 51.23 50.60

242,544,448 242,544,448 475,797,420 473,501,135 100.00 100.00

The board members and statutory directors, as a group, hold 19 common shares and

3,653,690 preferred shares.

Granting of Embraer stock options

The Extraordinary Shareholders’ Meeting held on April 17, 1998 approved the

“Embraer Stock Options Plan” for officers and employees, including employees of

subsidiaries. This plan is subject to restrictions based on continuous employment with

the Company or the subsidiaries for at least two years. The Plan Management

Committee, created on the same date by the Board of Directors, is responsible for

defining the rules and administering the plan.

Under the terms of the plan, 25,000,000 preferred shares are authorized to be granted.

At the end of the third and fourth years subsequent to granting the options, the

participants will be entitled to exercise 30% of the options, and the remaining 40% at

the end of the fifth year, provided that the beneficiaries are still employed by the

Company on each date.


34

Up to December 31, 2004, the Plan Management Committee had made seven grants,

equivalent to 400 lots of 50,000 shares each, making a total amount granted of

19,525,000 preferred shares, net of the 475,000 shares corresponding to awards to

individuals that no longer have an employment relationship with the Company.

Under item 11.1 of the “Embraer Stock Options Plan”, which established the end of the

grants after five years from the first grant, the granting period ended in May 2003 with a

balance of 5,000,000 shares, which were canceled.

Shares

Available for granting as of April 17, 1998 25,000,000

End of grants as of May 31, 2003, under item 11.1. of the “Embraer Stock

Options Plan” (5,000,000)

Total granted 20,000,000

Granted:

1998 7,210,000

1999 5,265,000

2000 5,200,000

2001 1,850,000

Canceled grants 475,000

Due to the 14.21% stock dividend on preferred shares, approved at the Extraordinary

Shareholders’ Meeting on March 1, 2002, the Plan Management Committee authorized

an additional 25,576 preferred shares for the participants who already held acquisition

rights on the date of the meeting, under the same conditions approved by the meeting.

For the other participants, an option to the 14.21% in preferred shares dividend has been

given priced at R$14.99 per share, with the participation of all grantees totaling 637,318

preferred shares.

We show below the changes in options, considering the incorporation of the stock

dividends:

2004 2003

Options

Average price

granted - R$ Options

Average price

granted - R$

Outstanding at beginning of

year 9,985,353 - 13,131,581 8.98

Exercised (2,296,285) 4.15 (3,056,228) 3.77

Canceled or expired (50,000) 23.00 (90,000) 13.51

Position at end of year 7,639,068 12.37 9,985,353 10.55

Exercisable at end of year 3,946,473 10.22 2,031,660 6.78


35

Options are granted with an exercise price equal to the weighted average price of the

Company’s preferred stock traded on the São Paulo Stock Exchange (BOVESPA) in the

60-trading days prior to the grant date. The price may be increased or decreased by

30%, as defined in the Management Committee Plan. This percentage is used to correct

unusual fluctuations in the market price during this 60-day period.

No amounts have been charged to expense for the options. The accumulated effect on

shareholders’ equity as of December 31, 2004, if the expenses were to be recorded,

would be R$12,098. Information regarding options granted to management and

employees is shown in the following table:

Total number of shares with options, incorporating the stock dividend - December 31, 2004 position

Date of grant Exercise date Maturity

Exercise

price

in R$

Number of

shares

granted

November 1998 November 2001 November 2005 - 3

May 1999 May 2002 May 2006 1.65 15,000

November 1998 and 1999 November 2002 November 2005 and 2006 6.02 130,657

May 1998, 1999 and 2000 May 2003 May 2005, 2006 and 2007 6.62 824,843

November 1998, 1999 and 2000 November 2003 November 2005, 2006 and 2007 11.41 360,501

May 1999, 2000 and 2001 May 2004 May 2006, 2007 and 2008 12.96 1,634,365

November 1999 and 2000 November 2004 November 2006 and 2007 8.94 981,104

May 2000 and 2001 May 2005 May 2007 and 2008 12.17 2,282,073

November 2000 November 2005 November 2007 13.85 565,367

May 2001 May 2006 May 2008 22.00 845,155

Total options exercisable 7,639,068

The exercise prices in the table above include the effect of the 14.21% stock dividend

on March 1, 2002.

Capitalization of reserves

The Extraordinary Shareholders’ Meeting held on April 26, 2004 approved an increase

in capital of R$814,853 using the balance of the reserve for investments and working

capital made in the 2002 fiscal year, without issuing new shares and in the benefit of all

shareholders.

Legal reserve

Brazilian corporations are required to allocate a minimum of 5% of annual net income

to a legal reserve until that reserve equals 20% of paid-up share capital, or the reserve

plus capital reserves equals 30% of paid-up share capital. Thereafter, allocations to this

reserve are not compulsory. This reserve can only be used to increase share capital or to

offset accumulated deficits.

Capital reserve

Refers to premiums on share subscriptions and income tax incentives related to:

Industrial Technology Development Program (PDTI); cultural and artistic activities;

Teenager and Child Rights Fund and Amazon Investment Fund (FINAM); and

audiovisual activities. In the 2004 fiscal year, R$5,672 was allocated to this reserve.


36

Allocation of net income

Management will propose to the Annual Shareholders’ Meeting the retention of net

income for the year, after allocation to the legal reserve and the dividend distribution,

amounting to R$629,044, as a reserve for investments and working capital for research

and development of the EMBRAER 170/190 family, new technologies, processes and

management models in order to improve the Company’s results, capabilities and

productivity, and for investments in subsidiaries.

25. SUPPLEMENTARY PENSION PLAN

a) Defined contribution

The Company and its subsidiaries sponsor a private defined contribution plan for

employees. For the companies based in Brazil, the plan is administered by Banco do

Brasil S.A. The consolidated contributions to the plan in 2004 and 2003 were R$21,943

and R$17,612, respectively.

b) Defined benefit

Embraer Aircraft Holding Inc. - EAH sponsored a defined benefit pension plan for

certain employees and a post-retirement medical plan, for which the expected costs of

the plans for the beneficiary employees and their dependents were accrued based on

actuarial valuations.

By means of an amendment, all the benefits were frozen as of December 31, 2003 and

the prorated benefit was fully accrued. As a result, the liability for future obligations

under the plan was reduced by R$22,327.

For employees hired as from October 1, 2001, the supplementary pension plan is a

defined contribution plan and those hired prior to that date were also transferred to the

defined contribution plan.

Changes in benefit liabilities for the years ended December 31, 2004 and 2003 are as

follows:

Defined benefit Post-retirement

pension plan benefits

2004 2003 2004 2003

Beginning of year 23,010 57,365 14,194 16,785

Exchange variation (1,869) (10,457) (1,153) (3,061)

Service cost - 5,837 1,835 1,661

Interest cost 1,271 2,758 960 971

Supplement to the plan - 16 - (1,997)

Plan restructuring - (22,327) - -

Actuarial loss (gain) 307 (3,558) 3,436 194

Benefits paid to participants (2,237) (6,624) (395) (394)

Participants’ contributions - - 21 35

End of year 20,482 23,010 18,898 14,194


37

Changes in plan assets for the years ended December 31, 2004 and 2003 are as follows:

Defined benefit Post-retirement

pension plan benefits

2004 2003 2004 2003

Fair value at the beginning of year 24,768 29,134 5,570 6,355

Exchange variation (2,013) (5,311) (452) (1,158)

Employer contributions 2,212 3,523 - -

Return on plan’s assets 1,736 4,045 479 733

Participants’ contributions - - 21 35

Benefits paid to participants (2,237) (6,623) (395) (395)

Fair value at the end of year 24,466 24,768 5,223 5,570

The components of accrued benefit costs at December 31, 2004 and 2003 are as

follows:

Defined pension Post-retirement

benefit medical benefits

2004 2003 2004 2003

Accumulated surplus (deficit) 3,984 1,757 (13,675) (8,624)

Unrecognized transition obligation - - (1,654) (1,933)

Unrecognized actuarial net gain (loss) (165) - 4,587 1,558

Accrued benefit cost 3,819 1,757 (10,742) (8,999)

The actuarial weighted average assumptions at December 31, 2004 and 2003 are as

follows:

%



2004 2003 2004 2003

Discount rate 6.00 6.25 6.00 6.50

Expected return on plan assets 7.75 7.75 7.75 7.75

Rate of compensation increase - 5.50 5.50 5.50


38

The components of net periodic benefit costs for 2004 and 2003 are as follows:



2004 2003 2004 2003

Service cost - 5,837 1,835 1,660

Interest cost 1,271 2,758 960 971

Expected return on plan assets (1,740) (1,937) (382) (387)

Amortization of unrecognized transition

obligation - 108 - -

Amortization of unrecognized past-service

cost - 126 (121) (132)

Amortization of actuarial losses - 892 - -

Restructuring effect - (8,250) 182 119

Net periodic benefit cost (469) (466) 2,474 2,231

26. EMPLOYEE PROFIT SHARING

The Company, based on the variable remuneration policy approved by the Board of

Directors in April 1996 and renewed on March 24, 2000, has a Profit Sharing Plan (PLR)

for employees, which is linked with an action plan, the payment of dividends to

shareholders and achieving specific goals, which are established and agreed at the beginning

of each year. The PLR is equivalent to 25% of dividends and interest on capital credited to

shareholders. Of this amount, 30% is distributed in equal parts to all employees and 70%

proportional to salary. The Company recorded a consolidated expense for the PLR in the

amounts of R$175,522 and R$58,937 in 2004 and 2003, respectively.

27. OTHER OPERATING INCOME (EXPENSES), NET

2004 2003

Provision for contingencies (822) (31,240)

Cost on Gavião Peixoto implementation (90) (2,536)

Professional training and development (10,363) (39,636)

Tax penalties (57,667) -

Insurance recovery 6,089 1,932

Contractual fines 4,087 51,195

Reimbursement of expenses 7,038 7,009

Feasibility study costs (70,473) (71,510)

Provision for market value (9,461) (28,677)

Reversal of contingency - FUNDAF 10,736 -

Other sales 11,565 8,197

Other (3,500) (9,768)

(112,861) (115,034)


39

28. FINANCIAL INCOME (EXPENSE)

2004 2003

Financial expense:

Interest and commissions on loans (161,922) (149,786)

Interest on taxes, social charges and contributions (91,136) (130,822)

CPMF (tax on bank account transactions) (40,451) (37,365)

Credit insurance (71,268) (13,527)

PIS/COFINS on interest income and exchange variations (32,308) (43,224)

Provision for losses on securities (*) (52,296) -

Other (26,281) (14,886)

(475,662) (389,610)

Financial income:

Short-term cash investments 321,438 292,130

Interest 34,815 28,456

Other 34,241 23,576

390,494 344,162

(*) The provision includes losses on debentures in the amount of R$31,827 and losses on

marking short-term financial investments to market in the amount of R$20,469.


40

29. MONETARY AND EXCHANGE VARIATIONS, NET

2004 2003

Exchange variations:

Assets:

Accounts receivable (593,003) (1,063,043)

Advances to suppliers 1,415 (69,114)

Translation gain (loss) on foreign investments (18,650) (32,223)

(610,238) (1,164,380)

Liabilities:

Advances from customers 92,658 289,709

Loans 267,467 367,485

Suppliers 162,324 233,941

Accounts payable 46,591 203,254

Derivative transactions (18,309) (289,570)

Other accounts 1,896 49,407

552,627 854,226

Exchange variations, net (57,611) (310,154)

Monetary variations:

Assets:

Tax credits 5,573 1,764

Accounts receivable 1,103 141

6,676 1,905

Liabilities:

Loans (1,542) (3,174)

Labor claims (4,179) (430)

Other (340) (199)

(6,061) (3,803)

Monetary variations, net 615 (1,898)

Monetary and exchange variations, net (56,996) (312,052)

30. NONOPERATING EXPENSES, NET

2004 2003

Write-off of property (1,762) (696)

Rental of property items 933 2,394

Contract cancellation expenses (*) - (49,440)

Other 180 1,613

(649) (46,129)

(*) Expense incurred with the repossession of aircraft related with cancellation of the

contract with Índigo.


41

31. INCOME AND SOCIAL CONTRIBUTION TAX CREDITS

Calculated based on the provisions of the legislation in effect at the applicable rates.

Deferred tax assets and liabilities are recognized on tax losses, negative social contribution

basis and temporary differences to the extent that their realization is probable.

The Company adopts the criterion of recognizing deferred tax assets on tax losses and

negative social contribution basis when realization is probable based on internal studies and

projections. With respect to credits corresponding to temporary differences related with

nondeductible provisions, composed principally of labor contingencies and tax litigation,

they will be realized as the corresponding proceedings are completed.

As of December 31, 2004, the balances of tax losses and negative social contribution basis

for which there is no statute of limitation were composed as follows:

Income tax 157,384

Social contribution 10,134

The components of deferred tax assets and liabilities as of December 31, 2004 and 2003 are

shown below:

2004 2003

Deferred tax assets on:

Tax loss carryforwards 39,346 42,976

Negative social contribution basis 912 17,179

Unrecognized credits (33,248) (35,133)

Tax loss carryforwards 7,010 25,022

Deferred tax assets on temporary differences:

Provision for tax contingencies except for income tax and social

contribution on net income 187,938 145,105

Provision for labor and civil contingencies 16,614 15,220

Provision for inventories 57,874 45,923

Provision for product warranties 67,864 79,194

Provision for losses on investments 5,259 35,485

Provision for nonrealization of tax credits 12,266 9,543

Provision for losses on contracts 94 1,488

Provision for technical assistance/training 23,767 16,029

Provision for product improvement 34,649 42,443

Provision for losses - debentures 17,781 -

Private pension accrual 2,344 2,444

Allowance for doubtful accounts 3,785 1,967

Accrual for payroll 5,442 6,373

Provision for unearned income 57,523 50,498

Other 69,933 38,844

563,133 490,556

Total assets 570,143 515,578

Deferred tax liabilities on temporary differences:

Revaluation of property, plant and equipment (16,853) (18,621)

Special monetary restatement reserve - IPC (6,098) (8,254)

Research and development (349,143) (279,638)

Government contracts (1,700) (1,167)

Accelerated depreciation (9,982) (7,415)

Others (2,388) (3,806)

Total liabilities (386,164) (318,901)

Net deferred tax asset 183,979 196,677


42

In accordance with CVM Instruction No. 371/02, the expectation of realization of the tax

credits derived from temporary differences and tax losses as of December 31, 2004 is as

follows:

2005 277,162

2006 192,627

2007 40,680

2008 18,386

2009 15,310

2010 and 2011 12,810

2012 and 2013 9,551

After 2013 3,617

Total 570,143

The deferred net tax assets presented previously are reflected in the financial statements as

follows:

2004 2003

Deferred tax assets:

Current 277,161 333,397

Long term 292,982 182,181

570,143 515,578

Deferred tax liabilities:

Current (39,809) (36,582)

Long term (346,355) (282,319)

(386,164) (318,901)

183,979 196,677

We show below the composition of income and social contribution taxes expense:

2004 2003

Deferred tax asset:

On tax losses:

Tax losses offset in the year (19,897) -

Recognized current tax losses - 19,311

Increase in unrecognized credits 1,885 (74)

(18,012) 19,237

Temporary differences:

Additions 5,313 -

Reversals - (235,645)

5,313 (235,645)

Provision for current income and social contribution taxes (320,251) (33,418)

Total income and social contribution tax expenses (332,950) (249,826)


43

We show below the reconciliation of the income and social contribution tax expenses:

2004 2003

Income before provision for income and social contribution taxes 1,012,228 643,123

Income and social contribution tax expenses at official rates - 34% 344,158 218,662

Permanent additions:

Translation loss on foreign investments 30,586 22,904

Income from subsidiaries - 5,133

Other 5,853 7,533

36,439 35,570

Permanent exclusions:

Translation gain on foreign investments (23,918) (11,705)

(23,918) (11,705)

Other items:

Reversal of income and social contribution taxes on earnings not

made available abroad (25,075) -

Other 1,346 7,299

(23,729) 7,299

Income and social contribution tax expenses recorded in the

statement of income 332,950 249,826

32. FINANCIAL INSTRUMENTS

Fair value of financial instruments

The estimated fair values of the Company’s financial assets and liabilities have been

determined using available market information and appropriate valuation methodologies.

However, considerable judgment was required in interpreting market data to produce the

estimated fair values. Accordingly, the estimates presented below are not necessarily

indicative of the amounts that could be realized in a current market exchange. The use of

different market assumptions and/or estimation methodologies could have a material effect

on the estimated realization values.

As of December 31, 2004, the Company had the following financial instruments:

1) Cash and banks, short-term cash investments, accounts receivable, other current assets

and accounts payable:

The book values approximate the realizable values.

2) Investments:

Principally consist of subsidiaries and affiliates recorded using the equity method or at

restated cost, which have a strategic interest in the Company’s operations. Market value

considerations are not applicable.


44

3) Financing:

Subject to interest at normal market rates, as described in Note 15. The estimated

market value was calculated based on the present value of future cash payments using

interest rates that are currently available to the Company for the issue of debt with

similar terms and maturities. The estimated market value of the loans, including short-

-term installments, is as follows:

2004 2003

Book value 3,553,702 3,016,372

Market value 3,447,399 2,991,304

a) Interest rate risk:

This risk is derived from the possibility that the Company incur in losses on account

of interest rate fluctuations that increase financial expenses of loans and financing

raised in the market. The Company has derivative contracts to hedge against this

risk in certain operations and, in addition, continuously monitors market interest

rates to evaluate the possible need to contract new derivative transactions to protect

against the risk of volatility in these rates.

As of December 31, 2001, the Company had R$3,553,702 in loans and financing,

the rates of which are described below:

In foreign currency:

Fixed interest 1,341,338 1,623,537

Floating rates (i) 1,318,525 1,326,456

2,659,863 2,949,993

In local currency:

Floating rates (ii) 893,839 66,379

(i) LIBOR for U.S. dollar and JIBOR for Japanese yen.

(ii) TJLP.

In July 2002, the Company introduced, as an interest rate fluctuation risk

management policy, related to asset operations, a system of market risk

measurement associated with financial investments called the value-at-risk (VAR)

method, which consists of an analysis of a variety of risk factors that may affect the

profitability of the investments.

b) Exchange rate risk:

This risk is related to the possibility that the Company may incur losses due to

fluctuations in exchange rates, leading to a reduction in nominal amounts billed or

an increase in loan values.

However, since approximately 97% of net sales for the year were denominated in

U.S. dollars and this situation should continue for the next few years, the principal

strategy is to consider the sales in the foreign market as a natural hedge against

foreign currency denominated liabilities.


45

The analysis of the amounts subject to exchange rate risk is based on a forecast of

cash flows; any unmatched cases are managed individually and the funding in

foreign currencies is contracted as derivate transactions, as described in item c)

below.

The following table shows the consolidated exposure by currency as of December

31, 2004 and 2003, based on the book value of loans and financing, trade accounts

payable, cash and cash equivalents and trade accounts receivable with and without

the effects of derivative transactions.

Without the effect of

derivative operations

With the effect of

derivative operations

2004 2003 2004 2003

Loans:

Brazilian real 893,839 66,379 1,046,381 732,042

U.S. dollar 2,451,191 2,537,747 2,491,127 2,259,567

Euro 16,194 24,763 16,194 24,763

Japanese yen 192,478 387,483 - -

3,553,702 3,016,372 3,553,702 3,016,372

Trade accounts payable:

Brazilian real 58,249 39,007 58,249 39,007

U.S. dollar 1,381,336 1,102,240 1,381,336 1,102,240

Euro 23,480 15,884 23,480 15,884

Other currencies 23,329 10,331 23,329 10,331

1,486,394 1,167,462 1,486,394 1,167,462

Total (1) 5,040,096 4,183,834 5,040,096 4,183,834

Cash and cash equivalents:

Brazilian real 1,548,951 2,581,319 1,548,951 2,581,319

U.S. dollar 1,887,260 1,067,882 1,887,260 1,067,882

Euro 4,114 5,658 4,114 5,658


3,463,744 3,658,604 3,463,744 3,658,604

Trade accounts receivable:

Brazilian real 50,951 31,285 50,951 31,285

U.S. dollar 1,614,088 961,664 1,614,088 961,664

Euro 82,829 45,500 82,829 45,500


1,752,316 1,040,153 1,752,316 1,040,153

Total (2) 5,216,060 4,698,757 5,216,060 4,698,757

Net exposure (1 - 2):

Brazilian real (647,814) (2,507,218) (495,272) (1,841,555)

U.S. dollar 331,179 1,610,441 371,115 1,332,261

Japanese yen 192,478 387,483 - -

Euro (47,269) (10,511) (47,269) (10,511)

Other currencies (4,538) 4,882 (4,538) 4,882


46

c) Derivatives:

The purpose of the derivative instruments contracted by the Company is to protect

operations from exchange rate risks and interest rate fluctuations; they are not

utilized for speculative purposes. As of December 31, 2004 the derivatives consist

of foreign currency swaps, as shown in the following table.

Gain (loss)

Original Actual Amount of Average rate

Carrying

value

Market

value

Purpose Type currency currency hedge agreed 2004 2004

Import finance -

FINIMP Swap US$ R$ 167,568

66.21% of

CDI (51,881) (38,744)

Working capital/

FINIMP Swap US$ US$ (*) 1,098,274 7.78% p.a. (2,221) (10,937)

Import finance -

FINIMP Swap JPY US$ 189,900 4.31% p.a. 13,001 14,904

Total (41,101) (34,777)

(*) This swap only fixes the LIBOR rate, protecting the Company against a possible rise in interest

rates.

Gain (loss)

Original Actual Amount of Average rate

Carrying

value

Market

value

Purpose Type currency currency hedge agreed 2003 2003

Import finance Swap JPY R$ 71,930 86.17% of CDI (16,690) (20,917)

Import finance Swap US$ R$ 641,739 75.07% of CDI (148,044) (129,771)

Import finance Swap JPY US$ 311,559 4.44% p.a. 8,150 6,635

Total (156,584) (144,053)

d) Credit risk:

The Company may incur losses related to the sales of spare parts and services. To

reduce this risk, customer credit analyses are made continuously. In relation to

accounts receivable from sales of aircraft, the Company may have credit risks until

the financing structure has been completed. To minimize this risk, the Company

works with the financial institutions, to facilitate structuring of the financing.

To provide for possible losses, the Company recognized an allowance for doubtful

accounts, considered sufficient by management to cover losses on realization.


47

33. COOBLIGATION, RESPONSIBILITIES AND COMMITMENTS

The Company is contingently liable for repurchasing a number of aircraft sold under sales

contracts that provide the customer with the right to sell the aircraft back to the Company in

the future, according to defined price rules. These put options become exercisable at various

times from 2004 to 2006 and can be made at the customer’s sole discretion. The put price

per aircraft under the repurchase option is less than the original sales price of the aircraft

and less than management’s estimate for the future market value of the aircraft during the

exercise period as assessed on the date of sale. If the Company is required to repurchase all

of the aircraft under the Company’s repurchase obligations, the Company may be required

to pay up to approximately US$120 million for these aircraft. Based on the Company’s

current estimates and third-party appraisals related to the forecast fair values of the aircraft,

management believes that any repurchased aircraft could be sold in the market without

material gain or loss.

The Company is also subject to trade-in options for six aircraft. These options provide that

the repurchase price can be applied to the price of an upgraded Company model. The trade-

-in price is based on a percentage of the original aircraft purchase price. The Company

continues to monitor all trade-in commitments to anticipate adverse situations. Based on the

Company’s current estimates and third-party appraisals, management believes that any

repurchased aircraft could be sold in the market without significant gain or loss.

Financial guarantees are triggered if customers do not meet their obligations to pay the debt

during the term of the financing under the related financing arrangements. Financial

guarantees provide credit support to the guaranteed party to mitigate default-related losses.

The related aircraft collateralize these guarantees. The value of the aircraft may be adversely

affected by an economic downturn. In an event of default, the Company usually acts as an

agent for the guaranteed party for the refurbishment and resale of the related aircraft. The

Company may be entitled to a fee for such resale services. Typically, a claim under the

guarantee should be made only upon surrender of the related aircraft for resale.

Residual value guarantees provide a third party with a specific guaranteed asset value,

typically at the end of the financing agreement. In the event of a decrease in market value of

the underlying asset, the Company shall bear the difference between the specific guaranteed

amount and the actual fair market value. The Company’s exposure is mitigated by the fact

that, in order to benefit from the guarantee, the guaranteed party has to make the underlying

assets meet specific return conditions. The value of the guarantee typically ranges from 18%

to 25% of the sales price from the 10th

to the 15th

year after delivery. Based on the

Company’s current estimates and third-party appraisals, the present minimum residual value

may exceed the assessed value of certain aircraft already delivered. However, management

believes that, considering the potential for recovery in the market and an improvement in

financing conditions for 15 to 16-year periods, no significant losses will be incurred.

The Company makes premium payments to its captive insurance affiliate, ECC Insurance &

Financial Co. Ltd., to assume such liabilities. The premium is considered to be sufficient to

cover the Company’s estimate of future payments it may incur as part of fulfilling its

guarantee obligations.


48

Considering the volatility of the air transport industry and its impact on the current

assumptions of future market value of the aircraft and airline companies’ credit risk, the

Company has recognized a provision of R$196,788 at ECC Insurance & Financial Co. Ltd.

in order to cover financial guarantees related to aircraft delivered to December 31, 2004

(R$158,830 in 2003).

Certain sales contracts contain provisions for guarantees of certain minimum levels of

aircraft performance subsequent to delivery based on predetermined operating targets. If the

aircraft subject to such guarantees do not achieve the minimum performance indices after

delivery, the Company may be obligated to reimburse its customers for the implied

incremental operating and service costs incurred based on formula defined in the related

agreements. Losses related to such performance guarantees are recognized when known or

when circumstances indicate that the aircraft is not expected to meet the minimum

performance requirement, based on management’s estimate.

Embraer Aircraft Holding Inc. - EAH is responsible for noncancelable operating leases for

land and equipment. These leases expire at various dates to 2020.

The facilities of Embraer Aircraft Customer Services, Inc. - EACS are located on leased

land under a contract which expires in 2020.

The Company has lease obligations for land, IT equipment and vehicles, with annual

payments as follows:

Year 2004

2005 13,715

2006 7,021

2007 2,382

2008 1,395

2009 1,350

After 9,540

Total 35,403

34. INSURANCE

As of December 31, 2004, the insurance policies taken out with third parties amounted to

R$7,798,146, and the amounts are considered to be sufficient to cover the risks involved.

This amount does not include the insurance of vehicles, which are covered to market value.

Line Amount insured

Fire 1,677,164

Aeronautical 2,659,645

Third-party liability 3,620,602


49

35. STATEMENTS OF CASH FLOW

The statements of cash flow were prepared using the indirect method based on accounting

information, in accordance with instructions of NPC 20 issued by IBRACON - Brazilian

Institute of Independent Auditors, considering the principal operations that influenced cash

and cash equivalents.

2004 2003

OPERATING ACTIVITIES

Net income for the year 1,255,833 587,653

Items that do not affect cash flow:

Equity in unconsolidated subsidiary - (146)

Translation losses on foreign investments 19,613 32,938

Minority interests 8,618 1,697

Depreciation and amortization 221,554 160,499

Write-off of deferred charges - 2,765

Losses on the disposal of permanent assets 317 696

Interest on tax refinancing, debentures, financing and other 137,287 116,525

Monetary and exchange variations, net (278,442) (246,515)

Provision for losses 34,269 33,032

Provision for obsolescence 18,989 10,411

Provision for market value reduction - (5,157)

Deferred income and social contribution taxes 12,697 216,408

Provision for losses on the bonds and securities 31,827 -

Provision for contingencies 57,930 13,820

Reversal for doubtful accounts (7,716) (16,408)

1,512,776 908,218

CHANGES IN ASSETS AND LIABILITIES

Accounts receivable (712,163) 1,413,012

Inventories (718,940) (513,587)

Prepaid expenses 67,869 (16,230)

Recoverable taxes (7,337) (39,818)

Other receivables (141,492) 370,869

Compulsory deposits and loans 71,406 (723,576)

Trade payables 318,932 25,843

Taxes payable 24,871 4,837

Other provisions (21,079) 72,074

Contributions from partners 14,940 (153,058)

Advances from customers (398,296) (131,073)

Contingencies 256,013 223,948

Income and social contribution taxes payable 28,999 (168,919)

Other accounts payable 48,519 (27,567)

(1,167,758) 336,755

CASH GENERATED BY OPERATING ACTIVITIES 345,018 1,244,973

INVESTMENT ACTIVITIES

Sale of property, plant and equipment 482 7,915

Bonds and securities (125,367) (30,866)

Additions to property, plant and equipment (109,656) (443,002)

Additions to deferred charges (415,954) (506,267)

Additions to investments (41,219) -

Tax incentives 5,672 551

CASH USED IN INVESTMENT ACTIVITIES (686,042) (971,669)


50

2004 2003

FINANCING ACTIVITIES

Loans repaid (3,779,313) (1,467,310)

New loans obtained 4,459,617 2,737,828

Dividends and interest on capital (543,664) (217,419)

Capital increase 9,524 11,533

CASH GENERATED BY FINANCING ACTIVITIES 146,164 1,064,632

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (194,860) 1,337,936

CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 3,658,604 2,320,668

CASH AND CASH EQUIVALENTS - END OF YEAR 3,463,744 3,658,604

36. INFORMATION PER SEGMENT

Commercial Aviation Segment

The operation to construct regional aircraft principally involves the development,

production and marketing of commercial jets and the supply of related supporting services,

principally to the global regional airline business. The Company’s products in the regional

aircraft segment are organized by product family, including the ERJ 135/140/145 family and

the EMBRAER 170/190 family.

The ERJ 145 family is composed of the ERJ 135, ERJ 140 and ERJ 145 jets, certified to

operate with 37, 44 and 50 seats, respectively. These aircraft types have approximately 96%

common parts and components. The Company has a limited number of customers for a

substantial portion of its total net sales.

The Company is developing a new group of commercial jets comprising the EMBRAER

170 for 78 passengers, EMBRAER 175 for 86 passengers, EMBRAER 190 for 106

passengers and the EMBRAER 195 for 118 passengers. As of December 31, 2004, the

Company had 297 firm orders for this aircraft group. The first model to reach full

development was the EMBRAER 170 followed by the EMBRAER 175.

The EMB 120 Brasília is a 30-seat turboprop aircraft that has been in operation since 1995.

Up to December 31, 2004, 352 of these aircraft had been delivered.

Defense market segment

The defense aircraft segment principally involves research, development, production,

modification and support for military defense aircraft, and related products and systems.

Although some military defense aircraft are contracted on the commercial market, the

Company’s principal client is the Air Force Command. In the defense segment, the

Company has the following products:

EMB-312, on two platforms, the Tucano Básico and the Super Tucano - EMB-314. The

Super Tucano is also being used as a platform for the AL-X, an aircraft developed for the

Air Force Command.


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AM-X, an advanced ground attack jet, developed and produced through a cooperation

agreement between Brazil and Italy.

Modified platforms of the ERJ 145 (EMB 145 AEW&C - Airborne Early Warning and

Control, EMB 145 RS - Remote Sensing Aircraft and EMB 145 MP - Marine Remote

Sensing Aircraft) for use by the Brazilian, Mexican and Greek authorities.

Corporate jet segment

The Company has developed a line of corporate jets based on the ERJ 135 regional jet. The

Legacy, as the corporate jet is called, is marketed in two versions - executive and corporate.

Other related business

The other related business segment is principally related with: (i) after-sales support

services to customers, including maintenance and training; (ii) operationally leased aircraft;

and (iii) production and sale of spare parts for the Company’s aircraft. In addition, Embraer

supplies structural parts and mechanical and hydraulic systems to certain specific clients.

The Company also produces agricultural crop spraying aircraft.

In millions of

Brazilian reais

2004 2003

Net sales per region

Americas, except Brazil:

Regional 6,617.6 4.564.0

Defense 270.9 342.3

Corporate 580.3 419.0

Other business 340.4 268.1

7,809.2 5.593.4

Europe:

Regional 924.9 201.6

Defense 62.9 161.6

Corporate - 106.2


1,146.9 677.0

Other:

Regional 247.8 -

Defense 19.4 2.1

Corporate 122.1 -


429.4 4.7

Brazil:

Defense 702.8 240.1


845.7 295.5

Total 10,231.1 6,570.6


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In millions of

Brazilian reais

2004 2003

Gross profit per segment

Net sales:

Regional 7,790.3 4,765.6

Defense 1,056.0 746.1



10,231.2 6,570.6

Sales costs:

Regional (4,936.2) (2,963.2)

Defense (828.1) (607.0)

Corporate (575.6) (436.5)

Other business (483.0) (213.1)

(6,822.9) (4,219.8)

Gross margin:

Regional 2,854.1 1,802.4

Defense 227.9 139.1



3,408.3 2,350.8

37. INFORMATION ON SPECIAL PURPOSE COMPANIES - SPCs

The Company structures some of its sales financing transactions through SPCs, which may

be subject to risks and/or residual benefits, even though it does not have corporate interests

in them. According to CVM Instruction No. 408, dated August 18, 2004, the Company

should consider this type of entity as a direct or indirect subsidiary for consolidation

purposes as from 2005.

We present below a summary of these transactions with SPCs, their purposes and balances

and related transactions as of December 31, 2004:

a) For the purpose of improving the quality of guarantees to finance the sale of EMB 120

aircraft by Embraer to an end customer in Latin America, the transaction was structured

by means of an SPC. The value of its assets is US$17 million, of its liabilities is US$15

million and of its shareholders’ equity is US$2 million

b) In order to temporarily structure leasing operations in the United States (US Leverage

Lease) of ERJ 145 aircraft for a customer, an SPC is being used until the final funding

structure is concluded. The value of its assets and liabilities is US$893 million. The

Company maintains a guarantee in the amount of US$226 million, according to Note

9.(a), and acts as a resale agent and guarantor for US$52 million of the financing

provided by third parties, the guarantees being covered by the full value of the aircraft.


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c) Certain entities were used to structure the financing of leasing sales of ERJ 145 aircraft

to clients in Europe and Latin America. The total value of their assets and liabilities is

US$247 million and the Company acts as a resale agent and guarantor for US$71 million

of the financing provided by third parties, the guarantees being covered by the full value

of the aircraft.

The remaining entities used to date do not have material assets and liabilities, and were

created to make certain sales possible and to securitize receivables from end customers. On

this date, the existence of these entities can be explained by the obligation to pay the

expenses of structuring the securitization throughout the terms of the financing.

RE0004*.*

Embraer - Empresa Brasileira de Aeronáutica

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